<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 December 31, 1999
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 6,284,673 shares of Common Stock
as of January 31, 2000.
Precision Auto Care, Inc.
Form 10-Q
<PAGE>
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
General Information....................................... 3
Consolidated Balance Sheets as of December 31, 1999 and
June 30, 1999............................................. 5
Consolidated Statements of Operations for the three and
six months ended December 31, 1999 and 1998............... 6
Consolidated Statements of Cash Flows for the six months
ended December 31, 1999 and 1998.......................... 8
Notes to the Consolidated Financial Statements............ 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk......................................... 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 16
Item 2. Changes in Securities............................... 16
Item 3. Defaults Upon Senior Securities..................... 16
Item 4. Submission of Matters to a Vote of Security
Holders............................................. 17
Item 5. Other Information................................... 17
Item 6. Exhibits or Reports on Form 8-K..................... 17
Signatures................................................... 18
Exhibit Index................................................ 19
<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, 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:
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, 1999, these services were
provided at 542 Precision Tune Auto Care centers owned and operated by
franchisees and one owned and operated by the Company.
Precision Auto Wash provides self-service and touchless automatic car wash
services. The advanced operating systems used at prototype Precision Auto Wash
centers permit remote monitoring and administration of operations. The no-touch
car wash technology employed in Precision Auto Wash centers also provides a
high-quality wash with less risk of vehicle damage than traditional car wash
systems. At December 31, 1999, there were 24 Company-owned car wash centers and
18 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 December 31, 1999, there were 14 Precision Lube Express centers
owned and operated by franchisees and six 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 and car wash equipment and
chemicals.
<PAGE>
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"). In March 1998, the Company acquired the holder of the master
franchise agreement for Precision Tune Auto Care in Mexico and Puerto Rico.
<PAGE>
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
(Unaudited)
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 86,109 $ 50,167
Accounts receivable, net of allowance of $2,530,000 and $2,080,000,
respectively....................................................... 4,682,584 5,242,780
Inventory............................................................ 2,363,724 3,084,637
Notes receivable, net of allowance................................... 116,496 379,487
Other assets......................................................... 148,788 209,342
Refundable income taxes.............................................. 1,029,530 1,658,931
------------ ------------
Total current assets.................................................... 8,427,231 10,625,344
Notes receivable, net of allowance...................................... 321,303 325,254
Property, plant and equipment, at cost.................................. 16,910,440 17,987,789
Less: Accumulated depreciation....................................... (3,151,622) (2,757,726)
------------ ------------
13,758,818 15,230,063
Goodwill and other intangibles, net of accumulated
amortization............................................................ 36,958,595 37,926,905
Deposits and other...................................................... 127,926 467,857
------------ ------------
Total assets............................................................ $ 59,593,873 $ 64,575,423
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............................. $ 8,594,467 $ 8,636,331
Bank facility........................................................ 7,713,615 1,230,002
Mortgage notes payable............................................... 366,469 295,064
Subordinated debt.................................................... 2,000,000 ---
Other notes payable.................................................. 601,688 541,535
Deferred revenue..................................................... 558,711 842,598
------------ ------------
Total current liabilities............................................... 19,834,950 11,545,530
Bank facility........................................................... --- 7,678,667
Mortgage notes payable.................................................. 7,101,938 7,938,859
Subordinated debt....................................................... 3,586,960 5,586,960
Other notes payable..................................................... 892,625 924,713
Deferred revenue........................................................ 509,145 239,714
Refundable deposits..................................................... 283,158 245,364
Other liabilities....................................................... 278,053 433,323
------------ ------------
Total liabilities....................................................... 32,486,829 34,593,130
Stockholders' equity:
Common stock, $.01 par; 19,000,000 shares authorized; 6,164,673 and
6,131,548 shares issued and outstanding............................ 61,647 61,315
Additional paid-in capital........................................... 46,013,363 46,012,211
Unearned restricted stock............................................ (231,562) (283,021)
Retained earnings.................................................... (18,736,404) (15,808,212)
------------ ------------
Total stockholders' equity.............................................. 27,107,044 29,982,293
------------ ------------
Total liabilities and stockholder's equity.............................. $ 59,593,873 $ 64,575,423
============ ============
</TABLE>
See accompanying notes.
<PAGE>
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
December 31,
--------------------------
1999 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Revenues:
Franchise development................................. $ 148,990 $ 158,390
Royalties............................................. 3,797,993 3,315,615
Manufacturing and distribution........................ 3,568,318 5,558,549
Company centers....................................... 1,191,446 1,804,401
Other................................................. 66,344 72,898
----------- -----------
Total revenues............................................ 8,773,091 10,909,853
Total direct cost......................................... 6,890,324 10,009,804
----------- -----------
Contribution (exclusive of amortization shown separately
below)................................................ 1,882,767 900,049
General and administrative expense........................ 1,479,168 4,039,014
Depreciation expense...................................... 361,540 560,478
Amortization of franchise rights and goodwill............. 497,793 536,880
Loss on sale of assets.................................... --- 709,578
----------- -----------
Operating (loss).......................................... (455,734) (4,945,901)
Other income (expense):
Interest expense...................................... (650,666) (671,044)
Interest income....................................... 11,256 55,102
Other (expense)....................................... (159,766) (474,509)
----------- -----------
Total other (expense)................................. (799,176) (1,090,451)
----------- -----------
(Loss) before income tax expense.......................... (1,254,910) (6,036,352)
Provision (benefit) for income taxes...................... 23,500 (1,441,709)
----------- -----------
Net (loss)................................................ $(1,278,410) $(4,594,643)
=========== ===========
Basic net (loss) per share................................ $(0.21) $(0.75)
Diluted net (loss) per share.............................. $(0.21) $(0.75)
Weighted average shares outstanding--Basic................ 6,164,673 6,120,543
Weighted average shares outstanding--Diluted.............. 6,164,673 6,120,543
</TABLE>
See accompanying notes.
<PAGE>
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
December 31, 1999
-------------------------
1999 1998
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Revenues:
Franchise development.................................... $ 322,385 $ 441,414
Royalties................................................ 7,783,026 7,154,833
Manufacturing and distribution........................... 8,191,824 11,383,284
Company centers.......................................... 2,479,019 3,598,903
Other.................................................... 96,894 121,174
----------- -----------
Total revenues............................................ 18,873,148 22,699,608
Total direct cost......................................... 15,129,182 19,933,556
----------- -----------
Contribution (exclusive of amortization shown separately
below)................................................... 3,743,966 2,766,052
General and administrative expense........................ 3,297,964 5,244,952
Depreciation expense...................................... 687,264 866,951
Amortization of franchise rights and goodwill............. 992,640 1,040,390
Loss on sale of assets.................................... --- 709,578
----------- -----------
Operating (loss).......................................... (1,233,902) (5,095,819)
Other income (expense):
Interest expense......................................... (1,340,603) (1,113,992)
Interest income.......................................... 36,710 99,609
Other (expense).......................................... (299,720) (789,119)
----------- -----------
Total other (expense).................................... (1,603,613) (1,803,502)
----------- -----------
(Loss) before income tax expense.......................... (2,837,515) (6,899,321)
Provision (benefit) for income taxes...................... 90,677 (1,587,228)
----------- -----------
Net (loss)................................................ $(2,928,192) $(5,312,093)
=========== ===========
Basic net (loss) per share................................ $(0.48) $(0.87)
Diluted net (loss) per share.............................. $(0.48) $(0.87)
Weighted average shares outstanding--Basic................ 6,161,809 6,120,543
Weighted average shares outstanding--Diluted.............. 6,161,809 6,120,543
</TABLE>
See accompanying notes.
<PAGE>
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-----------------------------
1999 1998
(Unaudited) (Unaudited)
------------- -----------
<S> <C> <C>
Operating activities:
Net (loss).................................................. $(2,928,192) $(5,312,093)
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Depreciation and amortization............................ 1,679,904 1,907,341
Deferred income taxes.................................... -- (1,587,000)
Severance accrual..................................... -- 265,000
Services received in exchange for stock............... 51,459 --
(Gain) loss on sale of assets......................... (160,128) 709,578
Foreign currency translation adjustment............... -- 25,765
Changes in operating assets and liabilities:
Accounts and notes receivable........................ 827,138 3,515,000
Inventory............................................ 720,913 222,171
Prepaid expenses, refundable income taxes, deposits
and other.......................................... 912,409 328,000
Accounts payable and accrued liabilities............. (41,863) (2,493,116)
Deferred revenue, net................................ (14,456) (155,646)
----------- -----------
Net cash provided by (used in) operating activities......... 1,047,184 (2,575,000)
Investing activities:
Purchases of property and equipment...................... (245,221) (1,148,000)
Sale of property and equipment........................... 1,165,000
Acquisitions............................................. -- (1,306,918)
----------- -----------
Net cash (used in) investing activities..................... 919,779 (2,454,918)
Financing activities:
Sale of company stock.................................... 1,484 --
(Repayments of) proceeds from bank facility.............. (1,195,053) 1,206,683
Proceeds from note payable............................... 345,685 2,000,000
(Repayments) of mortgage notes and other notes payable... (1,083,137) (213,317)
-----------
Net cash (used in) provided by financing activities......... (1,931,021) 2,993,366
----------- -----------
Net change in cash and cash equivalents..................... 35,942 (2,036,552)
Cash and cash equivalents at beginning of year.............. 50,167 2,070,294
----------- -----------
Cash and cash equivalents at end of period.................. $ 86,109 $ 33,742
=========== ===========
</TABLE>
See accompanying notes.
<PAGE>
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,
1999.
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 to
purchase Common Stock were exercised. For the three and six months ended
December 31, 1999 and for the three and six months ended December 31, 1998,
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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, 1999 December 31, 1999
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Numerator:
Net Loss...................................... $(1,278,410) $(4,594,643) $(2,928,192) $(5,312,093)
Denominator:
Denominator for basic EPS-weighted-average
shares........................................ 6,164,673 6,120,543 6,161,809 6,120,543
Denominator for diluted EPS-weighted-average
shares........................................ 6,164,673 6,120,543 6,161,809 6,120,543
Basic net loss per share........................ ($0.21) ($0.75) ($0.48) ($0.87)
Diluted net loss per share...................... ($0.21) ($0.75) ($0.48) ($0.87)
</TABLE>
The 890,850 stock options and 97,500 shares of restricted stock were not
included in the 1999 diluted net loss per share calculation because their effect
would be anti-dilutive.
<PAGE>
Note 3 - Inventory
The components of inventory are as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999
------------- -----------
<S> <C> <C>
Raw materials.................................. $ 659,912 $1,222,762
Work-in-process................................ 895,815 98,587
Finished goods................................. 1,197,997 2,153,288
Reserve for obsolete and unsaleable inventory.. (390,000) (390,000)
---------- ----------
$2,363,724 $3,084,637
========== ==========
</TABLE>
Note 4 - Contingencies
The Company is involved in certain litigation and is subject to unasserted
claims arising in the ordinary course of business. In the opinion of counsel and
management, the ultimate liability, if any, arising from the settlement of these
cases will not have a material adverse effect on the financial operations or
position of the Company.
Note 5 - Joint Venture
On November 10, 1999 the Company entered into a joint venture with Service
Champ, a national distributor of auto parts. The agreement is for three years
whereby the Company and the national distributor will promote the sale of auto
parts and supplies to Precision Tune Auto Care franchisees.
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 December 31, 1999 to the three months ended
December 31, 1998
<TABLE>
<CAPTION>
Summary (in thousands)
<S> <C> <C> <C> <C>
1999 % 1998 %
----- --- ------ ---
Net revenue.................. 8,773 100% 10,910 100%
Direct cost.................. 6,890 79 10,010 92
General and administrative... 1,479 17 4,039 37
Operating (loss)............. (456) (5) (4,946) (45)
</TABLE>
Revenue
Revenue for the three months ending December 31, 1999 was $8.8 million, a
decrease of $2.1 million, or 20%, compared with revenue of $10.9 million for the
corresponding period of the prior year. The decrease was primarily the result of
decreases in retail sales from company centers, manufacturing and distribution
revenues of $613,000 and $2.0 million, respectively. These decreases were
partially offset by an increase in royalty revenue of $482,000. The decrease
in revenue is primarily attributable to a joint venture with Service Champ by
which Service Champ would supply the franchisees with parts and equipment that
was previously sold by PAC, a wholly owned subsidiary of the Company. PAC was
wound down concurrent with the execution of the joint venture agreement.
<PAGE>
Direct Cost
Direct costs for the three months ending December 31, 1999 totaled $6.9 million,
a decrease of $3.1 million or 31%, compared with $10.0 million for the quarter
ending December 31, 1998. This was largely as a result of the closing of PAC a
former distribution center of parts and equipment.
General and Administrative Expense
General and administrative expense was $1.5 million for the three months ending
December 31, 1999, an decrease of $2.6 million or 63%, compared with $4.0
million for the quarter ending December 31, 1998. Writeoffs to accounts and
notes receivable accounted for the higher general and administrative costs
during the prior year. In addition, staffing levels were reduced as part of the
Company's attempt to improve operating results.
Operating (Loss)
The Company recorded an operating loss for the three months ending December 31,
1999 of $456,000 which represents an decrease in operating loss of $4.5 million
or 91% compared with an operating loss of $4.9 million 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:
<TABLE>
<CAPTION>
Three months ended December 31, 1999 1998
- --------------------------------- -------- ----------
<S> <C> <C>
Depreciation $361,540 $ 560,478
Amortization 497,793 536,880
-------- ----------
Total $859,333 $1,097,358
======== ==========
</TABLE>
TABLE 2 - Components of Interest Expense
The components of interest expense are summarized as follows:
<TABLE>
<CAPTION>
Three months ended December 31, 1999 1998
- ---------------------------------- --------- ---------
<S> <C> <C>
Interest incurred $650,666 $671,044
======== ========
</TABLE>
Results of Operations
Comparison of the six months ended December 31, 1999 to the six months
ended December 31, 1998
Summary (in thousands)
<TABLE>
<S> <C> <C> <C> <C>
1999 % 1998 %
-------- --- ------ ---
Net revenue........................................ 18,873 100% 22,700 100%
Direct cost........................................ 15,129 80 19,934 88
General and administrative......................... 3,298 17 5,245 23
Operating (loss)................................... (1,234) (7) (5,096) (22)
</TABLE>
Revenue
Revenue for the six months ending December 31, 1999 was $18.9 million, a
decrease of $3.8 million, or 17%, compared with revenue of $22.7 million for the
corresponding period of the prior year. The decrease was primarily the result of
decreases in retail sales from company centers, manufacturing and distribution
revenues and franchise development of $1.1 million, $3.2 million and $119,000
respectively. These decreases were partially offset by an increase in royalty
revenue of $628,000. The reduction in retail sales is a result the Company
selling under performing company stores during the second half of fiscal year
1999. Manufacturing and distribution revenues were down as a result of the
joint venture with Service Champ and low inventory levels during the first
quarter of fiscal year 2000.
<PAGE>
Direct Cost
Direct costs for the six months ending December 31, 1999 totaled $15.1 million,
a decrease of $4.8 million or 24%, compared with $19.9 million for the six
months ending December 31, 1998. The decrease is attributable to cost decreases
in company centers, manufacturing and distribution and franchise development of
$1.1 million, $3.6 million and $325,000 respectively. This was partially offset
by an increase in royalty costs of $225,000.
General and Administrative Expense
General and administrative expense was $3.3 million for the six months ending
December 31, 1999, a decrease of $1.9 million or 37%, compared with $5.2 million
for the six months ending December 31, 1998.
Operating (Loss)
The Company recorded an operating loss for the six months ending December 31,
1999 of $1.2 million which represents an decrease in operating loss of $3.9
million or 76% compared with an operating loss of $5.1 million for the
corresponding period of the prior year.
TABLE 3 - Components of Depreciation and Amortization Expense
The components of depreciation and amortization expense are summarized as
follows:
<TABLE>
<CAPTION>
Six months ended December 31, 1999 1998
- ------------------------------- ---------- ----------
<S> <C> <C>
Depreciation $ 687,264 $ 866,951
Amortization 992,640 1,040,390
Total $1,679,904 $1,907,341
========== ==========
</TABLE>
TABLE 4 - Components of Interest Expense
The components of interest expense are summarized as follows:
<TABLE>
<CAPTION>
Six months ended December 31, 1999 1998
- ----------------------------- ---- ----
<S> <C> <C>
Interest incurred $1,340,603 $1,113,992
========== ==========
</TABLE>
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>
Six Months Ended December 31,
------------------------------
1999 1998
------------- ---------------
<S> <C> <C>
Net cash provided by (used in)
operating activities..................... $ 1,047,184 $(2,575,000)
Net cash used in investing activities..... 919,779 (2,454,918)
Net cash used in (provided by) financing
activities............................... (1,931,021) 2,993,366
----------- -----------
Change in cash and cash equivalents....... $ 35,942 $(2,036,552)
=========== ===========
</TABLE>
Cash at December 31, 1999 was $86,000 an increase of $36,000 from $50,000 June
30, 1999. During the six months ending December 31, 1999, cash provided by
operating activities was $1.0 million which is attributable to decreases in
inventory levels of $720,000, decrease in accounts receivable of $827,000 and a
decrease in prepaid expenses of $900,000.
<PAGE>
Cash used in investing activities for the six months ended December 31, 1999 was
$919,000. The capital expenditures consisted mainly of PIN systems purchases and
signage upgrades, and upgrades to the Company's internal computer hardware and
software systems. Dispositions of company owned car washes and the chemical
plant generated $1.2 million in gross proceeds.
Cash used in financing activities for the six months ended December 31, 1999 was
$1.9 million. Financing activities during the period included repayments of the
Company's bank facility of $1.2 million and mortgage and notes payable of $1.1
million. The Company signed a note for $345,000 for the transfer of the Bay
Area franchise territory. In addition, the Company sold two car washes during
the second quarter that were encumbered by mortgages. From the net proceeds the
Company repaid $620,000 of principal to Heartland Bank, holder of the mortgages.
Debt Transactions
As of June 30, 1999, the Company had borrowed approximately $8.9 million under
its bank credit agreement, of which $4.4 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 $4.5 million represented funds advanced under a general revolving credit
portion of the credit facility (the "Line of Credit Loan").
During the first quarter of 1999, the Company was not in compliance with various
covenants contained in its bank credit agreement. On October 12, 1998, the
Company and the Bank executed an amendment to its credit agreement effective
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 became effective on January 31, 1999. Pursuant to the amendment,
loans extended by the bank under the Acquisition Line of Credit and the Line of
Credit Loan was to 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. The terms of the subordinated debt call for increases in the
interest rate if the Company defaults in the timely payment of interest on the
subordinated debt, and the Company is not permitted to make any payment with
respect to the subordinated debt during the continuance of a default or event of
default under the Company's senior indebtedness. As a result of a combination of
defaults under the Company's senior indebtedness and the Company's failure to
make interest payments on the subordinated debt, the subordinated debt was for a
period of time accruing interest at 16% per annum.
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 amended and restated
bank credit agreement (the "Amended and Restated Credit Agreement"), which was
reduced to writing on February 22, 1999, and effective retroactively to February
1, 1999, and which included a waiver of financial covenant noncompliance. Under
these terms of the Amended and Restated Credit Agreement, the Company was
required to complete a series of financings and asset sales, from which the bank
was to receive a portion of the proceeds as permanent reductions in the
Company's credit facility. The terms of the Amended and Restated Credit
Agreement were further amended on May 13, 1999, to revise the terms of certain
required real estate transactions and the application of proceeds to reduce the
Acquisition Line of Credit and the Line of Credit Loan.
In addition, 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 was to mature on
May 25, 1999. Accrued 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 on the subordinated
debenture may only be paid if the Company has made all required payments to the
bank as required by the terms of the Amended and Restated Credit agreement set
forth above and the Company is not otherwise in default of the Amended and
Restated Credit Agreement. This subordinated debenture has been extended to
April 15, 2001.
To date the Company has succeeded in concluding all but one of the required real
estate transactions, resulting in a permanent reduction of outstandings under
the Line of Credit Loan of $4,600,000 and the repayment of outstandings under
the Acquisition Line of Credit in the amount of $5,000,000. These transactions
also generated a small amount of working capital availability and approximately
$1,500,000 to repay a portion of the principal due under the $5,000,000
subordinated debenture due May 25, 1999. On June 1, 1999 the Company repaid $1.4
million as a permanent reductions of the subordinated debenture. The Company was
required to repay an additional $450,000 upon completing a sale of a certain car
wash property by July 31, 1999, which transaction has not yet occurred.
On March 8, 1999, the Company entered into a mortgage with Heartland Bank in the
principal amount of $1,035,000 with an annual
<PAGE>
interest rate of 8.75%. The rate is subject to adjustment on March 10, 2004. The
Company is required to make monthly payments of principal plus interest
beginning on April 10, 1999. The mortgage is being amortized over a 20 year
period, with a balloon payment due on March 10, 2009. The mortgage is secured by
four of the Company's car washes. If any payment required under the mortgage is
not made within thirty days after the date due, the interest rate will increase
by 2%.
On May 17, 1999, the Company executed nineteen promissory notes totaling
$7,204,000, with FFCA Acquisition Corporation. Each note accrues interest at a
rate of 9.9% per annum and matures on June 1, 2014 with the exception of one
which matures on August 1, 2004. Principal and interest payments are due in
monthly installments commencing on July 1, 1999. Each note is secured by
mortgages on properties. In the event of default the interest rate shall
increase to 18%.
Although the foregoing transactions improved cash flow by converting short term
obligations into long term debt, they have not significantly contributed to
working capital. Accordingly, there can be no assurance that the Company will
not require additional working capital financing to conduct its operations.
On October 14, 1999, the Company and the bank reached agreement in principal
concerning the terms of a second amended and restated loan and security
agreement (the "Second Amended and Restated Loan and Security Agreement"), which
was reduced to writing on October 27, 1999, and effective retroactively to
October 14, 1999. According to the agreement the senior lender 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 meet
the following over its next fiscal year to (a) reduce accounts payable by at
least $250,000 on a cumulative basis during each of the next four fiscal
quarters, (b) not suffer, for the quarter ending December 31, 1999, a negative
net income exceeding $500,000, exclusive of 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 exclusive of the required asset sales. In addition, the Company will be
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.
As of December 31, 1999, the Company succeeded in reducing accounts payable by
the required amount of $250,000. It also achieved the minimum earnings target
of no less than $500,000 loss adjusted for depreciation, amortization, taxes and
certain unpaid interest. In addition to the above conditions, the Company was
required to complete the sale of three prefabricated lube buildings and one car
wash during the quarter. The Company has received deposits for two buildings
which are scheduled to be delivered in the third quarter and has a signed
contract for the sale of a car wash of which the Company estimates net proceeds
of $600,000. There can be no assurances that the Company will be in a position
to satisfy each of these requirements. The Company has received a waiver from
the bank concerning non-compliance with the above dated February 8, 2000.
While the holder of $2 million in subordinated debt had previously agreed to
extend the maturity thereof to November 1, 2000, the holder and the Company
recently re-negotiated the terms of that arrangement. The parties have now
agreed that: (i) the maturity of the debt shall be extended to September 30,
2000; (ii) the interest rate would return to 14% effective August 15, 1999, and
(iii) that default interest in the amount of $266,667 would be paid in 71,111
shares of Common Stock if approved by shareholders. The amount of shares was
determined by 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. If
shareholder approval for the issuance of the stock is not obtained by April 12,
2000, the $266,667 is to be paid by the Company in cash on September 30, 2000.
The holder also agreed to waive existing events of default. The Company
previously received the approval of the holder of an additional $3.6 million in
subordinated debt to waive existing events of default and to extend the maturity
date to April 15, 2001.
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. The Company expects that its businesses will continue to be adversely
affected until sufficient cash is available to meet 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.
The Company's Board of Directors has authorized the Company to retain the
services of an investment banker to review strategic and recapitalization
opportunities.
<PAGE>
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. The Company's auditors have included an explanatory paragraph in
their report to the Company's consolidated financial statements for the fiscal
year ended June 30, 1999 that expresses substantial doubt as to the Company's
ability to continue as a going concern. The expression of this judgement by the
Company's auditors may make successful implementation of the Company's
restructuring program more difficult.
Joint Venture
On November 10, 1999 the Company entered into a joint venture with a national
distributor of auto parts. The agreement is for three years whereby the Company
and the national distributor will promote the sale of auto parts and supplies to
Precision Tune Auto Care franchisees. The Company expects the joint venture will
have a positive impact on cash flow.
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.
Year 2000 (Y2K) Compliance
As of the filing of this Form 10-Q, the Company has not experienced any material
negative impact related to the Y2K issue. The Company replaced its computer
system at its corporate headquarters with a new management information system
(MIS). The new MIS system is certified to be Y2K compliant. The new MIS system
is currently being integrated into the Company's existing network while
conversion of the Company's existing data into the new system continues.
Hardware and software costs were approximately $330,000 in FY99. Additional
programming costs are expected to reach $100,000 during FY00 representing 30% of
the MIS budget. 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. In
addition, the Company replaced its phone system with a certified Y2K system
during the quarter ended December 31, 1999 at a cost of approximately $60,000.
The Company will continue to monitor its systems and operations until it is
reasonably assured that no significant business interrruptions will occur as a
result of Y2K issues.
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 Contractural Maturity Dates
<TABLE>
<CAPTION>
2000 2001 2002 2003 2004 Thereafter Total
----------- ---------- ---------- ---------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term debt: $ 550,000 $3,117,000
Term loan................. 3,667,000
Variable rate............. LIBOR + 4.75%
Line of credit............ 4,047,000 4,047,000
Variable rate............. LIBOR + 4.75%
</TABLE>
<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 including 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 instituted a lawsuit against the Company in the United States District
Court for the Central District of California. The lawsuit alleged 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 also 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 sought damages in the amount of $15,000,000 plus interest, costs and any
consequential damages determined by the court. PAISA was also 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.
On April 16, 1999, a notice of voluntary dismissal without prejudice was filed
by the plaintiff and granted by the Court. Plaintiff re-filed their complaint in
the Superior Court of the State of California for the County of Los Angeles
Central District on April 27, 1999, Case No. BC209390. The Company believes that
the lawsuit is wholly without merit and intends to vigorously contest and defend
the action.
On November 1, 1999, the Court dismissed this case without prejudice.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
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
As previously disclosed, the Company's stock listing was moved from the Nasdaq
National Market to the Nasdaq SmallCap Market on August 16, 1999. The continued
listing of the Company's stock on the Nasdaq SmallCap Market is contingent upon
approval of the Nasdaq Stock Market. The Company intends to issue a press
release promptly following the time it has been advised of the Nasdaq Stock
Market's final determination with respect to the future listing of the Company's
shares of common stock. As of February 9, 2000, the Nasdaq Stock Market has not
made a final determination with regard to the Company's continued listing on the
Nasdaq SmallCap Market.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
27 Financial Data Schedule
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on Febraury 11, 2000.
Precision Auto Care, Inc.
/s/ Charles L. Dunlap
By: _____________________________________
Charles L. Dunlap
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/ Charles L. Dunlap President, Chief Executive February 11, 2000
- -------------------------------- Officer and Director
Charles L. Dunlap (Principal Executive Officer)
/s/ Jerry L. Little Senior Vice President and Chief February 11, 2000
- -------------------------------- Financial Officer (Principal
Jerry L. Little Financial Accounting Officer)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-1-1999
<PERIOD-END> DEC-31-1999
<CASH> 86,109
<SECURITIES> 0
<RECEIVABLES> 7,212,777
<ALLOWANCES> (2,530,193)
<INVENTORY> 2,363,724
<CURRENT-ASSETS> 8,427,231
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 19,834,950
<BONDS> 0
0
0
<COMMON> 61,647
<OTHER-SE> 26,993,939
<TOTAL-LIABILITY-AND-EQUITY> 59,593,873
<SALES> 18,773,148
<TOTAL-REVENUES> 18,773,148
<CGS> 15,129,182
<TOTAL-COSTS> 23,851,016
<OTHER-EXPENSES> 299,720
<LOSS-PROVISION> 2,928,192
<INTEREST-EXPENSE> 1,340,603
<INCOME-PRETAX> (2,837,515)
<INCOME-TAX> 90,677
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,928,192)
<EPS-BASIC> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
