UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO _________________
COMMISSION FILE NUMBER 1-14510
PRECISION AUTO CARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
VIRGINIA 54-1847851
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
748 MILLER DRIVE, S.E., LEESBURG, VIRGINIA 20175
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(ZIP CODE)
703-777-9095
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date 6,120,543 shares of Common
Stock as of January 31, 1998.
<PAGE>
Precision Auto Care, Inc.
Index
<TABLE>
<CAPTION>
Page No.
Part I. Financial Information
<S> <C> <C>
Item 1. Financial Statements 1
General Information 1
Consolidated Balance Sheets at December 31, 1998 and June 30, 1998 3
Consolidated Statement of Operations for the three months and six 5
months ended December 31, 1998 and 1997
Pro Forma Consolidated Statement of Operations for the three months 6
and six months ended December 31, 1998 and 1997
Consolidated Statement of Cash Flows for the three months and six 7
months ended December 31, 1998 and 1997
Notes to the Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition 15
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Part II. Other Information 27
Item 1. Legal Proceedings 27
Item 2. Changes in Securities and Use of Proceeds 27
Item 3. Defaults upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
Exhibit Index 30
</TABLE>
i
<PAGE>
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934. When used in this report, the words
"anticipate," "believe," "estimate," "expect," "intend" and "plan" as they
relate to Precision Auto Care, Inc. or its management are intended to identify
such forward-looking statements. All statements regarding Precision Auto Care,
Inc. or Precision Auto Care, Inc.'s expected future financial position, business
strategy, cost savings and operating synergies, projected costs and plans, and
objectives of management for future operations are forward-looking statements.
Although Precision Auto Care, Inc. believes the expectations reflected in such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the
expectations reflected in the forward-looking statements herein include, among
others, the factors set forth in the Company's 10-K filing for the year ending
June 30, 1998 under the caption "Business -- Risk Factors," general economic and
business and market conditions, changes in federal and state laws, increased
competitive pressure in the automotive after-market services business, and costs
or difficulties relating to the integration of acquired businesses (including
the businesses the Company acquired in connection with its November 1997 initial
public offering), including difficulties in achieving expected cost savings and
operating synergies.
ii
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL INFORMATION
Precision Auto Care, Inc. ("Precision Auto Care" or the "Company") is a provider
of automotive maintenance services with franchised and Company-operated centers
located in the United States and in certain international locations. The
Company's services are provided to automobile owners and focus on those high
frequency services required to properly maintain vehicles on a periodic basis.
The Company offers these services through three "Precision" brands that are
intended to be complementary:
o Precision Tune Auto Care provides automotive maintenance services which
require relatively short service times including engine performance, oil
change and lubrication and brake services. At December 31, 1998 these
services were provided at 561 Precision Tune Auto Care centers, four of
which are owned and operated by the Company.
o Precision Auto Wash provides self-service and touchless automatic car wash
services. The advanced operating systems used at prototype Precision Auto
Wash centers permit remote monitoring and administration of operations.
The no-touch car wash technology employed in Precision Auto Wash centers
also provides a high-quality wash with less risk of vehicle damage than
traditional car wash systems. At December 31, 1998, there were 37
Precision Auto Wash centers, 35 of which are owned and operated by the
Company.
o Precision Lube Express provides convenient fast oil change and lube
services. Because Precision Lube Express centers consist of "above ground"
configured modular buildings manufactured and sold by the Company,
operations can commence more quickly and with less capital investment than
is the case for many competitors. At December 31, 1998, there were 16
Precision Lube Express centers, seven of which are owned and operated by
the Company. As of that date there were also 18 Lube Depot centers
operated by franchisees, some of which are expected to become Precision
Lube Express centers.
The Company supports its franchisees and Company-owned centers by distributing
certain automotive and car washing parts and supplies, and manufacturing and
distributing pre-fabricated modular buildings and car wash equipment and
chemicals.
The Company, a Virginia corporation, was incorporated in April 1997, but through
predecessors has been in the automotive maintenance services business for over
twenty years. The first Precision Tune was established in 1976 to provide quick,
convenient and inexpensive engine tune-ups. Franchising of Precision Tune
centers began the next year. As changes in automotive technology reduced the
need for traditional tune-ups, Precision Tune expanded its menu of offered
automotive maintenance services to include oil changes, fuel injection service,
air conditioning service, cooling system service, brake service and more
diagnostic services. In September 1996, Precision Tune's name was changed to
Precision Tune Auto Care to reflect the shift in emphasis.
The Company is the result of the November 1997 combination of WE JAC Corporation
(the owner of Precision Tune Auto Care) and nine other automotive maintenance
services companies in connection with the Company's initial public offering (the
"IPO Combination"). The nine companies joined with WE JAC Corporation in the IPO
Combination were: Miracle Industries, Inc.; Lube Ventures, Inc.; Rocky Mountain
Ventures, Inc.; Rocky Mountain Ventures II, Inc.; Prema Properties, Ltd.;
Miracle Partners,
<PAGE>
Inc.; Ralston Car Wash Ltd.; KBG, LLC and Worldwide Drying Systems, Inc.
(referred to individually as a "Predecessor Company" or collectively, the
"Predecessor Companies"). With the IPO Combination, the "Precision" family of
brands was expanded to include car wash and quick oil change and lube services.
In March 1998, the Company acquired Promotora de Francquicias Praxis S.A. de
C.V., previously a holder of a master franchise agreement for Precision Tune
Auto Care in Mexico and Puerto Rico.
2
<PAGE>
Precision Auto Care, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
December 31,
1998 June 30,
(Unaudited) 1998
----------- ----
ASSETS
Current assets:
Cash and cash equivalents $34 $2,070
Accounts receivable, net 6,083 9,050
Inventory 3,980 4,202
Notes receivable, current portion, net of
allowance 718 1,520
Prepaid expenses 991 2,217
Deferred income taxes, net 3,176 722
--------- -------
Total current assets 14,982 19,781
Notes receivable, non-current portion, net of 239 654
allowance
Property, plant and equipment, at cost 22,717 20,978
Less accumulated depreciation (2,562) (1,678)
--------- --------
20,155 19,300
Goodwill and other intangibles, net of
accumulated amortization 46,223 45,632
Deposits, trademarks and other assets 1,138 1,182
--------- --------
Total assets $82,737 $86,549
========= ========
See accompanying notes to financial statements.
3
<PAGE>
Precision Auto Care, Inc. and Subsidiaries
Consolidated Balance Sheets
(In Thousands)
December 31,
1998 June 30,
(Unaudited) 1998
----------- ----
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $8,456 $9,336
Current maturities, notes payable 2,929 1,061
Current maturities, line of credit 1,438 ---
Current maturities, term loan 1,200 2,353
Deferred revenue, current portion 807 963
---------- -------
Total current liabilities 14,830 13,713
Revolving line of credit, net of current
portion 8,013 10,333
Term loan, net of current portion 12,287 9,045
Notes payable, net of current portion 1,390 1,471
Deferred revenue, net of current portion 393 393
Other liabilities 155 639
---------- -------
Total liabilities 37,068 35,594
Stockholders' equity:
Common stock, $0.01 par 61 61
Additional paid-in capital 45,683 45,683
Retained earnings (101) 5,211
Foreign currency translation adjustment 26 ---
---------- -------
Total stockholders' equity 45,669,551 50,955
---------- -------
Total liabilities and stockholders' equity $82,737 $86,549
========== =======
See accompanying notes to financial statements.
4
<PAGE>
Precision Auto Care, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales:
Franchise development $158 $387 $442 $492
Royalties 3,316 3,515 7,155 7,300
Manufacturing & distribution 5,559 5,706 11,383 8,527
Company centers 1,804 710 3,599 710
Other 73 60 121 116
------- ---- ------- ------
Total sales 10,910 10,378 22,700 17,145
Direct cost 10,010 7,149 19,934 11,878
------- ---- ------- ------
Contribution 900 3,229 2,766 5,267
General and administrative expense 4,038 1,065 5,244 1,870
Depreciation expense 561 146 867 196
Amortization of franchise rights & 537 349 1,041 579
goodwill
Anticipated loss on sale of assets 710 --- 710 ---
------- ---- ------- ------
Operating income (loss) (4,946) 1,669 (5,096) 2,622
Interest expense (671) (196) (1,114) (492)
Interest income 55 60 99 97
Other income (expense) (474) (52) (788) 34
------- ---- ------- ------
Income (loss) before income taxes (6,036) 1,481 (6,899) 2,261
Provision for income tax expense
(benefit) (1,441) 687 (1,587) 1,040
------- ---- ------- ------
Net income (loss) ($4,595) $794 ($5,312) $1,221
======= ==== ======= ======
Basic and diluted net income
(loss) per share ($0.75) $0.16 ($0.87) $0.27
Weighted avg. shares outstanding
- basic 6,121 4,992 6,121 4,510
Weighted avg. shares outstanding
- diluted 6,121 5,015 6,121 4,532
</TABLE>
See accompanying notes to financial statements.
5
<PAGE>
Precision Auto Care, Inc. and Subsidiaries
Pro Forma Condensed Consolidated Statements of Operations
(In Thousands Except Per Share Amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales:
Franchise development $158 $434 $442 $533
Royalties 3,316 3,521 7,155 7,316
Manufacturing & distribution 5,559 6,500 11,383 13,319
Company centers 1,804 1,110 3,599 2,062
Other 73 60 121 114
------- ---- ------- ------
Total sales 10,910 11,625 22,700 23,344
Direct cost 10,010 8,036 19,934 16,434
------- ---- ------- ------
Contribution 900 3,589 2,766 6,910
General and administrative expense 4,038 1,064 5,244 2,165
Depreciation expense 561 212 867 458
Amortization of franchise rights & 537 378 1,041 756
goodwill
Anticipated loss on sale of assets 710 --- 710 ---
------- ---- ------- ------
Operating income (loss) (4,946) 1,935 (5,096) 3,531
Interest expense (671) (122) (1,114) (245)
Interest income 55 26 99 81
Other income (expense) (474) (63) (788) 30
------- ---- ------- ------
Income (loss) before income taxes (6,036) 1,776 (6,899) 3,397
Provision for income tax expense (1,441) 810 (1,587) 1,578
(benefit) ------- ---- ------- ------
Net income (loss) ($4,595) $966 ($5,312) $1,819
======== ==== ======== ======
Basic and diluted net income
(loss) ($0.75) $0.18 ($0.87) $0.33
per share
Weighted avg. shares outstanding 6,121 5,474 6,121 5,474
- - basic
Weighted avg. shares outstanding 6,121 5,497 6,121 5,497
- - diluted
</TABLE>
See accompanying notes to financial statements.
6
<PAGE>
Precision Auto Care, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended December 31,
1998 1997
(Unaudited) (Unaudited)
---- ----
Cash flow from operating activities:
<S> <C> <C>
Net income (loss) ($5,312) $1,221
Adjustments to reconcile net income to
net cash flow from operating activities
Depreciation and amortization 1,907 774
Deferred income taxes (1,587) ---
Severance accrual 265 ---
Anticipated loss on sale of assets 710 ---
Foreign currency translation adjustment 26 ---
Changes in operating assets and liabilities:
Accounts and notes receivable 3,515 (3,260)
Inventory 222 132
Prepaid expenses 328 (973)
Accounts payable and accrued liabilities (1,186) (580)
Income taxes payable (867) 598
Other operating assets and liabilitites (596) 267
----- ---
Net cash provided by operating activities (2,575) (1,821)
Cash flow from investing activities:
Purchases of property and equipment (1,148) (275)
Purchase of franchise agreements and rights (1,307) (638)
Acquisitions --- (2,850)
--- -------
Net cash used in investing activities (2,455) (3,763)
Cash flow from financing activities:
Issuance of common stock net of transaction costs --- 21,684
Proceeds from term loan and line of credit 1,207 5,702
Proceeds from note payable 2,000 ---
Repayments of long-term debt and notes payable (213) (21,071)
----- --------
Net cash provided by (used in) financing activities 2,994 6,315
----- -----
Net change in cash and cash equivalents (2,036) 731
Cash and cash equivalents at beginning of year 2,070 577
----- ---
Cash and cash equivalents at end of year $34 $1,308
=== ======
</TABLE>
See accompanying notes to financial statements.
7
<PAGE>
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED)
NOTE 1. BUSINESS AND ORGANIZATION
Precision Auto Care, Inc. (the Company) is an international provider of
automotive maintenance services, including specialized automotive care services,
self-service and touchless automatic car wash services, and fast oil change and
lube services, which are conducted principally as franchise operations. These
services are provided under the Precision Tune Auto Care, Precision Auto Wash,
and Precision Lube Express brand names. The Company also distributes auto parts
primarily to its affiliated business units and franchisees and manufactures
equipment which is sold primarily to third parties. Additionally, the Company
assembles and sells modular automotive lubrication units, primarily to its
Precision Lube Express franchisees.
The Company began business operations upon completion of its November 1997
Initial Public Offering (IPO) of common stock. Concurrent with the IPO, ten
companies were combined to create Precision Auto Care. All of the combining
companies had conducted business operations prior to the IPO. The financial
statements presented herein for the period ending December 31, 1997 have been
prepared based on the historical financial statements of WE JAC Corporation,
which was deemed to be the accounting acquirer of the remaining combining
companies for financial reporting purposes. The Company has made several other
acquisitions subsequent to the IPO. The Company conducts substantially all of
its operations through its subsidiaries.
The accompanying financial statements are unaudited, and certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been omitted.
Significant intercompany accounts and transactions have been eliminated in
consolidation. The statements have been prepared in the ordinary course of
business for the purpose of providing information with respect to the interim
periods, and are subject to audit at the end of the fiscal year. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments
necessary to fairly present the financial position of the Company, results of
operations and cash flows with respect to the interim financial statements, have
been included. The interim condensed consolidated financial statements should be
read in conjunction with the Company's June 30, 1998 and 1997 audited financial
statements included with the Company's filing on Form 10K. The results for the
interim periods are not necessarily indicative of the results for the entire
fiscal year.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries and divisions, Precision Tune Auto
Care, Inc., HydroSpray Car Wash Equipment Co., Ltd., Precision Building
Solutions Incorporated, Car Wash Division (comprised of companies formerly known
as Prema Properties, Ltd., Miracle Partners, Inc., Rocky Mountain Ventures,
Inc., Rocky Mountain Ventures II, Ralston Car Wash Ltd.), National Auto
Chemical, Worldwide Drying Systems, Inc., Indy Ventures, Inc. and Promotora de
Francquicias Praxis, S.A. de C.V., ("Praxis") (a Mexican corporation.)
8
<PAGE>
CURRENCY TRANSLATION
The U.S. dollar is the functional currency for all the Company's consolidated
operations, including its Mexican subsidiary whose economic environment is
highly inflationary. All gains and losses from currency translation are included
in earnings.
REVENUE RECOGNITION
Revenues from the sale of parts is recognized when the parts are shipped from
the Company's warehouse. Revenues from the sale of modular automobile
lubrication units is recognized when such units have been shipped to customers
and the Company has performed on all obligations related to the sale, such as
installation and assistance with site development.
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 reestimated each period and takes into account
differences between franchisee's reported and estimated revenues.
Revenue from the sale of a franchise is recognized 50% at the time of sale and
50% upon the opening of the franchised center.
The Company enters into domestic Area Representative Agreements and
international Master License Agreements (Agreements) which grant the area
representative and master licensor, respectively, the right to sell, on the
Company's behalf, Precision Tune Auto Care franchises, Precision Auto Wash
franchises and Precision Lube Express franchises within a specific geographic
region. Revenue from the sale of area representative rights is deferred and
recognized ratably over the terms of the Agreement, generally 10 years, because
the Company's obligation under the Agreement does not depend significantly upon
the number of franchises opened. Revenue from the sale of master license rights,
for geographic areas outside the U.S., is recognized upon signing the Agreement
because the Company is not required to support the international franchises as
there is no contractual agreement between the Company and the international
franchisees.
Revenues from automobile oil change, lubrication and wash services are generally
paid in cash and are recognized at the time of service.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents are comprised of highly liquid instruments with
original maturities of three months or less.
INVENTORY
Inventory is stated at cost, which is lower than market. The cost of auto parts
inventory is determined by the "moving average" method. The cost of modular
automotive lubrication units, car wash equipment, and car wash supplies and is
determined by the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciated on a
straight-line basis over the estimated useful lives of the related assets. The
estimated useful lives are as follows:
9
<PAGE>
YEARS
-----
Building and leasehold improvements 11-30
Furniture and fixtures 5-7
Equipment 7-10
Other items 5-7
GOODWILL AND OTHER INTANGIBLE ASSETS
Purchase price in excess of the fair market value of net assets acquired is
included in goodwill/franchise rights. Franchise rights held by one of the
Company's predecessors are being amortized over 30 years on a straight line
basis. Goodwill related to the Company's acquisitions is being amortized on a
straight line basis over 30 years. Certain other intangibles, including
covenants not to compete and consulting agreements, are amortized on a straight
line basis over periods ranging from six months to two years.
The Company occasionally repurchases franchise rights. The lower of the cost or
fair market value of repurchased franchise rights is also included in goodwill
and other intangibles. The decision to repurchase is made solely at management's
discretion and is not a contractual obligation. The Company also will
periodically obtain possession of franchise rights by exchanging notes payable
or exercising rights outlined in the franchise agreements. The Company amortizes
the repurchased franchise rights over the remaining terms of the franchise
agreements on a straight line basis.
INCOME TAXES
The Company accounts for income taxes under the liability method. Under the
liability method, deferred income tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities. A valuation allowance is established, if necessary, to reduce
deferred income tax assets to the amount expected to be realized.
The companies combining at the time of the IPO filed final individual federal
tax returns for the period ending November 12, 1997. For the year ended June 30,
1998, the Company will file a consolidated federal income tax return. For
financial reporting purposes, the Company computes its federal and state income
taxes on a separate company basis.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the carrying amount of long-lived assets to be held and
used, including goodwill, franchise rights and other intangible assets, when
events and circumstances warrant such a review. The carrying amount of a
long-lived asset is considered impaired when the estimated undiscounted cash
flow from each asset is less than its carrying amount. In that event, the
Company would record a loss equal to the amount by which the carrying amount
exceeds the fair market value of the long-lived asset. Fair market value would
be determined primarily using the estimated cash flows discounted at a rate
consistent with the risk involved.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash, trade accounts
receivable and notes receivable. The Company's cash is held at what management
believes to be stable financial institutions. The trade receivable balances are
dispersed among a wide customer and franchisee base. The Company routinely
assesses the financial strength of its customers. The Company maintains reserves
for credit losses, and such losses have been within management's expectations.
10
<PAGE>
All of the Company's assets are located in the United States, except trade
receivables of $1.3 million, inventory of $346,000, property and equipment of
$466,000, and capitalized franchise rights of $572,000, 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.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
STOCK BASED COMPENSATION
The Company applies Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees", and related interpretations in
accounting for stock options and presents in Note 12 pro forma net income and
earnings per share data as if the accounting prescribed by Statement of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" had been applied.
Precision Auto Care, Inc. ("PAC" or the "Company") was established to create an
international provider of automotive services which are offered principally as
franchise operations marketed under the "Precision" brand name. On November 12,
1997, PAC acquired the Predecessor Companies for consideration consisting of
common stock. The closing of the Offering also occurred on that date.
For financial statement purposes, WEJAC, one of the Predecessor Companies, has
been identified as the accounting acquirer. Accordingly, the historical
financial statements represent those of WEJAC prior to
11
<PAGE>
the Combination and the Offering. The Combination was accounted for using the
purchase method of accounting. Allocations of the purchase price to the assets
acquired and liabilities assumed of the Predecessor Companies have been
initially assigned and recorded based on the book value at the time of the
Combination and may be revised as additional information concerning the
valuation of such assets and liabilities becomes available.
The interim financial statements for the three month and six month periods ended
December 31, 1997 and 1998 are unaudited, and certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted. In the opinion
of management, all adjustments, consisting only of normal recurring adjustments
necessary to fairly present the financial position of the company, results of
operations and cash flows with respect to the interim financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
The unaudited pro forma combined financial information for the three month and
six month periods ended December 31, 1997 includes the results of the
Predecessor Companies as if the Combinations had occurred at the beginning of
the three month and six month periods. The pro forma combined financial
information includes the effects of: (i) the Combinations; (ii) the provision
for income taxes as if the income was subject to corporate federal and state
income taxes during the periods; (iii) repayment of debt of $18.6 million; and
(iv) amortization of goodwill resulting from the Combinations. Prior to the
Combinations, the Predecessor Companies were not under common control or
management; accordingly, the pro forma combined financial information may not be
indicative of or comparable to the Company's post-Combination results of
operations.
NOTE 3. CREDIT FACILITY AND LONG-TERM DEBT
On November 12, 1997, the Company entered into a $25 million Loan and Security
Agreement (the Loan Agreement) with its primary lender (the Lender). The loan is
a combination of a Line of Credit Loan, which may not exceed $11 million, and an
Acquisition Line of Credit, and is secured by all of the assets of the Company.
The loan originally accrued interest, payable monthly, at a base rate which
approximated prime, or the LIBOR Rate, plus an applicable margin varying from
zero to 2.0%.
The Loan Agreement contains affirmative, negative and financial covenants. As of
June 30, 1998 and September 30, 1998, the Company was in violation of certain
covenants, which the lender subsequently waived.
On October 12, 1998, the Company and the Lender executed an amendment to the
Loan Agreement with an effective date of October 1, 1998, whereby the amounts
available under the Line of Credit Loan and Acquisition Line of Credit were to
be reduced to $5 million and $10 million, respectively, effective on the earlier
of January 31, 1999 or the execution of certain real estate refinancing
transactions which the Company currently had in process. The Company expected
that these financings would yield approximately $15 million in net cash proceeds
and would require monthly payments based on annual rates of 8.5% to 11% for
terms of ten to twenty years. Additionally, amounts repaid under the Acquisition
Line of Credit were not to be reborrowed.
On October 15, 1998 the Company entered into a subordinated debt agreement with
Board LLC, which was organized by substantially all of the Directors of the
Company for the sole purpose of providing additional financing to the Company.
Under the terms of the agreement, the Company received $2 million and was to
make monthly interest payments at an annual rate of 14% with the principal to be
paid at the end of the loan term of twelve months. Pursuant to the amended
Credit Agreement, the Company was required to comply with various loan
covenants, which include maintenance of certain financial
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ratios, restrictions on, among other things, additional indebtedness, liens,
guarantees, advances, capital expenditures, sale of assets and dividends. In
addition, the Company was not permitted to make any acquisitions without the
bank's prior consent. Interest on the outstanding balances under the credit
facility was to 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 of 4.75%. Availability fees ranging from 0.25% to 0.5%
were to be payable on the unused portion of the Line of Credit Loan. The
Company's subsidiaries are joint and several obligors with respect to all
amounts due under the credit facility.
Based on the anticipated results of the quarter ending December 31, 1998, the
Company determined that it would not be in compliance with these revised
financial ratios. The Company notified its bank of such expected non-compliance
and requested that the bank grant waivers or amendments to relieve this
non-compliance. On January 25, 1999 the Company reached an agreement in
principle with its lender to restructure its credit agreements. The Company and
the bank are working on finalizing the amendment to the bank credit
agreement("New Amendment"). Under these terms, which will supercede those of the
October 1, 1998 amendment, the Company is to complete a series of financings and
sales of assets, from which the bank is to receive a portion of those preceeds
as permanent reductions in the Company's credit facility. In addition, the
Company's lender agreed to waive the existing financial and other covenants
until March 31, 1999. The Company and its lender are in the process of
finalizing revisions to the terms of its Credit Agreement and the Company
expects to enter into an appropriate agreement with its lender giving effect to
these revisions shortly.
As of December 31, 1998 the Company had entered into agreements to sell certain
assets in order to raise capital which was to be used to pay off a portion of
its outstanding vendor obligations and to pay down a portion of its bank debt.
Additionally, the Company has reached definitive agreements and agreements in
principle subsequent to December 31, to refinance and dispose of certain
properties, the proceeds of which will be used to make further vendor and bank
payments. On January 25, 1999, the Company consummated a subordinated debt
financing with a director in the principal amount of $5,000,000, the terms of
which are more fully disclosed in Note 7 to these financial statements. In
accordance with the aforementioned agreement in principle with the Company's
primary lender, the Company would ordinarily be required to classify a
significant portion of the outstanding obligations under its line of credit and
term loan agreements as current liabilities. Because the Company has
demonstrated both the intent and ability to refinance a significant portion of
its bank debt with long-term obligations, these obligations are classified as
non-current. The balances owed on both the line of credit and term loan
agreements have been classified accordingly.
The Company has initiated a program to improve its liquidity that involves
selected reductions in staffing levels, reduction of expenses, disposition of
selected assets and accelerated collections of receivables. While Company
management believes that this program will improve its cash flow and ability to
meet future bank covenants, there can be no assurance that such program will be
effective in meeting its objectives or that if such objectives are met, that the
resulting improvements in liquidity will be sufficient to avoid the need for
additional reductions in expenditures, sales of additional assets, or
supplemental financing.
NOTE 4. CAPITAL STOCK
On November 12, 1997 PAC completed the Offering, which involved the sale by PAC
of 2,666,540 shares of Common stock at a price to the public of $9.00 per share.
The net proceeds to PAC from the Offering (after deducting underwriting
discounts, commissions and offering expenses) was approximately $20.1 million.
Of this amount approximately $18.6 million was used to repay debt.
NOTE 5. INCOME TAXES
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Prior to the combinations, the stockholders of Miracle Industries, Lube
Ventures, Rocky Mountain I, Rocky Mountain II, and Miracle Partners elected to
be taxed under Subchapter S of the Internal Revenue Code. The members of Prema
Properties, Ralston Car Wash, and KBG elected to be taxed as Limited Liability
Companies of the Internal Revenue Code. Under these provisions, the entities
were not subject to income taxation for federal purposes. As pass through
entities the stockholders and members report their share of taxable earnings or
losses in their personal tax returns.
The Company files a consolidated federal income tax return which includes the
operations of the Predecessor Companies for periods commencing on the date of
the Combinations (November 12, 1997). The Predecessor Companies were
individually responsible for filing federal income tax returns based on earnings
through November 11, 1997. The provision for income taxes included in the Pro
Forma Combined Statements of Operations for the three month and six month
periods ended December 31, 1997 and 1998 assumes the application of statutory
federal and state income tax rates and the partial non-deductibility of goodwill
amortization.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company carries a broad range of insurance coverage, including general and
business liability, commercial property, workers' compensation and general
umbrella policies. In November 1997, the Company secured Directors and Officers
and Prospectus Liability insurance coverage with an aggregate limit of $5
million. The Company has not incurred significant claims or losses on any of its
insurance policies during the periods presented in the accompanying financial
statements.
At December 31, 1998, the Company had lease commitments for office space, a
training center, and a number of service center locations. These leases expire
between 1998 and 2008, with renewal options in certain of the leases. Most of
the service center location leases are subleased to franchisees.
NOTE 7. SUBSEQUENT EVENTS
On January 25, 1999 the Company entered into a subordinated debt agreement with
a member of its Board of Directors to borrow $5 million to assist in
restructuring the Company's debt. Concurrently, the Company reached an agreement
in principle with the Company's senior lender on modifications to its loan
agreement and a waiver of financial covenants through the quarter ending March
31, 1999. The proposed modification with the Bank calls for the Company to
reduce its outstanding indebtedness with the Bank by $13,500,000 by April 25,
1999. The Company and its lender are in the process of finalizing revisions to
the terms of its Credit Agreement and the Company expects to enter into an
appropriate agreement with its lender giving effect to these revisions shortly.
The outstanding balances on these borrowings have been classified as both
current and non-current to reflect the conditions of this agreement.
On January 25, 1999, the Company entered into agreements with KRK Auto Wash,
Ltd. to sell five car wash properties for approximately $2.8 million in cash. On
January 29, 1999, the Company entered into agreements with Star Auto Center,
Inc. to sell two car wash properties for approximately $1.35 million in cash. On
February 12, 1999 the Company received a letter of intent from the Franchise
Financing Corporation of America ("FFCA") to provide $7.5 million in mortgage
financing on certain car wash properties of the Company. Proceeds from these
asset sales and mortgage financing transactions will be used to significantly
reduce the Company's indebtedness with its primary lender and its trade vendors.
The Company expects that all of these transactions will be completed during the
quarter ending March 31, 1999.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Actual and Pro
Forma Financial Statements of the Company and related notes thereto included in
the Company's Registration Statements and in the Form 10-K filed for the year
ending June 30, 1998.
The Company, a Virginia corporation, was incorporated in April 1997. It began
operations after the November 1997 combination with WE JAC Corporation (the
owner of Precision Tune Auto Care) and nine other automotive maintenance
services companies in connection with the Company's initial public offering (the
"IPO Combination"). The nine companies joined with WE JAC Corporation in
connection with the IPO Combination were: Miracle Industries, Inc.; Lube
Ventures, Inc.; Rocky Mountain Ventures, Inc.; Rocky Mountain Ventures II, Inc.;
Prema Properties, Ltd.; Miracle Partners, Inc.; Ralston Car Wash Ltd.; KBG, LLC
and Worldwide Drying Systems, Inc. (referred to individually as a "Predecessor
Company" or collectively, the "Predecessor Companies"). In March 1998 the
Company acquired Promotora de Francquicias Praxis S.A. de C.V. ("Praxis"), a
company which operates five company-owned centers and served as the holder of a
master franchise agreement for Mexico and Puerto Rico. The results presented
herein as "Actual" for the three and six months ending December 31, 1997
represent those of WE JAC through the IPO Combination on November 12, 1997, and
combined results for WE JAC and the Predecessor Companies thereafter. 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 sale of
automotive parts and equipment and the manufacture and sale of car wash
equipment, parts, supplies and chemicals. Company-owned center revenue is
derived from 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 determined that it would not proceed with the proposed acquisitions. As
a result, the Company recognized a charge to earnings of $602,000 in the quarter
ending June 30, 1998 and a charge of $200,000 in the quarter ended September 30,
1998 relating
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to professional fees, deposits and other costs relating to the proposed
acquisitions. These charges were included in other income and expense.
In October 1998, a new President and Chief Executive Officer was hired by the
Company and since June 1998 the Company has transitioned to new leadership in
its finance group, including a new Controller hired in September 1998 and a new
Chief Financial Officer hired in February 1999. This new management is focused
on improving the Company's cash flow, operations, processes, financing and
accounting practices. During the quarter ending December 31, 1998 this new
management initiated a program to improve its cash flow that involves selected
reductions in staffing levels, reductions of expenses, the disposition and
refinancing of selected assets and the accelerated collection of receivables. In
addition, the Company's management performed an extensive review of its
operations, and determined that its real estate development program be
substantially curtailed, and other functions be reorganized or shut down.
As a result of this extensive review, the Company recorded total charges of $3.4
million in the quarter ending December 31, 1998. These included the write-off or
reserving of approximately $1.1 million in accounts and notes receivable and a
charge of $1.2 million related to a change during this period of assumptions
used by the Company in estimating accounts receivable for royalties generated by
franchisees which the franchisees have not reported to the Company at the end of
a period. All of these charges are reported on a pre-tax basis and are included
in the Company's general and administrative expense for the quarter. A pre-tax
charge was made of $710,000 in anticipation of a loss that will be incurred upon
completion of the sale of certain car washes and is reported as a separate line
item. Additionally, the Company recognized a charge of $453,000 relating to
severance payments made to certain management and other employees terminated as
part of the business and management reorganization. This charge is also reported
on a pre-tax basis and is reported as a component of other income and expense.
Company management is still evaluating additional actions to improve the
Company's cash flow and long-term strategic position. Such actions may have
adverse impact on the reported results for the quarters ending March 31, 1999
and June 30, 1999.
PRESENTATION OF PRO FORMA COMBINED RESULTS
To obtain Pro Forma Results, the historical results of operations of the
Predecessor Companies have also been adjusted to reflect certain purchase
accounting adjustments, including (i) the amortization of goodwill arising from
the IPO Combination, (ii) the elimination of management fees charged between
certain Predecessor Companies, (iii) the elimination of inter-company
transactions and (iv) adjustments to interest expense based upon the assumed
reduction in debt from the proceeds of the Company's initial public offering.
RESULTS OF OPERATIONS-PRO FORMA COMBINED
The pro forma combined results of operations of the Company for the periods
discussed herein are only a summation of the revenues, direct costs, general and
administrative expenses, and operating income of the Predecessor Companies on a
historical basis, which include pro forma adjustments or amortization of
goodwill, interest expense eliminated on prepayment of debt and income taxes.
This data may not be comparable to and may not be indicative of post-IPO
Combination results of operations due to a variety of factors, including: (i)
the Predecessor Companies were not under common control or management and had
different tax and capital structures during the periods presented; (ii) the
Company incurred incremental costs related to its new corporate management and
costs of being a public company; (iii) the Company used the purchase method of
accounting and establish a new basis of accounting to record the Combinations;
(iv) the combined data does not reflect potential benefits and cost savings the
Company may realize when operating as a combined entity. Future quarterly
results may also be materially
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affected by the timing and magnitude of acquisitions, integration costs,
variation in product mix, and seasonality of the automotive service industry.
See "Seasonality and Quarterly Fluctuations." Accordingly, the operating results
for interim periods shown or for other interim periods are not necessarily
indicative of the results that may be achieved for any subsequent interim period
or for a full fiscal year.
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THREE MONTHS ENDING DECEMBER 31, 1998 COMPARED TO PRO FORMA THREE MONTHS ENDING
DECEMBER 31, 1997
The following table sets forth certain selected financial data as a percentage
of revenues for the period indicated:
THREE MONTHS ENDED DECEMBER 31,
(THOUSANDS) 1998 % 1997 %
- ----------- ---- - ---- -
Revenue $10,910 100 $11,625 100
Direct Cost 10,010 92 8,036 69
General and Administrative 4,038 37 1,064 9
Operating Income (Loss) (4,946) -45 1,935 17
PRO FORMA REVENUE. Revenue for the three months ended December 31, 1998 was
$10.9 million, a decrease of $715,000, or 6%, compared with pro forma revenue of
$11.6 million for the corresponding period of the prior year. Revenue from
franchise development activities decreased $276,000, or 64%, from the prior
year. The addition of franchise revenues from Praxis was offset by a decline in
franchise revenues in the U.S. and there was a sale of a master license in
Indonesia for $200,000 in the three months ended December 31, 1997 without a
comparable sale in the three months ended December 31, 1998. Royalty revenue
decreased $205,000, or 6%. The addition of revenues from Praxis was more than
offset by the affects of the adoption during this period of more conservative
assumptions used to estimate royalty revenue generated by franchisees who have
not submitted royalty reports by the end of the period. In addition, the Company
has made an ongoing effort to remove under-performing stores from the franchise
system. Manufacturing and distribution revenues declined by $941,000, or 15%.
Increases in sales at the Company's car wash equipment manufacturing operations
and the inclusion of revenues for Praxis were more than offset by declines in
revenues from prefabricated lube buildings. Also, the Company's distribution
business was adversely affected by the Company's constrained cash flow during
the three months ending December 31, 1998. The Company expects that its
constrained cash flow is likely to continue to adversely affect its distribution
business until the Company consummates the disposition of certain assets and
refinancing transactions which the Company expects to conclude by April 30,
1999. Revenue from Company-owned and operated stores increased by $694,000, or
63%. The increase was principally due to the inclusion of revenue from stores
owned by Praxis, as well as a net increase in store count for Company-owned
washes and lubes and improved same-store sales due to equipment upgrades and
focused marketing efforts.
PRO FORMA DIRECT COST. Direct cost for the three months ending December 31, 1998
was $10.0 million, an increase of $2.0 million, or 25%, compared with pro forma
direct cost of $8.0 million for the corresponding period of the prior year. The
increase was due in part to direct cost from Praxis of $1.5 million which was
not included in last year's pro forma results. Higher costs of $713,000 for the
Company's car wash equipment manufacturing businesses, $663,000 for
Company-owned stores and $148,000 for franchise development were partly offset
by reduced costs totaling $1.2 million in the royalty, distribution and lube
building operations.
PRO FORMA GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
for the three months ending December 31, 1998 was $4.0 million, an increase of
$2.9 million, or 281%, compared with pro forma expense of $1.1 million for the
corresponding period of the prior year. Charges totaling $2.3 million before
taxes were recorded during the quarter following a detailed periodic review of
the Company's operations. A charge was made of $1.1 million to write off or
reserve accounts receivable and notes receivable which were determined to be
uncollectible, or the collection of which was doubtful, in the course of
management's periodic review. A $1.2 million charge was made that related to a
change
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in the assumptions used to estimate accounts receivable for royalties generated
by franchisees which the franchisses have not reported reported to the Company
at the end of a period. General and administrative expenses also increased due,
in part, to the Company's development of its infrastructure in anticipation of
the growth plan it suspended, particularly in the areas of corporate
communications and business development. Actions were taken in the latter part
of the quarter ended December 31, 1998 to reduce these costs, but these actions
did not have a significant impact on expenses for the quarter. The Company
expects savings from those actions to be realized in coming quarters.
PRO FORMA OPERATING INCOME (LOSS). The Company recorded an operating loss for
the three months ending December 31, 1998 of $4.9 million, which represents a
decline in operating income of $6.9 million compared with pro forma operating
income of $1.9 million for the corresponding period of the prior year. This
decline resulted from a decrease in the contribution margin of $2.7 million,
related to the decreases in revenues and increases in direct costs described
above, an increase in general and administrative expenses of $2.9 million, and
an increase of $508,000, or 86%, in depreciation and amortization expense
related to businesses acquired following the IPO Combination. Additionally, a
charge of $710,000 was taken in anticipation of a loss that will be incurred
with the completion of the sale of certain car washes in the quarter ending
March 31, 1999.
PRO FORMA NET INCOME (LOSS). The Company recorded a loss before income taxes of
$6.0 million and a net loss of $4.6 million, or $0.75 per share, for the three
months ending December 31, 1998, compared with pro forma income before taxes of
$1.8 million and pro forma net income of $966,000, or $0.18 per share, for the
corresponding period of the prior year. The decrease in net income is primarily
the result of the $6.9 million decline in operating income. Additionally, the
Company recognized a charge of $453,000 related to severance for employees
terminated as part of a reorganization program that was included in other income
and expense. Increased interest expense resulting from the Company's increased
borrowing under its line of credit and subordinated debt account for the
remaining decline in net income. The impact of these items was partially offset
by the recognition of an interim income tax benefit of $1.4 million for the
three months ending December 31, 1998.
ACTUAL THREE MONTHS ENDING DECEMBER 31, 1998 COMPARED TO ACTUAL THREE MONTHS
ENDING DECEMBER 31, 1997
The following table sets forth certain selected financial data as a percentage
of revenues for the period indicated:
THREE MONTHS ENDING DECEMBER 31,
(THOUSANDS) 1998 % 1997 %
- ----------- ---- - ---- -
Revenue $10,910 100 $10,378 100
Direct Cost 10,010 92 7,149 70
General and Administrative 4,038 37 1,064 9
Operating Income (Loss) (4,946) -45 1,935 17
REVENUE. Revenue for the three months ending December 31, 1998 was $10.9
million, an increase of $532,000, or 5%, compared with revenue of $10.4 million
for the corresponding period of the prior year. Actual results for the quarter
ending December 31, 1997 include seven weeks of post-merger results for the
entities merged in conjunction with the IPO Combination on November 12, 1997,
while the quarter ending December 31, 1998 includes thirteen weeks of results
for those entities as well as results for Praxis. Revenue from franchise
development activities decreased $229,000, or 60%, from the prior year. The
addition of franchise revenues from Praxis was partly offset by a decline in
franchise revenues in the
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U.S. and there was a sale of a master license in Indonesia for $200,000 in the
three months ended December 31, 1997 without a comparable sale in the three
months ended December 31, 1998. Royalty revenue decreased $199,000 or 6%, as the
addition of revenues from Praxis was more than offset by the effects of the
adoption of more conservative assumptions used to estimate royalty revenue
generated by franchisees who have not submitted royalty reports by the end of
the period. In addition, the Company has made an ongoing effort to remove
under-performing stores from the franchise system. Manufacturing and
distribution revenues for the three months ending December 31, 1998 decreased by
$148,000, or 3%. Increases in sales at the Company's car wash equipment
manufacturing operations and the inclusion of revenues for Praxis were offset by
declines in revenues from prefabricated lube buildings. Also, as noted above,
the Company's distribution business was adversely affected by the Company's
constrained cash flow during the three months ending December 31, 1998. Revenue
from Company-owned and operated stores increased by $1.0 million, or 154%,
principally due to the inclusion of revenue from stores owned by Praxis, as well
as a net increase in store count for Company-owned wash and lubes and improved
same-store sales due to equipment upgrades and focused marketing efforts.
DIRECT COST. Direct cost for the three months ending December 31, 1998 was $10.0
million, an increase of $2.9 million, or 40%, compared with $7.1 million for the
corresponding period of the prior year. The increase was due in part to direct
cost from Praxis of $1.5 million which was not included in last year's results.
Higher costs of $2.2 million at the Company's car wash equipment manufacturing
business, Company-owned stores and franchise development were partly offset by
reduced costs totaling $1.0 million in the royalty, distribution and lube
building operations.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense was $4.0
million for the three months ending December 31, 1998, an increase of $2.9
million, or 279%, compared with the corresponding period of the prior year. The
Company recorded charges totaling $2.3 million before taxes during the quarter
following a detailed periodic review of the Company's operations. A charge was
taken of $1.1 million to write off or reserve accounts receivable and notes
receivable which were determined to be uncollectible, or the collection of which
was doubtful, in the course of management's periodic review. A $1.2 million
charge was made that related to a change in the assumptions used to estimate
accounts receivable for royalties generated by franchisees which franchisees
have not reported to the Company at the end of a period. This increase was also
due, in part, to the development of the Company's infrastructure in anticipation
of the growth plan it suspended, particularly in the areas of corporate
communications and business development. Actions were taken in the latter part
of the quarter ended December 31, 1998 to reduce these costs, but did not have a
significant impact on expenses for the quarter. The Company expects savings from
those actions to be realized in coming quarters.
OPERATING INCOME (LOSS). The Company recorded an operating loss for the three
months ending December 31, 1998 of $4.9 million, which represents a decline in
operating income of $6.6 million compared with operating income of $1.7 million
for the corresponding period of the prior year. This decline resulted from a
decrease in the contribution margin of $2.3 million, related to the decreases in
revenues and increases in costs described above, an increase in general and
administrative expenses of $2.9 million and an increase of $603,000, or 122%, in
depreciation and amortization related to businesses acquired at and following
the IPO Combination. A charge of $710,000 was taken in anticipation of a loss
that will be incurred with the completion of the sale of certain car washes in
the quarter ending March 31, 1999.
NET INCOME (LOSS). The Company recorded a loss before income taxes of $6.0
million and a net loss of $4.6 million, or $0.75 per share, for the three months
ending December 31, 1998, compared with income before taxes of $1.5 million, and
net income of $794,000, or $0.16 per share, for the corresponding period of the
prior year. The decrease in net income is primarily the result of the $6.6
million decline in operating income. Additionally, the Company recognized a
charge of $453,000 related to severance for
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employees terminated as part of a reorganization program that was included in
other income and expense. The impact of these items was partially offset by the
recognition of an interim income tax benefit of $1.4 million for the three
months ending December 31, 1998.
PRO FORMA SIX MONTHS ENDING DECEMBER 31, 1998 COMPARED TO PRO FORMA SIX MONTHS
ENDING DECEMBER 31, 1997
The following table sets forth certain selected financial data as a percentage
of revenues for the period indicated:
SIX MONTHS ENDING DECEMBER 31,
(THOUSANDS) 1998 % 1997 %
- ----------- ---- - ---- -
Revenue $22,700 100 $23,344 100
Direct Cost 19,934 88 16,434 70
General and Administrative 5,244 23 2,165 9
Operating Income (Loss) (5,096) -22 3,531 15
PRO FORMA REVENUE. Revenue for the six months ending December 31, 1998 was $22.7
million, a decrease of $644,000, or 3%, compared with revenue of $23.3 million
for the corresponding period of the prior year. Revenue from franchise
development activities decreased $92,000, or 17%, from the prior year. The
addition of franchise revenues from Praxis was partly offset by a decline in
franchise revenues in the U.S. and there was a sale of a master license in
Indonesia for $200,000 in the three months ended December 31, 1997 without a
comparable sale in the three months ended December 31, 1998. Royalty revenue
decreased $161,000 or 2%, as the addition of revenues from Praxis was more than
offset by the effects of the adoption of more conservative assumptions used to
estimate royalty revenue generated by franchisees who have not submitted royalty
reports by the end of the period. In addition, the Company has made an ongoing
effort to remove under-performing stores from the franchise system.
Manufacturing and distribution revenues decreased by $1.9 million, or 15%. The
inclusion of revenues for Praxis was more than offset by declines in revenues
from the Company's car wash equipment manufacturing business, prefabricated lube
buildings. Also, as described above, the Company's distribution business was
adversely affected by the Company's constrained cash flow during the six months
ending December 31, 1998. Revenue from Company-owned and operated stores
increased by $1.5 million, or 75%, principally due to the inclusion of revenue
from stores owned by Praxis, as well as a net increase in store count for
Company-owned wash and lubes and improved same-store sales due to equipment
upgrades and focused marketing efforts.
PRO FORMA DIRECT COST. Direct cost for the six months ending December 31, 1998
was $19.9 million, an increase of $3.5 million, or 21%, compared with pro forma
direct cost of $16.4 million for the corresponding period of the prior year. The
increase was due in part to direct cost from Praxis of $3.1 million which was
not included in last year's pro forma results. Higher costs of $1.4 million at
Company-owned stores and franchise development were partly offset by reduced
costs totaling $1.1 million in the royalty and other manufacturing and
distribution operations.
PRO FORMA GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
for the six months ending December 31, 1998 was $5.2 million, an increase of
$3.1 million, or 142%, compared with pro forma expense of $2.2 million for the
corresponding period of the prior year. The Company recorded charges totaling
$2.3 million before taxes during the quarter following a detailed periodic
review of the Company's operations. A charge was taken of $1.1 million to write
off or reserve accounts receivable and notes receivable which were determined to
be uncollectible, or the collection of which
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was doubtful, in the course of management's periodic review. A $1.2 million
charge was made that related to a change in the assumptions used to estimate
accounts receivable for royalties generated by franchisees which franchisees
have not reported to the Company at the end of a period. The increase was also
due, in part, to the development of the Company's infrastructure in anticipation
of the growth plan it suspended, particularly in the areas of corporate
communications and business development. Actions were taken in the latter part
of the quarter ended December 31, 1998 to reduce these costs, but these actions
did not have a significant impact on expenses for the quarter. The Company
expects to recognize savings from those actions in coming quarters.
PRO FORMA OPERATING INCOME (LOSS). The Company recorded an operating loss for
the six months ending December 31, 1998 of $5.1 million, which represents a
decline in operating income of $8.6 million compared with pro forma operating
income of $3.5 million for the corresponding period of the prior year. This
decline resulted from a decline in the contribution margin of $4.1 million,
related to the decreases in revenues and increases in costs described above, an
increase in general and administrative expenses of $3.1 million and an increase
of $694,000, or 57%, in depreciation and amortization related to businesses
acquired following the IPO Combination. Additionally, a charge of $710,000 was
taken in anticipation of a loss that will be incurred with the completion of the
sale of certain car washes in the quarter ending March 31, 1999.
PRO FORMA NET INCOME (LOSS). The Company recorded a loss before income taxes of
$6.9 million and a net loss of $5.3 million, or $0.87 per share, for the six
months ending December 31, 1998, compared with pro forma income before taxes of
$3.4 million, and pro forma net income of $1.8 million, or $0.33 per share, for
the corresponding period of the prior year. The decrease in net income is
primarily the result of the $8.6 million decline in operating income.
Additionally, the Company recognized a charge of $453,000 related to accrued
severance for employees terminated as part of a reorganization program, that was
included in other income and expense along with the $200,000 charge for expenses
incurred in the suspended acquisition program. The impact of these items was
partially offset by the recognition of an interim income tax benefit of $1.6
million for the six months ending December 31, 1998.
ACTUAL SIX MONTHS ENDING DECEMBER 31, 1998 COMPARED TO ACTUAL SIX MONTHS ENDING
DECEMBER 31, 1997
The following table sets forth certain selected financial data as a percentage
of revenues for the period indicated:
SIX MONTHS ENDING DECEMBER 31,
(THOUSANDS) 1998 % 1997 %
- ----------- ---- - ---- -
Revenue $22,700 100 $17,145 100
Direct Cost 19,934 88 11,879 69
General and Administrative 5,244 23 1,870 11
Operating Income (Loss) (5,096) -22 2,622 15
REVENUE. Revenue for the six months ended December 31, 1998 was $22.7 million,
an increase of $5.6 million, or 32%, compared with revenue of $17.1 million for
the corresponding period of the prior year. Actual results for the six months
ending December 31, 1997 includes seven weeks of post-merger results for the
entities merged in conjunction with the IPO Combination on November 12, 1997
while the six months ending December 31, 1998 includes twenty-six weeks of
results for those entities as well as results for Praxis. Revenue from franchise
development activities decreased $51,000, or 10%, from the prior year. The
addition of franchise revenues from Praxis was partly offset by a decline in
franchise revenues in the U.S. and there was a sale of a master license in
Indonesia for $200,000 in the six months ended December 31, 1997 without a
comparable sale in the six months ended December 31, 1998.
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Royalty revenue decreased $145,000, or 2%, as the addition of revenues from
Praxis was more than offset by the effects of the adoption of more conservative
assumptions used to estimate royalty revenue generated by franchisees who have
not been submitted royalty reports by the end of the period. In addition, the
Company has made an ongoing effort to remove under-performing stores from the
franchise system. Manufacturing and distribution revenues increased by $2.9
million, or 34%. This increase was attributable to the inclusion of revenues and
the results of the companies acquired simultaneously with and after the IPO
Combination, offset by decreased revenues at Company's distribution business,
which, as noted above, was adversely affected by the Company's constrained cash
flow during the six months ending December 31, 1998. Revenue from Company-owned
and operated stores increased by $2.9 million, or 407%, compared with $710,000
for the corresponding period of the prior year. The increase was principally due
to the inclusion of revenue from stores owned by Praxis, as well the inclusion
of Company-owned stores for all of the six months ending December 31, 1998 but
only for a portion of the same period a year earlier.
DIRECT COST. Direct cost for the six months ending December 31, 1998 was $19.9
million, an increase of $8.1 million, or 68%, compared with direct cost of $11.9
million for the corresponding period of the prior year. The increase was due in
part to direct cost from Praxis of $3.1 million which was not included in last
year's pro forma results. The remainder of the increase was related to the
inclusion of costs for the merged companies for all six months ending December
31, 1998, but only for a portion of the same period a year earlier.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense for the
six months ending December 31, 1998 was $5.2 million, an increase of $3.4
million, or 180%, compared with expense of $1.9 million for the corresponding
period of the prior year. The Company recorded charges totaling $2.3 million
before taxes during the quarter following a detailed periodic review of the
Company's operations. A charge was taken of $1.1 million to write off or reserve
accounts receivable and notes receivable which were determined to be
uncollectible, or the collection of which was doubtful, in the course of
management's periodic review. A $1.2 million charge was made that related to a
change in the assumptions used to estimate accounts receivable for royalties
generated by franchisees which franchisees have not reported to the Company at
the end of a period. This increase was also due, in part, to the development of
the Company's infrastructure in anticipation of the growth plan it suspended,
particularly in the areas of corporate communications and business development.
Actions were taken in the latter part of the quarter ended December 31, 1998 to
reduce these costs, but these actions were effected too late in this period to
have a significant impact on expenses. The Company expects savings from those
actions to be realized in coming quarters.
OPERATING INCOME (LOSS). The Company recorded an operating loss for the six
months ending December 31, 1998 of $5.1 million, which represents a decline in
operating income of $7.7 million compared with operating income of $2.6 million
for the corresponding period of the prior year. This decline resulted from a
decrease in the contribution margin of $2.5 million, related to the increase in
costs described above relative to the increase in revenues, an increase in
general and administrative expenses of $3.4 million and an increase of $1.1
million, or 146%, in depreciation and amortization related to businesses
acquired following the Company's IPO Combination. Additionally, a charge of
$710,000 was taken in anticipation of a loss that will be incurred with the
completion of the sale of certain car washes in the quarter ending March 31,
1999.
NET INCOME (LOSS). The Company recorded a loss before income taxes of $6.9
million and a net loss of $5.3 million, or $0.87 per share, for the six months
ending December 31, 1998, compared with income before taxes of $2.3 million and
net income of $1.2 million, or $0.27 per share, for the corresponding period of
the prior year. The decrease in net income is primarily the result of the $7.7
million decline in operating income. Additionally, the Company recognized a
charge of $453,000 related to severance for
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employees terminated as part of a reorganization program that is included in
other income and expense along with the $200,000 charge for expenses incurred in
the suspended acquisition program. The impact of these items was partially
offset by the recognition of an interim income tax benefit of $1.6 million for
the six months ending December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth selected information from the statement of cash
flows of Precision Auto Care, Inc.
Six months ended December 31,
1998 1997
---- ----
Net cash used in operating activities ($2,575,000) ($1,821,000)
Net cash used in investing activities (2,455,000) (3,763,000)
Net cash provided by financing activities 2,994,000 6,315,000
------------ ----------
Change in cash and cash equivalents ($2,036,000) $731,000
============ ==========
During the six months ended December 31, 1998 the Company's operations used $2.6
million in cash compared with $1.8 million for the prior year. The outflow of
cash was principally due to the net loss for the period and cash used to pay
reductions in accounts payable and accrued expenses, partially offset by
reductions in accounts receivable and the effect of non-cash charges on the net
loss.
Cash used in investing activities during the six months ended December 31, 1998
was $2.5 million, compared with a cash outflow of $3.8 million for the prior
year. The outflow in the current year consisted primarily of the repurchase of
franchise operations of $1.3 million and capital expenditures of $1.1 million.
The capital expenditures consisted mainly of PIN system purchases and signage
upgrades, and upgrades to the Company's internal computer hardware and software
systems.
Cash provided by financing activities was $3.0 million for the six months ended
December 31, 1998 compared with $6.3 million for the previous year. The increase
in cash resulted from borrowings against the Company's term loan and line of
credit and the proceeds of the $2 million subordinated note provided by members
of the Company's Board of Directors, partially offset by payments of other
long-term debt and notes payable.
As the Company previously announced, the Company has drawn substantially all of
the amounts available under its bank credit facility principally as a result of
acquisition activities the Company suspended during the quarter ending September
30, 1998, and the working capital requirements described above. As of December
31, 1998, the Company had borrowed approximately $23 million under its bank
credit agreement, of which $13.5 million of these borrowings represents amounts
extended under a portion of the bank credit facility that was dedicated to
funding acquisitions (the "Acquisition Line of Credit") and $9.5 million
represents funds advanced under a general revolving credit portion of the credit
facility (the "Line of Credit Loan"). On January 25, 1999, the Company received
$5 million from a member of its board of directors in the form of a subordinated
debenture, of which $2.5 million was used to pay trade vendors and $2.5 million
was used to pay down the Acquisition Line of Credit, resulting in the total
amount borrowed under its bank credit agreement being $20.5 million as of that
date.
On June 30, 1998 and September 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 an amendment to its credit agreement
dated October 1, 1998. Pursuant to this amendment, amounts available under the
Acquisition Line of Credit and the Line of Credit Loan were to be reduced to $10
million and $5 million, respectively, for a total of $15 million. These
reductions were to become
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<PAGE>
effective on the earlier of January 31, 1999 or the execution of certain real
estate financing transactions. Pursuant to the amendment, loans extended by the
bank under the Acquisition Line of Credit and the Line of Credit Loan would
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 could not be reborrowed.
The terms of this amendment also required the Company to obtain $2 million in
the form of equity financing or debt financing that is subordinate to the bank,
in each case on terms acceptable to the bank, which the Company arranged on
October 15, 1998. This subordinated debt bears interest at 14% and matures on
October 15, 1999. The terms of the subordinated debt call for increases in the
interest rates if the Company defaults on the subordinated debt or any of the
Company's senior indebtedness. From October 15, 1998 to December 15, 1998 the
Company's senior bank debt was considered in default and the subordinated debt
accrued interest at 16% per annum. On December 16, 1998 the interest rate on the
subordinated debt returned to 14% per annum. To date, interest has been accrued
on the subordinated debt but no payments have yet been made.
In December 1998, the Company notified its bank that, based on expected results
for the quarter ending December 31, 1998, it would not be in compliance with
certain revised financial covenants contained in the October 1, 1998 amendment
to the bank credit agreement. On January 25, 1999, the Company and the bank
reached agreement in principle concerning the terms of an additional amendment
to the bank credit agreement and a waiver of this noncompliance. The Company and
the bank are working on finalizing the amendment to the bank credit agreement
based on this agreement ("New Amendment"). Under these terms, which will
supersede those of the October 1, 1998 amendment, the Company is to complete a
series of financings and sales of assets, from which the bank is to receive a
portion of those proceeds as permanent reductions in the Company's credit
facility. The Company raised $5 million through a subordinated debenture that
was placed with a member of its board of directors, of which $2.5 million was
used to permanently reduce the Company's credit facility and $2.5 million was
used for vendor payments. This subordinated debenture bears interest at 15% per
annum, with provisions for higher rates in the event of default, and matures on
May 25, 1999 if not paid prior to that time. Interest and a one point
origination fee are payable in shares of the Company's common stock valued at
the closing price on the day prior to repayment of principal. The principal and
interest for the subordinated debenture may only be paid if the Company has made
all required payments to the bank as set forth above and the Company is not in
default of the bank credit agreement.
The Company has entered into letters of intent for five additional transactions
with total estimated proceeds of $14.3 million, a portion of which will be used
to permanently reduce its credit facility pursuant to the terms that will be
contained in the New Amendment, with the difference being available to the
Company for working capital. The planned closing dates for these transactions
are such that the Company anticipates that it will have sufficient proceeds to
make the payments required under the New Amendment, but there can be no
assurances that the transactions will close in a timely manner and will yield
sufficient cash proceeds to allow the Company to make the scheduled payments or
provide the Company with sufficient cash to avoid adverse impacts on its
businesses. If the Company fails to complete these transactions on the terms
described above (and fails to arrange alternative financing on a timely basis),
the Company's liquidity, financial condition and results of operations could be
materially adversely affected.
From the time that the Company utilized substantially all of its credit facility
in August 1998, the Company's cash flow has been constrained. As a result, the
Company's ability to meet obligations to its suppliers in a timely manner has
been adversely affected, which has adversely affected revenues and profits of
several of its businesses, particularly its distribution business in the U.S.
The Company expects that its businesses will continue to be adversely affected
until sufficient cash is available to meet
25
<PAGE>
ongoing supplier obligations in a timely manner. In October 1998, a new Chief
Executive Officer joined the Company and under his direction the management of
the Company has initiated a program to improve its cash flow. Actions taken to
date under this program include: a reduction in staffing levels of 10% in the
Company's field operations and 15% at the Company's headquarters; reductions in
expenses; improved inventory management; and an acceleration in the collection
of accounts receivable. Future actions under this program are expected to
include expanded expense reductions, dispositions of selected assets, an
assessment of the strategic and financial performance of all aspects of the
Company's operations and the continued restructuring and reorganization of those
operations of the Company that are not meeting their strategic and financial
objectives.
While Company management believes that this program will improve its cash flow
and ability to meet future bank covenants and vendor obligations in a timely
manner, there can be no assurance that such program will be effective in meeting
its objectives or that if such objectives are met, that the resulting
improvements in cash flow will be sufficient to avoid the need for additional
reductions in expenditures, sales of additional assets, or supplemental
financing. A substantial portion of the refinancing activities and asset sales
related to the cash flow improvement program are expected to be completed in the
quarter ending March 31, 1999. The Company expects that these actions will
improve the Company's cash flow, but are likely to have an adverse effect on the
reported net income of the Company for that period. Also, there can be no
assurance that the Company will not require additional working capital following
the completion of the refinancing activities and asset sales described above.
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
26
<PAGE>
computer and is currently being integrated into the Company's existing network.
The Company conducted an initial trial conversion in early February for
corporate headquarters based activities and expects these activities to be fully
migrated to the new system by April 30th. Field activities are scheduled to be
brought online 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.
ITEM 3. 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.
Principal Payments and Interest Rate Detail by Contractual Maturity Dates
(In $Thousands)
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 Thereafter Total
---- ---- ---- ---- ---- ---------- -----
27
<PAGE>
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term debt:
Term loan $1,200 --- --- --- --- --- $1,200
Variable rate LIBOR + 4.75%
Line of credit 1,438 --- --- --- --- --- 1,438
Variable rate LIBOR + 4.75%
Board LLC note 2,000 --- --- --- --- --- 2,000
Fixed rate 14%
Long-term debt:
Term loan --- 2,457 2,457 2,457 2,457 2,459 12,287
Variable rate LIBOR + 4.75%
Line of credit --- 8,013 --- --- --- --- 4,000
Variable rate LIBOR + 4.75%
</TABLE>
28
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to routine litigation in the
ordinary course of business, including contract, franchise and
employment-related litigation. In the course of enforcing its rights under
existing and former franchise agreements, the Company is subject to complaints
and letters threatening litigation concerning the interpretation and application
of these agreements, particularly in the case of defaults and terminations. None
of these routine matters, individually or in the aggregate, are believed by the
Company to be material to its business or financial condition or results of
operations.
During the second and third quarters of 1998, the Company conducted negotiations
with principals of PAISA, Inc. ("PAISA"), a corporation which owns, operates and
franchises automotive service centers in the States of California and Nevada,
concerning the Company's possible acquisition of PAISA. In connection with those
negotiations, the Company made a loan in the amount of $500,000 to PAISA. This
loan was secured by certain promissory notes payable to PAISA which were pledged
to secure the repayment of the loan. Under the terms of the loan, the entire
outstanding principal balance accrued but unpaid interest is due and payable at
the earlier of (i) the closing of the Company's acquisition of PAISA (in the
event the acquisition is consummated) or (ii) nine months after the Company
makes demand for payment (in the event the Company elects not to proceed with
the acquisition).
The Company advised PAISA that it would not be able to proceed with the
acquisition of PAISA and the Company notified PAISA on or about September 11,
1998 that it was demanding the repayment of the loan.
PAISA recently instituted a lawsuit against the Company in the United States
District Court for the Central District of California. The lawsuit alleges that
the Company failed to use its good faith efforts to obtain financing for the
transaction in the manner contemplated by a term sheet. PAISA has alleged that
the Company committed fraud, negligent misrepresentation and breach of contract
with and as a result of its failure to consummate an acquisition of PAISA.
PAISA is seeking damages in the amount of $15,000,000 plus interest, costs and
any consequential damages determined by the court. PAISA is seeking to enjoin
the Company from collecting the $500,000 promissory note or from collecting the
promissory notes owed to PAISA which ensures PAISA's obligation to repay the
Company.
The Company believes that the lawsuit is wholly without merit and intends to
vigorously contest and defend the action.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
a) Not applicable.
b) Not applicable.
c) On October 15, 1998 the Company issued subordinated debt in the
amount of $2 million to Board LLC, a Virginia limited liability
company, in a transaction exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) thereof and Rules 505
and 506 promulgated thereunder. Given that Board LLC was formed and
capitalized solely by members of the Company's Board of Directors
(all but Messrs. Pappas and Clineburg), Board LLC is an "accredited
investor" as that term is defined by Rule 501.
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<PAGE>
On January 25, 1999, the Company issued subordinated debt in the
amount of $5,000,000 to a director in a transaction exempt from
registration under the Securities Act pursuant to Section 4(2)
thereof and Rules 505 and 506 promulgated thereunder.
d) Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
As noted above in "Management's Discussion and Analysis of Financial Condition
and Results of Operations" the Company's Credit Agreement as presently in
effect, required the Company to make certain principal payments to its lender on
of before February 1, 1999 and to comply with certain financial covenants.
During the quarter ended December 31, 1998, the Company advised the lender that
it would be unable to make the required principal payments by February 1, 1999
and would likely be in violation of the financial covenants at March 31, 1999.
The Company subsequently reached agreement in principle with its lender
concerning the terms of proposed revisions to the Credit Agreement, which would
extend until April 25, 1999 the Company's obligation to make certain principal
payments and provide the Company with a waiver of the financial covenant
violations. The Company expects to execute an agreement with its lender giving
effect to the revisions shortly.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on December 16, 1998, for
the election of four Class I directors, to consider and approve a 1998 Employee
Stock Purchase Plan, to consider and approve a 1998 Outside Directors' Stock
Option Plan, and to ratify the selection of Ernst & Young LLP as independent
public accountants for the Company for the fiscal year ending June 30, 1999. A
total of 3,821,230 of the 6,120,543 votes entitled to be cast at the meeting
were present in person or by proxy. At the meeting, the stockholders:
(1) Elected the following four Class I directors for a term expiring in 2001:
Number of Shares
Number of Shares Voted Against or
Directors Voted For Authority Withheld
Charles L. Dunlap 3,814,369 6,861
Richard O. Johnson 3,814,369 6,861
Harry G. Pappas 3,553,485 267,745
George A. Bavelis 3,811,444 9,786
Following the election, Woodley A. Allen, Bassam N. Ibrahim, Arthur Kellar and
Gerald A. Zamensky continued to serve as Class II directors with terms expiring
in 1999 and Lynn E. Caruthers, William R. Klumb, Bernard H. Clineburg and Effie
L. Eliopulos continued to serve as Class III directors with terms expiring in
2000.
(2) Approved the 1998 Employee Stock Purchase Plan by an affirmative vote of
3,767,219; votes against ratification were 51,411; and abstentions were 2,600.
(3) Approved the 1998 Outside Directors' Stock Option Plan by an affirmative
vote of 3,726,877; votes against ratification were 79,254; and abstentions were
15,099.
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(4) Ratified the selection of Ernst & Young LLP as independent public
accountants for the Company for fiscal year ending June 30, 1999 by an
affirmative vote of 3,561,456; votes against ratification were 252,585; and
abstentions were 7,189.
No other matters were submitted to a vote of the stockholders at the meeting.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit No. Description
4 Subordinated Debenture dated January 25, 1999 in the principal
amount of $5,000,000 (incorporated by reference from the
Company's Current Report on Form 8-K filed with the Commission
February 1, 1999).
10(a) 1998 Employee Stock Purchase Plan.
10(b) 1998 Outside Directors' Stock Option Plan.
11 Computation of Earnings Per Share.
27 Financial Data Schedule.
The Company filed a Current Report on Form 8-K on February 1, 1999 reporting
under Item 5 of the Form (i) the Company's issuance of a Subordinated Debenture
in the principal amount of $5,000,000 and (ii) progress the Company had made in
reaching agreement in principle with its lender concerning the terms of proposed
modifications to the Company's Credit Agreement. The Company did not file any
other reports on Form 8-K during the three-month period ended December 31, 1998.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
February 15, 1999 PRECISION AUTO CARE, INC.
By: ________________________________
Charles L. Dunlap
President and Chief Executive Officer
By: _______________________________
John D. Dobey
Corporate Controller
(Principal Accounting Officer)
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<PAGE>
EXHIBIT INDEX
Number Page
10(a) 1998 Employee Stock Purchase Plan.
10(b) 1998 Outside Directors' Stock Option Plan.
11 Statement Re: Computation of Per Share Earnings --
27 Financial Data Schedule --
33
TO COME
PRECISION AUTO CARE, INC.
1998 EMPLOYEE STOCK PURCHASE PLAN
1. PURPOSE.
This 1998 Employee Stock Purchase Plan (the "Plan") is intended to
encourage and facilitate the purchase of the Common Stock of Precision Auto
Care, Inc. (the "Company"), by employees of the Company and its Designated
Subsidiaries, thereby providing employees with a personal stake in the Company
and a long-range inducement to remain in the employ of the Company and its
Designated Subsidiaries. It is the intention of the Company to have the Plan
qualify as an "employee stock purchase plan" within the meaning of Section 423
of the Internal Revenue Code of 1986, as amended (the "Code").
2. DEFINITIONS.
2.1. BOARD. The "Board" is the Board of Directors of the Company.
2.2. COMMON STOCK. The "Common Stock" is Precision Auto Care, Inc. Common
Stock, par value of $0.01 per share.
2.3. DESIGNATED SUBSIDIARIES. The "Designated Subsidiaries" are WE JAC
Corporation; Lube Ventures, Inc.; Rocky Mountain Ventures, Inc.; Rocky Mountain
Ventures II, Inc.; Ralston Car Wash, Ltd.; Miracle Partners, Inc.; Miracle
Industries, Inc.; Prema Properties Ltd.; Hydro Spray Car Wash Equipment Company,
Ltd.; Precision Tune Auto Care, Inc.; Worldwide Drying Systems, Inc.; National
60 Minute Tune, Inc.; PTW, Inc.; KBG, LLC and any subsidiary of the Company
whose Eligible Employees shall be authorized to participate in the Plan by the
Board, so long as such authorization is continued by the Board.
2.4. ELIGIBLE COMPENSATION. The "Eligible Compensation" of each Participant
is his or her regular rate of base compensation for a Grant Period determined as
of the first Grant Date of the Grant Period on which the Participant is an
Eligible Employee. "Eligible Compensation" does not include management
incentives, variable commissions, bonuses, overtime, shift differential, COLA
adjustments, extended work-week premiums, amounts paid or accrued with respect
to any qualified or nonqualified plan of deferred compensation or other employee
welfare plan, payments for group insurance, hospitalization and similar
benefits, perquisites reported as income, reimbursement for expenses and other
forms of extraordinary pay. An employee's base pay shall be calculated by
multiplying the employee's normal rate of pay as of the first Grant Date on
which the employee is an Eligible Employee by the number of pay periods between
said Grant Date and the end of the Grant Period.
2.5. ELIGIBLE EMPLOYEE. An "Eligible Employee" is an employee of the
Company or of a Designated Subsidiary; provided, however, that the term
"Eligible Employee" shall not include:
2.5.1. Employees who are scheduled to work less than twenty (20)
hours per week or less than five (5) months during the Grant Period; or
2.5.2. Any employee who, immediately after a Grant Date, owns five
percent (5%) or more of the total combined voting power or value of all classes
of stock of the Company or its subsidiaries as determined pursuant to Section
424(e) and (f) of the Code. For purposes of this Subsection 2.5.2, the
attribution rules of Section 424(d) of the Code shall apply in determining the
stock ownership of an employee, and stock which the employee may purchase under
outstanding options, whether or not granted under this Plan, shall be treated as
stock owned by the employee.
2.6. EXERCISE DATES. The "Exercise Dates" are October 31, January 31, and
March 31.
2.7. FAIR MARKET VALUE. The "Fair Market Value" of the Common Stock on any
Offering Date or on any Purchase Date, as the case may be, shall be (a) the
average on that date of the high and low prices of a share of Common Stock on
the principal national securities exchange on which shares of Common Stock are
then trading, or, if shares were not traded on such date, then on the next
preceding date on which a trade occurred; or (b) if Common Stock is not traded
on a national securities exchange but is quoted on the National Association of
Securities Dealers, Inc. Authorized Quotation System ("NASDAQ") or a successor
quotation system, the last reported sale price on such date as reported by
NASDAQ or such successor quotation system; or (c) if Common Stock is not traded
on a national securities exchange and is not reported on NASDAQ or a successor
quotation system, the closing bid price (or average of bid prices) last quoted
on such date by an established quotation service for over-the-counter
securities; or (d) if Common Stock is not traded on a national securities
exchange, is not reported on NASDAQ or a successor quotation system and is not
otherwise publicly traded on such date, the
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fair market value of a share of Common Stock as established by the Board acting
in good faith and taking into consideration all factors which it deems
appropriate, including, without limitation, recent sale or offer prices for the
Common Stock in private arm's-length transactions. During periods when the Fair
Market Value of a share of Common Stock cannot be determined under any of the
methods specified in clauses (a), (b) and (c), above, the Committee shall have
the authority to establish the Fair Market Value of the Common Stock as of the
beginning of (or periodically during) each fiscal year of the Company and to use
such value for all transactions occurring thereafter within such fiscal year.
2.8. GRANT DATES. The "Grant Dates" are April 1, July 1, October 1 and
January 1.
2.9. GRANT PERIOD. Each "Grant Period" shall commence on April 1st and
shall end on March 31st.
2.10. PARTICIPANT. A "Participant" is an Eligible Employee of the Company
or of a Designated Subsidiary who elects to participate in the Plan by filing an
enrollment form with the Company as provided in Section 6.
2.11. PURCHASE PRICE. The "Purchase Price" of a share of Common Stock
purchased pursuant to an option granted under the Plan shall be eighty-five
percent (85%) of the Fair Market Value of a share of Common Stock on the Grant
Date.
2.12. SUBSIDIARY. A "Subsidiary" is a Company, fifty percent (50%) or more
of the outstanding voting power of all classes of stock of which at the time of
granting of an option under the Plan is owned directly, or indirectly through a
subsidiary, by the Company within the meaning of Section 424(f) of the Code.
3. ADMINISTRATION.
3.1. The Plan shall be administered by a committee (the "Committee")
selected by the Board. The Committee shall consist of not less than three (3)
members who are members of the Board of Directors. An individual will not be
eligible to serve on the Committee if the individual is a Participant. Each
member of the Committee shall serve for a term commencing on a date specified by
the Board and continuing until such member dies, resigns, becomes a Participant
or is removed from office by the Board.
3.2. From time to time the Committee may adopt such rules and regulations
for carrying out the Plan as it may deem proper and in the best interest of the
Company. All determinations of the Committee shall be made by a majority of its
members. The interpretation of any provision of the Plan by the Committee shall
be final and the Board shall adopt and place into effect the determinations of
the Committee.
4. STOCK SUBJECT TO THE PLAN.
The stock subject to options under the Plan shall be authorized but
unissued shares of the Company's Common Stock. The aggregate amount of stock for
which options may be granted under the Plan shall be thirty thousand (30,000)
shares, subject to adjustment in accordance with Section 12. In the event that
an option granted under the Plan to any Participant is unexercised at the end of
a Grant Period as to any shares covered thereby, such shares thereafter shall be
available for the granting of options under the Plan.
5. GRANT OF OPTION.
Options will be granted on the Grant Dates. All Participants granted
options under the Plan shall have the same rights and privileges. On each Grant
Date of the Grant Period, each Participant who is an Eligible Employee on the
Grant Date may elect to be granted an option by the Board to purchase whole
shares of Common Stock. The maximum number of shares of Common Stock for which
each Participant may elect to be granted options during the Grant Period shall
equal ten percent (10%) of the Participant's Eligible Compensation divided by
eighty-five percent (85%) of the Fair Market Value of a share of Common Stock on
the first Grant Date of the Grant Period on which the Participant is an Eligible
Employee. In the event that the maximum number of shares to be granted to all
Participants on a Grant Date (determined according to the above formula) exceeds
the total number of shares available for sale under the Plan pursuant to Section
4, the Committee shall make a pro rata allocation of the available shares among
all Participants on such Grant Date based upon a uniform relationship to the
Eligible Compensation of all Participants in effect on the Grant Date. The
Committee may on the first Grant Date of each Grant Period decrease the
percentage of Eligible Compensation set forth above to calculate the number of
shares of Common Stock for which an Eligible Employee may elect to be granted
options to a minimum of five percent (5%) or increase it to a maximum of twenty
percent (20%). Notwithstanding the foregoing, in the event options are granted
prior to the approval of this Plan by shareholders owning a majority of the
common stock of the Company, such grant is expressly conditioned on subsequent
approval of the Plan by the Shareholders. Furthermore, both the grant and the
exercise of any options under this Plan are expressly conditioned on the
effective and continuing registration of this Plan under the Securities Act of
1933 or an
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available exemption from registration and effective registration or available
exemption from registration under applicable state securities laws.
6. ENROLLMENT, PAYROLL DEDUCTIONS AND CASH PAYMENTS.
6.1. Within the thirty (30) day period prior to each Grant Date, the
Company shall notify all employees of the Company and its Designated
Subsidiaries of the dates of the Grant Period, the Grant Dates and the Exercise
Dates, and furnish them with enrollment forms and other pertinent information.
6.2. An employee who is not a Participant and who will be an Eligible
Employee (as defined in Section 2.5) on any Grant Date of the Grant Period may
become a Participant by completing the enrollment form and forwarding such form
to such employee's appropriate payroll office prior to the Grant Date on which
the employee will be an Eligible Employee.
6.3. An enrollment form will allow an Eligible Employee to become a
Participant by authorizing a regular payroll deduction from the Participant's
Eligible Compensation on each pay day during the Grant Period at a rate which
will result in not less than a Five Dollar ($5.00) deduction per pay day and
which will not exceed ten percent (10%) of the Participant's Eligible
Compensation. An enrollment form shall also provide each Eligible Employee with
the option of becoming a Participant by electing to fund his or her stock
purchase account, in whole or in part, by making a lump sum cash payment
pursuant to the provisions of Section 6.8 hereof.
6.4. A participant's payroll deductions and lump sum cash payments shall be
deposited in the Company's general corporate account and shall be credited to
the Participant's stock purchase account under the Plan. No interest shall
accrue on the amount credited to a Participant's stock purchase account. Except
as provided in Sections 6.5 and 6.8, a Participant may not make any separate
cash payment into his or her account. A Participant may change the amount of the
payroll deduction only if the Participant elects to increase or decrease the
number of shares of Common Stock the Participant has an option to purchase
during the Grant Period.
6.5. During leaves of absence approved by the Company and meeting the
requirements of Treasury Regulation Section 1.421-7(h)(2), a Participant may
continue participation in the Plan by making cash payments to the Company on his
or her normal pay days equal to the short fall in his or her stock purchase
account caused by such leave of absence.
6.6. Payroll deductions for a Participant for each Grant Period shall
commence on the first pay day following the first Grant Date on which the
Participant is an Eligible Employee and shall end on the last pay day prior to
the end of the Grant Period, unless sooner terminated by the Participant as
provided in Section 8.
6.7. Individual stock purchase accounts will be maintained for each
Participant in the Plan. A statement will be given to each Participant promptly
following each Exercise Date of the Grant Period which sets forth the amount of
the Participant's payroll deductions and any cash payments, the per share
Purchase Price, the number of shares purchased, and the amount of the remaining
balance, if any, credited to the Participant's stock purchase account.
6.8. A Participant may elect to make a lump sum cash payment to be credited
to his or her stock purchase account on or before the last day of the Grant
Period in an amount which, when added to the amount already credited to his or
her stock purchase account for the Grant Period, does not exceed ten percent
(10%) of his or her Eligible Compensation.
7. EXERCISE OF OPTION.
7.1. Each Participant who is an Eligible Employee on an Exercise Date may
elect by written notice to the Company to exercise his or her option to purchase
up to the number of whole shares for which the Participant then has sufficient
credit to his stock purchase account, except that on the last Exercise Date of
the Grant Period each Participant shall be deemed to have exercised an option to
purchase such number of whole shares of Common Stock as the credit to the
Participant's stock purchase account on the Exercise Date will pay for at the
applicable Purchase Price. No fractional shares of Common Stock shall be
purchased. During the Participant's lifetime, the option to purchase shares of
Common Stock under the Plan is exercisable only by the Participant.
7.2. Any amount remaining credited to a Participant's stock purchase
account on the last Exercise Date of the Grant Period, after the purchase of
shares as provided above, will be refunded to the Participant promptly.
7.3. No Participant may be granted an option under the Plan which would
permit such employee's rights to purchase stock under all such employee stock
purchase plans of the Company or its Subsidiaries to accrue at a rate which
exceeds
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$25,000 in Fair Market Value of such stock (determined at the time such option
is granted) for each calendar year in which such option is outstanding at any
time.
7.4. Shares of Common Stock purchased by a Participant under the Plan will
be issued only in the name of the Participant, or if the Participant so
indicates on his or her enrollment form or in writing, in the name of the
Participant and any other person as joint tenants with rights of survivorship.
7.5. As promptly as practicable after each Exercise Date of the Grant
Period, the Company shall cause the number of shares purchased by each
Participant to be registered on the stock transfer records of the Company in the
name of the Participant.
8. WITHDRAWAL.
A Participant, at any time and for any reason, may terminate participation
in the Plan by delivering written notice of withdrawal to the Participant's
appropriate payroll office. If a Participant withdraws from the Plan, the
Participant shall not be eligible to again participate in the Plan for six (6)
months thereafter, and the balance in the Participant's stock purchase account
will be promptly refunded after receipt by the Company of the Participant's
notice of withdrawal.
9. TERMINATION OF EMPLOYMENT OR ELIGIBILITY.
9.1. If the employment of a Participant terminates, such Participant's
participation in the Plan automatically and without any act on his or her part
shall terminate as of the date of the termination of his or her employment. The
Company promptly will pay to the Participant the amount credited to his or her
stock purchase account under the Plan (without interest), and thereupon the
Participant's interest in the Plan and any options under the Plan shall
terminate.
9.2. In the event a Participant fails to meet the requirements of an
Eligible Employee under the Plan on any Exercise Date of the Grant Period, as
set forth in Section 2.5, the Participant will be deemed to have withdrawn from
the Plan and the payroll deductions credited to such Participant's account will
be promptly refunded to the Participant and no option to purchase shares of
Common Stock shall be granted to such Participant.
9.3. A Participant's withdrawal from participation in the Plan during the
Grant Period shall preclude (i) such Participant's eligibility to participate in
the Plan, and (ii) such Participant's eligibility to participate in any similar
plan which has been or may be adopted by the Company, for a period of six (6)
months thereafter.
10. TRANSFERABILITY.
Neither payroll deductions or cash payments credited to a Participant's
stock purchase account nor any rights with regard to the exercise of an option
or to receive shares under the Plan may be assigned, transferred, pledged or
otherwise disposed of in any way by the Participant. Any such attempt at
assignment, transfer, pledge or other disposition shall be without effect,
except that the Company may treat such act as an election to withdraw funds in
accordance with Section 8.
11. RIGHTS OF A SHAREHOLDER.
Subject to the provisions set forth in Sections 9.6 and 22 hereof, each
Participant shall have the rights or privileges of a Shareholder of the Company
with respect to shares purchased under the Plan when the shares have been
registered in the name of the Participant on the stock transfer records of the
Company.
12. CAPITAL ADJUSTMENT AFFECTING COMMON STOCK.
In the event of a capital adjustment resulting from a recapitalization,
stock dividend, stock split, reorganization, merger, consolidation or other
change in capitalization affecting the present Common Stock, the Board may, at
its option, terminate the Plan or make appropriate adjustments in the number of
shares which may be issued and sold under the Plan and may make such other
adjustments as it may deem equitable.
13. TERMINATION AND AMENDMENTS TO PLAN.
The Board, at any time, may terminate the Plan or from time to time, may
amend the Plan without the approval of the Shareholders of the Company;
provided, however, that no such amendment shall be made without the
Shareholders' approval which would (i) cause the Plan to fail to meet the
requirements of an "employee stock purchase plan" as defined in Section 423 of
the Code, or (ii) permit a Participant to be a member of the Committee.
Notwithstanding anything to the contrary, the Plan shall terminate immediately
after the last Exercise Date, which is March 31, 1999.
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14. TERMINATION OF THE PLAN.
Upon termination of the Plan, the amount credited to the stock purchase
accounts for all Participants shall be refunded promptly. The Exercise Dates may
be accelerated by the Company in the event of a termination of the Plan.
15. NON-GUARANTEE OF EMPLOYMENT.
Nothing in the Plan or in any option granted pursuant to the Plan shall be
construed as a contract of employment between the Company or a Subsidiary and
its employees, or as a contractual right to continue in the employ of the
Company or a Subsidiary, or as a limitation of the right of the Company or a
Subsidiary to discharge its employees at any time.
16. EXCLUSION FROM RETIREMENT AND FRINGE BENEFIT COMPUTATION.
No portion of the award of options under this Plan shall be taken into
account as "wages," "salary" or "compensation" for any purpose, whether in
determining eligibility, benefits or otherwise, under (i) any pension,
retirement, profit sharing or other qualified or non-qualified plan of deferred
compensation, (ii) any employee welfare or fringe benefit plan including, but
not limited to, group insurance, hospitalization, medical, and disability, or
(iii) any form of extraordinary pay including but not limited to bonuses, sick
pay and vacation pay.
17. LIABILITY LIMITED; INDEMNIFICATION.
17.1. To the maximum extent permitted by Virginia law, neither the Company,
Board or Committee nor any of its members, shall be liable for any action or
determination made with respect to this Plan.
17.2. In addition to such other rights of indemnification that they may
have, the members of the Board and Committee shall be indemnified by the Company
to the maximum extent permitted by Virginia law against any and all liabilities
and expenses incurred in connection with their service in such capacity.
18. GOVERNMENTAL REGULATIONS.
The Company's obligation to sell and deliver the Common Stock under the
plan is subject to the approval of any governmental authority required in
connection with the authorization, issuance or sale of such stock.
19. APPLICATION OF FUNDS.
Any payroll deductions received or held by the Company under the Plan may
be used for any corporate purpose.
20. SHAREHOLDER APPROVAL.
The Plan shall be subject to the approval of the Shareholders owning a
majority of the outstanding shares of the Common Stock, which approval must
occur within the period beginning twelve (12) months before and ending twelve
(12) months after the date the Plan is adopted by the Board.
21. OTHER TERMS AND CONDITIONS.
The Committee may impose such other terms and conditions not inconsistent
with the terms of the Plan, as it deems advisable, including, without
limitation, restrictions and requirements relating to (i) the registration,
listing or qualification of the Common Stock, (ii) the grant or exercise of
options, or (iii) the shares of Common Stock acquired under the Plan. The
Committee may require that a Participant notify the Company of any disposition
of shares of Common Stock purchased under the Plan within a period of two (2)
years subsequent to the Grant Date of the options exercised to purchase those
shares.
22. MISCELLANEOUS.
22.1. The headings in this Plan are for reference purposes only and shall
not affect the meaning or interpretation of the Plan.
22.2. This Plan shall be governed by, and construed in accordance with, the
laws of the Commonwealth of Virginia, without regard to principles of conflict
of laws.
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22.3. All notices and other communications made or given pursuant to this
Plan shall be in writing and shall be sufficiently made or given if delivered or
mailed, addressed to the employee at the address contained in the records of the
Company or to the Company at the Company's principal office.
22.4. This Plan may be executed in any number of counterparts, each of
which shall be considered an original and all of which taken together shall
constitute one and the same instrument.
WITNESS: PRECISION AUTO CARE, INC.
_____________________________ By: _______________________________
Dated: ____________________________
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PRECISION AUTO CARE, INC.
1998 OUTSIDE DIRECTORS' STOCK OPTION PLAN
1. DEFINITIONS. As used herein, the following terms have the meanings
hereinafter set forth unless the context clearly indicates to the contrary:
(a) "BOARD" shall mean the Board of Directors of the Company,
(b) "COMPANY" shall mean Precision Auto Care, Inc.
(c) "COMMITTEE" means the Committee appointed by the Board to administer
the Plan pursuant to Article 3 hereof.
(d) "COMMON STOCK" shall mean the common stock, par value $.001 per share,
of the Company or, in the event that the outstanding shares of Common Stock are
hereafter changed into or exchanged for different stock or securities of the
Company or some other corporation, such other stock or securities.
(e) "DATE OF GRANT" shall mean the Effective Date of the Plan and
thereafter the date of each Annual Meeting of Shareholders of the Company.
(f) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
(g) "FAIR MARKET VALUE" of a share of Common Stock on a particular date
shall be deemed to mean the average of the highest and lowest sales price per
share of Common Stock on the NASDAQ National Market System on that date, or, if
there shall have been no such sale so reported on that date, on the last
preceding date on which such a sale was so reported.
(h) "EFFECTIVE DATE OF THE PLAN" shall mean the Company's 1998 Annual
Meeting of Shareholders.
(i) "ELIGIBLE DIRECTOR" shall mean any member of the Board who is not a
salaried employee of or an exclusive, full-time consultant to the Company or its
Subsidiaries.
(j) "OPTION" shall mean an Eligible Director's stock option to purchase
stock granted pursuant to the provisions of Article 5 hereof.
(k) "OPTIONEE" shall mean an Eligible Director to whom an Option has been
granted hereunder.
(l) "OPTION PRICE" shall mean the price at which an Optionee may purchase a
share of Common Stock under a Stock Option Agreement.
(m) "PLAN" shall mean the Precision Auto Care, Inc. 1998 Outside Directors'
Stock Option Plan, the terms of which are set forth herein.
(n) "STOCK OPTION AGREEMENT" shall mean an agreement between the Company
and the Optionee under which the Optionee may purchase Common Stock in
accordance with the Plan.
(o) "SUBSIDIARY" of the Company shall mean any corporation of which the
Company directly or indirectly owns shares representing more than 50% of the
voting power of all classes or series of capital stock of such corporation which
have the right to vote generally on matters submitted to a vote of the
shareholders of such corporation.
2. THE PLAN.
(a) NAME. This Plan shall be known as the "PRECISION AUTO CARE, INC. 1998
OUTSIDE DIRECTORS' STOCK OPTION PLAN."
(b) PURPOSE. This Plan is intended as an incentive to retain and attract
Eligible Directors with training, experience and ability to serve as independent
directors of the Board and to afford Eligible Directors of the Company an
opportunity to acquire or increase their proprietary interests in the Company,
and thereby to encourage their continued service as a member of the Board and to
provide them additional incentives to achieve the growth objectives of the
Company and its Subsidiaries.
(c) TERMINATION DATE. Unless sooner terminated under Section 14, the Plan
shall terminate and no further Options shall be granted hereunder upon the tenth
anniversary of the Effective Date of the Plan.
3. ADMINISTRATION. The Plan shall be administered by the Compensation
Committee of the Board or by any other Committee appointed by the Board (the
"Committee"), which Committee shall consist solely of two or more Non-Employee
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Directors (as such are defined in Rule 16b-3, promulgated pursuant to the
Exchange Act), or any successor provision. The Committee shall, subject to the
provisions of the Plan, grant options under the Plan and shall have the power to
construe the Plan, to determine all questions thereunder, and to adopt and amend
such rules and regulations for the administration of the Plan as it may deem
desirable. The Committee may act only by a majority of its members. Any decision
of the Committee in the administration of the Plan, as described herein, shall
be final and conclusive. No member of the Committee shall be liable for anything
done or omitted to be done by such member or by any other member of the
Committee in connection with the Plan, except for such member's willful
misconduct or as expressly provided by statute.
4. DESIGNATION OF PARTICIPANTS; AUTOMATIC GRANT OF OPTIONS. On the Date of
Grant, each Eligible Director who has been elected or reelected or is continuing
as a member of the Board on such date and who has served continuously as an
Eligible Director for the entire year preceding the Date of Grant shall receive
an Option to purchase 2,500 shares of Common Stock pursuant to the provisions of
the Plan. Any Eligible Director who has not served continuously as an Eligible
Director for the entire year preceding the Date of Grant shall receive an Option
to Purchase a prorated portion of 2,500 shares of Common Stock as determined by
the Committee, based upon the portion of the preceding year that the person
actually served as an Eligible Director.
5. STOCK OPTION AGREEMENT, OPTION GRANT AND NUMBER OF SHARES. Each Option
granted hereunder shall be embodied in a Stock Option Agreement in such form as
the Committee prescribes, which shall be subject to the terms and conditions set
forth herein and shall be signed by the Optionee and by the Chief Executive
Officer of the Company. Each Stock Option Agreement shall state the Options'
number, duration, time of exercise, vesting schedule and exercise price. The
terms and conditions of the Option shall be consistent with the Plan.
6. COMMON STOCK RESERVED FOR THE PLAN. Subject to adjustment as provided in
Article 11 hereof, a total of 75,000 Shares of Common Stock shall be reserved
for issuance upon the exercise of Options granted pursuant to this Plan. The
shares subject to the Plan shall consist of unissued shares or previously issued
shares reacquired and held by the Company in its treasury. The Committee and the
appropriate officers of the Company shall from time to time take whatever
actions are necessary to execute, acknowledge, file and deliver any documents
required to be filed with or delivered to any governmental authority or any
stock exchange or transaction reporting system on which shares of Common Stock
are listed or quoted in order to make shares of Common Stock available for
issuance to an Optionee; provided, however, that shares of Common Stock with
respect to which an Option has been exercised shall not again be available for
any grant of Options hereunder. Common Stock subject to Options that are
forfeited or terminated or expire unexercised in such a manner that all or some
of the shares subject thereto are not issued to an Optionee shall immediately
become available for the granting of Options.
7. OPTION PRICE. The purchase price of each share of Common Stock that is
subject to an Option granted pursuant to this Plan shall be 100% of the Fair
Market Value of such share of Common Stock on the Date of Grant.
8. OPTION PERIOD. Each Option granted pursuant to this Plan shall terminate
and be of no force and effect with respect to any shares of Common Stock not
purchased by the Optionee upon the expiration of the tenth anniversary of the
Date of Grant.
9. EXERCISE OF OPTIONS.
(a) Unless otherwise determined by the Committee, Options granted pursuant
to this Plan shall be exercisable on a cumulative basis, as follows:
One-fourth (1/4) of the number of shares subject to the Option grant shall
vest on the last day of every third month from the Date of Grant and all
shares subject to such Option shall be vested on the first anniversary of
the Date of Grant.
(b) In the event that an Optionee ceases to serve as an Eligible Director
for any reason other than death, disability or mandatory retirement, an Option
granted to such Optionee may be exercised only to the extent such Option was
exercisable at the time the Optionee ceased to serve in such capacity.
(c) An Option may be exercised at any time or from time to time during the
term of the Option as to any or all full shares which have become exercisable in
accordance with this Section, but not as to less than 25 shares of Common Stock
unless the remaining shares of Common Stock that are so exercisable are less
than 25 shares of Common Stock.
(d) An Option shall be exercised by written notice of exercise of the
Option, with respect to a specified number of shares of Common Stock, delivered
to the Corporate Secretary of the Company at its principal offices.
(e) In the event that an Optionee ceases to serve as an Eligible Director
by reason of death, disability or mandatory retirement at a time when an Option
granted hereunder is still in force and unexpired under the terms of Section 8
hereof, the
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vesting of such Option shall be accelerated. Such acceleration shall be
effective as of the date of the Optionee's death, disability or retirement, as
appropriate, and each Option so accelerated shall be exercisable in full for so
long as it is still in force and unexpired under the terms of Section 8 hereof.
(f) The purchase price of the shares as to which an Option is exercised
shall be paid in full at the time of the exercise before any shares of Common
Stock are issued, Such purchase price shall be payable in U.S. dollars, which
may be paid by check or other instrument acceptable to the Company. The Board
may also provide for procedures to permit the exercise of Options by the use of
the proceeds to be received from the sale of Common Stock issuable pursuant to
an Option, or by means of tendering theretofore owned Common Stock, having a
Fair Market Value equal to the cash exercise price applicable to such Option. No
holder of an Option shall be, or have any of the rights or privileges of, a
stockholder of the Company in respect of any shares attributable to any Option
unless and until certificates evidencing such shares shall have been issued by
the Company to such holder.
10. NONTRANSFERABILITY OF OPTIONS. Unless otherwise allowed by the
Committee subject to applicable rules and regulations, Options may not be
transferred or assigned by an Optionee otherwise than by will or the laws of
descent and distribution, including, but not by way of limitation, execution,
levy, garnishment, attachment, pledge, bankruptcy, or in any other manner, and
no such right or interest of any participant in the Plan shall be subject to any
obligation or liability of any participant. Unless otherwise allowed by the
Committee subject to applicable rules and regulations, during the lifetime of an
Optionee, an Option may be exercised only by the Optionee (or by his guardian or
legal representative, should one be appointed). In the event of the death of an
Optionee, any Option held by the Optionee may be exercised by his legatee(s) or
other distributee(s) or by his personal representative. Any attempted transfer
of an Option in violation of this, Section 10 shall be null, void and of no
effect.
11. ADJUSTMENTS.
(a) The existence of outstanding Options shall not affect in any manner the
right or power of the Company or its shareholders to make or authorize any or
all adjustments, recapitalization, or other changes in the capital stock of the
Company or its business or any merger or consolidation of the Company, or any
issue of bonds, debentures, preferred or prior preference stock (whether or not
such issue is prior to, on a parity with or junior to the Common Stock) or the
dissolution or liquidation of the Company, or any sale or transfer of all or any
part of its assets or business, or any other corporate act or proceeding of any
kind, whether or not of a character similar to that of the acts or proceedings
enumerated above.
(b) In the event of any subdivision or consolidation of outstanding shares
of Common Stock or declaration of a dividend payable in shares of Common Stock
or capital reorganization or reclassification or other transaction involving an
increase or reduction in the number of outstanding shares of Common Stock, the
Board may adjust proportionally (i) the number of shares of Common Stock
reserved under these Options; and (ii) the exercise price of such Options. In
the event of any consolidation or merger of the Company with another corporation
or entity or the adoption by the Company of a plan of exchange affecting the
Common Stock or any distribution to holders of Common Stock of securities or
property (other than normal cash dividends or dividends payable in Common
Stock), the Board shall make such adjustments or other provisions as it may deem
equitable, including adjustments to avoid fractional shares, to give proper
effect to such event. In the event of a corporate merger, consolidation,
acquisition of property or stock, separation, reorganization or liquidation, the
Board shall be authorized to issue or assume Options by means of substitution of
new options for previously issued Options or an assumption of previously issued
Options, or to make provision for the acceleration of the exercisability of, or
lapse of restrictions with respect to, the termination of unexercised Options in
connection with such transaction.
(c) The vesting of an Option granted under the Plan shall be accelerated
and the Option shall become fully exercisable upon a Change in Control (as
hereinafter defined) of the Company. For purposes of this Plan, a "Change of
Control" shall be conclusively deemed to have occurred if (and only if) any of
the following events shall have occurred: (a) there shall have occurred an event
required to be reported in response to Item 6(e) of Schedule 14A of Regulation
14A (or in response to any similar item on any similar schedule or form)
promulgated under the Exchange Act, whether or not the Company is then subject
to such reporting requirement; (b) any "person" (as such term is used in Section
13(d) and 14(d) of the Exchange Act) shall have become the "beneficial owner"
(as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 20% or more of the combined voting power
of the Company's then outstanding voting securities without prior approval of at
least two-thirds of the members of the Board in office immediately prior to such
person's attaining such percentage interest; (c) the Company is a party to a
merger, consolidation, sale of assets or other reorganization, or a proxy
contest as a consequence of which members of the Board in office immediately
prior to such transaction or event constitute less than a majority of the Board
thereafter or (d) during any period of two consecutive years, individuals who at
the beginning of such period constituted the Board (including for this purpose
any new Director whose
B-3
<PAGE>
election or nomination for election by the Company's stockholders was approved
by a vote of at least two-thirds of the Directors then still in office who were
Directors at the beginning of such period) cease for any reason to constitute at
least a majority of the Board.
The foregoing adjustments and the manner of applications thereof shall be
determined solely by the Board. The adjustments required under this Article
shall apply to any successor or successors of the Company and shall be made
regardless of the number or type of successive events requiring adjustments
hereunder.
12. PURCHASE FOR INVESTMENT. Unless the Options and shares of Common Stock
covered by this Plan have been registered under the Securities Act of 1933, as
amended, each person exercising an Option under this Plan may be required by the
Company to give a representation in writing in form and substance satisfactory
to the Company to the effect that such person is acquiring such shares for his
or her own account for investment and not with a view to, or for sale in
connection with, the distribution of such shares or any part thereof.
13. WITHHOLDING AND EMPLOYMENT TAXES. At the time of exercise of an Option,
the Optionee shall remit to the Company in U.S. Dollars all applicable federal
and state withholding and employment taxes. If and to the extent authorized and
approved by the Committee in its sole discretion, an Optionee may elect, by
means of a form of election to be prescribed by the Committee, to have shares
which are acquired upon exercise of an option withheld by the Company or tender
other shares of Common Stock or other securities of the Company owned by the
Optionee to the Company at the time the amount of such taxes is determined in
order to pay the amount of such tax obligations, subject to the following
limitations:
(1) such election shall be irrevocable; and
(2) such election shall be subject to the disapproval of the Committee at
any time.
Any Common Stock or other securities so withheld or tendered will be valued
by the Company as of the date they are withheld or tendered. Unless the
Committee otherwise determines, the Optionee shall pay to the Company in cash,
promptly when the amount of such obligations become determinable, all applicable
federal and state withholding taxes resulting from the lapse of restrictions
imposed on exercise of an option, from a transfer or other disposition of shares
acquired upon exercise of an option or otherwise related to the Option or the
shares acquired upon exercise of the option.
14. TERMINATION, AMENDMENT AND MODIFICATION OF PLAN. The Committee may at
any time terminate the Plan, and may at any time and from time to time, and in
any respect, amend or modify the Plan, except that (a) no amendment or
alteration that would impair the rights of any Optionee under any Option that he
has been granted shall be made without the Optionee's consent; and (b) no
amendment or alteration which would increase the maximum number of shares of
Common Stock as to which Options may be granted under the Plan or which would
change the class of persons eligible to receive Options under the Plan, or as
required by applicable law shall be effective prior to approval by the Company's
shareholders to the extent such approval is otherwise required by applicable
legal requirements.
15. STOCK CERTIFICATES. The Company shall not be required to issue or
deliver any certificate for shares of Common Stock purchased upon the exercise
of any Option granted hereunder or any portion thereof unless, in the opinion of
counsel to the Company, there has been compliance with all applicable legal
requirements. An Option granted under the Plan may provide that the Company's
obligation to deliver shares of Common Stock upon the exercise thereof may be
conditioned upon the receipt by the Company of a representation as to the
investment intention of the holder thereof in such form as the Company shall
determine to be necessary or advisable to comply with the provisions of the
Securities Act of 1933, as amended, or any other federal, state or local
securities laws.
16. GOVERNMENT REGULATIONS. This Plan, and the granting and exercise of
Options hereunder, and the obligation of the Company to sell and deliver shares
of Common Stock under such Options, shall be subject to all applicable laws,
rules and regulations, and to such approvals on the part of any governmental
agencies or national securities exchanges or transaction reporting, systems as
may be required.
17. GOVERNING LAW. This Plan and all determinations made and actions taken
pursuant hereto, to the extent not otherwise governed by mandatory provisions of
the Code or the securities laws of the United States, shall be governed by and
construed in accordance with the laws of the Commonwealth of Virginia.
18. EFFECTIVE DATE OF PLAN. This Plan, as hereby amended, shall be
effective as of the date of its approval by the Company's shareholders.
B-4
<PAGE>
19. MISCELLANEOUS. The granting of any Option shall not impose upon the
Company or Board any obligation to nominate any Optionee for election as a
director, and the right of the shareholders of the Company to remove any person
as a director of the Company shall not be diminished or affected by reason of
the fact that an Option has been granted to such person.
20. RELATIONSHIP TO OTHER COMPENSATION PLANS. The adoption of the Plan
shall neither affect any other stock option, incentive or other compensation
plans in effect for the Company or any of its Subsidiaries, nor shall the
adoption of the Plan preclude the Company from establishing any other forms of
incentive or other compensation plan for directors of the Company.
21. MISCELLANEOUS.
(a) PLAN BINDING ON SUCCESSORS. The Plan shall be binding upon the
successors and assigns of the Company.
(b) SINGULAR, PLURAL, GENDER. Whenever used herein, nouns in the singular
shall include the plural, and the masculine pronoun shall include the feminine
gender.
(c) HEADINGS, ETC., NO PART OF PLAN. Headings of articles and paragraphs
hereof are inserted for convenience and reference, and do not constitute a part
of the Plan.
B-5
Precision Auto Care, Inc.
Exhibit 11-Statement Re: Computation of Per Share Earnings
(In Thousands, except per share data)
Pro Forma Combined As Adjusted
For Combination and Offering
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding
common stock 6,121 5,475 6,121 5,475
Weighted average shares issuable
upon exercise of dilutive common
stock options -- 14 -- 14
Commonstock and common stock equivalents
issued at prices below the IPO
price during the twelve months
preceding the initial filing of
the Registration Statement -- 8 -- 8
Total weighted average shares 6,121 5,497 6,121 5,497
===== ===== ===== =====
Net Income (Loss) ($4,595) $966 ($5,312) $1,819
======== ==== ======== ======
Earnings (loss) per share ($0.75) $0.18 ($0.87) $0.33
======= ===== ======= =====
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 33,742
<SECURITIES> 0
<RECEIVABLES> 6,801,220
<ALLOWANCES> 0
<INVENTORY> 3,979,581
<CURRENT-ASSETS> 14,981,975
<PP&E> 22,716,762
<DEPRECIATION> 2,562,012
<TOTAL-ASSETS> 82,736,693
<CURRENT-LIABILITIES> 14,829,886
<BONDS> 0
0
0
<COMMON> 61,205
<OTHER-SE> 46,484,258
<TOTAL-LIABILITY-AND-EQUITY> 82,736,693
<SALES> 11,383,284
<TOTAL-REVENUES> 22,699,608
<CGS> 11,617,848
<TOTAL-COSTS> 27,795,426
<OTHER-EXPENSES> 789,119
<LOSS-PROVISION> 2,948,860
<INTEREST-EXPENSE> 1,113,992
<INCOME-PRETAX> (6,899,321)
<INCOME-TAX> (1,587,228)
<INCOME-CONTINUING> (5,312,093)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,312,093
<EPS-PRIMARY> (0.87)
<EPS-DILUTED> (0.87)
</TABLE>
