1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998.
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from __________ to ___________
Commission File No. 0-19357
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MONRO MUFFLER BRAKE, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 16-0838627
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification #)
200 Holleder Parkway, Rochester, New York 14615
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code 716-647-6400
------------------------------
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
--------- ---------
As of February 1, 1999, 8,321,701 shares of the Registrant's Common Stock, par
value $ .01 per share, were outstanding after giving effect to the five percent
stock dividend, paid June 18, 1998 to stockholders of record as of June 8, 1998.
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MONRO MUFFLER BRAKE, INC.
INDEX
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Part I. Financial Information Page No.
--------
Consolidated Balance Sheet at
December 31, 1998 and March 31, 1998 3
Consolidated Statement of Income for the quarter
and nine months ended December 31, 1998 and 1997 4
Consolidated Statement of Changes in Common
Shareholders' Equity for the nine months ended
December 31, 1998 5
Consolidated Statement of Cash Flows for the
nine months ended December 31, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
Exhibit Index 17
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MONRO MUFFLER BRAKE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
DECEMBER 31, MARCH 31,
1998 1998
---- ----
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and equivalents, including interest-bearing accounts of $852 at $ 852 $ 5,315
December 31, 1998 and $5,315 at March 31, 1998
Trade receivables 1,231 841
Inventories, at LIFO cost 41,601 27,492
Deferred income tax asset 1,725 1,725
Other current assets 5,264 4,115
--------- ---------
Total current assets 50,673 39,488
--------- ---------
Property, plant and equipment 202,786 165,839
Less - Accumulated depreciation and amortization (56,511) (49,429)
--------- ---------
Net property, plant and equipment 146,275 116,410
Other noncurrent assets 9,327 3,190
--------- ---------
Total assets $ 206,275 $ 159,088
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,832 $ 3,582
Trade payables 9,845 11,633
Federal and state income taxes payable 34 2
Accrued expenses and other current liabilities
Accrued interest 216 233
Accrued payroll, payroll taxes and other payroll benefits 4,316 3,764
Accrued insurance 2,142 2,441
Accrued restructuring costs 3,000
Other current liabilities 7,114 4,316
--------- ---------
Total current liabilities 31,499 25,971
Long-term debt 82,862 54,102
Other long-term liabilities 3,469 576
Accrued long-term restructuring costs 4,484
Deferred income tax liability 1,768 1,881
--------- ---------
Total liabilities 124,082 82,530
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Commitments
Shareholders' equity:
Class C Convertible Preferred Stock, $1.50 par value, $.216 and $.227
conversion value at December 31, 1998 and March 31, 1998, respectively;
150,000 shares authorized; 91,727 shares issued and outstanding 138 138
Common Stock, $.01 par value, 15,000,000 shares authorized; 8,321,701
shares and 7,876,901 shares issued and outstanding at December 31, 1998 83 79
and March 31, 1998, respectively
Additional paid-in capital 36,370 29,284
Retained earnings 45,602 47,057
--------- ---------
Total shareholders' equity 82,193 76,558
--------- ---------
Total liabilities and shareholders' equity $ 206,275 $ 159,088
========= =========
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Annual Report on Form 10-K (File
No. 0-19357), filed by the Company with the Securities and Exchange Commission
on June 29, 1998.
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MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
QUARTER ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Sales $ 53,672 $ 36,336 $144,169 $118,649
Cost of sales, including distribution and
occupancy costs (a) 33,844 20,996 84,933 66,858
-------- -------- -------- --------
Gross profit 19,828 15,340 59,236 51,791
Operating, selling, general and
administrative expenses 19,449 11,409 46,168 34,637
-------- -------- -------- --------
Operating income 379 3,931 13,068 17,154
Interest expense, net of interest income for
the quarter of $18 in 1998 and $21 in
1997 (a) 1,598 1,005 3,579 2,775
Other expense, net 322 95 625 267
-------- -------- -------- --------
(Loss) income before provision for income taxes (1,541) 2,831 8,864 14,113
(Recovery of) provision for income taxes (618) 1,131 3,518 5,644
-------- -------- -------- --------
Net (loss) income $ (923) $ 1,700 $ 5,346 $ 8,469
======== ======== ======== ========
Basic (loss) earnings per share (b) $ (.11) $ .21 $ .64 $ 1.03
======== ======== ======== ========
Diluted (loss) earnings per share $ (.11) $ .19 $ .59 $ .94
======== ======== ======== ========
Weighted average number of shares of
common stock and common stock
equivalents used in computing earnings
per share: Basic 8,322 8,260 8,301 8,254
======== ======== ======== ========
Diluted (b) 8,322 8,984 9,002 9,019
======== ======== ======== ========
<FN>
(a) Amounts paid under operating and capital leases with affiliated parties
totaled $408 and $417 for the quarters ended December 31, 1998 and
1997, respectively, and $1,371 and $1,374 for the nine months ended
December 31, 1998 and 1997, respectively.
(b) The antidilutive effect of the Class C Convertible Preferred Stock and
outstanding options resulted in their exclusion from the calculation
of weighted average diluted shares outstanding, and thereby increased
the loss per share by $.01.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Annual Report on Form 10-K (File
No. 0-19357), filed by the Company with the Securities and Exchange Commission
on June 29, 1998.
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MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY
Nine Months Ended December 31, 1998
(UNAUDITED)
COMMON STOCK ADDITIONAL
--------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
------ ------ --------- ----------
(Amounts in thousands)
Balance at March 31, 1998 7,877 $ 79 $ 29,284 $ 47,057
Net income 5,346
Other comprehensive income:
Minimum pension liability adjustment (171)
Exercise of stock options 49 462
5% stock dividend 396 4 6,625 (6,629)
Rounding (1) (1)
-------- -------- -------- --------
Balance at December 31, 1998 8,322 $ 83 $ 36,370 $ 45,602
======== ======== ======== ========
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Annual Report on Form 10-K (File
No. 0-19357), filed by the Company with the Securities and Exchange Commission
on June 29, 1998.
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MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
DECEMBER 31,
-----------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income $ 5,346 $ 8,469
--------- ---------
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation and amortization 8,164 6,921
(Gain) loss on disposal of property, plant and equipment (101) 36
(Increase) decrease in trade receivables (390) 388
Increase in inventories (4,262) (7,475)
Decrease in other current assets 1,061 1,201
(Increase) decrease in other noncurrent assets (1,867) 67
(Decrease) increase in trade payables (2,792) 935
(Decrease) in accrued expenses (921) (1,082)
Increase in federal and state income taxes payable 32 1,197
Increase in other long-term liabilities 1,330
Decrease in deferred tax liability (113)
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Total adjustments 141 2,188
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Net cash provided by operating activities 5,487 10,657
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Cash flows from investing activities:
Capital expenditures (17,575) (18,792)
Proceeds from the disposal of property, plant and equipment 81 6,228
Payment for purchase of Speedy stores (21,488)
--------- ---------
Net cash used for investing activities (38,982) (12,564)
--------- ---------
Cash flows from financing activities:
Proceeds from the sale of common stock 462 52
Proceeds from borrowings 130,755 47,631
Principal payments on long-term debt and capital
lease obligations (102,185) (45,359)
--------- ---------
Net cash provided by financing activities 29,032 2,324
--------- ---------
(Decrease) increase in cash (4,463) 417
Cash at beginning of year 5,315 6,438
--------- ---------
Cash at December 31 $ 852 $ 6,855
========= =========
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Annual Report on Form 10-K (File
No. 0-19357), filed by the Company with the Securities and Exchange Commission
on June 29, 1998.
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MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Acquisition of Speedy Stores
- -------------------------------------
In September 1998, the Company completed the acquisition of 189
company-operated and 14 franchised Speedy stores, all located in the United
States, from SMK Speedy International Inc. of Toronto Canada. Speedy stores
provide automotive repair services, specializing in undercar care, in 11 states
located primarily in the Northeast. The acquisition was accounted for as a
purchase, and accordingly, the operating results of Speedy have been included in
the Company's consolidated financial statements since the date of the
acquisition.
Approximately $51 million was borrowed under a new $135 million secured
credit facility to pay the all-cash purchase price, with an additional $16
million to be borrowed to provide for the closing of up to 20 underperforming or
redundant Speedy stores, capital expenditures at remaining Speedy stores and
transaction expenses.
The excess of the aggregate purchase price over the fair value of net
assets acquired is being amortized on a straight-line basis over 20 years. The
accrued restructuring charge of approximately $7.5 million at December 31, 1998
represents estimated closing costs associated with poorly performing or
duplicative Speedy store locations resulting from the acquisition.
Note 2 - Stock Dividend
- -----------------------
On May 13, 1998, the Board of Directors declared a five percent stock
dividend, paid June 18, 1998, to stockholders of record as of June 8, 1998. The
consolidated financial statements, including all share information therein, have
been restated to reflect this dividend.
Additionally, in accordance with antidilution provisions of the Class C
Convertible Preferred Stock, the conversion value of the preferred stock was
restated from $.227 per share to $.216 per share.
Shares reserved for issuance to officers and key employees under
outstanding options under the 1984, 1987 and 1989 Incentive Stock Option Plans
have also been retroactively adjusted for the five percent stock dividend.
Note 3 - Inventories
- --------------------
The Company's inventories consist of automotive parts and tires.
Substantially all merchandise inventories are valued under the last-in,
first-out (LIFO) method. Under the first-in, first-out (FIFO) method, these
inventories would have been $534,000 and $426,000 higher at December 31, 1998
and March 31, 1998, respectively. The FIFO value of inventory approximates the
current replacement cost.
Note 4 - Cash and Equivalents
- -----------------------------
The Company's policy is to invest cash in excess of operating
requirements in income producing investments. Cash equivalents of $852,000 at
December 31, 1998 and $5,315,000 at March 31, 1998 include money market accounts
which have maturities of three months or less.
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MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 - Supplemental Disclosure of Cash Flow Information
- ---------------------------------------------------------
The following transactions represent noncash investing and financing
activities during the periods indicated:
NINE MONTHS ENDED DECEMBER 31, 1998:
Capital lease obligations of $754,000 were incurred under various lease
obligations.
In connection with the declaration of a five percent stock dividend
(see Note 2), the Company increased accrued expenses common stock and additional
paid-in capital by $1,000, $4,000 and $6,624,000, respectively, and decreased
retained earnings by $6,629,000.
In connection with the acquisition of Speedy stores (see Note 1),
liabilities were assumed as follows:
Fair value of assets acquired $36,134,000
Cash paid 21,488,000
-----------
Liabilities assumed $14,646,000
===========
NINE MONTHS ENDED DECEMBER 31, 1997:
Capital lease obligations of $236,000 were incurred under various lease
obligations.
In connection with the declaration of a five percent stock dividend
(see Note 1), the Company increased common stock and additional paid-in capital
by $4,000 and $7,015,000, respectively, and decreased retained earnings by
$7,019,000.
CASH PAID DURING THE PERIOD:
NINE MONTHS ENDED
DECEMBER 31,
---------------
1998 1997
---- ----
Interest, net $3,835,000 $ 3,041,000
Income taxes, net 3,488,000 4,448,000
Note 6 - Other
- --------------
These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Annual Report on Form
10-K (File No. 0-19357), filed by the Company with the Securities and Exchange
Commission on June 29, 1998.
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MONRO MUFFLER BRAKE, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The statements contained in this Form 10-Q which are not historical
facts, including (without limitation) statements made in the Management's
Discussion and Analysis of Financial Condition and Results of Operations, may
contain statements of future expectations and other forward-looking statements
that are subject to important factors that could cause actual results to differ
materially from those in the forward-looking statements, including (without
limitation) product demand, the effect of economic conditions, the impact of
competitive services and pricing, product development, parts supply restraints
or difficulties, industry regulation, the continued availability of capital
resources and financing and other risks set forth or incorporated elsewhere
herein and in the Company's Securities and Exchange Commission filings.
RESULTS OF OPERATIONS
The following table sets forth income statement data of Monro Muffler
Brake, Inc. ("Monro" or the "Company") expressed as a percentage of sales for
the fiscal periods indicated.
Quarter Ended December 31, Nine Months Ended December 31,
-------------------------- ------------------------------
1998 1997 1998 1997
---- ---- ---- ----
Sales ......................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales, including distribution
and occupancy costs .......................... 63.1 57.8 58.9 56.3
------- ------- ------- -------
Gross profit .................................. 36.9 42.2 41.1 43.7
Operating, selling, general and
administrative expenses ...................... 36.2 31.4 32.0 29.2
------- ------- ------- -------
Operating income .............................. .7 10.8 9.1 14.5
Interest expense - net ........................ 3.0 2.8 2.5 2.4
Other expenses - net .......................... .6 .2 .5 .2
------- ------- ------- -------
(Loss) income before provision for income
taxes ....................................... (2.9) 7.8 6.1 11.9
Provision for income taxes .................... (1.2) 3.1 2.4 4.8
------- ------- ------- -------
Net (loss) income ............................. (1.7)% 4.7% 3.7% 7.1%
======= ======= ======= =======
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THIRD QUARTER AND NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO
THIRD QUARTER AND NINE MONTHS ENDED DECEMBER 31, 1997.
In December 1998, the Company appointed Robert G. Gross as President
and Chief Executive Officer, replacing Jack M. Gallagher who returned as interim
President and Chief Executive Officer in February 1998. Mr. Gross began
full-time responsibilities on January 1, 1999.
On September 17, 1998, the Company completed its acquisition of 189
company-owned and 14 franchised Speedy stores, all located in the United States,
from SMK Speedy International Inc. of Toronto Canada (the "Acquisition"). Sales
for the fiscal year ended January 3, 1998 for the 189 company-operated stores,
some of which were opened only part of the year, were approximately $86 million.
While management expects the acquisition to have a dilutive impact on earnings
in the current 1999 fiscal year, management anticipates that the acquired
operations should begin to contribute to earnings per share during fiscal 2000,
and should be increasingly accretive in subsequent years.
Sales were $53.7 million for the quarter ended December 31, 1998
compared with $36.3 million for the quarter ended December 31, 1997. The sales
increase of $17.4 million, or 47.7%, was due to an increase in sales of
approximately $18.1 million relating to stores opened since the beginning of
fiscal 1998, including $15.7 million from the newly-acquired Speedy stores. This
increase was partially offset by a decrease in comparable store sales of 0.8%.
Sales for the nine months ended December 31, 1998 were $144.2 million compared
with $118.6 million for the same period of the prior year. The sales increase of
$25.5 million, or 21.5%, was due to an increase in sales of approximately $27.3
million relating to stores opened since the beginning of fiscal 1998, including
$18.2 million from the newly-acquired Speedy stores. This increase was partially
offset by a decrease in comparable store sales of 0.7%. At December 31, 1998,
the Company had 532 company-operated stores (including the stores acquired from
Speedy) compared to 341 at December 31, 1997.
In the third quarter of fiscal 1999, the weakness of Speedy's sales
represents a continuation of a decline which was most pronounced prior to the
Acquisition in September 1998. The conversion of systems and inventory at all
Speedy stores also impacted the performance of these locations. These
conversions, all of which occurred during this quarter, involved the
installation of new point-of-sale systems in all Speedy stores, as well as the
lifting of slow moving items and restocking with more popular parts,
representing approximately half of the inventory in the Speedy stores. Although
essential to margin improvement in future periods, this conversion process was
very disruptive to the operations of the Speedy stores in the quarter ended
December 31, 1998.
Gross profit for the quarter ended December 31, 1998 was $19.8 million,
or 36.9% of sales, compared with $15.3 million, or 42.2% of sales, for the
quarter ended December 31, 1997. Gross profit for the nine months ended December
31, 1998 was $59.2 million, or 41.1% of sales, compared to $51.8 million or
43.7% of sales, for the nine months ended December 31, 1997. The decline in
gross profit as a percentage of sales for Monro stores was due, in part, to an
increase in outside purchases. During periods of slower sales, store personnel
will more readily accept repair work outside of the normal recurring services
the store usually provides. In addition, Company personnel assigned to
controlling outside purchases were diverted during the Speedy due diligence
process, away from the Monro stores. However, beginning late in the second
quarter of fiscal 1999, the Company has refocused its resources in order to
reduce outside purchases at the Monro stores. In that regard, the Company will
be lifting older, slow moving inventory from the Monro stores, and restocking
them with faster moving items during the fourth quarter of fiscal 1999.
Secondly, there was an increase in distribution and occupancy costs as
a percent of sales for the third quarter of fiscal 1999 as compared to the third
quarter of fiscal 1998, primarily due to an increase in the number of stores and
increased occupancy costs against negative comparable store sales.
In addition, labor costs increased as a percentage of sales during the
third quarter of fiscal 1999 as compared to the same quarter of the prior year.
During periods of slower sales when technicians may not be fully productive,
they will receive a minimum base level wage.
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Additionally, the Speedy stores accounted for 2.5 percentage points of
the decline in gross profit as a percent of sales, in part in the "cost of
goods" component of cost of sales. Historically, Speedy's cost of goods has
averaged approximately six percentage points more than the Company's due to more
expensive parts acquisition costs. This resulted from a higher percentage of
outside purchases, and Speedy's distribution methods (store-door from vendors
vs. Monro's central distribution facility). Management is confident that, over
time, the Speedy stores will experience the same lower cost of goods as the
Monro stores. One measure leading to this is the inclusion of all Speedy stores
in the Company's central distribution/automatic replenishment system. As of
December 31, 1998, all Speedy stores were receiving product from the Company's
central warehouse facility in Rochester, New York.
The Company experienced improved margins during the few weeks after
conversion of the Speedy stores from Speedy's distribution system to Monro's
distribution system. Since all stores were not converted until mid-December,
the real impact of the improvement will not be seen until the fourth quarter of
fiscal 1999.
The Speedy stores also experienced higher than anticipated labor and
occupancy costs as a percentage of sales due to the weakness in Speedy sales in
the quarter.
Operating, selling, general and administrative expenses for the quarter
ended December 31, 1998 increased by $8.0 million to $19.4 million over the
quarter ended December 31, 1997, and were 36.2% of sales compared to 31.4% in
the same quarter of the prior year. For the nine months ended December 31, 1998,
these expenses increased by $11.5 million to $46.2 million over the comparable
period of the prior year and were 32.0% of sales compared to 29.2% in the
comparable period of the prior year. During the third quarter of fiscal 1999,
costs associated with the Speedy stores and acquisition-related activities
accounted for 4.0 percentage points of the increase. The remainder is primarily
due to increases in fixed, store-related operating and support costs (such as
store supervision and utilities) against negative comparable store sales.
Net interest expense for the quarter ended December 31, 1998, increased
by approximately $.6 million compared to the same period in the prior year, and
increased from 2.8% to 3.0% as a percentage of sales for the same periods. Net
interest expense for the nine months ended December 31, 1998, increased by
approximately $.8 million compared to the comparable period in the prior year,
and rose from 2.4% to 2.5% as a percentage of sales for the same periods. The
increase in expense is due to an increase in the weighted average debt
outstanding for the quarter and nine months ended December 31, 1998 as compared
to the same periods in the previous year.
The net loss for the quarter ended December 31, 1998 of approximately
$.9 million represents a 154.3% decrease from the net income reported for the
quarter ended December 31, 1997. For the nine months ended December 31, 1998,
net income of approximately $5.3 million decreased 36.9%, due to the factors
discussed above.
Interim Period Reporting
The data included in this report are unaudited and are subject to
year-end adjustments; however, in the opinion of management, all known
adjustments (which consist only of normal recurring adjustments) have been made
to present fairly the Company's operating results for the unaudited periods. The
results for interim periods are not necessarily indicative of results to be
expected for the fiscal year.
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Year 2000 Computer Issue
As the year 2000 approaches, the Company, along with other companies,
could experience potentially serious operational problems, since many computer
programs that were developed in the past may not properly recognize calendar
dates beginning with the year 2000. Further, there are embedded chips contained
within equipment that may be date sensitive.
PLANS: The Company's overall plan for dealing with the Year 2000
problem covers Information Technology ("IT") systems, non-IT systems, and third
party providers. The Company has established a dedicated Year 2000 team to lead
the Company's activities relating to its Year 2000 issues. The Company's current
state of readiness with respect to each of these elements is discussed below.
1.) All IT SYSTEMS that the Company considers to be critical
at this time have been evaluated for Year 2000 problems. In connection with this
process, the Company has developed detailed plans that establish phases of the
work to be done for each major area:
1.) An assessment of all systems and equipment.
2.) Development of detailed workplans and timelines
for remediation.
3.) Remediation/modification.
4.) Testing and validation.
5.) Acceptance and deployment.
6.) Independent validation and
7.) Contingency planning.
Although the Company has identified seven different phases of the
project, in some cases the phases are done concurrently. For example, certain
component systems may be completely tested and redeployed, while others are
still being remediated. Management of the Company believes these systems will
have been diagnosed, modified, tested and deployed by September 1, 1999.
2.) NON-IT SYSTEMS typically include embedded technology such
as microcontrollers. The Company's non-IT systems include machinery and
equipment in its buildings such as elevators, telephone equipment, HVAC,
security and alarm systems, copiers, fax machines and computerized alignment
equipment. The Company is reviewing these systems for Year 2000 compliance with
third party providers, and believes that full compliance will be achieved by
September 1, 1999.
3.) The Company uses a variety of third party providers and
vendors in the normal course of conducting its day to day operations. Year 2000
problems may result in a loss of service from these providers/vendors. The
Company believes that loss of electric power, phone, banking or certain
outsourced processing services, as well as a vendor's inability to deliver
product on a timely basis, could have an immediate and critical adverse material
impact on the Company's operations. The Company is contacting each of its major
third party providers and vendors to determine if the provider/vendor is Year
2000 compliant. If a provider is not currently Year 2000 compliant, and its
plans to become Year 2000 compliant are uncertain, then the Company intends to
seek other providers/vendors.
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CONTINGENCY PLANS: The Company's Year 2000 plans also include the
development and implementation of contingency plans in the event of Year 2000
failures, both within the Company and by third parties. The Company expects to
have these plans completed during calendar 1999 for all major systems. As
discussed above with regard to third party providers/vendors, if a provider is
not currently Year 2000 compliant, and its plans to become Year 2000 compliant
are uncertain, then the Company intends to seek other providers/vendors.
COSTS: The Company's incremental costs to address the Year 2000 issues
did not have a material impact on the Company's operations in fiscal 1998 or
during the nine months ended December 31, 1998, and are not expected to have a
material impact on the remainder of fiscal 1999 or fiscal 2000.
RISKS: The failure to correct for Year 2000 problems, either by the
Company or third parties, could result in significant disruptions of the
Company's operations. At this point in time, based upon the progress to date and
information received from third parties, the Company is unable to determine its
most likely worst case scenario.
Certain statements included in this discussion regarding Year 2000
compliance are forward-looking statements as defined in Section 21E of the
Securities Exchange Act of 1934. These statements include management's best
estimates for completion dates for the various phases and testing to be
performed, costs to be spent for compliance, and the risks associated with
non-compliance either by the Company or third parties. These forward-looking
statements are subject to various factors, which may materially affect the
Company's efforts with Year 2000 compliance. Specific factors that might cause
such material differences include, but are not limited to, the availability and
cost of personnel trained in this area, which could cause a change in the
estimated completion date of a particular phase, the ability to locate and
correct all relevant software and embedded components, the compliance of
critical vendors, and similar uncertainties. The Company's assessments of the
effects of Year 2000 on the Company are based, in part, upon information
received from third parties, and the Company's reasonable reliance on that
information. Therefore, the risk that inaccurate information is supplied by
third parties upon which the Company reasonably relied must be considered as a
risk factor that might affect the Company's Year 2000 efforts. The Company is
attempting to reduce the risks by utilizing an organized approach, extensive
testing and allowance of contingency time to address issues identified by
tests. Despite the Company's efforts to address its Year 2000 issues, there
can be no assurances that Year 2000 related failures of the Company's software,
or that Year 2000 related failures by third parties with which the Company
interacts, will not have a material adverse affect on the Company.
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
Other than the funding of the Acquisition, the Company's primary
capital requirement has been the funding of its new store expansion program and
the upgrading of facilities and systems in existing shops. For the nine months
ended December 31, 1998, the Company spent $18.4 million for equipment and new
store construction. Funds for equipment and new store construction were provided
primarily by cash flow from operations. Management believes that the Company has
sufficient resources available (including cash and equivalents, cash flow from
operations and bank financing) to expand its business as currently planned for
the next several years.
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Liquidity
Concurrent with the closing of the Acquisition, Monro obtained a new
$135 million secured credit facility from lenders led by The Chase Manhattan
Bank. Approximately $51 million was borrowed under this facility to pay the
all-cash purchase price in the Acquisition, with an additional $16 million to be
borrowed to provide for the closing of up to 20 underperforming or redundant
Speedy stores, capital expenditures at remaining Speedy stores and transaction
expenses. In addition, Monro refinanced approximately $35 million of
indebtedness through the new credit facility, with the balance of the facility
available for future working capital needs. More specifically, the new financing
structure consists of a $25 million term loan (all of which was outstanding at
December 31, 1998), a $75 million Revolving Credit facility (of which
approximately $42 million was outstanding at December 31, 1998), and synthetic
lease (off-balance sheet) financing for a significant portion of the Speedy real
estate, totaling $35 million. The loans bear interest at the prime rate or other
LIBOR-based rate options tied to the Company's financial performance.
The Company has outstanding $1.8 million in principal amount of its
10.65% Senior Notes due 1999 (the "Senior Notes") with Massachusetts Mutual Life
Insurance Company pursuant to a Senior Note Agreement. The fifth of six equal
annual installments of principal in the amount of $1.8 million was paid on April
1, 1998.
Certain of the Company's stores were financed by mortgages currently
bearing interest at LIBOR plus 100 basis points.
The Company has financed its office/warehouse facility via a 10 year
mortgage with a current balance of $2.5 million, amortizable over 20 years, and
an eight year term loan with a balance of $.5 million.
Certain of the Company's long-term debt agreements require, among other
things, the maintenance of specified current ratios, interest and rent coverage
ratios and amounts of tangible net worth. They also contain requirements
concerning Y2K compliance and restrictions on cash dividend
payments.
The Company enters into interest rate hedge agreements which involve
the exchange of fixed and floating rate interest payments periodically over the
life of the agreement without the exchange of the underlying principal amounts.
The differential to be paid or received is accrued as interest rates change and
is recognized over the life of the agreements as an adjustment to interest
expense.
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15
MONRO MUFFLER BRAKE, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a. Exhibits
10.1 - Amended and Restated Employment Agreement, dated
February 16, 1999, by and between the Company and
Robert G. Gross.
10.2 - Amended and Restated Secured Loan
Agreement, dated February 16, 1999, by and
between the Company and Robert G. Gross.
10.3 - Company's 1998 Stock Option Plan Amendment.
(*Subject to the approval of the shareholders of the
Company.)
11 - Statement of Computation of Per Share Earnings.
b. Reports on Form 8-K.
The Company filed a report on Form 8-K on December 3,
1998 in connection with the appointment of Robert G.
Gross as President and Chief Executive Officer of the
Company.
c. Reports on Form 8-K/A
The Company filed a report on Form 8-K/A on December
1, 1998 presenting financial statements and pro forma
financial information related to the acquisition of
189 company-owned and 14 franchised stores from Bloor
Automotive and Speedy Car-X on September 17, 1998.
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16
SIGNATURES
----------
Pursuant to the requirements 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.
MONRO MUFFLER BRAKE, INC.
DATE: February 12, 1999 By /s/ Robert G. Gross
---------------------------------------
Robert G. Gross
President and Chief Executive Officer
DATE: February 12, 1999 By /s/ Catherine D'Amico
---------------------------------------
Catherine D'Amico
Senior Vice President-Finance, Treasurer
and Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
10.1 Amended and Restated Employment Agreement, dated
February 16, 1999, by and between the Company and
Robert G. Gross.
10.2 Amended and Restated Secured Loan Agreement, dated
February 16, 1999, by and between the Company and
Robert G. Gross.
10.3 Company's 1998 Stock Option Plan Amendment.
(*Subject to the approval of the shareholders of the
Company.)
11 Statement of Computation of Per Share Earnings.
27 Financial Data Schedule
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