The following items were the subject of
a Form 12b-25 and are included herein:
6, 7, 7A, 8 and portions of item 14.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 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 (IRS Employer ID No.)
of incorporation or organization)
748 Miller Drive, S.E.
Leesburg, Virginia 20175
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 777-9095
--------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
--------------------------------------
(Title of class)
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
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<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Corporation at September 18, 1998 was $16,726,031 based on the closing price of
$7.00 per share. As of that date, 6,120,543 shares of Common Stock were issued
and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
The information required by Part III is incorporated by reference from the
registrant's definitive proxy statement to be filed pursuant to Regulation 14A.
<PAGE>
TABLE OF CONTENTS
Explanatory Note: In this Form 10-K/A, the registrant has added risk factor
disclosure in Item 1 and included the information omitted from items 6, 7, 7A, 8
and portions of item 14 of the Form 10-K originally filed by the registrant on
September 28, 1998.
<TABLE>
<CAPTION>
Page
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PART I Item 1. Business 1
Item 2. Properties 20
Item 3. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 22
PART II Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 23
Item 6. Selected Financial Data 24
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 24
Item 7A. Quantitative and Qualitative Disclosure about Market Risk 36
Item 8. Financial Statements and Supplementary Data 36
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 36
PART III Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners
and Management 37
Item 13. Certain Relationships and Related Transactions 37
PART IV Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 38
</TABLE>
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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 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.
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PART I
Item 1. Business
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Overview
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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:
* 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 June
30, 1998, these services were provided at 556 Precision Tune Auto
Care centers owned and operated by franchisees and 8 owned and
operated by the Company.
* 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 June 30, 1998, there were 36 Company-owned car wash
centers and 9 franchised car wash centers.
* 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
June 30, 1998, there were 7 Precision Lube Express centers owned
and operated by franchisees and 7 owned and operated by the
Company. As of that date there were also 19 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.
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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, 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.
Operations
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Precision Tune Auto Care
Precision Tune Auto Care is an automotive maintenance service provider
specializing in quality maintenance services that require relatively short
service times. At June 30, 1998, these services were provided at 556 Precision
Tune Auto Care centers owned and operated by franchisees and 8 owned and
operated by the Company. The automotive care services provided by Precision Tune
Auto Care centers include the diagnosis, maintenance and repair of ignition
systems, fuel systems, computerized engine control systems, cooling systems,
starting/charging systems, emissions control systems, engine drive train
systems, electrical systems, air conditioning systems, oil and other fluid
systems, and brake systems.
Prototype Center. The current prototype Precision Tune Auto Care center is a
free-standing building with six to eight service bays, two to four of which are
drive-through and include pits to facilitate fast oil change and lubrication
services. Approximately 42% of the Company's existing domestic Precision Tune
Auto Care centers have at
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least six service bays. The center is designed to be located on a half-acre lot,
in a high-traffic commercial area. Each center has Precision Tune Auto Care
signage to create a consistent image and heightened customer recognition.
Precision Tune Auto Care centers are generally open six days a week. Each center
maintains a broad inventory of parts and accessories, including oil and other
automotive fluids, having an aggregate average value of approximately $15,000.
The design and operation of each center is intended to provide the customer with
a superior experience by offering the customer high quality services quickly in
clean, well-run facilities. Exclusive of real estate, the estimated initial
capital required to open a prototype Precision Tune Auto Care center ranges from
$126,000 to $200,000.
Franchisees typically develop Precision Tune Auto Care centers either by
entering into a build-to-suit lease, under which the landlord constructs the
center and leases it to the franchisee, or by purchasing land and building the
facility. The Company typically seeks sites in commercial areas with a minimum
population of 50,000 people within a five mile radius and 24-hour drive-by
traffic of at least 20,000 cars. The Company aims to saturate existing markets
before opening centers in markets where Precision Tune Auto Care has no presence
in order to create and take advantage of advertising, managerial and operating
support efficiencies. The Company actively assists franchisees with site
selection and evaluation of proposed sites, and the Company has the right to
reject sites selected by franchisees.
Retail Marketing. Precision Tune Auto Care's marketing objectives at the retail
level are to increase sales, enhance first-time customers' experiences, and
bolster customer retention efforts. To further these objectives, Precision Tune
Auto Care has developed and implemented a marketing plan containing programs and
materials for use by Precision Tune Auto Care centers. The plan includes
targeted marketing programs designed to reach key market segments, in-store
merchandising materials designed to enhance retail sales and first time customer
trials, and other local marketing materials (e.g., second car discounts, service
reminder cards, and ATM receipt coupons) designed to generate customers and
improve customer retention. The Company's current data base includes
approximately three million names. The Company uses this data to analyze
services provided by Precision Tune Auto Care centers. Moreover, franchisees can
access the data for the purpose of issuing service reminder notices and other
promotional purposes. Precision Auto Care, in conjunction with an advertising
cooperative funded by franchisees, provides a variety of marketing materials to
franchisees, including television and radio commercials, newspaper, direct mail
material, and in store promotional material. In addition, a number of sales
promotion program packages, including grand opening, anniversary and peak season
promotional packages, have been developed.
Training and Operational Support. A significant element of Precision Tune Auto
Care's commitment to service is its training program for franchisees. New
franchisees are required to successfully complete 80 hours of initial training
at the Company's
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national training center in Leesburg, Virginia. The Company also offers a full
line of technical training, including courses on engine performance, fuel
systems and emissions, automotive electronics, fuel injection, and brake
certification. These courses, which include both classroom and hands-on
training, are designed to allow franchisees and service center technicians to
maintain and update their technical capability to service today's more
technically complex vehicles. Additionally, the Company offers a program through
which trainers are available to franchisees onsite. Generally, area developers
also are required to maintain a training facility and have one certified trainer
on staff to provide local technical training and certification. Upon opening a
new center, training crews are onsite for at least the first two business days
to assist in the startup process.
The Company has designed a policies and procedures manual to simplify the
management and operational challenges faced by a franchisee, maximize the
franchisee's revenue and earnings, and provide a consistent customer experience
throughout the Precision Tune Auto Care system. At a minimum, each center in the
system receives an evaluation utilizing a standard evaluation report on a
quarterly basis. In addition, an independent service is retained to "mystery
shop" approximately one-third of Precision Tune Auto Care centers each year and
supply independent feedback on the quality of service provided.
Management also has developed the Precision Information Network ("PIN"), a
proprietary point of sale computer system, and has made this system available to
franchisees. The latest version of PIN is a Windows-based system which employs
touch-screen technology and is designed to be user friendly. The PIN system
provides reports on productivity, cost of goods, labor, inventory and line of
service information, and includes a marketing database module that facilitates
the tracking of customer information for the development of direct mail
marketing campaigns and other marketing strategies. Remote-location polling of
information and electronic ordering from the Company's parts and equipment
division are features currently under development. Approximately 38% of the
Company's domestic franchised centers have installed a version of the PIN
system.
Franchise Marketing. The Company (through a Predecessor Company) has marketed
franchises for Precision Tune Auto Care centers since 1977. The Company's
franchise sales process includes advertising in appropriate franchise and
business publications, conducting franchise sales seminars, and maintaining a
home page on the Internet through which interested parties may submit a
franchise inquiry. Prospective franchisees are asked to complete a Confidential
Qualifications Report, which serves as the initial screen to determine whether a
prospect is qualified. The Company seeks individuals with management experience
who will commit full time to the operation of their franchise and who have a
minimum of $50,000 and $150,000 in liquid assets and net worth, respectively.
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Precision Tune Auto Care's area development system has played a significant role
in the Company's franchise development efforts. Under this system, Precision
Tune Auto Care has entered into area development agreements that grant area
developers the right and obligation to develop franchises on Precision Tune Auto
Care's behalf within specific geographic regions for stated periods of time.
Franchise agreements within the area are between the Company and the franchisee.
The area developer typically receives up to one-half of the initial franchise
fee, one-half of the subsequent royalty revenues and one-half of franchise
renewal and transfer fees. After the creation of a franchise, the area developer
performs most of Precision Tune Auto Care's franchisor obligations. Generally,
the Company is free to establish and operate Company-owned centers in areas in
which it has granted development rights to area developers. In that event the
Company is required to pay the area developer amounts equal to the royalty
payments that the area developer would otherwise receive if the center was being
operated by a franchisee. As of June 30, 1998, 25 area developers had an
ownership interest in a total of 131 Precision Tune Auto Care centers
(representing 29% of the total number of centers) and provided support to
another 228 centers.
Open Area Development. Precision Tune Auto Care's current strategy is also to
pursue the direct development of open areas in which area developers have not
been granted rights. To facilitate this strategy, the Company has formed a
franchise development team to pursue Precision Tune Auto Care's open area
development plan. This plan, which includes direct franchising and the
development of Company-owned stores for ultimate sale under the Turnkey Program
discussed below, addresses such factors as market demographics, development
resources (e.g., advertising and public relations vehicles, developers of
commercial real estate), criteria for initial center development, and criteria
for additional center development. Based on these factors, a specific expansion
strategy for each target area is developed. The Company believes that
significant expansion potential exists in areas not controlled currently by area
developers.
Precision Auto Wash
The Company is the owner, operator and franchisor of technologically-advanced
self-service and touchless automatic car wash centers. At June 30, 1998, there
were 36 Precision Auto Wash centers owned and operated by the Company. As of
that date, there were 9 franchised car wash centers.
The Company believes that the Precision Auto Wash system represents the
state-of-the-art in modern touchless automatic and self-service car washing
capabilities.
The computer-based operating system the Company developed for use in its car
wash centers includes the following features:
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* Computerized control of the wash system which allows the operator to
change time cycles, and equipment functions, and to monitor the
status of operations, quickly, easily and cost-effectively, from a
remote location on a laptop personal computer.
* The ability for customers to quickly and easily contact a central
national customer help center on a dedicated toll-free number in the
event of an equipment malfunction.
* A frequent wash card system, utilizing bar-code technology, rewards
customers with free washes based upon wash frequency, while
collecting valuable marketing data.
* Through its exclusive integrated voice, LED display and video
instruction features, the system provides the customer with
step-by-step instructions on how to operate the system.
* A grace period feature permits the customer to continue the wash
cycle by inserting additional quarters after his or her initial time
has expired.
* A bonus time feature allows customers more time per coin during
off-peak hours.
The system also includes several important mechanical features which provide the
motorist with a superior car wash. In the automatic bay, the HydroSpray unit
travels around the vehicle in a heated, galvanized track enabling the car wash
to be open 24 hours a day, 365 days a year. Motorized wash wands and high
pressure nozzles continuously sweep dirt and grime from the vehicle. Each wash
is finished with a spot-free rinse and dried using proprietary dryers. In the
self-service bay, the customer controls the entire wash process by means of a
wash wand and foaming brush system. Many motorists prefer self-service car
washing because they maintain total control over the entire wash process and the
amount of money they spend. Used properly, the self-serve wash produces results
similar to those of the automatic wash. Because the system is operated by an
integrated computer control system, the foregoing features may be modified and
tailored to each specific location, depending on customer needs and market
conditions.
Centers generally include powerful vacuums that deliver maximum cleaning power
and feature clear, graphic instructions. A timer offers a "Last Coin Alert,"
"Extra-Time" service, and a "Count-Down" display of time remaining. All
Precision Auto Wash centers also offer a complete line of auxiliary vending
items such as towels, wet towels and protective sealants. Depending on market
conditions and requirements, other services may be offered as well such as
fragrance-dispensing machines and carpet shampooers.
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The Company is continuing the process begun upon the completion of its initial
public offering of outfitting acquired car wash centers with its proprietary
operating system and marketing features of the Precision Auto Wash system, and
the Precision brand signage. This conversion will also generally be necessary in
connection with any auto wash companies or centers the Company may acquire in
the future. Nine of the Company-owned centers have the complete proprietary
operating system.
Prototype Center. There are two types of prototype Precision Auto Wash centers:
(i) the "Classic," a stand-alone facility consisting of one automatic and four
self-service car wash bays; and (ii) the "Junior," a one-bay automatic car wash
facility to be located on the same site as a Precision Tune Auto Care center or
a Precision Lube Express center. The "Classic" Precision Auto Wash Center is
designed to be placed on a half-acre lot. Exclusive of real estate, the
estimated initial investment to open a "Classic" Precision Auto Wash center
ranges from $360,000 to $462,000. The initial investment required for a "Junior"
Precision Auto Wash, exclusive of real estate, ranges from $128,000 to $177,000.
Retail Marketing. The Company believes that Precision Auto Wash will enjoy
significant benefits from consumer recognition of the "Precision" brand name. At
present, marketing initiatives at the retail level include (i) a grand opening
ceremony to publicize the opening of each new center, (ii) frequent usage/swipe
card system to encourage repeat business, (iii) direct mail marketing, (iv)
quarterly newsletter publication and distribution to customers, (v) advertising
on the back of grocery store receipts, (vi) customer appreciation days, and
(vii) fleet account solicitation.
Training and Operational Support. A three-day formal pre-opening training
program is required for all Precision Auto Wash franchisees prior to the opening
of a center. Precision Auto Wash provides its franchisees with an operations
policy and procedures manual, and performs a thorough center evaluation on a
quarterly basis. Precision Auto Wash centers participate in "mystery shopper"
and customer service programs. Field operations, marketing and training support
are provided by Company personnel.
Franchise Marketing. Prospective Precision Auto Wash franchisees are recruited
and granted franchises in accordance with the same processes and techniques that
are used to recruit and license prospective Precision Tune Auto Care
franchisees. Area developers who agree to become a Precision Auto Wash area
developer in their territory are paid a portion of the initial franchisee fee
and continuing royalty in consideration for assisting in the development and
ongoing support of a Precision Auto Wash center. It is anticipated that
Precision Auto Wash franchisees generally will purchase equipment manufactured
by the HydroSpray Car Wash Equipment Co., Ltd. ("HydroSpray") and Worldwide
Drying Systems, Inc. ("Worldwide"), subsidiaries of the Company, and the
operational system package from the Company.
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Precision Lube Express
Precision Lube Express is the owner, operator and franchisor of centers which
provide fast automobile oil change, lubrication, filter replacement and related
basic services. Precision Lube Express centers also check and fill vital fluids,
and conduct vehicle safety inspections, including inspection of exhaust systems.
Precision Lube Express offers its customers air filters, PCV valves, breather
filters, wiper blades and assorted engine additives. Precision Lube Express
centers top off vital fluids between customer's oil changes at no charge. At
June 30, 1998, there were 7 Precision Lube Express centers owned and operated by
franchisees and 7 owned and operated by the Company. As of that date there were
also 19 Lube Depot centers operated by franchisees, some of which are expected
to become Precision Lube Express centers.
The Company believes that the "above-ground" configuration of the modular
Precision Lube Express building manufactured and sold by the Company enables
Precision Lube Express operators to commence operations more quickly and with
lower levels of initial investment than many of its competitors. Unlike
traditionally constructed fast oil change and lube centers which include an
in-ground service pit, the Company's modular centers can be relocated or
expanded quickly. In addition, the modular Lube Express building can be located
on a relatively small piece of property. Unlike certain of its competitors,
Precision Lube Express centers generally do not perform differential fluid
changes, radiator flushes or other automotive maintenance or repair work.
Accordingly, the Company believes that this enables Precision Lube Express
operators to provide services more inexpensively than their competitors because
Precision Lube Express operations require less skilled labor. Because the
Precision Lube Express building is modular and relatively small, it can
sometimes be located on the same site as a Precision Auto Wash center, as well
as other retail locations.
Precision Lube Express marketing emphasizes the basic "hassle-free" fast oil
change and lube services provided by Precision Lube Express.
Prototype Center. The prototype Precision Lube Express Center consists of a one
or two bay unit. The size of the site will depend on the size of the center,
with 50 feet by 100 feet the minimum required for a one-bay unit. Exclusive of
real estate, the estimated initial investment to open a Precision Lube Express
prototype Center ranges from $132,000 to $253,000.
Retail Marketing. The Company believes that Precision Lube Express will enjoy
significant benefits from consumer recognition of the "Precision" brand name.
The Company believes retail sales should be further stimulated by cross
marketing opportunities generated through Precision Lube Express's association
with Precision Tune Auto Care and Precision Auto Wash.
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Specific marketing initiatives at the retail level include (i) VIP cards,
granting customers special rates and other benefits, (ii) point-of-sale
marketing materials, including frequent usage cards that provide customers with
free oil changes to encourage repeat business, (iii) radio and print media
advertising, and (iv) direct mail marketing.
Training and Operational Support. Precision Lube Express provides a one-week
training program that franchisees are required to complete successfully before
opening a Precision Lube Express center. The program addresses the following
areas: computer system operations, lubrication equipment training, center
operations, customer service, and advertising.
The Company actively supports its Precision Lube Express franchisees. Each
center receives operational visits similar to Precision Tune Auto Care centers
and are included in mystery shopper and customer service programs. Field
operations, marketing and training support are provided using the existing
Precision Tune Auto Care structure, with area developer personnel or corporate
personnel, as applicable.
Franchise Marketing. Prospective Precision Lube Express franchisees are
recruited and granted franchises in accordance with the same processes and
techniques that are used to recruit and license prospective Precision Tune Auto
Care franchisees.
Manufacturing and Distribution
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The Company's manufacturing and distribution operations account for a
significant portion of the Company's revenues. As more fully described below,
these operations allow the Company to promote uniform quality of supplies and
equipment used in each "Precision" center. The Company does not rely heavily on
any single supplier for the supply of any materials, such as oil, equipment or
raw materials or components the Company utilizes in its manufacturing
operations.
Precision Tune Auto Care. Precision Automotive Components ("PAC"), a distributor
of automotive parts and equipment located in Winchester, Virginia, has been an
integral part of the Precision Tune Auto Care system since its inception. PAC
sells a complete line of quality ignition parts, oil and air filters, brake
parts, diagnostic equipment, signage, and other items necessary and incidental
to the outfitting and operation of Precision Tune Auto Care centers. PAC carries
an inventory of approximately 5,500 stock keeping units ("SKUs"), many of which
are private labeled for the Precision brand and provides two-day delivery to
centers anywhere in North America. PAC supplies oil and air filters, spare parts
and other supplies to Precision Lube Express centers and Precision Auto Wash
centers.
Precision Auto Wash. HydroSpray, a Company subsidiary, manufactures, distributes
and sells the car wash equipment used in the Precision Auto Wash system. The
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Company believes that the HydroSpray equipment package is a leading car wash
equipment package on the market because it includes such unique features as an
integrated computer system that controls the auto wash system and allows remote
dial-in access for system status reports and the diagnosis of maintenance
problems along with its recently redesigned automatic tower and track which
adjusts to the size of each vehicle. HydroSpray will sell equipment to Precision
Auto Wash franchisees and to other third parties for installation in car wash
centers that are not franchised or otherwise affiliated with Precision Auto
Wash. HydroSpray's operations principally include the assembly of parts that
have been manufactured by suppliers to HydroSpray specifications. This assembly
process is conducted at HydroSpray's 40,000 square foot manufacturing facility
located in Cedar Falls, Iowa.
National Auto Chemicals blends and distributes the chemical solutions used in
Precision Auto Wash centers including the "Mean Green" presoak and other
solutions of the type which are required in the Precision Auto Wash system.
National Auto Chemicals makes its chemicals and supplies available to Precision
Auto Wash franchisees and other third parties who are not franchisees or
otherwise affiliated with Precision Auto Wash.
Worldwide manufactures and distributes drying systems for installation in
automatic car washes. Worldwide's dryers are available to Precision Auto Wash
franchisees and other third parties who are not franchisees or otherwise
affiliated with Precision Auto Wash. Worldwide's operations are conducted out of
a 9,600 square foot leased plant outside Denver, Colorado.
Precision Lube Express. Precision Building Solutions Incorporated ("PBSI")
manufactures and installs the modular building and equipment system used by
Precision Lube Express centers. PBSI conducts these manufacturing operations at
a 27,000 square foot facility located in Mansfield, Ohio. PBSI also sells its
modular buildings to third parties for various commercial applications. The
buildings are delivered, installed, field-tested, and outfitted with all of the
supplies and tools necessary to commence operations immediately. Most
installations are complete within three to five business days from the date of
receipt, thus providing competitive time and cost advantages over traditional
construction. PBSI purchases parts from third-party suppliers which are
manufactured to the PBSI's specifications.
The Company is not dependent upon any single supplier and the parts and
materials the Company uses in connection with its manufacturing process can be
obtained from a variety of suppliers.
Franchising Activities
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Precision Tune Auto Care. As of June 30, 1998, substantially all of the
Company's Precision Tune Auto Care centers were owned and managed by
franchisees. Precision
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Tune Auto Care's franchises have been sold during the preceding years under
franchise agreements that vary in detail as the Precision Tune Auto Care's
franchise program has evolved. Royalty rates in existing franchise arrangements
range from 6% to 7.5%. Currently, the Precision Tune Auto Care's standard
franchise agreement requires payment to the Company of an initial franchise fee
of $25,000 and a continuing royalty of 7.5% of weekly gross receipts. In
addition, the franchisee is required to contribute to or expend 9% of weekly
gross receipts on advertising, 1.5% of which is currently paid into the national
advertising fund and 7.5% of which is spent locally. The current standard form
franchise agreement has an initial term of ten years and provides for five year
renewal options.
The Company has implemented a program under which qualified franchisees are
eligible to have their royalty rate reduced to 6% if they satisfy certain
criteria. Under the program, franchisees are also provided with an incentive to
purchase additional Precision Tune Auto Care franchises. Any franchisee who has
owned and operated a center for at least one year in accordance with this
program will be charged an initial franchise fee of $15,000 for a second
franchise and $10,000 for each additional franchise purchased, provided certain
conditions are met.
Under its current form of franchise agreement, the Company has a continuing
obligation to provide technical and administrative support, supervisory
services, centralized advertising, and training and related support to its
franchisees. In certain regions, the Company has delegated these duties to area
developers under its area developer system.
Upon non-renewal and transfer, the Company has the first right to purchase the
operating assets and obtain an assignment of leased facilities in certain cases.
In certain situations, the Company will repurchase franchise rights. The
decision to repurchase is made solely at the Company's discretion and is not a
contractual obligation. The Company also periodically obtains possession of some
franchisees' franchise rights by exchanging for such rights notes payable or
other consideration, or by exercising rights outlined in the Franchise
Agreements.
The Company also enters into master franchise agreements to develop
international markets. At the present time, the Company has master franchise
agreements in Taiwan, Singapore, Indonesia, Oman, the Bahamas, Curacao/Aruba,
Jamaica, the Dominican Republic, St. Croix, Peru, and Brazil. Generally, the
master franchisee pays a license fee and is required to develop Precision Tune
Auto Care centers in accordance with an agreed upon schedule within the defined
area. Franchise agreements within the area are between the master franchisee and
the unit franchisee. The master franchisee is required to perform all of the
obligations of the franchisor including training, administrative and operational
support, and the Company generally receives 20% of the initial franchise fee and
up to one-third of ongoing royalty fees.
-11-
<PAGE>
Precision Auto Wash. The Company sold six car wash centers to franchisees under
its Turnkey Program in the year ended June 30, 1998. The Company is also
aggressively marketing Precision Auto Wash franchises. The standard franchise
agreement for Precision Auto Wash franchisees will require the payment of an
initial franchise fee of $20,000. The initial franchise fee includes a $5,000
credit that may be applied towards parts and supplies purchased from the
Company. Franchisees will be required to pay continuing royalties of 5% of
weekly gross receipts.
Franchisees will also be required to contribute an amount equal to 2% of their
monthly gross receipts to a national advertising fund and an additional amount
of their gross receipts royalties to a local advertising cooperative. In
addition, a franchisee will receive franchise protection within a specified
area. Precision Auto Wash franchise agreements have an initial term of ten years
and provide for five-year renewal options.
Precision Lube Express. The standard franchise agreement for Precision Lube
Express franchisees requires the payment of an initial franchise fee of $12,500.
Franchisees are required to pay continuing royalties of 5% of weekly gross
receipts. Precision Lube Express franchisees also are required to contribute an
amount equal to 2% of their monthly gross receipts to a national advertising
fund and an additional amount of their gross receipts royalties to a local
advertising cooperative. The franchise agreements have an initial term of ten
years and provide for five-year renewal options. Certain Precision Lube Express
franchise agreements (namely those inherited in connection with the IPO
Combination) have terms that vary with the standard agreement now in use.
Precision Turnkey Program. In addition to the direct franchising activities
discussed above, pursuant to which franchisees select a site and subsequently
develop a Precision Auto Care center on the site, the Company operates a
Precision Turnkey Program. Under this program, franchisees purchase either
existing Company-owned centers or recently-developed centers from the Company.
At the time the franchisee purchases the center, the franchisee also purchases a
franchise license (pursuant to which the franchisee agrees to pay royalties to
the Company on the same basis as franchisees who execute the Company's current
standard form of franchising agreement) as well as the center's assets and
goodwill. The program is designed to enhance franchising sales by providing
readily available and immediately operational sites of Company-selected
locations.
Competition
- -----------
The Company encounters competition in all aspects of its business, including the
sale by Precision Tune Auto Care, Precision Auto Wash and Precision Lube Express
centers of automotive maintenance and repair services, self-service and
automatic car wash services and fast oil and lubrication services, respectively.
The Company believes that automobile dealerships, including recently emerging
national and regional new and used
-12-
<PAGE>
auto dealerships, represent Precision Tune Auto Care's principal competitors.
Other Precision Tune Auto Care competitors include tire companies and regional
under-the-hood service specialists. National competitors within Precision Tune
Auto Care's market include Sears Auto Center and the automotive maintenance
centers operated by Goodyear, Firestone and Penske, among others. Its regional
competitors include All Tune and Lube (East Coast), EconoLube and Tune (West
Coast), Tunex International, Inc. (Rocky Mountain region), Tune-Up Masters and
Speedee Oil Change and Tune-Up (Southern region), among others. The Company
believes that the greater technical complexity of today's vehicles provides a
substantial barrier to entry for competitors in the "under-the-hood" segment of
the automotive care services industry.
Precision Auto Wash competes not only with other self-service automobile car
washes but with car wash services provided by full-service tunnels, exterior
only tunnels, hand washes, oil company washes, and do-it-yourself car washing.
Precision Lube Express also competes in the service segment of the automotive
aftermarket industry. According to the American Oil Change Association, an
estimated 650 million oil changes are performed annually in cars and light
trucks. These oil changes are performed by individuals or are performed
professionally. Professional oil changes are performed in all types of
automotive aftermarket outlets including fast oil change and lubrication
facilities such as those operated by the Company, car dealerships, and gasoline
stations. On a national level, Precision Lube Express competes with a number of
major oil manufacturers dominating the fast lube market. These include Pennzoil
Company (Jiffy Lube International, Inc.), Quaker State Corp. (Q-Lube Inc.),
Valvoline Company/Ashland Oil Inc. (Instant Oil Change) and Texaco Inc. (Express
Lube), among others. In addition, Precision Lube Express competes with regional
fast oil and lubrication operations including All Tune and Lube, EconoLube and
Tune, Tunex International Inc. and Speedee Oil Change and Tune-Up, among others.
The Company believes that the Precision Tune Auto Care, Precision Auto Wash and
Precision Lube Express centers all compete on the basis of customer awareness
through advertising, service, convenience and location and, to a lesser extent,
on price. The Company believes that the potential ability to offer all of the
services provided by each of the operations at one center or in centers in close
proximity to one another will be a significant competitive advantage.
The Company's HydroSpray subsidiary competes with many other manufacturers of
self-service and touchless automatic car wash equipment manufacturers. Many of
these competitors are larger and well-established. The Company's competitors
include, but are not limited to, Mark VII Industries, Inc., Ryko, PDQ and many
smaller businesses. Some of these companies are well capitalized and have long
standing relationships with large oil companies who frequently purchase their
equipment for installation at car washes located on or adjacent to gasoline
stations.
-13-
<PAGE>
Governmental Regulation
- -----------------------
Franchising Regulation. The Company is subject to federal, international and
state laws and regulations, including the regulations of the Federal Trade
Commission as well as similar authorities in individual states, in connection
with the offer, sale and termination of franchises and the regulation of the
franchisor/franchisee relationship. The failure by the Company to comply with
these laws could subject the Company to liability to franchisees and to fines or
other penalties imposed by governmental authorities. From time to time, the
Company experiences periods during which sales are restricted while it registers
updates of its disclosure material with various states. Such delays may have an
adverse effect on the Company's ability to offer and sell franchises. In
addition, the Company may become subject to litigation with, or other claims
filed with state, federal or international authorities by, franchisees or area
developers based on alleged unfair trade practices, implied covenants of good
faith and fair dealing or express violations of agreements. Accordingly, the
failure of the Company to comply with applicable franchise laws and regulations
could have a material adverse effect on the Company's financial condition and
results of operations.
Environmental Regulation. Precision Tune Auto Care and Precision Lube Express
centers store new oil and handle large quantities of used automotive oils and
fluids. Precision Auto Wash centers use chemicals in the washing process. These
chemicals, along with oils, fluids and other chemicals washed off of the vehicle
are collected with the waste water from the car wash process. As a result of
these activities, the Company, its franchisees and area developers are subject
to various federal, state and local environmental laws and regulations dealing
with the transportation, storage, presence, use, disposal and handling of
hazardous materials and hazardous wastes, discharge of stormwater, and
underground fuel storage tanks. If any such substances were improperly released
or improperly stored on the Company's property or the property of any
franchisee, including leased properties, or if the Company were found to be in
violation of applicable environmental laws and regulations, the Company could be
responsible for clean-up costs, property damage and fines or other penalties,
any one of which could have a material adverse effect on the Company's financial
condition and results of operations.
Trademarks
- ----------
The Company has registered (subject to certain limited exceptions) a number of
trademarks and service marks with the United States Patent and Trademark Office,
including "Precision Tune Auto Care," and has filed trademark and service mark
applications with respect to the names "Precision Auto Wash" and "Precision Lube
Express." The Company's failure to obtain trademark and service mark
registration could have a material adverse effect on the Company's operations.
The Company has also registered and made application to register trademarks in
foreign countries where master franchise licenses have been granted.
-14-
<PAGE>
Seasonality
- -----------
Seasonal changes may impact various sectors of the Company's businesses and,
accordingly, the Company's operations may be adversely affected by seasonal
trends in certain periods. In particular, severe weather in winter months may
make it difficult for consumers in affected parts of the country to travel to
Precision Tune Auto Care, Precision Lube Express and Precision Auto Wash centers
and obtain services. Severe winter weather and rainy conditions also can
adversely impact the Company's sale, installation and use of car wash equipment.
Conversely, the Precision Auto Wash business is favorably impacted by less
severe winter weather conditions as demand for the Company's car wash service
increases substantially in winter months.
Risk Factors
- ------------
The Companies business and an investment in its Common Stock are
subject to certain risks, including the following:
Limited Operating History. The Company has not yet completed a full year of
operations as a combined entity. While a predecessor of the Company has been in
business since 1976, the Company as currently constituted, acquired the majority
of its assets in November 1997 as the result of a combination of nine automotive
maintenance services companies in connection with its initial public offering.
In addition, since the IPO Combination, the Company has completed additional
acquisitions in the fiscal year ended June 30, 1998. The integration process
relating to all of the Company's acquisitions is not fully completed and there
can be no assurance that the Company's management will be able to successfully
manage the operations of the combined entity.
Management of Growth. The Company's growth and expanding operations will likely
continue to place a significant strain on the Company's management,
administrative, operational, and financial resources as well as demands on its
operating, financial and management systems and controls. To manage its growth
successfully, the Company will need to: (i) integrate successfully the
operations of any acquired businesses (including the business the Company
acquired in the IPO Combination) with the Company's operations; (ii) enhance
further its operational, financial and management systems, marketing and
franchising programs; (iii) manage and retain its current employees; and (iv)
identify, hire and train additional employees. Growth and expansion into new
markets will require the Company to establish and maintain new parts and
equipment distribution channels and local and regional support services for new
franchisees. The failure of the Company to manage its growth on an effective
basis would have a material adverse effect on the Company's business, financial
condition and operating results.
Liquidity. At the end of the fiscal year ended June 30, 1998 the Company was not
in compliance with certain covenants contained in its bank credit agreement. As
a result of certain acquisitions the Company had been pursuing, but terminated
during the quarter ended September 30, 1998, and increased working capital
requirements, the Company had borrowed substantially all amounts available
under its credit facility. The Company recently amended its bank credit
agreement. The amendment to the Company's credit agreement requires the Company
to obtain additional debt financings in a timely fashion and to apply certain
proceeds from such financings against amounts outstanding under the credit
agreement. In the event that the Company fails to obtain this financing or fails
to satisfy 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 and the Company would be in
default of its bank credit agreement. For a discussion of the Company's
liquidity position and a description of the terms of the amendment to the bank
credit facility, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources".
Competition. The automotive services industry is highly competitive. Direct
competitors exist for each of the Company's businesses, Precision Tune Auto
Care, Precision Auto Wash, Precision Lube Express and the Company's
manufacturing and distribution divisions and subsidiaries.
-15-
<PAGE>
The Company believes that automobile dealerships, including recently emerging
national and regional new and used auto dealerships, represent the principal
competitors for Precision Tune Auto Care and Precision Lube Express; however,
the Company also competes with national and regional fast oil change and lube
companies, major oil manufacturers, local service stations, and local, regional
and national automobile maintenance and repair service providers. "See Business
- -- Competition." Competitors for the services provided by Precision Auto Wash
include regional and local car wash operators. The Company believes the
principal competitive factors in the markets serviced by each of its business
units are location, name recognition and reputation, quality of service and
price.
The Company also competes with some of those noted above and with other parties
in the sale of franchises. Competitive factors include startup costs, royalty
rates, franchisee support and the financial performance of existing centers.
With respect to the sales of supplies and equipment for franchisees, competition
is based on availability, price, ability to provide prompt delivery and the
quality of support services.
The Company's manufacturing and distribution division competes with a number of
manufacturers and distributors of automotive and car wash supplies and
equipment. Many of these competitors are large and have a substantially longer
operating history than the Company. In addition, although the Company does not
intend to sell its complete proprietary automated car wash system to
unaffiliated car wash centers, the Company sells certain car wash equipment to
car wash centers unaffiliated with the Company. The sale of car wash equipment
to unaffiliated car wash centers could increase the level of competition in the
Company's car wash business, allow the Company's competitors to compete more
effectively with the Company or reduce the Company's ability to distinguish
itself from its competitors. See "Business -- Operations -- Manufacturing and
Distribution."
Certain competitors in each of the areas discussed above have greater
financial resources than the Company, and there can be no assurance that the
Company or individual Precision centers will be able to compete effectively.
See "Business -- Competition."
Reliance on Franchising. Franchise royalties are a significant component of the
Company's revenue base. Therefore, the Company depends upon the ability of its
franchisees to promote and capitalize upon the "Precision" brand and the
reputation the Company believes it enjoys for quality and value. There can be no
assurance that the Company or its area developers will be able to recruit and
retain franchisees with the business abilities or financial resources necessary
to open Precision Tune Auto Care, Precision Auto Wash and Precision Lube Express
centers on schedule or that the franchisees will conduct operations profitably.
In addition, to the extent that franchisees finance their operations with
secured indebtedness, the Company's rights to receive franchise royalties would
be effectively subordinated to the rights of franchisees' lenders. See "Business
- -- Operations."
-16-
<PAGE>
Automotive Technology Advances. The demand for the services offered by the
Company's Precision Tune Auto Care and Precision Lube Express centers could be
adversely affected by continuing developments in automotive technology.
Automotive manufacturers are producing cars that last longer and require service
and maintenance at less frequent intervals. For example, some manufacturers now
recommend that consumers change oil at 10,000 mile intervals and replace spark
plugs and other engine components at 100,000 miles, a significant increase from
the mileage intervals recommended for earlier models and those currently
recommended by most manufacturers. The demand for the Company's services also
could be adversely affected by longer and more comprehensive warranty programs
offered by automobile manufacturers. The Company believes that a majority of new
automobile owners have their cars serviced by a dealer during the period the car
is under warranty. In addition, advances in automotive technology may require
the Company to incur additional costs to update its technical training program
and upgrade the diagnostic capabilities of its centers.
Labor Availability. The provision of high quality maintenance services by
Precision Tune Auto Care centers requires an adequate supply of skilled labor.
In addition, the operating costs and operating revenues of such centers may be
adversely affected by high turnover in skilled technicians. Trained and
experienced automotive technicians are in high demand. Accordingly, a center's
ability to increase productivity and revenues could be affected by its inability
to maintain the employment of skilled technicians necessary to provide the
center's services. There can be no assurance that Precision Tune Auto Care or
its franchisees will be able to attract and maintain an adequate skilled labor
force necessary to efficiently operate these centers or that labor expenses will
not increase as a result of a shortage in the supply of skilled technicians,
thereby adversely impacting the Company's financial performance.
Dependence on Management and Key Personnel. The Company's success depends to a
significant extent on the performance and continued services of senior
management and certain key personnel. The Company believes these individuals
possess the necessary experience in acquiring, integrating, developing,
financing and operating the various types of Precision Auto Care centers and the
Company's related franchising and manufacturing and distribution activities, as
well as managing a company intending to implement an aggressive acquisition
program. The loss of the services of one or more of these key employees could
have a material adverse impact on the Company's financial condition and results
of operations. The Company has employment agreements with certain key
executives. Each of the employment agreements contains certain noncompetition
provisions that survive the termination of employment in certain circumstances.
The Company also has obtained certain noncompetition agreements from several
other members of management and key personnel who are not subject to employment
agreements. However, there can be no assurance that such noncompetition
agreements will be enforceable.
-17-
<PAGE>
Reliance on Area Developers. The Company relies, in part, on the assistance of
area developers to identify and recruit franchisees, to assist in the
development of a center, and to support franchisees' continuing operations. Most
area development agreements specify a schedule for opening the respective
"Precision" centers in the territory covered by the agreement. In the past, the
Company has selectively agreed to extend or waive the development schedules for
certain of its area developers and there can be no assurance that area
developers will be able to meet their contractual development schedules.
Although the Company also has added the resources to directly franchise in open
areas, the development schedules of the Company's area developers will remain a
part of the basis of the Company's expectations regarding the number and timing
of new center openings.
The Company will depend on its area developers to promote the Precision Tune
Auto Care, Precision Auto Wash and Precision Lube Express franchises in their
territories. The Company initially encountered some resistance to the
introduction of the Precision Auto Wash and Precision Lube Express brands. For
example, some area developers resisted the Company's efforts to offer Precision
Lube Express franchises or open Company-owned centers in areas covered by
Precision Tune Auto Care area subfranchisor agreements.
The Company believes that its area developers and the Company have substantially
resolved any concerns expressed by its area developers. There can be no
assurance, however, that the Company will not become subject to legal
proceedings or otherwise expend Company resources in connection with disputes
concerning the Company's ability to offer and sell Precision Lube Express and
Precision Auto Wash franchises or open Company-owned centers in areas covered by
Precision Tune Auto Care area subfranchisor agreements. It also may be difficult
for the Company to enforce its area subfranchisor agreements or to terminate the
rights of area subfranchisors who fail to meet development schedules or other
standards and requirements imposed by the Company, limiting the ability of the
Company to develop the territories of such subfranchisors. Any such disputes or
difficulties could increase the costs of the Company's operations or otherwise
adversely affect the Company's financial condition and results of operations.
See "Business -- Operations."
Seasonal Nature of Portions of the Business. Seasonal changes may impact various
sectors of the Company's businesses and, accordingly, the Company's operations
may be adversely affected by seasonal trends in certain periods. In particular,
severe weather in winter months may make it difficult for consumers in affected
parts of the country to travel to Precision Tune Auto Care, Precision Lube
Express and Precision Auto Wash centers and obtain services. Severe winter
weather and rainy conditions also can adversely impact the Company's sale,
installation and use of car wash equipment. Conversely, the Precision Auto Wash
business is favorably impacted by less severe winter weather conditions as
demand for the Company's car wash service increases substantially in winter
months.
-18-
<PAGE>
Control by Management and Principal Shareholders. As of September 18, 1998,
directors of the Company, executive officers of the Company, and shareholders
beneficially-owning more than 5% of the Company's outstanding Common Stock, in
the aggregate beneficially owned approximately 61% of the Company's outstanding
Common Stock. Accordingly, these persons have substantial influence over the
affairs of the Company, including the ability to influence the election of
directors, the outcome of votes by the Company's shareholders on major corporate
transactions, including mergers, sales of substantial assets, acquisitions and
going-private transactions, and other matters requiring shareholder approval.
Risks of Acquisitions/Integration of Acquisitions. To the extend that a portion
of the Company's future growth occurs through acquisitions, the success of the
Company will depend on a number of factors, including (i) the Company's ability
to locate existing automotive maintenance services businesses or centers for
acquisition that meet the Company's operating and financial criteria, (ii) the
availability of adequate financing to acquire or develop such additional
businesses and centers, and (iii) the Company's ability to integrate
successfully the operations of businesses or centers acquired in the future into
the Company's operations. There can be no assurance that any acquisition
strategy pursued by the Company will be successful, that modifications to any
such strategy will not be required, or that the Company will be able to obtain
adequate financing on reasonable terms to acquire or develop additional
businesses or centers. There can be no assurance that any suitable acquisitions
can be identified or consummated or that the Company's lender will give its
consent to any such acquisition. Further, there can be no assurance that the
Company will be able to integrate successfully the operations of the acquired
businesses, including their franchising activities. In addition, increased
competition for acquisition candidates may increase purchase prices for
acquisitions to levels beyond the Company's financial capability or assessment
of value and the Company may be competing for acquisitions and expansion
opportunities with companies that have substantially greater resources. The
size, cost, timing and integration of any future acquisitions may cause
substantial fluctuations in operating results from quarter to quarter.
Consequently, operating results for any quarter may not be indicative of the
results that may be achieved for any subsequent fiscal quarter or for a full
fiscal year. The Company may experience delays, complications and unforeseen
losses and expenses in implementing and integrating acquisitions, which could
also have a material adverse effect on the Company's operations and financial
results.
The integration of newly-acquired companies may also lead to a diversion of
management attention from other ongoing business concerns which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
-19-
<PAGE>
The Company expects that it will conduct due diligence reviews of businesses to
be acquired and receive representations and warranties regarding acquired
businesses. There can be no assurance, however, that unforeseen liabilities will
not arise in connection with the operation of the businesses acquired to date,
or other future acquired businesses or that any contractual purchase price
adjustments, rights or set-off, or other remedies available to the Company will
be sufficient to compensate the Company in the event unforeseen liabilities
arise. Once integrated, acquired operations may not achieve levels of revenues
or profitability comparable with those achieved by the Company's existing
operations, or achieve standards otherwise expected.
Risks Related to Acquisition Financing; Additional Dilution; Leverage. To the
extent that the Company's lender consents to an acquisition and the Company
pursues acquisitions, the Company currently intends financing any future
acquisitions it may consummate by using shares of its Common Stock, cash,
borrowed funds or a combination thereof. If the Company's Common Stock does not
maintain a sufficient market value, or if potential acquisition candidates are
otherwise unwilling to accept Common Stock as part of the consideration for the
sale of their businesses, the Company may be required to use more of its cash
resources or more borrowed funds, in each case, if available, in order to follow
its acquisition strategy.
Franchising Regulation. The Company is subject to federal, international and
state laws and regulations, including the regulations of the Federal Trade
Commission as well as similar authorities in individual states, in connection
with the offer, sale and termination of franchises and the regulation of the
franchisor/franchisee relationship. See "Business -- Government Regulation." The
failure by the Company to comply with these laws could subject the Company to
liability to franchisees and to fines or other penalties imposed by governmental
authorities. From time to time, the Company experiences periods during which
sales are restricted while it registers updates of its disclosure material with
various states. Such delays may have an adverse effect on the Company's ability
to offer and sell franchises. In addition, the Company may become subject to
litigation with, or other claims filed with state, federal or international
authorities by, franchisees or area developers based on alleged unfair trade
practices, implied covenants of good faith and fair dealing or express
violations of agreements. Accordingly, the failure of the Company to comply with
applicable franchise laws and regulations could have a material adverse effect
on the Company's financial condition and results of operations.
Environmental Regulation. Precision Tune Auto Care and Precision Lube Express
centers store new oil and handle large quantities of used automotive oils and
fluids. Precision Auto Wash centers use chemicals in the washing process. These
chemicals, along with oils, fluids and other chemicals washed off of the vehicle
are collected with the waste water from the car wash process. As a result of
these activities, the Company, its franchisees and area developers are subject
to various federal, state and local environmental laws and regulations dealing
with the transportation, storage, presence, use, disposal and handling of
hazardous materials and hazardous wastes, discharge of stormwater, and
-20-
<PAGE>
underground fuel storage tanks. If any such substances were improperly released
or improperly stored on the Company's property or the property of any
franchisee, including leased properties, or if the Company were found to be in
violation of applicable environmental laws and regulations, the Company could be
responsible for clean-up costs, property damage and fines or other penalties,
any one of which could have a material adverse effect on the Company's financial
condition and results of operations. See "-- Government Regulation."
Risks of International Operations. International operations comprised
approximately 6% of the Company's pro forma consolidated net revenue during the
fiscal year ended June 30, 1998. The Company intends to expand its international
operations through acquisitions and master licenses in targeted areas.
International operations are subject to risks such as currency exchange rate
fluctuations, unique legal and regulatory requirements, political and economic
uncertainties, difficulties in staffing and managing foreign operations,
differences in financial reporting, differences in the manner in which different
cultures do business, operating difficulties and other factors. The many
difficulties and risks inherent in international operations could result in a
material adverse impact on the Company's business, financial condition and
results of operation.
Year 2000 Compliance. The Company has assessed and will continue to assess the
impact the Year 2000 issue will have on its reporting and operating systems. In
connection with upgrading its operational, financial and management systems, the
Company is in the process of converting its financial and operations software
from a system that the Company believes is not Year 2000 compliant to a
LAN-based system the manufacturer of which has represented is Year 2000
compliant. Although the Company does not anticipate that the Year 2000 issue
will have a significant impact on its business, unanticipated Year 2000
compliance problems of the Company, its vendors or suppliers could potentially
have a material adverse effect on the Company's business, financial condition
and operating results.
Item 2. Properties
----------
The Company's corporate headquarters are located in approximately 24,000 square
feet of leased office space in Leesburg, Virginia pursuant to a lease that
expires in 2002. The Company also leases 32,000 square feet in Winchester,
Virginia pursuant to a lease that expires in 2002. The Winchester facility
houses PAC, which warehouses the parts that are distributed to the Company's
Precision Tune Auto Care operation.
The Company conducts its HydroSpray car wash equipment manufacturing operations
from a 40,000 square foot Company-owned facility located in Cedar Falls, Iowa.
The Company conducts its Worldwide Drying Systems car wash drying equipment
manufacturing operations from a 9,600 square foot leased facility outside of
Denver, Colorado.
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<PAGE>
The Company conducts its car wash chemical blending and distribution operations
from an 8,000 square foot Company-owned facility located in Columbus, Ohio and
operates its modular building manufacturing facility from a 27,000 square foot
Company-owned building located in Mansfield, Ohio.
The Company believes that the manufacturing facilities described above will
provide the Company with sufficient manufacturing capacity for the foreseeable
future.
The Company's rental obligations on its headquarters and leased warehouse and
manufacturing facilities was approximately $412,000 for the year ended June 30,
1998. The Company owns the underlying real estate for 45 Company-owned centers
and 2 franchised centers. The remaining 6 Company-owned centers are leased. The
Company-owned real estate for franchised centers is subleased to franchisees.
The rent expense associated with Company-owned centers for the year ended June
30, 1998 of $209,000 is the net amount after allowing for $790,000 of sublease
income.
In the opinion of management, the Company's current space is adequate for its
operating needs.
Item 3. 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 applicable
of these agreements, particularly in 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 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
-22-
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
-----------------------------------------------------
The Company's common stock, par value $.01 per share ("Common Stock") is
publicly traded on the Nasdaq Stock Market ("Nasdaq") and is quoted under the
symbol "PACI."
As of September 18, 1998, there were 223 record holders of Common Stock. The
number of record holders was determined from the records of the Company's
transfer agent and does not include beneficial owners of Common Stock whose
shares are held in the names of various securities brokers, dealers and
registered clearing agencies. The Company estimates that there are approximately
1,050 shareholders.
The following table sets forth the high and low sales prices on the Nasdaq for
the Common Stock during the fiscal year ended June 30, 1998 following the
completion of its initial public offering in November, 1997. To date, the
Company has not paid any dividends and does not anticipate paying any dividends
in the foreseeable future. The terms of the Company's credit agreement also
restrict the Company from paying any dividends.
<TABLE>
Fiscal Year Ended June 30, 1998
<CAPTION>
Quarter High Low
- ------- ---- ---
<S> <C> <C>
First* n/a n/a
Second* $ 9 1/16 $ 7
Third 11 8 5/8
Fourth 11 9 3/4
- ----------
* The Company's Common Stock began trading on the Nasdaq on November 6, 1997.
</TABLE>
-23-
<PAGE>
Item 6. Selected Financial Data
-----------------------
<TABLE>
<CAPTION>
Actual
------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $41,776 $27,457 $26,734 $26,579 $24,814
Net Income (loss) from operations $ 1,228 $ 1,255 $ 1,070 $ (225) $ 757
Net EPS (diluted) $0.28 $0.82 $0.73 $(0.11) $0.54
Total assets $86,549 $26,694 $25,654 $24,810 $25,325
Total debt $24,243 $ 9,379 $ 8,462 $ 8,633 $ 9,011
Cash dividends declared per common share (1) $- $- $- $- $-
(1) In conjunction with the Company's initial public offering, in 1998 a cash dividend totaling approximately
$360,000 was declared and paid to the former shareholders of WE JAC Corporation, but is not included in
the per share amounts.
</TABLE>
Item 7. 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 elsewhere in this Form 10-K.
The Company, a Virginia corporation, was incorporated in April 1997 and
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 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
-24-
<PAGE>
results presented herein as "Actual" consist of WE JAC for the full fiscal year
ending June 30, 1998 ("Fiscal 1998"), and, beginning with the IPO Combination,
the results of operations from the Predecessor Companies and the results of
Praxis from its date of acquisition. 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 $600,000 in the quarter ending June 30, 1998 and an estimated charge
of approximately $700,000 will be made in the quarter ended September 30, 1998
relating to professional fees, deposits and other costs relating to the proposed
acquisitions.
-25-
<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 intercompany
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 following table sets forth certain income statement items as a
percentage of net revenue for the years ended June 30, 1997 and 1998.
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Net revenue 100% 100%
Direct cost 74 74
-- --
Contribution 26 26
General and administrative expense 9 9
Depreciation and amortization expense 6 6
-- --
Operating income 11 11
Other expense (2) (2)
-- --
Income before taxes 9 9
Provision for income taxes 5 5
-- --
Net income 4% 4%
== ==
</TABLE>
-26-
<PAGE>
Pro Forma: Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
- -------------------------------------------------------------------------
Pro Forma Revenue. Pro forma revenues for the year ended June 30, 1998
were $48.0 million, an increase of $4.9 million or 11%, compared with revenues
of $43.1 million for the prior year. Revenues from manufacturing and
distribution operations for the year ended June 30, 1998 increased $1.7 million,
or 7%, over 1997, principally as a result of improved sales performance in
Hydrospray, the Company's car wash equipment manufacturer. Revenues from
Company-owned centers for the year ended June 30, 1998 increased $1.4 million,
or 37%, relative to the same period in 1997 as the result of the acquisition of
additional centers following the IPO Combination along with upgrades to the
centers and the application of the Company's management and marketing programs,
which generally have increased same store sales. Royalty revenues increased
$896,000, or 7%, from the prior year reflecting increases in retail sales at
domestic centers and the addition of Praxis, the Company's Mexican subsidiary.
Franchise development sales for the year ended June 30, 1998 increased $591,000
from the prior year as the result of $495,000 of sales under the turnkey sales
program and $260,000 from the sale of property, offset by a net decline in
franchise revenues of $164,000. This net decline is comprised of increases in
sales of Precision Auto Wash and Precision Lube Express franchises (which were
new in fiscal 1998) and Praxis franchise sales in the fourth quarter less
decreases in international master license sales in fiscal 1998 versus 1997 and a
slight decrease in revenues from Precision Tune Auto Care franchises related to
a lower number of store openings in fiscal 1998 versus 1997.
Pro Forma Direct Cost. Pro forma direct costs for the year ended June
30, 1998 were $35.3 million, an increase of $3.2 million, or 10%, compared with
direct costs of $32.0 million for the prior year. Overall direct costs increased
at a slightly lower rate than revenues, resulting in an increase in contribution
from Fiscal 1997 to Fiscal 1998 of $1.6 million, or 15%.
Pro Forma General & Administrative Expenses. Pro forma general and
administrative expenses were $4.4 million for the year ended June 30, 1998, an
increase of $615,000, or 16%, from $3.8 million for the prior year. This
increase was related to continued development of the Company's infrastructure to
execute its growth plan.
Pro Forma Amortization and Depreciation Expense. Pro forma amortization
and depreciation expense for the year ended June 30, 1998 was $2.7 million, an
increase of $41,000, or 2%, from expense of $2.6 million for the same period in
1997. This increase was related to amortization and depreciation for the
businesses acquired during the fiscal year.
Pro Forma Operating Income. Pro forma operating income for the year
ended June 30, 1998 of $5.6 million represented an increase of $1.0 million, or
21%, from the operating income of $4.6 million a year earlier. This increase is
largely the result of an increase in contribution margin of $1.6 million which
was partially offset by an increase in general and administrative expenses of
$615,000.
-27-
<PAGE>
Pro Forma Interest Income. Pro forma interest income for the year ended
June 30, 1998 of $143,000 declined $26,000, or 5%, from interest income of
$169,000 for the same period in 1997 as the result of lower average cash
balances.
Pro Forma Interest Expense. Pro forma interest expense for the year
ended June 30, 1998 was $791,000, an increase of $350,000, or 79%, from interest
expense of $442,000 for the same period a year earlier as the result of higher
borrowing levels partially offset by a decline in applicable interest rates.
Pro Forma Other Expense. Pro forma other expense for the year ended June
30, 1998 was $808,000, an increase of $267,000 or 49%, from $541,000 the prior
year. This increase was the result of a $600,000 charge incurred in connection
with the Company's acquisition activities and the related financing effort, both
of which were suspended during September 1998.
Pro Forma Provision for Income Taxes. The pro forma provision for
income taxes for the year ended June 30, 1998 of $2.3 million resulted in an
effective tax rate of 56%, which is caused by the impact of the portion of
amortization of goodwill that is not deductible for tax purposes relative to pro
forma pre-tax income.
Pro Forma Net Income/Earnings per Share. Pro forma net income for the
year ended June 30, 1998 was $1.8 million, an increase of $9,000 or 0.5% over
the pro forma net income of $1.8 million for the same period in 1997. Pro forma
earnings per share of $0.32 for the year ended June 30, 1998 decreased by $0.01
from pro forma earnings per share of $0.33 for the prior year.
Results of Operations - Actual
- ------------------------------
The following table sets forth certain income statement items as a
percentage of net revenue for the year ended June 30, 1996, 1997 and 1998.
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Net revenue 100% 100% 100%
Direct cost 74 74 74
-- -- --
Contribution 26 26 26
</TABLE>
-28-
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
General and administrative expense 8 9 10
Depreciation and amortization expense 4 4 5
-- -- --
Operating income 14 13 11
Other expense (6) (4) (4)
-- -- --
Income before taxes 8 9 7
Provision for income taxes 4 5 4
-- -- --
Net income 4% 4% 3%
-- -- --
</TABLE>
Actual: Year Ended June 30, 1998 Compared to Year Ended June 30, 1997
- ---------------------------------------------------------------------
Revenue. Actual revenues for the year ended June 30, 1998 were $41.8
million, an increase of $14.3 million, or 52%, compared with revenues of $27.5
million for the prior year. This increase relates principally to the results of
the companies acquired simultaneous with and after the IPO Combination.
Direct Cost. Actual direct costs for the year ended June 30, 1998 were
$30.7 million, an increase of $10.4 million, or 51%, compared with direct costs
of $20.3 million for the prior year. This increase in direct costs was
approximately commensurate with the increase in revenues. Overall direct costs
increased at a slightly lower rate than revenues, resulting in an increase in
contribution from fiscal 1997 to fiscal 1998 of $3.9 million, or 54%.
General & Administrative Expenses. Actual general and administrative
expenses for the year ended June 30, 1998 were $4.1 million, an increase of $1.8
million, or 77%, from $2.3 million for the prior year. This increase primarily
relates to the results of the companies acquired simultaneous with and after the
IPO Combination. The Company also incurred expenses in 1998 associated with the
development of infrastructure to execute its growth plan.
Amortization and Depreciation Expense. Actual amortization and
depreciation expense for the year ended June 30, 1998 was $2.2 million, an
increase of $1.1 million, or 96%, from expense of $1.1 million for the prior
year. This increase was related to amortization and depreciation related to the
businesses acquired or merged during the fiscal year.
Operating Income. The actual operating income for the year ended June
30, 1998 of $4.7 million was an increase of $1.0 million, or 27%, from the
operating income of $3.7 million in the prior year. This increase is largely the
result of an increase in contribution margin of $3.9 million offset by an
increase in general and administrative expenses of $1.8 million and depreciation
and amortization expenses of $1.1 million.
-29-
<PAGE>
Interest Income. Actual interest income for the year ended June 30,
1998 of $159,000 was an increase of $11,000, or 8%, from interest income of
$148,000 for the prior year as the result of slightly higher average cash
balances offset by lower interest rates.
Interest Expense. Actual interest expense for the year ended June 30,
1998 was $1.0 million, a decrease of $18,000, or 2%, from interest expense of
$1.1 million for the prior year as the result of higher borrowing levels
partially offset by a decline in applicable interest rates.
Other Expense. Actual other expense for the year ended June 30,
1998 of $803,000 increased $562,000 or 233% from other expense for the prior
year. This increase was the result of a charge of $600,000 to expense
acquisition and financing costs incurred in conjunction with the Company's
acquisition activities and related financing effort, both of which were
suspended during September 1998.
Provision for Income Taxes. The provision for income taxes for the year
ended June 30, 1998 of $1.8 million results in an effective tax rate of 59%,
which largely results from the impact of the portion of amortization of goodwill
that is not deductible for tax purposes relative to the pretax income. The tax
provision for the same period a year earlier of $1.3 million represented an
effective tax rate of 50%.
Net Income/Earnings per Share. Actual net income for the year ended
June 30, 1998 was $1.2 million, a decrease of $27,000 or 2% over the net income
of $1.3 million for the prior year. Diluted earnings per share of $0.28 for the
year ended June 30, 1998 decreased by $0.54 from diluted earnings per share of
$0.82 for the prior year as the result of the additional shares issued in
connection with the IPO Combination and the Praxis acquisition.
Actual: Year Ended June 30, 1997 Compared to Year Ended June 30, 1996
- ----------------------------------------------------------------------
Revenue. Revenue increased $723,000 or 3% to $27.5 million for the year
ended June 30, 1997 from $26.7 million for the year ended June 30, 1996. This
reflects increases of $757,000 in royalty revenue, $235,000 in franchise revenue
and $82,000 in other revenues which were offset by a $351,000 decrease in sales
of equipment and parts. The increase in royalty revenue resulted from an
increase in system-wide sales reflecting the Company's emphasis on a wider range
of vehicle maintenance services instead of specialty tune ups. While this has
resulted in a lower average price per service visit, the volume of service
visits increased during the period. The Company's emphasis on providing a wider
range of vehicle maintenance services has resulted in a lower average cost per
service and a corresponding decrease in average parts sales per visit. The
increase in franchise revenue reflects the sale of international master
licenses, consistent with the Company's strategy to expand into international
markets. Including master license fees, franchise fees and royalties, total
revenues derived from international operations were $937,000 for the year ended
June 30, 1997 compared to $636,000 for the year ended June 30, 1996.
-30-
<PAGE>
Direct Cost. Direct cost increased $583,000, or 3%, to $20.3 million
for the year ended June 30, 1997 from $19.7 million for the year ended June 30,
1996. Direct cost as a percentage of revenue remained constant at 74% for 1997
and 1996, notwithstanding a $400,000 increase in expenses associated with
franchisee field operations and training support, marketing and communication
costs focused on the strategic repositioning of the business, and international
and domestic sales development costs. Equipment and parts costs decreased
$196,000 which was consistent with the decline in related sales.
Contribution. Contribution increased $140,000, or 2%, to $7.2 million
for the year ended June 30, 1997 from $7.0 million for the year ended June 30,
1996. Contribution margin as a percentage of revenue remained constant at 26%
for 1997 and 1996.
General and Administrative Expenses. General and administrative
expenses increased $288,000, or 14%, to $2.3 million for the year ended June 30,
1997 from $2.1 million for the year ended June 30, 1996. General and
administrative expenses as a percentage of revenue increased to 9% for the year
ended June 30, 1997 from 8% for the year ended June 30, 1996. This increase was
primarily due to the hiring of additional personnel and improvements made to the
Company's management information system.
Operating Income. Operating income decreased $110,000, or 3%, to $3.7
million for the year ended June 30, 1997 from $3.8 million for the year ended
June 30, 1996. Operating income as a percentage of revenues decreased to 13% for
the year ended June 30, 1997 from 14% for the year ended June 30, 1996. This
decrease reflects the divestiture of Company-owned stores which were operated by
the Company in 1996.
Other Income (Expense), Net. Other expense decreased $387,000, or 25%,
to $1.2 million for the year ended June 30, 1997 from $1.5 million for the year
ended June 30, 1996. A decrease in other expense of $332,000 and an increase in
interest income of $80,000 were partially offset by increased interest expense
of $25,000.
Income (Loss) Before Taxes. Income before taxes increased $278,000, or
12% to $2.5 million for the year ended June 30, 1997 from $2.2 million for the
year ended June 30, 1996. Income before taxes as a percentage of revenue
increased to 9% for the year ended June 30, 1997 from 8% for the year ended June
30, 1996.
Provision for Income Taxes. Provision for income taxes increased
$93,000, or 8%, to $1.3 million for the year ended June 30, 1997 from $1.2
million for the year ended June 30, 1996 due to the increase in income before
taxes.
Net Income. Net income increased $185,000, or 17%, to $1.3 million for
the year ended June 30, 1997 from $1.1 million for the year ended June 30, 1996.
Net income as a percentage of revenue remained at 4%.
-31-
<PAGE>
Liquidity and Capital Resources
- -------------------------------
Historically, the operations and growth of the Company and its
subsidiaries have been financed through private equity capital, internally
generated working capital, and borrowings from commercial banks or other
lenders. These borrowings were generally secured by substantially all of the
assets of the respective company as well as the personal guarantees of the
respective owners. Approximately $14.2 million of the net proceeds of the
Company's initial public offering was used to repay certain outstanding
indebtedness of the Predecessor Companies. A portion of the remaining balance
was refinanced with borrowings under the Company's revolving credit facility.
The following table sets forth selected information from the Statements
of Cash Flows for Precision Auto Care, Inc. and its subsidiaries for the time
periods during which they were members of the consolidated group and do not
include the effect of pro forma adjustments.
<TABLE>
<CAPTION>
Year ended June 30,
1998 1997
---- ----
(in thousands)
<S> <C> <C>
Net cash (used in)/provided by operating activities $ (2,132) $ 2,207
Net cash used in investing activities (15,047) (891)
Net cash provided by/(used in) financing activities 18,673 (1,491)
-------- -------
Change in cash $ 1,494 $ (175)
======== =======
</TABLE>
During the twelve months ended June 30, 1998 the Company's operations
used $2.1 million in cash principally due to increases in accounts receivable
and inventory related to companies acquired during the year. The increase in
accounts receivable of $5.0 million was comprised, in substantial part, of
approximately $2.0 million in turnkey sales and approximately $1.0 million in
car wash equipment sales in the fourth quarter. Additionally, the Company
increased its inventory by approximately $1.2 million during the latter part of
the year in anticipation of increased sales levels. Finally, the timing of
required income tax payments used approximately $2.9 million in cash from
operations.
Cash used in investing activities during the twelve months ended June
30, 1998 was $15.0 million compared with $891,000 for the prior year. The $15.0
million of fiscal 1998 investments were comprised of $11.0 million related to
acquisitions of businesses and area rights, $800,000 in purchases of real
estate, and $3.2 million in capital expenditures (including approximately $1.2
million in PIN system and signage upgrades to the retail system, $800,000 for
company owned car wash upgrades, and $1.2 million in other corporate capital
expenditures).
-32-
<PAGE>
Cash provided by financing activities was $18.4 million for the year
ended June 30, 1998 compared with a net cash outflow of $1.5 million for the
prior year. The cash inflow is principally the result of the issuance of common
stock in conjunction with the Company's initial public offering which resulted
in an inflow of $19.6 million net of transaction costs. The remaining inflow of
cash represents advances under the Company's bank credit facilities net of
payments made to extinguish debt assumed in the Company's acquisitions.
As the Company recently announced, the Company has drawn substantially
all of the amounts available under its bank credit facility principally as a
result of its acquisition activities and the working capital requirements
described above. The Company presently has borrowed approximately $24 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 $10
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, 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 mortgage financing transactions
which the Company has initiated recently. The Company expects that these
mortgages will yield approximately $15 million in net cash proceeds and will
require monthly payments of interest (at an annual rate of approximately 8%) and
principal (amortized over a 20 year period). 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 require 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, no later than October
15, 1998. Substantially all of the members of the Company's Board of Directors
have signed pledges to provide the Company with $2 million of subordinated debt
financing in order to satisfy this requirement and the Company expects that it
will complete this financing by the October 15, 1998 deadline. The Company
presently expects that the subordinated debt will bear interest at a rate of up
to 14% and that the terms of the subordinated debt will call for increases in
the interest rates if the Company defaults on the subordinated debt or any of
the Company's senior indebtedness. In the event that the Company fails to secure
the $2 million of equity or subordinated debt financing required by October 15,
1998 the Company will have to seek to renegotiate the terms of its credit
facility and there can be no assurance that the Company will be able to
renegotiate the credit facility or negotiate the facility on terms that may be
satisfactory to the Company.
-33-
<PAGE>
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 consummate the real estate mortgage transactions, the Company will need
to seek alternative sources of financing. The Company has initiated a
sale/leaseback financing effort as one such alternative. 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 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
subsidiaries are joint and several obligors with respect to all amounts due
under the credit facility.
During the year ended June 30, 1999 ("Fiscal 1999"), the Company
intends to spend approximately $750,000 in recurring capital expenditures and
may spend approximately $3.25 million in new investments depending on cash flow
availability to make such investments. These expenditures include amounts to
upgrade substantially all of the Company-owned car wash facilities with the full
complement of HydroSpray car wash equipment and the proprietary operating and
marketing features of the Precision Auto Wash System, amounts for investments in
productivity improvements, investments in management information and accounting
systems at the retail and corporate level, investments in centers included in
the Precision Turnkey Program and general corporate capital expenditures. The
Company intends to fund these expenditures through internally generated funds
and, if necessary, borrowings under the revolving credit facility to the extent
available.
The Company believes that the lending arrangements discussed above
combined with expected cash flow from operations will be sufficient to support
its existing operations; provided the Company obtains the subordinated debt
financing and obtains approximately $15 million in net cash proceeds from the
real estate financing transactions discussed above. If the Company fails to
obtain the subordinated debt financing or the real estate financing on the terms
described above (and fails to arrange alternative financing on a timely basis)
or fails to satisfy the revised financial and other covenants set forth in the
Credit Agreement as it has been amended, the Company's liquidity, financial
condition and results of operations could be materially adversely affected and
the Company would be in default of the Amendment to the Credit Agreement. Also,
to the extent that the Company seeks to grow materially through the acquisition
of additional businesses the Company will be required to obtain additional
capital from outside sources. There can be no assurance that the Company will be
able to obtain such capital on satisfactory terms and conditions.
-34-
<PAGE>
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.
-35-
<PAGE>
Item 7A. Quantitative and Qualitative Disclosure about Market Risks
----------------------------------------------------------
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.
<TABLE>
Principal Payments and Interest Rate Detail by Contractual Maturity Dates
(In $Thousands)
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term debt:
Term loan $2,353 - - - - - $ 2,353
Variable rate LIBOR + 0.25 - 2.50%
Long-term debt:
Term loan - $ 2,353 $2,353 $2,353 $1,986 - $ 9,045
Variable rate LIBOR + 0.25 - 2.50%
Line of credit - $10,333 - - - - $10,333
Variable rate Prime + 0.25 - 2.50%
</TABLE>
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The financial statements and schedules listed in Item 14 are filed as
part of this report and appear on pages F-1 through F-25.
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure
-----------------------------------------------------------
Not applicable.
-36-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Information responsive to this Item is incorporated herein by
reference to the Company's definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before October 28, 1998.
Item 11. Executive Compensation
Information responsive to this Item is incorporated herein by
reference to the Company's definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before October 28, 1998.
Item 12. Security Ownership of Certain Beneficial owners and Management
Information responsive to this Item is incorporated herein by
reference to the Company's definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before October 28, 1998.
Item 13. Certain Relationships and Related Transactions
Information responsive to this Item is incorporated herein by
reference to the Company's definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders to be filed with the Securities and Exchange Commission
on or before October 28, 1998.
-37-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
(a) The following documents are filed as part of this report:
1. Financial Statements
The following financial statements of the Company appear on
pages F-1 through F-25 of this report and are incorporated by reference in Part
II, Item 8:
Report of Independent Auditors
Audited Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
The following pro forma financial statements appear on page
P-1 of this report and are incorporated by reference in Part II, Item 8:
Pro Forma Financial Statements
2. Financial Statement Schedules
The following schedule appears on page S-1 of this report:
Schedule II - Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore have
been omitted.
(b) Reports on Form 8-K.
On April 15, 1998, the Company filed a current Report on Form 8-K
pursuant to Item 2 thereof, reporting the closing of the Company's acquisition
of Promotora de Franquicias Praxis, S.A. de C.V. An amendment to this Form 8-K
was filed on June 12, 1998.
(c) Exhibits
3.1 Articles of Incorporation of the Company included as an
exhibit to the Company's Registration Statement on Form S-1
(No. 333-34439) filed August 27, 1997 are incorporated herein
by reference.
-38-
<PAGE>
3.2 By-laws of the Company included as an exhibit to the Company's
Registration Statement on Form S-1 (No. 333-34439) filed
August 27, 1997 are incorporated herein by reference.
10.1 Plan of Reorganization and Agreement for Combination of
Businesses dated as of August 27, 1997 by and among the
Company, WE JAC Corporation, Miracle Industries, Inc., Lube
Ventures, Inc., Rocky Mountain Ventures, Inc., Rocky Mountain
Ventures II, Inc., Miracle Partners, Inc., Prema Properties,
LLC, Ralston Car Wash, LLC and KBG LLC, included as an exhibit
to the Company's Registration Statement on Form S-1 (No.
333-34439) filed August 27, 1997 are incorporated herein by
reference.
*10.2 Loan and Security Agreement between the Company and its
designated subsidiaries and Signet Bank, now known as First
Union National Bank, dated as of November 12, 1997, but
incorporating on a composite basis the terms of Amendment No.
2 dated as of May 12, 1998.
*10.3 Amendment No. 3 to Loan and Security Agreement between the
Company and its designated subsidiaries and First Union
National Bank dated October 1, 1998.
*10.4 Second Consolidated, Amended and Restated Revolving and
Acquisition Line of Credit Promissory Note by the Company
and its designated Subsidiaries in favor of First Union
National Bank dated October 1, 1998.
10.5 Employee Stock Purchase Plan, included as an exhibit to the
Company's Registration Statement on Form S-8 (No. 333-49097),
filed April 1, 1998, is incorporated herein by reference.
10.6 Employee Stock Option Plan, included as an exhibit to the
Company's Registration Statement on Form S-8 (No. 333-47169),
filed March 2, 1998, is incorporated herein by reference.
*10.7 Employment Agreement between the Company and John F. Ripley,
dated June 17, 1998.
10.8 Employment Agreement between the Company and James A. Hay,
dated August 27, 1997, included as an exhibit to the Company's
Registration Statement on Form S-1 (No. 333-34439) filed
August 27, 1997 is incorporated herein by reference.
10.9 Employment Agreement between the Company and Arnold Janofsky,
dated August 27, 1997, included as an exhibit to the Company's
Registration
-39-
<PAGE>
Statement on Form S-1 (No. 333-34439) filed
August 27, 1997 is incorporated herein by reference.
10.10 Employment Agreement between the Company and Grant G. Nicolai,
dated August 27, 1997, included as an exhibit to the Company's
Registration Statement on Form S-1 (No. 333-34439) filed
August 27, 1997 is incorporated herein by reference.
*10.11 Employment Agreement between the Company and John F. Moynahan,
dated June 8, 1998.
10.12 Employment Agreement between the Company and Peter Kendrick,
dated August 27, 1997, included as an exhibit to the Company's
Registration Statement on Form S-1 (No. 333-34439) filed
August 27, 1997 is incorporated herein by reference.
*10.13 Employment Agreement between the Company and Jaime J. Valdes
dated March 31, 1998.
*10.14 Independent Contractor Agreement between the Company and
Ernest S. Malas dated November 12, 1997.
10.15 Subscription and Stock Purchase Agreement dated as of March
31, 1998 by and among Precision Auto Care, Inc., Precision
Auto Care Mexico I, S. de R.L. de C.V., and Promotora de
Franquicias Praxis, S.A. de C.V., included as an exhibit to
the Company's Current Report on Form 8-K, filed April 15,
1998, is incorporated herein by reference.
*21 Significant Subsidiaries of the Company.
*23 Consent of Ernst & Young LLP, Independent Auditors.
*24 Power of Attorney
*27 Financial Data Schedule.
- -------------------
* Filed herewith.
-40-
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Precision Auto Care, Inc.
We have audited the accompanying consolidated balance sheets and schedule of
Precision Auto Care, Inc. and subsidiaries as of June 30, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the three years in the period ended June 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements and schedule referred to
above present fairly, in all material respects, the consolidated financial
position of Precision Auto Care, Inc. and subsidiaries at June 30, 1998 and
1997, and the consolidated results of their operations and their cash flows for
the three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles.
Vienna, Virginia Ernst & Young LLP
October 12, 1998
F-1
<PAGE>
<TABLE>
Precision Auto Care, Inc. and Subsidiaries
Consolidated Balance Sheets
---------------------------
<CAPTION>
June 30,
1997 1998
-------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 576,608 $ 2,070,294
Accounts receivable, net of allowance of $301,000 and
$1,390,000, respectively 4,080,216 9,050,190
Inventory 768,496 4,201,752
Notes receivable, current portion, net of allowance of $137,000
and $99,000, respectively 512,960 1,519,642
Other assets 404,300 2,217,164
Deferred costs 1,211,257 -
Deferred income taxes, net 257,000 722,000
-------------------------------------
Total current assets 7,810,837 19,781,042
Notes receivable, noncurrent portion, net of allowance of
$61,085 and $52,000, respectively 1,360,958 654,382
Property, plant and equipment, at cost 1,614,134 20,978,240
Less: accumulated depreciation (760,508) (1,678,527)
-------------------------------------
853,626 19,299,713
Goodwill and other intangibles, net of accumulated amortization of
$9,682,000 and $11,010,000, respectively 15,968,449 45,631,583
Deposits, trademarks and other 700,398 1,182,502
-------------------------------------
Total assets $ 26,694,268 $ 86,549,222
=====================================
</TABLE>
See accompanying notes.
F-2
<PAGE>
<TABLE>
Precision Auto Care, Inc. and Subsidiaries
Consolidated Balance Sheets
---------------------------
<CAPTION>
June 30,
1997 1998
----------------------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued liabilities $ 5,202,650 $ 9,336,120
Income taxes payable 680,000 -
Current maturities, notes payable 161,098 1,060,910
Current maturities, term loan 7,066,667 2,352,948
Current maturities, revolving line of credit 1,529,301 -
Deferred revenue, current portion 413,465 962,977
----------------------------------------
Total current liabilities 15,053,181 13,712,955
Revolving line of credit - 10,333,000
Term loan, net of current portion - 9,045,052
Notes payable, net of current portion 622,308 1,471,068
Deferred revenue, net of current portion 529,837 393,338
Refundable deposits 194,557 424,245
Other - 214,978
----------------------------------------
Total liabilities 16,399,883 35,594,636
Stockholders' equity:
Common stock, $.01 par; 19,000,000 shares authorized; 1,580,740
and 6,120,543 issued; 1,333,700 and 6,120,543 outstanding, in
1997 and 1998, respectively 15,807 61,205
Additional paid-in capital 8,407,722 45,682,551
Retained earnings 4,342,813 5,210,830
Treasury stock, at cost, 247,040 shares in 1997 (2,471,957) -
----------------------------------------
Total stockholders' equity 10,294,385 50,954,586
----------------------------------------
Total liabilities and stockholders' equity $ 26,694,268 $ 86,549,222
========================================
</TABLE>
See accompanying notes.
F-3
<PAGE>
<TABLE>
Precision Auto Care, Inc. and Subsidiaries
Consolidated Statements of Operations
-------------------------------------
<CAPTION>
Years ended June 30,
1996 1997 1998
------------------------------------------------------------
<S> <C> <C> <C>
Sales:
Franchise Development $ 1,316,055 $ 1,551,097 $ 2,255,744
Royalties 12,998,505 13,755,440 14,603,825
Manufacturing and distribution 12,203,414 11,852,062 20,458,420
Company centers - - 3,940,916
Other 216,340 298,332 516,709
------------------------------------------------------------
Total sales 26,734,314 27,456,931 41,775,614
Direct cost 19,708,075 20,291,174 30,708,388
------------------------------------------------------------
Contribution (exclusive of amortization shown 7,026,239 7,165,757 11,067,226
separately below)
General and administrative expense 2,059,124 2,346,775 4,147,276
Depreciation expense 217,000 175,000 775,088
Amortization of franchise rights and goodwill 964,311 968,072 1,469,035
------------------------------------------------------------
Operating income 3,785,804 3,675,910 4,675,827
Other income (expense):
Interest expense (1,031,705) (1,056,597) (1,038,851)
Interest income 67,353 147,638 158,771
Other (573,466) (241,211) (803,283)
------------------------------------------------------------
Total other income (expense) (1,537,818) (1,150,170) (1,683,363)
------------------------------------------------------------
Income before income tax expense 2,247,986 2,525,740 2,992,464
Provision for income taxes 1,177,810 1,270,860 1,764,368
------------------------------------------------------------
Net income $ 1,070,176 $ 1,254,880 $ 1,228,096
============================================================
Basic net income per share $ 0.74 $ 0.84 $ 0.29
Diluted net income per share $ 0.73 $ 0.82 $ 0.28
Weighted average shares outstanding - Basic 1,451,418 1,486,162 4,247,977
Weighted average shares outstanding - Diluted 1,457,587 1,526,774 4,322,623
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
Precision Auto Care, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
-----------------------------------------------
<CAPTION
Additional
Common Common Paid-in Retained Treasury
Shares Stock Capital Earnings Stock Total
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1995 1,414,418 $ 14,144 $ 7,160,983 $ 2,017,757 - $ 9,192,884
Issuances of common stock 147,975 1,480 1,141,413 1,142,893
Net income - - - 1,070,176 - 1,070,176
-----------------------------------------------------------------------------------------------
Balance at June 30, 1996 1,562,393 15,624 8,302,396 3,087,933 - 11,405,953
Issuances of common stock 18,347 183 105,326 - - 105,509
Treasury stock - purchase (247,040) - - - (2,471,957) (2,471,957)
Net income - - - 1,254,880 1,254,880
-----------------------------------------------------------------------------------------------
Balance at June 30, 1997 1,333,700 15,807 8,407,722 4,342,813 (2,471,957) 10,294,385
Issuances of common stock 17,114 171 124,776 - 124,947
Retirement of treasury stock - (2,470) (2,469,487) - 2,471,957 -
Dividends paid - - - (360,079) - (360,079)
Initial public offering 2,666,540 26,665 19,592,275 - - 19,618,940
Combination 1,436,724 14,367 12,916,823 - - 12,931,190
Exercised common stock
options and warrants 47,200 472 382,128 - - 382,600
Acquisition of Praxis 619,265 6,193 6,728,314 - - 6,734,507
Net income - - - 1,228,096 - 1,228,096
-----------------------------------------------------------------------------------------------
Balance at June 30, 1998 6,120,543 $ 61,205 $45,682,551 $ 5,210,830 - $ 50,954,586
===============================================================================================
</TABLE>
See accompanying notes.
F-5
<PAGE>
<TABLE>
Precision Auto Care, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
-------------------------------------
<CAPTION>
Year Ended June 30,
1996 1997 1998
-------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $1,070,176 $ 1,254,880 $ 1,228,096
Adjustments to reconcile net income to net cash
provided by operating activities:
Proceeds from turnkey sales of operating assets - - 1,097,930
Depreciation and amortization 1,234,705 1,251,462 2,244,123
Loss (gain) on disposal of property, plant, and equipment 306,705 207,256 (324,089)
Deferred income taxes (67,000) 623,000 (465,000)
Changes in operating assets and liabilities:
Accounts and notes receivable (768,799) (1,535,862) (3,912,703)
Inventory (43,044) 365,362 (1,185,081)
Prepaid expenses, recoverable income taxes, deposits and
other (72,420) (1,193,484) (498,567)
Accounts payable and accrued liabilities (1,349,981) 1,819,478 2,581,720
Income taxes payable 701,363 (77,011) (2,853,950)
Deferred revenue, net (549,833) (507,888) (44,890)
-------------------------------------------------
Net cash provided by (used in) operating activities 461,872 2,207,193 (2,132,411)
Investing activities:
Purchases of property and equipment (358,392) (296,088) (4,046,162)
Purchase of franchise agreements and rights (754,545) (545,730) (1,478,871)
Acquisitions (62,949) (49,535) (9,277,225)
-------------------------------------------------
Net cash used in investing activities (1,175,886) (891,353) (14,802,258)
Financing activities:
Purchase of treasury stock - (2,471,957) -
Issuances of common stock 1,142,893 105,509 20,126,487
Loan acquisition costs (39,374) (41,226) (40,000)
Transaction costs - - (1,714,086)
Proceeds from long-term debt and notes payable 1,593,808 2,918,309 22,722,670
Repayments of long-term debt and notes payable (1,764,374) (2,001,339) (22,306,637)
Payment of dividend - - (360,079)
-------------------------------------------------
Net cash provided by (used in) financing activities 932,953 (1,490,704) 18,428,355
-------------------------------------------------
Net change in cash and cash equivalents 218,939 (174,864) 1,493,686
Cash and cash equivalents at beginning of year 532,533 751,472 576,608
=================================================
Cash and cash equivalents at end of year $ 751,472 $ 576,608 $ 2,070,294
=================================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
Precision Auto Care, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
------------------------------------------
For the three years in the period ended June 30, 1998
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, nine
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 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.
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.
F-7
<PAGE>
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 car wash equipment and
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.
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 Subfranchise 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 subfranchise 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.
F-8
<PAGE>
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:
<TABLE>
<CAPTION>
Years
------------------
<S> <C>
Building and leasehold improvements 11-30
Furniture and fixtures 5-7
Equipment 7-10
Other items 5-7
</TABLE>
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, as described in Note 3,
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.
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
F-9
<PAGE>
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 high quality
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 $1.1 million, inventory of $243,000, property and equipment of
$288,000, and capitalized franchise rights of $262,000, 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.
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.
F-10
<PAGE>
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.
3. Acquisitions
------------
The Combination
Simultaneous with its IPO in November 1997, the Company combined with nine
operating entities in a series of mergers and exchange offers (the Combination).
The consideration paid consisted of 1,436,724 shares of the Company's newly
issued Common Stock valued at the IPO price of $9 per share and $2,750,000 paid
out of the IPO proceeds. This Combination was recorded as a purchase
transaction. Operating results of the combining companies are included in the
Company's financial statements since the effective date of the acquisition.
The total cost of the Combination is as follows:
<TABLE>
<S> <C>
Issuance of common stock
1,436,724 shares, $9 per share $ 12,931,000
Cash consideration 2,750,000
Transaction costs 478,000
----------------
Total purchase price $ 16,159,000
================
</TABLE>
F-11
<PAGE>
The purchase price of the Combination has been allocated as follows:
<TABLE>
<S> <C>
Assets:
Cash $ 225,000
Receivables 563,000
Inventory 1,711,000
Other 957,000
Property, plant & equipment, net 12,896,000
Goodwill and other intangibles 15,479,000
-------------------
Total assets $ 31,831,000
===================
Liabilities:
Current maturities of debt 4,814,000
Accounts payable & accrued expenses 2,435,000
Long term debt 8,423,000
-------------------
Total liabilities 15,672,000
-------------------
Equity 16,159,000
-------------------
Total liabilities and equity $ 31,831,000
===================
</TABLE>
Praxis
On March 31, 1998, the Company purchased all of the shares of Praxis for a total
of $10,505,000, comprised of 619,265 shares of common stock valued at $10.875
per share and $3,770,000 in cash. The acquisition was recorded as a purchase
transaction with the majority of the purchase price, $9,368,000, being allocated
to goodwill. Operating results of Praxis are included in the Company's financial
statements since the effective date of the acquisition.
Prior to March 31, 1998, the Company owned a fifteen percent interest in a joint
venture with Praxis Corporation, (a subsidiary of Praxis). Through March 31,
1998, the Company accounted for its investment in the joint venture using the
cost method.
Indy Ventures, Inc.
On March 31, 1998, the Company purchased the remaining 50% interest in Indy
Ventures, Inc. not acquired in the IPO Combination for $1,734,000. Prior to this
acquisition, the Company had recorded its 50% investment in Indy Ventures using
the equity method of accounting. Goodwill and other intangibles in the amount of
$1,124,000 were recorded. Operating results of Indy Ventures, Inc. are included
in the Company's financial statements since the effective date of the
acquisition.
F-12
<PAGE>
Other Acquisitions
The Company has also purchased other businesses and components of businesses
recorded under the purchase method of accounting. Where applicable, the
operating results of these businesses are included in the consolidated financial
statements since the effective dates of these acquisitions.
Unaudited Pro Forma Selected Information
The selected pro forma information for the years ended June 30, 1998 and 1997,
include the operating results of the above listed acquisitions as if the Company
had completed these acquisitions on July 1, 1996. The pro forma information does
not purport to be indicative of the results of operations that would have
occurred had the transactions taken place at the beginning of the periods
presented or of future operating results.
<TABLE>
<CAPTION>
Years ended June 30,
1997 1998
-----------------------------------
(unaudited) (unaudited)
<S> <C> <C>
Pro forma net revenue $ 43,106,908 $ 47,974,728
Pro forma net income $ 1,816,592 $ 1,825,810
Pro forma net income per common share
$ 0.33 $ 0.32
Pro forma weighted average shares
outstanding 5,496,880 5,707,035
===================================
</TABLE>
4. Inventory
---------
The components of inventory are as follows:
<TABLE>
<CAPTION>
June 30,
1997 1998
-----------------------------------
<S> <C> <C>
Raw materials $ - $1,430,303
Work-in-process - 600,541
Finished goods 768,496 2,170,908
===================================
$768,496 $4,201,752
===================================
</TABLE>
F-13
<PAGE>
5. Property, Plant and Equipment
-----------------------------
The components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------------
1997 1998
---------------------------------------
<S> <C> <C>
Land $ 57,865 $3,152,035
Building and leasehold improvements 128,551 8,731,539
Furniture and fixtures 829,256 2,402,893
Equipment 561,831 5,558,949
Other items 36,631 1,132,824
---------------------------------------
1,614,134 20,978,240
Accumulated depreciation (760,508) (1,678,527)
---------------------------------------
Property, plant and equipment, net $ 853,626 $19,299,713
=======================================
</TABLE>
During the years ended June 30, 1996, 1997, and 1998, the Company's depreciation
expense was $217,000, $175,000, and $775,000 respectively.
6. Goodwill and Other Intangibles
------------------------------
The significant components of goodwill and other intangibles are as follows:
<TABLE>
<CAPTION>
June 30,
1997 1998
---------------------------------------
<S> <C> <C>
Franchise rights (WE JAC) $25,650,797 $28,011,174
Goodwill from combination - 15,479,000
Other goodwill - 13,151,433
---------------------------------------
25,650,797 56,641,607
Accumulated amortization (9,682,348) (11,010,024)
=======================================
$15,968,449 $45,631,583
=======================================
</TABLE>
F-14
<PAGE>
7. Income Taxes
------------
Income tax expense consists of the following items:
<TABLE>
<CAPTION>
Years Ended June 30,
1996 1997 1998
------------------- ------------------- -------------------
<S> <C> <C> <C>
Current tax expense - federal and state $1,244,810 $ 647,860 $ 2,229,368
Deferred tax expense (benefit) - federal and state (67,000) 623,000 (465,000)
=================== =================== ===================
Total income tax expense $1,177,810 $1,270,860 $ 1,764,368
=================== =================== ===================
</TABLE>
The effective tax rate differed from the statutory rate as follows:
<TABLE>
<CAPTION>
Years Ended June 30,
1996 1997 1998
--------------------------------------------------------
<S> <C> <C> <C>
Statutory federal rate 34% 34% 34%
Amortization of goodwill and other intangibles 11 11 18
State taxes 5 5 7
Other 2 - -
========================================================
Effective tax rate 52% 50% 59%
========================================================
</TABLE>
F-15
<PAGE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. Significant components of the Company's deferred tax
liabilities and assets are as follows:
<TABLE>
<CAPTION>
June 30,
1997 1998
----------------------------------------------
<S> <C> <C>
Deferred tax liabilities:
Area rights $252,000 $ 255,000
State income taxes - 194,000
Expense related to acquisition 154,000 155,000
Royalties 44,000 45,000
Other, net 14,000 -
----------------------------------------------
Total deferred tax liabilities 464,000 649,000
Deferred tax assets:
Reserve for bad debts 127,000 639,000
Deferred revenue 594,000 671,000
Other, net - 61,000
----------------------------------------------
Total deferred tax assets 721,000 1,371,000
Valuation allowance for
deferred tax assets - -
----------------------------------------------
Deferred tax assets, net of allowance 721,000 1,371,000
----------------------------------------------
Net deferred tax assets $257,000 $ 722,000
==============================================
</TABLE>
During the years ended June 30, 1996, 1997, and 1998, the Company paid income
taxes of $150,000 and $756,000 and $2,854,000, respectively.
8. Bank Facility
-------------
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 June 30, 1998, $21,731,000 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.
F-16
<PAGE>
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 mortgage refinancing
transactions which the Company currently has in process. The Company expects
these mortgages to yield approximately $15 million in cash and to require
monthly payments of interest (at an annual rate of approximately 8%) and
principal (amortized over a 20 year period). Additionally, amounts repaid under
the Acquisition Line of Credit may not be reborrowed.
As amended, the Credit Agreement requires the Company to obtain $2 million in
subordinated debt or equity financing and 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 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 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.
Prior to the IPO and Combination, the Company held a credit facility with the
same bank which consisted of $10,700,000 in term loans and a $2,500,000
revolving line of credit (the "Prior Facility"). The term loans accrued interest
monthly at a rate equal to the index rate (which approximated the prime rate)
plus 2% (10.50% at June 30, 1997).
An amendment to the original agreement required $2,700,000 of the proceeds from
the term loan to be used to repurchase shares of the Company's common stock and
warrants from a related party (See Note 11) and to satisfy working capital
requirements. The revolving line-of-credit accrued interest, payable monthly, at
the lender's prime rate plus 1 1/2%. The Company granted warrants to the Lender
and another bank to secure these loans (See Note 12). At June 30, 1997,
approximately $7,067,000, was outstanding under the term loan and $1,529,000 was
outstanding under the revolving line-of-credit. Both loans were paid in full
with the proceeds of the IPO in November 1997.
This Prior Facility also required the Company to maintain certain covenants. As
of June 30, 1997, the Company was not in compliance with a provision of the
agreement which restricted capital expenditures. The Lender subsequently amended
the terms of the capital requirements covenant. During the years ended June 30,
1996, 1997, and 1998, the Company paid interest under the Prior Facility of
approximately $875,000, $845,000 and $735,000, respectively.
F-17
<PAGE>
Future bank facility obligations are as follows:
<TABLE>
<CAPTION>
Term Loan Revolving Line of Credit Total
--------- ------------------------ -----
<S> <C> <C> <C>
1999 $ 2,352,948 - $ 2,352,948
2000 2,352,948 $ 10,333,000 12,685,948
2001 2,352,948 - 2,352,948
2002 2,352,948 - 2,352,948
2003 1,986,208 - 1,986,208
Thereafter - - -
----------- ------------ ------------
$11,398,000 $ 10,333,000 $ 21,731,000
</TABLE>
9. Notes Payable
-------------
<TABLE>
<CAPTION>
June 30,
1997 1998
------------------------------------
<S> <C> <C>
Various notes and obligations payable in monthly
installments. Notes payable to banks, principal
and interest payable in monthly and quarterly
installments at a weighted average interest rate
of 7.98%, collateralized by liens on vehicles and
equipment $ 783,406 $ 2,531,978
Less: current maturities (161,098) (1,060,910)
------------------------------------
Long-term portion $ 622,308 $ 1,451,068
====================================
</TABLE>
The companies combining at the time of the IPO had numerous notes payable due to
affiliates and other entities. Substantially all of these obligations were paid
off with the proceeds of the IPO.
F-18
<PAGE>
The future debt obligations with maturities in excess of one year as of June 30,
1998 are as follows:
<TABLE>
<CAPTION>
Future
Debt Maturities
-------------------------
<S> <C>
1999 $1,060,910
2000 606,890
2001 589,824
2002 191,206
2003 16,650
Thereafter 66,498
-------------------------
$2,531,978
=========================
</TABLE>
10. Lease Commitments
-----------------
At June 30, 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. Rent expense for
office space and warehouse facilities of approximately $308,000, $326,000 and
$412,000 is included in operating expenses for the year ended June 30, 1996,
1997, and 1998, respectively. Rent expense for service center locations of
approximately $488,000, $100,000 and $209,000 is recorded net of sublease income
of $288,000, $912,000 and $790,000, for the years ended June 30, 1996, 1997, and
1998, respectively.
The future minimum lease payments and related sublease payments for leases with
terms in excess of one year as of June 30, 1998 are as follows:
<TABLE>
<CAPTION>
Future Minimum Sublease
Lease Payments Income Net
-----------------------------------------------------------------
<S> <C> <C> <C>
1999 $1,097,458 $ 534,655 $ 562,803
2000 921,593 370,840 550,753
2001 846,972 352,783 494,189
2002 806,113 352,783 453,330
2003 575,408 353,503 221,905
Thereafter 1,871,853 794,989 1,076,864
-----------------------------------------------------------------
$6,119,397 $2,759,553 $3,359,844
=================================================================
</TABLE>
F-19
<PAGE>
11. Related Party Transactions
--------------------------
Pursuant to a Management Agreement approved by the Board of Directors of
Precision Tune Advertising Fund, Inc. (P.T.A.F., Inc.) (which includes both
franchisees and Company personnel), the Company manages the operation of
P.T.A.F., Inc. - the national advertising fund for Precision Tune Auto Care
centers. The Company charged P.T.A.F., Inc. $384,000, $416,000 and $555,000 for
administrative and other expenses incurred on behalf of P.T.A.F., Inc., during
the years ended June 30, 1996, 1997, and 1998, respectively. Based on the timing
of receipts and disbursements, it is common for amounts to be due to and from
the Company and P.T.A.F., Inc. At June 30, 1997 and 1998, the net amounts due
from P.T.A.F., Inc. were $44,000 and $146,000, respectively. These amounts are
included in accounts receivable.
Between March 31, 1998 and April 30, 1998, the Company purchased the remaining
50% interest in Indy Ventures, Inc. for $1,734,000 from an investor group that
included a member of the Company's Board of Directors. See Note 3.
On March 31, 1998, the Company sold the rights to future cash flows from a car
wash acquired in the IPO Combination to an employee of the Company for $235,000.
The gain on this sale was applied to goodwill as a purchase price adjustment. At
June 30, 1998, $210,000 of this purchase price is recorded in accounts
receivable. Also on March 31, 1998, the Company sold licenses in Mexico for
$250,000 to an investor group which included an individual who later became an
executive officer of the Company.
On June 30, 1998, the Company sold a company-owned and operated Precision Tune
Auto Care center to a partnership among several officers and certain members of
the Board of Directors of the Company for $220,000 and recorded $110,000 as
gain. Also on June 30, 1998, the Company sold a property to an investor group
that included an officer of the Company for $260,000 and recorded a $40,000
gain. At June 30, 1998, $234,000 of this purchase price is recorded in accounts
receivable.
On June 30, 1998 the Company sold three Precision Auto Washes and one Precision
Lube Express to an investor group that included a related party for $700,000.
The gain on these sales was recorded as a reduction to the goodwill recorded as
part of the IPO Combination. At June 30, 1998, $675,000 is due from these
related parties and is included in accounts receivable.
12. Stockholders' Equity
--------------------
Common Stock
In November, 1997, the Company sold 2,666,540 shares of Common Stock, including
the Underwriters' over-allotments, in an IPO for net proceeds of $19.6 million.
Simultaneously, the Company issued 1,436,724 shares of common stock in exchange
for ownership of nine combining companies. Also at that time, the Company issued
27,200 shares related to the exercise of common stock warrants.
During the year ended June 30, 1996, WE JAC completed a private placement of
147,975 shares of Common Stock and received proceeds of approximately
$1,143,000, net of direct expenses of approximately $41,000.
F-20
<PAGE>
Treasury Stock
In January 1997, WE JAC purchased from a former officer of the Company and
another company 247,040 shares of outstanding common stock and options to
purchase another 84,865 shares of common stock for a total price of
approximately $2,472,000. The transaction was recorded as treasury stock at
cost. To finance the purchase, the Company borrowed from its term loan in
January 1997. In November 1997, the treasury stock was retired.
Common Stock Option Plans
In November 1997, the Company's Board of Directors and the Company's
stockholders approved the "1998 Employee Stock Option Plan" and reserved 400,000
shares for issuance under the Plan. Options outstanding under predecessor plans
consisted of 175,000 related to shares of WE JAC Corporation common stock. The
Compensation Committee of the Company's Board of Directors determines the
recipients of the award to be granted, exercise price, vesting period, and
number of shares underlying the options. Generally, options are granted at fair
market value.
The Company applies APB 25 in accounting for its Stock Option Plan, and,
accordingly, recognizes compensation expense for any difference between the fair
value of the underlying common stock and the grant price of the option at the
date of grant. The effect of applying SFAS No. 123 on 1997 and 1998 net income
and pro forma net loss as stated below is not necessarily representative of the
effects on reported net income or loss for future years due to, among other
things, (1) the vesting period of the stock options, and (2) the fair market
value of additional stock option grants in future years. Had compensation
expense been determined based upon the fair market value at the grant date for
awards under the plans consistent with the methodology prescribed under SFAS No.
123, the Company's net income in 1997 and 1998 would have been approximately
$1,140,000 and $900,000, respectively and net income per share (diluted) would
have been $0.75 and $0.21, respectively. The fair value of the options granted
during 1997 and 1998 are estimated as $2.59 and $2.98 per share, respectively,
on the date of grant using the binomial value method with the following
assumptions: dividend yield 0%, risk-free interest rate of 6%, expected life of
5 years, and a 10 year contractual life.
F-21
<PAGE>
Additional information with respect to Stock Option activity is summarized as
follows:
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------------------
1996 1997 1998
--------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year 84,865 $ 2.23 315,991 $ 6.31 432,600 $ 8.89
Options granted 231,126 7.80 213,974 10.00 393,500 9.73
Options exercised - - - - (20,000) 8.25
Options canceled or expired - - (97,365) 3.00 (55,500) 10.00
--------------------------------------------------------------------------------------
Outstanding, end of year 315,991 $ 6.31 432,600 $ 8.89 750,600 $ 9.26
======================================================================================
Options exercisable 87,865 $ 2.43 111,875 $ 8.52 355,422 $ 8.97
======================================================================================
</TABLE>
The options outstanding at June 30, 1998 range in price from $7.05 to $10.88
and have a weighted average remaining contractual life of 8.7 years.
At June 30, 1998, the President and Chief Executive Officer had options to
purchase 268,100 shares of the Company common stock. These options were granted
at fair market value on the dates of grants.
In 1996 and 1997, WEJAC offered an Employee Stock Purchase Plan (the Plan) to
encourage and facilitate the purchase of Common Stock by employees of the
Company. Upon completion of the IPO, this plan was converted to the Company.
Under the Plan, employees of the Company who elect to participate may purchase
Common Stock at 85% of the fair market value of the Common Stock on the
commencement date of each offering period. The plan permits an enrolled employee
to make contributions through the use of payroll deductions or lump sum
payments. In January 1998, the Company issued 17,114 shares of common stock to
employees. The Company has reserved 30,000 shares to be purchased by employees
under the "1998 Employee Stock Purchase Plan."
Common Stock Warrants
During 1997, WE JAC Corporation granted its Lender and another bank warrants to
purchase 27,200 shares of Common Stock, after application of an anti-dilution
provision, at $8.00 per share which represented the fair market value at the
date of issuance. The warrants were exercised at the time of the IPO.
F-22
<PAGE>
13. Employees' Savings Plan
-----------------------
The Company maintains a 401(k) plan under which the Company may contribute up to
50% of an employee's first 6% of compensation deferred under the plan. Employees
become eligible after attaining the age of 21 and completing six months of
employment with the Company. The employees may elect to contribute up to 15% of
their annual compensation subject to limitations set forth in the Internal
Revenue Code. Employees' contributions vest immediately. The matching
contribution vests 20% after two years and in increments of 20% each additional
year.
14. Purchase of Franchise Rights
----------------------------
During the year ended June 30, 1996, Bay Area Precision, Inc. (BAP), an area
subfranchisor of the Company, acquired all of the stock of Acc-U-Tune (AUT). AUT
owned twenty-six franchise agreements located in the San Francisco Bay Area. The
Company purchased from BAP the franchise agreements and trademarks of AUT for
$850,000. Simultaneously, the Company granted BAP additional area franchise
rights for the territory occupied by the AUT franchises. The franchise rights
acquired from BAP were valued at the acquisition price less the area franchise
rights sold. Accordingly, no revenue or expense was recognized by the Company
relating to this transaction.
In July 1997, the Company and BAP signed a term sheet describing the intended
purchase by the Company of the three Precision Tune Auto Care centers owned by
BAP, the area franchise rights and BAP's notes receivable for approximately $1.5
million. While this transaction has not been consummated, on June 30, 1998 the
Company purchased one of the centers and sold it for a $187,000 gain. At June
30, 1998, $206,000 related to this sale is included in accounts receivable.
15. Deferred Costs
--------------
During the year ended June 30, 1997, the Company incurred $1,221,000 in expenses
related to its efforts to raise permanent equity capital. These costs were
deferred and were deducted from the IPO proceeds when received in November 1997.
At June 30, 1997, most of the costs mentioned were unpaid and included in
accounts payable and accrued liabilities.
16. Contingencies
-------------
The Company is involved in certain litigation and is subject to unasserted
claims arising in the ordinary course of business. In the opinion of counsel and
management, the ultimate liability, if any, arising from the settlement of these
cases will not have a material adverse effect on the financial operations or
position of the Company.
F-23
<PAGE>
17. Net Income per Share
--------------------
The following table sets forth the computation of basic and diluted net income
per share.
<TABLE>
<CAPTION>
Years Ended June 30, 1996 1997 1998
------------------ ------------------ --------------------
<S> <C> <C> <C>
Numerator:
Net Income $ 1,070,176 $ 1,254,880 $ 1,228,096
Denominator:
Denominator for basic EPS-
weighted-average shares 1,451,418 1,486,162 4,247,977
Denominator for diluted EPS-
weighted-average shares 1,457,587 1,526,774 4,322,623
Basic net income per share $ 0.74 $ 0.84 $ 0.29
Diluted net income per share $ 0.73 $ 0.82 $ 0.28
</TABLE>
18. Quarterly Sales and Earnings Data - Unaudited
---------------------------------------------
The following table presents the quarterly results for Precision Auto Care, Inc.
and its subsidiaries on both an actual and pro forma basis for the year ending
June 30, 1998. To obtain pro forma results, the historical results of operations
of the Predecessor Companies and Worldwide Drying Systems, Inc. have been
adjusted to reflect certain purchase accounting adjustments.
F-24
<PAGE>
<TABLE>
In thousands except per share amounts
<CAPTION>
1998 Actual Q1 Q2 Q3 Q4 Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 6,767 $ 10,378 $ 11,003 $ 13,628 $ 41,776
Contribution 2,038 3,229 2,988 2,877 11,227
Net income (loss) 427 794 619 (612) 1,228
EPS (diluted) $ 0.10 $ 0.18 $ 0.11 $ (0.11) $ 0.28
1997 Actual Q1 Q2 Q3 Q4 Total
- ------------------------------------------------------------------------------------------------------------
Net sales $ 6,822 $ 6,847 $ 6,773 $ 7,015 $ 27,457
Contribution 1,812 1,860 1,803 1,691 7,166
Net income 396 472 254 133 1,255
EPS (diluted) $ 0.26 $ 0.31 $ 0.16 $ 0.09 $ 0.82
1998 Pro forma Q1 Q2 Q3 Q4 Total
- ------------------------------------------------------------------------------------------------------------
Net sales $ 11,719 $ 11,625 $ 11,003 $ 13,628 $ 47,975
Contribution 3,320 3,590 2,988 2,812 12,710
Net income (loss) 853 966 619 (612) 1,826
EPS (diluted) $ 0.15 $ 0.17 $ 0.11 $ (0.11) $ 0.32
1997 Pro forma Q1 Q2 Q3 Q4 Total
- ------------------------------------------------------------------------------------------------------------
Net sales $ 11,539 $ 11,214 $ 10,387 $ 9,967 $ 43,107
Contribution 3,052 2,709 2,991 2,334 11,086
Net income 750 612 436 19 1,817
EPS (diluted) $ 0.14 $ 0.11 $ 0.08 $ 0.00 $ 0.33
</TABLE>
As a result of certain adjustments made affecting the third quarter, the actual
and pro forma results differ from those previously reported on the Company's
10-Q for the period ending March 31, 1998. These adjustments, which related to
the method of accounting for the sale of pre-fabricated Lube Express buildings
and car washes net of the related income tax effects, had a negative impact on
revenue of $620,000, on contribution of $489,000 and on net income of $300,000
or $0.07 per share from the amounts previously reported. The Company anticipates
filing an amended 10-Q for this period in conjunction with the filing of its
10-K for the year ending June 30, 1998.
F-25
<PAGE>
SCHEDULE II
<TABLE>
Valuation and Qualifying Accounts
- ---------------------------------
($ Thousands)
<CAPTION>
Beginning
Balances
Balance @ Bad Debt of Companies Balance @
Description 7/1/97 Expense Acquired Write-offs 6/30/98
- ----------- --------- -------- ------------ ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ (301) $ (308) $ (1,071) $ 291 $ (1,390)
</TABLE>
S-1
<PAGE>
<TABLE>
Precision Auto Care, Inc.
Unaudited Pro Forma Combined Statements of Operations
-----------------------------------------------------
<CAPTION>
Unaudited Proforma Combined
Adjusted for Offering and Acquisition
For the Years Ended June 30,
1997 1998
-------------------- -------------------
<S> <C> <C>
Sales
Franchising
Development $ 1,704,680 $ 2,296,086
Royalty 13,723,591 14,619,254
Manufacturing & distribution 23,514,458 25,249,709
Company center operations 3,865,848 5,292,970
Other 298,331 516,709
-------------------- -------------------
Total sales 43,106,908 47,974,728
Direct cost 32,020,592 35,264,453
-------------------- -------------------
Contribution 11,086,316 12,710,275
General & administrative 3,827,604 4,442,135
Depreciation & amortization 2,642,314 2,683,612
-------------------- -------------------
Operating income 4,616,398 5,584,528
Other income (expense)
Interest income 169,060 143,478
Interest expense (441,660) (791,378)
Other income (expense) (541,206) (808,484)
-------------------- -------------------
Total other income (expense) (813,806) (1,456,384)
Earnings before taxes 3,802,592 4,128,144
-------------------- -------------------
Provision for income taxes 1,986,000 2,302,334
-------------------- -------------------
Net income $ 1,816,592 $ 1,825,810
==================== ===================
Earnings per share
Basic net income per share $ 0.33 $ 0.32
==================== ===================
Diluted net income per share $ 0.33 $ 0.32
==================== ===================
Weighted average shares outstanding-
Basic 5,474,435 5,632,388
Weighted average shares outstanding-
Diluted 5,496,880 5,707,035
</TABLE>
P-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on October 13, 1998.
PRECISION AUTO CARE, INC.
By: /s/ John F. Ripley
----------------------------------
John F. Ripley
President and Chief Executive Officer
(Duly Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
* Chairperson of the Board October 13, 1998
- -----------------------------
Lynn E. Caruthers
/s/ John F. Ripley President, Chief Executive Officer and October 13, 1998
- ----------------------------- Director (Principal Executive Officer)
John F. Ripley
/s/ John F. Moynahan Senior Vice President and Chief Financial October 13, 1998
- ----------------------------- Officer (Principal Financial Accounting
John F. Moynahan Officer)
* Director October 13, 1998
- -----------------------------
Woodley A. Allen
* Director October 13, 1998
- -----------------------------
George A. Bavelis
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
* Director October 13, 1998
- -----------------------------
Bernard H. Clineburg
* Director October 13, 1998
- -----------------------------
Clarence E. Deal
* Director October 13, 1998
- -----------------------------
Effie L. Eliopulos
* Director October 13, 1998
- -----------------------------
Bassam N. Ibrahim
* Director October 13, 1998
- -----------------------------
Richard O. Johnson
* Director October 13, 1998
- -----------------------------
Arthur Kellar
* Director October 13, 1998
- -----------------------------
Harry G. Pappas, Jr.
*
- -----------------------------
William R. Klumb Director October 13, 1998
* Director October 13, 1998
- -----------------------------
Gerald A. Zamensky
</TABLE>
*By: /s/ Arnold Janofsky
------------------------
Arnold Janofsky
Attorney-in-Fact
(Upon the Authority of a Power-of-Attorney
filed as Exhibit 24 to this Annual Report.)
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
10.2 Loan and Security Agreement with Signet Bank, now known
as First Union National Bank __
10.3 Amendment No. 3 to Loan and Security Agreement with
First Union National Bank __
10.4 Second Consolidated, Amended and Restated Revolving and
Acquisition Line of Credit Promissory Note in favor of First
Union National Bank __
10.7 Employment Agreement with John F. Ripley __
10.11 Employment Agreement with John F. Moynahan __
10.13 Employment Agreement with Jaime J. Valdes __
10.14 Independent Contractor Agreement with Ernest S. Malas __
21 Significant Subsidiaries of the Company. __
23 Consent of Ernst & Young LLP, Independent Auditors. __
24 Power of Attorney __
27 Financial Data Schedule. N/A
</TABLE>
Exhibit 10.2
LOAN AND SECURITY AGREEMENT
among
PRECISION AUTO CARE, INC.
a Virginia corporation,
WE JAC CORPORATION,
a Delaware corporation,
LUBE VENTURES, INC.
a Delaware corporation,
ROCKY MOUNTAIN VENTURES, INC.
a Colorado corporation,
ROCKY MOUNTAIN VENTURES, II, INC.
a Colorado corporation,
MIRACLE PARTNERS, INC.
a Delaware corporation,
RALSTON CAR WASH, LTD.
a Colorado limited liability company,
PREMA PROPERTIES, LTD.
an Ohio limited liability company,
MIRACLE INDUSTRIES, INC.
an Ohio corporation,
KBG, LLC
a Colorado limited liability company,
PTW, INC.
a Washington corporation,
NATIONAL 60 MINUTE TUNE, INC.
a Washington corporation,
HYDRO-SPRAY CAR WASH EQUIPMENT CO., LTD.
an Ohio limited liability company,
PRECISION TUNE AUTO CARE, INC.
a Virginia corporation
and
SIGNET BANK
a Virginia banking corporation
November 12, 1997
<PAGE>
LOAN AND SECURITY AGREEMENT
TABLE OF CONTENTS
ARTICLE I Definitions.................................................. 3
Section 1.1 Account Debtor............................................... 3
Section 1.2 Accounts, Chattel Paper, Documents,
Inventory, Equipment, General
Intangibles, and Instruments................................. 3
Section 1.3 Advance Rates................................................ 3
Section 1.4 Advances..................................................... 3
Section 1.5 Affiliate.................................................... 3
Section 1.6 Agent........................................................ 3
Section 1.7 Agreement.................................................... 4
Section 1.8 Assumption Agreement......................................... 4
Section 1.9 Available Funds.............................................. 4
Section 1.10 Borrower..................................................... 4
Section 1.11 Business Day................................................. 4
Section 1.12 Collateral................................................... 4
Section 1.13 Deposit Account.............................................. 4
Section 1.14 Eligible Receivables......................................... 4
Section 1.15 ERISA........................................................ 5
Section 1.16 Event of Default............................................. 5
Section 1.17 Excess Funds................................................. 5
Section 1.18 Item......................................................... 5
Section 1.19 Investment................................................... 5
Section 1.20 Laws......................................................... 5
Section 1.21 Letter of Credit............................................. 5
Section 1.22 Line of Credit............................................... 6
Section 1.23 Line of Credit Note.......................................... 6
Section 1.24 Liquidation Costs............................................ 6
Section 1.25 Loan......................................................... 6
Section 1.26 Loan Documents............................................... 6
Section 1.27 Obligations.................................................. 6
Section 1.28 Permitted Liens.............................................. 7
Section 1.29 Person....................................................... 7
Section 1.30 Receivables.................................................. 7
Section 1.31 Records...................................................... 7
Section 1.32 Subsidiary................................................... 7
Section 1.33 Subordinated Debt............................................ 7
Section 1.34 Target Balance............................................... 8
Section 1.35 Tax-Exempt Intermediary...................................... 8
ARTICLE II TERMS AND PURPOSE OF THE LOAN................................ 8
Section 2.1 The Line of Credit........................................... 8
<PAGE>
Section 2.1.1 Purpose of the Line of Credit................................ 8
Section 2.1.2 Advance Rates................................................ 8
Section 2.1.3 Interest Rate; Line of Credit Note........................... 8
Section 2.1.4 Line of Credit Fees.......................................... 10
Section 2.1.5 Advances under the Line of Credit............................ 10
Section 2.1.6 Repayment of the Line of Credit.............................. 12
Section 2.1.7 Prepayment of the Line of Credit............................. 12
ARTICLE III
SECURITY FOR THE LOAN........................................ 12
Section 3.1 Grant of Security Interest................................... 12
Section 3.2 Proceeds and Products........................................ 13
Section 3.3 Priority of Security Interests............................... 13
Section 3.4 Future Advances.............................................. 13
Section 3.5 Landlord's Waivers........................................... 13
ARTICLE IV CONDITIONS PRECEDENT......................................... 14
Section 4.1 Required Documents........................................... 14
Section 4.2 Satisfaction of Terms........................................ 14
ARTICLE V REPRESENTATIONS AND WARRANTIES............................... 15
Section 5.1 Accuracy and Completeness of Information..................... 15
Section 5.2 Non-Existence of Defaults, Etc. ............................. 15
Section 5.3 Litigation................................................... 16
Section 5.4 Liabilities or Adverse Changes............................... 16
Section 5.5 Title to Collateral.......................................... 16
Section 5.6 Use of Loan Proceeds......................................... 16
Section 5.7 Corporate Status............................................. 16
Section 5.8 Validity, Binding Nature,
and Enforceability of the Loan Documents..................... 16
Section 5.9 Defaults Under Loan Documents................................ 17
Section 5.10 Taxes........................................................ 17
Section 5.11 ERISA........................................................ 17
Section 5.12 Compliance with Laws......................................... 17
Section 5.13 Accuracy of Representations and Warranties................... 17
Section 5.14 Consents, Approvals, and Authorizations...................... 18
Section 5.15 Title to Assets Other Than Collateral........................ 18
Section 5.16 Place of Business............................................ 18
Section 5.17 Additional Business Locations................................ 18
Section 5.18 Other Subsidiaries........................................... 18
-2-
<PAGE>
Section 5.19 Material Contracts and Commitments........................... 19
Section 5.20 Representations as to Receivables............................ 19
ARTICLE VI AFFIRMATIVE COVENANTS........................................ 19
Section 6.1 Payments..................................................... 20
Section 6.2 Performance.................................................. 20
Section 6.3 Protection of Security....................................... 20
Section 6.4 Insurance.................................................... 20
Section 6.4.1 Casualty Insurance........................................... 20
Section 6.4.2 Liability and Worker's Compensation Insurance................ 20
Section 6.4.3 Other Insurance.............................................. 20
Section 6.5 Collection of Accounts....................................... 21
Section 6.6 Maintenance of Existence..................................... 21
Section 6.7 Notice of Litigation and Proceedings......................... 21
Section 6.8 Performance under Material Contract.......................... 21
Section 6.9 Payment of Indebtedness to Third Persons..................... 21
Section 6.10 Notice of Change of Business Location........................ 21
Section 6.11 Pension Plans................................................ 22
Section 6.12 Maintenance of Assets and Properties......................... 22
Section 6.13 Payment of Taxes............................................. 22
Section 6.14 Further Assurances and Power of Attorney..................... 22
Section 6.15 Advancements................................................. 22
Section 6.16 Maintain Records and Make Available to Bank for Inspection... 23
Section 6.17 Borrowing Base Certificates.................................. 23
Section 6.18 Financial Statements......................................... 24
Section 6.19 Maximum Quarterly Tangible Capital........................... 25
Section 6.20 Minimum Quarterly Tangible Capital........................... 25
Section 6.21 Minimum Annual Cash Flow Coverage............................ 25
Section 6.22 Positive Net Profit.......................................... 25
Section 6.23 Current Ratio................................................ 25
Section 6.24 Capital Expenditures......................................... 26
Section 6.25 Operating Budget............................................. 26
Section 6.26 Depository Banks............................................. 26
Section 6.27 Tax-Exempt Intermediaries.................................... 26
ARTICLE VII NEGATIVE COVENANTS........................................... 26
Section 7.1 Change of Name, Merger, Sale of Stock Etc. .................. 26
Section 7.2 Sale or Transfer of Assets................................... 27
Section 7.3 Encumbrance of Assets........................................ 27
Section 7.4 Guarantees................................................... 27
Section 7.5 Indebtedness................................................. 27
Section 7.6 Investments.................................................. 27
-3-
<PAGE>
Section 7.7 Loans........................................................ 27
Section 7.8 Dividends.................................................... 27
Section 7.9 Acquisition of Stock or Assets of Third Person............... 27
Section 7.10 Assignment of this Agreement................................. 28
ARTICLE VIII EVENTS OF DEFAULT............................................ 28
Section 8.1 Failure to Pay............................................... 28
Section 8.2 Failure to Perform........................................... 28
Section 8.3 Failure of Warranty or
Representation to be True.................................... 28
Section 8.4 Failure to Perform Covenants
Relating to Collateral....................................... 27
Section 8.5 Failure to Perform Other Covenants........................... 28
Section 8.6 Default Under Loan Documents................................. 28
Section 8.7 Judgments.................................................... 29
Section 8.8 Levy By Secured Creditor..................................... 29
Section 8.9 Failure to Pay Debts to Third Persons........................ 29
Section 8.10 Involuntary Bankruptcy....................................... 29
Section 8.11 Voluntary Bankruptcy......................................... 29
Section 8.12 Termination of Material Contracts............................ 29
Section 8.13 Material Adverse Change...................................... 30
Section 8.14 Impairment of Collateral..................................... 30
ARTICLE IX RIGHTS AND REMEDIES ON THE OCCURRENCE
OF AN EVENT OF DEFAULT....................................... 30
Section 9.1 Rights and Remedies.......................................... 30
Section 9.2 Collection of Receivables by the Bank........................ 31
Section 9.3 Sale of Collateral........................................... 32
Section 9.4 Confession of Judgment....................................... 33
Section 9.5 Attorneys' Fees and Expenses................................. 33
Section 9.6 Remedies Cumulative.......................................... 33
Section 9.7 Proof of Sums Due on the Loan................................ 33
Section 9.8 Obligations of the Borrower
Hereunder Unconditional...................................... 34
ARTICLE X GENERAL CONDITIONS AND TERMS................................. 34
Section 10.1 Loan Costs................................................... 34
Section 10.2 Incorporation................................................ 34
Section 10.3 Waivers...................................................... 34
Section 10.4 No Third Party Beneficiary Rights............................ 34
Section 10.5 Continuing Obligation of Borrowers........................... 35
Section 10.6 Binding Obligation........................................... 35
Section 10.7 Notices...................................................... 35
Section 10.8 Final Agreement.............................................. 35
Section 10.9 Extensions................................................... 36
-4-
<PAGE>
Section 10.10 Amendment.................................................... 36
Section 10.11 Time......................................................... 36
Section 10.12 Disclosure................................................... 36
Section 10.13 Number, Gender, and Captions................................. 36
Section 10.14 Security Agreement; Photocopies Sufficient................... 36
Section 10.15 Additional Borrowers and Assumption Agreement................ 36
Section 10.16 Joint and Several Liability.................................. 37
Section 10.17 Choice of Law; Waiver of Jury Trial.......................... 37
-5-
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT is made between PRECISION AUTO
CARE, INC., a Virginia corporation ("PAC"), and certain of its subsidiaries
wholly-owned and/or controlled by it, namely, WE JAC CORPORATION, a Delaware
corporation; LUBE VENTURES, INC., a Delaware corporation; ROCKY MOUNTAIN
VENTURES, INC., a Colorado corporation; ROCKY MOUNTAIN VENTURES II, INC., a
Colorado corporation, MIRACLE PARTNERS, INC., a Delaware corporation; RALSTON
CAR WASH, LTD., a Colorado limited liability company; PREMA PROPERTIES, LTD., an
Ohio limited liability company; MIRACLE INDUSTRIES, INC., an Ohio corporation;
KBG, LLC, a Colorado limited liability company; PTW, INC., a Washington
corporation; NATIONAL 60 MINUTE TUNE, INC., a Washington corporation;
HYDRO-SPRAY CAR WASH EQUIPMENT CO., LTD., an Ohio limited liability company;
PRECISION TUNE AUTO CARE, INC., a Virginia corporation (each of the foregoing
and PAC are sometimes hereafter referred to individually as a "Borrower" and
collectively as the "Borrowers"), and SIGNET BANK, a Virginia banking
corporation (the "Bank).
RECITALS
A. PAC is a holding company which conducts business through its
Subsidiaries (as hereafter defined).
B. Because of the ownership relation and the other relationships
described hereafter, PAC and all Subsidiaries have requested the Bank to provide
credit upon the terms and conditions stated herein.
C. PAC is the sole or controlling, direct or indirect, owner of all
of the issued and outstanding capital stock or other equity interests of all of
the Subsidiaries. Each Borrower is a separate legal entity, however, and in
addition to the ownership affiliation, each Borrower will be actively engaged in
interwoven and ongoing business and financial relationships with PAC and the
other Subsidiaries in the conduct of their respective but related businesses.
These relationships include: (a) centralized accounting, data processing,
payroll and other administrative services; (b) the sharing of common
administrative (e.g., legal, accounting, etc.) services; (c) common management
and the utilization of personnel for common services such as purchasing and
administrative services; (d) the purchase and exchange of goods and services
among the Borrowers; (e) PAC will provide substantial financial support to its
Subsidiaries through loans; (f) PAC and a substantial number of the Subsidiaries
will file consolidated federal tax returns; and (g) other contemplated business
accommodations by and between the Borrowers. Because of the affiliation and
inter-relationship of the Borrowers, in law and in fact, and because of the
economic dependence of one on the other, and
<PAGE>
further because each Borrower is joining in the execution hereof for the purpose
of inducing the Bank to enter into this Loan and Security Agreement, each
Borrower promises to pay all Obligations (as hereafter defined) regardless of
which Borrower requested and/or received, directly or indirectly, the proceeds
or benefit of any Loan (as hereafter defined). For purposes of this Loan and
Security Agreement, each Borrower joins as a co-maker, the liability of each
co-maker shall be joint and several for the repayment of all Loans, interest
thereon and all other Obligations, and the performance of all terms, conditions
and provisions of this Loan and Security Agreement. The Loans may be made to one
Borrower for the use and benefit of one or more other Borrowers, and each
Borrower may act as and be the agent of each other Borrower; the Collateral of
each Borrower shall be Collateral for all Obligations arising hereunder,
regardless of which Borrower incurred the Obligations; notice to PAC or any
other Borrower shall constitute notice to all Borrowers; a request for a Loan by
PAC for its use or for the use of another Borrower shall be valid and binding on
all Borrowers. Each Subsidiary designates, constitutes and appoints PAC as its
true and lawful attorney-in-fact to act for and on its behalf under this Loan
and Security Agreement in all respects, and any action taken by PAC with respect
to any Subsidiary shall be binding on both. No action now or hereafter taken by
the Bank for administrative purposes or otherwise, including, without
limitation, recording this transaction on its books and records in the name of
PAC, administering the Loans through one deposit account, collateral account or
other account or accounts, notifying or dealing with one Borrower to the
exclusion of any other shall be, or shall be deemed to be, a waiver or
relinquishment of any right, power or remedy with respect to all Borrowers nor a
release of any Borrower from strict performance and unconditional liability
under this Loan and Security Agreement.
D. The Borrowers acknowledge that they will benefit from the making
of the Loans, the extension of credit and all join in the execution hereof and
the joint and several undertakings herein to induce the Bank to make the Loans
and continue making the Loans.
NOW, THEREFORE, in consideration of the premises, the covenants and
agreements of the parties hereafter set forth, and other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
As used in this Loan and Security Agreement, the following terms
shall have the meanings set forth as definitions, unless the specific context
clearly requires a different meaning, and all terms defined in this Article, or
elsewhere herein, shall be capitalized throughout this Loan and Security
Agreement. Terms defined in the Uniform Commercial Code of Maryland or of any
other state in which any portion of
-2-
<PAGE>
the Collateral may be located shall have the meanings ascribed to them therein,
and all financial terms not otherwise defined shall have those meanings as
determined under generally accepted accounting principles, as recognized by the
American Institute of Certified Public Accountants ("GAAP"). The plural use of
any defined term shall include the singular, and the singular use of any defined
term shall include the plural.
SECTION 1.1. ACCOUNT DEBTOR. The term "Account Debtor" shall
mean any Person who is obligated to pay a Receivable to any Borrower.
SECTION 1.2. ACCOUNTS, CHATTEL PAPER, DOCUMENTS, INVENTORY,
SECURITIES, EQUIPMENT, GENERAL INTANGIBLES AND INSTRUMENTS. The terms
"Accounts," "Chattel Paper," "Documents," "Inventory," "Securities,"
"Equipment," "General Intangibles" and "Instruments" shall have the same
respective meanings as are given to those terms in the Maryland Uniform
Commercial Code-Secured Transactions, Title 9, Commercial Law Article, Annotated
Code of Maryland, as amended.
SECTION 1.3. ACQUISITION. The term "Acquisition" shall mean any
acquisition, whether in a single transaction or series of related transactions,
by PAC or any one or more of its Subsidiaries, or any combination thereof, of
(i) all, or substantially all, of the assets, equity or a going business or
division, of any Person, whether through purchase of assets or securities, by
merger or otherwise, (ii) control of at least eighty percent (80%) of the
outstanding securities of an existing corporation ordinarily (and apart from
rights accruing under special circumstances) having the right to vote in the
election of directors, or (iii) control of a greater than eighty percent (80%)
ownership interest in any existing partnership, joint venture or other Person.
SECTION 1.4. ACQUISITION COSTS. The term "Acquisition Costs" shall
mean, with respect to any Acquisition, the sum (without duplication) of (i) the
amount of cash paid by PAC and its Subsidiaries in connection with such
Acquisition, (ii) the fair market value of all capital stock or other ownership
interests of PAC or any of its Subsidiaries issued or given in connection with
such Acquisition, (iii) the outstanding principal amount of all indebtedness
incurred, assumed or acquired in connection with such Acquisition, (iv) all
additional purchase price amounts in the form of earnouts using pro forma
projections and other contingent obligations assuming satisfaction of the
related contingency, (v) all amounts paid in respect of covenants not to
compete, consulting agreements and other affiliated contracts in connection with
such Acquisition other than bona fide employment and similar agreements not a
part of the allocation of the purchase price, and (vi) the aggregate fair market
value of all other consideration given by PAC and its Subsidiaries in connection
with such Acquisition. All capital expenditures made or projected to be incurred
by PAC or its Subsidiaries within ninety (90) days in connection with any
Acquisition shall be included in the
-3-
<PAGE>
Acquisition Costs attributable to such Acquisition, except for expenditures for
signage and other equipment to standardize the acquired Person's business
activities with the Borrowers.
SECTION 1.5. ACQUISITION LINE OF CREDIT. The term "Acquisition Line
of Credit" shall mean those Advances, readvances and other credit accommodations
and Loans provided under this Agreement for Acquisitions, as evidenced by the
Acquisition Line of Credit Note, made from time to time in accordance with the
terms of this Agreement.
SECTION 1.6. ACQUISITION LINE OF CREDIT NOTE. The term
"Acquisition Line of Credit Note" shall mean the Consolidated Note.
SECTION 1.7. ADVANCES. The term "Advances" shall mean each credit to
PAC's Deposit Account based on a request from PAC for borrowing as provided in
Article II herein, or any extension of credit under the Line of Credit or
Acquisition Line of Credit as herein provided, regardless of whether a specific
request has been made therefor.
SECTION 1.8. AFFILIATE. The term "Affiliate" shall mean any
corporation, including all of the Subsidiaries, partnership, limited liability
company, limited liability partnership or other Person of which more than fifty
percent (50%) of the legal or beneficial ownership interests are held, directly
or indirectly, by PAC or any other Borrower, or which is otherwise controlled,
directly or indirectly, through one or more intermediaries, or both, by PAC.
SECTION 1.9. AGENT. The term "Agent" shall mean PAC as exclusive
agent for all of the Subsidiaries to act for and on behalf of each and all of
them, individually and collectively, to request Advances, receive notices,
accept service of process and take all actions deemed necessary in connection
with this Agreement, the Loan and the Notes.
SECTION 1.10. AGREEMENT. The term "Agreement" shall mean this Loan
and Security Agreement, as amended, restated, extended or modified from time to
time, together with all attachments and exhibits hereto or thereto.
SECTION 1.10A. ADJUSTED EBITDA. The term "Adjusted EBITDA" shall
mean as of the end of each fiscal quarter, the consolidated EBITDA of all
Borrowers less any net increase during such fiscal quarter in income
attributable to any receivable, royalty or deposit which is over 90 days past
due (the "Past Due Items"), any franchise, area subfranchise or master license
fees or any other curent year revenue financed by notes or other instruments and
not otherwise included in the Past Due Items, and any other non-cash revenue
items reflected in Consolidated Net Income, however, the amount of the current
bad debt expense and other agreed upon adjustments shall be added to
Consolidated Net Income provided such amount does not exceed the amount of Past
Due Items for such period. For purposes of
-4-
<PAGE>
computing EBITDA for the fiscal quarters ending December 31, 1996, March 31,
1997, June 30, 1997, September 30, 1997, and December 31, 1997, there shall be
an assumed EBITDA $1,000,000 for each of such quarters, except that when PAC
submits a 10Q report to the Securities and Exchange Commission for the quarterly
periods ending September 30, 1997 and December 31, 1997, then the EBITDA as of
the end of such fiscal quarters shall be the actual combined EBITDA of the
Borrowers resulting from their respective operations as of the quarter ending
September 30, 1997, and the EBITDA of the Borrowers as of the quarter ending
December 31, 1997 reflecting operations both prior to and after the Combination,
and the financial information so reported shall be utilized to compute Adjusted
EBITDA for such quarterly periods.
SECTION 1.11. ANNUALIZED ADJUSTED EBITDA. The term "Annualized
Adjusted EBITDA" shall mean with respect to the Borrowers, on a consolidated
basis and as of the end of each fiscal quarter, the sum of Adjusted EBITDA for
the immediately preceding four fiscal quarters; plus the trailing twelve-month
Adjusted EBITDA of any acquired Subsidiary which becomes a Borrower so long as
the computation of such trailing Adjusted EBITDA can be determined to the Bank's
satisfaction from audited financial statements or other information deemed
reliable by the Bank.
SECTION 1.12. ANNUALIZED ADJUSTED EBITDAR. The term "Annualized
Adjusted EBITDAR" shall mean with respect to the Borrower, on a consolidated
basis and as of the end of each fiscal quarter, the sum of the Annualized
Adjusted EBITDA for the immediately preceding four fiscal quarters, plus Rent
Expense for such period.
SECTION 1.12A. ANNUALIZED EBITDA. The term "Annualized EBITDA" shall
mean with respect to the Borrowers on a consolidated basis and as of the end of
each fiscal quarter, the sum of EBITDA for such quarter and for the three fiscal
quarters immediately preceding such quarter, as reported in the Forms 10Q and
10K (as applicable) filed by PAC with the Securities and Exchange Commission.
SECTION 1.12B. ANNUALIZED EBITDAR. The term "Annualized EBITDAR"
shall mean with respect to the Borrowers on a consolidated basis and as of the
end of each fiscal quarter, the sum of the Annualized EBITDA for the period
ending on such date, plus Rent Expense for such four quarters.
-5-
<PAGE>
SECTION 1.13. APPLICABLE MARGIN. The term "Applicable Margin" shall
mean, at any time with respect to any Loan, the applicable percentage points as
determined under the following matrix with reference to the ratio of Total
Funded Debt to Annualized EBITDA, each for the most recent fiscal quarter then
ended, calculated as provided below:
APPLICABLE APPLICABLE
RATIO OF TOTAL FUNDED DEBT TO ANNUALIZED MARGIN MARGIN
EBITDA FOR THE QUARTER THEN ENDED (BASE RATE) (LIBOR RATE)
- ---------------------------------------- ------------ ------------
Less than or equal to 3.0 to 1.0 but
greater than 2.5 to 1.0 0.25% 2.00%
Less than or equal to 2.5 to 1.0 but
greater than 2.0 to 1.0 0.00% 1.75%
Less than or equal to 2.0 to 1.0 but
greater than 1.5 to 1.0 0.00% 1.50%
Less than or equal to 1.5 to 1.0 0.00% 1.25%
[NOTE: THE FOREGOING PROVISIONS OF SECTION 1.13, AS AMENDED, SHALL BECOME
EFFECTIVE COMMENCING WITH THE FISCAL QUARTER ENDING JUNE 30, 1998, AND THE
APPLICABLE MARGIN (LIBOR RATE) SHALL BE (A) 1.25% EFFECTIVE AS OF APRIL 1, 1998,
TO (AND INCLUDING) JUNE 30, 1998, AND (B) 1.75% EFFECTIVE AS OF JULY 1, 1998,
UNTIL CHANGED IN ACCORDANCE WITH THE PROVISIONS OF SECTION 1.13, AS AMENDED.]
SECTION 1.14. ASSUMPTION AGREEMENT. The term "Assumption Agreement"
shall mean an agreement in substantially the form attached hereto as Exhibit B
and made a part hereof in which a corporation or other business entity hereafter
acquired, directly or indirectly, or subsequently created, and which otherwise
qualifies as a Subsidiary, agrees to be bound by the terms of this Agreement and
assumes joint and several liability for repayment of the Notes and all other
Obligations.
SECTION 1.15. AVAILABLE LOAN AMOUNT. The term "Available Loan
Amount" shall mean the maximum Total Funded Debt permitted at any time under
Section 6.17 (i.e., 3 times Annualized Adjusted EBITDA), less the outstanding
principal balance of all Loans, Outstanding Letter of Credit Obligations and
other outstanding Total Funded Debt.
SECTION 1.16. BASE RATE. The term "Base Rate" shall mean the
interest rate declared in internal publications by the Bank from time to time as
its
-6-
<PAGE>
prime rate, whether or not such rate is otherwise published or announced. The
Base Rate is not necessarily the lowest rate charged by the Bank to borrowers.
SECTION 1.17. BORROWER. The term "Borrower" or "Borrowers" shall
mean PAC and all of the additional parties identified on the first page of this
Agreement which are Subsidiaries owned and controlled by PAC, and shall also
include such other Persons hereafter qualifying as a Subsidiary which execute
and deliver to the Bank an Assumption Agreement.
[NOTE NOTWITHSTANDING THE FACT THAT NONE OF PROMOTORA DE FRANQUICIAS
PRAXIS, S.A. DE C.V., A MEXICAN CORPORATION ("PFP"), OR ANY OF THE "PRAXIS
COMPANIES" AS DEFINED IN THAT CERTAIN SUBSCRIPTION AND STOCK PURCHASE AGREEMENT
MADE AS OF MARCH 31, 1998, BY AND AMONG PAC, PAC MEXICO I AND THE STOCKHOLDERS
OF PFP (THE "PFP PURCHASE AGREEMENT," AND ALL OF SUCH ENTITIES, COLLECTIVELY,
THE "NON-BORROWER MEXICAN SUBSIDIARIES") WILL ENTER INTO AN ASSUMPTION AGREEMENT
AND BECOME A PARTY TO THE LOAN AGREEMENT AS A BORROWER THEREUNDER, THE TERMS
"BORROWER" AND "SUBSIDIARY" AS USED IN THE LOAN AGREEMENT SHALL INCLUDE THE
NON-BORROWER MEXICAN SUBSIDIARIES FOR THE FOLLOWING PURPOSES:
(A) THE DEFINITIONS OF "ADJUSTED EBITDA," "ANNUALIZED ADJUSTED
EBITDA," "CONSOLIDATED LIABILITIES," "CONSOLIDATED NET INCOME," "CONSOLIDATED
TANGIBLE NET WORTH," "EBITDA," "MATERIAL ADVERSE CHANGE" AND "MATERIAL ADVERSE
EFFECT" IN THE LOAN AGREEMENT; PROVIDED, HOWEVER, THAT THE TRAILING TWELVE-MONTH
ADJUSTED EBITDA OF THE NON-BORROWER MEXICAN SUBSIDIARIES WILL ONLY BE INCLUDED
IN ANNUALIZED ADJUSTED EBITDA IF AND SO LONG AS THE COMPUTATION THEREOF CAN BE
DETERMINED TO THE BANK'S SATISFACTION FROM AUDITED FINANCIAL STATEMENTS OR OTHER
INFORMATION DEEMED RELIABLE BY THE BANK.
(B) THE REPRESENTATIONS AND WARRANTIES OF THE BORROWERS UNDER
SECTIONS 5.1, 5.2, 5.3, 5.4, 5.10, 5.13, 5.15, 5.17, 5.20 AND 5.25 OF THE LOAN
AGREEMENT;
(C) THE AFFIRMATIVE COVENANTS OF THE BORROWERS CONTAINED IN SECTIONS
6.4, 6.6, 6.7, 6.8, 6.11, 6.12, 6.13, 6.15, 6.16, 6.17, 6.18 AND 6.19 OF THE
LOAN AGREEMENT; PROVIDED, HOWEVER, THAT (A) FOR PURPOSES OF SUCH SECTIONS THE
COVENANT AND AGREEMENT OF THE BORROWERS WHICH ARE PARTIES TO THE LOAN AGREEMENT
SHALL BE TO CAUSE THE NON-BORROWER MEXICAN SUBSIDIARIES TO COMPLY WITH THE
PROVISIONS THEREOF, AND (B) IT IS UNDERSTOOD AND AGREED THAT THE FISCAL YEAR OF
PAC SHALL END ON JUNE 30 OF EACH YEAR;
(D) THE NEGATIVE COVENANTS OF THE BORROWERS CONTAINED IN SECTIONS
7.1, 7.2, 7.3, 7.4, 7.5, 7.6, 7.7, 7.8, 7.9, 7.10, 7.11, 7.12, 7.17 AND 7.18 OF
THE LOAN AGREEMENT; PROVIDED, HOWEVER, THAT (A) FOR PURPOSES OF SUCH
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SECTIONS THE COVENANT AND AGREEMENT OF THE BORROWERS WHICH ARE PARTIES TO THE
LOAN AGREEMENT SHALL BE NOT TO CAUSE OR PERMIT THE NON-BORROWER MEXICAN
SUBSIDIARIES TO VIOLATE ANY OF THE PROVISIONS THEREOF, AND (B) THE CONTINGENT
OBLIGATIONS OF THE NON-BORROWER MEXICAN SUBSIDIARIES IDENTIFIED IN SCHEDULE 7.5
ATTACHED HERETO AND INCORPORATED BY REFERENCE HEREIN SHALL NOT REPRESENT A
VIOLATION OF THE PROVISIONS OF SUBSECTION 7.5 OF THE LOAN AGREEMENT; AND
(E) THE EVENTS OF DEFAULT UNDER SECTIONS 8.7, 8.8, 8.9, 8.10, 8.11,
8.12 AND 8.13 OF THE LOAN AGREEMENT.]
SECTION 1.18. BUSINESS DAY. The term "Business Day" shall mean any
day other than a Saturday, Sunday or legal holiday or days on which banking
institutions are authorized or obligated to close under the laws of the United
States or the State of Maryland.
SECTION 1.19. CLOSING. The term "Closing" shall mean the closing of
the transactions contemplated by this Agreement, including the execution and
delivery of all Loan Documents, the delivery of all documents, certificates or
other required items of the Borrowers hereunder, and the satisfaction of all
conditions to closing (or the waiver thereof) as provided herein. Closing shall
take place at the offices of Miles & Stockbridge, P.C., 10 Light Street,
Baltimore, Maryland 21201 on November 12, 1997, or at such other place or time
as the parties hereto shall mutually agree.
SECTION 1.20. COLLATERAL. The term "Collateral" shall mean all of
the tangible and intangible property with respect to which the Borrowers have
granted a security interest or lien to the Bank pursuant to the terms of this
Agreement or any of the other Loan Documents.
SECTION 1.21. COMBINATION. The term "Combination" shall mean the
reorganization and share exchange to be effected by the Borrowers immediately
prior to the Closing, all in accordance with terms of a Plan of Reorganization
and Agreement for Share Exchange Offers dated as of August 27, 1997 by and among
PAC, WE JAC Corporation, Lube Ventures, Inc., Rocky Mountains Ventures, Inc.,
Prema Properties, Ltd., Miracle Industries, Inc., Miracle Partners, Inc., Rocky
Mountain Ventures II, Inc., Ralston Car Wash, Ltd., and KBG, LLC., as amended by
the First Amendment to Plan of Reorganization and Agreement for Share Exchange
Offers dated as of October 17, 1997.
SECTION 1.22. COMPLIANCE CERTIFICATE. The term "Compliance
Certificate" shall mean the certificate executed by the chief executive officer
or chief financial officer of PAC and delivered to the Bank at the end of each
fiscal quarter indicating the Borrowers' compliance with all financial covenants
contained herein and the absence of any Event of Default, all in the form as
provided in Exhibit A attached hereto.
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SECTION 1.23 CONSOLIDATED LIABILITIES. The term "Consolidated
Liabilities" shall mean, on a consolidated basis, the aggregate liabilities of
the Borrowers, less Subordinated Debt.
SECTION 1.24. CONSOLIDATED NET INCOME. The term "Consolidated Net
Income" shall mean, for any fiscal period, the net income (or loss) of PAC and
its Subsidiaries, on a consolidated basis and excluding intercompany items, for
such quarter, determined in accordance with GAAP, but excluding as income: (a)
gains on the sale, conversion or other disposition of capital assets, (b) gains
on the acquisition, retirement, sale or other disposition of stock or securities
of PAC or any of its Subsidiaries, (c) gains on the collection of life insurance
proceeds, (d) any write-up of any asset, and (e) any other gain or credit of an
extraordinary nature.
SECTION 1.24A. CONSOLIDATED NOTE. The term "Consolidated Note" shall
mean the Consolidated, Amended and Restated Revolving and Acquisition Line of
Credit Note dated May 12, 1998, executed by the Borrowers as obligors, in the
principal amount of Twenty-Five Million Dollars ($25,000,000) and payable to the
order of the Bank, and any and all substitutions, extensions, renewals,
amendments, restatements, modifications or replacements thereof.
SECTION 1.25. CONSOLIDATED TANGIBLE NET WORTH. The term
"Consolidated Tangible Net Worth" shall mean, on a consolidated basis, the
aggregate amount of Borrowers' total assets, exclusive of goodwill, trademarks,
trade names, licenses and such other assets as Bank may determine from time to
time are properly classified as intangible assets, less Consolidated
Liabilities, plus Bank-approved Subordinated Debt, if any.
SECTION 1.26. DEPOSIT ACCOUNT. The term "Deposit Account" shall mean
PAC's deposit account(s) established and maintained with the Bank for the
benefit of itself and all other Borrowers, or any substitute or additional
account(s), to be utilized as the means of advancing funds under the Line of
Credit or Acquisition Line of Credit.
SECTION 1.26A. DOMESTIC ACQUISITION. The term "Domestic
Acquisition" shall mean any Acquisition which (a) is not a Permitted
Acquisition, and (b) is not a Foreign Acquisition.
SECTION 1.27. EBITDA. The term "EBITDA" shall mean, with respect to
PAC and its Subsidiaries, on a consolidated basis as of the last day of any
fiscal quarter, the aggregate of (a) Consolidated Net Income for the immediately
preceding fiscal quarter then ended, plus (b) the sum of interest, taxes.
depreciation and amortization (to the extent taken into the calculation of
Consolidated Net Income for such period).
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SECTION 1.28. ERISA. The term "ERISA" shall mean the Employee
Retirement Income Security Act of 1974, as amended, and all regulations or
rulings promulgated thereunder.
SECTION 1.29. EVENT OF DEFAULT. The term "Event of Default" shall
mean the events constituting defaults under this Agreement as set forth in
Article VIII hereof.
SECTION 1.29A. FOREIGN ACQUISITION. The term "Foreign Acquisition"
shall mean any Acquisition in which the assets or equity interests to be
acquired are of a Person (a) which is organized under the laws of any
jurisdiction other than a state of the United States of America (including the
District of Columbia), or (b) which has more than fifty percent of the value of
its assets located outside of the United States of America.
SECTION 1.30. TOTAL FUNDED DEBT/ANNUALIZED EBITDA RATIO. The term
"Total Funded Debt/Annualized EBITDA Ratio" shall mean, on a consolidated basis,
as of the end of each fiscal quarter, the ratio of Total Funded Debt to
Annualized EBITDA.
SECTION 1.31. GOVERNING DOCUMENTS. The term "Governing Documents"
shall mean the articles of incorporation, certificate of incorporation, charter
or other organizational instrument of a corporation, the articles of
organization and operating agreement of a limited liability company, a
partnership or joint venture agreement of any partnership, limited liability
partnership or joint venture, and the by-laws or other rules for the governance
of any such Person.
SECTION 1.32. LAWS. The term "Laws" shall mean all ordinances,
statutes, rules, regulations, orders, injunctions, writs or decrees of any
government or political subdivision or agency thereof, or any court or similar
authority established by any thereof.
SECTION 1.33. LETTER OF CREDIT. The term "Letter of Credit" shall
mean any standby or commercial letter of credit which the Bank may, but shall
not be obligated to, now or hereafter issue for the account of a Borrower, and
the term "Outstanding Letter of Credit Obligations" shall mean the aggregate
stated amount of all Letters of Credit at any time outstanding. The issuance of
any Letter of Credit shall be upon such terms and conditions as the Bank may
from time to time reasonably determine, and the terms of any letter of credit
application or other agreement between the Borrower and the Bank in connection
with any Letter of Credit shall govern and control any inconsistent terms
provided herein. The Borrower shall pay any customary or standard costs or fees
imposed by the Bank in connection with the issuance of any Letter of Credit.
SECTION 1.34. LIBOR RATE. The term, "LIBOR Rate" means a per annum
rate of interest, as determined by the Bank in its sole discretion and
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changed as of the first day of each month during the term of this Agreement,
equal to the London Interbank Offered Rate (adjusted to reflect the cost of
insurance premiums and reserve requirements as they exist from time to time)
published by Bloomberg or Dow Jones-Telerate, as BBA LIBOR on page 3750 (or by
Reuters Monitor Money Rates Service (LIBO page), if Bloomberg or Dow
Jones-Telerate is not available), or such other page as may replace that page on
that service for the purpose of displaying rates or prices comparable to that
rate (rounded upwards, if necessary, to the next higher 1/100%), for deposits in
U.S. dollars on the first day of each such month, for a period of thirty (30)
days (an "Interest Period"). If more than one such rate appears on such page or
its replacement, LIBOR Rate shall be the arithmetic mean of such rates. In the
event the first day of any such month is not a Business Day, the applicable
LIBOR Rate shall be the rate in effect on the immediately preceding Business
Day.
SECTION 1.35. LINE OF CREDIT. The term "Line of Credit" shall mean
those Advances, readvances and other credit accommodations and Loans provided
under this Agreement for working capital and other ordinary course working
capital purposes, as evidenced by the Line of Credit Note, made from time to
time in accordance with the terms of this Agreement.
SECTION 1.36. LINE OF CREDIT NOTE. The term "Line of Credit
Note" shall mean the Consolidated Note.
SECTION 1.37. LIQUIDATION COSTS. The term "Liquidation Costs" shall
mean any and all costs and expenses (including reasonable attorneys' fees and
legal expenses) which are incurred by or on behalf of the Bank (a) to enforce
payment of any of the Obligations, (b) to enforce payment of any Receivable
following the occurrence of an Event of Default, whether as against an Account
Debtor, the Borrowers or any surety of any Account Debtor or of any of the
Obligations, (c) in the prosecution or defense of any action growing out of or
connected with the Collateral or any of the Bank's rights therein or thereto,
and (d) in connection with the custody or preservation of the Collateral
following the occurrence of an Event of Default, and the preparation for sale,
sale or other disposition of any Collateral.
SECTION 1.38. LOAN. The term "Loan" or "Loans" shall mean all monies
advanced under the Line of Credit and Acquisition Line of Credit and the Notes,
including future Advances and readvances, whether now existing or hereafter
arising, including any amendments, extensions, modifications thereto or
replacements or substitutions therefor.
SECTION 1.39. LOAN DOCUMENTS. The term "Loan Documents" shall mean
all documents executed by the Borrowers in connection with the Loan, including,
but not limited to, this Agreement, the Line of Credit Note, the Acquisition
Line of Credit Note, the Trademark Assignment, the Pledge Agreement,
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appropriate financing statements and continuation statements, or any amendments,
extensions or modifications thereof or thereto.
SECTION 1.40. MATERIAL ADVERSE CHANGE. The terms "Material Adverse
Change" or "Material Adverse Effect" shall mean, in the good faith opinion of
the Bank, and subject to any applicable cure or grace periods, a material
adverse effect upon, or a material adverse change in, any of (a) the financial
condition, operations, business or properties of PAC and/or its Subsidiaries,
taken as a whole; (b) the ability of PAC and its Subsidiaries taken as a whole
to perform under any Loan Document or any other material contract to which any
of them are parties; (c) the legality, validity or enforceability of any Loan
Document; (d) the perfection or priority of the liens of the Bank granted under
the Loan Documents or the rights and remedies of the Bank under the Loan
Documents; or (e) the condition or value of any material portion of the
Collateral.
SECTION 1.41. MATURITY. The term "Maturity" shall mean November 1,
2000, the date on which all Loans and Obligations, all accrued interest, and all
other fees, costs and expenses provided for herein, in the Notes or the other
Loan Documents shall be due and payable, in full, or such earlier date upon
acceleration as provided herein or in the Notes.
SECTION 1.41A. MAXIMUM LOAN AMOUNT. The term "Maximum Loan Amount"
shall mean Twenty-Five Million Dollars ($25,000,000) minus the amount of the
Outstanding Letter of Credit Obligations.
SECTION 1.42. NOTES. The term "Notes" shall mean the Consolidated
Note.
SECTION 1.43. OBLIGATIONS. The terms "Obligation" or "Obligations"
shall mean any joint or several obligation of payment or performance by the
Borrowers owing to the Bank, including: (a) any and all sums due to the Bank
under the Loan or otherwise under the terms of this Agreement, the Line of
Credit Note, the Acquisition Line of Credit Note and the Loan Documents; (b) any
and all sums advanced by the Bank to preserve or protect the Collateral and the
value of the Collateral or to preserve, protect, or perfect the Bank's security
interest in the Collateral; (c) Outstanding Letter of Credit Obligations; (d) in
the event of any proceeding to enforce the collection of the Obligations or any
of them, the reasonable expenses of retaking, holding, preparing for sale,
selling or otherwise disposing of or realizing on the Collateral, or of any
exercise by the Bank of the Bank's rights upon the occurrence of an Event of
Default, together with reasonable attorneys' fees, expenses of collection, and
court costs as provided in the Loan Documents; (e) the Liquidation Costs; and
(f) any other indebtedness, overdraft or liability of the Borrowers to the Bank,
whether direct or indirect, joint or several, absolute or contingent, now
existing or hereafter arising.
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SECTION 1.44. PERMITTED ACQUISITION. The term "Permitted
Acquisition" shall mean an Acquisition with respect to which the following
conditions are satisfied: (i) the Acquisition Costs of a single transaction
shall not exceed $2,000,000, and the Acquisition Costs of a single transaction
when aggregated with the Acquisition Costs of all other Permitted Acquisitions
in any fiscal year of the Borrowers shall not exceed $6,000,000; (ii) the assets
acquired, or the business of the Person whose stock or ownership interests are
acquired, shall be primarily within the line of business presently conducted by
the Subsidiaries (i.e., the repair and maintenance of motor vehicles and
products, goods or services related thereto); (iii) those Acquisitions that are
structured as asset acquisitions shall be for an entire business, division,
facility, operation or product line of such acquired Person; and (iv) those
Acquisitions that are structured as stock or equity acquisitions shall be
effected through a purchase of no less than eighty percent (80%) of the capital
stock or equity interests of such Person by PAC or a Subsidiary or through a
merger between such Person and a newly-formed direct subsidiary of PAC or a
Subsidiary, as the case may be, so that after giving effect to such merger
eighty percent (80%) of the capital stock or equity interests of the surviving
corporation of such merger is owned by PAC or a Subsidiary. The Acquisition of
Worldwide Drying Systems, Inc. shall constitute a Permitted Acquisition (and the
Acquisition Costs thereof shall not be included in computing the $6,000,000
aggregate limitation stated above) so long as (a) the Acquisition Cost is
approximately $2,700,000, (b) no more than $1,600,000 is advanced as an
Acquisition Loan, (c) closing shall occur within sixty (60) days of the Closing
of the Loans, (d) the Acquisition shall generally be structured as described in
a letter of intent between Worldwide Drying Systems, Inc. and PAC, and (e) no
material event or occurrence, or series of events or occurrences, shall have
happened which would materially affect the projections used by PAC to evaluate
the Acquisition. Notwithstanding the foregoing, in no event shall any Foreign
Acquisition be a Permitted Acquisition.
SECTION 1.45. PERMITTED LIENS. The term "Permitted Liens" shall mean (a) liens
or security interests in favor of the Bank; (b) existing liens described in
Schedule "A" attached hereto and incorporated herein by this reference
(including the "Grimaud Lien" as identified in Exhibit "A"); (c) liens arising
or created in the future with the prior written consent of the Bank or as
otherwise permitted herein; and (d) purchase money security interests in
Equipment which (i) attach concurrently or within ten (10) days after
acquisition thereof, or (ii) are permitted under Section 2.2.10 hereof..
Permitted Liens shall also include:
(i) Liens for current taxes, assessments or other governmental
charges that are not delinquent or remain payable without any penalty or that
are being contested in good faith and with due diligence by appropriate
proceedings, provided that all such liens in the aggregate have no Material
Adverse Effect and, if reasonably requested by the Bank, PAC or such
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Subsidiary has established reserves reasonably satisfactory to the Bank with
respect thereto;
(ii) Easements, rights of way, restrictive covenants,
conditions, zoning restrictions and other similar encumbrances on real estate
that do not materially impair the value of the property to which they relate;
(iii) Carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like liens arising in the ordinary course of business that
are not overdue for a period of more than thirty (30) days, or, if overdue for
more than thirty (30) days, (i) which are being contested in good faith and by
appropriate proceedings; (ii) for which adequate reserves in accordance with
GAAP have been established on the books of PAC or appropriate Subsidiary; and
(iii) with respect to which the obligations secured thereby are immaterial;
(iv) Pledges or deposits in connection with workers'
compensation insurance, unemployment insurance and like matters;
(v) Deposits to secure the performance of bids, trade
contracts (other than for borrowed money), leases, statutory obligations, surety
and appeal bonds, performance bonds and other obligations of a like nature
incurred in the ordinary course of business; and
(vi) Liens in respect of any writ of execution, attachment,
garnishment, judgment or award in an amount less than $100,000, the time for
appeal or petition for rehearing of which shall not have expired, or in respect
of which an appeal or appropriate proceeding for review is being prosecuted in
good faith and a stay of execution pending such appeal or proceeding for review
has been secured.
SECTION 1.46. PLEDGE AGREEMENT. The term "Pledge Agreement" shall
mean the Pledge Agreement executed and delivered by PAC and WE JAC Corporation
in connection with the granting of a security interest and pledge in the shares
of stock or equity interests of the Subsidiaries which are Borrowers under this
Agreement as of the date hereof, or which subsequently assume the joint and
several Obligations hereunder by the execution and delivery of an Assumption
Agreement. The term "Pledge Agreement" shall also mean any amendment to such
Pledge Agreement wherein PAC subsequently grants a security interest and pledges
the securities of any additional Subsidiary upon its becoming a Borrower.
SECTION 1.47. PERSON. The term "Person" shall mean any individual,
corporation, partnership, association, joint-stock company, trust,
unincorporated organization, joint venture, limited liability company, limited
liability partnership, court, or government or political subdivision or agency
thereof.
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SECTION 1.48. RECEIVABLES. As used herein, the term "Receivables"
shall mean all of the Borrowers' Accounts, Instruments, Documents, Chattel
Paper, General Intangibles, notes, notes receivable, royalties, franchise fees,
reimbursements, commissions, fees, choses in action, and all other rights or
entitlements to moneys or property payable by a Person to PAC or any Subsidiary,
now existing or hereafter created or arising, and all cash and non-cash proceeds
and products thereof, and all rights thereto including rights in rejected,
returned or repossessed goods arising from the sale of or providing of goods or
services by the Borrowers.
SECTION 1.49. RECORDS. The term "Records" shall mean correspondence,
memoranda, tapes, discs, papers, books and other documents or transcribed
information of any type, whether expressed in ordinary or machine language,
maintained by the Borrowers in connection with the Collateral or their business
operations.
SECTION 1.50. REGULATION G. The term "Regulation G" shall mean
Regulation G of the Board of Governors of the Federal Reserve System, 12 C.F.R.
Part 207, or any successor or other regulation hereafter promulgated by said
Board to replace the prior Regulation G and having substantially the same
function.
SECTION 1.51. REGULATION U. The term "Regulation U" shall mean
Regulation U promulgated by the Board of Governors of the Federal Reserve
System, 12 C.F.R. Part 221, or any successor or other regulation hereafter
promulgated by said Board to replace the prior Regulation U and having
substantially the same function.
SECTION 1.52. REGULATION X. The term "Regulation X" shall mean
Regulation X promulgated by the Board of Governors of the Federal Reserve
System, 12 C.F.R. Part 224, or any successor or other regulation hereafter
promulgated by said Board to replace the prior Regulation X and having
substantially the same function.
SECTION 1.53. RENT EXPENSE. The term "Rent Expense" shall mean, for
any period, all amounts paid, payable or accrued during such period by the
Borrower and its Subsidiaries on a consolidated basis with respect to all
operating leases of real and personal property, excluding intercompany items.
SECTION 1.54. SELLER DEBT. The term "Seller Debt" shall mean
indebtedness incurred or assumed in connection with a Permitted Acquisition, or
an Acquisition approved by the Bank, as described in Section 2.2.
SECTION 1.55. SUBSIDIARY. The term "Subsidiary" or, collectively,
the "Subsidiaries", shall include all of the Borrowers named herein except PAC,
and any other corporate or other entity now or hereafter created, acquired or
organized in which at least eighty percent (80%) or more of the voting control
and legal and
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beneficial equity interests therein is held, directly or indirectly, by PAC or
any other Borrower, or any combination thereof.
SECTION 1.56. SUBORDINATED DEBT. The term "Subordinated Debt" shall
mean any and all indebtedness and liabilities of PAC or any other Borrower (a)
which has been subordinated to the Loans and the other Obligations pursuant to a
written agreement (including the express written terms of the subordinated
indebtedness instruments) in form and substance acceptable to the Bank, and (b)
has been incurred pursuant to written agreements in form and substance
acceptable to the Bank and, if required by the Bank, such covenants of any of
the Borrowers contained therein have been incorporated herein as may be required
by the Bank.
SECTION 1.57. TOTAL FUNDED DEBT. The term "Total Funded Debt" shall
mean (a) the aggregate amount of all interest bearing obligations of the
Borrowers, including, without limitation, monies borrowed, Seller Debt, capital
leases, or any indebtedness secured by any lien, security interest or title
retention device (including, without limitation, any amount owed which is
secured by the Grimaud Lien), minus (b) Subordinated Debt.
SECTION 1.58. TRADEMARK ASSIGNMENT. The term "Trademark Assignment"
shall mean any of the Trademark Assignments executed, delivered and acknowledged
by PAC and other Subsidiaries, assigning unto the Bank a lien upon such
registered trademarks identified therein. All such Trademark Assignments shall
be in form suitable for recordation in the United States Patent and Trademark
Office.
SECTION 1.59. UNUSED LINE FEE. The term "Unused Line Fee" shall mean
the amounts determined by subtracting the average daily balance of principal
outstanding under the Line of Credit and Acquisition Line of Credit, from
$25,000,000, and multiplying such sums by the fee percentage calculated from the
following matrix with reference to the Total Funded Debt/Annualized EBITDA ratio
for the most recently completed fiscal quarter for which a Compliance
Certificate has been received and approved by the Bank.
RATIO OF TOTAL FUNDED
DEBT FOR THE QUARTER THEN ENDED TO
ANNUALIZED EBITDA FEE PERCENTAGE
- ----------------------------------- --------------
Less than or equal to 3.0 to 1.0 but greater than 2.5
to 1.0 0.30%
Less than or equal to 2.5 to 1.0 0.25%
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ARTICLE II
TERMS AND PURPOSE OF THE LOANS
SECTION 2.1. THE LINE OF CREDIT LOAN. The Bank agrees to make
Advances to PAC under the Line of Credit during the term of this Agreement in an
amount not to exceed the Line of Credit Portion (as hereinafter defined). PAC
shall from time to time advise the Bank in writing of that portion of the
Maximum Loan Amount which it wishes to have allocated to the Line of Credit (the
"Line of Credit Portion"); provided, however, that in no event shall the Line of
Credit Portion exceed the lesser of (a) the Maximum Loan Amount minus the
aggregate outstanding principal amount of Advances under the Acquisition Line of
Credit, and (b) $11,000,000. The obligation of the Borrowers to repay the
Advances under the Line of Credit shall be evidenced by the Consolidated Note.
Subject to the limitations provided herein, the Borrowers may borrow, repay and
reborrow under the Line of Credit and under the Consolidated Note.
SECTION 2.1.1. PURPOSE OF THE LINE OF CREDIT. The proceeds of
the Line of Credit Loan shall be used by the Borrowers for the financing of
Receivables, for other general working capital needs, and for the financing of
capital expenditures; PROVIDED, HOWEVER, that proceeds of the Line of Credit
Loan may also be used to pay accrued interest on, and scheduled installments of
principal with respect to Advances outstanding under, the Acquisition Line of
Credit.
SECTION 2.1.2. INTEREST RATE. Advances under the Line of
Credit shall bear interest at the Base Rate or LIBOR Rate, plus the Applicable
Margin, as provided in the Line of Credit Note. Interest shall be calculated
based upon a year of 360 days and the actual number of days elapsed. If the
interest is accruing based on a Base Rate index, the applicable rate of interest
on the Line of Credit shall change immediately and automatically with any change
in the Bank's prime rate. If interest is accruing at a LIBOR Rate index, the
LIBOR Rate shall be determined as of the first day of each month. The Line of
Credit shall be evidenced by, and shall be repaid with interest in accordance
with, the provisions of the Line of Credit Note which shall be duly executed and
delivered by the Borrowers to the Bank on the date hereof, and the terms and
conditions of which are incorporated herein by reference. The date and amount of
each Advance made by the Bank and each payment made by the Borrowers shall be
recorded by the Bank on the books and records of the Bank, but any failure to
record such dates or amounts shall not relieve the Borrowers of their obligation
of repayment hereunder or under the Line of Credit Note.
SECTION 2.1.3. LINE OF CREDIT FEES. In addition to interest,
the Borrowers shall pay monthly the Unused Line Fee attributable to the Line of
Credit. The Unused Line Fee shall be payable to the Bank on the first day of
each month.
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SECTION 2.1.4. ADVANCES UNDER THE LINE OF CREDIT. Subject to
compliance by the Borrowers with all of the terms and conditions of this
Agreement, the continued satisfactory financial condition of the Borrowers, the
satisfaction of all conditions precedent to the making of Advances hereunder and
the non-existence of any Event of Default or any event, circumstance, act or
omission which with the giving of notice, the passage of time, or both, would
constitute an Event of Default hereunder, upon the request of PAC the Bank shall
lend or make Advances to PAC from time to time as set forth in this Agreement
and all additional agreements of the parties hereafter made concerning the
Deposit Account and the procedures for obtaining Advances, and all amendments,
modifications or substitutions of any of the foregoing. Subsequent to the date
hereof, Bank and PAC contemplate using an automated system of funding overdrafts
as a means of disbursing Loan proceeds as shall be reflected in further
agreements or documents between PAC and the Bank. Presentment of any instrument
against PAC's Deposit Account at the Bank's offices at a time when collected
funds in such Deposit Account are not sufficient to cover such instrument fully
shall constitute a request by PAC and all other Borrowers for an Advance.
SECTION 2.1.5. LIMITATION ON BORROWINGS. Notwithstanding
anything to the contrary contained herein, the Borrowers shall not at any time
allow the outstanding principal balance advanced under the Consolidated Note to
exceed the Maximum Loan Amount.
SECTION 2.1.6. REPAYMENT OF THE LINE OF CREDIT. The Borrowers
shall pay accrued interest on the outstanding principal balance of the Line of
Credit on the first day of each month, commencing January 1, 1998. The Borrowers
promise to pay to the order of the Bank all principal, accrued interest, all
Unused Line Fees and other costs and expenses arising under the Line of Credit,
this Agreement and all other Obligations, at Maturity; provided, however, that
(a) if at any time the principal amount outstanding under the Line of Credit
exceeds the Line of Credit Portion, then the Borrowers shall immediately pay
over a sum equal to the amount by which such outstanding principal exceeds the
Line of Credit Portion, plus accrued interest to the date of prepayment, and (b)
upon the occurrence of an Event of Default, subject to any applicable grace or
cure period, the entire outstanding and unpaid principal balance of the Line of
Credit Loan, together with the accrued interest thereon to the date of payment,
shall be immediately due and payable at the option of the Bank. Interest shall
be payable monthly following preparation by the Bank of an interest statement
showing interest and the Unused Line Fee due through the end of the monthly
payment period. In the event interest for the final days of any period are
estimated, PAC's Deposit Account shall be debited or credited, as the case may
be, to reflect actual interest due through the end of such period. The Bank
shall automatically debit the PAC's Deposit Account on the due date of, and in
the amount of, the interest and the Unused Line Fee shown to be due on each
monthly statement.
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SECTION 2.1.7. PREPAYMENT OF THE LINE OF CREDIT. The Borrowers
may prepay the Line of Credit in whole or in part at any time and from time to
time without penalty or additional interest. The Line of Credit may be reduced,
from time to time, to a zero balance without affecting the continuing validity
of this Agreement or the continuing security interest and lien of the Bank in
and to the Collateral.
SECTION 2.2. THE ACQUISITION LINE OF CREDIT LOAN.
SECTION 2.2.1. THE ACQUISITION LINE OF CREDIT LOAN. The Bank
agrees to make Advances to PAC under the Acquisition Line of Credit during the
term of this Agreement in an aggregate principal amount outstanding at any one
time not to exceed the Maximum Loan Amount minus the Line of Credit Portion
established by PAC from time to time. The obligation of the Borrowers to repay
the Advances under the Acquisition Line of Credit shall be evidenced by the
Consolidated Note. Subject to the limitations provided herein, the Borrowers may
borrow, repay and reborrow hereunder and under the Consolidated Note.
SECTION 2.2.2. PURPOSE OF THE ACQUISITION LINE OF CREDIT. The
proceeds of the Acquisition Line of Credit Loan shall be used by PAC or
designated Borrowers for the financing of Permitted Acquisitions and other
Acquisitions approved by the Bank. Notwithstanding the foregoing, following the
conclusion of each quarterly accounting period of PAC, any Advance made during
such quarterly period under the Line of Credit for the purpose of financing
capital expenditures may be reallocated under the Acquisition Line of Credit if
PAC shall request such reallocation in writing within ten (10) Business Days
following the conclusion of such quarterly period. Each requested reallocation
shall be treated as a request for an Advance under the Acquisition Line of
Credit and subject to the repayment provisions of Section 2.2.6 hereof, and to
the extent any reallocation requires that the Line of Credit Portion to be
reduced, such reduction shall occur without the need of a separate request by
PAC therefor.
SECTION 2.2.3. INTEREST RATE. Advances under the Acquisition
Line of Credit shall bear interest at the Base Rate or LIBOR Rate, plus the
Applicable Margin, as provided in the Acquisition Line of Credit Note.Interest
shall be calculated based upon a year of 360 days and the actual number of days
elapsed. If the interest is accruing based on a Base Rate index, the applicable
rate of interest on the Acquisition Line of Credit shall change immediately and
automatically with any change in the Base Rate. If interest is accruing at a
LIBOR Rate index, the applicable rate of interest shall be determined as of the
first day of each month. The Acquisition Line of Credit shall be evidenced by,
and shall be repaid with interest in accordance with, the provisions of the
Acquisition Line of Credit Note which shall be duly executed and delivered by
the Borrowers to the Bank on the date hereof, and the terms and conditions of
which are incorporated herein by reference. The date and amount of each Advance
made by the Bank and
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each payment made by the Borrowers shall be recorded by the Bank on the books
and records of the Bank, but any failure to record such dates or amounts shall
not relieve the Borrowers of their obligation of repayment hereunder or under
the Acquisition Line of Credit Note.
SECTION 2.2.4. LINE OF CREDIT FEES. In addition to interest,
the Borrowers shall pay monthly the Unused Line Fee attributable to the
Acquisition Line of Credit. The Unused Line Fee shall be payable to the Bank on
the first day of each month.
SECTION 2.2.5. ADVANCES UNDER THE LINE OF CREDIT. Subject to
compliance by the Borrowers with all of the terms and conditions of this
Agreement, including (a) the continued satisfactory financial condition of the
Borrowers, (b) the satisfaction of all conditions precedent to the making of
Advances hereunder, (c) the non-existence of any Event of Default or any event,
circumstance, act or omission which with the giving of notice, the passage of
time, or both, would constitute an Event of Default hereunder, and (d) no Event
of Default would arise upon the consummation of the acquisition. PAC may request
and the Bank may lend or make Advances to PAC from time to time as set forth in
this Agreement.
SECTION 2.2.6. REPAYMENT OF THE ACQUISITION LINE OF Credit.
The Borrowers promise to pay to the order of the Bank all principal, accrued
interest, all Unused Line Fees and other costs and expenses arising under the
Acquisition Line of Credit, this Agreement and all other Obligations, at
Maturity. Interest on all outstanding Advances under the Acquisition Line of
Credit Note shall be payable on the first day of each month, commencing January
1, 1998, and the outstanding principal balance of each Advance under the
Acquisition Line of Credit shall be repaid in consecutive equal monthly
principal installments commencing in the month following the month in which such
Advance was made and extending over a term not to exceed sixty (60) months, as
elected by PAC at the time such Advance is requested; provided, however, that
(a) in the absence of any requested repayment term by PAC, the repayment term
shall be sixty (60) months, (b) if at any time the principal amount outstanding
under the Acquisition Line of Credit exceeds the maximum amount permitted under
Section 2.2.1 hereof, then the Borrowers shall immediately pay over a sum equal
to the amount by which such outstanding principal exceeds such amount, plus
accrued interest to the date of prepayment, which shall be applied as a
prepayment of the Advance under the Acquisition Line of Credit most recently
extended, (c) all principal, plus interest and other sums due under the
Acquisition Line of Credit shall be absolutely due and payable at Maturity, and
(d) upon the occurrence of an Event of Default, subject to any applicable grace
or cure period, the entire outstanding and unpaid principal balance of the
Acquisition Line of Credit Loan, together with the accrued interest thereon to
the date of payment, shall be immediately due and payable at the option of the
Bank. No single Advance under the Acquisition Line of Credit shall be in an
amount of less than $25,000. Interest shall be payable monthly following
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preparation by the Bank of an interest statement showing interest and the Unused
Line Fee due through the end of the monthly payment period. In the event
interest for the final days of any period are estimated, PAC's Deposit Account
shall be debited or credited, as the case may be, to reflect actual interest due
through the end of such period. The Bank shall automatically debit the PAC's
Deposit Account on the due date of, and in the amount of, the interest and the
Unused Line Fee shown to be due on each monthly statement.
SECTION 2.2.7. PREPAYMENT OF THE ACQUISITION LINE OF Credit.
The Borrowers may prepay the Acquisition Line of Credit in whole or part at any
time and from time to time without penalty or additional interest. The Line of
Credit may be reduced, from time to time, to a zero balance without affecting
the continuing validity of this Agreement or the continuing security interest
and lien of the Bank in and to the Collateral.
SECTION 2.2.8. PROCEDURE FOR PERMITTED ACQUISITIONS. Not less
than two (2) Business Days following any Acquisition purporting to be a
Permitted Acquisition, PAC shall notify the Bank of such Acquisition and provide
a term sheet or other summary description of the material terms thereof. Within
thirty (30) days after the closing of each Permitted Acquisition, PAC shall
deliver or cause to be delivered to the Bank (v) a copy of the fully executed
acquisition agreements, certified as true and complete by an authorized officer
of PAC, (w) copies of Uniform Commercial Code financing statement, judgment,
suit and tax lien searches, demonstrating that the assets of the new Subsidiary
(or the assets being purchased, if applicable) are free and clear of all liens
and security interests, other than Permitted Liens, (x) those Assumption
Agreements, Amendment to Pledge Agreements, resolutions, certificates and
agreements identified in Section 10.15 hereof, (y) the original shares of stock
or other evidences of the equity interests to be pledged (if any), endorsed in
blank or accompanied with executed undated stock powers, or such other evidence
of the perfection of the Bank's security interest therein as the Bank may
reasonably require, and (z) such opinions of counsel to the Borrowers with
respect to the documents identified in clause (x) above, financing statements,
insurance certificates (to the extent not covered by certificates previously
delivered), assignments of trademarks and other documents and agreements as the
Bank may reasonably require.
SECTION 2.2.9. PROCEDURE FOR DOMESTIC AND FOREIGN
ACQUISITIONS.
(a) Any Domestic Acquisition may only be made with
the Bank's written approval. Not less than seven (7) days prior to the Bank
making its decision whether to grant or withhold such approval, PAC shall
deliver to the Bank in writing (i) a detailed description of the material terms
of such Acquisition, (ii) not less than two years of historical financial
statements of the business being acquired in form and substance acceptable to
the Bank (which may, subject to
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Bank's reasonable discretion, be internally prepared if audited or
accountant-prepared financial statements are not available), (iii) projected
income statements and balance sheets with respect to the business to be acquired
for the one-year period following consummation of the acquisition, (iv) not less
than one year of the most recent tax returns for the business being acquired,
and (v) calculations certified by the chief executive officer or chief financial
officer of PAC that if such Acquisition had been effected on the last day of the
last fiscal quarter of PAC for which financial statements are available, the
Borrowers would have been in compliance with all financial covenants, and that a
good faith projection indicates that the Borrowers will continue to be in
compliance with the financial covenants for the twelve-month fiscal period
following the acquisition; provided, however, that for the purpose of
determining whether the Borrowers would have been in compliance with all
financial covenants as of the last day of the last fiscal quarter of PAC for
which financial statements are available, no credit or other allowance shall be
made for EBITDA of the business being acquired. Prior to (or concurrently with)
the closing of any Domestic Acquisition which has been approved by the Bank, PAC
shall have delivered or caused to have been delivered to the Bank, in form and
substance acceptable to the Bank, each of those items identified in clauses
(v)-(z) of Section 2.2.8 above; provided, however, that if delivery of the items
identified in clause (y) of Section 2.2.8 cannot feasibly be accomplished prior
to (or concurrently with) the closing of any Acquisition, such items may be
provided no later than three (3) Business Days following such Acquisition.
(b) The procedure for making a Foreign Acquisition
shall be identical to the procedure for making a Domestic Acquisition as
provided in Section 2.2.9(a) above except that (i) the Bank shall be given not
less than thirty (30) days prior written notice of each Foreign Acquisition
(which notice shall include the location(s) of the proposed Target and its
assets) prior to making its decision whether to grant or withhold its approval
of such Acquisition, (ii) PAC shall provide or cause to be provided to the Bank
all of the information described in clauses (i)-(v) of Section 2.2.9(a) above
with respect to each Proposed Foreign Acquisition as soon as it becomes
available to PAC, and in any event not less than fifteen (15) days prior to
making the Bank making its decision whether to grant or withhold its approval of
such Acquisition, (iii) to the extent reasonably necessary to avoid material
adverse tax consequences to the Borrowers or any new Subsidiary being formed or
acquired in connection with such Acquisition (the "Foreign Subsidiary"),
notwithstanding the provisions of Section 10.15 hereof, (x) the Foreign
Subsidiary shall not be required to become liable for repayment of the
Obligations or to grant a security interest in any of its properties to secure
the Obligations (but shall for such other purposes as the Bank may prescribe be
considered to be a "Borrower" hereunder), and (y) the Borrowers shall not be
required to pledge all of the shares of stock or other equity interests of the
Foreign Subsidiary, and shall instead cause the lesser of (1) 65% of the
outstanding shares of each class of such stock or other equity interests, or (2)
all of such stock or other equity interests owned by the Borrowers to be pledged
pursuant to a pledge agreement in form and substance
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acceptable to the Bank, and (iv) the Borrowers shall cause to be delivered to
the Bank, prior to or concurrently with the making of the initial Advance with
respect to such Acquisition, an opinion of counsel practicing under the laws of
the jurisdiction under which the Foreign Subsidiary was formed with respect to
the enforceability of such pledge agreement and the validity and perfection of
the liens and security interests granted pursuant thereto.
SECTION 2.2.10. SELLER DEBT. The Bank anticipates that the
Borrowers will use Seller Debt in making Acquisitions. Seller Debt may be
take-back financing of the Seller(s) of the Person being acquired (the
"Target"), or liabilities of such Person which the Borrower intends to assume in
connection with the Acquisition. The Seller Debt shall be permitted in all
Permitted Acquisitions so long as the Seller Debt is unsecured. Notwithstanding
the foregoing, (a) with the prior written approval of the Bank (not to be
unreasonably withheld) the Seller Debt may be secured in whole or in part by a
first priority lien on any real estate being acquired by the Borrowers in such
Acquisition, and (b) Borrowers may assume liabilities of the Target consisting
of purchase money indebtedness secured by a purchase money security interest or
finance lease encumbering Equipment being acquired in such Acquisition if (i)
either (A) such assumed liabilities are accruing interest at a substantially
favorable rate as compared to the rate of interest accruing on the Loans, or (B)
prepayment of such assumed liabilities is either prohibited or would require the
payment of a substantial penalty, and (ii) no Event of Default (and no event
which, with the giving of notice or lapse of time (or both) would be an Event of
Default) shall have occurred and be continuing either immediately prior to or
immediately after such assumption of liabilities. In the case of any other
Acquisitions, the Bank reserves the right to approve, or disapprove, the terms
of any such Acquisition, including specifically, without limitation, the terms
of any contemplated Seller Debt.
SECTION 2.3. COMMITMENT FEE. In addition to the Unused Line
Fees, the Borrower shall pay to the Bank a commitment fee in the amount of
$40,000, payable at Closing.
ARTICLE III
SECURITY FOR THE LOANS
The repayment of the Loans, the satisfaction of the Obligations, and
the full, complete and absolute performance by the Borrower of each of the terms
and conditions of this Agreement, the Line of Credit Note, the Acquisition Line
of Credit Note, the other Loan Documents and all other Obligations, direct or
indirect, owing to the Bank shall be secured by the following:
SECTION 3.1. GRANT OF SECURITY INTEREST. PAC and each other Borrower
hereby jointly and severally assign to the Bank, all of the Borrowers' right,
title, and interest in and to, and grant to the Bank a continuing first priority
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lien security interest (subject only to any Permitted Lien) in and to, the
following tangible and intangible assets owned by the Borrowers, wherever
located, whether now owned or hereafter acquired by the Borrowers, together with
all substitutions therefor, and replacements and renewals thereof:
(a) Accounts (including all Receivables);
(b) Inventory;
(c) Chattel Paper;
(d) Documents;
(e) General Intangibles (including trademarks, tradenames,
patents, copyrights and the goodwill associated therewith, and
all rights to payments due from franchisees of whatever
nature);
(f) Instruments;
(g) Equipment;
(h) Securities (including the capital stock of all Subsidiaries);
and
(i) All Records relating to or pertaining to any of the above.
In addition to the previously described kinds and types of property of the
Borrowers, the Borrowers hereby assign, transfer and set over to the Bank all of
the Borrowers' right, title and interest in and to, and grant to the Bank a
continuing security interest in all amounts that may be owing at any time and
from time to time by the Bank to the Borrowers in any capacity, including, but
not limited to, any balance or share belonging to any Borrower of any deposit or
other account with the Bank, which security interest shall be independent of and
in addition to any right of set-off which the Bank may possess.
SECTION 3.2. PROCEEDS AND PRODUCTS. The Bank's security interest
provided for herein shall apply to all cash and non-cash proceeds, including but
not limited to insurance proceeds, and the products of the Collateral.
SECTION 3.3. PRIORITY OF SECURITY INTERESTS. The security interests
granted by the Borrowers to the Bank pursuant to this Agreement and at the time
of any Advance hereunder shall be a first priority lien security interest in the
Collateral subject to no other security interest or lien except Permitted Liens.
The Collateral shall secure the payment and performance of all Obligations
hereunder.
SECTION 3.4. REAL ESTATE. The Bank reserves the right to secure the
Loans and Obligations by deeds of trust or mortgages on any real estate, or
interests in real estate, now or hereafter owned by PAC or the Borrowers,
subject to any Permitted Liens. PAC shall reasonably attempt to give written
notice to the Bank at least thirty (30) days in advance of any possible purchase
or acquisition of real estate, or any contemplated Acquisition where the real
estate of the Target is a substantial asset. Such notice shall also provide the
Bank with relevant information as to the value, size, current use and past use
of the real property, and the physical condition of any improvements. No
Borrower shall commence
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construction of any significant improvement (with a cost in excess of One
Hundred Thousand Dollars ($100,000)), on any real property owned or hereafter
acquired without giving similar notice at least thirty (30) days in advance to
the Bank.
SECTION 3.5. FUTURE ADVANCES. The security interests granted by the
Borrowers shall secure all current and all future Advances made by the Bank to
the extent such current and future Advances constitute Loans or Obligations, and
the Bank may advance or readvance upon repayment by the Borrowers of all or any
portion of the sums loaned to the Borrowers and any such advancement or
readvancement shall be fully secured by the security interests created by this
Agreement.
SECTION 3.6. TRADEMARK ASSIGNMENTS. The Borrowers shall assign and
grant a security interest and lien upon all federally registered trademarks,
tradenames, service marks, copyrights, and patents now or hereafter existing,
and applications therefor, including specifically, without limitation, the
trademarks identified in the Trademark Assignments to be executed and delivered
at Closing.
SECTION 3.7. LANDLORD'S WAIVERS. At the request of the Bank, at any
time and from time to time, PAC and/or any Borrower requested by the Bank shall
provide to the Bank appropriate landlords' waivers, in form and content
satisfactory to the Bank, for the location of PAC's or any other Borrower's
chief executive office where its or their original entry books of account are
maintained, and such other locations as may be determined from time to time by
the Bank, which landlords' waivers shall acknowledge the Bank's priority lien
security interest in the Collateral and shall contain an express subordination
of any rights which the landlord might attempt to assert against such Collateral
to the rights of the Bank.
ARTICLE IV
CONDITIONS PRECEDENT
All duties and obligations of the Bank hereunder are specifically
subject to the full satisfaction of the conditions precedent set forth in this
Article IV as follows:
SECTION 4.1. REQUIRED DOCUMENTS. The Borrowers shall deliver to
the Bank prior to or at Closing hereunder the following:
(a) A certified (as of the date of the closing) copy of resolutions
of each Borrower (i) authorizing the execution, delivery and performance of the
Loan Documents; and (ii) stating the incumbency and containing the signatures of
the officers of each Borrower executing the Loan Documents;
(b) A Certificate of Good Standing, as of a current date, issued by
the Secretaries of State or other appropriate governmental authorities of the
states where
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each Borrower is incorporated or organized, and in which any Borrower is
qualified to do business as a foreign corporation, evidencing the good standing
of each Borrower in the respective jurisdictions;
(c) A certified copy of the Governing Documents or other
organizational instruments of each Borrower, including all amendments thereto;
(d) Proof of current insurance coverages required by this Agreement,
including delivery of certificates or duplicate policies as the Bank may direct;
(e) Duly executed Line of Credit Note;
(f) Duly Executed Acquisition Line of Credit Note;
(g) Duly executed Financing Statements in form and number suitable
for recordation;
(h) Duly executed and acknowledged Trademark Assignment;
(i) Duly executed Pledge Agreements and delivery of all "Pledged
Securities" as defined therein, duly endorsed in blank;
(j) Duly executed Landlord's Waivers if requested by the Bank;
(k) True copies of all leases of properties where the Collateral
(including Records) are maintained;
(l) An opinion of Borrowers' counsel to and for the benefit of the
Bank as to the due execution, enforceability and validity of the Loan Documents,
in form satisfactory to the Bank and its counsel;
(m) Payment of the Forty Thousand Dollar ($40,000) commitment fee to
the Bank;
(n) Resolutions, signature cards and other administrative documents
necessary to establish the Deposit Account(s) and any other bank accounts;
(o) A listing of all accounts with financial institutions as
provided in Section 6.20;
(p) The final Form S-1 submitted to the Securities and Exchange
Commission;
(q) Closing certificates, executed by the chief executive office or
chief financial officer, as to such matters and in such form as requested by the
Bank;
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(r) Such other requirements as are set forth in this Agreement or
in the Loan Documents; and
(s) Such other items as the Bank may reasonably require.
SECTION 4.2. COMBINATION AND INITIAL PUBLIC OFFERING. The making of
the Loans and effectiveness of this Agreement are expressly conditioned upon the
satisfactory completion of the Combination and a satisfactory initial public
offering of common stock of PAC which are contemplated to occur immediately
preceding the Closing. If, for any reason, (a) the Combination does not occur in
the manner described to the Bank; or (b) the initial public offering does not
occur or does not raise a net amount of at least Nineteen Million Dollars
($19,000,000) after accounting for issuance costs (including all professional
fees incurred in the initial public offering) to be paid from the proceeds
thereof; or (c) any event or happening occurs in connection with the initial
public offering or the Combination which would have a Material Adverse Effect on
the business to be conducted by PAC and the Subsidiaries, the prospects for
repayment of the Loans, or the quality and character of the Collateral, then the
Bank's obligations hereunder shall cease and become void and there shall exist
no duty on the part of the Bank to make any loans or otherwise perform under
this Agreement or any of the Loan Documents.
SECTION 4.3. SATISFACTION OF TERMS. At the time of each Advance, or
any readvance or other credit extended hereunder, the Borrowers shall have
complied with all of the terms and conditions hereof, all representations and
warranties shall be true and accurate in all material respects as of such date
(other than changes occurring in the ordinary course of business and not in
violation of this Agreement), and no Event of Default shall have occurred and be
continuing.
SECTION 4.4. CLOSING. The express conditions of Closing described
above shall be strictly interpreted and no obligation on the part of the Bank
shall arise unless and until all conditions are satisfied or waived, in the sole
discretion of the Bank.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
To induce the Bank to make the Loans and enter into this Agreement,
PAC represents and warrants as to the business and affairs of itself and, to its
knowledge, all Subsidiaries, and each Subsidiary represents and warrants as to
its business and affairs, and all Borrowers acknowledge the Bank's justifiable
reliance upon the accuracy of the matters set forth below as of the date hereof
and at the time of each Advance under the Line of Credit and Acquisition Line of
Credit:
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SECTION 5.1. ACCURACY AND COMPLETENESS OF INFORMATION. All
information, documents, reports, statements, financial statements, and data
submitted by or on behalf of the Borrower in connection with the Loan, or in
support thereof, are true, accurate, and complete in all material respects and
contain no knowingly false, incomplete or misleading statements or omit any
material information.
SECTION 5.2. NON-EXISTENCE OF DEFAULTS, ETC. Except to the extent
disclosed to the Bank by the Borrower, the Borrower is not in material default
with respect to any of its existing indebtedness, and the making and performance
of this Agreement and the Loan Documents will not immediately, or with the
passage of time, the giving of notice, or both: (a) violate the provisions of
any Governing Document of the Borrower, violate any Laws which would impair the
Collateral or the Bank's lien and security interest therein or result in a
material default under any material contract, agreement, or instrument to which
the Borrower is a party or by which the Borrower or its property is bound; or
(b) result in the creation or imposition of any security interest in, or lien or
encumbrance upon, any of the assets of the Borrower, except in favor of the Bank
or the holders of Permitted Liens.
SECTION 5.3. LITIGATION. Except to the extent disclosed in Schedule
"E" attached hereto, there is no action, suit, investigation, or proceeding
pending or, to the best knowledge and belief of the Borrower, threatened against
the Borrower, which if adversely determined could reasonably be expected to have
a material adverse effect on the Borrower.
SECTION 5.4. LIABILITIES OR ADVERSE CHANGES. The Borrower has no
direct or contingent material liability or indebtedness, other than such
indebtedness as is secured by a Permitted Lien, which is known to the Borrower
and not previously disclosed to the Bank, nor does the Borrower know of or
expect any Material Adverse Change in the assets, liabilities, properties,
business, or condition, financial or otherwise, of the Borrower.
SECTION 5.5. TITLE TO COLLATERAL. The Borrower has good and
marketable title to all of the existing Collateral and will have good and
marketable title to all of the Collateral hereafter acquired, subject in each
case to Permitted Liens. The Bank's liens described herein shall constitute
first priority lien security interests, subject to Permitted Liens and except as
otherwise disclosed to the Bank.
SECTION 5.6. FIRST PRIORITY LIENS. Upon the proper filing of all
financing statements, the Trademark Assignments and other recordings
contemplated herein in the jurisdictions and locations identified by Borrower to
Bank, or, in the case of the Pledge Agreement, the possession by the Bank of
certificates evidencing the Pledged Securities, the Loan Documents are and will
be effective to create in favor of the Bank, a valid and enforceable first
priority perfected security
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interest in and lien upon all right, title and interest of PAC and its
Subsidiaries in the Collateral described therein, subject only to Permitted
Liens.
SECTION 5.7. USE OF LOAN PROCEEDS. The Borrower shall use the
proceeds of the Loan only for the purposes represented to the Bank and as set
forth in this Agreement.
SECTION 5.8. STATUS. The Borrower is a corporation or a limited
liability company, as the case may be, validly organized and existing under the
Laws of the state of its incorporation or organization and its operations and
affairs have been effectively and validly commenced. The Borrower has qualified
to do business as a foreign corporation or limited liability company, as the
case may be, in all states where the ownership of its properties or conduct of
its business requires qualification. The Borrower has the power to own its
properties, conduct its business and affairs, and enter into the Loan and
perform the Obligations. The Borrower's entry into the Loan with the Bank has
been validly and effectively approved by its Board of Directors, shareholders,
members or as may be required by its Governing Documents or applicable Law. All
copies of the Governing Documents and corporate resolutions of the Borrower
shown to the Bank are true, accurate, and complete and no action has been taken
in derogation or abrogation thereof. The Borrower has not changed its name, been
the surviving corporation in a merger, acquired any business, or conducted
business under any trade name, except as referenced in Schedule "B" attached
hereto and incorporated herein by this reference. No Borrower has changed the
county and state in which its chief executive office is located within the last
five (5) years.
SECTION 5.9. FINANCIAL STATEMENTS.
(a) PAC has heretofore furnished to Bank copies of financial
statements for Precision Tune Auto Care, Inc. (a Subsidiary of WE JAC
Corporation and a Borrower hereunder) and other Borrowers. The financial
statements have been prepared in accordance with GAAP (subject, with respect to
the unaudited financial statements, to the absence of notes required by GAAP and
to normal year-end audit adjustments) and present fairly the financial position
of such Subsidiaries and the consolidated results of operations of the
Subsidiaries for the periods then ended. Except as fully reflected in the most
recent Financial Statements and the notes thereto, as of the Closing Date, and
taking into account the Loans to be made on the Closing Date and the other
transactions contemplated by the Loan Documents, there will be no material
liabilities or obligations with respect to PAC or any of its Subsidiaries of any
nature whatsoever (whether absolute, contingent or otherwise and whether or not
due). Since the date of the most recent financial statements, there has been no
Material Adverse Change, and no Material Adverse Change is threatened or
reasonably likely to occur. Neither PAC nor any of its Subsidiaries has directly
or indirectly declared, ordered, paid, made or set apart any amounts or
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property for any dividend, share acquisition or other distribution, or agreed to
do so, except as contemplated in the Combination.
(b) PAC has prepared, and has heretofore furnished to the Bank
copies of, annual projected balance sheets and statements of income and cash
flows of PAC and its Subsidiaries for the three-year period commencing on the
date set forth therein (the "Projections"). In the opinion of PAC's management,
the assumptions used in preparation of the Projections were reasonable when made
and will be reasonable as of the Closing. The Projections have been prepared in
good faith by the executive and financial personnel of PAC in light of the
historical financial performance of the Subsidiaries and the financial and
operating condition of the Subsidiaries at the time prepared, give effect to the
transactions contemplated by the Loan Documents and, in the opinion of PAC's
management, represent, as of Closing, a reasonable estimate of the future
performance and financial condition of PAC and its Subsidiaries, subject to the
uncertainties and approximations inherent in any projections and without
representation or warranty that such projected performance and financial
condition will actually be achieved.
SECTION 5.10. SOLVENCY. PAC and each of its Subsidiaries is,
and PAC and its Subsidiaries, on a consolidated basis are, (i) solvent, and
(ii) after giving effect to the transactions contemplated hereby, will be
solvent.
SECTION 5.11. VALIDITY, BINDING NATURE, AND ENFORCEABILITY OF THE
LOAN DOCUMENTS. The Loan Documents executed by the Borrower are the valid and
binding obligations of the Borrower, fully enforceable against the Borrower in
accordance with their terms.
SECTION 5.12. DEFAULTS UNDER LOAN DOCUMENTS. There is not currently
existing any action, event, or condition which would constitute an Event of
Default on the part of Borrower under this Agreement or of the Borrower under
any other Loan Document, and no action, event or condition has occurred and is
continuing to occur which, with notice or the passage of time, or both, would
constitute a default by the Borrower under any provision of this Agreement or by
the Borrower under any other Loan Document.
SECTION 5.13. TAXES. The Borrower has: (a) filed all federal, state
and local tax returns and other reports which are required by Law to be filed
prior to the date hereof; (b) paid or caused to be paid all taxes, assessments
and other governmental charges that are due and payable prior to the date
hereof, except where the same are being contested in good faith by appropriate
proceedings with adequate reserves therefor having been set aside; and (c) made
adequate provision for the payment of such taxes, assessments or other charges
accruing but not yet payable. The Borrower has no knowledge of any deficiency or
additional assessment in a materially important amount in connection with any
taxes, assessments or charges not provided for on the Borrower's books of
account or reflected in the Borrower's
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financial statements, nor is the Borrower under audit by any federal, state or
local tax authority in connection with any material tax obligations.
SECTION 5.14. ERISA.
(a) Schedule "C" lists, as of the Closing, all employee benefit
plans within the meaning of Section 3(3) of ERISA maintained or sponsored by PAC
or, to the knowledge of PAC, any of its Subsidiaries or to which PAC or, to the
knowledge of PAC, any of its Subsidiaries is obligated to contribute (the
"Plans") and separately identifies all Qualified Plans (as defined below) and
all multiemployer plans within the meaning of Section 3(37) of ERISA with
respect to which PAC or, to the knowledge of PAC, any of its Subsidiaries is a
participating employer ("Multiemployer Plan"). PAC will at the request of the
Bank deliver true and correct copies of all such Plans to the Bank.
(b) To the knowledge of PAC, each such Plan is in compliance in all
material respects with the applicable provisions of ERISA, the Internal Revenue
Code and other federal or state law, including, to the knowledge of PAC, all
requirements under the Internal Revenue Code or ERISA for filing reports (which
are true and correct in all material respects as of the date filed).
(c) The form of each Plan intended to be qualified under Section
401(a) of the Internal Revenue Code ("Qualified Plan") to the knowledge of PAC
qualifies under Section 401(a) of the Internal Revenue Code, and the trusts
created thereunder are, to the knowledge of PAC, exempt from tax under the
provisions of Section 501(a) of the Internal Revenue Code, and to the knowledge
of PAC nothing has occurred that would cause the loss of such qualification or
tax-exempt status.
(d) There is no outstanding liability under Title IV of ERISA with
respect to any Plan maintained or sponsored by PAC or, to the knowledge of PAC,
its Subsidiaries (as to which PAC or any of its Subsidiaries is or may be
liable), nor with respect to any Plan to which PAC or, to the knowledge of PAC,
any of its Subsidiaries (wherein PAC or any of its Subsidiaries is or may be
liable) contributes or is obligated to contribute which would have a Material
Adverse Effect.
(e) To the knowledge of PAC, none of the Qualified Plans subject to
Title IV of ERISA has any unfunded benefit liability as defined in Section
4001(a)(18) of ERISA (as to which PAC or any of its Subsidiaries is or may be
liable) which would have a Material Adverse Effect.
(f) PAC and, to the knowledge of PAC, its Subsidiaries have complied
in all material respects with the applicable notice and continuation coverage
requirements of Section 4980B of the Internal Revenue Code.
(g) No event has occurred or is reasonably expected to occur with
respect to any Plan maintained or sponsored by PAC or any of its Subsidiaries or
to
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which PAC or any of its Subsidiaries is obligated to contribute which would
constitute a "reportable event" within the meaning of Section 4043(c) of ERISA
(excluding a reportable event for which the notice requirement has been waived
by the PBGC) otherwise affect the tax qualification of any Qualified Plans, or
result in a deficiency in any required contributions which would have a Material
Adverse Effect.
(h) As of the Closing Date, there are no pending or, to the
knowledge of PAC, threatened claims, actions or lawsuits, other than routine
claims for benefits in the usual and ordinary course, asserted or instituted
against (i) any Plan maintained or sponsored by PAC and, to the knowledge of
PAC, its Subsidiaries or their assets, or (ii) any fiduciary with respect to any
Plan for which PAC or, to the knowledge of PAC, any of its Subsidiaries may be
directly or indirectly liable, through indemnification obligations or otherwise
which would have a Material Adverse Effect.
(i) Neither PAC nor, to the knowledge of PAC, any of its
Subsidiaries has incurred or, to the knowledge of PAC, reasonably expects to
incur (i) any liability (and no event has occurred that, with the giving of
notice under Section 4219 of ERISA, would result in such liability) under
Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan or (ii) any
liability under Title IV of ERISA (other than premiums due and not delinquent
under Section 4007 of ERISA) with respect to a Plan which would have a Material
Adverse Effect.
(j) Neither PAC nor, to the knowledge of PAC, any of its
Subsidiaries has engaged, directly or indirectly, in a nonexempt prohibited
transaction (as defined in Section 4975 of the Internal Revenue Code or Section
406 of ERISA) in connection with any Plan that has a Material Adverse Effect.
SECTION 5.15. ASSETS FOR CONDUCT OF BUSINESS. PAC and each of its
Subsidiaries possesses adequate assets, licenses, patents, copyrights,
trademarks and trade names necessary to continue to conduct its business
substantially as heretofore conducted without any material conflict with the
rights of other Persons.
SECTION 5.16. TRADEMARKS. Schedule D sets forth a true and complete
list of all registered patents, trademarks, trade names and copyrights owned by
the Borrower, or for which applications are pending (the "Intellectual
Property"). Each of the federal registrations pertaining to the Intellectual
Property owned by the Borrower is valid and in full force and effect, and all
required filings in connection with such registrations have been properly made
and all required fees have been paid. The Borrower owns, or has the right to use
pursuant to valid and effective agreements, all Intellectual Property and no
claims are pending against the Borrower by any person with respect to the use of
any Intellectual Property or challenging or questioning the validity or
effectiveness of any license or agreement relating to the same, and the current
use by the Borrower of the Intellectual Property does not infringe on the rights
of any third party.
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SECTION 5.17. COMPLIANCE WITH LAWS. Except as otherwise disclosed to
the Bank, Borrower has complied in all material respects with all applicable
Laws with respect to: (a) any restrictions, specifications, or other
requirements pertaining to products that the Borrower sells or to the services
it performs; (b) the conduct of its business; and (c) the use, maintenance, and
operation of the real and personal properties owned or leased by it in the
conduct of its business. The Borrower has, and shall continue to, comply with
all laws, ordinances, rules, regulations, guidelines, orders and decrees in
regard to safety and the disposal of toxic wastes and hazardous materials.
SECTION 5.18. ACCURACY OF REPRESENTATIONS AND WARRANTIES. No
representation or warranty by the Borrower contained herein or in any
certificate or other document furnished by the Borrower pursuant hereto contains
any untrue statement of material fact or omits to state a material fact
necessary to make such representation or warranty not misleading in light of the
circumstances under which it was made.
SECTION 5.19. CONSENTS, APPROVALS, AND AUTHORIZATIONS. Each consent,
approval or authorization of, or filing, registration or qualification with, any
Person which is required to be obtained or effected by the Borrower in
connection with the execution and delivery of this Agreement and the Loan
Documents, or the undertaking or performance of any obligation hereunder or
thereunder, has been duly obtained or effected.
SECTION 5.20. TITLE TO ASSETS OTHER THAN COLLATERAL. The Borrower
has good and marketable title to all of its material assets, subject to no
security interest, encumbrance, lien, or claim of any Person other than the
Bank, holders of Permitted Liens and lessors under true operating leases.
SECTION 5.21. MARGIN SECURITIES. Neither PAC nor any of its
Subsidiaries owns any "margin stock" within the meaning of Regulation U. None of
the proceeds of the Loans will be used, directly or indirectly, for the purpose
of purchasing or carrying any margin stock, maintaining, reducing or retiring
any indebtedness that was originally incurred to purchase or carry margin stock
or for any other purpose that would violate Regulation G, Regulation U,
Regulation T or Regulation X or any other regulation of the Board of Governors
of the Federal Reserve System, as the same may be in effect from time to time.
SECTION 5.22. PLACE OF BUSINESS. The Borrowers' respective chief
executive offices, principal places of business, and only places of business
where their respective original entry Records are kept, are located at the
address(es) set forth in Schedule "B" attached hereto and incorporated herein by
this reference.
SECTION 5.23. ADDITIONAL BUSINESS LOCATIONS. The Borrower
maintains other business locations as set forth in Schedule "B" attached
hereto where Collateral is stored.
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SECTION 5.24. OTHER SUBSIDIARIES. As used herein, the term
"Subsidiaries" means those companies (other than PAC) which have executed this
Agreement and assumed the joint and several Obligations hereunder and under the
Notes, and which are, directly or indirectly, owned and controlled by PAC,
whether directly or through an intermediary which is a Subsidiary. The term
"Subsidiaries" may also include additional parties who subsequently execute
Assumption Agreements and become parties to this Agreement and joint and several
obligors under the Notes. PAC may now or hereafter own and/or control other
business entities, and may in the future create, form or acquire other such
subsidiaries which are not now, and will not in the future be, a "Borrower" as
such term is defined and used herein and in the Notes. PAC shall notify the
Bank, in writing, of any such non-borrowing Affiliate hereafter created, formed
or acquired. PAC and all other Borrowers now or hereafter existing represent and
covenant that none of the non-borrowing Affiliates shall receive any direct
benefit from the Loans.
SECTION 5.25. MATERIAL CONTRACTS AND COMMITMENTS. Except as
previously disclosed in writing to the Bank: (a) the Borrower is not in material
default under any binding Material Contract of any kind; and (b) to the best of
Borrower's knowledge, all parties to any Material Contract binding upon the
Borrower have complied in all material respects with the provisions of such
Material Contract. As used in this Section 5.25, the term "Material Contract"
shall mean any contract or commitment for consideration in excess of Two Hundred
Fifty Thousand Dollars ($250,000).
SECTION 5.26. ENVIRONMENTAL MATTERS.
(a) Except as disclosed in the Phase I Environmental Surveys for
each of the Borrower-owned real properties, copies of which were delivered to
the Bank, (i) no Hazardous Substances are unlawfully stored or otherwise
unlawfully located on the business premises of PAC or its Subsidiaries, and
neither PAC nor any of its Subsidiaries has contaminated, nor to the
Subsidiaries knowledge has any other Person contaminated, any part of the
business premises of PAC or its Subsidiaries, including the groundwater located
thereon and thereunder, with any Hazardous Substance during the ownership,
occupancy or operation thereof by PAC or any of its Subsidiaries; (ii) there
have been no releases of Hazardous Substances in violation of any environmental
Law by PAC or any of its Subsidiaries, or to its Subsidiaries' knowledge by any
other Person, on any real estate previously owned by the Subsidiaries; (iii) to
the Subsidiaries' knowledge, there are no underground storage tanks situated on
the business premises of PAC or its Subsidiaries; and (iv) to the knowledge of
the Subsidiaries, neither PAC nor any of its Subsidiaries has ever sent
Hazardous Substances to a site which, pursuant to any environmental Law, (1) has
been placed on the "National Priorities List" or "CERCLIS List" of hazardous
waste sites (or any similar state list), or (2) which is subject to a claim, an
administrative order or other request to take "removal" or "remedial" action (as
defined under environmental Laws) or to pay for the costs of cleaning up such a
site; and
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(b) All activities and operations of PAC and each of its
Subsidiaries comply in all material respects with the requirements of all
applicable environmental Laws of all governmental authorities having
jurisdiction over PAC or any of its Subsidiaries or its properties, and neither
PAC nor any of its Subsidiaries is involved in any suit or proceeding or has
received any written notice from any governmental agency alleging that PAC or
any of its Subsidiaries is a responsible party with respect to a release of
Hazardous Substances or has received written notice of any claims from any
person or entity relating to property damages or personal injuries from exposure
to Hazardous Substances.
(c) As used herein, "Hazardous Substance" means any substances or
materials (i) that are or become defined as hazardous wastes, hazardous
substances, pollutants, contaminants or toxic substances under any environmental
Law; (ii) that are toxic, explosive, corrosive, flammable, infectious,
radioactive, mutagenic or otherwise hazardous and are or become regulated by any
governmental authority; (iii) the presence of which requires investigation or
remediation under any environmental Law or common law; or (iv) that contain,
without limitation, asbestos, polychlorinated biphenyls, urea formaldehyde foam
insulation, petroleum hydrocarbons, petroleum derived substances or waste, crude
oil, nuclear fuel, natural gas or synthetic gas.
SECTION 5.27. GRIMAUD LIEN. PAC will perform all obligations which
are secured by the Grimaud Lien in a timely manner, including specifically,
without limitation, the payment of all subfranchisor fees within ten (10) days
of receipt, and in no event shall any payments owing Grimaud and secured by the
Grimaud Lien exceed in the aggregate at any one time the sum of $100,000. PAC
shall notify the Bank in writing of any material disputes, or possible disputes,
promptly upon having actual knowledge of a material dispute, or the possibility
thereof. PAC shall use its best efforts in the ordinary conduct of its business
to (a) avoid any enforcement action of the Grimaud Lien, and (b) terminate the
Grimaud Lien.
SECTION 5.28. YEAR 2000. All of the material computer software,
computer firmware, computer hardware (whether general or special purpose) and
other similar or related items of automated, computerized and/or software
systems(s) that are used or relied on by Borrower or any Subsidiary in the
conduct of its business will not malfunction, will not cease to function, will
not generate incorrect data, and will not produce incorrect results when
processing, providing and/or receiving (i) date-related data into and between
the twentieth and twenty-first centuries, and (ii) date-related data in
connection with any valid date in the twentieth and twenty-first centuries.
As used above in this Article V, the singular "Borrower" shall mean each
Borrower (except PAC) for itself, and PAC for and on behalf of itself and all
other Borrowers (except representations of PAC on behalf of its Subsidiaries
shall be to PAC's knowledge).
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ARTICLE VI
AFFIRMATIVE COVENANTS
PAC for itself and all other Borrowers, and each Subsidiary for
itself, covenants and agrees, during the term of this Agreement and while any
Obligations are outstanding and unpaid, to do and perform the following:
SECTION 6.1. PAYMENTS. All Obligations shall be paid in full
when and as due, time being of the essence.
SECTION 6.2. PERFORMANCE. Except in any instance where a cure period
is applicable or otherwise provided by the Bank, all Obligations shall be fully
and completely performed, when and as required, time being of the essence.
SECTION 6.3. PROTECTION OF SECURITY. The value of the
Collateral shall at all times be protected and preserved.
SECTION 6.4. INSURANCE. The Borrower shall obtain and maintain
the following insurance coverages:
SECTION 6.4.1. CASUALTY INSURANCE. The Borrower shall obtain
and maintain during the term of the Loan for all of its assets and properties,
both real, personal, and mixed, including but not limited to the Collateral,
fire and extended coverage casualty insurance. Such insurance shall be written
in amounts satisfactory to the Bank and sufficient to prevent any co-insurance
liability (which amount shall be the full insurable value). The Bank shall be
supplied with a certificate of insurance and/or duplicate originals or copies of
the aforementioned insurance policies and paid receipts evidencing payment of
the premiums due on the same. The aforementioned policies shall be endorsed so
as to make them noncancellable unless thirty (30) days prior notice of
cancellation is provided to the Bank. The Borrower shall give the Bank prompt
notice of any material loss covered by such casualty insurance.
SECTION 6.4.2. LIABILITY AND WORKER'S COMPENSATION INSURANCE.
The Borrower shall obtain and maintain during the term of the Loan public
liability and property damage insurance in such amounts, with insurance
companies, and upon policy forms reasonably acceptable to and approved by the
Bank. The Borrower shall obtain and maintain during the term of the Loan,
workers' compensation insurance, in such amounts, with insurance companies, and
in forms reasonably acceptable to and approved by the Bank. The Borrower, on
request, shall supply the Bank with copies of the liability and worker's
compensation insurance policies and receipts evidencing the payment of premiums
due thereon or, alternatively, certificates from the insurance companies
certifying to the existence of policies, summarizing the terms of the policies,
and indicating the payment of premiums due thereon.
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SECTION 6.4.3. OTHER INSURANCE. The Borrower shall also
maintain such other forms of insurance as may be customary or prudent for
businesses of the type carried on by each Borrower or as may be required by the
Bank from time to time as determined in its reasonable discretion.
SECTION 6.5. COLLECTION OF ACCOUNTS. The Borrower shall collect its
Accounts only in the ordinary course of business unless written permission to
the contrary is obtained from the Bank.
SECTION 6.6. MAINTENANCE OF EXISTENCE. The Borrower shall take all
necessary actions to preserve its existence, franchises and good standing in its
state of incorporation or organization and in any other state where
qualification as a foreign corporation or organization is required, and shall
comply with all present and future Laws applicable in the operation and conduct
of business, and all material agreements to which it is subject.
SECTION 6.7. NOTICE OF LITIGATION AND PROCEEDINGS. The Borrower
shall give (a) notice to the Bank within fifteen (15) calendar days of any
litigation or proceeding in which it is a party if an adverse decision (i) would
require it to pay more than Two Hundred Thousand Dollars ($200,000) or deliver
assets the value of which equals or exceeds such sum (whether or not the claim
is considered to be covered by insurance), or (ii) could, when aggregated with
all other litigation in which any Borrower is a party, cause any one or more
Borrowers to pay more than Five Hundred Thousand Dollars ($500,000) if an
adverse decision were rendered; and (b) immediate notice to the Bank of the
institution of any other suit or proceeding which might have a Material Adverse
Effect on the Collateral, the Borrower's operations, financial condition,
property or business.
SECTION 6.8. PAYMENT OF INDEBTEDNESS TO THIRD PERSONS. The Borrower
shall pay when and as due, or within applicable grace periods, all material
indebtedness due third Persons, except when the amount thereof is being
contested in good faith by appropriate proceedings and with adequate reserves
therefor being set aside by the Borrower.
SECTION 6.9. NOTICE OF CHANGE OF BUSINESS LOCATION. The Borrower
shall notify the Bank thirty (30) days in advance of: (a) any change in the
location of its existing offices or places of business; (b) the establishment of
any new, or the discontinuance of any existing, place of business; and (c) any
change in or addition to the location of the place where Records are kept.
SECTION 6.10. PENSION PLANS. The Borrower shall: (a) fund all of its
defined benefit plans within the meaning of Section 3(35) of ERISA in accordance
with, and in amounts not less than required by, the minimum funding standards of
Section 302 of ERISA; (b) furnish the Bank promptly, upon request, with copies
of all reports or other statements filed with the United States Department of
Labor or the Internal Revenue Service with respect to any employee benefit plans
governed by
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ERISA; and (c) promptly advise the Bank of the occurrence of any "reportable
event" within the meaning of Section 4043(c) of ERISA (excluding a reportable
event for which the notice requirement has been waived by the Pension Benefit
Guarantee Corporation) or a non-exempt "prohibited transaction" within the
meaning of Section 406 of ERISA and Section 4975 of the Internal Revenue Code
with respect to any employee benefit plans governed by ERISA.
SECTION 6.11. MAINTENANCE OF ASSETS AND PROPERTIES. The Borrower
shall maintain its material assets and property, real, personal, and mixed, in
good condition and repair, normal wear and tear excepted, and shall pay and
discharge or cause to be paid and discharged when due, the cost of repairs to or
maintenance of the same, and shall pay or cause to be paid all rental or
mortgage payments due on any real estate used or owned by the Borrower.
SECTION 6.12. PAYMENT OF TAXES. The Borrower shall pay or cause to
be paid when and as due, without interest or penalty, all taxes, assessments and
charges or levies imposed upon it or on any of its property or which it is
required to withhold and pay over to any taxing authority or which it must pay
on its income, except where contested in good faith by appropriate proceedings
with adequate reserves therefor having been set aside by it. The Borrower shall
pay or cause to be paid all such taxes, assessments, charges or levies forthwith
whenever foreclosure on any lien that attaches appears imminent (or provide
security therefor).
SECTION 6.13. FURTHER ASSURANCES AND POWER OF ATTORNEY. The Borrower
agrees to execute such other and further documents, including, without
limitation, promissory notes, security agreements, agreements, financing
statements, continuation statements, and the like as may from time to time in
the reasonable opinion of the Bank be deemed necessary, proper, or convenient,
to perfect, confirm, establish, reestablish, continue, or complete the security
interest in the Collateral and the purposes and intentions of this Agreement as
provided herein, it being the intention of the Borrower to hereby provide a full
and absolute warranty of further assurance to the Bank. Upon the written request
of the Bank that the Borrower execute any such document and the failure of the
Borrower to so execute any such document within ten (10) days, or at any time
and from time to time upon the occurrence and during the continuance of any
Event of Default, as the case may be, the Borrower hereby irrevocably and
automatically appoints the Bank as the Borrower's attorney-in-fact to execute
any such document in the Borrower's name and on the Borrower's behalf and such
power of attorney shall constitute a power of attorney coupled with an interest
and be irrevocable.
SECTION 6.14. ADVANCEMENTS. If the Borrower should fail to perform
any of the affirmative covenants contained in this Article within any grace or
cure period as herein provided, or if the Borrower should fail to protect or
preserve the Collateral or the status and priority of the security interest of
the Bank in the Collateral, the Bank may make Advances to perform the same on
behalf of the
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Borrower. Bank shall endeavor to give notice prior to advancements; provided
that failure to give notice shall not affect Borrowers' liability therefor. All
sums so advanced shall be deemed to be an Advance made pursuant to the Line of
Credit and immediately upon advancement become secured by the security interests
created by this Agreement and the terms and provisions of this Agreement and all
of the applicable Loan Documents, and shall become part of the principal amount
owed to the Bank with interest to be assessed at the applicable rate thereon.
The Borrower shall repay on demand all sums so advanced on the Borrower's
behalf, plus any reasonable expenses or costs incurred by the Bank, including
reasonable attorney's fees, with interest thereon at the highest rate provided
for in the applicable Loan Documents from the date of advancement. The
provisions of this Section shall not be construed to prevent the institution of
the rights and remedies of the Bank upon the occurrence of an Event of Default
by the Borrower. The contrary notwithstanding, the authorization contained in
this Section shall impose no duty or obligation on the Bank to perform any
action or make any Advance on behalf of the Borrower and is for the sole benefit
and protection of the Bank.
SECTION 6.15. MAINTAIN RECORDS AND MAKE AVAILABLE TO BANK FOR
INSPECTION. The Borrower shall maintain Records pertaining to the Collateral and
the conduct and operation of its business, in such detail, form and scope as the
Bank shall from time to time require. During normal business hours, the Bank and
its duly authorized representatives shall have full access to, and the right to
audit, check, inspect and make abstracts and copies from, such Records. The Bank
or the Bank's agents may enter upon any of the Borrower's premises from time to
time during normal business hours for the purpose of inspecting the Collateral
and any and all such Records. The Bank may send verifications of Receivables to
Account Debtors and may confer and correspond with other creditors of the
Borrower. Upon the occurrence and during the continuation of an Event of
Default, the Bank may enter the business premises and take possession of and
remove any or all such Records, or copies thereof, provided, however, such
Records or copies shall be at all times available to the Borrower. All audits,
examinations and inspections shall be performed at the Borrower's expense.
SECTION 6.16. FINANCIAL STATEMENTS. PAC and the other Borrowers
shall furnish the Bank:
(a) INTENTIONALLY OMITTED
(b) INTENTIONALLY OMITTED
(c) INTENTIONALLY OMITTED
(d) As soon as practicable and in any event within thirty (30) days
after the close of each fiscal year of PAC, beginning with the current fiscal
year, an annual operating budget and capital budget prepared on a quarterly
basis for PAC
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and its Subsidiaries on a consolidated basis, in form and detail reasonably
acceptable to the Bank;
(e) Promptly upon receipt thereof, copies of any management letters
or other reports submitted to PAC or its Subsidiaries by its independent
certified public accountants in connection with its examination of or
preparation of financial statements for PAC or its Subsidiaries.
(f) Copies of all Forms 10Q and 10K reports filed with the
Securities and Exchange Commission shall be delivered to the Bank within ten
(10) days after the filing thereof, together with a Compliance Certificate of
the chief executive officer or chief financial officer of PAC stating whether
any Event of Default (or any event which, with the giving of notice or passage
of time (or both) would be an Event of Default) has occurred and is continuing,
and if so, all relevant facts with respect thereto, together with those
calculations required to demonstrate compliance with the financial covenants set
forth in Sections 6.17 through 6.19 hereof, inclusive. The Borrower covenants
and agrees to timely file its Forms 10Q and 10K with the Securities and Exchange
Commission.
(g) Copies of all proxy statements and other material reports or
statements filed with the Securities and Exchange Commission (or the National
Association of Securities Dealers) or any other governmental agency including,
without limitation, the Environmental Protection Agency and the Occupational
Safety and Health Administration shall be delivered to the Bank within ten (10)
days of the date such proxy statements are sent to stockholders or reports or
statements are sent to the governmental or regulatory authority.
(h) Such other information as the Bank may, from time to time,
request.
SECTION 6.17. TOTAL FUNDED DEBT/ANNUALIZED EBITDA RATIO. The
Borrowers shall maintain on a consolidated basis as of the end of each fiscal
quarter, commencing with the fiscal quarter ending June 30, 1998, a Total Funded
Debt/Annualized EBITDA Ratio of less than 3.0 to 1.0.
SECTION 6.18. CONSOLIDATED LIABILITIES TO TANGIBLE NET WORTH RATIO.
The Borrowers shall maintain on a consolidated basis a ratio of Consolidated
Liabilities to Consolidated Tangible Net Worth of (a) less than 3.5 to 1.0 at
all times from June 30, 1998, to (but excluding) December 31, 1998, and (b) less
than 2.5 to 1.0 commencing December 31, 1998, and at all times thereafter.
SECTION 6.19. ANNUALIZED EBITDAR. The Borrowers shall maintain on a
consolidated basis as of the end of each fiscal quarter, commencing with the
fiscal quarter ending June 30, 1998, a ratio of (a) Annualized EBITDAR to (b)
interest expense, plus Rent Expense, plus current maturities of long-term
indebtedness and capital leases, of greater than 1.5 to 1.0.
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SECTION 6.20. DEPOSITORY BANKS. PAC and each Subsidiary shall
maintain its primary depository banking relation with the Bank (unless
unreasonably inconvenient). PAC shall provide the Bank with the names and
addresses of all financial institutions where it and each Subsidiary maintains
any depository, brokerage, investment or other accounts, the account number of
all such accounts, and such information shall be supplemented as depository
accounts are established or discontinued throughout the term of this Agreement.
Notwithstanding the foregoing, Promotora de Franquicias Praxis, S.A. de C.V., a
Mexican corporation ("PFP"), and each of the "Praxis Companies" as defined in
that certain Subscription and Stock Purchase Agreement made as of March 31,
1998, by and among PAC, Precision Auto Care Mexico I, S. de R.L. de C.V. and the
stockholders of PFP (PFP and each of the Praxis Companies, collectively, the
"Non-Borrower Mexican Subsidiaries") shall maintain their primary depository
banking relationships with one of the following financial institutions: Banco
Serfin, Banco Nationale de Mexico or Bancomer.
As used above in this Article VI, the singular "Borrower" shall mean each
Borrower (except PAC) for itself, and PAC for and on behalf of itself and all
other Borrowers.
ARTICLE VII
NEGATIVE COVENANTS
PAC for itself and all other Borrowers, and each other Borrower for
itself, covenants and agrees during the term of this Agreement and while any
Obligations are outstanding and unpaid not to do or to permit to be done or to
occur any of the acts or events set forth below:
SECTION 7.1. CHANGE OF NAME, MERGER, SALE OF STOCK, ETC. Except as
expressly permitted herein, liquidate, wind up or dissolve, or enter into any
consolidation, merger, or other combination, or agree to do any of the
foregoing; PROVIDED, HOWEVER, that:
(a) any Subsidiary may merge or consolidate with another Person so
long as (i) the Person surviving such merger or consolidation is a Subsidiary,
and (ii) immediately after giving effect thereto, no Event of Default would
exist; and
(b) Neither PAC or any Subsidiary shall change its name without ten
(10) days' prior written notice to, and the approval of, the Bank, such approval
not to be unreasonably withheld. No Subsidiary shall issue any additional stock
unless issued to PAC, without the Bank's written consent, such consent not to be
unreasonably withheld.
SECTION 7.2. SALE OR TRANSFER OF ASSETS. Sell, lease, transfer,
convey or otherwise dispose of any of its assets or property, including, without
limitation, the Collateral, except for (i) sales of inventory in the ordinary
course of business; (ii) the
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sale of worn out or obsolete equipment for fair market value or the exchange of
used or obsolete equipment for replacement equipment; (iii) the sale of
permitted temporary or overnight investments; (iv) sales or dispositions of
assets or property having a fair market value of less than $250,000 on an annual
aggregate basis; and (v) any sale, lease, transfer or conveyance from one
Subsidiary to another Subsidiary or to PAC, or from PAC to any Subsidiary, for
less than fair consideration, PROVIDED that, immediately after giving effect
thereto, no Event of Default would exist.
SECTION 7.3. ENCUMBRANCE OF ASSETS. Create, assume or suffer to
exist any deed of trust, mortgage or encumbrance, lien (including a lien of
attachment, judgment or execution) or security interest (including the interest
of a conditional seller of goods), securing a charge or obligation, in or on any
of its property, real or personal, whether now owned or hereafter acquired,
except for Permitted Liens.
SECTION 7.4. TRANSACTIONS WITH RELATED PARTIES. Except as provided
herein, directly or indirectly make any loan or advance to, or purchase, assume
or guarantee any indebtedness to or from, any of its officers, directors,
stockholders or Affiliates, or subcontract any operations to any Affiliate, or
enter into any other transaction with any Affiliate, except (a) in the ordinary
course of and pursuant to the reasonable requirements of business, and (b) upon
fair and reasonable terms no less favorable to PAC or such Subsidiary than would
apply in a comparable arm's-length transaction with a Person not an Affiliate.
SECTION 7.5. GUARANTEES. Without the prior written consent of the
Bank, the Borrower shall not become liable, directly or indirectly, as guarantor
or otherwise for any obligation of any other Person, except for (a) the
endorsement of checks, drafts, instruments or commercial paper for deposit or
collection in the ordinary course of business; (b) the guaranty by PAC of
payment and performance with respect to the obligations of the Subsidiaries; and
(c) the guaranty by PAC of ordinary course of business obligations of any
Subsidiary.
SECTION 7.6. INDEBTEDNESS. The Borrower shall not incur, create,
assume, or permit to exist any indebtedness except: (a) the Loan; (b) existing
secured indebtedness previously disclosed to the Bank; (c) unsecured trade
indebtedness incurred in the ordinary course of business; (d) indebtedness
secured by a Permitted Lien; (e) Subordinated Debt, if approved by the Bank; (g)
intercompany debt among the Borrowers; and (h) Seller Debt.
SECTION 7.7. CONTINGENT OBLIGATIONS. Create, incur, assume or suffer
to exist any contingent obligation other than: (a) endorsements of instruments
or items of payment for deposit or collection in the ordinary course of
business; (b) contingent obligations incurred pursuant to the Loan Documents;
(c) contingent obligations consisting of the indemnification by PAC or any of
its Subsidiaries of (i) the officers, directors, employees and agents of PAC or
such Subsidiary, to the
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extent permissible under the Law of the jurisdiction in which PAC or such
Subsidiary is organized, (ii) commercial banks, investment bankers and other
independent consultants or professional advisors pursuant to agreements relating
to the underwriting of PAC's or such Subsidiary's securities or the rendering of
banking or professional services to PAC or such Subsidiary, and (iii) landlords,
licensors, licensees and other parties pursuant to agreements entered into in
the ordinary course of business by PAC or such Subsidiary; (d) customary
indemnification obligations of PAC and its Subsidiaries incurred in connection
with Permitted Acquisitions or other Acquisitions approved by the Bank; (e)
unsecured amounts payable under earnouts and other contingent obligations in a
Permitted Acquisition, or in any other Acquisition if approved by and if
requested by Bank, subordinated on terms acceptable to the Bank, whether or not
earned or matured; (f) contingent obligations consisting of warranties,
indemnities and guaranties regarding copyright and trademark infringement and
other matters approved by the Bank given to customers in the ordinary course of
business consistent with past practices; (g) Letter of Credit Obligations; (h)
guarantees by any Borrower or any Subsidiaries of obligations of PAC or its
subsidiaries under leases permitted hereunder; and (i) guarantees by PAC or any
of its Subsidiaries of any other indebtedness permitted under Section 7.6.
SECTION 7.8. INVESTMENTS. Directly or indirectly, purchase, own,
invest in or otherwise acquire any capital stock, evidence of indebtedness or
other obligation or security or any interest whatsoever in any other Person, or
make or permit to exist any loans, advances or extensions of credit to, or any
investment in cash or by delivery of property in, any other Person, or become a
partner or joint venturer in any partnership or joint venture, or consummate an
Acquisition, or make a commitment or otherwise agree to do any of the foregoing,
other than: (a) cash investments; (b) loans and advances to employees not to
exceed in the aggregate $100,000; (c) Accounts owing to PAC or any of its
Subsidiaries created in the ordinary course of business and payable in
accordance with customary terms prevailing in the industry; (d) prepaid expenses
incurred in the ordinary course of business; (e) existing investments in
corporations or limited liability companies that are Subsidiaries as of the date
hereof; (f) investments in Subsidiaries and Permitted Acquisitions or other
Acquisitions approved by the Bank; (g) investments in and loans to Persons which
do not constitute Subsidiaries; PROVIDED, HOWEVER, that the aggregate amount of
all investments in and loans to any single Person shall not exceed $100,000 at
any time, and the aggregate amount of all investments in and loans to all
Persons which do not constitute Subsidiaries shall not exceed $200,000 at any
time; (h) investments by any Borrower under any swap agreement or hedging device
relating to the indebtedness incurred under this Agreement; PROVIDED that the
notional amount of all such swap agreements at any time shall not exceed the
maximum principal amount of the Loan at such time; (i) loans or advances from a
Subsidiary to PAC or to another Subsidiary, or from PAC to a Subsidiary, (i)
short-term loans to franchisees from time to time, however, such loans in the
aggregate shall not exceed Four Hundred Thousand Dollars ($400,000) without the
Bank's prior written consent; and (j) creation of a
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subsidiary for the sole purpose of effecting an Acquisition. A Permitted
Acquisition or an Acquisition approved by the Bank shall not be deemed an
investment violative of this covenant.
SECTION 7.9. DIVIDENDS. Without the written consent of the Bank, PAC
shall not pay any dividends, nor shall PAC or the Subsidiaries make any
distributions of cash or property to purchase, redeem, retire or otherwise
acquire any shares of stock or equity interests of PAC or the Subsidiaries,
except for stock dividends or stock splits or any other corporate distribution
which does not involve cash or tangible property.
SECTION 7.10. ACQUISITION OF STOCK OR ASSETS OF THIRD PERSON. Except
as may be otherwise permitted under Section 7.8 hereof, neither PAC nor any of
the Subsidiaries shall acquire stock or equity interests of any other Person, or
the assets of any third person, except for temporary investments permitted in
this Agreement and Permitted Acquisitions or Acquisitions approved by the Bank.
SECTION 7.11. SALE AND LEASEBACK. Enter into any arrangement with
any Person (other than PAC or any of its Subsidiaries) providing for the leasing
by PAC or any of its Subsidiaries of any asset that has been sold or transferred
by PAC or such Subsidiary to such Person.
SECTION 7.12. NEW BUSINESS. Engage in any business other than
businesses primarily within the line of business presently conducted by the
Subsidiaries or make any material change in any of its business objectives,
purposes and operations that would be reasonably likely to materially adversely
affect the repayment of the Loans and Obligations.
SECTION 7.13. SUBSIDIARIES. Except as otherwise permitted by
the terms of this Agreement, create or acquire any new Subsidiary.
SECTION 7.14. TRANSACTIONS AFFECTING THE COLLATERAL. Enter into any
transaction that will have, or could reasonably be expected to have, a
Materially Adverse Effect on the Collateral or the ability of the Borrowers to
repay any of the Loans and Obligations.
SECTION 7.15. HAZARDOUS WASTES. Permit any Hazardous Substances, the
removal of which is required or the maintenance of which is restricted,
prohibited or penalized by any governmental authority, to be unlawfully brought
onto or located on any real property owned or, to the extent PAC or any of its
Subsidiaries is in possession or control of same, leased by PAC or any of its
Subsidiaries, except in material compliance with all applicable environmental
Laws; and if any Hazardous Substance is brought or found located thereon in
material violation of any applicable environmental Laws, it shall be immediately
removed, with proper disposal, and all required environmental cleanup procedures
shall be diligently undertaken pursuant to all such environmental Laws, and the
obligations hereunder with respect to any
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such materials brought or located thereon while PAC or any of its Subsidiaries
owned or leased any such real property shall survive any foreclosure of the
deeds of trust or mortgages. EACH BORROWER HEREBY ACKNOWLEDGES THAT ALL
HAZARDOUS WASTE HANDLING PRACTICES AND ENVIRONMENTAL PRACTICES AND PROCEDURES
ARE THE SOLE RESPONSIBILITY OF PAC AND ITS SUBSIDIARIES. PAC FURTHER
ACKNOWLEDGES THAT THE BANK IS NOT AN ENVIRONMENTAL CONSULTANT, ENGINEER,
INVESTIGATOR OR INSPECTOR OF ANY TYPE WHATSOEVER.
SECTION 7.16. FISCAL YEAR. Change its fiscal year from a
twelve-month period ending June 30; PROVIDED, HOWEVER, that it is understood and
agreed that the fiscal year of any Person subject to the provisions hereof which
is organized under the laws of Mexico shall be a calendar year.
SECTION 7.17. AMENDMENTS; PREPAYMENTS OF INDEBTEDNESS, ETC. (a)
Amend in any material respect its certificate, or articles of incorporation or
articles of organization without thirty (30) days' prior written notice; or (b)
make any payment or prepayment with respect to any Subordinated Debt, whether
principal, interest or otherwise, which is not permitted under the terms of the
applicable instrument of subordination.
SECTION 7.18. NO INCONSISTENT TRANSACTIONS OR AGREEMENTS. Enter into
any transaction or agreement, or enter into any amendment or other modification
to any currently existing agreement, that by its terms prohibits or materially
restricts the ability of the Borrowers to pay the principal of or interest on
the Loans and all other Obligations.
SECTION 7.19. ASSIGNMENT OF THIS AGREEMENT. Borrower may not assign
or attempt to assign this Agreement; provided, however, that PAC shall be
permitted to add additional Subsidiaries as Borrowers hereunder in accordance
with the procedures set forth in Section 10.15, the terms of any Assumption
Agreement and the approval of the Bank.
SECTION 7.20. EQUITY OWNERSHIP; CERTIFICATES. Cause or permit
(a) any of the Persons identified in Exhibit C attached hereto and
incorporated herein to own legal and beneficial title to less than the
interest(s) indicated in such Exhibit in each of the Persons identified
therein, or (b) any of the member interests in PAC Mexican Holding Company
LLC, or any of the partnership or other equity interests in Precision Auto
Care Mexico II, S. de R.L. de C.V. or Precision Auto Care Mexico I, S. de
R.L. de C.V. to be evidenced by any certificate or other writing
("Certificate") unless such Certificate(s) shall have been delivered to the
Bank, together with such executed instruments of transfer and assignment as
the Bank may require.
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As used above in this Article VII, the singular "Borrower" shall mean each
Borrower (except PAC) for itself, and PAC for and on behalf of itself and all
other Borrowers.
ARTICLE VIII
EVENTS OF DEFAULT
The occurrence of any of the following events or circumstances by or
with respect to PAC or any other Borrower and the expiration of any applicable
cure or grace period shall constitute "Events of Default" hereunder and shall
entitle the Bank to exercise the Bank's rights and remedies under Article IX
hereof:
SECTION 8.1. FAILURE TO PAY. The failure by the Borrowers to pay any
Obligation, which failure shall not be cured or discharged within a period of
five (5) days after the same becomes due and payable.
SECTION 8.2. FAILURE TO PERFORM. The failure of the Borrowers to
perform or observe any Obligation (which failure is not specifically enumerated
in this Article VIII as an Event of Default).
SECTION 8.3. FAILURE OF WARRANTY OR REPRESENTATION TO BE TRUE. The
failure of any representation or warranty provided in this Agreement to be true
and accurate in all material respects, and to continue to be true and accurate
in all material respects at all times while any of the Obligations remain
outstanding or unsatisfied.
SECTION 8.4. FAILURE TO PERFORM COVENANTS RELATING TO
COLLATERAL. The failure by the Borrowers to perform or observe any covenant
or agreement with respect to the Collateral.
SECTION 8.5. FAILURE TO PERFORM OTHER COVENANTS. The failure by the
Borrowers to perform or observe any covenant provided in this Agreement, other
than one specifically enumerated in this Article VIII as an Event of Default.
SECTION 8.6. DEFAULT UNDER LOAN DOCUMENTS. A breach of or default by
the Borrower under the terms, covenants, and conditions set forth in any other
Loan Document, which is not cured within any applicable cure or grace period.
SECTION 8.7. JUDGMENTS. The Borrowers shall suffer final judgments
for payment of money aggregating in excess of Two Hundred Fifty Thousand Dollars
($250,000) during any calendar year and shall not discharge the same within a
period of thirty (30) days unless, pending further proceedings, the Borrowers
post a supersedes bond or execution has been effectively stayed.
SECTION 8.8. LEVY BY SECURED CREDITOR. A secured or judgment
creditor of any Borrower shall obtain possession, or attempt to obtain
possession, of
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any of the Collateral with a value in excess of Fifty Thousand Dollars ($50,000)
by any means, including, but without limitation, levy, distraint, replevin or
self-help.
SECTION 8.9. FAILURE TO PAY DEBTS TO THIRD PERSONS. The Borrowers
shall (a) fail to pay any indebtedness of any material nature due any
third-party and such failure shall continue beyond any applicable grace period,
or (b) suffer to exist any other event of default under any agreement binding
upon any Borrower regardless of whether default is actually declared thereunder,
and such other event of default shall continue beyond any applicable grace
period, unless, in either event, the Borrower is diligently contesting such
obligation in good faith and adequate reserves are maintained therefor.
SECTION 8.10. INVOLUNTARY BANKRUPTCY. The commencement of a
proceeding before a court having jurisdiction against or with respect to any
Borrower in an involuntary case under the federal bankruptcy Laws or any state
insolvency or similar Laws seeking: (a) the liquidation of any Borrower, (b) a
reorganization of any Borrower or the Borrower's business and affairs, or (c)
the appointment of a receiver, liquidator, assignee, custodian, trustee, or
similar official for any Borrower or any of the Borrower's property including,
but not limited to, the Collateral, which proceeding is not dismissed within
thirty (30) days.
SECTION 8.11. VOLUNTARY BANKRUPTCY. The commencement by any Borrower
of a voluntary case under the federal bankruptcy Laws or any state insolvency or
similar Laws or the consent by any Borrower to the appointment for taking
possession by a receiver, liquidate, assignee, custodian, trustee, or similar
official for the Borrower or any of the Borrower's property including, but not
limited to, the Collateral, or the making by Borrower of any assignment for the
benefit of creditors or the failure by Borrower generally to pay its debts as
they become due either as to the amount of such debts or the number of such
debts.
SECTION 8.12. TERMINATION OF MATERIAL CONTRACTS. The termination,
cancellation or other cessation during any twelve (12) month period of any
Material Contract or Material Contracts which, in the aggregate, eliminate
future projected revenues in excess of One Million Dollars ($1,000,000), except
for termination arising because of the expiration or termination of a franchise
agreement which has been fully performed.
SECTION 8.13. MATERIAL ADVERSE CHANGE. Any Material Adverse
Change shall occur.
SECTION 8.14. IMPAIRMENT OF COLLATERAL. Any event or series of
events shall occur which the Bank deems, in good faith and in its sole
discretion, to impair the Collateral or other security for the Loan or otherwise
threaten the value thereof, and which adversely affects the prospects of
repayment of the Loan.
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SECTION 8.15. CURE. Notwithstanding anything above contained in this
Article VIII, the Borrowers shall have a period of thirty (30) days from the
occurrence of an Event of Default specified in Sections 6.6, 6.7, 6.9, 6.10,
6.11 and 6.20, and ten (10) days with respect to an Event of Default under
Section 6.16, to cure such default (nothing herein shall be deemed a 10-day
extension to deliver financial information.) Any occurrence constituting an
Event of Default under Section 6.02 which is specifically identified in one of
the foregoing mentioned Sections shall be subject to cure as above provided.
Such cure period may, in the Bank's sole discretion, be extended if such cure is
diligently being pursued and such continuing Event of Default does not
substantially impair the prospects of repayment of the Loans. Nothing herein
contained shall limit the continuing obligation of the Borrower to notify the
Bank of any Event of Default and the Borrower's actions to cure such default
within the period above stated.
In every such event which is not cured within the applicable cure period, if
any, the Bank shall have no further obligation to make any additional Advances
under the Line of Credit or Acquisition Line of Credit, and the Bank may declare
all Obligations immediately due and payable. All such Events of Default and
remedies are in addition to any such rights and remedies set forth in the other
Loan Documents.
ARTICLE IX
RIGHTS AND REMEDIES UPON THE OCCURRENCE
OF AN EVENT OF DEFAULT
SECTION 9.1. RIGHTS AND REMEDIES. In addition to all other rights
and remedies provided by Law and the Loan Documents, the Bank, upon the
occurrence of any Event of Default or upon Maturity, and subject to any
applicable grace or cure period, may:
(a) Refuse to make further Advances or readvances under the Line of
Credit and/or Acquisition Line of Credit;
(b) Require the Borrowers to deposit all collected Receivables and
cash proceeds of the Collateral, including all Accounts and General Intangibles,
at the Bank or a financial institution designated by the Bank and in an account
or accounts under the exclusive control of the Bank, with all such deposits to
be applied against Obligations outstanding under the Line of Credit Loan or
Acquisition Line of Credit Loan as the Bank determines;
(c) Accelerate, call due and demand the immediate payment of the
unpaid principal balance of the Loans and Notes, and all accrued interest and
other sums due as of the date of default;
(d) Foreclose any security interest, lien, assignment, or pledge
created by any Loan Document or this Agreement;
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(e) Confess judgment or file suit against the Borrowers, or on any
one of them, on the Notes;
(f) File suit against the Borrowers or any one of them, on this
Agreement, or under any other Loan Document;
(g) Seek specific performance or injunctive relief to enforce
performance of the undertakings, duties, and agreements provided in the Loan
Documents, whether or not a remedy at law exists or is adequate;
(h) Exercise any rights of a secured creditor under the Maryland
Uniform Commercial Code-Secured Transactions, Title 9, Commercial Law Article,
Annotated Code of Maryland, as amended, or any other applicable version of the
Uniform Commercial Code, including the right to take possession of the
Collateral without the use of judicial process and the right to require the
Borrower to assemble the Collateral at such place as the Bank may specify; and
(i) Set-off any amounts in any account or represented by any
certificate with any Bank in the name of any Borrower or in which any Borrower
has an interest.
SECTION 9.2. COLLECTION OF RECEIVABLES BY THE BANK. The Bank, at any
time or from time to time following the occurrence of an Event of Default which
is a continuing Event of Default, may terminate the Borrowers' authority to
collect the Receivables and may exercise any or all of the rights contained in
this Section 9.2. Upon such a termination of the Borrowers' authority, the Bank
shall have the right to send a notice of assignment or notice of the Bank's
security interest to any and all Account Debtors or any third party holding or
otherwise concerned with any of the Collateral, and thereafter the Bank shall
have the sole right to collect the Receivables and take possession of the
Collateral and Records relating thereto. All of the Bank's reasonable collection
expenses, including Liquidation Costs, shall be charged to the Borrowers'
account and added to the Obligations. If the Bank is collecting the Receivables
as provided, the Bank shall have the right to receive, endorse, assign and
deliver in the Bank's name or the Borrowers' name any and all checks, drafts and
other instruments for the payment of money relating to the Receivables, and the
Borrowers hereby waive notice of presentment, protest and non-payment of any
instrument so endorsed. If the Bank is collecting the Receivables directly as
above provided, the Borrowers hereby individually and collectively, jointly and
severally, constitute and appoint the Bank and/or the Bank's designee, as the
Borrowers' attorney-in-fact with power with respect to the Receivables: (a) to
endorse the Borrowers' name upon any notes, acceptances, checks, drafts, money
orders or other evidences of payment of Collateral that may come into the Bank's
or designee's possession; (b) to sign the Borrowers' name on any invoice
relating to any of the Receivables, drafts against Account Debtors, assignments
and verifications of Receivables and notices to Account Debtors; (c) to notify
the Post Office authorities to
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change the address for delivery of mail addressed to the Borrowers; (d) to
receive and open all mail addressed to the Borrowers and accept checks, drafts,
money orders or other evidences of payment, or correspondence relating in any
way to a Receivable or other Collateral (all other items of mail shall be
delivered or made available to PAC); and (e) to do all other acts and things
necessary, proper, or convenient to carry out the terms, conditions, purposes
and intent of this Agreement. All good faith acts of the Bank as such attorney
are hereby ratified and approved, and such attorney or designee shall not be
liable for any acts of omission or commission other than acts of gross
negligence or intentional wrongdoing, nor for any error of judgment or mistake
of fact or law exercised in accordance with this Agreement. The power of
attorney hereby granted, being coupled with an interest, is irrevocable while
any of the Obligations remain unpaid. The Bank or attorney may, without notice
to or consent from the Borrowers, sue upon or otherwise collect, extend the time
of payment of or compromise or settle for cash, credit or otherwise upon any
terms, any of the Receivables or any securities, instruments or insurances
applicable thereto or release any obligor thereon. The Bank or attorney does
not, by anything herein or in any assignment or otherwise, assume any of the
Borrower's obligations under any contract or agreement assigned to the Bank, and
the Bank or attorney shall not be responsible in any way for the performance by
the Borrowers of any of the terms and conditions thereof.
SECTION 9.3. SALE OF COLLATERAL. In addition to any other remedy
provided herein, upon the occurrence of any Event of Default and subject to any
applicable grace or cure period, the Bank may immediately, without
advertisement, sell in a commercially reasonable manner at public or private
sale or otherwise realize upon the whole or any part of the Collateral, or any
interest which the Borrowers may have therein. After deducting from the proceeds
of sale or other disposition of the Collateral all reasonable expenses,
including all reasonable expenses for legal services, the Bank shall apply such
proceeds toward the satisfaction of the Obligations in any order or manner as
the Bank may determine. Any remainder of the proceeds after satisfaction in full
of the Obligations shall be distributed as required by applicable Law. Written
notice of any sale or other disposition shall be given to PAC and any other
Borrower whose property is being sold at least ten (10) days before the time of
any intended public sale or of the time after which any intended private sale or
other disposition of the Collateral is to be made, which the Borrowers hereby
agree shall be reasonable notice of such sale or other disposition. The
Borrowers agree to assemble, or to cause to be assembled, at the Borrowers' own
expense, the Collateral at such place or places as the Bank shall designate. At
any such sale or other disposition, the Bank may, to the extent permissible
under applicable Law, purchase the whole or any part of the Collateral, free
from any right of redemption on the part of the Borrower, which right is hereby
waived and released. The Borrowers waive the right, if any, to have the
Collateral marshaled upon a sale. Without limiting the generality of any of the
rights and remedies conferred upon the Bank under this Section, the Bank may, to
the full extent permitted by applicable Law: (a) peacefully enter upon the
premises of the
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Borrowers, exclude therefrom the Borrowers or any entity connected therewith,
and take immediate possession of the Collateral, either personally or by means
of a receiver appointed by a court of competent jurisdiction, using all
necessary permitted force to do so; (b) at the Bank's option, use, operate,
manage, and control the Collateral in any lawful manner (but without any
obligation to continue the business operations of the Borrower); (c) collect and
receive all rents, income, revenue, earnings, issues, and profits therefrom; and
(d) maintain, preserve, alter or remove the Collateral as the Bank may determine
in its sole discretion. The Borrower shall indemnify and save harmless the Bank
and its agents, employees, officers and directors, for any action or inaction
taken in connection therewith, except for acts or omissions of gross negligence
or intentional misconduct.
SECTION 9.4. CONFESSION OF JUDGMENT. Upon the occurrence of a
default under this Agreement, each of the Borrowers, individually and
collectively, jointly and severally, authorize any attorney admitted to practice
before any court of record in the United States, on behalf of itself and any or
all of the other Borrowers, to then confess judgment before any clerk or judge
against PAC and any or all of the Subsidiaries in the full amount due under this
Agreement, the Notes, and all other Obligations, plus attorneys' fees equal to
fifteen percent (15%) of all amounts due, or $50,000 whichever is less. Such
attorneys' fees shall relate solely to services in connection with the action or
actions relating to the confession of judgment, and shall not diminish or alter
the Borrowers' obligations to pay actual reasonable legal expenses of the Bank
as herein provided and all Liquidation Costs. Each Borrower consents to the
jurisdiction of, and agrees that venue shall be proper in, the Circuit Court for
any County or the City of Baltimore, Maryland, and the United States District
Court for the District of Maryland, if diversity of citizenship or other
jurisdictional basis exists; and if such confession occurs in the Commonwealth
of Virginia, the Borrowers, individually, collectively, jointly and severally,
constitute and appoint Keith M. Northern and Gregory A. Baugher, or any vice
president of Bank their true and lawful attorney-in-fact for them, or in the
name of any one or more of them, to confess judgment in the Circuit Court for
Arlington County, Virginia, or in the Circuit Court for Loudoun County,
Virginia. Each Borrower expressly waives, summons and other process and the
benefit of any and every statute, ordinance or rule of court which may be
lawfully waived conferring upon any Borrower any right or privilege of
exemption, stay of execution, or supplementary proceedings, or other relief from
the enforcement or immediate enforcement of a judgment or related proceedings on
a judgment. The authority and power to appear for and enter judgment against any
Borrower shall not be extinguished by any judgment entered pursuant hereto; such
authority and power may be exercised on one or more occasions from time to time,
in the same or different jurisdictions, as often as the holder shall deem
necessary or advisable until all sums due under this Agreement have been paid in
full.
SECTION 9.5. ATTORNEYS' FEES AND EXPENSES. The Borrower shall pay
all Liquidation Costs and/or reasonable attorneys' fees and expenses which the
Bank
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may incur as a result of the happening of an Event of Default, even if judgment
is not obtained or confessed and the Event of Default is cured and the Loan is
placed in good standing.
SECTION 9.6. REMEDIES CUMULATIVE. The rights and remedies provided
in this Agreement or in the Loan Documents or under applicable Law shall be
cumulative and the exercise of any particular right or remedy shall not preclude
the exercise of any other rights or remedies in addition to, or as an
alternative of, such right or remedy.
SECTION 9.7. PROOF OF SUMS DUE ON THE LOAN. In any action or
proceeding brought by the Bank to collect the sums owed on the Loan, an
affidavit made under oath by an officer of the Bank setting forth the unpaid
balance of principal, and any accrued interest, default interest, and late
charges owed on the Loan and the Unused Line Fee shall be presumed correct and
shall be admissible in evidence for the purpose of establishing the truth of
what it asserts.
SECTION 9.8. OBLIGATIONS OF THE BORROWER HEREUNDER Unconditional.
The payment and performance of the Obligations shall be the absolute and
unconditional duty and obligation of the Borrowers, and shall be independent of
any defense or any rights of set-off, recoupment or counterclaim which any
Borrower might otherwise have against the Bank, and the Borrowers shall pay
absolutely net the payments of principal, interest and the Unused Line Fee to be
made on account of the Loan and all other payments required hereunder, free of
any deductions and without abatement, diminution or set-off, and until such time
as the Obligations have been fully paid and performed, the Borrowers: (a) will
not suspend or discontinue any payments provided for herein in the Notes; (b)
will perform and observe all of the Borrowers' other covenants and agreements
contained in the Loan Documents, including without limitation, making all
payments required to be made to the Bank; and (c) will not terminate or attempt
to terminate the Loan Documents for any cause.
ARTICLE X
GENERAL CONDITIONS AND TERMS
SECTION 10.1. LOAN COSTS. The Loan and all transactions relating
thereto and provided for herein shall be made at no cost to the Bank and all
costs including, without limitation, the Bank's counsel fees, recordation costs,
costs of documentary stamps, photocopying expense, appraisals, lien searches,
travel expenses for the Bank's agents, employees, and counsel, and all other
reasonable out-of-pocket expenses shall be paid by the Borrowers, whether
incurred prior to or after closing, such that the subject transactions shall be
cost free to the Bank.
SECTION 10.2. INCORPORATION. The terms and conditions of the Loan
Documents are incorporated by reference and made a part hereof as if fully set
forth
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<PAGE>
herein. In the event of any inconsistencies between this Agreement and any other
Loan Document, the terms and conditions of this Agreement shall govern and
control.
SECTION 10.3. WAIVERS. The Bank may at any time or from time to time
waive all or any of its rights under this Agreement or any other Loan Document,
but any waiver or indulgence by the Bank at any time or from time to time shall
not constitute, unless specifically so expressed by the Bank in writing (except
to the extent an express waiver need not be in writing under the provisions of
another Section of this Agreement), a future waiver of performance or exact
performance by the Borrower.
SECTION 10.4. NO THIRD PARTY BENEFICIARY RIGHTS. No Person not a
party to this Agreement shall have any benefit hereunder nor have third party
beneficiary rights as a result of this Agreement or any other Loan Documents,
nor shall any party be entitled to rely on any actions or in actions of the Bank
or its agents, all of which are done for the sole benefit and protection of the
Bank .
SECTION 10.5. CONTINUING OBLIGATION OF BORROWERS. The terms,
conditions, and covenants set forth herein and in the Loan Documents shall
survive closing and shall constitute a continuing obligation of the Borrowers
during the course of the transaction contemplated herein. The obligations of the
Borrowers and all Collateral granted under this Agreement shall remain valid and
in effect so long as any Obligation is outstanding, unpaid or unsatisfied
between the Borrowers and the Bank.
SECTION 10.6. BINDING OBLIGATION. This Agreement shall be binding
upon and inure to the benefit of the Borrowers and their successors and
permitted assigns, and the Bank and its successors and assigns. Notwithstanding
the foregoing, the Bank agrees that in the absence of an Event of Default which
has not been cured (if such Event of Default is subject to cure), this Agreement
shall not be assigned, in whole or in part, without (90) days notice to PAC, and
the Bank shall advise PAC as to the selection of an assignee.
SECTION 10.7. NOTICES. Any notice required or permitted by or in
connection with this Agreement or any other Loan Document shall be in writing
and made by hand delivery, by certified mail, return receipt requested, postage
prepaid, or by overnight courier for next Business Day delivery, addressed to
the party at the appropriate address set forth below or to such other address as
may be hereafter specified by written notice by any party, and shall be
considered given as of the date of hand delivery, as of three (3) days after the
date of mailing, or the date specified for delivery with an overnight courier
service, independent of the date of actual delivery, as the case may be:
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<PAGE>
IF TO THE BANK:
Signet Bank
4th Floor
Seven Saint Paul Street
Baltimore, Maryland 21202
Attention: Warren F. Boutilier, Vice President
Telephone: (410) 625-6336
Telefax: (410) 625-6365
IF TO PAC (WHICH CONSTITUTES NOTICE TO ALL BORROWERS):
Precision Auto Care, Inc.
748 Miller Drive, S.E.
Leesburg, Virginia 20175
Attention: Chief Financial Officer
Telephone: (703) 777-9095
Telefax: (703) 779-0137
SECTION 10.8. FINAL AGREEMENT. This Agreement and the Loan Documents
contain the final and entire agreement and understanding of the parties, and any
terms and conditions not set forth in this Agreement or the Loan Documents are
not a part of this Agreement and the understanding of the parties hereof.
SECTION 10.9. EXTENSIONS. The payment of the Obligations hereunder
may be extended, from time to time, without impairing or otherwise affecting the
liability of the Borrowers, any endorser, guarantor or other party liable
hereunder or under any Loan Document, or the continuing security interest in the
Collateral provided herein.
SECTION 10.10. AMENDMENT. This Agreement may be amended,
modified or altered only in writing signed by the party to be bound by the
amendment, modification or alteration.
SECTION 10.11. TIME. Time is of the essence of this Agreement.
SECTION 10.12. DISCLOSURE. The Bank may disclose financial
information concerning the Borrowers to any other financial institution which
may share, participate or join in the Loan.
SECTION 10.13. NUMBER, GENDER, AND CAPTIONS. As used herein, the
singular shall include the plural and the plural may refer to only the singular.
The use of any gender shall be applicable to all genders. The captions contained
herein are for purposes of convenience only and are not a part of this
Agreement.
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<PAGE>
SECTION 10.14. SECURITY AGREEMENT; PHOTOCOPIES SUFFICIENT. This
Agreement shall constitute a security agreement as described in Section
9-105(1)(1) of the Maryland Uniform Commercial Code - Secured Transactions,
Title 9, Commercial Law Article, Annotated Code of Maryland, as amended. A
carbon, photographic, photocopy or other reproduction of this Agreement shall be
sufficient as a financing statement.
SECTION 10.15. ADDITIONAL BORROWERS AND ASSUMPTION AGREEMENT,
AMENDMENT TO PLEDGE. Subject to the provisions of Section 2.2.9(b) hereof, any
Subsidiary created or acquired by PAC or the Subsidiaries shall join as parties
to this Agreement and assume all Obligations hereunder and under the
Consolidated Note. Any new Borrower shall deliver such additional resolutions,
certificates and agreements as the Bank may from time to time reasonably require
to grant liens or security interests to the Bank or for such other purposes.
Subject to the provisions of Section 2.2.9(b) hereof, contemporaneously with the
execution of an Assumption Agreement, PAC (or a Subsidiary if applicable) shall
execute and deliver to the Bank such written agreements as the Bank may require
pursuant to which PAC (or such Subsidiary) shall pledge and grant a first
priority security interest to the Bank in the shares of stock or other equity
interests of such new Borrower which are held by PAC (or such Subsidiary) to
further secure the Loan and all other Obligations.
SECTION 10.16. JOINT AND SEVERAL LIABILITY. The Obligations of the
Borrowers hereunder are joint and several. All Persons which hereafter become
Subsidiaries and Borrowers by virtue of executing and delivering an Assumption
Agreement shall assume jointly and severally liability for all Obligations then
existing or thereafter created and arising hereunder and under the Notes. Each
Borrower shall have a right of contribution to obtain reimbursement from each
other Borrower for any payment made by such Borrower in respect of the
Obligations to the extent that such payment exceeds the benefit realized by such
Borrower under the Loan. Any right of contribution among the Borrowers which
arises as a result of payments made in respect of the Obligations under this
Agreement or the other Loan Documents shall be subordinate in all respect to the
Bank's right to receive payment in full of the Obligations. The Borrowers
acknowledge and agree that the right of contribution set forth above shall not
in any event be construed in a manner inconsistent with the joint and several
liability of each of the Borrowers for the repayment of all Obligations. PAC and
each of its Subsidiaries is, and PAC and its Subsidiaries, on a consolidated
basis are, (i) solvent, and (ii) after giving effect to the transactions
contemplated hereby, will be solvent.
SECTION 10.17. GOVERNING LAW; CONSENT TO JURISDICTION. THIS
AGREEMENT SHALL BE DEEMED TO HAVE BEEN EXECUTED, DELIVERED AND ACCEPTED IN THE
STATE OF MARYLAND AND SHALL BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF
THE PARTIES HERETO DETERMINED, IN ACCORDANCE WITH THE
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<PAGE>
INTERNAL LAWS (AS OPPOSED TO CONFLICTS OF LAW PROVISIONS) OF THE STATE OF
MARYLAND; PROVIDED THAT EACH LETTER OF CREDIT SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE LAWS OR RULES DESIGNATED IN SUCH
LETTER OF CREDIT OR, IF NO SUCH LAWS OR RULES ARE DESIGNATED, THE UNIFORM
CUSTOMS AND PRACTICES FOR DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL
CHAMBER OF COMMERCE, PUBLICATION NO. 500 (THE "UNIFORM CUSTOMS") AND, AS TO
MATTERS NOT GOVERNED THEREBY, THE INTERNAL LAWS OF THE STATE OF THE DOMICILE OF
THE ISSUING BANK. AS PART OF THE CONSIDERATION FOR NEW VALUE THIS DAY RECEIVED,
THE BORROWERS HEREBY CONSENT TO THE JURISDICTION OF ANY STATE COURT WITHIN
BALTIMORE CITY OF BALTIMORE COUNTY, MARYLAND OR ANY FEDERAL COURT LOCATED WITHIN
THE NORTHERN DISTRICT OF THE STATE OF MARYLAND FOR ANY PROCEEDING INSTITUTED
HEREUNDER OR UNDER ANY OF THE OTHER LOAN DOCUMENTS, OR ARISING OUT OF OR IN
CONNECTION WITH THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS, OR ANY
PROCEEDING TO WHICH THE BANK AND ANY BORROWER IS A PARTY, INCLUDING ANY ACTIONS
BASED UPON, ARISING OUT OF, OR IN CONNECTION WITH ANY COURSE OF CONDUCT, COURSE
OF DEALING, STATEMENT (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE BANK OR THE
BORROWER. THE BORROWER IRREVOCABLY AGREES TO BE BOUND (SUBJECT TO ANY AVAILABLE
RIGHT OF APPEAL) BY ANY JUDGMENT RENDERED OR RELIEF GRANTED THEREBY AND FURTHER
WAIVES ANY OBJECTION THAT IT MAY HAVE BASED ON LACK OF JURISDICTION OR IMPROPER
VENUE OR FORUM NON CONVENIENCE TO THE CONDUCT OF ANY SUCH PROCEEDING. THE
BORROWERS CONSENT THAT ALL SERVICE OF PROCESS BE MADE BY REGISTERED OR CERTIFIED
MAIL DIRECTED TO ANY SUCH BORROWER AT ITS ADDRESS SET FORTH HEREIN, AND SERVICE
SO MADE SHALL BE DEEMED TO BE COMPLETED UPON THE EARLIER OF ACTUAL RECEIPT
THEREOF OR THREE (3) DAYS AFTER DEPOSIT IN THE UNITED STATES MAILS, PROPER
POSTAGE PREPAID AND PROPERLY ADDRESSED. NOTHING IN THIS SECTION SHALL AFFECT THE
RIGHT TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT THE
RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST ANY BORROWER OR ITS PROPERTY IN
THE COURTS OF ANY OTHER JURISDICTION.
10.18. WAIVER OF JURY TRIAL. EACH PARTY HEREBY EXPRESSLY WAIVES ANY
RIGHT TO A TRIAL BY A JURY IN ANY SUIT, ACTION OR PROCEEDING INSTILLED IN
CONNECTION WITH THIS AGREEMENT, THE LOAN OR THE OBLIGATIONS.
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<PAGE>
IN WITNESS WHEREOF, the Bank and the Borrowers execute and seal this
Agreement on this 12th day of November, 1997, with the specific intention that
this Agreement constitute a document under seal.
WITNESS/ATTEST: SIGNET BANK
By: (SEAL)
________________________ _______________________________
Warren F. Boutilier
Vice President
PRECISION AUTO CARE, INC.
By: (SEAL)
________________________ _______________________________
John F. Ripley
President and CEO
WE JAC CORPORATION
By: (SEAL)
________________________ _______________________________
John F. Ripley
President and CEO
LUBE VENTURES, INC.
By: (SEAL)
________________________ _______________________________
John F. Ripley
President and CEO
ROCKY MOUNTAIN VENTURES, INC.
By: (SEAL)
________________________ _______________________________
John F. Ripley
President and CEO
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<PAGE>
ROCKY MOUNTAIN VENTURES II, INC.
By: (SEAL)
________________________ _______________________________
John F. Ripley
President and CEO
MIRACLE PARTNERS, INC.
By: (SEAL)
________________________ _______________________________
John F. Ripley
President and CEO
RALSTON CAR WASH, LTD.
By: (SEAL)
________________________ _______________________________
John F. Ripley
Manager
PREMA PROPERTIES, LTD.
By: (SEAL)
________________________ _______________________________
John F. Ripley
General Manager
MIRACLE INDUSTRIES, INC.
By: (SEAL)
________________________ _______________________________
John F. Ripley
President and CEO
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<PAGE>
KBG, LLC
By: (SEAL)
________________________ _______________________________
John F. Ripley
Manager
PTW, INC.
By: (SEAL)
________________________ _______________________________
John F. Ripley
President and CEO
NATIONAL 60 MINUTE TUNE, INC.
By: (SEAL)
________________________ _______________________________
John F. Ripley
President and CEO
HYDRO-SPRAY CAR WASH
EQUIPMENT CO., LTD.
By: (SEAL)
________________________ _______________________________
John F. Ripley
Authorized Manager
PRECISION TUNE AUTO CARE, INC.
By: (SEAL)
________________________ _______________________________
John F. Ripley
President and CEO
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<PAGE>
ACKNOWLEDGMENTS
STATE OF MARYLAND, CITY/COUNTY OF ___________________, TO WIT:
I HEREBY CERTIFY that on this 12th day of November, 1997, before me,
the undersigned Notary Public, personally appeared Warren F. Boutilier, who
acknowledged himself to be the Vice President of Signet Bank, a Virginia banking
corporation, known to me (or satisfactorily proved) to be the person who
executed the foregoing Loan and Security Agreement and acknowledged that he,
being authorized so to do, executed the same for the purposes therein contained
as the duly authorized Vice President of Signet Bank, by signing the name of
Signet Bank by himself as Vice President.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
__________________________________
Notary Public
My Commission Expires:
______________________
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STATE OF ____________, CITY/COUNTY OF _________________, TO WIT:
I HEREBY CERTIFY that on this 12th day of November, 1997, before me,
the undersigned, a Notary Public of the State aforesaid, personally appeared
John F. Ripley, who acknowledged himself to be the President and CEO of
Precision Auto Care, Inc., a Virginia corporation; WE JAC Corporation, a
Delaware corporation; Lube Ventures, Inc., a Delaware corporation; Rocky
Mountain Ventures, Inc., a Colorado corporation; Rocky Mountain Ventures II,
Inc., a Colorado corporation, Miracle Partners, Inc., a Delaware corporation;
Miracle Industries, Inc., an Ohio corporation; PTW, Inc., a Washington
corporation; National 60 Minute Tune, Inc., a Washington corporation; Precision
Tune Auto Care, Inc. a Virginia corporation; and the Manager of Ralston Car
Wash, Ltd., a Colorado limited liability company; and the General Manager of
Prema Properties, Ltd., an Ohio limited liability company; the Manager of KBG,
LLC, a Colorado limited liability company; the Authorized Manager of Hydro-Spray
Car Wash Equipment Co., Ltd., an Ohio limited liability company; and that he, as
such President and CEO, Manager, General Manager and Authorized Manager being
authorized so to do, executed the foregoing instrument for the purposes therein
contained, by signing the name of each of the corporations and limited liability
companies by himself as President and CEO, Manager, General Manager and
Authorized Manager, respectively.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
__________________________________
Notary Public
My Commission Expires:
______________________
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EXHIBIT 10.3
AMENDMENT NO. 3 TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT is dated
as of the 1st day of October, 1998, by and among PRECISION AUTO CARE, INC., a
Virginia corporation ("PAC"), WE JAC CORPORATION, a Delaware corporation; ROCKY
MOUNTAIN VENTURES, INC., a Colorado corporation; ROCKY MOUNTAIN VENTURES II,
INC., a Colorado corporation; RALSTON CAR WASH LTD., a Colorado limited
liability company; PREMA PROPERTIES, LTD., an Ohio limited liability company;
MIRACLE INDUSTRIES, an Ohio corporation; KBG, LLC, a Colorado limited liability
company; PTW, INC., a Washington corporation; NATIONAL 60 MINUTE TUNE, INC., a
Washington corporation; HYDRO-SPRAY CAR WASH EQUIPMENT CO., LTD., an Ohio
limited liability company; PRECISION TUNE AUTO CARE, INC., a Virginia
corporation; WORLDWIDE DRYING SYSTEMS, INC., a Colorado corporation; PAC MEXICAN
DELAWARE HOLDING COMPANY, INC., a Delaware corporation; PAC MEXICAN DELAWARE
HOLDING COMPANY, LLC, a Virginia limited liability company; PRECISION AUTO CARE
MEXICO II, S. de R.L. de C.V., a Mexican limited liability company; PRECISION
AUTO CARE MEXICO I, S. de R.L. de C.V., a Mexican limited liability company; and
INDY VENTURES, L.L.C., an Indiana limited liability company (PAC and each of
such Persons are sometimes hereafter referred to individually as a "Borrower"
and collectively as the "Borrowers"), and FIRST UNION NATIONAL BANK, successor
by merger to Signet Bank (the "Bank").
RECITALS
Reference is made to that certain Loan and Security Agreement
dated November 12, 1997, by and among the Borrowers and the Bank, as
supplemented from time to time by certain Assumption Agreements, and as amended
by that certain Amendment No. 1 to Loan and Security Agreement dated as of March
31, 1998, and by that certain Amendment No. 2 to Loan and Security Agreement
dated as of May 12, 1998 (as supplemented and amended, the "Loan Agreement"),
pursuant to which the Bank agreed to extend to the Borrowers a Line of Credit
and an Acquisition Line of Credit in the aggregate principal amount not to
exceed Twenty-Five Million Dollars ($25,000,000). In order to further amend the
Loan Agreement as provided herein, the parties hereto have entered into this
Amendment No. 3.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants set forth herein, and such other consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
<PAGE>
1. All capitalized terms not otherwise defined
herein which are defined in the Loan Agreement shall have the same meanings
assigned to them in the Loan Agreement.
2. All references herein, in the Loan
Agreement and in the Consolidated Note to "this Loan Agreement", "this
Agreement", "the Loan Agreement" and "the Agreement" shall mean and include the
Loan Agreement as amended by this Amendment No. 3.
3. Section 1.13 of the Loan Agreement is hereby
amended to read in its entirety as follows:
Section 1.13. Applicable Margin. The term
"Applicable Margin" shall mean, at any time with respect to any Loan, the
applicable percentage points as determined under the following matrix with
reference to the ratio of Total Funded Debt to Annualized EBITDA, each for the
most recent fiscal quarter then ended, calculated as provided below:
<TABLE>
<CAPTION>
Ratio of Total Funded Debt to Annualized EBITDA for the Applicable Margin Applicable Margin
Quarter then Ended (Base Rate) (LIBOR Rate)
- ------------------------------------------------------- ----------- ------------
<S> <C> <C>
Less than or equal to 4.5 to 1.0 but greater than 4.0 to 1.0 0.75% 2.75%
Less than or equal to 4.0 to 1.0 but greater than 3.5 to 1.0 0.75% 2.50%
Less than or equal to 3.5 to 1.0 but greater than 3.0 to 1.0 0.50% 2.25%
Less than or equal to 3.0 to 1.0 but greater than 2.5 to 1.0 0.25% 2.00%
Less than or equal to 2.5 to 1.0 but greater than 2.0 to 1.0 0.00% 1.75%
Less than or equal to 2.0 to 1.0 but greater than 1.5 to 1.0 0.00% 1.50%
Less than or equal to 1.5 to 1.0 0.00% 1.25%
</TABLE>
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<PAGE>
4. Section 1.24A of the Loan Agreement is hereby amended
to read in its entirety as follows:
Section 1.24A. Consolidated Note. The term "Consolidated Note"
shall mean the Second Consolidated, Amended and Restated
Revolving and Acquisition Line of Credit Promissory Note dated
October 1, 1998, executed by the Borrowers as obligors, in
the original principal amount of Twenty-Five Million Dollars
($25,000,000) and payable to the order of the Bank, and any
and all substitutions, extensions, renewals, amendments,
restatements, modifications or replacements thereof.
5. Section 1.41 of the Loan Agreement is hereby amended
to read in its entirety as follows:
Section 1.41. Maturity. The term "Maturity" shall mean
September 30, 1999, the date on which all Loans and
Obligations, all accrued interest, and all other fees, costs
and expenses provided for herein, in the Consolidated Note or
the other Loan Documents shall be due and payable, in full, or
such earlier date upon acceleration as provided herein or in
the Consolidated Note.
7. Section 1.41A of the Loan Agreement is hereby amended
to read in its entirety as follows:
Section 1.41A. Maximum Loan Amount. The term "Maximum Loan
Amount" shall mean the sum of (a) the Line of Credit Portion
(as defined in Section 2.1 hereof), plus (b) the outstanding
principal balance of the Acquisition Line of Credit. The
Maximum Loan Amount is subject to reduction in the manner
provided in Section 2.4 hereof, and from and after January 31,
1999, the Maximum Loan Amount shall be Fifteen Million Dollars
($15,000,000) minus the amount of the Outstanding Letter of
Credit Obligations.
8. Article I of the Loan Agreement is hereby amended to
add the following new Section 1.41B:
Section 1.41B. Net CARS Transaction Proceeds. The term "Net
CARS Transaction Proceeds" shall mean the gross proceeds
payable to or for the account of the Borrowers in connection
with the proposed sale by the Borrowers to Capital Automotive
REIT of approximately 17 auto wash locations in Colorado, Ohio
and Indiana, and the leaseback of such locations by the
Borrowers (the "CARS Transaction"), minus the reasonable and
customary transaction costs payable by the Borrowers in
connection with the closing thereof.
-3-
<PAGE>
9. Article I of the Loan Agreement is hereby amended to
add the following new Section 1.41C:
Section 1.41B. Net Mortgage Loan Proceeds. The term "Net
Mortgage Loan Proceeds" shall mean the gross proceeds to or
for the account of any of the Borrowers in connection with any
transaction pursuant to which any real property of any of the
Borrowers has been encumbered or otherwise made subject to any
lien, minus the reasonable and customary transaction costs
payable by the Borrowers in connection therewith.
10. Section 1.59 of the Loan Agreement is hereby amended
to read in its entirety as follows:
Section 1.59. Unused Line Fee. The term "Unused
Line Fee" shall mean the amount determined by multiplying the average daily
unborrowed amount of the Line of Credit Portion by the fee percentage calculated
from the following matrix with reference to the Total Funded Debt/Annualized
EBITDA ratio for the most recently completed fiscal quarter for which a
Compliance Certificate has been received and approved by the Bank.
<TABLE>
<CAPTION>
Ratio of Total Funded
Debt for the Quarter then Ended to
Annualized EBITDA Fee Percentage
- ---------------------------------- --------------
<S> <C>
Less than or equal to 4.5 to 1.0 but greater than 3.0 to 1.0 0.50%
Less than or equal to 3.0 to 1.0 but greater than 2.0 to 1.0 0.30%
Less than or equal to 2.0 to 1.0 0.25%
</TABLE>
11. Section 2.1 of the Loan Agreement is hereby amended
to read in its entirety as follows:
Section 2.1. The Line of Credit Loan. The Bank agrees to make
Advances to PAC under the Line of Credit during the term of
this Agreement in an amount not to exceed Eleven Million
Dollars ($11,000,000) minus the amount of the Outstanding
Letter of Credit Obligations (the "Line of Credit Portion");
provided, however, that the Line of Credit Portion is subject
to reduction in the manner provided in Section 2.4 hereof. The
obligation of the Borrowers to repay the Advances under the
Line of Credit shall be evidenced by the Consolidated Note.
Subject to the limitations provided herein, the Borrowers may
borrow, repay and reborrow under the Line of Credit and under
the Consolidated Note.
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<PAGE>
12. Section 2.1.6 of the Loan Agreement is hereby amended
to read in its entirety as follows:
Section 2.1.6. Repayment of the Line of Credit. The Borrowers
shall pay accrued interest on the outstanding principal
balance of the Line of Credit on the first day of each month,
commencing January 1, 1998. The Borrowers promise to pay to
the order of the Bank all principal, accrued interest, all
Unused Line Fees and other costs and expenses arising under
the Line of Credit, this Agreement and all other Obligations,
at Maturity; provided, however, that (a) the outstanding
principal balance of the Line of Credit is subject to
mandatory prepayment as further provided in Section 2.4
hereof, (b) if at any time the principal amount outstanding
under the Line of Credit exceeds the Line of Credit Portion,
then the Borrowers shall immediately pay over a sum equal to
the amount by which such outstanding principal exceeds the
Line of Credit Portion, plus accrued interest to the date of
prepayment, and (c) upon the occurrence of an Event of
Default, subject to any applicable grace or cure period, the
entire outstanding and unpaid principal balance of the Line of
Credit Loan, together with the accrued interest thereon to the
date of payment, shall be immediately due and payable at the
option of the Bank. Interest shall be payable monthly
following preparation by the Bank of an interest statement
showing interest and the Unused Line Fee due through the end
of the monthly payment period. In the event interest for the
final days of any period are estimated, PAC's Deposit Account
shall be debited or credited, as the case may be, to reflect
actual interest due through the end of such period. The Bank
shall automatically debit the PAC's Deposit Account on the due
date of, and in the amount of, the interest and the Unused
Line Fee shown to be due on each monthly statement.
13. Section 2.1.7 of the Loan Agreement is hereby amended
to read in its entirety as follows:
Section 2.1.7. Prepayment of the Line of Credit.
(a) Optional Prepayment. The Borrowers may prepay the
Line of Credit in whole or in part at any time and from time
to time without penalty or additional interest. The Line of
Credit may be reduced, from time to time, to a zero balance
without affecting the continuing validity of this Agreement or
the continuing security interest and lien of the Bank in and
to the Collateral.
-5-
<PAGE>
(b) Mandatory Prepayment. The Borrowers shall be
required to prepay the Line of Credit and to permanently
reduce the Line of Credit Portion in accordance with the
provisions of Section 2.4 hereof.
14. Section 2.2.1 of the Loan Agreement is hereby amended
to read in its entirety as follows:
Section 2.2.1. The Acquisition Line of Credit Loan. Subject to
the provisions of this Agreement, the Bank agrees to make
Advances to PAC under the Acquisition Line of Credit through
September 30, 1998, in an aggregate principal amount
outstanding at any one time not to exceed Fourteen Million
Dollars ($14,000,000). The obligation of the Borrowers to
repay the Advances under the Acquisition Line of Credit shall
be evidenced by the Consolidated Note. From and after
October 1, 1998, amounts repaid under the Consolidated Note
with respect to the Acquisition Line of Credit may not be
reborrowed.
15. Section 2.2.2 of the Loan Agreement is hereby amended
to read in its entirety as follows:
Section 2.2.2. Purpose of the Acquisition Line of Credit. The
proceeds of Advances under the Acquisition Line of Credit
shall be used by PAC or designated Borrowers for the financing
of Permitted Acquisitions and other Acquisitions approved by
the Bank; provided, however, that notwithstanding anything to
the contrary contained in this Agreement or in any of the
other Loan Documents, from and after October 1, 1998 (a) no
additional Advances under the Acquisition Line of Credit shall
be requested or made, and (b) no further Domestic
Acquisitions, Foreign Acquisitions, Permitted Acquisitions or
other Acquisitions shall be made without the prior written
consent of the Bank, which may be given or withheld by the
Bank in its sole discretion.
16. Section 2.2.6 of the Loan Agreement is hereby amended
to read in its entirety as follows:
Section 2.2.6. Repayment of the Acquisition Line of Credit.
The Borrowers promise to pay to the order of the Bank all
principal, accrued interest, all Unused Line Fees and other
costs and expenses arising under the Acquisition Line of
Credit, this Agreement and all other Obligations, at Maturity.
Interest on all outstanding Advances under the Acquisition
Line of Credit Note shall be payable on the first day of each
month, commencing January 1, 1998, and the outstanding
principal balance of each Advance under the Acquisition Line
of Credit shall be repaid in consecutive equal monthly
principal installments commencing in the month following the
month in which such Advance was made and extending over a term
not to exceed sixty (60) months, as elected by PAC at the time
such Advance is requested; provided, however, that (a) in the
absence of any requested repayment term by PAC, the repayment
term shall be sixty (60) months, (b) the outstanding principal
balance of
-6-
<PAGE>
the Acquisition Line of Credit is subject to mandatory
repayment prior to February 1, 1999, as further provided in
Section 2.4 hereof, (c) the aggregate outstanding principal
balance of all Advances under the Acquisition Line of Credit
on the earlier of (i) the first day of the first month
following the application of the Net CARS Transaction Proceeds
or the Net Mortgage Loan Proceeds to the Acquisition Line of
Credit as provided in Section 2.4 hereof, or (ii) February 1,
1999 (such outstanding balance on such date, the "Amortization
Balance"), shall be repaid in consecutive equal monthly
principal installments due on the first (1st) day of each
month commencing on the date the Amortization Balance is
determined, each of which shall be in the amount of
one-sixtieth (1/60th) of the Amortization Balance, (d) if at
any time the principal amount outstanding under the
Acquisition Line of Credit exceeds the maximum amount
permitted under Section 2.2.1 hereof, then the Borrowers shall
immediately pay over a sum equal to the amount by which such
outstanding principal exceeds such amount, plus accrued
interest to the date of prepayment, which shall be applied as
a prepayment of the Advance under the Acquisition Line of
Credit most recently extended, (e) all principal, plus
interest and other sums due under the Acquisition Line of
Credit shall be absolutely due and payable at Maturity, and
(f) upon the occurrence of an Event of Default, subject to any
applicable grace or cure period, the entire outstanding and
unpaid principal balance of the Acquisition Line of Credit
Loan, together with the accrued interest thereon to the date
of payment, shall be immediately due and payable at the option
of the Bank. Interest shall be payable monthly following
preparation by the Bank of an interest statement showing
interest and the Unused Line Fee due through the end of the
monthly payment period. In the event interest for the final
days of any period are estimated, PAC's Deposit Account shall
be debited or credited, as the case may be, to reflect actual
interest due through the end of such period. The Bank shall
automatically debit the PAC's Deposit Account on the due date
of, and in the amount of, the interest and the Unused Line Fee
shown to be due on each monthly statement.
17. Section 2.2.7 of the Loan Agreement is hereby amended
to read in its entirety as follows:
Section 2.2.7. Prepayment of the Acquisition Line of Credit.
(a) Optional Prepayment. The Borrowers may prepay the
Acquisition Line of Credit in whole or in part at any time and
from time to time without penalty or additional interest.
(b) Mandatory Prepayment. The Borrowers shall be required
to prepay the Acquisition Line of Credit in accordance with
the provisions of Section 2.4 hereof.
-7-
<PAGE>
18. A new Section 2.4 is hereby added to the Agreement to
read in its entirety as follows:
Section 2.4. Mandatory Repayments and Prepayments. The
Borrowers shall, on the date of receipt (or if not
practicable, promptly following such receipt) by it of any Net
Mortgage Loan Proceeds or Net CARS Transaction Proceeds
received on or before January 31, 1999, apply 100% of such
Proceeds (a) first, to make a mandatory prepayment of the
Acquisition Line of Credit until the unpaid principal balance
thereof shall have been reduced to Ten Million Dollars
($10,000,000), and (b) second, to make a mandatory prepayment
of the Line of Credit until the unpaid principal balance
thereof plus the Outstanding Letter of Credit Obligations
shall have been reduced to Five Million Dollars ($5,000,000);
provided, however, that (i) the Borrowers shall be required to
obtain the prior written consent of the Bank (A) pursuant to
Section 7.3 hereof to any transaction which will result in the
receipt of Net Mortgage Loan Proceeds, and (B) pursuant to
Section 7.2 hereof to any transaction which will result in the
receipt of Net CARS Transaction Proceeds, and (ii) on January
31, 1999, the Borrowers shall be required to prepay (x) the
Acquisition Line of Credit in an amount sufficient to reduce
the outstanding principal balance thereof to not more than Ten
Million Dollars ($10,000,000), and (b) the Line of Credit in
an amount sufficient to reduce the outstanding principal
balance thereof plus the Outstanding Letter of Credit
Obligations to not more than Five Million Dollars
($5,000,000). All mandatory prepayments of the Line of Credit
pursuant to this Section 2.4 shall permanently reduce the Line
of Credit Portion and may not be reborrowed; provided,
further, that (a) the Line of Credit Portion shall not be
reduced below an amount which, when added to the Outstanding
Letter of Credit Obligations, would be less than Five Million
Dollars ($5,000,000), and (b) on and after February 1, 1999,
the Line of Credit Portion shall equal Five Million Dollars
($5,000,000) minus the Outstanding Letter of Credit
Obligations. All prepayments pursuant to this Section 2.4
shall be made without premium or penalty.
19. Section 6.16(c) of the Loan Agreement is hereby
amended to read in its entirety as follows:
(c) As soon as practicable and in any event within thirty (30)
days after the end of each calendar month, a combined
statement of income and retained earnings of the Borrowers for
such period and for the period from the beginning of the
current fiscal year of PAC to the end of each period, all in
detail and scope satisfactory to the Bank, prepared in
accordance with GAAP consistently applied, certified as true
and complete by the chief financial officer of PAC and
accompanied by a certificate of that officer demonstrating
compliance with each of the covenants contained in Sections
6.17, 6.18, and 6.19, as applicable with respect to covenants
tested on a quarterly basis.
-8-
<PAGE>
20. Section 6.17 of the Loan Agreement is hereby amended
to read in its entirety as follows:
Section 6.17. Total Funded Debt/Annualized EBITDA Ratio. The
Borrowers shall maintain on a consolidated basis, a Total
Funded Debt/Annualized EBITDA Ratio of less than (a) 4.50 to
1.0 as of the end the fiscal quarter ending September 30,
1998, (b) 4.50 to 1.00 as of the end the fiscal quarter ending
December 31, 1998, (c) 4.25 to 1.00 as of the end the fiscal
quarter ending March 31, 1999, and (d) 3.00 to 1.00 as of the
end the fiscal quarter ending June 30, 1999; provided,
however, that in the event the CARS Transaction is
consummated, in lieu of the requirements in clauses (b), (c)
and (d) above, the Borrowers shall be required to maintain on
a consolidated basis, a Total Funded Debt/Annualized EBITDA
Ratio of less than (x) 3.75 to 1.0 as of the end the fiscal
quarter ending December 31, 1998, (y) 3.50 to 1.0 as of the
end the fiscal quarter ending March 31, 1999, and (z) 2.50 to
1.00 as of the end the fiscal quarter ending June 30, 1999.
21. Section 6.18 of the Loan Agreement is hereby amended
to read in its entirety as follows:
Section 6.18. Consolidated Liabilities to Tangible Net Worth
Ratio. The Borrowers shall maintain on a consolidated basis a
ratio of Consolidated Liabilities to Consolidated Tangible Net
Worth of less than (a) 7.00 to 1.0 as of the end the fiscal
quarter ending September 30, 1998, (b) 6.75 to 1.00 as of the
end the fiscal quarter ending December 31, 1998, (c) 5.75 to
1.00 as of the end the fiscal quarter ending March 31, 1999,
and (d) 4.75 to 1.00 as of the end the fiscal quarter ending
June 30, 1999; provided, however, that in the event the CARS
Transaction is consummated, in lieu of the requirements in
clauses (b), (c) and (d) above, the Borrowers shall be
required to maintain on a consolidated basis, a ratio of
Consolidated Liabilities to Consolidated Tangible Net Worth of
less than (x) 5.50 to 1.0 as of the end the fiscal quarter
ending December 31, 1998, (y) 4.50 to 1.0 as of the end the
fiscal quarter ending March 31, 1999, and (z) 3.75 to 1.00 as
of the end the fiscal quarter ending June 30, 1999.
22. Section 6.19 of the Loan Agreement is hereby amended
to read in its entirety as follows:
Section 6.19. Annualized EBITDAR Ratio. The Borrowers shall
maintain on a consolidated basis a ratio of (a) Annualized
EBITDAR to (b) interest expense, plus Rent Expense, plus
current maturities of long-term indebtedness and capital
leases, of greater than (i) 1.17 to 1.0 as of the end of the
fiscal quarter ending September 30, 1998, (ii) 1.20 to 1.0 as
of the end of the fiscal quarter ending December 31, 1998,
(iii) 1.20 to 1.0 as of the end of the fiscal quarter ending
March 31, 1999, and (iv) 1.50 to 1.00 as of the end of the
fiscal quarter ending June 30, 1999.
-9-
<PAGE>
23. A new Section 6.21 is hereby added to the Agreement
to read in its entirety as follows:
Section 6.21. Additional Subordinated Debt. Subsequent to
October 1, 1998, and on or before October 15, 1998, the
Borrowers shall obtain not less than $2,000,000 in additional
cash equity capitalization in the form of Subordinated Debt.
The terms and written evidence of such Subordinated Debt must
be acceptable in form and substance to the Bank and, without
limitation of the foregoing, shall provide (a) that interest
at a rate deemed acceptable by the Bank may be paid as
scheduled (but not more frequently than monthly) provided no
Event of Default (and no event which, with the giving of
notice or lapse of time (or both), would be an Event of
Default) shall have occurred and be continuing at the time of
such payment and after giving effect thereto, and (b) that
principal may not be repaid without the prior written consent
of the Bank except that, provided no Event of Default (and no
event which, with the giving of notice or lapse of time (or
both), would be an Event of Default) shall have occurred and
be continuing at the time of such repayment and after giving
effect thereto, the Borrowers may repay the outstanding
principal balance of such Subordinated Debt upon (i) the
outstanding principal balance of the Acquisition Line of
Credit, plus the Line of Credit Portion having been
permanently repaid and/or permanently reduced to an amount not
to exceed Fifteen Million Dollars ($15,000,000) minus the
Outstanding Letter of Credit Obligations, and (ii) the filing
of a Form 10Q or Form 10K with the Securities and Exchange
Commission subsequent to such repayment and/or reduction which
indicates that, on a consolidated basis as of the end of the
applicable fiscal quarter or fiscal year, the Total Funded
Debt/Annualized EBITDA Ratio was less than 3.00 to 1.0.
24. Section 10.7 of the Loan Agreement is hereby amended by
amending the Bank's notice address to read in its entirety as follows:
If to the Bank:
FIRST UNION NATIONAL BANK
Seven East Baltimore Street
Baltimore, Maryland 21202
Attention: Warren F. Boutilier
Vice President
Telephone: (410) 244-3615
Facsimile: (410) 244-1236
25. Simultaneously with the execution hereof, PAC and the
other Borrowers shall execute and deliver to Bank, appropriately completed and
duly executed, the Consolidated Note in the form attached as Exhibit A hereto.
The Consolidated Note is given in replacement of the Consolidated, Amended and
Restated Revolving and Acquisition Line of Credit Promissory Note dated May 12,
1998, and made by the Borrowers to the order of the Bank (the "Prior Note"). The
execution of the Consolidated Note and the replacement of the Prior Note thereby
shall not constitute or act as a novation, satisfaction or extinguishment of the
indebtedness evidenced by the Prior Note, and accrued and unpaid interest under
the Prior Note shall be due and payable with the first payment of interest due
thereunder.
-10-
<PAGE>
26. To further induce the Bank to enter into this Amendment
No. 3, the Borrowers hereby represent and warrant to the Bank that (a) the
representations and warranties set forth in Article V of the Loan Agreement and
in each other Loan Document delivered in connection herewith or therewith are
true and correct in all material respects with the same effect as if made on the
date hereof (unless stated to relate solely to an earlier date, in which case
they were true and correct as of such earlier date), and (b) the Borrowers are
in compliance with all the terms and conditions of the Loan Agreement and the
other Loan Documents, and both before and after giving effect to the terms of
this Amendment no Event of Default (and no event which, with the giving of
notice and/or passage of time, would be an Event of Default) has occurred and is
continuing.
27. The Bank hereby waives the non-compliance by the Borrowers
with (a) the covenant contained in Section 6.17 of the Loan Agreement to
maintain on a consolidated basis a Total Funded Debt/Annualized EBITDA Ratio of
less than 3.0 to 1.0 as of June 30, 1998, (b) the covenant contained in Section
6.18 of the Loan Agreement to maintain on a consolidated basis a ratio of
Consolidated Liabilities to Consolidated Tangible Net Worth of less than 3.5 to
1.0 for the period from June 30, 1998 to September 29, 1998, and (c) the
covenant contained in Section 6.19 of the Loan Agreement to maintain on a
consolidated basis a ratio of (i) Annualized EBITDAR to (ii) interest expense,
plus Rent Expense, plus current maturities of long-term indebtedness and capital
leases, of greater than 1.50 to 1.00 as of June 30, 1998; provided, however,
that the foregoing waivers are conditioned upon the (x) actual consolidated
Total Funded Debt/Annualized EBITDA Ratio as of June 30, 1998, being no greater
than 4.0 to 1.0, and (y) the actual ratio of (i) Annualized EBITDAR to (ii)
interest expense, plus Rent Expense, plus current maturities of long-term
indebtedness and capital leases as of June 30, 1998, being no less than 1.30 to
1.00. The Bank further waives noncompliance by the Borrowers with Section 7.8 of
the Loan Agreement with respect to the advance made by PAC in June of 1998 in
the amount of approximately $500,000 in connection with the proposed "Purrfect"
Acquisition, which advance was made without the prior consent of the Bank;
provided, however, that the foregoing waiver is conditioned upon such advance
being structured as a loan repayable over a period of approximately nine months.
The Bank further waives noncompliance by the Borrowers with Section 7.8 of the
Loan Agreement with respect to the non-refundable deposit made by PAC in the
amount of approximately $200,000 in connection with the proposed "Spot-Not"
Acquisition. Notwithstanding the foregoing waivers, the Borrowers acknowledge
and agree that consummation of each of the "Purrfect" Acquisition and the
"Spot-Not" Acquisition will require the Bank's consent in accordance with the
provisions of Section 2.2.2 of the Loan Agreement.
-11-
<PAGE>
28. The Borrower agrees to pay all out-of-pocket expenses
incurred by the Bank in connection with the preparation, negotiation, execution
and delivery of this Amendment and all other Loan Documents executed or to be
executed in connection herewith.
29. Except as amended hereby, the Loan Agreement shall remain
unchanged, and the Loan Agreement, as so amended, shall continue in full force
and effect in accordance with its terms.
30. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which, when so executed and delivered, shall be an original, but all such
counterparts shall together constitute one and the same instrument.
31. The recitals hereto and all of the terms of the Loan
Agreement are hereby incorporated into and made a part hereof as though fully
set forth herein.
-12-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Amendment No.
3 to Loan and Security Agreement to be duly executed under seal by their duly
authorized respective officers as of the day and year first above written.
WITNESS/ATTEST: PRECISION AUTO CARE, INC.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
President, Chief Executive Officer
WE JAC CORPORATION
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
President, Chief Executive Officer
LUBE VENTURES, INC.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
President, Chief Executive Officer
ROCKY MOUNTAIN VENTURES, INC.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
President, Chief Executive Officer
-13-
<PAGE>
ROCKY MOUNTAIN VENTURES II, INC.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
President, Chief Executive Officer
MIRACLE PARTNERS, INC.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
President, Chief Executive Officer
RALSTON CAR WASH, LTD.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
Manager
PREMA PROPERTIES, LTD.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
General Manager
MIRACLE INDUSTRIES, INC.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
President, Chief Executive Officer
-14-
<PAGE>
KBG, LLC
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
Manager
PTW, INC.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
President, Chief Executive Officer
NATIONAL 60 MINUTE TUNE, INC.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
President, Chief Executive Officer
HYDRO-SPRAY CAR WASH
EQUIPMENT CO. LTD.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
Authorized Member
PRECISION TUNE AUTO CARE, INC.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
President, Chief Executive Officer
-15-
<PAGE>
WORLDWIDE DRYING SYSTEMS, INC.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
President, Chief Executive Officer
PAC MEXICAN DELAWARE HOLDING
COMPANY, INC.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
President, Chief Executive Officer
PAC MEXICAN DELAWARE
HOLDING COMPANY, LLC
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
President
PRECISION AUTO CARE MEXICO II,
S. de R.L. de C.V.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
President and General Manager
-16-
<PAGE>
PRECISION AUTO CARE MEXICO I,
S. de R.L. de C.V.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
President and General Manager
INDY VENTURES, L.L.C.
By:
- --------------------------- ----------------------------------(SEAL)
John F. Ripley
Manager
FIRST UNION NATIONAL BANK
By:
- --------------------------- ----------------------------------(SEAL)
Name:
---------------------------
Title:
---------------------------
-17-
EXHIBIT 10.4
Baltimore, Maryland $25,000,000
October 1, 1998
SECOND CONSOLIDATED, AMENDED AND RESTATED REVOLVING AND
ACQUISITION LINE OF CREDIT PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, PRECISION AUTO CARE, INC., a
Virginia corporation ("PAC"), WE JAC CORPORATION, a Delaware corporation; LUBE
VENTURES, INC., a Delaware corporation; ROCKY MOUNTAIN VENTURES, INC., a
Colorado corporation; ROCKY MOUNTAIN VENTURES II, INC., a Colorado corporation,
MIRACLE PARTNERS, INC., a Delaware corporation; RALSTON CAR WASH, LTD., a
Colorado limited liability company; PREMA PROPERTIES, LTD., an Ohio limited
liability company; MIRACLE INDUSTRIES, INC., an Ohio corporation; KBG, LLC, a
Colorado limited liability company; PTW, INC., a Washington corporation;
NATIONAL 60 MINUTE TUNE, INC., a Washington corporation; HYDRO-SPRAY CAR WASH
EQUIPMENT CO., LTD., an Ohio limited liability company; PRECISION TUNE AUTO
CARE, INC., a Virginia corporation, WORLDWIDE DRYING SYSTEMS, INC., a Colorado
corporation, PAC MEXICAN DELAWARE HOLDING COMPANY, INC., a Delaware corporation,
PAC MEXICAN HOLDING COMPANY LLC, a Virginia limited liability company, PRECISION
AUTO CARE MEXICO II, S. de R.L. de C.V., a Mexican limited liability company,
PRECISION AUTO CARE MEXICO I, S. de R.L. de C.V., a Mexican limited liability
company, and INDY VENTURES, L.L.C., an Indiana limited liability company (PAC
and each of such Persons are sometimes hereafter referred to individually as a
"Borrower" and collectively as the "Borrowers"), jointly and severally promise
to pay to the order of FIRST UNION NATIONAL BANK, successor by merger to Signet
Bank (the "Bank"), at the Bank's offices at Seven Saint Paul Street, Baltimore,
Maryland 21202, or at such other place as the holder of this Promissory Note
(the "Promissory Note") may from time to time designate, the principal sum of
Twenty-Five Million Dollars ($25,000,000), or so much of the principal sum as
may have been advanced or readvanced by the Bank, and borrowed or reborrowed by
the Borrowers, and which remains outstanding and unpaid pursuant to the terms
and conditions of a Loan and Security Agreement dated November 12, 1997, as
amended (as the same has been and hereafter may be amended, extended, modified,
renewed or replaced from time to time, the "Loan Agreement") and various other
agreements, documents, instruments and certificates executed and delivered in
connection therewith (collectively, the "Loan Documents"), providing to the
Borrowers a Line of Credit and an Acquisition Line of Credit (the "Loans"),
together with interest thereon at the rate hereafter specified and any and all
other sums which may be owing to the holder of this Promissory Note by the
Borrowers, on September 30, 1999, the final and absolute due date (the "Maturity
Date"), subject to acceleration as herein provided. All capitalized terms not
otherwise defined herein shall have the meanings assigned to those terms in the
Loan Agreement. The following terms shall apply to this Promissory Note:
1. INTEREST RATE, ADDITIONAL CHARGES, DEEMED ELECTION AND TERM.
1.1 INTEREST RATE. For the period from the date of this
Promissory Note until all sums due hereunder have been paid in full, interest on
the outstanding and unpaid
<PAGE>
principal balance existing from time to time shall accrue at an annual rate
selected by PAC equal to either (i) the one-month LIBOR Rate, plus the
Applicable Margin, as provided below; or (ii) the Base Rate, plus the Applicable
Margin (if any). The Borrowers shall pay interest monthly in arrears as provided
below.
(a) As used herein, the term "LIBOR Rate"
applicable to any Interest Period means that rate per annum, determined solely
by the Bank, equal to the rate quoted by Bank in its sole discretion on the
first day of such Interest Period, as the London Interbank Offered Rate
(adjusted to reflect the cost of reserve requirements as they exist from time to
time) as published by Bloomberg or Dow Jones-Telerate, as BBA LIBOR on page 3750
(or by Reuters Monitor Money Rates Service (LIBOR page), if Bloomberg or Dow
Jones-Telerate is not available), or such other page as may replace that page on
that service for the purpose of displaying rates or prices comparable to that
rate (rounded upwards, if necessary, to the next higher 1/100%) for deposits in
United States Dollars for a period of one (1) month. If more than one such rate
appears for the one-month rate on such page or its replacement, LIBOR Rate shall
be the arithmetic mean of such rates. In the event the first day of the Interest
Period is not a Business Day, the applicable LIBOR Rate shall be the rate in
effect on the immediately preceding Business Day. "Interest Period" means,
initially, the period commencing on January 1, 1998, and ending one month
thereafter; and after the initial Interest Period, each period commencing on the
day immediately following the last day of the preceding Interest Period (an
"Effective Date") and ending on the corresponding day one month thereafter,
provided, however, that no Interest Period shall extend beyond the Maturity
Date. Further, the LIBOR Rate shall be effective as the rate of interest
throughout such Interest Period even if Borrowers reduce the outstanding and
unpaid principal balance to zero and thereafter during such Interest Period
borrow or reborrow hereunder.
(b) As used herein, the term "Base Rate" shall mean
the interest rate declared in internal publications by the Bank from time to
time as its prime rate, whether or not such rate is otherwise published or
announced. The Base Rate is not necessarily the lowest rate charged by the Bank
to borrowers. If interest is accruing on the Loan at the Base Rate, the
applicable interest rate shall change immediately and automatically with any
change in the Base Rate.
(c) As used herein, the term "Applicable Margin"
shall mean, at any time, the applicable percentage points as determined under
the following matrix with reference to the ratio of Total Funded Debt for the
immediately preceding fiscal quarter to Annualized EBITDA, calculated as
provided below:
<TABLE>
<CAPTION>
RATIO OF TOTAL FUNDED DEBT TO
ANNUALIZED EBITDA AS OF THE APPLICABLE MARGIN APPLICABLE MARGIN
QUARTER THEN (BASE (LIBOR
ENDED RATE) RATE)
----------------------------- ----------------- -----------------
<S> <C> <C>
Less than or equal to 4.5 to 1.0 but
greater than 4.0 to 1.0 0.75% 2.75%
Less than or equal to 4.0 to 1.0 but
greater than 3.5 to 1.0 0.75% 2.50%
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C> <C>
Less than or equal to 3.5 to 1.0 but
greater than 3.0 to 1.0 0.50% 2.25%
Less than or equal to 3.0 to 1.0 but
greater than 2.5 to 1.0 0.25% 2.00%
Less than or equal to 2.5 to 1.0 but
greater than 2.0 to 1.0 0.00% 1.75%
Less than or equal to 2.0 to 1.0 but
greater than 1.5 to 1.0 0.00% 1.50%
Less than or equal to 1.5 to 1.0 0.00% 1.25%
</TABLE>
Notwithstanding the foregoing, from October 1, 1998, until
changed in accordance with the provisions of this Section 1.1(c) and Section 1.4
hereof (i) the Applicable Margin (LIBOR Rate) shall be 2.50% and (ii) the
Applicable Margin (Base Rate) shall be 0.75%.
1.2. ADDITIONAL CHARGES.
(a) The Borrowers shall also pay to the Bank a
monthly unused line fee at the annual percentage rate (the "Fee Percentage")
determined according to the following matrix with reference to the ratio of
Total Funded Debt to Annualized EBITDA as of the immediately preceding fiscal
quarter, applied to the average daily unborrowed amount of the Line of Credit
Portion:
<TABLE>
<CAPTION>
RATIO OF TOTAL FUNDED DEBT TO ANNUALIZED
EBITDA AS OF THE QUARTER THEN
ENDED FEE PERCENTAGE
---------------------------------------- --------------
<S> <C>
Less than or equal to 4.5 to 1.0 but greater than 3.0 to 1.0 0.50%
Less than or equal to 3.0 to 1.0 but greater than 2.5 to 1.0 0.30%
Less than or equal to 2.5 to 1.0 0.25%
</TABLE>
The unused line fee shall be payable to the Bank on the first day of each month.
Notwithstanding the foregoing, from October 1, 1998, until
changed in accordance with the provisions of this Section 1.2(a) and Section 1.4
hereof the Fee Percentage shall be 0.50%.
(b) The Borrowers shall, from time to time, pay to
the Bank on demand such amount as the Bank may reasonably determine to be
necessary to compensate it for any increased costs attributable to its making or
maintaining the Loan which result from any change in applicable law, regulation
or directive, or in the interpretation or application thereof, including
specifically, without limitation, any reserve, capital or other requirements
that may be imposed by law, regulation or guidelines adopted by any state or
federal regulatory agency. In
-3-
<PAGE>
the event that any demand for increased costs is made by the Bank, the Bank
shall provide the Borrowers with a written calculation of the increased costs
attributable to the Loan.
1.3. INTEREST RATE ELECTION. PAC, on behalf of itself and all
Borrowers, may elect to accrue interest on the principal balance of this
Promissory Note at the Base Rate, plus the Applicable Margin, if any (a "Base
Rate Election"); PROVIDED, HOWEVER, that any Base Rate Election shall be
effective only if in writing and delivered to the Bank at least two (2) Business
Days prior to an Effective Date. A Base Rate Election shall be applicable as to
the daily outstanding and unpaid principal balance of this Promissory Note as of
such Effective Date and as of each day thereafter during the applicable Interest
Period. In the absence of a timely Base Rate Election by PAC for an additional
Interest Period, upon the expiration of any Interest Period during which
interest is accruing in accordance with a Base Rate Election, interest shall
immediately thereafter commence to accrue on the outstanding principal balance
of this Promissory Note at the LIBOR Rate, plus the Applicable Margin, until a
Base Rate Election is duly made by PAC.
1.4 INTEREST RATE AND UNUSED LINE FEE TERM. PAC shall
calculate the ratio of Total Funded Debt to Annualized EBITDA (the "Funded
Debt/EBITDA Ratio") as of the end of each of the first three fiscal quarters of
each year of PAC and as of the end of each fiscal year of PAC in the preparation
of its Compliance Certificate as required in the Loan Agreement. The Compliance
Certificate shall be delivered to the Bank for verification concurrently with
the delivery to the Bank of each Form 10Q and Form 10K filed by PAC with the
Securities and Exchange Commission (the "Compliance Certificate Due Date").
Subject to the provisions of Section 1.1(c) and Section 1.2(a) hereof, the
Funded Debt/EBITDA Ratio as of the last day of each applicable period (a
"Determination Date"), as calculated and reported to the Bank on or before the
applicable Compliance Certificate Due Date, shall be used for purposes of
determining (a) the Applicable Margin to be added to the Base Rate or LIBOR Rate
of interest, and (b) the Fee Percentage, which determinations shall be effective
as of the first day of the month which immediately follows the applicable
Compliance Certificate Due Date (the "Rate Conversion Date"). Subject to the
provisions of Section 1.1(c) and Section 1.2(a) hereof, the Applicable Margin
and Fee Percentage so determined shall apply in determining the percentage rate
of interest and the Fee Percentage for the unused line fee for the period
commencing on the Rate Conversion Date until the next succeeding Rate Conversion
Date.
2. CALCULATION OF INTEREST. Interest shall be calculated on the
basis of a three hundred sixty (360) days per year factor applied to the actual
days on which there exists an outstanding and unpaid principal balance.
3. REPAYMENT. The Borrowers shall pay to the Bank, on the first day
of each month, commencing on the first day of January, 1998, accrued interest
and the unused line fee as hereinabove set forth, computed on the daily
outstanding and unpaid principal balance of this Promissory Note. The principal
amount of each Advance under the Acquisition Line of Credit shall be repaid in
consecutive equal monthly principal installments commencing in the month
following the month in which such Advance was made and extending over a term not
to exceed sixty (60) months, as elected by PAC at the time such Advance is
requested; PROVIDED, HOWEVER, that in the absence of any requested repayment
term by PAC, the repayment term shall be sixty
-4-
<PAGE>
(60) months. Notwithstanding the foregoing (a) the aggregate outstanding
principal balance of all Advances under the Acquisition Line of Credit on the
earlier of (i) the first day of the first month following the application of the
Net CARS Transaction Proceeds or the Net Mortgage Loan Proceeds to the
Acquisition Line of Credit as provided in Section 2.4 of the Loan Agreement, or
(ii) February 1, 1999 (such outstanding balance on such date, the "Amortization
Balance"), shall be repaid in consecutive equal monthly principal installments
due on the first (1st) day of each month commencing on the date the Amortization
Balance is determined, each of which shall be in the amount of one-sixtieth
(1/60th) of the Amortization Balance, (b) subject to the provisions of clauses
(c) and (d) below, the entire outstanding and unpaid principal balance due under
this Promissory Note (whether consisting of Advances under the Acquisition Line
of Credit, under the Line of Credit, or otherwise), together with accrued
interest thereon to the date of payment, and any and all other sums due and
owing under this Promissory Note shall be immediately due and payable on the
Maturity Date, (c) upon the occurrence of an "Event of Default" under the Loan
Agreement or any Loan Document, the terms of which are incorporated herein by
this reference, and subject to any applicable grace or cure period, the entire
outstanding and unpaid principal balance, together with the accrued interest
thereon to the date of payment, and any and all other sums due and owing under
this Promissory Note shall be immediately due and payable at the option of the
Bank, and (d) reference is made to the Loan Agreement, the provisions of which
are incorporated by reference herein, for additional provisions with respect to
the required repayment and/or prepayment hereof prior to Maturity. The Bank
shall record on its books and records (i) the date and amount of each Advance
under the Line of Credit, (ii) the date, amount and repayment schedule of each
Advance under the Acquisition Line of Credit, and (iii) the date of each payment
made by the Borrowers with respect to each Advance, and such books and records
shall be PRIMA FACIE evidence of the matters recited therein; PROVIDED, HOWEVER,
that any failure to record such dates, amounts or terms of repayment shall not
relieve the Borrowers of their obligation of repayment under this Promissory
Note.
4. PREPAYMENT. The Borrowers may prepay this Promissory Note in
whole or part at any time or from time to time without penalty or additional
interest, and the Borrowers shall immediately and without demand prepay
principal as may be required under Section 2.1.6 , Section 2.2.6 and Section 2.4
of the Loan Agreement. Prepayment of the principal under the Acquisition Line of
Credit shall be applied to principal installment payments (including any balloon
payment) coming due in the inverse order of their maturity.
5. APPLICATION OF PAYMENTS. All payments made hereunder shall be
applied (a) first to late penalties or other sums owing the holder, (b) then to
the unused credit fee, (c) then to accrued interest, and (d) then to principal
of Advances under the Line of Credit or to principal of Advances under the
Acquisition Line of Credit, as PAC shall advise the Bank at the time of the
making of such principal payment (or, in the absence of any such advice, to
Advances under the Line of Credit); PROVIDED, HOWEVER, that following the
occurrence of any Event of Default and during the continuance thereof, such
payments shall be applied in such other order or proportion as the holder of
this Promissory Note, in its discretion, may determine.
6. LATE PAYMENT PENALTY. Should any payment of interest, principal,
or principal and interest, or any other sum due hereunder be received by the
holder of this
-5-
<PAGE>
Promissory Note more than ten (10) days after its due date, the Borrowers shall
pay a late payment penalty equal to five percent (5%) of the amount then due.
7. DEFAULT INTEREST RATE. Upon the occurrence of any Event of
Default which is not cured or discharged within any applicable cure or grace
period, the holder may without notice or demand, and for the period the Event of
Default remains uncured, increase the rate of interest accruing on the
outstanding and unpaid principal balance by two (2) percentage points above the
rate of interest otherwise applicable, independent of whether the holder of this
Promissory Note elects to accelerate the maturity of the obligation evidenced by
this Promissory Note.
8. CONFESSION OF JUDGMENT. Upon the occurrence of an Event of
Default under the Loan Agreement or a default under this Promissory Note, each
of the Borrowers, individually and collectively, jointly and severally,
authorize any attorney admitted to practice before any court of record in the
United States, on behalf of the itself and any or all of the other Borrowers, to
then confess judgment against the Borrower(s) in the full amount of principal,
interest and costs due under this Promissory Note, plus attorneys' fees equal to
the lesser of fifteen percent (15%) of all amounts due, or $50,000, which
attorneys' fees shall relate solely to services in connection with the
confession of judgment action. The Borrowers consent to the jurisdiction of, and
agrees that venue shall be proper in, the Circuit Court for any County or the
City of Baltimore, Maryland, and the United States District Court for the
District of Maryland, if diversity of citizenship or other jurisdictional basis
exists; and if such confession occurs in the Commonwealth of Virginia, the
Borrowers, individually, collectively, jointly and severally, constitute and
appoint Keith M. Northern, Gregory A. Baugher, or any vice president of Bank
their true and lawful attorney-in-fact for them, or in the name of any one or
more of them, to confess judgment in the Circuit Court for Arlington County,
Virginia, or in the Circuit Court for Loudoun County, Virginia. It is understood
and agreed that this power of attorney shall be deemed a power coupled with an
interest and cannot be revoked. The Borrowers expressly waive summons and other
process and the benefit of any and every statute, ordinance or rule of court
which may be lawfully waived conferring upon any Borrowers any right or
privilege of exemption, stay of execution, or supplementary judgment or related
proceedings on a judgment. The authority and power to appear for and enter
judgment against the Borrowers shall not be extinguished by any judgment entered
pursuant hereto; such authority and power may be exercised on one or more
occasions from time to time, in the same or different jurisdictions, as often as
the holder shall deem necessary or advisable until all sums due under this
Promissory Note have been paid in full.
9. INTEREST RATE AFTER JUDGMENT. If judgment is entered against the
Borrowers on this Promissory Note, the amount of the judgment entered (which may
include principal, interest, default interest, late charges, fees, and costs)
shall bear interest at the highest rate authorized under this Promissory Note as
of the date of entry of the judgment.
10. EXPENSES OF COLLECTION. This Promissory Note may be referred to
an attorney for collection, whether or not suit has been filed or judgment
confessed, and the Borrowers shall pay all of the holder's costs, fees, and
expenses, including reasonable attorneys' fees, resulting from such referral.
-6-
<PAGE>
11. WAIVER OF PROTEST. The Borrowers, and all parties to this
Promissory Note, whether maker, endorser, or guarantor, waive demand,
presentment, notice of dishonor and protest.
12. EXTENSIONS OF MATURITY; WAIVER. All parties to this Promissory
Note, whether maker, endorser, or guarantor, agree that the Bank, at its option,
exercisable in writing and at its sole and absolute discretion, may extend,
waive, modify or grant indulgences with respect to any payment due hereunder,
without releasing, discharging, or affecting the liability of any such party.
Each right, power and remedy of the Bank as provided for in this Promissory Note
or now or hereafter existing at law or in equity or by statute or otherwise
shall be cumulative and concurrent and shall be in addition to every other
right, power or remedy, and the exercise or beginning of the exercise by the
Bank of any one or more of such rights, powers or remedies shall not preclude
the simultaneous or later exercise by the Bank of any or all such other rights,
powers or remedies. No failure or delay by the Bank to insist upon the strict
performance of any term, condition, covenant or agreement of this Promissory
Note, or to exercise any right, power or remedy upon a breach thereof, shall
constitute a waiver of any such term, condition, covenant or agreement or of any
such breach, or preclude the Bank from exercising any such right, power or
remedy at any later time or times unless in writing. If the Bank accepts any
payment after its due date, it shall not constitute a waiver of the Bank's right
to receive timely payment of all other amounts when due.
13. COMMERCIAL LOAN. The Borrowers warrant that this Promissory Note
is the result of a commercial loan transaction within the meaning of Sections
12-101(c) and 12-103(e), Commercial Law Article, Annotated Code of Maryland, as
amended.
14. ADVANCE CONDITIONS. The Bank's obligation to make advances under
the terms of this Promissory Note shall be conditioned upon and subject to
Borrowers' continued compliance with the terms of the Loan Agreement and other
Loan Documents relating to the Loan evidenced hereby. All statements of account
rendered by the Bank to the undersigned shall be presumed to be accurate and
correct and shall constitute an account stated between the Borrowers and the
Bank, unless within twenty (20) days after the Bank's mailing of any such
statement of account, PAC shall give the Bank written notice objecting to such
statement of account and specifying the error or errors thought to be contained
in such statement.
15. NOTICES. Any notice or demand required or permitted by or in
connection with this Promissory Note (but without implying any obligation to
give any notice or demand) shall be in writing and made by hand delivery, by
certified mail, return receipt requested, postage prepaid, or by overnight
courier service for next business day delivery, addressed to the holder of this
Promissory Note or PAC at the appropriate address set forth below, or to such
other address as may be hereafter specified by written notice by the holder of
this Promissory Note or PAC, and shall be considered given as of the date of
hand delivery, as of three (3) business days after the date of mailing, as of
the date specified for delivery if by overnight courier service, independent of
the date of actual delivery, as the case may be:
-7-
<PAGE>
IF TO THE BANK:
FIRST UNION NATIONAL BANK
Seven East Baltimore Street
Baltimore, Maryland 21202
Attention: Warren F. Boutilier
Vice President
Telephone: (410) 244-3615
Facsimile: (410) 244-1236
IF TO THE BORROWERS (NOTICE TO PAC CONSTITUTES NOTICE TO ALL
BORROWERS):
PRECISION AUTO CARE, INC.
748 Miller Drive, S.E.
Leesburg, Virginia 20175
Attention: Chief Financial Officer
Telephone: (703) 777-9095
Facsimile: (703) 779-0137
16. ASSIGNABILITY. This Promissory Note may be assigned by the
holder of this Promissory Note.
17. BINDING NATURE. This Promissory Note shall inure to the benefit
of and be enforceable by the Bank and the Bank's successors and assigns and any
other person to whom the Bank may grant an interest in the Borrowers'
obligations to the Bank, and shall be binding and enforceable against the
Borrowers and the Borrowers' successors.
18. INVALIDITY OF ANY PART. If any provision or part of any
provision of this Promissory Note shall for any reason be held invalid, illegal
or unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Promissory Note and this
Promissory Note shall be construed as if such invalid, illegal or unenforceable
provision or part hereof had never been contained herein, but only to the extent
of its invalidity, illegality or unenforceability.
19. GOVERNING LAW. This Promissory Note shall be strictly governed
by and construed in accordance with the laws of the State of Maryland, exclusive
of its conflict of laws rules, and the undersigned expressly acknowledges that
this Promissory Note shall be deemed for all purposes to have been executed and
delivered to the Bank within the geographic boundaries of the State of Maryland.
The Borrowers consent to the jurisdiction of, and agree venue shall be proper
in, the Circuit Court for any County or Baltimore City, Maryland, or the United
States District Court for the District of Maryland, if diversity of citizenship
or other jurisdictional basis exists, if suit is filed by the Bank to enforce or
construe this Promissory Note or any of the Loan Documents.
20. SECURITY. The obligations under the Promissory Note are secured
by certain collateral identified in the Loan Agreement, including specifically,
all now existing or
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<PAGE>
hereafter arising accounts, general intangibles, chattel paper, documents,
inventory, equipment and instruments of the Borrowers, as those terms are
defined in the Maryland Uniform Commercial Code - Secured Transactions, Title 9,
Commercial Law Article, Annotated Code of Maryland, as amended, and all records
relating thereto and the proceeds of the foregoing.
21. JOINT AND SEVERAL LIABILITY. The liability of the makers of this
Promissory Note is joint and several. As used herein, the singular "Borrower"
shall mean the plural "Borrowers", and vice versa, as the context may require.
22. AGENT. Each of the Borrowers hereby individually and
collectively, jointly and severally, nominate, constitute and appoint PAC as its
exclusive agent and attorney-in-fact for purposes of (a) requesting advances and
receiving monies under the Promissory Note and the Loan Agreement, (b) making a
LIBOR Rate or Base Rate election, and (c) receiving or giving notices hereunder,
and taking any actions hereunder for and on behalf of any or all of the
Borrowers, and the Bank shall be fully indemnified, released and acquitted from
any action taken, or not taken, in reliance upon information from, or actions
taken by, PAC. This appointment is irrevocable and shall remain in full force
and effect until all obligations of the Borrowers hereunder have been paid, in
full.
23. ADDITIONAL MAKERS. The Bank may permit additional corporate
persons to join in and jointly and severally assume the obligations of the
Borrowers provided herein and in the Loan Agreement. Any such person who shall
assume such obligations shall do so by executing and delivering an Assumption
Agreement, the terms and conditions of which shall be acceptable in form and
content to the Bank, and such other instruments or documents as the Bank may
require.
24. WAIVER OF JURY TRIAL. Any suit, action or proceeding, whether
claim, counterclaim or cross-claim, brought or instituted by any party hereto or
any successor or assign of any party on or with respect to this Promissory Note
or any other Loan Document, shall be tried only by a court and not by a jury.
EACH OF THE BORROWERS AND THE BANK HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL
BY A JURY IN ANY SUCH SUIT, ACTION OR PROCEEDING.
25. NO NOVATION. This Promissory Note is given pursuant to the terms
of the Loan Agreement in replacement of that certain Consolidated, Amended and
Restated Revolving and Acquisition Line of Credit Promissory Note dated May 12,
1998, in the original principal amount of $25,000,000 made by the Borrowers to
the order of the Bank (the "Prior Note"). The execution of this Promissory Note
and the replacement of the Prior Note hereby shall not constitute or act as a
novation, satisfaction or extinguishment of the indebtedness evidenced by the
Prior Note, and accrued and unpaid interest under the Prior Note shall be due
and payable with the first payment of interest due hereunder.
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<PAGE>
IN WITNESS WHEREOF, this Promissory Note has been executed by the
Borrowers as of the 1st day of October, 1998, with the specific intention
that this Promissory Note constitute an instrument under seal.
WITNESS/ATTEST: PRECISION AUTO CARE, INC.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
President, Chief Executive Officer
WE JAC CORPORATION
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
President, Chief Executive Officer
LUBE VENTURES, INC.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
President, Chief Executive Officer
ROCKY MOUNTAIN VENTURES, INC.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
President, Chief Executive Officer
ROCKY MOUNTAIN VENTURES II, INC.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
President, Chief Executive Officer
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<PAGE>
MIRACLE PARTNERS, INC.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
President, Chief Executive Officer
RALSTON CAR WASH, LTD.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
Manager
PREMA PROPERTIES, LTD.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
General Manager
MIRACLE INDUSTRIES, INC.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
President, Chief Executive Officer
KBG, LLC
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
Manager
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<PAGE>
PTW, INC.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
President, Chief Executive Officer
NATIONAL 60 MINUTE TUNE, INC.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
President, Chief Executive Officer
HYDRO-SPRAY CAR WASH EQUIPMENT CO., LTD.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
Authorized Member
PRECISION TUNE AUTO CARE, INC.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
President, Chief Executive Officer
WORLDWIDE DRYING SYSTEMS, INC.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
President, Chief Executive Officer
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<PAGE>
PAC MEXICAN DELAWARE HOLDING
COMPANY, INC.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
President, Chief Executive Officer
PAC MEXICAN HOLDING COMPANY LLC
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
President
PRECISION AUTO CARE MEXICO II, S.
de R.L. de C.V.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
President and General Manager
PRECISION AUTO CARE MEXICO I, S.
de R.L. de C.V.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
President and General Manager
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<PAGE>
INDY VENTURES, L.L.C.
By: (SEAL)
- ----------------------------- -------------------------------
John F. Ripley
Manager
ACCEPTED AND AGREED
AS OF THE 1ST DAY OF OCTOBER, 1998
FIRST UNION NATIONAL BANK
By:
--------------------------------
Name:
------------------------
Title:
-----------------------
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<PAGE>
ACKNOWLEDGMENTS
COMMONWEALTH OF VIRGINIA
CITY/COUNTY OF LOUDOUN, TO WIT:
I HEREBY CERTIFY that on this ____ day of October, 1998,
before me, the undersigned, a Notary Public of the State aforesaid, personally
appeared John F. Ripley, who acknowledged himself to be the President, Chief
Executive Officer of Precision Auto Care, Inc., a Virginia corporation; WE JAC
Corporation, a Delaware corporation; Lube Ventures, Inc., a Delaware
corporation; Rocky Mountain Ventures, Inc., a Colorado corporation; Rocky
Mountain Ventures II, Inc., a Colorado corporation, Miracle Partners, Inc., a
Delaware corporation; Miracle Industries, Inc., an Ohio corporation; PTW, Inc.,
a Washington corporation; National 60 Minute Tune, Inc., a Washington
corporation; Precision Tune Auto Care, Inc. a Virginia corporation; Worldwide
Drying Systems, Inc., a Colorado corporation, PAC Mexican Delaware Holding
Company, Inc., a Delaware corporation; and the Manager of Ralston Car Wash,
Ltd., a Colorado limited liability company, KBG, LLC, a Colorado limited
liability company, and Indy Ventures, L.L.C., an Indiana limited liability
company; the General Manager of Prema Properties, Ltd., an Ohio limited
liability company; the Authorized Member of Hydro-Spray Car Wash Equipment Co.,
Ltd., an Ohio limited liability company; the President of PAC Mexican Holding
Company LLC, a Virginia limited liability company; the President and General
Manager of Precision Auto Care Mexico II, S. de R.L. de C.V., a Mexican limited
liability company; and Precision Auto Care Mexico I, S. de R.L. de C.V., a
Mexican limited liability company; and that he, as such President, Chief
Executive Officer, General Manager, Authorized Member, Manager and President and
General Manager (as applicable), being authorized so to do, executed the
foregoing instrument for the purposes therein contained, by signing the name of
each of the corporations and limited liability companies by himself as
President, Chief Executive Officer, General Manager, Authorized Member, Manager
and General Manager (as applicable).
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
------------------------------------
Notary Public
My Commission Expires:
- -------------------------------
Exhibit 10.7
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made this 17th day of June, 1998, by and between John F.
Ripley, a resident of Round Hill, Virginia (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 July 1, 1998, and
continuing for a period of three (3) years until and including June 30, 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 July 1, 1998,
shall be at an annual rate of Two Hundred Fifty Thousand Dollars ($250,000),
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 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.
1
<PAGE>
(b) Performance Bonus. The Executive shall participate in the Senior
Management Incentive Bonus Plan, and shall be entitled to receive bonuses
thereunder, as approved by the Board of Directors.
(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 1998
Employee Stock Purchase Plan, the Executive shall be granted a non-qualified
stock option to purchase 75,000 shares of Common Stock of the Company. The
option shall vest in equal installments of one-third of the total shares granted
on the first three anniversaries of the grant date, which shall be June 17,
1998. The exercise price shall be equal to the closing price of the Common Stock
as of June 17, 1998, and the term of the option shall be ten years.
(iii) The Company shall reimburse the Executive for
the cost of monthly dues at Stoneleigh Golf Club.
(iv) The Company shall reimburse the Executive for
the cost of the Executive's participation in the Young President's Organization.
Such reimbursement shall be limited to Executive's expenses for International,
Chapter and Forum dues only, and shall not include any activities or other fees.
(v) The Company shall reimburse the Executive for
all expenses incurred by him in the performance of his duties pursuant to
this Agreement.
(vi) 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.
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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 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 the auto care industry, except that the Executive may
hold as a passive investment not more than 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
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.
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(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 enforce its rights, as contemplated by
Section 6(a) hereof, to injunctive and other equitable relief in the event of
breach of Section 4 or 5 hereof by arbitration pursuant to this Section 6(b) or
directly in any court of competent jurisdiction.
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 and eight (180) consecutive days or for shorter periods
aggregating more than two hundred and twenty (220) 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 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.
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(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 repeated willful misconduct or gross
negligence;
(ii) The Executive's repeated conscious disregard of his
obligations hereunder;
(iii) The Executive's repeated conscious violation of any
provision of the Company's by-laws or of its other stated policies, standards or
regulations;
(iv) A determination that the Executive has demonstrated a
dependence upon any addictive substance, including alcohol, controlled
substances, narcotics or barbiturates;
provided, however, that if the Board of Directors of the Company desires to
terminate the Executive for any of the reasons set forth in clauses (i), (ii) or
(iii) of this Section 7(c), the Company within the sixty (60) day period
immediately following each alleged commission of a proscribed act or omission,
shall have furnished to the Executive a written description of the allegedly
proscribed act or omission and a statement advising him that the Company views
such conduct as being of the type that could lead to a termination of the
Executive for Cause and, provided further, that if the Board of Directors of the
Company desires to terminate the Executive on the basis of clause (iii) of this
Section 7(c), it must be able to demonstrate that the Executive has been
furnished with a copy of the by-law provision, policy, standard or regulation,
the violation of which the Executive is being accused, at a time prior to the
alleged commission of the violation.
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); the Company shall be under no
further obligation hereunder to the Executive, and 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 the 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
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may be entitled under and in accordance with the terms of any employee benefit
plan, policy or program maintained by the Company; and 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.
(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 "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 change 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.
(v) A change in control of the Company; provided that, 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 be 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 three fourths of the directors then
in office who are directors at the beginning of such period.
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 the 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 to the
Executive following any such termination.
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(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.
(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 shall include a pro-rata performance bonus, determined in
accordance with the provisions of the Senior Management Incentive Bonus Plan.
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. Anything to the contrary herein notwithstanding, 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. The 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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If to the Executive:
John F. Ripley
35481 Troon Court
Round Hill, Virginia 20141
If to the Company:
Precision Auto Care, Inc.
748 Miller Drive, S.E.
P.O. Box 5000
Leesburg, Virginia 22075
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 Article 7 of the Bylaws of the Company;
provided that the Company shall be permitted to amend such provision 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 Such Article
7 as in effect on the date hereof.
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(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 transaction which
is the subject 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: Chairman of the Board
_____________________________________
John F. Ripley
Exhibit 10.11
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made this 8th day of June, 1998, by and between John F.
Moynahan, a resident of Fairfax, Virginia (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 June 8, 1998 and
continuing for a period of three (3) years until and including the same month
and day in 2001 (the "Initial Term"), unless such employment is earlier
terminated as provided herein. After expiration of the Initial Term, Executive's
employment under this Agreement shall continue until terminated as provided
herein.
2. Duties.
The Executive shall serve in the capacity of Senior Vice President and
Chief Financial Officer. 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 the date his
employment commences with the Company shall be at an annual rate of One Hundred
Thirty-Five Thousand Dollars ($135,000), payable in approximately equal
installments at such intervals as are consistent with the Company's pay periods
for salaried executive employees.
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(b) Performance Bonus. The Executive is entitled to receive a
Performance Bonus as designed consistent with the Company's performance bonus
plan(s) for all Senior Vice Presidents in the Company, the specifics of which
shall be determined at a later occasion, and which shall be approved by the
Board of Directors.
(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) The Executive shall be eligible to participate in the
Company's Stock Option Plan. Executive shall receive an option to purchase a
minimum of Twenty-five Thousand (25,000) shares with a three-year vesting
period, one third of the total number of options being eligible for exercise on
each of the first, second, and third anniversaries of the date of execution. The
exercise price for said stock options will be at fair market value on the date
of grant and the term will be for ten (10) years.
(iii) The Company shall reimburse the Executive for all
expenses incurred by him in the performance of his duties pursuant to this
Agreement.
(iv) The Company shall reimburse the Executive for dues of a
luncheon or country club of choice up to a maximum of $2,400 per year.
(v) Executive shall receive such other benefits and/or
allowances as are permitted to him from time to time by the Company.
(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.
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
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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 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 the auto care, quick lube or car wash industries,
except that the Executive may hold as a passive investment not more than 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 6 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
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.
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(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 enforce its rights, as contemplated by
Section 6(a) hereof, to injunctive and other equitable relief in the event of
breach of Section 4 or 5 hereof by arbitration pursuant to this Section 6(b) or
directly in any court of competent jurisdiction.
7. Termination of Employment.
(a) Death. The Executive's employment hereunder shall terminate in
the event of the 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 and eighty (180) consecutive days or for shorter periods
aggregating more than two hundred and twenty (220) 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 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 of benefits under this Agreement.
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(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 repeated willful misconduct or gross
negligence;
(ii) The Executive's repeated conscious disregard of his
obligations hereunder;
(iii) The Executive's repeated conscious violation of any
provision of the Company's by-laws or of its other stated policies, standards or
regulations;
(iv) A determination that the Executive has demonstrated a
dependence upon any addictive substance, including alcohol, controlled
substances, narcotics or barbiturates; provided, however, that if the Board of
Directors of the Company desires to terminate the Executive for any of the
reasons set forth in clauses (I), (ii) or (iii) of this Section 7(c), the
Company within the sixty (60) day period immediately following each alleged
commission of a proscribed act or omission, shall have furnished to the
Executive a written description of the allegedly proscribed act or omission and
a statement advising him that the Company views such conduct as being of the
type that could lead to termination of the Executive for Cause and, provided
further, that if the Board of Directors of the Company desires to terminate the
Executive on the basis of clause (iii) of this Section 7(c), it must be able to
demonstrate that the Executive has been furnished with a copy of the by-law
provision, policy, standard or regulation, the violation of which the Executive
is being accused, at a time prior to the alleged commission of the violation.
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 payment 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); the Company shall be under no
further obligation hereunder to the Executive, and 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 eighteen (18) months, 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; and upon the Executive's
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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 payment or any other rights or benefits
under this Agreement.
(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 "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 material change in title or a substantial elimination
of the duties and responsibilities of the Executive;
(ii) A material breach by the Company of its obligations
hereunder.
(iii) A change in control of the Company; provided that, for
the purposes of this Section 7(e)(iii), 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 fifty percent (50%)
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 three fourths of the directors then
in office who are directors at the beginning of such period.
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 eighteen (18) months. 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 of benefits under
this Agreement, and the Company shall have no further obligation hereunder to
the Executive following any such termination.
(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 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 any salary 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
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Executive no longer shall be entitled to receive any other payments, rights or
benefits under this Agreement.
8. Place of Employment.
The Company agrees that the principal location at which the Executive is
to render his services hereunder will be Leesburg, Virginia, unless a
modification is understood and agreed to in writing by Executive and Company.
9. Withholding.
Anything to the contrary herein notwithstanding, 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.
The 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 effect 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:
If to the Executive:
John F. Moynahan
12302 Blair Ridge Road
Fairfax, VA 22033
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If to the Company:
Precision Auto Care, Inc.
748 Miller Drive, SE
P.O. Box 5000
Leesburg, Virginia 20175
Attn: John F. Ripley
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, 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
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 or
unenforceability shall not affect any other provision of this 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 Article 7 of the Bylaws of the Company;
provided that the Company shall be permitted to amend such provision 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 such Article
7 as in effect on the date hereof.
(h) Captions. All captions and section headings used herein are for
convenient reference only and do not form a part of this Agreement.
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(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 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 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 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.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the day and year first above written.
PRECISION TUNE AUTO CARE, INC.
By:
__________________________________
Name:
_______________________________
Title:
_______________________________
_____________________________________
John F. Moynahan
9
Exhibit 10.13
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made this 31st day of March, 1998, by and between Jaime
Valdes, a resident of Monterrey, Mexico (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 April 1,1998 and
continuing for a period of three (3) years until and including the same month
and day in 2001 (the "Initial Term"), unless such employment is earlier
terminated as provided herein. After expiration of the Initial Term, Executive's
employment under this Agreement shall continue until terminated as provided
herein.
2. Duties.
The Executive shall serve in the capacity of Senior Vice President and
President - Latin American Division. 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 the date his
employment commences with the Company shall be at an annual rate of One Hundred
Twenty Thousand Dollars (US$120,000), payable in approximately equal
installments at such intervals as are consistent with the Company's pay periods
for salaried executive employees.
(b) Performance Bonus. The Executive is entitled to receive a
Performance
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Bonus as designed consistent with the Company's performance bonus plan(s) for
all senior executives in the Company, the specifics of which shall be determined
at a later occasion, and which shall be approved by the Board of Directors.
(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) The Executive shall be eligible to participate in the any
Stock Option Plan as may approved by the Board of Directors and the Chief
Executive Officer. Executive shall receive an option to purchase a minimum of
Twenty-five Thousand (25,000) shares with a three-year vesting period, one third
of the total number of options being eligible for exercise on each of the first,
second, and third anniversaries of the date of execution. The exercise price for
said stock options will be at fair market value on the date of grant and the
term will be for ten (10) years.
(iii) The Company shall reimburse the Executive for all
expenses incurred by him in the performance of his duties pursuant to this
Agreement.
(iv) The Company shall reimburse the Executive for dues of a
luncheon or country club of choice up to a maximum of $2,400 per year.
(v) Executive shall receive such other benefits and/or
allowances as are permitted to him from time to time by the Company.
(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.
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
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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 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 the auto care, quick lube or car wash industries,
except that the Executive may hold as a passive investment not more than 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 6 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
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.
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(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 enforce its rights, as contemplated by
Section 6(a) hereof, to injunctive and other equitable relief in the event of
breach of Section 4 or 5 hereof by arbitration pursuant to this Section 6(b) or
directly in any court of competent jurisdiction.
7. Termination of Employment.
(a) Death. The Executive's employment hereunder shall terminate in
the event of the 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 and eighty (180) consecutive days or for shorter periods
aggregating more than two hundred and twenty (220) 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 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 of benefits under this Agreement.
4
<PAGE>
(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 repeated willful misconduct or gross
negligence;
(ii) The Executive's repeated conscious disregard of his
obligations hereunder;
(iii) The Executive's repeated conscious violation of any
provision of the Company's by-laws or of its other stated policies, standards or
regulations;
(iv) A determination that the Executive has demonstrated a
dependence upon any addictive substance, including alcohol, controlled
substances, narcotics or barbiturates; provided, however, that if the Board of
Directors of the Company desires to terminate the Executive for any of the
reasons set forth in clauses (I), (ii) or (iii) of this Section 7(c), the
Company within the sixty (60) day period immediately following each alleged
commission of a proscribed act or omission, shall have furnished to the
Executive a written description of the allegedly proscribed act or omission and
a statement advising him that the Company views such conduct as being of the
type that could lead to termination of the Executive for Cause and, provided
further, that if the Board of Directors of the Company desires to terminate the
Executive on the basis of clause (iii) of this Section 7(c), it must be able to
demonstrate that the Executive has been furnished with a copy of the by-law
provision, policy, standard or regulation, the violation of which the Executive
is being accused, at a time prior to the alleged commission of the violation.
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 payment 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); the Company shall be under no
further obligation hereunder to the Executive, and 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 eighteen (18) months, 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
5
<PAGE>
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;
and 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 payment or any other
rights or benefits under this Agreement.
(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 "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 material change in title or a substantial elimination of
the duties and responsibilities of the Executive;
(ii) A material breach by the Company of its obligations
hereunder.
(iii) A change in control of the Company; provided that, for
the purposes of this Section 7(e)(iii), 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 fifty percent (50%)
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 three fourths of the directors then
in office who are directors at the beginning of such period.
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 eighteen (18) months. 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 of benefits under
this Agreement, and the Company shall have no further obligation hereunder to
the Executive following any such termination.
(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 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 any salary 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
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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.
8. Place of Employment.
The Company agrees that the principal location at which the Executive is
to render his services hereunder will be Monterrey, Mexico unless a modification
is understood and agreed to in writing by Executive and Company.
9. Withholding.
Anything to the contrary herein notwithstanding, 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.
The 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 effect 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:
If to the Executive:
[insert Jaime home address]
_______________________________________
_______________________________________
_______________________________________
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If to the Company:
Precision Auto Care, Inc.
748 Miller Drive, SE
P.O. Box 5000
Leesburg, Virginia 20175
Attn: President
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, 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
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 or
unenforceability shall not affect any other provision of this 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 Article 7 of the Bylaws of the Company;
provided that the Company shall be permitted to amend such provision 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 such Article
7 as in effect on the date hereof.
(h) Captions. All captions and section headings used herein are for
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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 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 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 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.
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:
_________________________________
Title:
_________________________________
_______________________________________
Jaime Valdes
9
[Explanatory Note: Effective July 1, 1998, Mr. Malas became a full-time employee
of the Company. An employment agreement has not yet been formalized.]
Exhibit 10.14
INDEPENDENT CONTRACTOR AGREEMENT
THIS INDEPENDENT CONTRACT AGREEMENT (the "Agreement") is made this 12th
day of November, 1997 between PRECISION AUTO CARE, INC., a Virginia corporation
having its principal offices at 748 Miller Drive SE, Leesburg, Virginia 20175
(the "Company") and Ernest S. Malas, an Ohio resident having his principal
residence at 371 Pugh Road, Mansfield, OH (the "Consultant").
WHEREAS, the Company is in need of a consultant and contractor to
assist it with business development; and
WHEREAS, the Consultant possesses certain experience, information,
skills and credential in the area of developing businesses; and
WHEREAS, the Company desires to obtain the benefits of the Consultant's
knowledge and experience as a consultant and contractor for the Company, and the
Consultant desires to perform consulting services for the Company, subject to
the terms and provisions of this Agreement.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
promises and covenants contained herein, and for other good and valuable
consideration, the sufficiency of which are hereby acknowledged, the parties
hereto agree as follows:
1. Engagement.
(a) The Company hereby engages the consultant for the Contract
Period set forth in Section 3, and the consultant hereby accepts such engagement
on the terms and conditions set forth in this Agreement.
(b) During the Contract Period, the Consultant shall devote full and
sufficient time to the performance of services as shall be necessary, and shall
make himself available to perform work assigned to the Consultant by the
Company.
2. Services.
(a) The Consultant agrees to perform the duties, responsibilities
and initiatives appropriate to the role of a senior business development
executive.
(b) The Consultant further agrees to perform these responsibilities
within the purview of the knowledge and expertise of the consultant and as
selected by the company
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according to the specifications explained to the Consultant by the Company. If
requested or required, the Consultant will prepare a written estimate of labor
and materials needed to complete each initiative. The Consultant understands
that the company will reimburse the Consultant for reasonable out-of-pocket
expenses actually incurred by the Consultant and that are incidental to this
engagement to include, without limitation, travel, lodging, meals, and
transportation mileage associated with required travel outside of the Mansfield,
Ohio area, (or such other area where Consultant subsequently may reside),
photocopying, postage, long distance telephone charges, facsimile transmissions,
courier fees and supplies (such supplies to be approved by the company),
subsequently verified by receipts and/or payroll records. Such costs shall not
include payroll or other general administrative costs of Consultant.
(c) The Consultant may utilize the equipment and space of the
Company.
3. Contract Period.
(a) Duration. The term of this Agreement (the "Contract Period")
shall be deemed to have commenced as of the date of this Agreement and shall
continue until the earliest to occur of (i) three years from the date hereof,
(ii) the death or disability of Consultant, or (iii) the inability of the
Consultant to perform his duties by reason of lack of staff or lack of
resources.
4. Termination.
(a) Death. The Consultant's engagement hereunder shall terminate in
the event of the Consultant's death. Except for any fees and expenses accrued,
vested and unpaid as of the date of any such termination and except for any
benefits to which the Consultant 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 Consultant or his heirs or personal
representatives, and the Consultant 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 Consultant's
engagement hereunder for "Disability," if an independent physician mutually
selected by the Consultant or his representative and the Board of Directors or
its designee has determined that the Consultant 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 and eighty (180) consecutive days or for
shorter periods aggregating more than two hundred and twenty (220) days in any
period of twelve (12) consecutive months (excluding in each case days on which
the Consultant was on vacation). In the event of such Disability, the Consultant
shall be entitled to receive any fees and expenses accrued, vested and unpaid as
of the date of any such termination and any benefits to which the Consultant may
be entitled under and in accordance with the terms of any employee benefit plan,
2
<PAGE>
policy or program maintained by the Company. The Company shall be under no
further obligation hereunder to the Consultant, and the Consultant no longer
shall be entitled to receive any other payments, rights of benefits under this
Agreement.
(c) Termination by the Company for Cause. The Company may terminate
the Consultant's engagement hereunder for "Cause." For purposes of this
Agreement, "Cause" shall mean any of the following:
(i) The Consultant's repeated willful misconduct or gross
negligence;
(ii) The Consultant's repeated conscious disregard of his
obligations hereunder;
(iii) The Consultant's repeated conscious violation of any
provision of the Company's by-laws or of its other stated policies, standards or
regulations;
(iv) A determination that the Consultant has demonstrated a
dependence upon any addictive substance, including alcohol, controlled
substances, narcotics or barbiturates; provided, however, that if the Board of
Directors of the Company desires to terminate the Consultant for any of the
reasons set forth in clauses (I), (ii) or (iii) of this Section 7(c), the
Company within the sixty (60) day period immediately following each alleged
commission of a proscribed act or omission, shall have furnished to the
Consultant a written description of the allegedly proscribed act or omission and
a statement advising him that the Company views such conduct as being of the
type that could lead to termination of the Consultant for Cause and, provided
further, that if the Board of Directors of the Company desires to terminate the
Consultant on the basis of clause (iii) of this Section 7(c), it must be able to
demonstrate that the Consultant has been furnished with a copy of the by-law
provision, policy, standard or regulation, the violation of which the Consultant
is being accused, at a time prior to the alleged commission of the violation.
In the event that the Company terminates the Consultant's engagement for
Cause, the Consultant shall be entitled to receive a severance benefit of two
(2) months' Monthly Fee in effect at the time of termination. The Consultant
shall not be entitled to receive any other payment 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); the Company shall be
under no further obligation hereunder to the Consultant, and 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 Consultant's engagement hereunder at any time for any other
reason, provided that the Company has given the Consultant ninety (90) days'
written notice of termination, termination being effective upon expiration of
the notice period. In the event of such termination, the Consultant shall be
entitled to receive a severance benefit equal to Monthly Fee
3
<PAGE>
at the rate in effect at the time of termination for eighteen (18) months, 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
Consultant may be entitled under and in accordance with the terms of any
employee benefit plan, policy or program maintained by the Company; and upon the
Consultant's receipt of such severance benefit, salary and benefits, the Company
shall be under no further obligation hereunder to the Consultant and the
Consultant no longer shall be entitled to receive any payment or any other
rights or benefits under this Agreement.
(e) Termination by the Consultant for Good Reason. Notwithstanding
anything herein to the contrary, the Consultant shall be entitled to terminate
his engagement hereunder for "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 material change in title or a substantial elimination
of the duties and responsibilities of the Consultant;
(ii) A material breach by the Company of its obligations
hereunder.
(iii) A change in control of the Company; provided that, for
the purposes of this Section 7(e)(iii), 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 fifty percent (50%)
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 three fourths of the directors then
in office who are directors at the beginning of such period.
In the event of such termination by the Consultant, the Consultant shall
nonetheless be entitled to receive a severance benefit equal to Monthly Fee at
the rate in effect at the time of termination for eighteen (18) months. Except
for such severance benefit and except for any salary and benefits accrued,
vested and unpaid as of the date of such termination, the Consultant no longer
shall be entitled to receive any payments or any other rights of benefits under
this Agreement, and the Company shall have no further obligation hereunder to
the Consultant following any such termination.
(f) Termination by the Consultant for other than Good Reason. The
Consultant may terminate his engagement hereunder at any time for any other
reason, provided the Consultant has given the Company ninety (90) days' written
notice of termination, termination being effective upon expiration of the notice
period. In the event of such
4
<PAGE>
termination, the Consultant shall be entitled to receive any salary benefits
accrued, vested and unpaid as of the date of any such termination and any
benefits to which the Consultant 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
Consultant and the Consultant no longer shall be entitled to receive any other
payments, rights or benefits under this Agreement.
5. Independent Contractor. The parties agree that the Consultant is
providing services to the Company as an independent contractor and nothing in
this Agreement shall be construed so as to create the relationship of employer
and employee between the Company and the Consultant. The Consultant shall be
responsible for all federal, state and local taxes, FICA, FUTA and SUTA
unemployment, workers' compensation and any other taxes or insurance obligations
for himself arising out of the fees, expenses and/or reimbursements to be paid
to the Consultant under this Agreement. The Consultant agrees to indemnify the
Company against all liability with regard to such taxes and insurance
obligations. The Consultant shall not be entitled to any employee benefit plans
or fringe benefits offered by the Company during the term of this Agreement,
except as may be made available within all established guidance in the Company's
existing and future Plan documents governing stock option benefits normally
afforded to members of the Board of Directors (the "Board"), so long as
Consultant also operates as a member of such Board. Nothing in this Agreement
shall give either party any authority or responsibility to hire or terminate
employees of the other party, to supervisor or direct such employees, to
discipline them, to accept and resolve their grievances, to provide workers'
compensation coverage, or to otherwise exercise control over agents or employees
of the other party.
6. Compensation.
(a) In consideration of the Consultant's undertakings and the
performance of the obligations contained in this Agreement, the Company shall
pay to the Consultant a retainer fee of Ten Thousand Dollars ($10,000.00) per
month (the "Monthly Fee"), which shall be payable on the first (1st) day of each
calendar month during the Contract Period, starting January 1, 1998.
(b) Payment for expenses described in Section 2(b) shall be due and
payable within thirty (30) days of the date of Consultant's expense report.
(c) The Consultant shall be eligible to participate in the any Stock
Option Plan as may approved by the Board of Directors and the Chief Executive
Officer. In the event such Stock Option Plan(s) are approved, ratified, and
implemented by the Board of Directors for Company executives, Consultant shall
receive an option to purchase a minimum of Twenty-five Thousand (25,000) shares
with a three-year vesting period, one third of the total number of options being
eligible for exercise on each of the first, second, and third anniversaries of
the date of execution. The exercise price for said stock options will be at fair
market value on the date of
5
<PAGE>
grant and the term will be for ten (10) years.
(d) Consultant shall be considered eligible for an Incentive Bonus
program to be developed in conjunction with the President.
7. Covenant Not to Compete.
(a) The Consultant 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 the auto care, quick lube or car wash industries,
except that the Consultant may hold as a passive investment not more than five
percent (5%) of the outstanding securities of any class of any publicly-held
entity that engages in the auto care industry and may own Precision Auto Care
franchises.
(b) It is the desire and the intent of the parties that the
provisions of this Section 6 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.
8. Licenses. The Consultant covenants and agrees that it will obtain and
will keep current licenses required by any governmental agency to perform the
services required by this Agreement. The Consultant understands that the costs
of these licenses are not reimbursable to the Consultant by the Company under
this Agreement.
9. Indemnification. The Company agrees to defend, indemnify and save
harmless the Consultant from and against any and all claims, actions and suits,
and from and against all liabilities, losses, damages, costs, charges and
expenses (including reasonable attorneys' fees) of every nature and kind arising
out of or in consequence of the company's acceptance of or failure to accept the
Consultant's opinions and/or recommendations. The Consultant agrees to defend,
indemnify and save harmless the Company from and against any and all claims,
damages, costs, charges and expenses (including reasonable attorneys' fees) of
every nature and kind arising out of or in consequence of the gross negligence,
recklessness or intentional wrongdoing of the Company.
10. Notices. Any notice required or permitted to be given under this
Agreement shall be given in writing, and shall be delivered by hand or by
certified mail, postage prepaid and return receipt requested, addressed as set
forth below:
If to the Company: Precision Auto Care, Inc.
6
<PAGE>
748 Miller Drive, SE
Leesburg, VA 20175
Attn: John F. Ripley
If to the Consultant: Ernest S. Malas
371 Pugh Road
Mansfield, OH 44903
All notices delivered by hand or certified mail shall be deemed delivered on the
day of delivery to the designated address of the addressee set forth above. Any
change of address by either the Company or the consultant must be promptly
communicated in writing and shall be delivered by hand or by certified mail,
postage prepaid and return receipt requested.
11. Waiver. The waiver by any party hereto of a breach of any provision of
this Agreement by any other party hereto shall not operate or be construed as a
waiver of any subsequent breach by the breaching party.
12. Binding Effect.
(a) This Agreement shall be binding upon and inure to the benefit of
the parties hereto and their respective successors and assigns (it being
understood that the Consultant shall not be able to assign its obligations under
this Agreement to any third party without the company's prior written consent
which the Company may withhold in its sole and absolute discretion).
Notwithstanding anything else in this Agreement to the contrary, the Company's
obligations as set forth in this Agreement shall survive any sale of the
business, shares or operating assets of the Company or any change of management
or control of the Company except for the following.
13. Entire Agreement. This Agreement constitutes the entire understanding
of the consultant and the Company with respect to the subject matter hereof and
supersedes any and all prior understandings and agreement, written or oral,
relating to the subject matter of this Agreement. This Agreement and the
provisions hereof may be changed, waived or canceled orally, but may be changed,
waived, or canceled only by an instrument in writing signed by the parties
hereto.
14. Section Headings. The section headings of this Agreement are for
convenience of reference only and shall not limited or otherwise affect any of
the provisions of this Agreement.
15. Law and Interpretation. This Agreement shall be governed by the laws
of the State of Virginia, and the invalidity or unenforceability of any
provision hereof shall in no way affect the validity of enforceability of any
other provision.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement under seal as of the date first above written.
ATTEST: PRECISION AUTO CARE, INC.
By: (SEAL)
________________________ ______________________________
John F. Ripley
ATTEST: ERNEST S. MALAS
By: (SEAL)
________________________ ______________________________
Ernest S. Malas
8
EXHIBIT 21
PRECISION AUTO CARE, INC. SUBSIDIARIES
Subsidiary Jurisdiction of Incorporation
- ---------- -----------------------------
WE JAC Corporation Delaware
Worldwide Drying Systems, Inc. Colorado
Precision Tune Auto Care, Inc. Virginia
PTW, Inc. Washington
Precision Building Solutions Incorporated Delaware
Rocky Mountain Ventures, Inc. Colorado
Ralston Car Wash, Ltd. Colorado
Rocky Mountain Ventures II, Inc. Colorado
Miracle Partners, Inc. Delaware
Miracle Industries, Inc. Ohio
Hydro Spray Car Wash Equipment Co., LLC Iowa
Indy Ventures, LLC Indiana
Prema Properties, LLC Ohio
PAC Mexican Delaware Holding Company, Inc. Delaware
PAC Mexican Holding Co., LLC Virginia
Precision Auto Care Mexico I S.de R.L. de C.V. Mexico
Promotora de Franquicias Praxis S.A. de C.V. Mexico
Praxis Afinaciones, S.A. de C.V. Mexico
Praxis Auto Parts, S.A. de C.V. Mexico
Praxis Afinaciones, Puerto Rico, Inc. Mexico
Exhibit 23
Consent of Independent Auditors
We consent to the reference to our firm in the following Registration Statements
on Form S-8
No. 333-47165 pertaining to the Precision Tune Stock Option Plan
No. 333-47167 pertaining to the Precision Tune 1996 Employee Stock
Purchase Plan
No. 333-47169 pertaining to the Precision Auto Care Employee Stock
Option Plan
No. 333-47171 pertaining to the Precision Auto Care, Inc. Director
Stock Option Plan
No. 333-49097 pertaining to the Precision Auto Care 1998 Employee Stock
Purchase Plan
and of our report dated September 25, 1998, with respect to the consolidated
financial statements and schedule of Precision Auto Care in the Annual Report
(Form 10-K) for the year ended June 30, 1998.
Vienna, Virginia Ernst & Young LLP
October 12, 1998
EXHIBIT 24
POWER OF ATTORNEY
We, the undersigned Directors and Officers of Precision Auto Care, Inc.
(the "Corporation"), hereby constitute and appoint Arnold Janofsky, our true and
lawful attorney-in-fact with full power to sign for us, in our names and in the
capacities indicated below, the Corporation's Annual Report on Form 10-K for the
year ended June 30, 1998, and any and all amendments thereto.
Name Title Date
/s/ John F. Ripley President and Chief Executive
_________________________ Officer; Director (Principal
John F. Ripley Executive Officer) September 28, 1998
Senior Vice President and Chief
/s/ John F. Moynahan Financial Officer (Principal
_________________________ Financial and Accounting
John F. Moynahan Officer) September 28, 1998
/s/ Lynn E. Caruthers
_________________________ Chairperson of the Board of
Lynn E. Caruthers Directors; Director September 28, 1998
/s/ Woodley A. Allen
_________________________
Woodley A. Allen Director September 28, 1998
/s/ George A. Bavelis
_________________________
George Bavelis Director September 28, 1998
/s/ Bernard H. Clineburg
_________________________
Bernard H. Clineburg Director September 28, 1998
/s/ Clarence E. Deal
_________________________
Clarence E. Deal Director September 28, 1998
<PAGE>
/s/ Effie L. Eliopulos
_________________________
Effie Eliopulos Director September 28, 1998
/s/ Bassam N. Ibrahim
_________________________
Bassam N. Ibrahim Director September 28, 1998
/s/ Richard O. Johnson
_________________________
Richard O. Johnson Director September 28, 1998
/s/ Arthur Kellar
_________________________
Arthur Kellar Director September 28, 1998
/s/ Harry G. Pappas, Jr.
_________________________
Harry G. Pappas, Jr. Director September 28, 1998
/s/ William R. Klumb
_________________________
William R. Klumb Director September 28, 1998
/s/ Gerald A. Zamensky
_________________________
Gerald A. Zamensky Director September 28, 1998
-2-
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