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 March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-29478
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 10,724,308 shares of Common
Stock as of March 31, 2002.
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 March 31, 2002 and
June 30, 2001..................................................................................... 4
Consolidated Statements of Operations for the three months
ended March 31, 2002 and 2001..................................................................... 5
Consolidated Statements of Operations for the nine months
ended March 31, 2002 and 2001..................................................................... 6
Consolidated Statements of Cash Flows for the nine months
ended March 31, 2002 and 2001..................................................................... 7
Notes to the Consolidated Financial Statements.................................................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................... 16
Item 2. Changes in Securities................................................................. 18
Item 3. Defaults Upon Senior Securities....................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders................................... 19
Item 5. Other Information..................................................................... 19
Item 6. Exhibits or Reports on Form 8-K....................................................... 19
Signatures........................................................................................ 20
2
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of the
Securities Act of 1933 (the "Securities Act") and the Securities Exchange Act of
1934. When used in this report, the words "anticipate," "believe," "estimate,"
"expect," "intend" and "plan" as they relate to Precision Auto Care, Inc. or its
management are intended to identify such forward-looking statements. All
statements regarding Precision Auto Care, Inc. or Precision Auto Care, Inc.'s
expected future financial position, business strategy, cost savings and
operating synergies, projected costs and plans, and objectives of management for
future operations are forward-looking statements. Although Precision Auto Care,
Inc. believes the expectations reflected in such forward-looking statements are
based on reasonable assumptions, no assurance can be given that such
expectations will prove to have been correct. Important factors that could cause
actual results to differ materially from the expectations reflected in the
forward-looking statements herein include, among others, the factors set forth
under the caption "Business--Risk Factors," general economic and business and
market conditions, changes in federal and state laws, and increased competitive
pressure in the automotive aftermarket services business.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
General Information
Precision Auto Care, Inc. ("PACI" or the "Company") is a provider of
automotive maintenance services with franchised centers located in the United
States and in certain foreign countries. At March 31, 2002, the Company had 57
employees. Primarily through its franchised centers, services are provided to
automobile owners and focus on those high frequency items required on a periodic
basis to maintain the vehicle properly. The Company offers these services
through three brands that are intended to be complementary:
. Precision Tune Auto Care ("PTAC") provides automotive maintenance
services, such as engine performance, oil change and lubrication
and brake services, that require relatively short service times.
At March 31, 2002, these services were provided at 462 Precision
Tune Auto Care centers owned and operated by franchisees.
. 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, the Company believes that operations commence
more quickly and with less capital investment than is the case
for many competitors. At March 31, 2002, there were 16 Precision
Lube Express centers owned and operated by franchisees. In the
future, the Company intends to grow this part of the business
primarily through its co-branding relationship with Petro USA,
Inc., a subsidiary of Getty Petroleum Marketing, Inc., and
potential co-branding relationships with other petroleum
retailers.
. Through HydroSpray Car Wash Equipment, Co., Inc. ("HydroSpray"),
one of its subsidiaries, the Company manufactures, distributes
and sells car wash equipment. It also manufactures and installs
the modular building and equipment system used by Precision Lube
Express centers, although there have not been any purchases of
Hydrospray products by Precision Lube Express centers for the
past 21 months. HydroSpray also sells these modular buildings
to third parties for various commercial applications. The
Company believes that the HydroSpray equipment package is a
leading car wash equipment package on the market. It includes
such unique features as an integrated computer system that
controls the auto wash system and allows remote dial-in access
for system status reports and the diagnosis of maintenance
problems along with its recently redesigned automatic tower and
track that adjusts to the size of each vehicle.
The Company operated a manufacturing facility that produced dryers for car
washes. That business was merged with HydroSpray Car Wash Equipment, Co., Inc.
in March 2002 in an effort to reduce company overhead.
The Company was incorporated as a Virginia corporation in April 1997, but
its predecessors have been in the automotive maintenance services business for
over twenty-five 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 automotive technology changed,
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 its initial public offering.
In March 1998, the Company acquired the holder of the master franchise agreement
for Precision Tune Auto Care in Mexico and Puerto Rico. The master franchise
agreement for Mexico was sold in January 2002.
3
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
--------- --------
2002 2001
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 482,422 $ 344,458
Restricted cash in escrow...................................................... 350,000 -
Accounts receivable, net of allowance of $645,478 and $331,793
respectively................................................................ 1,473,496 1,024,751
Inventory, net of allowance of $189,475 and $213,770, respectively............. 1,406,581 1,792,462
Other assets................................................................... 192,736 211,970
Assets held for sale........................................................ 119,116 1,329,293
------------ ------------
Total current assets...................................................... 4,024,351 4,702,934
Property, plant and equipment, at cost.............................................. 4,647,079 5,364,233
Less: Accumulated depreciation................................................. (3,497,416) (3,003,787)
------------ ------------
1,149,663 2,360,446
Goodwill and other intangibles, net of accumulated amortization of $16,237,528
and $15,665,423, respectively.................................................... 9,058,407 13,019,849
Deposits and other.................................................................. 28,088 32,087
------------ ------------
Total assets.............................................................. $14,260,509 $20,115,316
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities....................................... $ 6,421,909 $ 5,705,182
Related party payable- Board LLC............................................... 539,900 1,551,946
Subordinated debt.............................................................. 3,586,960 -
Accrued interest on related party debt......................................... 2,122,479 -
Other notes payable- current................................................... 734,717 543,576
Deferred revenue............................................................... 914,142 380,148
------------ ------------
Total current liabilities................................................. 14,320,107 8,180,852
Credit facility with related party.................................................. 10,889,721 10,736,573
Subordinated debt................................................................... - 3,586,960
Related party payable- Board LLC- non current....................................... 396,137 -
Other notes payable- non current.................................................... 89,126 179,081
Accrued interest on related party debt.............................................. - 2,173,827
Deferred revenue and other.......................................................... 567,632 144,039
------------ ------------
Total liabilities......................................................... 26,262,723 25,001,332
Commitments and contingencies:
Stockholders' equity (deficit):
Common stock, $.01 par; 19,000,000 shares authorized; 10,724,308 and
9,149,308 shares issued and outstanding..................................... 107,244 91,493
Additional paid-in capital..................................................... 48,580,636 48,189,136
Unearned restricted stock...................................................... - (48,126)
Accumulated deficit............................................................ (60,690,094) (53,118,519)
------------ ------------
Total stockholders' deficit............................................... (12,002,214) (4,886,016)
------------ ------------
Total liabilities and stockholders' equity (deficit)...................... $14,260,509 $20,115,316
============ ============
See accompanying notes.
4
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
---------
2002 2001
(Unaudited) (Unaudited)
----------- -----------
Revenues:
Franchise development $ 51,465 $ 460,962
Royalties 2,459,063 2,735,962
Manufacturing and distribution 1,636,401 2,184,660
Company centers 315,115 349,463
Other 151,787 54,263
----------- -----------
Total revenues 4,613,831 5,785,310
Direct costs:
Royalties 2,216,037 2,079,552
Manufacturing and distribution 1,747,815 1,450,362
----------- -----------
Total direct cost 3,963,852 3,529,914
----------- -----------
Contribution (exclusive of amortization shown separately below) 649,979 2,255,396
General and administrative expense 1,930,036 2,102,372
Depreciation expense 187,923 168,306
Amortization of franchise rights and goodwill 340,950 351,118
Charge for impairment of fixed assets - 150,000
Charge for impairment of goodwill - 200,000
----------- -----------
Operating loss (1,808,930) (716,400)
Other income (expense):
Interest expense (551,666) (561,103)
Interest income 1,890 27,825
Other (63,645) (21,676)
----------- -----------
Total other (expense) (613,421) (554,954)
----------- -----------
Loss before income tax expense (2,422,351) (1,271,354)
(Benefit) provision for income taxes - -
----------- -----------
Net loss before extraordinary item $(2,422,351) $(1,271,354)
----------- -----------
Extraordinary gain from debt restructuring - 406,660
----------- -----------
Net loss $(2,422,351) $ (864,694)
=========== ===========
Basic and diluted net loss per share before extraordinary item $ (0.23) $ (0.16)
Weighted average shares outstanding--Basic and Diluted 10,724,308 8,081,808
Extraordinary item $ - $ 0.05
Weighted average shares outstanding--Basic and Diluted 10,724,308 8,081,808
Basic and diluted net loss per share $ (0.23) $ (0.11)
Weighted average shares outstanding--Basic and Diluted 10,724,308 8,081,808
See accompanying notes.
5
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
March 31,
---------
2002 2001
(Unaudited) (Unaudited)
----------- -----------
Revenues:
Franchise development $ 163,712 $ 725,788
Royalties 8,069,748 9,209,563
Manufacturing and distribution 5,692,233 5,876,332
Company centers 1,144,424 1,549,380
Other 294,143 151,364
----------- -----------
Total revenues 15,364,260 17,512,427
Direct costs:
Royalties 7,092,124 8,468,123
Manufacturing and distribution 5,206,746 4,033,396
----------- -----------
Total direct cost 12,298,870 12,501,519
----------- -----------
Contribution (exclusive of amortization shown separately below) 3,065,390 5,010,908
General and administrative 5,228,208 6,504,169
expense
Depreciation expense 617,529 730,682
Amortization of franchise rights and goodwill 1,022,850 1,290,683
Charge for impairment of capitalized software 202,909 -
Charge for impairment of fixed assets - 150,000
Charge for impairment of goodwill 1,893,735 200,000
----------- -----------
Operating loss (5,899,841) (3,864,626)
Other income (expense):
Interest expense (1,612,278) (2,148,085)
Interest income 8,533 41,476
Other (68,125) (71,173)
----------- -----------
Total other (expense) (1,671,870) (2,177,782)
----------- -----------
Loss before income tax expense (7,571,711) (6,042,408)
(Benefit) provision for income taxes - -
----------- -----------
Net loss before extraordinary item $(7,571,711) $(6,042,408)
----------- -----------
Extraordinary gain from debt restructuring - 406,660
----------- -----------
Net loss $(7,571,711) $(5,635,748)
=========== ===========
Basic and diluted net loss per share before extraordinary item $ (0.72) $ (0.75)
Weighted average shares outstanding--Basic and Diluted 10,486,671 8,081,808
Extraordinary item $ - $ 0.05
Weighted average shares outstanding--Basic and Diluted 10,486,671 8,081,808
Basic and diluted net loss per share $ (0.72) $ (0.70)
Weighted average shares outstanding--Basic and Diluted 10,486,671 8,081,808
See accompanying notes.
6
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
March 31,
---------
2002 2001
(Unaudited) (Unaudited)
----------- -----------
Operating activities:
Net loss................................................................................ $(7,571,711) $(5,635,748)
Adjustments to reconcile net (loss) to net cash used in
operating activities:
Depreciation and amortization........................................................ 1,640,379 2,021,365
Amortization of debt discount........................................................ 153,148 125,935
Stock issued for compensation........................................................ 132,250 66,755
Gain on restructuring of debt........................................................ - (406,660)
Gain on disposal of asset............................................................ (2,125) -
Charge for impairment of capitalized software........................................ 202,909 -
Charge for impairment of fixed asset................................................. - 150,000
Charge for impairment of goodwill.................................................... 1,893,735 200,000
Services received in exchange for stock.............................................. 48,127 -
Changes in operating assets and liabilities:
Accounts and notes receivable.................................................... (448,745) 1,190,744
Inventory........................................................................ 385,881 183,750
Other assets..................................................................... 16,869 8,647
Assets held for sale............................................................. (723,582) -
Accounts payable and accrued liabilities......................................... 665,381 (1,764,450)
Deferred revenue and other....................................................... 966,211 (1,142,004)
----------- -----------
Net cash used in operating activities................................................... (2,641,273) (5,001,666)
Investing activities:
Purchases of property and equipment.................................................. (178,466) (76,519)
Proceeds from sale of subsidiary..................................................... 2,410,305 -
Sale of property and equipment....................................................... 787,122 8,420,833
----------- -----------
Net cash provided by investing activities............................................... 3,018,961 8,344,314
Financing activities:
Proceeds from exercise of warrants................................................... 275,000 -
Issuance of company stock............................................................ - 750,000
Repayments of bank facility.......................................................... - (7,126,615)
Proceeds from note payable........................................................... 384,912 11,250,000
Repayments of subordinated debt...................................................... (615,910) -
Repayment of mortgage notes and other notes payable.................................. (283,726) (7,483,020)
----------- -----------
Net cash used in financing activities................................................... (239,724) (2,609,635)
----------- -----------
Net change in cash and cash equivalents................................................. 137,964 733,013
Cash and cash equivalents at beginning of year.......................................... 344,458 13,370
----------- -----------
Cash and cash equivalents at end of period.............................................. $ 482,422 $ 746,383
=========== ===========
See accompanying notes.
7
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 accounting principles generally accepted in the
United States of America ("US 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 US GAAP for
complete financial statements. Certain amounts on the FY2001 financial
statements have been reclassed to be in conformity with the FY2002 financial
statements. In the opinion of management, all adjustments consisting primarily
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/A for the year ended June 30, 2001.
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. Significant intercompany accounts and transactions
have been eliminated in consolidation.
The preparation of financial statements in conformity with US 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.
Note 2 - New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 141, "Business Combinations", which
supercedes Accounting Principles Board ("APB") Opinion No. 16, "Business
Combinations". SFAS 141 eliminates the pooling of interests method of accounting
for business combinations and modifies the application of the purchase
accounting method. The elimination of the pooling of interests method is
effective for transactions initiated after June 30, 2001. The remaining
provisions of SFAS 141 will be effective for transactions accounted for using
the purchase method that are completed after June 30, 2001. The impact of
adopting this standard had no material effect on the Company's financial
position or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Intangible
Assets", which supercedes Accounting Principles Board ("APB") Opinion No. 17,
"Intangible Assets". SFAS 142 eliminates the current requirement to amortize
goodwill and indefinite-lived intangible assets, addresses the amortization of
intangible assets with a defined life and addresses the impairment testing and
recognition for goodwill and intangible assets. SFAS 142 will apply goodwill and
intangible assets arising from transactions completed before and after the
Statement's effective date. The Company's current amortization expense is
approximately $341,000 per quarter, however goodwill will be tested for
impairment on a periodic basis.
In June 2001, the FASB approved for issuance SFAS No. 143, "Accounting for
Asset Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred and that the associated asset retirement costs be
capitalized as part of the carrying value of the related long-lived asset.
Management intends to adopt SFAS No. 143 for fiscal year 2003. Management does
not expect this standard to have a material impact on the Company's consolidated
financial position or results of operations.
In August 2001, the FASB approved for issuance SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 broadens the
presentation of discontinued operations to include more transactions and
eliminates the need to accrue for future operating losses. Additionally, SFAS
No. 144 prohibits the retroactive classification of assets as held for sale and
requires revisions to the depreciable lives of long-lived assets to be
abandoned. Management intends to adopt SFAS No. 144 for fiscal year 2003.
Management is currently assessing the impact of this new standard on the
Company's consolidated financial position and results of operations.
Note 3 - 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. The
weighted average number of
8
shares outstanding related to the stock options and warrants at March 31, 2002
was 1,518,633. For the nine months ended March 31, 2002 and 2001, the assumed
exercises of the Company's outstanding stock options and warrants are not
included in the calculation as the effect would be anti-dilutive.
The following table sets forth the computation of basic and diluted net
(loss) per share.
Nine Months Ended March 31,
---------------------------
2002 2001
---- ----
Earnings per share computation - basic and diluted
Net loss.............................................. $(7,571,711) $(5,635,748)
Weighted average shares outstanding................... 10,486,671 8,081,808
Net loss per share- basic and diluted..................... $ (0.72) $ (0.70)
Note 4 - Inventory
The components of inventory are as follows:
March 31, June 30,
2002 2001
---- ----
Raw materials........................................ $ 791,409 $ 927,679
Work-in-process...................................... 376,831 206,050
Finished goods....................................... 427,816 872,503
Reserve for obsolete and unsaleable inventory........ (189,475) (213,770)
--------- ---------
$ 1,406,581 $ 1,792,462
Note 5 - Debt
Senior Debt
On September 29, 2000 the Company issued senior debentures to Precision
Funding, LLC, an entity owned and operated by Arthur C. Kellar and Desarollo
Integrado, S.A. de C.V, an entity controlled by Mauricio Zambrano. Pursuant to
the commitment made by Arthur C. Kellar and Desarollo Integrado, S.A. de C.V. on
August 3, 2000, Precision Funding made available a credit facility of $11.25
million bearing interest at a fixed rate of 12% per annum with provisions for
higher rates in the event of a default, and is to mature on September 1, 2003,
if not paid prior to that time. In September 2001, Precision Funding agreed to
allow the Company to defer the interest payment that was due in September 2001
until July 1, 2002. In January 2002, this interest payment was paid.
Substantially all assets of the Company have been pledged as collateral and the
Company may not pay any dividends without the written consent of Precision
Funding. Precision Funding used the facility to purchase the Loan documents on
the Bank Facility provided by First Union National Bank. A bridge loan that was
made on August 4, 2000 by Arthur C. Kellar and to Desarollo Integrado, S.A. de
C.V. was refinanced under the new credit facility. The Company used $991,000 of
the new credit facility to repay a mortgage payable to FFCA. In connection with
extending the credit facility, an origination fee was paid to the Lenders in the
form of a warrant entitling them to purchase 2,000,000 shares of common stock at
an exercise price of $0.275 per share. A valuation was performed on the debt and
warrants issued in connection with obtaining the new credit facility. The
relative fair market value allocated to the warrants of approximately $651,000
has been recorded as paid in capital and a discount to the face value of the
debt. The discount resulting from recording the value of the warrants is being
amortized over the term of the debt agreement. The warrants were approved by the
shareholders at the 2001 Annual Meeting held on March 21, 2001. In June 2001,
Arthur C. Kellar exercised his right to purchase 1,000,000 shares and in July
2001, Falcon Solutions, Ltd., an entity controlled by Mauricio Zambrano, to
which the rights had been assigned, purchased the remaining 1,000,000 shares.
On October 26, 2001, Precision Funding, LLC assigned its interest in the
Company's trademarks, franchise agreements, and certain other assets to
Precision Franchising, LLC. In connection with this assignment, the Company
pledged all of its membership interest in Precision Franchising, LLC to
Precision Funding, LLC as collateral security for the loan dated September 29,
2000.
Subordinated Debt
On October 15, 1998, the Company entered into a subordinated debenture with
Board LLC, which was organized and funded by substantially all of the Directors
of the Company for the sole purpose of providing additional financing to the
Company. Under the terms of the agreement, the Company received $2 million and
was to make monthly interest payments at an annual rate of 14% with the
principal to be paid at the end of the loan term of twelve months. The terms of
the subordinated debt call for increases in the interest
9
rate if the Company defaults in the timely payment of interest on the
subordinated debt. 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 Senior Lender Funding Facility. As a result of a combination of
defaults under the Bank Facility and the Company's failure to make interest
payments on the subordinated debt, the debt has accrued interest at 16% per
annum from the date of its issuance through August 15, 1999. The Board LLC had
approved the waiver of existing events of default and the extension of the
maturity date on such debt to November 1, 2000 and the interest rate returned to
14% effective August 15, 1999. Subsequent to June 30, 2000 Board LLC extended
the maturity date of the subordinated debenture and waived all defaults under
the agreement through September 30, 2001. In February 2001, the Company
renegotiated the loan agreement with the Board LLC. All of the interest of
approximately $407,000 that had been accrued up to that point was waived and has
been reflected as an extraordinary item in the March 2001 statement of
operations. Under the terms of the new agreement, the Board LLC agreed to make
monthly payments through December 2003. The effective interest rate for the new
agreement was 8.68% per annum. In January 2002, the Company renegotiated the
loan agreement with the Board LLC. Under the terms of the new agreement, the
Board LLC agreed to a revised payment plan consisting of monthly payments of
$50,000 ending in December 2003. The effective interest rate for the new
agreement was 8.68% per annum.
On January 25, 1999, the Company consummated a subordinated debt financing
with a shareholder/director in the principal amount of $5,000,000. This
subordinated debenture bears interest at 15% per annum, with provisions for
higher rates in the event of default, and was to mature on May 25, 1999, if not
paid prior to that time. Interest and a one point origination fee were paid in
shares of the Company's common stock valued at the closing price on the day
prior the original principal due date. The principal and interest for the
subordinated debenture may only be paid if the Company has made all required
payments to the Senior Lender as set forth above and the Company is not in
default on the Precision Funding credit facility. As of June 30, 2000, the
Company had repaid $1.4 million of the debt. The Company received from the
holder of $3.6 million in subordinated debt a waiver of existing events of
default and an extension of the maturity date to April 15, 2001. Subsequent to
June 30, 2000 and 2001 the Company received further extensions of the maturity
date through September 30, 2001 and January 1, 2003, respectively.
On November 28, 2001, the Company consummated subordinated debt financing
agreements with two shareholder/directors in the principal amounts of $156,000
and $229,000, respectively. Interest on the subordinated debt was 10% per annum,
with provisions for higher rates in the event of default, and matured on March
31, 2002. This debt was repaid in April 2002.
Note 6 - 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. At that time,
management and its legal counsel believed that there were ample grounds for
seeking appellate remedies by which, if granted, would result in a new trial.
Subsequent to such date, motions for a new trial were not granted, and in June
2000, the Company was required to post a surety bond to appeal the case.
Management concluded, in consultation with the Company's new internal counsel,
that such developments had adversely affected the assessment of the outcome of
this matter. Accordingly, in the fourth quarter of fiscal year 2000, the Company
recorded an accrual of the jury verdict and estimated legal costs of
approximately $1 million and included such amount in other operating expense in
the consolidated statement of operations. 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.
A subsidiary of the Company was party to a confessed judgment of
approximately $1.3 million. The subsidiary is currently inactive and has no
assets. As such, management believes this judgment will have no material impact
on the Company's consolidated results of operations.
In December 2000, the Company was named in a lawsuit seeking $15,000,000
damages arising out of a 1998 potential acquisition of Paisa, Inc. On November
14, 2001, the parties agreed to settle the case for $37,500 with the parties
agreeing to mutual releases and with the Company retaining the right to proceed
against the collateral securing a $500,000 loan guaranteed by the principal
stockholders of Paisa, contingent on court approval. The court has approved the
settlement and the Company has paid the full amount due under the settlement
agreement.
On April 10, 2000, a landlord filed suit against a subsidiary of the
Company for monies due under a lease signed by one of its subsidiaries, seeking
damages of more than $45,000. The Court entered summary judgment against the
subsidiary in the amount of $54,000 plus interest and costs of $1,600. The claim
was settled in December 2001 with the Company's payment of $10,000 in cash and a
promissory jointly signed by the Company to pay an additional $15,000 in 15
monthly installments of $1,000 beginning January 1, 2002.
In November 2000, a landlord filed suit against the Company for monies due
under a lease signed by one of its subsidiaries, seeking damages of $234,000
plus attorneys fees. On January 19, 2001, the Company and its subsidiary filed
an answer and affirmative defenses. The Court granted summary judgment in favor
of Precision Auto Care, Inc., but reversed its judgment in January
10
2002. In February 2002, the parties agreed in principle to settle the case with
PTAC's payment of $15,000 in cash and agreeing to pay an additional $25,000
payable over 6 months. In April 2002, all monies owed under this settlement were
paid.
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 recorded reserves 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 have a material impact on the Company's financial
position and results of operations.
Note 7 - Segment Information
For the quarter ended September 30, 2001 and thereafter, the Company has
implemented the provisions of SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" as the Chief Operating Decision Maker (CODM)
began evaluating the Company's operations along its two business lines:
Automotive Care Franchising and Manufacturing and Distribution. The automotive
care division, which is comprised of Precision Tune Auto Care and Precision Lube
Express, provides automotive services primarily through franchised operations
located in the United States and in certain foreign countries. As the end
customer is the automotive consumer and the method of providing services is via
the franchise system, the Company aggregated the financial results for Precision
Tune Auto Care and Precision Lube Express entities. The Company's manufacturing
and distribution division, which includes PBSI, Hydrospray, and World Wide Dryer
produces modular buildings and car wash equipment. PBSI, Hydrospray, and World
Wide Dryer are manufacturing entities producing the aforementioned products as
opposed to rendering services which are provided by the Automotive Care
division. Given that all three entities are manufacturing businesses, the
Company made the decision to consolidate their operations and aggregate their
financial results into a distinct segment. There were no sales between the two
segments for the three and nine months ended March 31, 2002. The chief operating
decision maker evaluates the performance of the Company's operating segments
based upon contribution margin, which includes all direct costs associated with
the operations of such businesses. Certain expenses such as corporate general
and administrative costs, other operating costs and non-recurring charges, which
are managed and evaluated outside of the operating segments, are excluded. The
information that is presented below is for the nine months ended March 31, 2002.
A summary of the segment financial information is as follows:
Nine Months Ended
March 31,
---------
2002 2001
---- ----
Revenues:
Automotive Care Franchising........................................................ $ 8,233,460 $ 9,935,351
Manufacturing & Distribution....................................................... 5,692,233 5,876,332
----------- -----------
Total segment revenues............................................................. 13,925,693 15,811,683
Other.............................................................................. 1,438,567 1,700,744
----------- -----------
Total revenues..................................................................... $15,364,260 $17,512,427
=========== ===========
Contribution:
Automotive Care Franchising........................................................ $ 2,741,376 $ 3,176,776
Manufacturing & Distribution....................................................... 485,487 1,842,936
----------- -----------
Total segment contribution......................................................... 3,226,863 5,019,712
Other.............................................................................. (161,473) (8,804)
----------- -----------
Total contribution................................................................. $ 3,065,390 $ 5,010,908
=========== ===========
Assets:
Automotive Care Franchising........................................................ $11,551,155 $30,033,404
Manufacturing & Distribution....................................................... 2,709,354 3,485,053
----------- -----------
Total assets....................................................................... $14,260,509 $33,518,457
=========== ===========
11
Capital expenditures:
Automotive Care Franchising........................................................ $ 62,159
Manufacturing and Distribution..................................................... 116,307
-----------
Total Capital Expenditures......................................................... $ 178,466
===========
Reconciliation of segment contribution to net income before income taxes and
extraordinary item:
Automotive Care Franchising........................................................ $ 2,741,376 $ 3,176,776
Manufacturing & Distribution....................................................... 485,487 1,842,936
----------- -----------
Total segment contribution......................................................... 3,226,863 5,019,712
Other.............................................................................. (161,473) (8,804)
----------- -----------
Total contribution................................................................. 3,065,390 5,010,908
----------- -----------
General & administrative expense................................................... 5,228,208 6,504,169
Depreciation expense............................................................... 617,529 730,682
Amortization expense............................................................... 1,022,850 1,290,683
Charge for impairment of capitalized software...................................... 202,909 -
Charge for impairment of fixed asset............................................... - 150,000
Charge for impairment of goodwill.................................................. 1,893,735 200,000
Other expenses..................................................................... 1,671,870 2,177,782
----------- -----------
Net income (loss) before income taxes and extraordinary item....................... $(7,571,711) $(6,042,408)
=========== ===========
Note 8 - Subsequent Events
In April 2002, the Company raised $765,000 by issuing 2.6 million shares of
common stock through a stock rights offering.
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 unaudited interim consolidated financial
statements and notes thereto included in "Item 1. - Financial Statements" of
this quarterly report and the audited combined financial statements and notes
thereto and the section titled "Item 7. - Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the Company's annual report
on Form 10-K/A for the fiscal year ended June 30, 2001 filed with the Securities
and Exchange Commission on January 25, 2002. Historical results and percentage
relationships set forth herein are not necessarily indicative of future
operations.
Results of Operations
Comparison of the three months ended March 31, 2002 to the three months ended
March 31, 2001
Summary (in thousands)
2002 % 2001 %
---- - ---- -
Automotive car franchising revenue............................ $2,511 55 $3,197 55
Manufacturing & distribution revenue.......................... 1,636 35 2,184 38
Other......................................................... 467 10 404 7
------ --- ------ ---
Total revenues................................................ $4,614 100% $5,785 100%
====== ======
Automotive care franchising direct cost....................... $1,396 30 $1,674 29
Manufacturing & distribution direct cost...................... 1,748 38 1,450 25
Other......................................................... 820 18 406 7
------ --- ------ ---
Total direct cost............................................. $3,964 86 $3,530 61
====== ======
General and administrative.................................... 1,930 42 2,102 36
Depreciation expense.......................................... 188 4 168 3
Amortization of franchise rights and goodwill................. 341 7 351 6
Impairment charges............................................ - - 350 6
12
Operating loss................................................ (1,809) (39) (716) (12)
Other......................................................... (613) (13) (555) (10)
Extraordinary Gain............................................ - - 407 7
Net loss...................................................... (2,422) (52) (864) (15)
Revenue. Total revenues for the three months ending March 31, 2002 was $4.6
million, a decrease of approximately $1.2 million, or 20%, compared with total
revenues of $5.8 million for the corresponding period of the prior year.
Automotive care franchising revenue for the three months ending March 31, 2002
was $2.5 million, a decrease of approximately $686,000, or 21%, compared with
automotive care revenues of $3.2 million for the corresponding period of the
prior year. The decrease was a result of a decrease in royalty revenues of
$277,000 and franchise development revenues of $409,000. The Company sold the
franchise operations in Mexico in January of 2002, which accounts for the
decrease in royalty revenues. Development revenues were lower because during the
third quarter of fiscal year 2001 the Company sold rights in Portugal. There was
not a comparable sale during the same quarter for fiscal year 2002.
Manufacturing and distribution revenue for the three months ending March 31,
2002 was $1.6 million, a decrease of approximately $548,000, or 25%, compared
with manufacturing and distribution revenues of $2.2 million for the
corresponding period of the prior year. This decrease was due primarily to the
sale of manufacturing and distribution operations in Mexico and in the general
down- turn of business in the manufacturing operations at Precision Building
Solutions, Worldwide Dryer, and Hydrospray.
Other revenue for the three months ending March 31, 2002 was $467,000, an
increase of approximately $63,000, or 16%, compared with other revenues of
$404,000 for the corresponding period of the prior year. This is attributable to
the contract with Shell Autopartes, the company that purchased PACI's operations
in Mexico, which provided for technical training and support for a three-year
period, of which the Company has recognized revenue year to date of $75,000.
Direct Cost. Total direct costs for the three months ending March 31, 2002
totaled $4.0 million, an increase of $434,000 or 12%, compared with $3.5 million
for the corresponding period of the prior year.
Automotive care franchising direct costs for the three months ending March 31,
2002 totaled $1.4 million, a decrease of $278,000 or 17%, compared with $1.7
million for the corresponding period of the prior year. This decrease is
consistent with lower royalty and franchise development revenues.
Manufacturing and distribution direct costs for the three months ending March
31, 2002 totaled $1.7 million, an increase of $298,000 or 21%, compared with
$1.5 million for the corresponding period of the prior year. This increase is
attributable to deteriorating margins in the Company's manufacturing operations.
Other direct costs for the three months ending March 31, 2002 totaled $820,000,
an increase of $414,000 or 102%, compared with $406,000 for the corresponding
period of the prior year. This increase in direct costs is attributable to the
Company's write-down of inventory at the Company's Mexican subsidiary.
General and Administrative Expense. General and administrative expense was $1.9
million for the three months ending March 31, 2002, a decrease of $172,000 or
8%, compared with $2.1 million for the quarter ending March 31, 2001. This is
primarily the result of management's cost reduction initiatives, specifically in
the reduction of external professional consulting fees.
Operating (Loss). The Company recorded an operating loss for the three months
ending March 31, 2002 of $1.8 million, which represents an increase in operating
loss of $1.1 million or 153% compared with an operating loss of $716,000 for the
corresponding period of the prior year. The increase in the operating loss is
primarily attributed to a decline in contribution margin from the Company's
manufacturing operations.
Other Income (Expense). Other Expense of $613,000 for the three months ending
March 31, 2002, increased $58,000 or 10% compared to the Other Expense for the
corresponding period of the prior year.
Net Loss. The Company recorded a Net Loss of $2.4 million for the three months
ending March 31, 2002. This represents an increase of $1.6 million or 180%
compared to the Net Loss for the corresponding period of the prior year. The
increase was primarily attributable to the $1.1 million increase in the
operating loss. Furthermore, in FY 2001, there was an extraordinary gain of
$407,000 associated with debt restructuring. In FY 2002, there was not a
comparable event.
Comparison of the nine months ended March 31, 2002 to the nine months ended
March 31, 2001
Summary (in thousands)
13
2002 % 2001 %
---- - ---- -
Automotive car franchising revenue............................ $ 8,233 54 $ 9,936 57
Manufacturing & distribution revenue.......................... 5,692 37 5,876 34
Other......................................................... 1,439 9 1,700 10
------- --- ------- ---
Total revenues................................................ $15,364 100% $17,512 100%
======= =======
Automotive care franchising direct cost....................... $ 5,492 36 $ 6,759 39
Manufacturing & distribution direct cost...................... 5,207 34 4,033 23
Other......................................................... 1,600 10 1,709 10
------- --- ------- ---
Total direct cost............................................. $12,299 80 $12,501 71
======= =======
General and administrative.................................... 5,228 34 6,504 37
Depreciation expense.......................................... 618 4 731 4
Amortization of franchise rights and goodwill................. 1,023 7 1,291 7
Impairment charges............................................ 2,096 14 350 2
Operating loss................................................ (5,900) (38) (3,865) (22)
Other......................................................... (1,672) (11) (2,178) (12)
Extraordinary Gain............................................ - - 407 2
Net loss...................................................... (7,572) (49) (5,636) (32)
Revenue. Total revenues for the nine months ending March 31, 2002 was $15.4
million, a decrease of approximately $2.1 million, or 12%, compared with total
revenues of $17.5 million for the corresponding period of the prior year.
Automotive care franchising revenue for the nine months ending March 31, 2002
was $8.2 million, a decrease of approximately $1.7 million, or 17%, compared
with automotive care revenues of $9.9 million for the corresponding period of
the prior year. The decrease was the result of a decrease in royalty revenues of
$1.1 million and franchise development revenues of $562,000. The Company sold
the franchise operations in Mexico in January of 2002, which accounts for the
decrease in royalty revenues. FY 2002 development revenues were lower than FY
2001 because during the third quarter of fiscal year 2001, the Company sold the
rights to Portugal. There was not a comparable sale during the third quarter of
fiscal year 2002.
Manufacturing and distribution revenue for the nine months ending March 31, 2002
was $5.7 million, a decrease of approximately $184,000, or 3%, compared with
manufacturing and distribution revenues of $5.9 million for the corresponding
period of the prior year. This decrease was due primarily to the sale of the
operations in Mexico in the first quarter of calendar year 2002.
Other revenue for the nine months ending March 31, 2002 was $1.4 million, a
decrease of approximately $261,000, or 15%, compared to $1.7 million for the
corresponding period of the prior year. This decrease was due primarily to the
sale of manufacturing and distribution operations in Mexico.
Direct Cost. Total direct costs for the nine months ending March 31, 2002
totaled $12.3 million, a decrease of $202,000 or 2%, compared with $12.5 million
for the corresponding period of the prior year.
Automotive care franchising direct costs for the nine months ending March 31,
2002 totaled $5.5 million, a decrease of $1.3 million or 19%, compared with $6.8
million for the corresponding period of the prior year. This decrease is
consistent with lower royalty and franchise development revenues.
Manufacturing and distribution direct costs for the nine months ending March 31,
2002 totaled $5.2 million, an increase of $1.2 million or 29%, compared with
$4.0 million for the corresponding period of the prior year. This increase is
attributable to deteriorating margins in the Company's manufacturing operations.
Other direct costs for the nine months ending March 31, 2002 totaled $1.6
million, a decrease of $109,000 or 6%, compared with $1.7 million for the
corresponding period of the prior year. This decrease was due primarily to the
sale of manufacturing and distribution operations in Mexico.
General and Administrative Expense. General and administrative expense was $5.2
million for the nine months ending March 31, 2002, a decrease of $1.3 million or
20%, compared with $6.5 million for the nine months ending March 31, 2001. This
is primarily a result of management's cost reduction initiatives, specifically
in the reduction of external professional consulting fees.
Impairment of Capitalized Software. The Company recognized a $203,000 impairment
charge for a point of sale software system when it was determined by management
that the system was no longer going to be utilized.
Impairment of Goodwill. The Company recognized a $1.9 million impairment charge
to reduce the amount of goodwill attributed to the company's Mexican subsidiary.
In May 2001, the Company was approached by an outside investor who expressed an
interest in
14
purchasing the company's Mexican subsidiary. The proposed purchase price offered
by the prospective buyer lead to internal discussion regarding the
appropriateness of the carrying value of goodwill relating to this entity. After
completing analysis on the operations, it was clear that because of the
subsidiary's declining revenues and significant decrease in profitability, it
was appropriate and necessary to record an impairment charge. Subsequent to June
30, 2001, the outside investor performed due diligence and revised their offer.
The revised offer led to further analysis on operations and the decision to
record an initial impairment charge of $793,000 in the three months ending
September 30, 2001. In January 2002, the Company sold the assets owned by its
Mexican subsidiary for $1.8 million, of which $350,000 is contingent upon
certain events outside the company's control. In addition, the company entered
into a technical service agreement with the buyer in return for a non-refundable
payment of $900,000. Because the final negotiations with the outside investor
reduced the purchase price from what had previously been anticipated, an
additional impairment charge of $1.1 million was subsequently taken in December
31, 2001.
Operating (Loss). The Company recorded an operating loss for the nine months
ending March 31, 2002 of $5.9 million, which represents an increase in operating
loss of $2.0 million or 53% compared with an operating loss of $3.9 million for
the corresponding period of the prior year. $1.8 million of the $2.0 million
increase can be attributed to the increase in impairment charges. The balance of
the operating loss was due to operating losses on domestic manufacturing
operations.
Other Income (Expense). The Company recorded Other Expense of $1.7 million for
the nine months ending March 31, 2002, which represents a decrease in Other
Expense of $506,000 or 23% compared to the Other Expense for the corresponding
period of the prior year when other expenses were $2.2 million. The decrease was
primarily attributable to a decrease in interest expense. The new financing that
the Company obtained with Precision Funding provided for better terms than the
previous financing arrangement with First Union and enabled the Company to save
money on interest expense. In addition, the Company renegotiated the loan with
the Board LLC. This resulted in savings in interest expense.
Net Loss. The Company recorded a Net Loss of $7.6 million for the nine months
ending March 31, 2002. This represents an increase of $1.9 million or 34%
compared to the Net Loss for the corresponding period of the prior year. The net
loss is attributable to the operating loss.
Liquidity and Capital Resources
Sources and Uses of Cash
Cash at March 31, 2002 was $482,000. This was an increase of $138,000 from
June 30, 2001. During the period, cash used in operations was $2.6 million. The
Company expects to be able to meet all of its operating obligations by
reductions in operating expenses, improved collections, improved inventory
management, and the sale of certain assets. In April 2002, the Company raised
$765,000 from its Rights Offering, the proceeds of which will help enable it to
exercise its business plan. In the event that the Company has difficulty in
meeting obligations, the Company expects that they will be able to borrow money
from certain shareholders and/or officers on a short-term basis, although
absolute assurance cannot be given that it would be successful in doing so.
Cash provided by investing activities for the nine months ended March 31,
2002 was $3.0 million. In January 2002, the Company sold its Mexican subsidiary
for $1.8 million, of which $350,000 is contingent upon meeting certain events.
In addition, the company entered into a technical service agreement with the
buyer in return for a non-refundable payment of $900,000. Proceeds of the sale
were used to pay interest on the Company's senior debt and to liquidate other
liabilities. In January 2002, the Company sold a building owned by one of its
manufacturing subsidiaries to a related party, a partnership that includes Ernie
Malas, the manager of the Hydrospray subsidiary, for $660,000 and subsequently
leased back the property. One year of prepaid rent was included in the sales
proceeds.
Cash used in financing activities for the nine months ended March 31, 2002
was $240,000. Cash used in financing activities during the period included
proceeds from the exercise of warrants of $275,000 and the issuance of
subordinated debt financing agreements with two shareholder/directors in the
principal amounts of $156,000 and $229,000. In April 2002, the Company repaid
these subordinated debt agreements in full. This infusion of cash was offset by
repayments of the subordinated debt and other notes payable of $900,000.
Debt Transactions
During fiscal year 2001, the Company was successful in obtaining a new
source of financing. 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 a period of three years. In September 2001, Precision Funding
agreed to allow the Company to defer the interest payment that was due in
September 2001 until July 1, 2002. The Company subsequently paid the accrued
interest in January 2002.
On October 26, 2001, Precision Funding, LLC, assigned its interest in the
Company's trademarks and certain other assets relating to the franchising
operations to Precision Franchising, LLC, a wholly owned subsidiary of the
Company. In connection with this
15
assignment, the Company pledged all of its membership interest in Precision
Franchising, LLC to Precision Funding LLC as collateral for the loan dated
September 29, 2000.
In addition to the credit facility with Precision Funding LLC, the Company
has two outstanding subordinated debenture agreements. Under the terms of each
subordinated debenture, payments of principal and interest on certain of the
subordinated debt may only be made by the Company if the Company has made all
required payments to Precision Funding or is otherwise not in default under that
credit facility.
The first subordinated debenture in the amount of $2.0 million was executed
in October 1998 with an LLC composed of certain members of the Company's board
of directors (Board LLC). Originally due October 15, 1999, the maturity of the
subordinated debenture was extended until September 30, 2001. The Company had
also agreed that default interest in the amount of $266,667 would be paid in
71,111 shares of Common Stock. The amount of shares was determined by dividing
266,667 by the average closing price per share of the Corporation's Common Stock
in the fifteen day period between August 1, 1999 and August 15, 1999. This
translates into an issuing price per share of $3.75. The holder also waived
defaults under the agreement through September 30, 2001.
In February 2001, the Company renegotiated the terms of the subordinated
debenture with the Board LLC. Under the revised terms, Board LLC agreed to waive
all of the $407,000 of interest that had been accrued through that date. In
exchange, the Company agreed to begin making payments to Board LLC so that the
Board LLC would be completely paid by May 2002. Precision Funding LLC agreed to
the terms of the renegotiation. In January 2002, the Company renegotiated the
loan agreement with the Board LLC. Under the terms of the new agreement, the
Company agreed to a revised payment plan consisting of monthly payments ending
in December 2003. The effective interest rate for the new agreement is 8.68% per
annum.
The second subordinated debenture in the amount of $5.0 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 has been
extended to January 1, 2003. The holder also waived all debt covenants through
January 1, 2003.
On November 28, 2001, the Company consummated subordinated debt financing
agreements with two shareholder/directors in the principal amounts of $156,000
and $229,000, respectively. Each subordinated debenture bears interest at 10%
per annum, with provisions for higher rates in the event of default, and is to
mature on March 31, 2002, if not paid prior to that time. In April 2002, the
Company repaid these subordinated debt agreements in full.
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
operations, particularly the manufacturing and distribution business in the U.S.
However, with the refinancing, reductions in expenses, improved collections,
improved inventory management, the sale of certain assets, and raising
additional capital in the rights offering, the Company expects to be able to
meet all of its financial obligations and be able to focus on growing and
improving profitability of its franchising and manufacturing businesses.
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
and Precision Lube Express centers. Severe winter weather and rainy conditions
may also adversely impact the Company's sale and installation of car wash
equipment.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
At March 31, 2002 the Company did not have market risk exposure as interest
rates for all of its outstanding debt were fixed.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is party to legal proceedings, including the
following described below. Other than the Radcliffe case (in which an adverse
judgment was entered, but which has been subsequently reversed), the Company
does not believe that any of the legal proceedings below will result in material
judgments against the Company. There can be no assurance, however, that these
suits will ultimately be decided in its favor. Any of these proceedings may
result in a material judgment against the Company, which could cause material
adverse consequences to its operations. The Company has adequately reserved
against any final, adverse judgment in the Radcliffe case.
16
Performance Concepts, Inc. and James E. Radcliffe vs. Precision Tune Auto Care,
-------------------------------------------------------------------------------
Inc. (Circuit Court, 17th Judicial Circuit, Broward County, Florida, filed May
---
4, 1998).
In response to PTAC's notice of termination of plaintiff's franchise
agreement due to certain acts of plaintiff expressly prohibited by the franchise
agreement, plaintiff filed suit seeking a temporary injunction to enjoin PTAC
from terminating plaintiff's franchise agreement and alleging that PTAC breached
its contract with the plaintiffs, breached an implied covenant of good faith and
fair dealing, tortiously interfered with business relationship, and slandered
the plaintiffs. On November 24, 1999, the court entered a default judgment
against PTAC as a result of a finding that PTAC failed to comply with certain
orders of the court and submitted the issue of damages to a jury. On March 21,
2000, a jury awarded plaintiff damages in the amount of approximately $841,000,
which the Company has reserved for in its financial statements. PTAC has
appealed the decision to the Fourth District Court of Appeal on a number of
grounds. PTAC filed its appellate brief on January 5, 2001. The Fourth District
Court of Appeal heard oral arguments on April 24, 2001. On November 14, 2001,
the Court ruled that the trial court erred in allowing the plaintiff to obtain
damages based on other franchise agreements that were not pleaded in the
complaint, and remanded the case back to the trial court for another hearing on
damages. PTAC filed a motion for rehearing seeking a complete reversal of the
trial court decision, which the court denied. On April 24, 2002, the Fourth
District Court of Appeals ruled that the plaintiff was not entitled to
attorney's fees and reversed the trial court's award of attorney's fees in the
amount of $63,569. As of the date of this Report on Form 10-Q, the trial court
has not rescheduled the hearing on damages.
Anwar Meherally, Shan Meherally, A. M. Enterprises, Inc., Shanwar WA, Inc. and
------------------------------------------------------------------------------
Car Tune, Inc. v. Precision Auto Care, Inc., Precision Tune Auto Care, Inc., and
--------------------------------------------------------------------------------
PTW, Inc., Superior Court of the State of Washington for the County of King,
---------
Case No. 00-2-13974-8SEA)
On May 11, 2000, the plaintiffs filed suit against the Company and two of
its indirect, wholly-owned subsidiaries alleging that a 1998 settlement
agreement of a prior lawsuit between the parties is voidable because it was
obtained through fraud, misrepresentation, and the malicious application of
economic duress; that the defendants' actions constituted a failure to act in
good faith as required by the Washington Franchise Investment Protection Act;
that the defendants violated an implied covenant of good faith and fair dealing
in both the area agreement and the settlement agreement; that the defendants'
actions violate the Washington Franchise Investment Protection Act; and that the
defendants used instrumentalities of interstate commerce in carrying out
concerted actions. The plaintiffs seek damages in excess of $5 million (to be
trebled under the Washington Franchise Investment Protection Act), attorneys'
fees, rescission of the settlement agreement, injunctive relief prohibiting the
defendants from stopping the payment of royalties to the plaintiffs under the
area agreement and other relief. The defendants filed an answer and affirmative
defenses alleging that the defendants breached their agreements and owe PTAC
money damages in an amount to be determined. The defendants also filed a Motion
for Summary Judgment seeking to dismiss the lawsuit based on the 1998 settlement
agreement. On October 29, 2001, the Court entered an Order granted the
defendants' motion for summary judgment in part, dismissing the claims seek to
avoid or rescind the 1998 settlement agreement and dismissing the claims
alleging violation of the Washington Franchise Investment Protection Act and the
RICO Act. The Court denied the defendants' motion for summary judgment regarding
the plaintiffs' claims that the defendants' breached the settlement agreement
and other claims (sounding in good faith and fair dealing). Trial of the lawsuit
was scheduled to commence on April 1, 2002 but on varying dates in late February
and March 2002, each of the plaintiffs filed for protection under Chapter 11 of
the U. S. Bankruptcy Act, in the United States Bankruptcy Court for the District
of Washington.
Precision Tune Auto Care, Inc. v. Shanwar WA, Inc., Shanwar, Inc., Car Tune,
----------------------------------------------------------------------------
Inc., Anwar Meherally and Shahnaz A. Meherally, Civil Action No. 01-1151-4
----------------------------------------------
(U.S. District Court for the Eastern District of Virginia, filed July 26, 2001)
In an action involving substantially the same parties in the Washington
State action described above, PTAC filed suit in the U. S. District Court for
the Eastern District of Virginia against Shanwar WA, Inc., its owners (Anwar
Meherally and Shahnaz Meherally) and related corporations for breach of two
franchise agreements, and failure to pay franchise fees, service mark
infringement unfair competition and unjust enrichment arising out the failure to
discontinue use of trademark's on expiration of the franchise agreements. On
October 5, 2001, the Court denied the defendants' motion to dismiss PTAC's
claims based on the priority of the Washington State action referred to above,
and instead ordered the action to proceed in federal court in Virginia. On
October 15, 2001, the defendants filed an answer and affirmative defenses based
on similar facts and allegations to those alleged in the Washington State action
described above. Trial of the lawsuit had been scheduled to begin on March 5,
2002 but, as noted above, on varying dates in late February and March 2002, each
of the plaintiffs filed for protection under Chapter 11 of the U. S. Bankruptcy
Act, in the United States Bankruptcy Court for the District of Washington.
United Bank, NA v. C. Eugene Deal, Miracle Partners, Inc., and Star Auto Center,
--------------------------------------------------------------------------------
Inc., Common Pleas Court, Crawford County, Ohio, Case No. 01-CV-0019.
---------------------------------------------------------------------
In February 2001, a confessed judgment of approximately $1.3 million was
entered against Miracle Partners, Inc., a wholly owned subsidiary of the
Company. The subsidiary is currently inactive and has no assets. As such,
management believes this judgment will have no material impact on the Company's
consolidated results of operations.
17
Radiant Systems, Inc. v. Precision Tune Auto Care, Inc., American Arbitration
-----------------------------------------------------------------------------
Association.
------------
Radiant Systems, Inc. ("Radiant") has filed a demand for arbitration with
the American Arbitration Association alleging that Precision Tune Auto Care,
Inc., a wholly owned indirect subsidiary of the Company, owes it $327,338.05
under a contract dated February 23, 2001. The Company believes that there are
valid defenses to the claim. As of the date of this Report on Form 10-Q, the
arbitration hearing has not yet been scheduled.
Redstone Development Group, LLC v. Hydro Spray Car Wash Equipment Co., Ltd., et
-------------------------------------------------------------------------------
al., (Circuit Court for Ottawa County, Michigan, filed December 13, 2001).
----
A purchaser of car wash equipment manufactured by Hydro Spray Car Wash
Equipment Co., Ltd., a subsidiary of the Company, sued Hydro Spray and the
independent distributor who sold and installed the equipment for damages in
excess of $389,990 alleging that the equipment did not work as represented or
warranted. The Company believes that it has valid defenses and is defending the
lawsuit.
The following previously reported legal proceedings have been recently disposed
of:
Lawrence W. Frakes and Teresa K. Frakes v. John Garies, William Grimaud, Grimaud
--------------------------------------------------------------------------------
Enterprises, Inc., Precision Tune Auto Care, Inc. F/D/B/A Precision Tune, Inc.
-------------------------------------------------------------------------------
(Circuit Court of Madison County, Alabama, filed November 3, 1997).
Plaintiffs allege defendants orally made false material representations
about adequate capitalization, access to used equipment, support, and guarantees
of expected earnings. Plaintiffs also allege defendants breached their
agreement, violated the Deceptive Trade Practices Act of Alabama and
participated in a civil conspiracy to defraud. Plaintiffs are seeking judgment
for unspecified compensatory and punitive damages. On December 22, 1997,
defendants William Grimaud and PTAC filed motions to dismiss. On April 26,2001,
PTAC filed a second motion to dismiss. A hearing on the pending motions to
dismiss is scheduled for November 15, 2001. In April 2002, the Court granted the
motions to defendants' dismiss without prejudice.
Precision Tune Auto Care, Inc. v. Andhras Corporation, Rambal Anne, Babu Anne,
------------------------------------------------------------------------------
Chad Anne and Sunitha Anne, U. S. District Court, Eastern District of Virginia,
---------------------------
Alexandria Division, Civil Action No. 01-0095-A.
On January 19, 2001, PTAC filed suit against Andhras Corporation
("Andhras") and its stockholders for moneys owed under 6 franchise agreements
totaling over $430,000. About May 17, 2001, Andhras and Rambal Anne filed an
Answer and Counterclaim alleging that PTAC breached a settlement agreement that
the parties signed in 1998 by converting a Lube Depot located within 1.5 miles
of one of Andhras' franchised locations to a Precision brand center, violated
the Indiana Franchise Deceptive Practice Act by operating a company-owned center
within the exclusive territory of Andhras, and violated the franchise agreements
by failing to take action to enjoin use of "Precision Auto Care" by the owner(s)
of 2 auto repair centers located near Andhras' franchised locations in Indiana.
On June 27, 2001, PTAC filed an answer denying the allegations made in the
Counterclaim. In April 2002, Andhras and Rambal Anne agreed to entry of a
judgment in the amount of $315,000, and the Company agreed to dismiss without
prejudice the claims against Chad Anne and Sunitha Anne based on certain
representation made by them.
Howard Grobstein, Chapter 7 Trustee v. Precision Auto Care, Inc., U. S. District
---------------------------------------------------------------
Court, Central District, Los Angeles Division, Case No. CV-01-01176 ABC
In December 2000, the Company was named in an adversary proceeding seeking
damages of $15,000,000, interest and costs alleging that the Company breached an
acquisition agreement with Paisa, Inc. In August 2001, the parties agreed to
settle the matter for $37,500 to be paid by the Company with the Company
retaining the right to proceed against the collateral securing a $500,000 loan
guaranteed by the principal stockholders of Paisa, Inc., subject to court
approval. On September 26, 2001, the court rejected this settlement. On November
14, 2001, the parties agreed to settle the case by PACI's agreement to pay
$37,500 to the bankruptcy estate, within 60 days after bankruptcy court
approval, with the parties agreeing to mutual releases and with PACI retaining
the right to proceed against the collateral securing a $500,000 loan guaranteed
by the principal stockholders of Paisa, contingent on court approval. The court
has approved the settlement and PACI has paid the entire amounts due under the
settlement.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 17, 2001, Falcon Solutions, Ltd. exercised a warrant to purchase
1,000,000 shares of common stock for $275,000. The proceeds were used to fund
the Company's working capital.
On September 24, 2001, bonuses in the form of stock grants were granted to
officers of the Company totaling $132,250.
In February 2002, the SEC declared the company's Rights Offering effective.
In April 2002, the Company raised $765,000 through the issuance of 2.6 million
shares of common stock via this Rights Offering.
18
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 5 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. None.
(b) On March 12, 2002, the Company filed a form 8-K in which it reported it
issued a press release announcing the extension of its rights offering from
March 15, 2002 to April 5, 2002.
19
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 May 15, 2002.
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 May 15, 2002
------------------ Officer and Director
Louis M. Brown (Principal Executive Officer)
/s/ Robert R. Falconi Senior Vice President and Chief May 15, 2002
--------------------- Operating Officer (Principal
Robert R. Falconi Financial Accounting Officer)
20