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, 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 December 31, 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 8,081,808 shares of Common Stock
as of January 31, 2001.
Precision Auto Care, Inc.
Form 10-Q
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
General Information............................................................................... 3
Consolidated Balance Sheets as of December 31, 2000 and
June 30, 2000..................................................................................... 4
Consolidated Statements of Operations for the three months
ended December 31, 2000 and 1999.................................................................. 5
Consolidated Statements of Operations for the six months
ended December 31, 2000 and 1999.................................................................. 6
Consolidated Statements of Cash Flows for the six months
ended December 31, 2000 and 1999.................................................................. 7
Notes to the Consolidated Financial Statements.................................................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...............................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................14
Item 2. Changes in Securities.................................................................14
Item 3. Defaults Upon Senior Securities.......................................................14
Item 4. Submission of Matters to a Vote of Security Holders...................................14
Item 5. Other Information.....................................................................14
Item 6. Exhibits or Reports on Form 8-K.......................................................15
Signatures........................................................................................15
Exhibit Index.....................................................................................16
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. Currently the Companys intent is 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 December 31, 2000, these services were
provided at 581 Precision Tune Auto Care centers owned and operated by
franchisees and four 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 December 31, 2000, there are 30 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, 2000, there were 10 Precision Lube Express centers
owned and operated by franchisees. 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.
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2000 2000
(Unaudited) ----
----------
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 1,804,766 $ 13,370
Accounts receivable, net of allowance of $1,504,394 and $2,155,735,
respectively.................................................................... 4,527,817 3,335,300
Inventory, net of allowances of $600,000.......................................... 1,462,572 1,517,693
Notes receivable, net of allowances of 0 and $586,000, respectively............... 80,139 153,260
Other assets...................................................................... 136,295 132,013
Deferred income taxes............................................................. - 71,774
- ------------
Total current assets.......................................................... 8,011,589 5,223,410
Notes receivable, net of allowance.................................................... - 276,000
Property, plant and equipment, at cost................................................ 7,487,516 15,480,911
Less: Accumulated depreciation.................................................... (3,298,359) (3,669,556)
------------ ------------
4,189,157 11,811,355
Goodwill and other intangibles, net of accumulated
Amortization of $14,069,688 and $14,971,394........................................... 25,549,437 28,939,600
Deposits and other.................................................................... 158,353 81,224
------------ ------------
Total assets.................................................................. $ 37,908,536 $ 46,331,589
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.......................................... $ 10,288,037 $ 11,633,783
Mortgage notes payable............................................................ - 301,962
Subordinated debt................................................................. 5,586,960 -
Other notes payable............................................................... 314,177 552,209
Deferred revenue.................................................................. 1,521,325 1,478,533
------------ ------------
Total current liabilities..................................................... 17,710,499 13,966,486
Notes payable- long term debt......................................................... 10,643,228 -
Bank facility......................................................................... - 7,126,615
Subordinated debt..................................................................... - 5,586,960
Mortgage notes payable................................................................ - 6,628,428
Other notes payable................................................................... 460,887 482,936
Deferred revenue...................................................................... 80,666 134,517
Refundable deposits................................................................... 4,0004,000
Other liabilities..................................................................... 45,128 125,657
------------ ------------
Total liabilities............................................................. 28,944,408 34,055,600
Stockholders' equity:
Common stock, $.01 par; 19,000,000 shares authorized; 8,160,508 and
6,434,534 shares issued and outstanding......................................... 81,605 64,345
Additional paid-in capital........................................................ 47,937,332 46,532,803
Unearned restricted stock......................................................... (93,518) (130,922)
Retained earnings (deficit)....................................................... (38,961,291) (34,190,236)
------------ ------------
Total stockholders' equity.................................................... 8,964,128 12,275,989
------------ ------------
Total liabilities and stockholder's equity.................................... $ 37,908,536 $ 46,331,589
============ ============
See accompanying notes.
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
December 31,
------------
2000 1999
(Unaudited) (Unaudited)
----------- -----------
Revenues:
Franchise development $ 129,490 $ 148,990
Royalties 3,129,656 3,797,993
Manufacturing and distribution 1,790,296 3,568,318
Company centers 389,308 1,191,446
Other 59,581 66,344
----------- -----------
Total revenues 5,498,331 8,773,091
Total direct cost 4,833,251 6,890,324
----------- -----------
Contribution (exclusive of amortization shown separately below) 665,080 1,882,767
General and administrative expense 1,399,509 1,479,168
Depreciation expense 263,404 361,540
Amortization of franchise rights and goodwill 446,189 497,793
Other operating expense (6,608) 159,766
----------- -----------
Operating (loss) (1,437,414) (615,501)
Other income (expense):
Interest expense (644,431) (650,666)
Interest income 3,369 11,256
----------- -----------
Total other (expense) (641,062) (639,410)
----------- -----------
Loss before income tax expense (2,078,476) (1,254,911)
(Benefit) provision for income taxes 28,719 23,500
----------- -----------
Net loss $(2,107,195) $(1,278,410)
=========== ===========
Basic and diluted net loss per share $ (0.26) $ (0.21)
Weighted average shares outstanding--Basic and Diluted 8,081,808 6,164,673
See accompanying notes.
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended
December 31,
------------
2000 1999
(Unaudited) (Unaudited)
----------- -----------
Revenues:
Franchise development $ 264,827 $ 322,385
Royalties 6,473,601 7,783,026
Manufacturing and distribution 3,691,672 8,191,824
Company centers 1,199,917 2,479,019
Other 97,101 96,894
----------- -----------
Total revenues 11,727,118 18,873,148
Total direct cost 10,383,661 15,129,182
----------- -----------
Contribution (exclusive of amortization shown separately below) 1,343,457 3,743,966
General and administrative expense 2,989,741 3,297,963
Depreciation expense 562,376 687,264
Amortization of franchise rights and goodwill 939,566 992,640
Other operating expense 49,496 299,720
----------- -----------
Operating (loss) (3,197,722) (1,533,622)
Other income (expense):
Interest expense (1,586,982) (1,340,603)
Interest income 13,650 36,711
----------- -----------
Total other (expense) (1,573,332) (1,303,892)
----------- -----------
Loss before income tax expense (4,771,054) (2,837,515)
(Benefit) provision for income taxes - 90,677
----------- -----------
Net loss $(4,771,054) $(2,928,192)
=========== ===========
Basic and diluted net loss per share $ (0.61) $ (0.48)
Weighted average shares outstanding--Basic and Diluted 7,762,873 6,161,809
See accompanying notes.
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
December 31,
------------
2000 1999
(Unaudited) (Unaudited)
----------- -----------
Operating activities:
Net loss............................................................................. $(4,771,054) $(2,928,192)
Adjustments to reconcile net (loss) to net cash provided by operating activities:
Depreciation and amortization..................................................... 1,501,942 1,679,904
Interest expense.................................................................. 44,228
Services received in exchange for stock........................................ 58,193 51,459
Gain on sale of assets......................................................... - (160,128)
Changes in operating assets and liabilities:
Accounts and notes receivable................................................. (843,396) 827,138
Inventory..................................................................... 55,121 720,913
Prepaid expenses, recoverable income taxes, deposits and other................ (13,038) 912,409
Accounts payable and accrued liabilities...................................... 40,879 (41,863)
Deferred revenue.............................................................. (11,059) (14,456)
----------- -----------
Net cash (used in) provided by operating activities.................................. (3,938,184) 1,047,184
Investing activities:
Purchases of property and equipment............................................... (53,334) (245,221)
Sale of property and equipment.................................................... 8,100,000 1,165,000
----------- -----------
Net cash provided by (used in) investing activities.................................. 8,046,666 919,779
Financing activities:
Sale of company stock............................................................. 750,000 1,484
Repayments of bank facility....................................................... (7,126,615) (1,195,053)
Proceeds from note payable..................................................... 11,250,000 345,685
Repayment of mortgage notes and other notes payable............................ (7,190,471) (1,083,137)
----------- -----------
Net cash used in financing activities................................................ (2,317,086) (1,931,021)
----------- -----------
Net change in cash and cash equivalents.............................................. 1,791,396 35,942
Cash and cash equivalents at beginning of year....................................... 13,370 50,167
----------- -----------
Cash and cash equivalents at end of period........................................... $ 1,804,766 $ 86,109
=========== ===========
See accompanying notes.
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 six months ended
December 31, 2000 and 1999, diluted EPS is equivalent to basic EPS as the
inclusion of the effect of assumed exercises and conversions of outstanding
options and warrants was anti-dilutive.
The following table sets forth the computation of basic and diluted net (loss)
per share.
Six Months Ended December 31,
-----------------------------
2000 1999
---- ----
Numerator:
Net Loss.............................................................. $(4,771,054) $(2,928,192)
Denominator:
Denominator for basic EPS-weighted-average shares..................... 7,762,873 6,161,809
Denominator for diluted EPS-weighted-average shares................... 7,762,873 6,161,809
Basic net loss per share.................................................. $(0.61) $(0.48)
Diluted net loss per share................................................ $(0.61) $(0.48)
Note 3 - Inventory
The components of inventory are as follows:
December 31, June 30,
2000 2000
---- ----
Raw materials........................................................... $ 755,054 $ 979,777
Work-in-process......................................................... 113,338 191,504
Finished goods.......................................................... 1,194,180 946,412
Reserve for obsolete and unsaleable inventory........................... (600,000) (600,000)
----------- -----------
$ 1,462,572 $ 1,517,693
=========== ===========
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.
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.
In connection with obtaining the above credit facility, an origination fee was
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. A valuation was performed on the
debt and the warrants issued in this transaction. The relative fair market value
allocated to the warrants of approximately $651,000 has been recorded as paid in
capital. The discount resulting from recording the value of the warrants is
being amortized over the term of the debt agreement.
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 approximately
$850,000 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
None.
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, 2000 to the three months ended
December 31, 1999
Summary (in thousands)
2000 % 1999 %
---- - ---- -
Net revenue.................................. 5,498 100% 8,773 100%
Direct cost.................................. 4,833 88 6,890 79
General and administrative................... 1,400 25 1,479 17
Operating (loss)............................. (1,437) (26) (616) (7)
Revenue. Revenue for the three months ending December 31, 2000 was $5.5 million,
a decrease of approximately $3.3 million, or 38%, compared with revenue of $8.8
million for the corresponding period of the prior year. The decrease was
primarily the result of decreases in retail sales from Company stores of
$800,000, significant reduction in manufacturing and distribution revenues of
$1.8 million, and a reduction of franchise and royalty revenues of $688,000. 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 $740,000. The Company's Car wash manufacturing revenue was down
$970,000. Royalty revenues were down as a result of fewer franchise centers from
the prior year.
Direct Cost. Direct costs for the three months ending December 31, 2000 totaled
$4.8 million, a decrease of $2.1 million or 30%, compared with $6.9 million for
the quarter ending December 31, 1999. The decrease is attributable to cost
decreases in company centers and manufacturing and distribution of $751,000 and
$1.5 million, respectively. These decreases were partially offset by an increase
in franchise and royalty expenses of $168,000.
General and Administrative Expense. General and administrative expense was $1.4
million for the three months ending December 31, 2000, a decrease of $79,000 or
5%, compared with $1.5 million for the quarter ending December 31, 1999.
Operating (Loss). The Company recorded an operating loss for the three months
ending December 31, 2000 was $1.4 million which represents an increase in
operating loss of $1.4 million or 127% compared with an operating loss of
$616,000 for the corresponding period of the prior year.
Comparison of the six months ended December 31, 2000 to the six months ended
December 31, 1999
Summary (in thousands)
2000 % 1999 %
---- - ---- -
Net revenue.................................. 11,727 100% 18,873 100%
Direct cost.................................. 10,384 89 15,129 80
General and administrative................... 2,990 26 3,298 17
Operating (loss)............................. (3,198) (27) (1,534) (8)
Revenue. Revenue for the six months ending December 31, 2000 was $11.7 million,
a decrease of approximately $7.2 million, or 38%, compared with revenue of $18.9
million for the corresponding period of the prior year. The decrease was
primarily the result of decreases in manufacturing and distribution revenues of
$4.5 million, company center operations of $1.3 million, and a reduction of
franchise and royalty revenues of $1.4 million. 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 $2.4 million. The
Company's Car wash manufacturing revenue was down $970,000. Royalty revenues
were down as a result of fewer franchise centers from the prior year.
Direct Cost. Direct costs for the six months ending December 31, 2000 totaled
$10.4 million, a decrease of $4.7 million or 31%, compared with $15.1 million
for the six months ending December 31, 1999. The decrease is attributable to
cost decreases in company centers and manufacturing and distribution of $1.3
million and $4.5 million, respectively. These decreases were partially offset by
an increase in franchise and royalty expenses of $444,000.
General and Administrative Expense. General and administrative expense was $3.0
million for the six months ending December 31, 2000, a decrease of $308,000 or
9%, compared with $3.3 million for the six months ending December 31, 1999.
Operating (Loss). The Company recorded an operating loss for the six months
ending December 31, 2000 of $3.2 million which represents an increase in
operating loss of $1.7 million or 113% compared with an operating loss of $1.5
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:
Three months ended December 31, 2000 1999
------------------------------- ---- ----
Depreciation $ 263,404 $ 361,540
Amortization 446,189 497,793
---------- ----------
Total $ 709,593 $ 859,333
========== ==========
Six months ended December 31, 2000 1999
----------------------------- ---- ----
Depreciation $ 562,376 $ 687,264
Amortization 939,566 992,640
---------- ----------
Total $1,501,942 $1,679,904
========== ==========
TABLE 2 - Components of Interest Expense
The components of interest expense are summarized as follows:
Three months ended December 31, 2000 1999
------------------------------- ---- ----
Interest incurred $ 644,431 $ 650,666
========== ==========
Six months ended December 31, 2000 1999
----------------------------- ---- ----
Interest incurred $1,586,982 $1,340,603
========== ==========
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.
Three Months Ended December 31,
-------------------------------
2000 1999
---- ----
Net cash (used in) provided by operating activities............................. $(3,938,184) $1,047,184
Net cash provided by (used in) investing activities............................. 8,046,666 919,779
Net cash (used in) financing activities......................................... (2,317,086) (1,931,021)
----------- ----------
Change in cash and cash equivalents............................................. $ 1,791,396 $ 35,942
=========== ==========
Cash at December 31, 2000 was $1,804,766 an increase of $1,791,396 from $13,370
on June 30, 2000. During the period, cash used by operating activities was $3.9
million which is attributable to a net loss of $4.8 million and increases in
accounts receivable of $843,000. These were partially offset by non-cash
expenses for depreciation and amortization, services received in exchange for
stock and interest expense of $1.5 million, $58,000 and $44,000, respectively.
The decrease was further offset by increases of accounts payable and reduction
of inventory by $41,000 and $55,000, respectively.
Cash provided by investing activities for the quarter ended December 31, 2000
was $8.0 million. The cash provided by investing activities was the result of
sales of car washes and quick lube buildings in Denver, Colorado, Columbus, Ohio
and Indianapolis, Indiana for $4.9 million, $1.8 million and $1.4 million,
respectively. The sales of the assets was for less than the carrying value of
the fixed assets and goodwill combined. This difference was anticipated and
accrued as a loss at June 30, 2000. These sales did not impact earnings this
fiscal year from these sales. This increase was partially offset by additions of
fixed assets of $53,000.
Cash used in financing activities for the quarter ended December 31, 2000 was
$2.3 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
$11.3 million. The infusions of cash were offset by repayments of mortgages, the
bank facility and other notes payable of $14.3 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 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 December 31, 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 December 31, 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 December 31, 2001. The holder also waived all debt
covenants through December 31, 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 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 approximately
$850,000 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
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.
Signature Title Date
--------- ----- ----
/s/ Louis M. Brown President, Chief Executive February __, 2000
------------------
Officer and Director
Louis M. Brown (Principal Executive Officer)
/s/ Robert R. Falconi Senior Vice President and Chief February __, 2000
---------------------
Financial Officer (Principal
Robert R. Falconi Financial Accounting Officer)
EXHIBIT INDEX
Number PAGE
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27 Financial Data Schedule