UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15 (d)
OF THE EXCHANGE ACT
For the transition period from ____ to ____
Commission File Number 0-9812
GREASE MONKEY HOLDING CORPORATION
(Exact name of small business issuer as specified in its charter)
Utah 87-0321320
--------------------------------- ------------------------------------
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
216 16th Street Mall, Suite 1100
Denver, Colorado 80202
----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (303) 534-1660
Check whether issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 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
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Outstanding at
Class November 1, 1996
----------------------------- ----------------
Common Stock, $0.03 par value 4,379,860 shares
Transitional Small Business Disclosure Format Yes No X
--- ---
GREASE MONKEY HOLDING CORPORATION
COMMISSION FILE NUMBER: 0-9812
QUARTER ENDED SEPTEMBER 30, 1996
FORM 10-QSB
PART I FINANCIAL INFORMATION
Consolidated Statements of Operations . . . . . . . . Page 1
Consolidated Balance Sheets . . . . . . . . . . . . . Page 2
Consolidated Statements of Stockholders' Equity . . . Page 4
Consolidated Statements of Cash Flows . . . . . . . . Page 5
Notes to Consolidated Financial Statements. . . . . . Page 8
Management's Discussion and Analysis or Plan
of Operation. . . . . . . . . . . . . . . . . . . . Page 10
PART II OTHER INFORMATION
Legal Proceedings . . . . . . . . . . . . . . . . . . Page 16
Exhibits and Reports on Form 8-K. . . . . . . . . . . Page 16
Signatures. . . . . . . . . . . . . . . . . . . . . . Page 17
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
Operating Revenue:
Royalty fees............................... $ 827,617 833,673 2,392,110 2,416,109
Franchise sales - center openings.......... 75,400 53,000 75,400 318,800
Product and equipment revenue.............. 243,556 191,794 574,164 830,850
Sales by Company-owned Centers............. 3,817,786 3,423,316 10,881,425 9,399,072
Leasing revenue............................ 361,590 348,555 1,062,392 1,045,065
Other...................................... 19,103 37,825 115,499 125,643
---------- ---------- ---------- ----------
5,345,052 4,888,163 15,100,990 14,135,539
---------- ---------- ---------- ----------
Operating Expenses:
Franchise costs - center openings.......... 20,985 25,709 20,985 71,918
Product and equipment costs................ 130,626 82,834 241,342 488,910
Company-owned Centers...................... 3,216,101 2,859,677 9,320,816 8,150,752
Leasing expense............................ 335,040 351,979 1,019,210 1,057,859
General and administrative expenses........ 1,103,471 1,048,581 3,357,714 3,056,419
Provision for credit losses................ 31,761 36,700 90,107 101,700
Depreciation............................... 177,236 161,014 514,731 480,815
Amortization............................... 64,222 47,417 180,734 130,139
---------- ---------- ---------- ----------
5,079,442 4,613,911 14,745,639 13,538,512
---------- ---------- ---------- ----------
Operating income (loss)...................... 265,610 274,252 355,351 597,027
---------- ---------- ---------- ----------
Other income (expense):
Gain (loss) on sale/disposition of centers. (76,887) - (80,299) (16,841)
Undeveloped franchise licenses canceled.... - - 27,563 4,000
Interest income............................ 7,795 11,494 17,160 31,205
Interest expense........................... (166,314) (150,032) (483,545) (419,696)
---------- ---------- ---------- ----------
(235,406) (138,538) (519,121) (401,332)
---------- ---------- ---------- ----------
Net income (loss)............................ $ 30,204 135,714 (163,770) 195,695
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings (loss) per common share (Note 5).... $ * 0.02 (0.06) 0.02
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average shares outstanding.......... 4,364,264 4,362,211 4,355,565 4,350,968
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
* Less than $.01 per share.
(UNAUDITED)
1
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Sept. 30, December 31,
1996 1995
------------ ------------
ASSETS
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . $ 590,639 385,167
Restricted cash including certificates of
deposit. . . . . . . . . . . . . . . . . . . . . . . 34,455 32,232
Accounts receivable, net of allowance for
doubtful accounts of $368,048 at September 30,
1996, and $399,141 at December 31, 1995. . . . . . . 898,654 1,123,267
Current portion of notes receivable,
net of allowance for uncollectible amounts . . . . . 104,396 105,584
Current portion of net investment
in direct financing leases . . . . . . . . . . . . . 212,509 187,195
Inventories. . . . . . . . . . . . . . . . . . . . . . 828,142 697,383
Prepaid expenses and supplies. . . . . . . . . . . . . 194,849 155,661
------------ ----------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . 2,863,644 2,686,489
------------ ----------
Property and Equipment, at Cost, Pledged:
Land . . . . . . . . . . . . . . . . . . . . . . . . . 295,917 152,079
Buildings (including buildings under capital leases) . 5,704,992 5,294,542
Furniture and fixtures . . . . . . . . . . . . . . . . 557,865 486,648
Leasehold improvements . . . . . . . . . . . . . . . . 659,865 630,073
Machinery and equipment. . . . . . . . . . . . . . . . 1,733,576 1,454,289
------------ ----------
8,952,215 8,017,631
Less accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . . . . (3,364,738) (3,061,632)
------------ ----------
NET PROPERTY AND EQUIPMENT . . . . . . . . . . . . 5,587,477 4,955,999
------------ ----------
Other Assets:
Net investment in direct financing leases. . . . . . . 3,553,962 3,331,596
Notes receivable, net of allowance for uncollectible
amounts. . . . . . . . . . . . . . . . . . . . . . . 336,423 99,036
Deferred franchising costs . . . . . . . . . . . . . . 194,449 159,788
Goodwill and covenants not to compete, net
of accumulated amortization of $907,825 at
September 30, 1996, and $746,793 at December
31, 1995 . . . . . . . . . . . . . . . . . . . . . . 2,473,855 1,588,348
Real estate held for sale. . . . . . . . . . . . . . . 173,500 173,500
Other assets, net of accumulated
amortization of $136,892 at September 30, 1996,
and $120,713 at December 31, 1995. . . . . . . . . . 130,959 150,877
------------ ----------
TOTAL OTHER ASSETS . . . . . . . . . . . . . . . . 6,863,148 5,503,145
------------ ----------
$ 15,314,269 13,145,633
------------ ----------
------------ ----------
(UNAUDITED)
(continued on next page)
2
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
Sept. 30, December 31,
1996 1995
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . $ 966,592 773,983
Accrued salaries and wages . . . . . . . . . . . . . . 218,363 191,116
Other accrued liabilities . . . . . . . . . . . . . . 343,912 218,426
Current portion of long-term debt. . . . . . . . . . . 669,741 420,887
Current portion of obligations
under capital leases . . . . . . . . . . . . . . . . 410,254 363,209
------------ ----------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . 2,608,862 1,967,621
------------ ----------
Long-term Debt . . . . . . . . . . . . . . . . . . . . . 3,241,476 2,223,817
Obligations Under Capital Leases . . . . . . . . . . . . 6,761,505 6,374,027
Deferred Franchise Sales Revenue . . . . . . . . . . . . 907,671 655,553
Stockholders' Equity:
Series C Preferred stock, issued and outstanding
20,896 shares and 20,958 shares at September 30,
1996 and December 31, 1995, respectively, stated
value of $100.00 . . . . . . . . . . . . . . . . . . 2,089,638 2,095,838
Common stock, par value $.03, 20,000,000
shares authorized, 4,369,251 and 4,336,764,
shares issued and outstanding at September 30,
1996 and December 31, 1995, respectively . . . . . . 131,078 130,103
Capital in excess of par value . . . . . . . . . . . . 5,812,383 5,773,248
Accumulated deficit. . . . . . . . . . . . . . . . . . (6,238,344) (6,074,574)
------------ ----------
TOTAL STOCKHOLDERS' EQUITY . . . . . . . . . . . . 1,794,755 1,924,615
Commitments and Contingencies. . . . . . . . . . . . .
------------ ----------
$ 15,314,269 13,145,633
------------ ----------
------------ ----------
(UNAUDITED)
3
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock
--------------------- ---------------------------------
Capital in
Number of Number of Excess of Accumulated
Shares Amount Shares Amount Par Value Deficit Total
---------- ------ -------- ------ --------- ------------ -----
Balance at December 31, 1994. . . . . . 22,205 $2,220,500 4,305,359 $129,161 5,707,382 (6,312,764) 1,744,279
Issuance of common stock pursuant to
employee benefit plan. . . . . . . . . - - 11,542 346 20,682 - 21,028
Conversion of Series C Preferred stock
to common stock, including payment
of accumulated dividends . . . . . . . (1,247) (124,662) 49,863 1,496 113,224 - (9,942)
Offering costs of Series C Preferred
stock. . . . . . . . . . . . . . . . . - - - - (7,500) - (7,500)
Common stock reacquired and
canceled . . . . . . . . . . . . . . . - - (30,000) (900) (60,540) - (61,440)
Net income . . . . . . . . . . . . . . . - - - - - 238,190 238,190
------ ---------- --------- -------- --------- ---------- ---------
Balance at December 31, 1995 . . . . . . 20,958 2,095,838 4,336,764 130,103 5,773,248 (6,074,574) 1,924,615
Issuance of common stock pursuant to
employee benefit plan. . . . . . . . . - - 30,007 901 33,738 - 34,639
Conversion of Series C Preferred stock
to common stock, including payment
of accumulated dividends . . . . . . . (62) (6,200) 2,480 74 5,397 - (729)
Net loss . . . . . . . . . . . . . . . . - - - - - (163,770) (163,770)
------ ---------- --------- -------- --------- ---------- ---------
Balance at September 30, 1996. . . . . . 20,896 $2,089,638 4,369,251 $131,078 5,812,383 (6,238,344) 1,794,755
------ ---------- --------- -------- --------- ---------- ---------
------ ---------- --------- -------- --------- ---------- ---------
(UNAUDITED)
4
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1996 1995
--------- --------
Cash flows from operating activities:
Net income (loss)............................................ $(163,770) 195,695
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Increase in deferred franchise sales revenue............... 442,200 75,000
Franchise sales revenue recognized - center openings....... (75,400) (318,800)
Increase in deferred franchising costs..................... (88,046) (61,543)
Franchise costs recognized - center openings............... 20,985 71,918
Provision for credit losses................................ 90,107 101,700
Net loss realized on retirement of property and
equipment................................................. 666 13,636
Depreciation and amortization.............................. 695,465 610,954
Undeveloped franchise licenses canceled.................... (27,563) (4,000)
Interest on litigation award............................... - 17,658
Loss on sale of centers.................................... 55,752 17,041
Other, net................................................. (9,859) 3,646
Change in assets and liabilities:
Increase in accounts receivable.......................... (249,705) (284,348)
(Increase) decrease in notes receivable.................. (7,016) 12,947
(Increase) decrease in inventories....................... (85,417) 7,497
Increase in prepaid expenses and supplies................ (39,188) (60,000)
(Decrease) increase in accounts payable.................. 202,241 (169,471)
Increase in accrued salaries and wages
and other liabilities................................... 125,104 30,929
--------- --------
Net cash provided by operating activities.................. $ 886,556 260,459
--------- --------
(UNAUDITED)
(continued on next page)
5
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1996 1995
--------- ---------
Cash flows from investing activities:
Principal receipts on direct financing leases................ $ 130,398 139,292
Acquisition of centers....................................... (394,389) (870,388)
Sale of centers.............................................. 31,573 123,233
Capital expenditures......................................... (681,922) (190,055)
(Increase) decrease in other assets.......................... 2,713 (3,016)
--------- ---------
Net cash used in investing activities...................... (911,627) (800,934)
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt................................. 842,000 1,241,880
Principal payments on long-term debt......................... (359,463) (247,265)
Principal payments on capital lease obligations.............. (253,541) (225,857)
Offering costs of preferred stock............................ - (7,500)
Payment of accumulated dividends
upon conversion of preferred stock to common stock......... (729) (9,942)
Decrease (increase) in restricted cash....................... (2,224) 105,746
Increase in lease deposit obligations........................ 4,500 300
--------- ---------
Net cash provided by financing activities.................. 230,543 857,362
--------- ---------
Net increase in cash........................................... 205,472 316,887
Cash, beginning of period...................................... 385,167 256,631
--------- ---------
Cash, end of period............................................ $ 590,639 573,518
--------- ---------
--------- ---------
Supplemental disclosures of cash flow
information -
Cash paid during the period for interest..................... $ 802,906 720,048
--------- ---------
--------- ---------
(UNAUDITED)
(continued on next page)
6
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Supplemental Schedule of Non-cash Investing and Financing Activities:
The following table sets forth, by period, the amount and nature of
amounts paid and received for the acquisition/purchase and foreclosure and
sale (refranchising) of Company-owned Centers.
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
---------- -------
Acquisitions/Purchases and Foreclosures:
Number of Centers acquired/purchased............. 2 1
---------- -------
---------- -------
Number of Centers foreclosed..................... 5 -
---------- -------
---------- -------
Receivables applied (net of related
allowance)...................................... $ 251,328 -
Liabilities assumed.............................. 1,218,960 -
Cash paid........................................ 394,389 870,388
---------- -------
Cost of assets acquired.......................... $1,864,677 870,388
---------- -------
---------- -------
Sales:
Number of Centers refranchised................... 4 2
---------- -------
---------- -------
Cash received.................................... $ 31,573 123,233
Notes received................................... 124,776 5,500
Liabilities assumed by purchaser................. 39,750 -
(Gain) Loss on sale.............................. 55,752 17,041
Operating/Marketing subsidies granted
purchaser....................................... (97,750) -
Franchise fee revenue............................ 28,000 25,000
Franchise costs.................................. (5,000) (7,500)
---------- -------
Net book value of centers refranchised........... $ 177,101 163,274
---------- -------
---------- -------
During the nine months ended September 30, 1996 and 1995, non-cash
transactions consisted of the Company issuing 30,007 and 8,428 shares of
common stock at an average value of $1.15 and $1.92 per share respectively,
in accordance with its matching requirement under the Company's 401(k) plan.
Other non-cash transactions during the first nine months of 1996 included: a
settlement agreement with a franchisee, who owned two centers, whereby,
$109,439 of net receivables, ($7,000) of lease deposits and one undeveloped
license of ($16,312), were exchanged for a note receivable of $86,127 upon
the sale of the centers to a new franchisee; a franchise license in the
amount of $7,392, net of deferred franchising costs of $2,222, was cancelled
and applied to a franchisee's accounts receivable balance and a capital lease
obligation of $368,000 was recorded. Other non-cash transactions during the
first nine months of 1995 included: a $5,000 lease deposit was applied to
past due accounts receivable.
(UNAUDITED)
7
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, all adjustments, consisting only of normal
recurring adjustments necessary for a fair statement of (a) the results of
operations for the three-month and nine-month periods ended September 30,
1996 and 1995, (b) the financial position at September 30, 1996, (c) the
cash flows for the nine-month periods ended September 30, 1996 and 1995,
and (d) the changes in stockholders' equity for the nine-month period ended
September 30, 1996, have been made.
2. The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all the
information and footnotes required by generally accepted accounting
principles for financial statements. For further information, refer to the
audited consolidated financial statements and notes thereto for the year
ended December 31, 1995, included in the Company's Form 10-KSB filed with
the Securities and Exchange Commission on March 29, 1996.
3. The results for the three-month and nine-month periods ended September 30,
1996, are not necessarily indicative of the results to be expected for the
entire fiscal year of 1996.
4. STOCKHOLDERS' EQUITY
On June 11, 1996, at the Annual Meeting of Shareholders, the Company's
shareholders voted to amend Article IV of the Company's Articles of
Incorporation to increase the authorized shares of Common Stock with a par
value of $0.03 per share to 20,000,000 shares.
The Company's Series C, 6% cumulative, preferred stock is redeemable at the
option of the Company upon 60 days prior written notice after December 31,
1996. At the option of the holder, at any time prior to the close of
business on the redemption date, each share of Series C Preferred stock,
plus any accumulated unpaid dividends, may be converted into shares of
common stock at a conversion price of $2.50 per share of common stock. On
September 30, 1996, accumulated unpaid dividends totaled $349,965.
The Company has an employee deferred compensation 401(k) plan and matches
employee contributions to this plan in an amount equal to 50% of the
employees' contribution, up to a maximum of 6% of the employees'
compensation. The Company's contribution is paid with its $0.03 par value
common stock (net of forfeitures) valued at market on the date of the
contribution. During the first nine months of 1996 and 1995, the Company
contributed 30,007 and 8,428 shares to this plan at an average of $1.15 and
$1.92 per share, respectively.
5. EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share is determined based on the number of
common and common equivalent shares outstanding and is adjusted for the
assumed conversion of shares issuable upon exercise of options and
warrants, after the assumed repurchase of common shares with the related
proceeds (anti-dilutive for all periods presented in 1996). Earnings
(loss) per share for
(continued)
8
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
all periods was computed after reduction for preferred stock dividends
($31,602 and $31,696 for the third quarter of 1996 and 1995, respectively,
and $94,163 and $94,936 for the first nine months of 1996 and 1995,
respectively). The assumed conversion of preferred stock was anti-dilutive
for all periods presented.
6. COMMITMENTS AND CONTINGENCIES
The Company leases certain Grease Monkey Center sites under capital lease
agreements. These sites are either subleased to franchisees or operated as
Company-owned Centers. The typical lease period is 15 to 20 years and some
leases contain renewal options. These leases are accounted for as capital
leases and are capitalized using interest rates appropriate at the
inception of each lease.
The Company is a party to legal proceedings including claims by franchisees
against the Company that arise in the ordinary course of business. In the
opinion of management, the outcome of these matters will not have a
material effect on the financial condition, results of operations or cash
flows of the Company.
7. NEW ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
(SFAS 121) was issued in March 1995, by the Financial Accounting Standards
Board. It requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The adoption of SFAS 121 by the
Company in the first quarter of 1996 did not have an effect on the
Company's financial statements.
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-
BASED COMPENSATION (SFAS 123), was issued by the Financial Accounting
Standards Board in October 1995. SFAS 123 establishes financial accounting
and reporting standards for stock-based employee compensation plans as well
as transactions in which an entity issues its equity instruments to acquire
goods and services from non-employees. This statement defines a fair value
based method of accounting for employee stock option or similar equity
instruments, and encourages all entities to adopt that method of accounting
for all of their employee stock compensation plans. However, it also
allows an entity to continue to measure compensation cost for those plans
using the intrinsic value based method of accounting prescribed by APB
Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Entities
electing to remain with the accounting in Opinion 25 must make pro forma
disclosures of the effect on net income and, if presented, earnings per
share, as if the fair value based method of accounting defined by SFAS 123
had been applied. The Company adopted SFAS 123 in the first quarter of
1996 and elected to continue accounting for its equity instruments using
the accounting prescribed by Opinion 25. The Company will include the
disclosures required by SFAS 123 in the Company's 1996 annual report.
9
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
The Company reported a loss of ($163,770) for the first nine months of
1996, as compared to income of $195,695 for the first nine months of 1995.
For the third quarter of 1996, the Company recognized income of $30,204
compared to income of $135,714 for the same quarter in 1995. The losses
recorded in 1996 compared to the income recorded in 1995 can be attributed to
a reduction in the number of center openings combined with an increase in
legal expenses pertaining to the enforcement of certain franchise agreements,
offset in part by improved margins at Company-owned Centers.
Total revenue increased by $965,451 or 7% for the first nine months of
1996, compared to the first nine months of 1995. Revenue during the third
quarter of 1996 increased $456,889 over the same quarter last year, an
increase of 9%. The increases are due primarily to an increase in the
average number of Company-owned Centers (based on number of months operated).
The Company operated twenty-nine centers for the first nine months of 1995
compared to thirty-two centers for the first nine months of 1996. Averages
for the third quarter periods were twenty-nine centers in 1995 and thirty-two
centers in 1996. Company-owned Center revenue increased $1,482,353 over the
first nine months of 1995 and $394,470 over the third quarter of 1995. The
increases realized in Company-owned Center revenue were offset by reductions
in revenue recognized on the opening of franchised centers, and product and
equipment revenue.
Royalty fees are a percentage of gross sales paid monthly by all
franchised Grease Monkey Centers. Royalty fee revenue for the first nine
months of 1996 decreased by 1% compared to the first nine months of 1995 to
$2,392,110. Royalty fee revenue for the third quarter of 1996 decreased 1%
compared to the third quarter of 1995 to $827,617. The minor decreases in
royalty revenue result from the termination and/or closure of franchise
centers since January 1, 1995, offset by increased royalty income resulting
from new Center openings and the refranchising of Company-owned Centers.
Based upon many factors, including the age of amounts owed the Company, the
extent of collateralization, and historical performance, the Company may
place certain financially troubled franchisees on a non-accrual status. For
the first nine months of 1996, estimated royalties of $90,325 were not
accrued under this policy, compared to $122,775 for the first nine months of
1995. During the third quarter of 1996, estimated royalties of $28,450 were
not accrued compared to $42,325 for the third quarter of 1995. The Company
has a royalty rebate program for franchisees under which eligible franchisees
can receive a rebate of royalties paid. For the first nine months of 1996,
the rebate accrued under this program was $194,051, compared to $185,751 for
the first nine months of 1995. The rebate accrued for the third quarter of
1996, was $68,336, compared to a rebate of $68,887 for the third quarter of
1995. The rebate is recorded as a reduction in royalty revenue.
The Company recognized franchise sales net revenue of $75,400 during the
first nine months and third quarter of 1996 (representing five centers).
Franchise sales net revenue was $318,800 (representing fourteen centers) for
the first nine-months of 1995. For the third quarter of 1995, franchise
sales net revenue was $53,000 (representing two centers). Franchise sales
revenue represents initial one-time payments received by the Company from
buyers of its franchises. The fee and any directly related costs are
recognized as revenue and expense when the related franchise center opens for
business.
(continued)
10
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
At September 30, 1996, the Company operated 32 centers as compared to 29
centers at September 30, 1995. For the first nine months of 1996, the
Company reported an operating margin (Company-owned Center sales less
expenses, excluding interest, depreciation and amortization) of $1,560,609 on
revenue of $10,881,425 at Company-owned Centers, as compared to an operating
margin of $1,248,320 on revenue of $9,399,072 for the same period last year.
This represents an increase of 16% in revenue and 25% in operating margin.
For the third quarters of 1996 and 1995, the Company reported operating
margins of $601,685 and $563,639 on revenue of $3,817,786 and $3,423,316,
respectively, representing increases in revenue of 12% and operating margin
of 7%.
On a same center basis, those Company-owned Centers operated
continuously over the period January 1, 1995 through September 30, 1996,
representing 24 centers, had an operating margin of $1,175,837 on revenue of
$8,121,945 for the first nine months of 1996, as compared to an operating
margin of $1,075,157 on revenue of $8,007,933 for the first nine months of
1995. This represents an increase of 1% in revenue and 9% in operating
margin. The same center statistics for the third quarter of 1996 and 1995
were operating margins of $457,383 on revenue of $2,689,414 and $439,880 on
revenue of $2,732,346, respectively, representing a decrease in revenue of 2%
and an increase in operating margins of 4%.
In the first nine months of 1996, the Company realized marketing
allowances and gross margins on product and equipment sales of $332,822, as
compared to $341,940 in the first nine months of 1995. In the third quarter
of 1996, marketing allowances and gross margins on product and equipment
sales were $112,930, as compared to $108,960 in the third quarter of 1995.
Product and equipment revenue represents the sale of fluid dispensing
equipment and other supplies to franchisees, and marketing allowances relate
to the sale of oil filters, air filters, oil additives, and certain other
products. The number of center openings in a period impacts product and
equipment revenue, thus revenue for 1996 was below that of 1995. The
marketing allowances relate to the number of centers open and purchasing
product.
General and administrative expenses for the first nine months and third
quarter of 1996 increased 10% or $301,295 and 5% or $54,890 as compared to
the first nine months and third quarter of 1995. The primary factors causing
this variance include: increases in litigation legal fees of approximately
$146,000 and $16,000 for the nine month and third quarter periods,
respectively; increases in the general and administrative expenses at the
Company-owned Center Division of approximately $73,000 and $37,000 for the
nine month and third quarter periods, respectively; and increases in
franchise sales and advertising expenses of approximately $51,000 and $17,000
for the nine month and third quarter periods, respectively. In addition, in
the first nine months of 1996 a real estate settlement in the amount of
$35,000 was incurred.
Depreciation and amortization expense for the first nine months and
third quarter of 1996 increased 14% and 16% respectively over the same
periods in 1995. These increases are due to the net addition of three
Company-owned Centers during those periods.
(continued)
11
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Gain (loss) on sale of centers represents the net results of the
refranchising/disposal of Company-owned Centers. When the Company
refranchises a center, a franchise license fee is included in the sales price
and included in the resulting gain or loss on sale. The loss of ($80,299)
for the nine months ended September 30, 1996, represents the refranchising of
four Company-owned Centers. The loss of ($16,841) for the nine months ended
September 30, 1995, represents the refranchising of one Company-owned Center,
and the refranchising of one closed center.
In the first nine months of 1996, the Company recognized $27,563 in
franchise sales revenue resulting from license cancellations as compared to
$4,000 in the first nine-months of 1995. There were no license cancellations
in the third quarter of 1996 or 1995.
Interest expense includes interest on debt financing and interest
recorded on capital leases of Company-owned Centers. The addition of the
three Company-owned Centers, as mentioned above, accounts for the increase in
interest expense due to additional borrowings to acquire the centers and
interest expense related to capital leases entered into. In addition,
interest was incurred related to borrowings for the purchase of land and
building related to a Grease Monkey Center previously leased.
(continued)
12
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(CONTINUED)
The following schedule summarizes the activity with regard to Grease
Monkey Company-owned Centers as well as Grease Monkey franchised centers for
the nine-months ended September 30, 1996 and 1995.
NINE MONTHS ENDED:
SEPTEMBER 30, 1996 SEPTEMBER 30, 1995
-------------------------------------------------------------
COMPANY FRANCHISEE COMPANY FRANCHISEE
OWNED OWNED TOTAL OWNED OWNED TOTAL
----- ----- ----- ----- ----- -----
Centers open, beginning 29 181 210 29 176 205
Centers opened (A) - 5 5 - 14 14
Centers purchased 2 (2) - 1 - 1
Centers sold (4) 4 - (1) 1 -
Centers terminated or
closed (B) - (5) (5) - (12) (12)
Centers reacquired 5 (5) - - - -
---- ------ ------- ---- ------ -------
Centers open, ending (C) 32 178 210 29 179 208
---- ------ ------- ---- ------ -------
---- ------ ------- ---- ------ -------
Vehicles serviced (000's) 2,139 2,204
------- -------
------- -------
Franchise licenses
issued (D) 23 5
------- -------
------- -------
Undeveloped franchise
licenses (E) 52 48
------- -------
------- -------
Franchise applications
outstanding (E) 17 20
------- -------
------- -------
Franchise
license/application
fees received (F) $442,200 $75,000
------- -------
------- -------
(A) 1995 includes one refranchised center which was previously closed. 1996
includes one franchised center which was involved in a settlement with GMI
which resulted in GMI assuming possession of the Center in April 1996 and
thus no franchise revenue was recognized.
(B) 1995 includes one center which was deidentified by the franchisee in
January 1995; subsequently, the Company acquired the center on May 1, 1995.
(C) Includes 19 franchised centers in Mexico in 1996 and 15 franchised centers
in Mexico in 1995.
(D) Represents the number of licenses issued during the period.
(E) Represents the number of licenses/applications outstanding at September 30.
(F) Represents amounts received for franchise licenses/applications during the
period.
(continued)
13
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL RESOURCES
During May 1996, the Company entered into a Business Loan Agreement with a
major bank. Under the Loan Agreement, a $2,000,000 three year line of credit was
established. Loans drawn under the line are restricted to the development of
new Centers. The Company has the right to select an optional interest rate as
described in the agreement, however, in no case will the interest rate exceed
the bank's reference rate. In exchange for a supply agreement on any Centers
built utilizing the line of credit, a motor oil supplier agreed to guarantee the
line.
During April 1995, the Company entered into two agreements with a motor oil
supplier - a Loan Agreement and a Fast Lube Supply Agreement. Under the Loan
Agreement, a $2,400,000 line of credit was established. All loans drawn under
this line accrue interest at 9% per annum and are repaid in quarterly
installments over a ten year period from date of disbursement. The line is
secured by the assignment of leases and lubrication equipment of certain
Company-owned Centers. As of September 30, 1996, the Company had drawn
approximately $2,056,000 of which $1,839,000 remains outstanding. The balance
of the funds available under the line are restricted to the acquisition or
construction of new fast lube centers. Under the Fast Lube Supply Agreement,
the Company is required to purchase at least 85% of the petroleum products for
such Centers from the supplier, the Company is required to meet certain minimum
annual purchase requirements and the Company is required to feature the
supplier's products in such Centers.
Another motor oil supplier has provided financing for Company-owned Centers
where the Company agrees to feature its products. The financing ranges from
$30,000 to $45,000 per Center depending on the expected usage at the Center.
The advances are amortized based on the Company's purchases of its products.
Similar oil company financing is expected to be available for any new Company-
owned Centers acquired and existing Company-owned Centers where the Company does
not have a supply agreement or where the existing supply agreement may be
canceled.
The growth of the Grease Monkey system is dependent on the ability of the
Company and its franchisees to obtain real estate development capital.
Historically, Grease Monkey Centers have been built utilizing build-to-suit
services, whereby the land is purchased and the building is constructed to GMI's
specifications, then leased to GMI or to a franchisee, by a third party.
However, the franchisees have moved toward purchasing and developing the real
estate for their own account, thereby creating greater value in their business.
Development of GMI-owned Centers will continue to utilize build-to-suit capital
for expansion.
(continued)
14
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(CONTINUED)
LIQUIDITY
Cash provided by operations during the first nine months of 1996 was
$886,556 as compared to $260,459 in the first nine months of 1995. The most
significant factors contributing to this variance are the sale of franchise
licenses and an improved operating margin at Company-owned Centers. As
mentioned above, as franchise licenses are sold, the revenue is deferred until
the center opens for business. For the first nine months, cash collections on
franchise sales increased from $75,000 in 1995 to $442,200 in 1996. This
increase will result in income in future periods as the Centers open.
Cash used in investing activities was ($911,627) in the first nine months
of 1996, as compared to cash used in investing activities of ($800,934) in the
first nine months of 1995. Cash provided in both periods consisted primarily of
receipts on direct financing leases which remained relatively constant over the
periods. Additional cash was received in the first nine months of 1996 and 1995
with the refranchising of four and two Company-owned Centers, respectively.
Cash used in investing activities for the first nine months of 1996 and 1995
consisted primarily of cash used to purchase Centers. Additional cash was used
in both periods for capital expenditures, primarily computer systems and Company
Center equipment. Additionally, cash was used in the first nine months of 1996
for the buy-out of leases of automobiles used by field employees and to purchase
a property as described previously.
Cash provided by financing activities was $230,543 in the first nine months
of 1996 as compared to cash provided by financing activities of $857,362 in the
first nine months of 1995. Cash provided by financing activities in the first
nine months of 1996 consisted primarily of proceeds from long-term debt related
to the purchase of automobiles (as described above), an equipment loan from a
motor oil supplier, and a draw on a line of credit for the financing of the
acquisition of two franchised Centers. Cash provided by financing activities in
the first nine months of 1995 consisted primarily of proceeds from long-term
debt (related to the facility described previously) of $1,241,880 and the
release of $105,746 of restricted cash to operating cash. Financing activities
also included cash used to reduce long-term debt and capital lease obligations
of $613,004 in the first nine months of 1996 and $473,122 in the first nine
months of 1995.
The Company does not have any material commitments for capital
expenditures. The Company believes it has the capital resources and liquidity
necessary to meet all of the obligations, debt maturities, and commitments of
the Company during 1996.
15
GREASE MONKEY HOLDING CORPORATION
COMMISSION FILE NUMBER: 0-9812
QUARTER ENDED SEPTEMBER 30, 1996
FORM 10-QSB
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ---------------------------
The Company is a party to legal proceedings including claims by franchisees
against the Company that arise in the ordinary course of business. In the
opinion of management, the outcome of these matters will not have a material
effect on the financial condition, results of operations or cash flows of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
- -----------------------------------------
(a) Exhibits (numbered in accordance with Item 601 of regulation S-K)
11. Statement Re: Computation of Per Share Earnings
27. Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the period covered by this report.
16
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
COMMISSION FILE NUMBER: 0-9812
QUARTER ENDED SEPTEMBER 30, 1996
FORM 10-QSB
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GREASE MONKEY HOLDING CORPORATION
By: /s/ T. Timothy Kershisnik
---------------------------------------
T. Timothy Kershisnik
Controller, Treasurer and
Corporate Secretary
(Principal Financial and
Accounting Officer)
Denver, Colorado
November 12, 1996
17