UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 2001
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 January 25, 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 December 31, 2001 and
June 30, 2001. 5
Consolidated Statements of Operations for the three months
ended December 31, 2001 and 2000. 6
Consolidated Statements of Operations for the six months
ended December 31, 2001 and 2000. 7
Consolidated Statements of Cash Flows for the six months
ended December 31, 2001 and 2000. 8
Notes to the Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits or Reports on Form 8-K 22
Signatures. 22
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 both franchised and company-operated
centers located in the United States and in certain foreign countries. At
December 31, 2001, the Company had 59 employees. Its 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:
o 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
December 31, 2001, these services were provided at 601 Precision Tune
Auto Care centers owned and operated by franchisees.
o 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 December 31, 2001, 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.
o Through HydroSpray Car Wash Equipment, Co., Inc, 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 18 months. It 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 also operates a manufacturing facility that produces dryers for
car washes. That business is currently being marketed by the Company for sale as
it does not fit into its future plans. The Company believes that greater
revenues and margins can be realized by investing the proceeds from this sale
into its core business.
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 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
December 31, June 30,
------------ ----------
2001 2001
------------ ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $315,897 $344,458
Accounts receivable, net of allowance of $564,752 and $331,793
Respectively 1,500,053 1,024,751
Inventory, net of allowance of $0 and $213,770, respectively 2,272,898 1,792,462
Other assets 155,774 211,970
Assets held for sale 1,549,159 1,329,293
--------- ---------
Total current assets 5,793,781 4,702,934
Property, plant and equipment, at cost 4,655,074 5,364,233
Less: Accumulated depreciation (3,344,471) (3,003,787)
----------- -----------
1,310,603 2,360,446
Goodwill and other intangibles, net of accumulated amortization of $15,896,579
and $15,665,423, respectively 10,446,654 13,019,849
Deposits and other 28,088 32,087
----------- -----------
Total assets $17,579,126 $20,115,316
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $6,800,815 $5,705,182
Related party payable- Board LLC 1,260,654 1,551,946
Other notes payable- current 758,652 543,576
Deferred revenue 746,122 380,148
----------- -----------
Total current liabilities 9,566,243 8,180,852
Credit facility with related party 10,836,836 10,736,573
Subordinated debt 3,586,960 3,586,960
Other notes payable- non current 120,668 179,081
Accrued interest on related party debt 3,067,577 2,173,827
Deferred revenue and other 2,500 144,039
----------- -----------
Total liabilities 27,180,784 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 48,574,886 48,189,136
Unearned restricted stock (16,044) (48,126)
Accumulated deficit (58,267,744) (53,118,519)
------------ ------------
Total stockholders' deficit (9,601,658) (4,886,016)
----------- -----------
Total liabilities and stockholders' equity $17,579,126 $20,115,316
=========== ===========
See accompanying notes.
4
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
December 31,
------------
2001 2000
(Unaudited) (Unaudited)
----------- -----------
Revenues:
Franchise development $112,247 $129,490
Royalties 2,587,437 3,129,656
Manufacturing and distribution 1,779,015 1,790,296
Company centers 404,606 389,308
Other 73,728 59,581
------ ------
Total revenues 4,957,033 5,498,331
Direct costs:
Royalties 2,393,191 3,005,869
Manufacturing and distribution 1,531,607 1,360,027
--------- ---------
Total direct cost 3,924,798 4,365,896
--------- ---------
Contribution (exclusive of amortization shown separately below) 1,032,235 1,132,435
General and administrative expense 1,930,418 1,866,864
Depreciation expense 217,222 263,404
Amortization of franchise rights and goodwill 311,508 446,189
Charge for impairment of capitalized software 202,909 -
Charge for impairment of goodwill 1,100,523 -
--------- -
Operating (2,730,345) (1,444,022)
loss
Other income (expense):
Interest expense (532,784) (644,431)
Interest income 1,766 3,369
(481) 6,608
----- -----
Other
Total other (expense) (531,499) (634,454)
------------ ------------
Loss before income tax expense (3,261,844) (2,078,476)
(Benefit) provision for income taxes - 28,719
------------ ------
Net loss $(3,261,844) $(2,107,195)
============ ============
Basic and diluted net loss per share $(0.30) $(0.26)
Weighted average shares outstanding--Basic and 10,724,308 8,081,808
Diluted
See accompanying notes.
5
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended
December 31,
------------
2001 2000
(Unaudited) (Unaudited)
----------- -----------
Revenues:
Franchise development $112,247 $264,827
Royalties 5,610,685 6,473,601
Manufacturing and distribution 4,055,832 3,691,672
Company centers 829,309 1,199,917
Other 142,356 97,101
------- ------
Total revenues 10,750,429 11,727,118
Direct costs:
Royalties 4,876,087 6,388,570
Manufacturing and distribution 3,458,931 2,854,290
--------- ---------
Total direct cost 8,335,018 9,242,860
--------- ---------
Contribution (exclusive of amortization shown separately below) 2,415,411 2,484,258
General and administrative 3,298,172 4,130,542
expense
Depreciation expense 429,606 562,376
Amortization of franchise rights and goodwill 681,900 939,566
Charge for impairment of capitalized software 202,909 -
Charge for impairment of goodwill 1,893,735 -
--------- -
Operating (4,090,911) (3,148,226)
loss
Other income (expense):
Interest expense (1,060,612) (1,586,982)
Interest income 6,643 13,650
(4,480) (49,496)
------- --------
Other
Total other (1,058,449) (1,622,828)
----------- -----------
(expense)
Loss before income tax expense (5,149,360) (4,771,054)
(Benefit) provision for income - -
- -
taxes
Net loss $(5,149,360) $(4,771,054)
============ ============
Basic and diluted net loss per share $(0.50) $(0.61)
Weighted average shares outstanding--Basic and 10,369,799 7,762,873
Diluted
See accompanying notes.
6
PRECISION AUTO CARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
December 31,
------------
2001 2000
(Unaudited) (Unaudited)
----------- -----------
Operating activities:
Net loss. $(5,149,360) $(4,771,054)
Adjustments to reconcile net (loss) to net cash provided
by operating activities:
Depreciation and amortization. 1,111,506 1,501,942
Amortization of debt discount. 100,263 -
Stock issued for compensation. 126,500 -
Charge for impairment of capitalized software. 202,909 -
Charge for impairment of goodwill. 1,893,735 -
Services received in exchange for stock 32,082 58,193
Changes in operating assets and liabilities:
Accounts and notes receivable. (475,301) (843,396)
Inventory. (480,436) 55,121
Other assets. 56,194 (13,038)
Assets held for sale. 273,030 -
Accounts payable and accrued liabilities 2,106,227 85,107
Deferred revenue and other 228,434 (11,059)
------- --------
Net cash provided by (used in) operating activities 25,783 (3,938,184)
Investing activities:
Purchases of property and equipment. (81,576) (53,334)
Sale of property and equipment 50,000 8,100,000
------ ---------
Net cash (used in) provided by investing activities (31,576) 8,046,666
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 (350,000) -
Repayment of mortgage notes and other notes payable (332,680) (7,190,471)
--------- -----------
Net cash used in financing activities (22,768) (2,317,086)
-------- -----------
Net change in cash and cash equivalents (28,561) 1,791,396
Cash and cash equivalents at beginning of year. 344,458 13,370
------- ------
Cash and cash equivalents at end of period. $315,897 $1,804,766
======== ==========
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.
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. Significant intercompany accounts and transactions have been
eliminated in consolidation.
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 Company believes
that the adoption of SFAS 141 will not have a material impact on the financial
position or the results of operations of the Company.
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. Management intends to adopt SFAS No. 142 for fiscal
year 2003.
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 shares outstanding related to the stock options and
warrants at December 31, 2001 was 1,458,179. For the six months ended December
31, 2001 and 2000, the assumed exercises of the Company's outstanding stock
options is 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.
Six Months Ended December 31,
-----------------------------
2001 2000
---- ----
Earnings per share computation - basic and diluted
Net loss......................................... $(5,149,360) $(4,771,054)
Weighted average shares outstanding.............. 10,369,799 7,762,873
Net loss per share- basic and diluted................ $(0.50) $(0.61)
8
Note 4 - Inventory
The components of inventory are as follows:
December 31, June 30,
2001 2001
---- ----
Raw materials..................................... $1,077,396 $927,679
Work-in-process................................... 329,066 206,050
Finished goods.................................... 866,436 872,503
Reserve for obsolete and unsaleable inventory..... - (213,770)
---------- ----------
$2,272,898 $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. 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 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 Company agreed to make monthly payments through 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. 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.
Mortgage Notes Payable
On May 17, 1999, the Company executed nineteen promissory notes totaling
$7,204,000, with FFCA Acquisition Corporation. Each note accrues interest at a
rate of 9.9% per annum and matures on June 1, 2014 with the exception of one
which would have matured on August 1, 2004. Principal and interest payments were
due in monthly installments that commenced on July 1, 1999. Each note was
secured by mortgages on properties. In the event of default the interest rate
would have increased to 18%. On October 2, 2000, the mortgages were repaid.
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 acquisition agreement. 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 moneys 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 by the Court 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 moneys 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 itself in January 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.
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.
10
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 provision 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 aggregate their financial results into a distinct
segment. There were no sales between the two segments. Precision Lube Express
franchises did not buy any Hydrospray products. 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 six months ended December 31,
2001. A new CEO, Lou Brown and a new CFO, Robert Falconi were hired by the
Company during FY01. The new CFO upgraded the accounting staff, had new
accounting software installed and made numerous other changes in accounting
processes and procedures so that the Company would be able to collect accurate
financial information by business segment. Prior to the quarter ending September
30, 2001, information was evaluated by the CODM and reviewed with the Board of
Directors solely at the consolidated level.
A summary of the segment financial information is as follows:
Six Months Ended
December 31,
------------
2001 2000
---- ----
Revenues:
Automotive Care Franchising...................................... $5,722,932 $6,738,428
Manufacturing & Distribution..................................... 4,055,832 3,691,672
----------- -----------
Total segment revenues........................................... 9,778,764 10,430,100
Other............................................................ 971,665 1,297,018
----------- -----------
Total revenues................................................... $10,750,429 $11,727,118
=========== ===========
Contribution:
Automotive Care Franchising...................................... $1,627,300 $1,653,572
Manufacturing & Distribution..................................... 596,901 837,382
---------- ----------
Total segment contribution....................................... 2,224,201 2,490,954
Other............................................................ 191,210 (6,696)
---------- ----------
Total contribution............................................... $2,415,411 $2,484,258
========== ==========
Assets:
Automotive Care Franchising...................................... $13,314,929 $34,342,436
Manufacturing & Distribution..................................... 4,264,197 3,566,099
----------- -----------
Total assets..................................................... $17,579,126 $37,908,535
=========== ===========
11
Capital expenditures:
Automotive Care Franchising.................................................... $51,732
Manufacturing and Distribution ................................................ 29,844
------
Total Capital Expenditures $81,576
=======
Reconciliation of segment contribution to net income before income taxes:
Automotive Care Franchising.................................................... $1,627,300 $1,653,572
Manufacturing & Distribution................................................... 596,901 837,382
------- -------
Total segment contribution..................................................... 2,224,201 2,490,954
Other.......................................................................... 191,210 (6,696)
------- -------
Total contribution............................................................. 2,415,411 2,484,258
--------- ---------
General & administrative expense............................................... 3,298,172 4,130,542
Depreciation expense........................................................... 429,606 562,376
Amortization expense........................................................... 681,900 939,566
Charge for impairment of capitalized software.................................. 202,909 -
Charge for impairment of goodwill.............................................. 1,893,735 -
Other expenses................................................................. 1,058,449 1,622,828
--------- ---------
Net income (loss) before income taxes.......................................... $(5,149,360) $(4,771,054)
============ ============
Note 8 - Subsequent Events
The Company sold assets owned by its Mexican subsidiary for $1.8 million
in January 2002, 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. The
tangible assets involved in this sale are included in assets held for sale as of
December 31, 2001. The Company will recognize the revenue from the technical
services agreement in future periods. The proceeds of the sale are earmarked 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 for $660,000 to a related party, a partnership which
includes Ernie Malas, the manager of the Hydrospray subsidiary, and subsequently
leased back the property. One year of prepaid rent was netted against the sales
proceeds.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Introduction
The following discussion and analysis of the consolidated financial
condition and results of operations of Precision Auto Care, Inc. (the "Company")
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto. Historical results and percentage relationships set forth herein
are not necessarily indicative of future operations.
Results of Operations
Comparison of the three months ended December 31, 2001 to the three months ended
December 31, 2000
Summary (in thousands)
2001 % 2000 %
---- - ---- -
Automotive car franchising revenue $2,700 54 $3,259 59
Manufacturing & distribution revenue 1,779 36 1,790 33
Other 478 10 449 8
------ ----- ------ ---
Total revenues $4,957 100% $5,498 100%
====== ======
Automotive care franchising direct cost. $2,004 40 $2,563 46
Manufacturing & distribution direct cost. 1,532 31 1,360 25
Other 389 8 443 8
------ ----- ------ -----
Total direct cost. $3,925 79 $4,366 79
====== ======
General and administrative 1,930 39 1,867 34
Charge for impairment of capitalized software 203 4 - 0
Charge for impairment of goodwill 1,100 22 - 0
Operating (loss) (2,730) (55) (1,444) (26)
Other 532 11 634 12
Net loss (3,262) (66) (2,107) (38)
12
Revenue. Total revenues for the three months ending December 31, 2001 was $4.9
million, a decrease of approximately $541,000, or 10%, compared with total
revenues of $5.5 million for the corresponding period of the prior year.
Automotive care franchising revenue for the three months ending December 31,
2001 was $2.7 million, a decrease of approximately $559,000, or 17%, compared
with automotive care revenues of $3.3 million for the corresponding period of
the prior year. The decrease was primarily the result of a decrease in royalty
revenues. Royalty revenues were down as a result of fewer franchise centers from
the prior year.
Manufacturing and distribution revenue for the three months ending December 31,
2001 was $1.8 million, a decrease of approximately $11,000, or 1%, compared with
manufacturing and distribution revenues of $1.8 million for the corresponding
period of the prior year.
Other revenue for the three months ending December 31, 2001 was $478,000, an
increase of approximately $29,000, or 6%, compared with other revenues of
$449,000 for the corresponding period of the prior year.
Direct Cost. Total direct costs for the three months ending December 31, 2001
totaled $3.9 million, a decrease of $441,000 or 10%, compared with $4.4 million
for the corresponding period of the prior year.
Automotive care franchising direct costs for the three months ending December
31, 2001 totaled $2.0 million, a decrease of $559,000 or 22%, compared with $2.6
million for the corresponding period of the prior year. The decrease is
attributable to cost decreases in royalty of $517,000 and franchise development
of $42,000. This is consistent with the lower sales the Company has experienced
in royalty and franchise development.
Manufacturing and distribution direct costs for the three months ending December
31, 2001 totaled $1.5 million, an increase of $172,000 or 13%, compared with
$1.3 million for the corresponding period of the prior year. This is
attributable to the increase cost of certain manufacturing components.
Other direct costs for the three months ending December 31, 2001 totaled
$389,000, a decrease of $54,000 or 12%, compared with $443,000 for the
corresponding period of the prior year. The decrease is consistent with the
lower sales the Company has experienced in company centers.
General and Administrative Expense. General and administrative expense was $1.9
million for the three months ending December 31, 2001, an increase of $63,000 or
3%, compared with $1.8 million for the quarter ending December 31, 2000. This is
the primary result of the legal and accounting costs associated with the sale of
the Company's Mexican subsidiary.
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 useful.
Impairment of Goodwill. The Company recognized a $1.1 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 purchasing the company's Mexican subsidiary. The proposed purchase
price offered by the prospective buyer lead to internal discussion regarding the
appropriateness of the current 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 additional impairment charge of $793,000 in the three
months ending September 30, 2001. In January 2002, the Company sold 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. The tangible assets involved in this sale are included in
assets held for sale as of December 31, 2001. The Company will recognize the
revenue from the technical services agreement in future . Because the final
negotiations with the outside investor further reduced the purchase price from
what had previously been anticipated, , an additional impairment charge of $1.1
million was subsequently taken in the three months ending December 31, 2001.
13
Operating (Loss). The Company recorded an operating loss for the three months
ending December 31, 2001 of $2.7 million, which represents an increase in
operating loss of $1.3 million or 89% compared with an operating loss of $1.4
million for the corresponding period of the prior year.
Other Income (Expense). The Company recorded Other Expense of $532,000 for the
three months ending December 31, 2001 which represents a decrease in Other
Expense of $103,000 or 16% compared to the Other Expense for the corresponding
period of the prior year. 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.
Net Loss. The Company recorded a Net Loss of $3.3 million for the three months
ending December 31, 2001. This represents an increase of $1.1 million or 55%
compared to the Net Loss for the corresponding period of the prior year. The
increase was primarily attributable to the increase in the operating loss of
$1.3 million, offset in part by a reduction in interest expense of $110,000.
Comparison of the six months ended December 31, 2001 to the six months ended
December 31, 2000
Summary (in thousands)
2001 % 2000 %
---- - ---- -
Automotive car franchising revenue.................. $5,724 53 $6,739 57
Manufacturing & distribution revenue................ 4,055 38 3,691 31
Other............................................... 971 9 1,297 11
------- ----- ------- -----
Total revenues...................................... $10,750 100% $11,727 100%
======= ----- ======= -----
Automotive care franchising direct cost............. $4,096 38 $5,084 43
Manufacturing & distribution direct cost............ 3,459 32 2,854 23
Other............................................... 780 7 1,304 11
------- ----- ------- -----
Total direct cost................................... $8,335 78 $9,242 79
======= ====== -----
General and administrative.......................... 3,298 31 4,131 35
Charge for impairment of capitalized software....... 203 2 - 0
Charge for impairment of goodwill................... 1,894 18 - 0
Operating (loss).................................... (4,091) (38) (3,148) (27)
Other............................................... 1,058 10 1,623 14
Net loss............................................ (5,149) (48) (4,771) (41)
Revenue. Total revenues for the six months ending December 31, 2001 was $10.8
million, a decrease of approximately $977,000, or 8%, compared with total
revenues of $11.7 million for the corresponding period of the prior year.
Automotive care franchising revenue for the six months ending December 31, 2001
was $5.7 million, a decrease of approximately $1.0 million, or 15%, compared
with automotive care revenues of $6.7 million for the corresponding period of
the prior year. The decrease was primarily the result of a decrease in royalty
revenues. Royalty revenues were down as a result of fewer franchise centers from
the prior year.
Manufacturing and distribution revenue for the six months ending December 31,
2001 was $4.0 million, an increase of approximately $364,000, or 10%, compared
with manufacturing and distribution revenues of $3.6 million for the
corresponding period of the prior year. The increase in manufacturing and
distribution revenue is the result of increased sales in its car wash
manufacturing subsidiary.
Other revenue for the six months ending December 31, 2001 was $971,000, a
decrease of approximately $326,000, or 25%, compared with other revenues of $1.3
million for the corresponding period of the prior year. The decrease was
primarily the result of decreases in retail sales from Company stores of
$370,000. The decrease in company store revenues is a result of the disposition
of all domestically owned car care centers. These decreases were partially
offset by an increase in other income of $44,000.
Direct Cost. Total direct costs for the six months ending December 31, 2001
totaled $8.3 million, a decrease of $907,000 or 10%, compared with $9.2 million
for the corresponding period of the prior year.
Automotive care franchising direct costs for the six months ending December 31,
2001 totaled $4.1 million, a decrease of $988,000 or 19%, compared with $5.1
million for the corresponding period of the prior year. The decrease is
attributable to cost decreases in royalty of $821,000 and franchise development
of $167,000. This is consistent with the lower sales the Company has experienced
in royalty and franchise development.
14
Manufacturing and distribution direct costs for the six months ending December
31, 2001 totaled $3.5 million, an increase of $605,000 or 21%, compared with
$2.8 million for the corresponding period of the prior year. This is consistent
with the higher sales the Company experienced from the corresponding period of
the prior year and deteriorating margins.
Other direct costs for the six months ending December 31, 2001 totaled $780,000,
a decrease of $524,000 or 40%, compared with $1.3 million for the corresponding
period of the prior year. The decrease is attributable to cost decreases in
company centers of $479,000 and other of $45,000. This is consistent with the
lower sales the Company has experienced in company centers.
General and Administrative Expense. General and administrative expense was $3.3
million for the six months ending December 31, 2001, a decrease of $833,000 or
20%, compared with $4.1 million for the six months ending December 31, 2000.
This is the primary result of management's cost reduction initiatives.
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 purchasing the company's Mexican subsidiary. The proposed purchase
price offered by the prospective buyer lead to internal discussion regarding the
appropriateness of the current 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. The tangible assets involved in this sale
are included in assets held for sale as of December 31, 2001. The Company will
recognize the revenue from the technical services agreement in future periods.
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 the three months ending
December 31, 2001.
Operating (Loss). The Company recorded an operating loss for the six months
ending December 31, 2001 of $4.1 million, which represents an increase in
operating loss of $943,000 or 30% compared with an operating loss of $3.1
million for the corresponding period of the prior year.
Other Income (Expense). The Company recorded Other Expense of $1.1 million for
the six months ending December 31, 2001 which represents a decrease in Other
Expense of $592,000 or 36% compared to the Other Expense for the corresponding
period of the prior year. 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.
Net Loss. The Company recorded a Net Loss of $5.2 million for the six months
ending December 31, 2001. This represents an increase of $378,000 or 8% compared
to the Net Loss for the corresponding period of the prior year.
Liquidity and Capital Resources
Sources and Uses of Cash
Cash at December 31, 2001 was $316,000. This was a decrease of $29,000 from
June 30, 2001. During the period, cash provided by operations was $26,000. 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. At this time, the Company can not
anticipate when it will be able to sell World Wide Dryer because of the lack of
interest to date, and if there continues to be no interest in the very near
term, the Company may decide to merge World Wide Dryer with Hydrospray. 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. In February, the SEC declared the company's
Rights Offering effective. The Company expects to raise enough money from the
rights offering to enable it to exercise its business plan.
Cash used in investing activities for the six months ended December 31,
2001 was $32,000. The cash used in investing activities was primarily the result
of purchases of property and equipment. In January 2002, the Company sold 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. Proceeds of the sale are earmarked 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.
15
Cash used in financing activities for the six months ended December 31,
2001 was $23,000. Cash provided by financing activities during the period
included the sale of common stock 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. This infusion of cash was offset by repayments
of mortgages, the subordinated debt and other notes payable of $683,000.
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 the period of three years. In September 2001, Precision Funding
agreed to allow the Company to defer the interest payment that is due in
September, 2001 until July 1, 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 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 composed of certain members of the
Company's board of directors. Under the terms of the renegotiation, Board LLC
agreed to waive all of the $407,000 of interest that had been accrued to 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.
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 May 17, 1999, the Company executed nineteen promissory notes totaling
$7.2 million, with FFCA Acquisition Corporation. Each note accrued interest at a
rate of 9.9% per annum and would have matured on June 1, 2014 with the exception
of one that had a maturity date of August 1, 2004. Principal and interest
payments were due in monthly installments that commenced on July 1, 1999. Each
note was secured by mortgages on properties. During fiscal year 2001 the Company
repaid all of this debt with proceeds from sales of car wash and lube centers
(see discussion above).
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.
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, and the sale of certain assets, 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.
16
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 December 31, 2001 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
The Company is subject to litigation that could have a material adverse impact
on its liquidity as follows:
Precision Tune Auto Care, Inc. v. Andhras Corporation, Rambal 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, Precision Tune Auto Care, Inc., ("PTAC") filed suit against
Andhras Corporation ("Andhras") and its stockholders for moneys owed under 6
franchise agreements totaling over $430,000. On May 15, 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 against unknown owners to enjoin
use of "Precision Auto Care" in connection with 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 February 2002, the
parties agreed in principle to settle the case with Andhras agreeing to a
stipulated judgment of $315,000 and to dismiss the counter claim with prejudice.
PTAC agreed to dismiss the claims against Chad Anne and Sonata Anne based on
their representations that they had no assets. In addition, Ramble Anne, who had
filed for protection under Chapter 13 of the U.S. Bankruptcy Code agreed not to
oppose PTAC's claim in the amount of $315,000.
Bonneville Car Wash Systems, Inc. and Ivory Enterprises, Inc. v. Precision
-------------------------------------------------------------------------------
Auto Care, Inc. dba Precision and Hydrospray, Third Judicial District,
-------------------------------------------------------------------------
District Court for Salt Lake County, Utah. Civil Case Number 99-090-6889
------------------------------------------------------------------------
Bonneville, a distributor of Hydro Spray Car Wash Equipment Co., Ltd. and its
related corporation sued PACI and Hydro Spray on July 8, 1999. The plaintiffs
allege that the defendants made fraudulent representations in connection with
the sale of certain equipment manufactured by Hydro Spray and sold it to Ivory,
made intentional misrepresentations, breeched the warranty of merchantability,
breached various contracts with the plaintiffs and tortiously interfered with
Bonneville's business relationships with existing customers. The plaintiff seeks
actual damages in excess of $515,000, punitive damages and attorney's fees. The
defendants filed an answer denying the allegations on August 18, 1999. The court
has not yet scheduled a trial date.
Performance Concepts, Inc. and James E. Radcliffe v. Precision Tune Auto
--------------------------------------------------------------------------
Care, Inc., (Circuit Court, 17th Judicial Circuit, Broward
-----------------------------------------------------------
County, Florida, Case No. 98-007130 (03) 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 the following that
PTAC breach its contract with the plaintiffs, breached the covenant of good
faith and fair dealing, tortiously interfered with business relationship, and
slandered the plaintiffs. The plaintiffs sought unspecified damages in excess of
$15,000 plus punitive damages. On June 3, 1998, the court granted a temporary
injunction enjoining both parties from violating the franchise contract. In a
counterclaim filed August 6, 1998, PTAC demanded indemnification under the
franchise agreement by both plaintiffs for certain of the allegations, which has
been agreed to by plaintiffs' insurance carrier. On August 26, 1998,
counter-plaintiffs filed a motion to dismiss the counterclaim. In October 1999,
the plaintiffs filed Motions for Sanctions for failure to comply with a request
for documentation and failure to supply most knowledgeable corporate
representatives for deposition. In November 1999, plaintiff filed a Second
Motion for Sanctions, seeking to strike PTAC's pleadings, including the
Counterclaim. On November 15, 1999, the court granted the motion to strike
PTAC's pleadings and on November 24, 1999, the court entered an order striking
PTAC's pleadings and entering a default, ruling that the allegations of the
Plaintiff's Complaint would be deemed admitted and that the only issue for trial
was the amount of damages sustained. On March 21, 2000, a jury awarded Plaintiff
damages in the amount of $841,000. PTAC has appealed the decision to the Fourth
District Court of Appeals. PTAC filed its appellate brief on January 5, 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 was denied in February, 2002. The
trial court has not yet scheduled a new trial on the issue of damages.
17
Anwar Meherally, Shan Meherally, A. M. Enterprises, Inc., Shanwar WA, Inc. and
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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 alleging that a
1998 settlement agreement of a prior lawsuit was 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 the implied covenant of good faith and fair dealing
in both the area agreement and the settlement agreement, that the defendants'
actions violated the Washington Franchise Investment Protection Act, and that
the defendants used instrumentalities of interstate commerce in carrying out
concerted actions in violation of the Racketeer Influenced and Corrupt
Organizations Act. 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 responsive pleadings. The
defendants also filed a motion for summary judgment seeking dismissal of the
lawsuit based on the 1998 settlement agreement of the prior lawsuit. On October
29, 2001, the Court entered an Order granting 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 and denying 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). On November 8, 2001, the plaintiffs filed a motion for
clarification of the Order entered on October 29, 2001, which motion is still
pending . Trial is currently scheduled to begin on April 1, 2002.
Precision Tune Auto Care, Inc. v. Shanwar WA, Inc., Shanwar, Inc., Car Tune,
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Inc., Anwar Meherally and Shahnaz A. Meherally, Civil Action No. 01-1151-4
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(U.S. District Court for the Eastern District of Virginia, filed July 26, 2001).
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PTAC filed suit against Shanwar WA, Inc., its stockholders (Anwar Meherally and
Shahnaz Meherally) and related corporations for unpaid franchise fees and
trademark infringement arising out of the defendant's unauthorized use of PTAC's
trademarks. 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. On January 16, 2002, the Court granted PTAC's motion for partial
summary judgment as to the defendant's liability. Trial is currently scheduled
to determine the amount of the defendants' liability to PTAC on April 1, 2002.
Lawrence W. Frakes, and Teresa K. Frakes v. John Garies, William Grimaud,
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Grimaud Enterprises, Inc., Precision Tune Auto Care, Inc. f/d/b/a Precision
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Tune, Inc., Civil Action No. CV97-2126 (Circuit Court of Madison County,
------------------------------------------------------------------------
Alabama, filed November 3, 1997).
--------------------------------
Plaintiffs allege that defendants orally made material misrepresentations about
adequate capitalization, access to used equipment, support, and guarantees of
expected earnings. Plaintiffs also allege that 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 Garies, William Grimaud and PTAC filed motions to dismiss. On May 9,
2000, all defendants filed an Amended Motion to Dismiss. On April 26, 2001, PTAC
filed a Second Amended Motion to Dismiss. The Court has scheduled a hearing on
the defendants' motions to dismiss for November 15, 2001. The court has not yet
ruled on the motions to dismiss, and no trial date has been scheduled.
Paisa, Inc. v. Precision Auto Care, Inc. , Case No. CV-99-0128R (United
-------------------------------------------------------------------------
States District Court, Central District of California, Los
------------------------------------------------------------
Angeles, filed February 8, 1999).
--------------------------------
Plaintiff alleged breach of contract relating to an alleged offer to purchase
plaintiff, fraud by inducing plaintiff to accept a loan thereby placing
plaintiff in a position of further financial detriment and indebtedness, and
negligent misrepresentation by not informing plaintiff of defendant's financial
difficulties. Plaintiff sought judgment for $15,000,000 consequential damages;
court costs and attorneys' fees; and any other relief the Court might find
proper. Plaintiff also sought injunctive relief against enforcement of their
promissory note and security agreement with defendant. PACI filed an answer
denying the allegations contained in the complaint. On April 6, 1999, a notice
of voluntary dismissal without prejudice was filed by the plaintiff and granted
by the Court. Paisa re-filed their complaint in the state court with the same
allegations as above, Paisa v. Precision Auto Care, Inc., Case No. BC209390
(Superior Court of the State of California for the County of Los Angeles Central
District filed April 27, 1999). On July 2, 1999, Plaintiff filed a voluntary
Chapter 11 petition, later converted to a Chapter 7 liquidation. On November 11,
1999, the court dismissed this case without prejudice.
18
On November 20, 2000, Paisa, Inc., through the Chapter 7 Trustee, filed a
complaint alleging breach of contract by failing to close on the acquisition of
Paisa, Inc., seeking unspecified damages (Howard Grobstein, Chapter 7 Trustee v.
Precision Auto Care, Inc., U. S. Bankruptcy Court, Central District of
California). On January 5, 2001, PACI filed an answer denying the allegations in
the complaint and the case was transferred to the U.S. District Court, Central
Division, Los Angeles Division (Civil Action No. 01-011176 ABC). 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 full amount due under the
settlement agreement.
Lorena Strickland v. Precision Tune Auto Care, Inc. and PTW, Inc.,
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Case No. 00-2-28092-1-SEA, (Superior County, King County, Washington,
-------------------------------------------------------------------------
filed November 7, 2000)
-----------------------
In November 2000, a landlord filed suit against the Company for moneys 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 itself in January 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.
Landmark Development Group II v. PTW, Inc., Case No. 00-2-08158-8-KNT
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(Superior Court, King County, Washington, filed April 10, 2000).
---------------------------------------------------------------
On April 10, 2000, a landlord filed suit against one of the Company's
subsidiaries for moneys due under a lease signed by its subsidiary, seeking
damages of more than $45,000. The Court entered summary judgment against the
subsidiary by the Court in the amount of $54,000 plus interest and costs of
$1,600. The claim was settled in December 2001 with the subsidiary'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.
United Bank, NA v. C. Eugene Deal, Miracle Partners, Inc., and Star Auto
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Center, Inc. (Common Pleas Court, Crawford County, Ohio).
--------------------------------------------------------
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.
Other than the Radcliffe case, the Company does not believe that any of the
above litigation 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 one of these suits may result in a material judgment against the
Company, which could cause material adverse consequences to its operations.
Although the Company has a judgment against it in the Radcliffe case and the
Company has reserved for that judgment, the Company believes that it will
ultimately prevail against Radcliffe.
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 $126,500.
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
19
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 February 14, 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 February 14, 2002
------------------ Officer and Director
Louis M. Brown (Principal Executive Officer)
/s/ Robert R. Falconi Senior Vice President and Chief February 14, 2002
--------------------- Financial Officer (Principal
Robert R. Falconi Financial Accounting Officer)
20