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, 2001
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 March 31, 2001
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 April 30, 2001.
Precision Auto Care, Inc.
Form 10-Q
INDEX
PAGE
----
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
General Information................................................... 1
Consolidated Balance Sheets as of March 31, 2001 and
June 30, 2000......................................................... 2
Consolidated Statements of Operations for the three months
ended March 31, 2001 and 2000......................................... 3
Consolidated Statements of Operations for the nine months
ended March 31, 2001 and 2000......................................... 4
Consolidated Statements of Cash Flows for the nine months
ended March 31, 2001 and 2000......................................... 5
Notes to the Consolidated Financial Statements........................ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................ 12
Item 2. Changes in Securities........................................ 12
Item 3. Defaults Upon Senior Securities.............................. 12
Item 4. Submission of Matters to a Vote of Security Holders.......... 12
Item 5. Other Information............................................ 12
Item 6. Exhibits or Reports on Form 8-K.............................. 13
Signatures............................................................ 13
FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934. When used in this report, the words
"anticipate," "believe," "estimate," "expect," "intend" and "plan" as they
relate to Precision Auto Care, Inc. or its management are intended to identify
such forward-looking statements. All statements regarding Precision Auto Care,
Inc. or Precision Auto Care, Inc.'s expected future financial position, business
strategy, cost savings and operating synergies, projected costs and plans, and
objectives of management for future operations are forward-looking statements.
Although Precision Auto Care, Inc. believes the expectations reflected in such
forward-looking statements are based on reasonable assumptions, no assurance can
be given that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from the
expectations reflected in the forward-looking statements herein include, among
others, the factors set forth in the Company's 10-K filing for the year ending
June 30, 1999 under the caption "Business--Risk Factors," general economic and
business and market conditions, changes in federal and state laws and increased
competitive pressure in the automotive after-market services business.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GENERAL INFORMATION
Precision Auto Care, Inc. ("Precision Auto Care" or the "Company") is a provider
of automotive maintenance services with franchised and Company-operated centers
located in the United States and in certain international locations. The
Company's services are provided to automobile owners and focus on those high
frequency items required to properly maintain the vehicle on a periodic basis.
The Company offers these services through three "Precision" brands that are
intended to be complementary.
Precision Tune Auto Care provides automotive maintenance services that require
relatively short service times including engine performance, oil change and
lubrication and brake services. At March 31, 2001, these services were provided
at 581 Precision Tune Auto Care centers owned and operated by franchisees.
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 March 31, 2001, there are 13 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 March 31, 2001, there were 10 Precision Lube Express centers
owned and operated by franchisees. As of that date, there were also 10 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
March 31, June 30,
2001 2000
---------- --------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents.............................................. $ 746,383 $ 13,370
Accounts receivable, net of allowances of $1,377,040 and $2,155,735,
respectively.......................................................... 2,500,061 3,335,300
Inventory, net of allowance of $536,978................................ 1,333,943 1,517,693
Notes receivable, net of allowances of 0 and $586,000, respectively.... 73,754 153,260
Other assets........................................................... 195,139 132,013
Deferred income taxes.................................................. - 71,774
------------ ------------
Total current assets................................................. 4,849,280 5,223,410
Notes receivable, net of allowance...................................... - 276,000
Property, plant and equipment, at cost.................................. 7,060,078 15,480,911
Less: Accumulated depreciation......................................... (3,486,865) (3,669,556)
------------ ------------
3,573,213 11,811,355
Goodwill and other intangibles, net of accumulated
Amortization of $15,183,573 and $14,971,394............................. 25,063,877 28,939,600
Deposits and other...................................................... 32,087 81,224
------------ ------------
Total assets......................................................... $ 33,518,457 $ 46,331,589
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities............................... $ 8,176,876 $ 11,633,783
Mortgage notes payable................................................. - 301,962
Subordinated debt...................................................... 5,401,425 -
Other notes payable.................................................... 24,998 552,209
Deferred revenue....................................................... 248,471 1,478,533
------------ ------------
Total current liabilities............................................ 13,851,770 13,966,486
Notes payable- long term debt........................................... 10,689,066 -
Bank facility........................................................... - 7,126,615
Subordinated debt....................................................... - 5,586,960
Mortgage notes payable.................................................. - 6,628,428
Other notes payable..................................................... 635,571 482,936
Deferred revenue........................................................ 222,575 134,517
Refundable deposits..................................................... 4,000 4,000
Other liabilities....................................................... - 125,657
------------ ------------
Total liabilities.................................................... 25,402,982 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............................... 81,493 64,345
Additional paid-in capital............................................. 47,924,136 46,532,803
Unearned restricted stock.............................................. (64,167) (130,922)
Retained deficit....................................................... (39,825,987) (34,190,236)
------------ ------------
Total stockholders' equity........................................... 8,115,475 12,275,989
------------ ------------
Total liabilities and stockholder's equity........................... $ 33,518,457 $ 46,331,589
============ ============
See accompanying notes.
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
--------------------------
2001 2000
(Unaudited) (Unaudited)
----------- -----------
Revenues:
Franchise development $ 460,962 $ 142,693
Royalties 2,735,962 3,569,774
Manufacturing and distribution 2,184,660 2,182,687
Company centers 349,463 1,400,008
Other 54,263 92,070
----------- -----------
Total revenues 5,785,310 7,387,232
Total direct cost 4,393,550 5,875,679
----------- -----------
Contribution (exclusive of amortization shown separately
below) 1,391,760 1,511,553
General and administrative expense 1,238,736 1,597,015
Depreciation expense 168,306 328,430
Amortization of franchise rights and goodwill 351,118 493,377
Impairment charges 350,000 -
----------- -----------
Operating loss (716,400) (907,269)
Other income (expense):
Interest expense (561,103) (640,177)
Interest income 27,825 16,371
Other income (expense) (21,676) 190,179
----------- -----------
Total other expense (554,954) (433,627)
----------- -----------
Loss before income tax expense (1,271,354) (1,340,896)
(Benefit) provision for income taxes - (43,174)
----------- -----------
Net loss before extraordinary item $(1,271,354) $(1,297,722)
----------- -----------
Extraordinary gain from debt restructuring 406,660 -
----------- -----------
Net loss $ (864,694) $(1,297,722)
=========== ===========
Basic and diluted net loss per share before extraordinary item $(0.16) $(0.21)
Weighted average shares outstanding--Basic and Diluted 8,081,808 6,258,006
Extraordinary item $0.05 -
Weighted average shares outstanding--Basic and Diluted 8,081,808 6,258,006
Basic and diluted net loss per share $(0.11) $(0.21)
Weighted average shares outstanding--Basic and Diluted 8,081,808 6,258,006
See accompanying notes.
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
March 31,
--------------------------
2001 2000
(Unaudited) (Unaudited)
----------- -----------
Revenues:
Franchise development $ 725,788 $ 465,078
Royalties 9,209,563 11,352,800
Manufacturing and distribution 5,876,332 10,374,510
Company centers 1,549,380 3,879,027
Other 151,364 188,965
----------- -----------
Total revenues 17,512,427 26,260,380
Total direct cost 14,777,211 21,004,861
----------- -----------
Contribution (exclusive of amortization shown separately
below) 2,735,216 5,255,519
General and administrative expense 4,228,477 4,894,978
Depreciation expense 730,682 1,015,694
Amortization of franchise rights and goodwill 1,290,683 1,486,017
Impairment charges 350,000 -
----------- -----------
Operating loss (3,864,626) (2,141,170)
Other income (expense):
Interest expense (2,148,085) (1,980,780)
Interest income 41,476 53,082
Other expense (71,173) (109,541)
----------- -----------
Total other expense (2,177,782) (2,037,239)
----------- -----------
Loss before income tax expense (6,042,408) (4,178,409)
Provision for income taxes - 47,503
----------- -----------
Net loss before extraordinary gain $(6,042,408) $(4,225,912)
=========== ===========
Extraordinary gain from debt restructuring 406,660 -
----------- -----------
Net loss $(5,635,748) $(4,225,912)
=========== ===========
Basic and diluted net loss per share before extraordinary item $(0.75) $(0.69)
Extraordinary item $0.05 -
Basic and diluted net loss per share $(0.70) $(0.69)
Weighted average shares outstanding--Basic and Diluted 8,081,808 6,192,920
See accompanying notes.
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
March 31,
-----------------------------
2001 2000
(Unaudited) (Unaudited)
----------- -----------
Operating activities:
Net loss....................................................................................... $(5,635,748) $(4,225,912)
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Charge for impairment of fixed asset........................................................ 150,000 -
Charge for impairment of goodwill........................................................... 200,000 -
Depreciation and amortization............................................................... 2,021,365 2,501,711
Interest expense from amortization of debt discount ........................................ 125,935 -
Services received in exchange for stock..................................................... - 77,187
Interest paid with stock.................................................................... - 300,000
Stock issued for compensation............................................................... 66,755 -
Gain on restructuring of debt............................................................... (406,660) -
Extraordinary gain on sale of assets........................................................ - (488,561)
Changes in operating assets and liabilities:
Accounts and notes receivable............................................................ 1,190,744 634,957
Inventory................................................................................ 183,750 1,136,203
Other Assets............................................................................. 8,647 1,311,069
Accounts payable and accrued liabilities................................................. (1,764,449) 35,605
Deferred revenue......................................................................... (1,142,004) (88,158)
----------- -----------
Net cash (used in) provided by operating activities............................................ (5,001,666) 1,194,101
Investing activities:
Purchases of property and equipment......................................................... (76,519) (294,891)
Sale of property and equipment.............................................................. 8,420,833 2,390,000
----------- -----------
Net cash provided by investing activities...................................................... 8,344,314 2,095,109
Financing activities:
Proceeds from sale of common stock.......................................................... 750,000 1,484
Repayments of bank facility................................................................. (7,126,615) (1,607,054)
Proceeds from note payable.................................................................. 11,250,000 345,685
Repayment of mortgage notes and other notes payable ........................................ (7,483,020) (1,796,008)
----------- -----------
Net cash used in financing activities......................................................... (2,609,635) (3,055,893)
----------- -----------
Net change in cash and cash equivalents........................................................ 733,013 233,317
Cash and cash equivalents at beginning of year................................................. 13,370 50,167
----------- -----------
Cash and cash equivalents at end of period..................................................... $ 746,383 $ 283,484
=========== ===========
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 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 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 nine months ended
March 31, 2001 and 2000, 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.
Nine Months Ended March 31,
---------------------------
2001 2000
---- ----
Earnings per share computation - basic and diluted
Net loss before extraordinary item.................................................. $(6,042,408) $(4,225,912)
Extraordinary item.................................................................. 406,660 -
----------- -----------
Net loss............................................................................ $(5,635,748) $(4,225,912)
=========== ===========
Weighted average shares outstanding................................................. 8,081,808 6,192,920
Earnings per share - basic and diluted
Net loss before extraordinary item.................................................. $ (0.75) $ (0.69)
Extraordinary item.................................................................. $ 0.05 -
----------- -----------
Net loss............................................................................ $ (0.70) $ (0.69)
=========== ===========
Note 3 - Inventory
The components of inventory are as follows:
March 31, June 30,
2001 2000
---- ----
Raw materials..................................................................... $ 753,293 $ 979,777
Work-in-process................................................................... 220,648 191,504
Finished goods.................................................................... 896,980 946,412
Reserve for obsolete and unsaleable inventory..................................... (536,978) (600,000)
----------- -----------
$ 1,333,943 $ 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 of $11.25 million, 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. 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 as a reduction of the face
amount of the debt 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.
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 March 31, 2001 to the three months ended
March 31, 2000
Summary (in thousands)
2001 % 2000 %
---- --- ---- ---
Net revenue.................. 5,785 100% 7,387 100%
Direct cost.................. 4,394 76 5,875 80
General and administrative... 1,239 21 1,597 22
Operating (loss)............. (716) (12) (907) (12)
Revenue. Revenue for the three months ending March 31, 2001 was $5.8 million, a
decrease of approximately $1.5 million, or 22%, compared with revenue of $7.3
million for the corresponding period of the prior year. The decrease was
primarily the result of decreases in retail sales from Company stores of $1
million and a reduction of royalty revenues of $800,000. The decrease in
company store revenues is largely attributable to the disposition of company
owned stores. Royalty revenues were down as a result of fewer franchise centers
from the prior year. These decreases were partially offset by an increase in
franchising development revenue of $300,000.
Direct Cost. Direct costs for the three months ending March 31, 2001 totaled
$4.4 million, a decrease of $1.5 million or 25%, compared with $5.9 million for
the quarter ending March 31, 2000. The decrease is attributable to cost
decreases in company centers of $755,000 consistent with lower sales, royalty of
$428,000, manufacturing and distribution of $150,000, and franchise development
of $120,000.
General and Administrative Expense. General and administrative expense was $1.2
million for the three months ending March 31, 2001, a decrease of $358,000 or
22%, compared with $1.6 million for the quarter ending March 31, 2000,
principally a result of cost reduction initiatives.
Impairment charges. Impairment charges were $350,000 for the three months
ending March 31, 2001, an increase of $350,000 or 100%, compared with no charge
for the quarter ending March 31, 2000, principally a result of reducing the
carrying values of certain assets.
Operating (Loss). The Company recorded an operating loss for the three months
ending March 31, 2001 of $716,000 which represents a decrease in operating loss
of $191,000 or 21% compared with an operating loss of $907,000 for the
corresponding period of the prior year.
Comparison of the nine months ended March 31, 2001 to the nine months ended
March 31, 2000
Summary (in thousands)
2001 % 2000 %
---- --- ---- ---
Net revenue.................. 17,512 100% 26,260 100%
Direct cost.................. 14,777 84 21,005 80
General and administrative... 4,228 24 4,895 19
Operating (loss)............. (3,864) (22) (2,141) (8)
Revenue. Revenue for the nine months ending March 31, 2001 was $17.5 million, a
decrease of approximately $8.7 million, or 33%, compared with revenue of $26.2
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 $2.1 million, and a reduction of
franchise and royalty revenues of $2.1 million. The decrease in manufacturing is
partially attributable to the disposition of certain manufacturing and
distribution businesses. During fiscal year 2000 the Company disposed of an
automotive parts and supply distribution business. This business accounted for a
decrease in revenue of $2.0 million. The remaining $2.5 million decrease is
due to slower sales of the company car wash, modular buildings, and dryer
equipment. The decrease in company store revenues is largely attributable to
the disposition of company owned stores. Royalty revenues were down as a result
of fewer franchise centers from the prior year.
Direct Cost. Direct costs for the nine months ending March 31, 2001 totaled
$14.8 million, a decrease of $6.2 million or 30%, compared with $21.0 million
for the nine months ending March 31, 2000. The decrease is largely attributable
to cost decreases in company centers and manufacturing and distribution of $1.9
million and $4.2 million, respectively.
General and Administrative Expense. General and administrative expense was $4.2
million for the nine months ending March 31, 2001, a decrease of $667,000 or
14%, compared with $4.9 million for the nine months ending March 31, 2000.
Impairment charges. Impairment charges were $350,000 for the three months
ending March 31, 2001, an increase of $350,000 or 100%, compared with no charge
for the quarter ending March 31, 2000, principally a result of reducing the
carrying values of certain assets.
Operating (Loss). The Company recorded an operating loss for the nine months
ending March 31, 2001 of $3.9 million which represents an increase in operating
loss of $1.7 million or 81% compared with an operating loss of $2.1 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 March 31, 2001 2000
---------------------------- ---- ----
Depreciation $ 168,306 $ 328,430
Amortization 351,118 493,377
---------- ----------
Total $ 519,424 $ 821,807
========== ==========
Nine months ended March 31, 2001 2000
--------------------------- ---- ----
Depreciation $ 730,682 $1,015,694
Amortization 1,290,683 1,486,017
---------- ----------
Total $2,021,365 $2,501,711
========== ==========
TABLE 2 - Components of Interest Expense
The components of interest expense are summarized as follows:
Three months ended March 31, 2001 2000
---------------------------- ---- ----
Interest incurred $ 561,103 $ 640,177
========== ==========
Nine months ended March 31, 2001 2000
--------------------------- ---- ----
Interest incurred $2,148,085 $1,980,780
========== ==========
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.
Nine Months Ended March 31,
---------------------------
2001 2000
---- ----
Net cash (used in) provided by
operating activities.................................. $(5,001,666) $ 1,194,101
Net cash provided by (used in) investing activities.... 8,344,314 2,095,109
Net cash (used in) financing
activities............................................ (2,609,635) (3,055,893)
----------- -----------
Change in cash and cash equivalents.................... $ 733,013 $ 233,317
=========== ===========
Cash at March 31, 2001 was $746,383. This was an increase of $733,013 from
$13,370 on June 30, 2000. During the period, cash used by operating activities
was $5.0 million which is due to the net loss of $5.6 million, a decrease in
accounts payable of $1.8 million, and a decrease in deferred revenue (a non-cash
item) of $1.1 million. These were partially offset by a decrease in accounts
receivable of $1.2 million and by non-cash expenses for depreciation and
amortization, non-cash impairment charges, stock issued for compensation and
interest expense of $2.0 million, $350,000, $67,000 and $90,000, respectively.
Cash provided by investing activities for the nine months ended March 31, 2001
was $8.3 million. The cash provided by investing activities was primarily the
result of sales of car washes.
Cash used in financing activities for the nine months ended March 31, 2001 was
$2.6 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 $14.6 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).
During fiscal year 2001, 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.
Due to recurring operating losses since inception, 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
None.
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.
By: /s/ Louis M. Brown
---------------------------------
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 14, 2001
--------------------- Officer and Director
Louis M. Brown (Principal Executive Officer)
/s/ Robert R. Falconi Senior Vice President and Chief May 14, 2001
--------------------- Financial Officer (Principal
Robert R. Falconi Financial Accounting Officer)