<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from July 1, 2000 to September 30, 2000
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 8,160,508 shares of Common Stock
as of October 31, 2000.
Precision Auto Care, Inc.
Form 10-Q
<PAGE>
INDEX
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PAGE
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PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
General Information................................................... 3
Consolidated Balance Sheets as of September 30, 2000 and
June 30, 2000......................................................... 4
Consolidated Statements of Operations for the three months
ended September 30, 2000 and 1999..................................... 5
Consolidated Statements of Cash Flows for the three months
ended September 30, 2000 and 1999..................................... 6
Notes to the Consolidated Financial Statements........................ 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 12
Item 2. Changes in Securities.......................................... 12
Item 3. Defaults Upon Senior Securities................................ 12
Item 4. Submission of Matters to a Vote of Security Holders............ 12
Item 5. Other Information.............................................. 12
Item 6. Exhibits or Reports on Form 8-K................................ 13
Signatures............................................................... 13
Exhibit Index............................................................ 14
</TABLE>
2
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FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934. When used in this report, the words
"anticipate," "believe," "estimate," "expect," "intend" and "plan" as they
relate to Precision Auto Care, Inc. or its management are intended to identify
such forward-looking statements. All statements regarding Precision Auto Care,
Inc. or Precision Auto Care, Inc.'s expected future financial position, business
strategy, cost savings and operating synergies, projected costs and plans, and
objectives of management for future operations are forward-looking statements.
Although Precision Auto Care, Inc. believes the expectations reflected in such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the
expectations reflected in the forward-looking statements herein include, among
others, the factors set forth in the Company's 10-K filing for the year ending
June 30, 1999 under the caption "Business--Risk Factors," general economic and
business and market conditions, changes in federal and state laws and increased
competitive pressure in the automotive after-market services business.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL INFORMATION
Precision Auto Care, Inc. ("Precision Auto Care" or the "Company") is a
provider of automotive maintenance services with franchised and Company-operated
centers located in the United States and in certain international locations. The
Company's services are provided to automobile owners and focus on those high
frequency items required to properly maintain the vehicle on a periodic basis.
The Company offers these services through three "Precision" brands that are
intended to be complementary. However, in August 2000, the company made the
decision to change senior management and hired a new CEO, Louis M. Brown, Jr.
and a new CFO, Robert R. Falconi. With that change in management there has been
a change in direction for the Company. In the future, the Company intends to
focus on growing the franchising business.
Precision Tune Auto Care provides automotive maintenance services that require
relatively short service times including engine performance, oil change and
lubrication and brake services. At September 30, 2000, these services were
provided at 515 Precision Tune Auto Care centers owned and operated by
franchisees and five owned and operated by the Company.
Precision Auto Wash provides self-service and touch-less automatic car wash
services. The advanced operating systems used at prototype Precision Auto Wash
centers permit remote monitoring and administration of operations. The no-
touch car wash technology employed in Precision Auto Wash centers also
provides a high-quality wash with less risk of vehicle damage than traditional
car wash systems. At September 30, 2000, there were seven Company-owned car
wash centers and 23 franchised car wash centers.
Precision Lube Express provides convenient fast oil change and lube services.
Because Precision Lube Express centers consist of "above ground" configured
modular buildings manufactured and sold by the Company, operations can
commence more quickly and with less capital investment than is the case for
many competitors. At September 30, 2000, there were 10 Precision Lube Express
centers owned and operated by franchisees and one owned and operated by the
Company. As of that date, there were also 17 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.
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, the Precision Tune brand 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"). In March 1998, the Company acquired the
holder of the master franchise agreement for Precision Tune Auto Care in Mexico
and Puerto Rico.
3
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PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
2000 2000
(Unaudited)
---------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 3,028,512 $ 13,370
Accounts receivable, net of allowance of $2,452,117 and $2,155,735,
respectively....................................................... 3,756,259 3,335,300
Inventory, net of allowances of $600,000............................. 1,222,988 1,517,693
Notes receivable, net of allowances of $586,000...................... 128,705 153,260
Other assets......................................................... 264,673 132,013
Deferred income taxes................................................ 44,658 71,774
------------ ------------
Total current assets.............................................. 8,445,795 5,223,410
Notes receivable, net of allowance...................................... 200,000 276,000
Property, plant and equipment, at cost.................................. 9,313,404 15,480,911
Less: Accumulated depreciation....................................... (3,216,142) (3,669,556)
------------ ------------
6,097,262 11,811,355
Goodwill and other intangibles, net of accumulated
Amortization of $14,109,460 and $14,971,394............................. 25,997,926 28,939,600
Deposits and other...................................................... 60,716 81,224
------------ ------------
Total assets...................................................... $ 40,801,699 $ 46,331,589
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............................. $ 10,188,171 $ 11,633,783
Mortgage notes payable............................................... - 301,962
Other notes payable.................................................. 514,510 552,209
Deferred revenue..................................................... 734,046 1,478,533
------------ ------------
Total current liabilities......................................... 11,436,727 13,966,486
Notes payable- long term debt........................................... 11,250,000 -
Bank facility........................................................... - 7,126,615
Subordinated debt....................................................... 5,586,960 5,586,960
Mortgage notes payable.................................................. 991,201 6,628,428
Other notes payable..................................................... 371,227 482,936
Deferred revenue........................................................ 709,554 134,517
Refundable deposits..................................................... 4,000 4,000
Other liabilities....................................................... 50,409 125,657
------------ ------------
Total liabilities................................................. 30,400,078 34,055,600
Stockholders' equity:
Common stock, $.01 par; 19,000,000 shares authorized; 8,160,508 and
6,434,500 shares issued and outstanding............................ 81,605 64,345
Additional paid-in capital........................................... 47,286,332 46,532,803
Unearned restricted stock............................................ (112,220) (130,922)
Retained earnings (deficit).......................................... (36,854,096) (34,190,236)
------------ ------------
Total stockholders' equity........................................ 10,401,621 12,275,989
------------ ------------
Total liabilities and stockholder's equity........................ $ 40,801,699 $ 46,331,589
============ ============
</TABLE>
See accompanying notes.
4
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PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
2000 1999
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Revenues:
Franchise development $ 135,337 $ 173,395
Royalties 3,343,944 3,985,033
Manufacturing and distribution 1,901,376 4,623,505
Company centers 810,609 1,287,573
Other 37,520 30,551
----------- -----------
Total revenues 6,228,787 10,100,057
Total direct cost 5,550,410 8,238,858
----------- -----------
Contribution (exclusive of amortization shown separately
below) 678,377 1,861,199
General and administrative expense 1,590,232 1,818,795
Depreciation expense 298,972 325,724
Amortization of franchise rights and goodwill 493,377 494,847
----------- -----------
Operating (loss) (1,704,204) (778,167)
Other income (expense):
Interest expense (942,551) (689,937)
Interest income 10,281 25,455
Other (56,104) (139,955)
----------- -----------
Total other (expense) (988,374) (804,437)
----------- -----------
Loss before income tax expense (2,692,578) (1,582,604)
(Benefit) provision for income taxes (28,719) 67,177
----------- -----------
Net loss $(2,663,859) $(1,649,781)
=========== ===========
Basic and diluted net loss per share ($0.36) ($0.27)
Weighted average shares outstanding--Basic and Diluted 7,428,810 6,159,152
</TABLE>
See accompanying notes.
5
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PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------
2000 1999
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Operating activities:
Net loss............................................................................................... $(2,663,859) $(1,649,781)
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Depreciation and amortization....................................................................... 792,349 820,571
Deferred income taxes............................................................................... -
Services received in exchange for stock.......................................................... 39,491 51,459
Changes in operating assets and liabilities:
Accounts and notes receivable................................................................... (320,404) 317,468
Inventory....................................................................................... 294,705 300,242
Prepaid expenses, recoverable income taxes, deposits
and other..................................................................................... (180,792) 1,037,143
Accounts payable and accrued liabilities........................................................ (261,686) (381,105)
Deferred revenue................................................................................ (169,450) (54,084)
----------- -----------
Net cash (used in) provided by operating activities.................................................... (2,469,646) 441,913
Investing activities:
Purchases of property and equipment................................................................. - (81,029)
Sale of property and equipment...................................................................... 6,700,000 -
----------- -----------
Net cash provided by (used in) investing activities.................................................... 6,700,000 (81,029)
Financing activities:
Sale of company stock............................................................................... 750,000 1,484
Repayments of bank facility........................................................................ (8,362,843) (488,002)
Proceeds from note
payable................................................................................... 11,250,000 345,000
Repayment of mortgage notes and other notes
payable................................................................................... (4,852,369) (222,772)
----------- -----------
Net cash used in financing activities.................................................................. (1,215,212) (364,290)
----------- -----------
Net change in cash and cash equivalents................................................................ 3,015,142 (3,406)
Cash and cash equivalents at beginning of year......................................................... 13,370 50,167
----------- -----------
Cash and cash equivalents at end of period............................................................. $ 3,028,512 $ 46,761
=========== ===========
</TABLE>
See accompanying notes.
6
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Precision Auto Care, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1 - Interim Financial Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP") for interim
financial information and the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments consisting only of recurring accruals considered
necessary for a fair presentation have been included. Operating results for such
interim periods are not necessarily indicative of the results which may be
expected for a full fiscal year. For further information, refer to the
consolidated financial statements and footnotes included in Precision Auto Care
Inc.'s (the "Company") annual report on Form 10-K for the year ended June 30,
2000.
Unless the context requires otherwise, all references to the Company herein mean
Precision Auto Care, Inc. and those entities owned or controlled by Precision
Auto Care, Inc.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent 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.
Significant intercompany accounts and transactions have been eliminated in
consolidation. Certain prior period financial information has been reclassified
to conform with the current period presentation.
Note 2 - Earnings Per Share
The Company reports earnings per share ("EPS") in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" which
specifies the methods of computation, presentation, and disclosure. SFAS No. 128
requires the presentation of basic EPS and diluted EPS. Basic EPS is calculated
by dividing net income (loss) available to common shareholders by the weighted
average number of shares outstanding during the period. Diluted EPS includes the
potentially dilutive effect, if any, which would occur if outstanding options
and warrants to purchase Common Stock were exercised. For the three months ended
September 30, 2000 and for the three months ended September 30, 1999, diluted
EPS is equivalent to basic EPS as the inclusion of the effect of assumed
exercises and conversions was anti-dilutive.
The following table sets forth the computation of basic and diluted net (loss)
per share.
Three Months Ended September 30, 2000
-------------------------------------
2000 1999
---- ----
Numerator:
Net Loss...................................... $(2,663,859) $(1,649,781)
Denominator:
Denominator for basic EPS-weighted-average
shares........................................ 7,428,810 6,159,152
Denominator for diluted EPS-weighted-average
shares........................................ 7,428,810 6,159,152
Basic net loss per share........................ ($0.36) ($0.27)
Diluted net loss per share...................... ($0.36) ($0.27)
Note 3 - Inventory
The components of inventory are as follows:
September 30, June 30,
2000 2000
---- ----
Raw materials.................................. $ 805,054 $ 979,777
Work-in-process................................ 59,673 191,504
Finished goods................................. 958,261 946,412
Reserve for obsolete and unsaleable inventory.. (600,000) (600,000)
---------- ----------
$1,222,988 $1,517,693
========== ==========
7
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Note 4 - Debt
On August 3, 2000, the Board of Directors accepted a proposal from Arthur C.
Kellar, a member of the Company's Board of Directors and Desarollo Integrado,
S.A. de C.V., of which a principal is Mauricio Zambrano who is on the Company's
Board of Directors, to refinance the Company's existing debt and provide the
Company's ongoing working capital needs. The lenders committed to make available
a credit facility of $11.25 million pursuant to certain terms and conditions.
On August 4, 2000, the Company issued subordinated debentures to Arthur C.
Kellar and to Desarollo Integrado, S.A. de C.V. respectively pursuant to which
they made a bridge loan to the Company in an aggregate principal amount of
$2.5 million to fund the Company's payroll, payroll taxes, debt service
obligations and other immediate needs. The entire principal amount earned
interest at a rate of 12% per annum. The entire principal balance was deemed
repaid on September 29, 2000.
On September 29, 2000 the Company's remaining debt to First Union was repaid
with a facility provided by Precision Funding, LLC a company owned and
controlled by Arthur C. Kellar and Desarollo Integrado, S.A. de C.V.
In connection with obtaining the above credit facility, an origination fee will
be paid in the form of a warrant entitling the lenders to purchase 2,000,000
shares of common stock at an exercise price of $0.275 per share. The issuance of
the warrants are subject to shareholder approval. Once such approval is
obtained, the Company will record the estimated value of such warrants as a
reduction of the face value of the related debt and an increase to paid in
capital and thereafter amortize the value over the life of the commitment.
Note 5 - Contingencies
The Company is subject to a suit filed in the State of Florida by a former
Precision Tune Auto Care franchisee. The franchisee is alleging breach of
contract and personal slander. In March 2000, a judgment of $841,094 plus
attorneys' fees was entered against the Company. In connection with this matter,
the Company is vigorously appealing the judgment. However, it is not possible to
predict whether the appeal will be successful. If the appeal is not successful,
payment of the judgment would have a material adverse impact on the liquidity of
the Company.
The Company and its subsidiaries are subject to other litigation in the ordinary
course of business, including contract, franchisee and employment-related
litigation. In the course of enforcing its rights under existing and former
franchisee agreements, the Company is subject to complaints and letters
threatening litigation concerning the interpretation and applicability of these
agreements, particularly in case of defaults and terminations.
Note 6 - Subsequent Events
On October 2, 2000 the Company received $2.75 million from Precision Funding to
use for working capital and to repay the balance of the FFCA mortgages of
$991,000.
On October 17, 2000 the Company sold three car washes in Indiana for $1.4
million. The proceeds were used for working capital.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction
The following discussion and analysis of the consolidated financial condition
and results of operations of Precision Auto Care, Inc. (the "Company") should be
read in conjunction with the Consolidated Financial Statements and Notes
thereto. Historical results and percentage relationships set forth herein are
not necessarily indicative of future operations.
Results of Operations
Comparison of the three months ended September 30, 2000 to the three months
ended September 30, 1999
Summary (in thousands)
2000 % 1999 %
---- --- ---- ---
Net revenue.................. 6,229 100% 10,100 100%
8
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Direct cost........................... 5,550 90 8,239 82
General and administrative............ 1,590 26 1,819 18
Operating (loss)...................... (1,704) (28) (778) (8)
Revenue. Revenue for the three months ending September 30, 2000 was $6.2
million, a decrease of approximately $3.9 million, or 38%, compared with revenue
of $10.1 million for the corresponding period of the prior year. The decrease
was primarily the result of decreases in retail sales from Company stores of
$477,000, a significant reduction in manufacturing and distribution revenues of
$2.7 million, and a reduction of royalty revenues of $641,000. The decrease in
manufacturing is partially attributable to the disposition of certain
manufacturing and distribution businesses. During fiscal year 1999 the Company
disposed of an automotive parts and supply distribution business and a chemical
manufacturing plant. These businesses accounted for decreases in revenue of $1.4
million and $213,000 respectively. The Company's inadequate working capital
contributed to a decrease of $1.2 million in Car wash manufacturing revenue.
These decreases were partially offset by an increase in the sale of modular
buildings. Royalty revenues were down as a result of fewer franchise centers
from the prior year. The Company reports that the sales for the centers that
were open a year ago compared to the past quarter (same store sales) have
remained flat.
Direct Cost. Direct costs for the three months ending September 30, 2000 totaled
$5.6 million, a decrease of $2.6 million or 32%, compared with $8.2 million for
the quarter ending September 30, 1999. The decrease is attributable to cost
decreases in company centers, manufacturing and distribution and franchise
development of $371,000, $2.5 million, $87,000, respectively. These decreases
were partially offset by an increase in royalty expenses of $365,000.
General and Administrative Expense. General and administrative expense was $1.6
million for the three months ending September 30, 2000, a decrease of $229,000
or 13%, compared with $1.8 million for the quarter ending September 30, 1999.
Operating (Loss). The Company recorded an operating loss for the three months
ending September 30, 2000 of $1,746,000 which represents an increase in
operating loss of $968,000 or 124% compared with an operating loss of $778,000
for the corresponding period of the prior year.
TABLE 1 - Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense are summarized as
follows:
Three months ended September 30, 2000 1999
-------------------------------- ---- ----
Depreciation $298,972 $325,724
Amortization 493,377 494,847
-------- --------
Total $792,349 $820,571
======== ========
TABLE 2 - Components of Interest Expense
The components of interest expense are summarized as follows:
Three months ended September 30, 2000 1999
-------------------------------- ---- ----
Interest incurred $942,551 $689,937
======== ========
Liquidity and Capital Resources
Sources and Uses of Cash
The following table sets forth selected information from the statement of cash
flows of Precision Auto Care, Inc.
<TABLE>
<CAPTION>
Three Months Ended September 30,
--------------------------------
2000 1999
---- ----
<S> <C> <C>
Net cash (used in) provided by
operating activities................................................... $(2,469,646) $ 441,913
Net cash provided by (used in) investing activities..................... 6,700,000 ( 81,029)
Net cash (used in) financing
activities............................................................. (1,215,212) ( 364,290)
----------- ----------
</TABLE>
9
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<TABLE>
<S> <C> <C>
Change in cash and cash equivalents..................................... $ 3,015,142 $ (3,406)
=========== ==========
</TABLE>
Cash at September 30, 2000 was $168,899 an increase of $155,530 from $13,370 on
June 30, 2000. During the period, cash used by operating activities was
$2,469,645 which is attributable to increases in accounts receivable of
$320,000, prepaid expenses of $181,000 and decreases in accounts payable and
deferred revenue of $262,000 and $169,000 respectively. The use of cash was
partially offset by decreases in inventory levels of $295,000.
Cash provided by investing activities for the quarter ended September 30, 2000
was $6.7 million. The cash provided by investing activities was the result of
sales of car washes and quick lube buildings in Denver, Colorado and Columbus,
Ohio for $4.9 million and $1.8 million respectively.
Cash used in financing activities for the quarter ended September 30, 2000 was
$4.1 million. Cash provided by financing activities during the period included
the sale of common stock of $750,000 and the issuance of a note payable for $2.5
million. The infusions of cash were offset by repayments of mortgages, the bank
facility and other notes payable of $7.3 million.
Debt Transactions
As of June 30, 2000, the Company had borrowed approximately $7.1 million
under its bank credit agreement, of which $3.1 million represented amounts
extended under a portion of the bank credit facility that was dedicated to
funding acquisitions and capital expenditures (the "Acquisition Line of Credit")
and of which $4.0 million represented funds advanced under a general revolving
credit portion of the credit facility (the "Line of Credit Loan").
At June 30, 2000 the Company had a bank credit agreement with First Union
National Bank, under which the Bank has extended loans to the Company under both
the Line of Credit Loan and Acquisitions Line of Credit. The agreement was
originally executed on November 7, 1997 with Signet Bank (which was later
acquired by First Union). As of September 29, 2000 both of these credit
facilities have been repaid (see discussion below).
Beginning in the summer of 1998, the Company has not always been able to
remain in compliance with certain financial covenants included in the agreement.
As a result, the agreement has been amended and modified several times including
amendments executed October 12, 1998, February 22, 1999 (effective retroactively
to February 1, 1999) and May 13, 1999. Prior reports include more detailed
descriptions of these earlier amendments and waivers of non-compliance issued by
the Bank.
In the latest amendment to the agreement (the "Second Amended and Restated
Loan and Security Agreement"), dated October 27, 1999 (effective retroactively
to October 14, 1999), the Bank extended the maturity date of the credit
facilities to October 5, 2000, subject to the satisfaction of certain conditions
including the execution of liens on all owned and unencumbered real property.
The terms of the extension require the Company to engage in a series of further
asset sales generating minimum net proceeds in the aggregate amount of
$2,575,000. In addition, the Company is required to: (a) reduce accounts payable
by at least $250,000 on a cumulative basis, by December 31, 1999, and each
quarter thereafter, (b) not suffer, for the quarter ending December 31, 1999, a
negative net earnings before taxes, depreciation and amortization, but after
interest (excluding accrued or non-cash interest payable on the subordinated
debt) exceeding $500,000, excluding the gain (loss) resulting from the required
asset sales, and (c) achieve for each quarter beginning with the quarter ending
March 31, 2000, a positive earnings before taxes, depreciation and amortization,
but after interest (excluding accrued or non-cash interest payable on the
subordinated debt), exclusive of the required asset sales. In addition, the
Company is obligated to reduce bank debt by an additional $200,000 on or before
September 1, 2000, and must continue to make timely payments of principal and
interest. The Company is not permitted to make payment of any amount of
principal or interest on its subordinated debt in cash without the prior written
consent of the Bank. In addition to the above conditions and requirements to
dispose of certain businesses which have been satisfied, the Company was
required to complete the sale of (1) certain prefabricated lube buildings during
the quarters ended December 31, 1999, and March 31, 2000, and (2) the sale of
certain real property located in Marion, IN and Roscoe, IL, by certain dates.
The Company was not in compliance with certain financial covenants as of
December 31, 1999 and March 31, 2000. As of December 31, 1999, and March 31,
2000, the Company succeeded in reducing accounts payable by the required amount
of $250,000. It also achieved the December 31, 1999, minimum earnings target of
no more than $500,000 loss (as defined above). The requirement of achieving a
positive earnings (as defined above) for the quarter ended March 31, 2000 was
not achieved. The Company was also not able to complete the remaining real
property sales by the specified dates. The Company did receive a waiver from the
Bank, dated February 8, 2000, concerning non-compliance with certain covenants
for the quarter ended December 31, 1999. The Bank had agreed
10
<PAGE>
to provide the Company with a waiver concerning such non-compliance for the
quarter ended March 31, 2000 in return for certain modifications to the Second
Amended and Restated Loan and Security Agreement. A modification agreement dated
May 15, 2000 permanently reduced availability under the Line of Credit $240,000
by July 10, 2000 and increased the interest rate for all existing and future
advances by 1% to 5.75% over LIBOR.
At June 30, 2000 the Company was not in compliance with certain financial
covenants. Effective September 29, 2000, the Bank credit facility was repaid
(see discussion below).
In addition to the Bank credit facility, the Company has entered into two
outstanding subordinated debenture agreements and has received mortgage
financing for certain Company-owned real estate. Under the terms of each
subordinated debenture, payments of principal and interest on the subordinated
debt may only be made by the Company if the Company has made all required
payments or is otherwise not in default under the Bank credit facility.
The first subordinated debenture in the amount of $2 million was executed
in October 1998 with an LLC composed of certain members of the Company's board
of directors. Originally due October 15, 1999, the maturity of the subordinated
debenture has been extended until September 30, 2001. The Company had also
agreed that default interest in the amount of $266,667 would be paid in 71,111
shares of Common Stock. The amount of shares was determined by dividing 266,667
by the average closing price per share of the Corporation's Common Stock in the
fifteen day period between August 1, 1999 and August 15, 1999. This translates
into an issuing price per share of $3.75. The holder also waived defaults under
the agreement through September 30, 2001.
The second subordinated debenture in the amount of $5 million was executed
in January 1999 directly with one member of the Company's board of directors.
$1.4 million of the original principal amount has been repaid. Originally due
May 25, 1999, the term of this subordinated debenture had been extended to April
15, 2001 and later extended to September 30, 2001. The holder also waived all
debt covenants through September 30, 2001.
On March 8, 1999, the Company entered into a mortgage with Heartland Bank
in the principal amount of $1,035,000 with an annual interest rate of 8.75%,
amortized over a 20 year period and secured by four of the Company's car washes.
This mortgage was paid off from the sale of the respective secured properties,
on December 22, 1999, and January 28, 2000.
On May 17, 1999, the Company executed nineteen promissory notes totaling
$7,204,000, with FFCA Acquisition Corporation. Each note accrued interest at a
rate of 9.9% per annum and would have matured on June 1, 2014 with the exception
of one which would have matured on August 1, 2004. Principal and interest
payments were due in monthly installments that commenced on July 1, 1999. Each
note was secured by mortgages on properties. In the event of default the
interest rate would have increased to 18%. During the first quarter of fiscal
year 2001 the Company repaid all but $991,000 of this debt with proceeds from
sales of car wash and lube centers. On October 2, 2000, the remaining mortgage
balance was repaid (see discussion below)..
During fiscal year 2001, the Company was successful in obtaining a new
source of financing. The Company received $11.25 million in financing from
Precision Funding, L.L.C., a corporation owned by two members of the Company's
Board of Directors. With that financing, the Company was able to liquidate its
debt with First Union on September 29, 2000 in the amount of $5.8 million and
the remainder of its mortgage debt with FFCA in the amount of $1.0 million on
October 2, 2000. The remaining proceeds of the financing will be used for
working capital requirements. The terms of the loan with Precision Funding,
L.L.C. do not require the Company to pay any interest for the period of one year
or any principal for the period of three years. In light of this financing
arrangement, management does not anticipate requiring additional financing to
continue the Company's operations for the next year.
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 in turn has adversely affected
revenues and profits of several of its businesses, particularly its distribution
business in the U.S. However, with the refinancing, reductions in expenses,
improved collections, improved inventory management, the Company expects to be
able to meet all of its financial obligations and be able to focus on growing
its franchising operation and making it profitable.
While Company management believes that this program will improve cash flow
and the ability to meet 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.
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
11
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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 wash 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.
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 wash 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company refinanced its debt at a fixed interest rate of 12% and is not
subject to changing interest rates.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to a suit filed in the State of Florida by a former
Precision Tune Auto Care franchisee. The franchisee is alleging breach of
contract and personal slander. In March 2000, a judgment of $841,094 plus
attorneys' fees was entered against the Company. In connection with this matter,
the Company is vigorously appealing the judgment. However, it is not possible to
predict whether the appeal will be successful. If the appeal is not successful,
payment of the judgment would have a material adverse impact on the liquidity of
the Company.
The Company and its subsidiaries are subject to other litigation in the
ordinary course of business, including contract, franchisee and employment-
related litigation. In the course of enforcing its rights under existing and
former franchisee agreements, the Company is subject to complaints and letters
threatening litigation concerning the interpretation and applicability of these
agreements, particularly in case of defaults and terminations.
The Company has reserves in its accounts for litigation based on
management's best judgment. Except as discussed above with respect to the
Florida matter, management is of the opinion that the ultimate liability in
respect of litigation is not likely to be of material importance to the
Company's financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On August 4, 2000 the Company issued 1,700,000 shares of common stock to Louis
Brown for $750,000. The proceeds were used to fund the Company's working
capital.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
The information concerning defaults and the subsequent cure thereof with respect
to the Company's indebtedness contained in Note 3 to the Company's financial
statements and appearing at "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
27 Financial Data Schedule
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on November 15, 2000.
Precision Auto Care, Inc.
/s/ Louis M. Brown
By: ---------------------------------------
Louis M. Brown
President and Chief Executive Officer
(Duly Authorized Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Louis M. Brown President, Chief Executive November 15, 2000
------------------
Officer and Director
Louis M. Brown (Principal Executive Officer)
/s/ Robert R. Falconi Senior Vice President and Chief November 15, 2000
---------------------
Financial Officer (Principal
Robert R. Falconi Financial Accounting Officer)
</TABLE>
13
<PAGE>
EXHIBIT INDEX
Number PAGE
------ ----
27 Financial Data Schedule
14
