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 SEPTEMBER 30, 1999.
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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.
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(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
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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
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As of October 31, 1999, 8,321,701 shares of the Registrant's Common Stock, par
value $ .01 per share, were outstanding.
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MONRO MUFFLER BRAKE, INC.
INDEX
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Part I. Financial Information Page No.
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Item 1. Financial Statements
Consolidated Balance Sheet at
September 30, 1999 and March 31, 1999 3
Consolidated Statement of Income for the quarter
and six months ended September 30, 1999 and 1998 4
Consolidated Statement of Changes in Common
Shareholders' Equity for the six months ended September 30, 1999 5
Consolidated Statement of Cash Flows for the
six months ended September 30, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 14
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)
SEPTEMBER 30, MARCH 31,
1999 1999
------------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and equivalents, including interest-bearing accounts of $3,068 $ 3,068 $ 5,599
at September 30, 1999 and $5,599 at March 31, 1999
Trade receivables 1,340 1,291
Inventories, at LIFO cost 42,301 38,656
Federal and State income taxes receivable 0 1,090
Deferred income tax asset 1,709 1,709
Other current assets 4,141 5,002
--------- ---------
Total current assets 52,559 53,347
--------- ---------
Property, plant and equipment 202,462 194,808
Less - Accumulated depreciation and amortization (64,135) (59,021)
--------- ---------
Net property, plant and equipment 138,327 135,787
Other noncurrent assets 13,046 13,800
--------- ---------
Total assets $ 203,932 $ 202,934
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 7,790 $ 8,373
Trade payables 13,358 9,745
Federal and state income taxes payable 1,953 0
Accrued expenses and other current liabilities
Accrued interest 535 268
Accrued payroll, payroll taxes and other payroll benefits 5,641 5,269
Accrued insurance 1,550 1,700
Accrued restructuring costs 1,728 1,825
Other current liabilities 6,202 7,999
--------- ---------
Total current liabilities 38,757 35,179
Long-term debt 71,494 78,672
Other long-term liabilities 604 669
Accrued long-term restructuring costs 3,806 5,100
Deferred income tax liability 2,363 2,363
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Total liabilities 117,024 121,983
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Commitments
Shareholders' equity:
Class C Convertible Preferred Stock, $1.50 par value, $.216 conversion
value; 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 issued and outstanding 83 83
Additional paid-in capital 35,924 35,873
Retained earnings 50,763 44,857
--------- ---------
Total shareholders' equity 86,908 80,951
--------- ---------
Total liabilities and shareholders' equity $ 203,932 $ 202,934
========= =========
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, 1999.
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MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED
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SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1999 1998 1999 1998
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(DOLLARS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Sales $60,513 $46,385 $121,492 $90,498
Cost of sales, including distribution and
occupancy costs (a) 35,356 26,770 70,747 51,090
------- ------- -------- -------
Gross profit 25,157 19,615 50,745 39,408
Operating, selling, general and
administrative expenses 17,727 14,330 36,809 26,720
------- ------- -------- -------
Operating income 7,430 5,285 13,936 12,688
Interest expense, net of interest income for
the quarter of $17 in 1999 and $8 in
1998, and year to date of $27 in 1999
and $22 in 1998 (a) 1,689 1,077 3,406 1,982
Other expense, net 400 194 715 302
------- ------- -------- -------
Income before provision for income taxes 5,341 4,014 9,815 10,404
Provision for income taxes 2,128 1,603 3,909 4,136
------- ------- -------- -------
Net income $ 3,213 $ 2,411 $ 5,906 $ 6,268
======= ======= ======== =======
Basic earnings per share $ .39 $ .29 $ .71 $ .75
======= ======= ======== =======
Diluted earnings per share $ .36 $ .27 $ .66 $ .70
======= ======= ======== =======
Weighted average number of shares of
common stock and common stock
equivalents used in computing earnings
per share: Basic 8,322 8,317 8,322 8,311
======= ======= ======== =======
Diluted 8,975 8,987 8,976 9,013
======= ======= ======== =======
(a) Amounts paid under operating and capital leases with affiliated parties
totaled $452 and $467 for the quarters ended September 30, 1999 and
1998, respectively, and $917 and $963 for the six months ended
September 30, 1999 and 1998, respectively.
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, 1999.
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MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
LESS:
NOTE NET
ADDITIONAL RECEIVABLE ADDITIONAL
COMMON STOCK PAID-IN FROM PAID-IN RETAINED
SHARES AMOUNT CAPITAL SHAREHOLDER CAPITAL EARNINGS
Balance at March 31, 1999 8,322 $83 $36,370 ($497) $35,873 $44,857
Net income 5,906
Note receivable from shareholder 51 51
----- --- ------- ----- ------- -------
======= =======
Balance at September 30, 1999 8,322 $83 $36,370 ($446) $35,924 $50,763
===== === ======= ===== ======= =======
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, 1999.
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MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
SEPTEMBER 30,
----------------------
1999 1998
-------- --------
(DOLLARS IN THOUSANDS)
INCREASE (DECREASE) IN
CASH
Cash flows from operating activities:
Net income $ 5,906 $ 6,268
-------- --------
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation and amortization 6,482 4,889
Gain on disposal of property, plant and equipment (81) (65)
Increase in trade receivables (49) (119)
Increase in inventories (3,645) (1,285)
Decrease in other current assets 934 320
Decrease (increase) in other noncurrent assets 460 (1,168)
Increase (decrease) in trade payables 3,613 (550)
(Decrease) increase in accrued expenses (1,404) 846
Increase in federal and state income taxes payable 3,043 986
(Decrease) increase in other long-term liabilities (1,386) 14
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Total adjustments 7,967 3,868
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Net cash provided by operating activities 13,873 10,136
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Cash flows from investing activities:
Capital expenditures (9,677) (10,035)
Proceeds from the disposal of property, plant and equipment 1,120 65
Payment for purchase of Speedy Muffler King (21,490)
-------- --------
Net cash used for investing activities (8,557) (31,460)
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Cash flows from financing activities:
Proceeds from the sale of common stock (option exercises) 462
Proceeds from borrowings 40,375 91,670
Principal payments on long-term debt and capital
lease obligations (48,222) (71,669)
-------- --------
Net cash (used for) provided by financing activities (7,847) 20,463
-------- --------
Decrease in cash (2,531) (861)
Cash at beginning of year 5,599 5,315
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Cash at September 30 $ 3,068 $ 4,454
======== ========
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, 1999.
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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 dealer-operated 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 of borrowings to provide for the closing of 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.
In connection with the acquisition, the Company recorded a reserve for
accrued restructuring costs of approximately $7.8 million. This reserve relates
to costs associated with the closing of approximately 45 poorly performing or
duplicative Speedy stores, and includes charges for rent and real estate taxes
(net of anticipated sublease income), the write down of assets to their fair
market value, and net losses experienced by these stores through their closure
date.
NOTE 2- 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 $120,000 and $170,000 higher at September 30, 1999
and March 31, 1999, respectively. The FIFO value of inventory approximates the
current replacement cost.
NOTE 3- CASH AND EQUIVALENTS
The Company's policy is to invest cash in excess of operating
requirements in income producing investments. Cash equivalents of $3,068,000 at
September 30, 1999 and $5,599,000 at March 31, 1999 include money market
accounts, which have maturities of three months or less.
NOTE 4 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following transactions represent noncash investing and financing
activities during the periods indicated:
SIX MONTHS ENDED SEPTEMBER 30, 1999:
Capital lease obligations of $85,000 were incurred under various lease
obligations.
In connection with the sale of assets, the Company reduced fixed assets
by $49,000 and increased other current assets, other non-current assets and
accrued long-term restructuring costs by $73,000, $90,000 and $114,000,
respectively.
SIX MONTHS ENDED SEPTEMBER 30, 1998:
Capital lease obligations of $170,000 were incurred under various lease
obligations.
In connection with the declaration of a five percent stock dividend,
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.
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MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH PAID DURING THE PERIOD:
SIX MONTHS ENDED
SEPTEMBER 30,
-------------------------------
1999 1998
---- ----
Interest, net $3,045,000 $2,211,000
Income taxes 866,000 3,152,000
NOTE 5 - 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, 1999.
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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, the ability of the Company to maximize the
value of the acquired Speedy Stores, 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 SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
--------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
Sales ................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales, including distribution
and occupancy costs .................... 58.4 57.7 58.2 56.4
------ ------ ------ ------
Gross profit ............................ 41.6 42.3 41.8 43.6
Operating, selling, general and
administrative expenses ................ 29.3 30.9 30.3 29.6
------ ------ ------ ------
Operating income ........................ 12.3 11.4 11.5 14.0
Interest expense - net .................. 2.8 2.3 2.8 2.2
Other expenses - net .................... .7 .4 .6 .3
------ ------ ------ ------
Income before provision for income taxes 8.8 8.7 8.1 11.5
Provision for income taxes .............. 3.5 3.5 3.2 4.6
------ ------ ------ ------
Net income .............................. 5.3% 5.2% 4.9% 6.9%
====== ====== ====== ======
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SECOND QUARTER AND SIX MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO
SECOND QUARTER AND SIX MONTHS ENDED SEPTEMBER 30, 1998
Sales were $60.5 million for the quarter ended September 30, 1999
compared with $46.4 million in the quarter ended September 30, 1998. The sales
increase of $14.1 million, or 30.5%, was due to an increase in sales of
approximately $16.4 million relating to stores opened or acquired since April 1,
1998, partially offset by a comparable store sales decrease of 2.8%. Sales for
the six months ended September 30, 1999 were $121.5 million compared with $90.5
million for the comparable period of the prior year. The sales increase of $31.0
million or 34.2% was due to an increase in sales of approximately $35.7 million
relating to stores opened or acquired since April 1, 1998, partially offset by a
comparable store sales decrease of 3.2%. At September 30, 1999, the Company had
515 company-operated stores in operation (including the stores acquired from
Speedy) compared to 530 at September 30, 1998.
In an effort to further drive sales, the Company established a
commercial sales division in September 1999 to pursue what the Company believes
can be a high-volume, solid-margin, predictable source of revenue. Additionally,
in November, the Company will begin testing windshield repair and replacement
services through a joint venture operating as "Monro Auto Glass". This service
will be a customer convenience offered initially at approximately 60 locations
in conjunction with a major automotive glass repair and replacement company. The
arrangement should add incrementally to Monro's profitability through referral
fees, further build brand equity and enhance the Company's service offerings.
Gross profit for the quarter ended September 30, 1999 was $25.2 million
or 41.6% of sales compared with $19.6 million or 42.3% of sales for the quarter
ended September 30, 1998. Gross profit for the six months ended September 30,
1999 was $50.7 million, or 41.8% of sales, compared to $39.4 million or 43.6% of
sales, for the six months ended September 30, 1998. The decline in gross profit
as a percentage of sales is primarily attributable to an increase in occupancy
costs, reflecting the impact of fixed costs (such as rent and depreciation)
against a decline in comparable store sales, and soft new store sales (including
the acquired Speedy stores).
Additionally, labor costs increased over the prior year. During
periods of slower sales when technicians may not be fully productive, they
receive a minimum base-level wage, which increases labor cost as a percent of
sales.
Total material usage (including outside purchases) declined as a
percent of sales when compared to the same quarter of last year, due to the
impact of price reductions negotiated with vendors, inventory replenishment of
all Speedy Stores from Monro's central distribution facility, and mix changes
from the same quarter of last year.
Operating, selling, general and administrative expenses for the quarter
ended September 30, 1999 increased by $3.4 million to $17.7 million over the
quarter ended September 30, 1998, and were 29.3% of sales compared to 30.9% in
the same quarter of the prior year. For the six months ended September 30, 1999,
these expenses increased by $10.1 million to $36.8 million over the comparable
period of the prior year and were 30.3% of sales compared to 29.6% in the
comparable period of the prior year. The second quarter improvement in
operating, selling, general and administrative expenses as a percent of sales,
as compared to the prior year period, is due primarily to reductions in direct
store expenses, and corporate and field overhead expenses. These reductions
reflect the Company's continuing efforts to achieve planned cost savings and
improve efficiency.
Management remains very encouraged by the decreases in expenses at the
acquired Speedy stores from their historical levels. The Company is on, and in
some cases, ahead of schedule in realizing its planned cost reductions at the
Speedy stores.
Operating income for the quarter ended September 30, 1999 of
approximately $7.4 million increased 40.6% over operating income for the quarter
ended September 30, 1998, and increased as a percentage of sales from 11.4% to
12.3% for the same periods. On a year to date basis, operating income increased
approximately $1.2 million or 9.8% over the same prior year period, but
decreased as a percentage of sales from 14.0% to 11.5% during this same period.
Net interest expense for the quarter ended September 30, 1999 increased
by approximately $.6 million compared to the comparable period in the prior
year, and increased from 2.3% to 2.8% as a percentage of sales for the same
period. Net interest expense for the six months ended September 30, 1999
increased by approximately $1.4 million compared to the same period in the prior
year, and increased from 2.2% to 2.8% as a percentage of sales for the same
period. The increase in dollars expended is due to an increase in the weighted
average debt outstanding for the quarter and six months ended September 30, 1999
as compared to the same periods in the previous year, as well as an increase in
the weighted average interest rate.
Net income for the quarter ended September 30, 1999 of $3.2 million
increased 33.3% from net income for the quarter ended September 30, 1998. For
the six months ended September 30, 1999 net income of $5.9 million decreased
5.8%, due to the factors discussed above.
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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.
YEAR 2000
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 team regularly
updates senior management, including the Company's Chief Executive and Chief
Financial Officers, as well as the Board of Directors, as to the progress under
the Year 2000 Remediation Plan. 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 the following
phases of 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.
All IT systems, considered to be critical, have been diagnosed,
modified, tested, and deployed. Third party testing tools have been used to
validate results on internally developed software where the Company believed it
to be critical and cost beneficial, and contingency plans have been developed.
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. All
non-IT systems, considered to be critical have been tested and deemed compliant.
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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 has contacted each of its major third
party providers and vendors to determine if the provider/vendor is Year 2000
compliant. There were no instances where a major provider/vendor represented
that there would be a loss of service because of a Year 2000 problem.
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. These plans will identify the specific
actions which will be taken if a critical system or third party service provider
are not Year 2000 compliant. The Company expects to have these plans completed
by December 1, 1999 for all major systems. As discussed above, the Company has
contacted its major third party providers/vendors, and none indicated that there
would be a loss of service because of Year 2000 problems.
Costs
The Company estimates that the total costs associated with the Year
2000 effort will be approximately $600,000, the majority of which was expensed
in fiscal 1999. The Company's Year 2000 costs have been, and are expected to be,
funded out of cash flows from operating activities.
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. The Company, however, continues to monitor its
internal progress and the progress of third parties in order to efficiently
implement its contingency plans, if necessary.
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.
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CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
In fiscal year 2000, the Company's primary capital requirements have
been the funding of its new store expansion program and the upgrading of
facilities and systems in existing stores. For the six months ended September
30, 1999, the Company spent approximately $9.8 million for equipment and new
store construction. Funds were provided primarily by cash flow from operations.
Management believes that the Company has sufficient resources available
(including cash and equivalents, net cash flow from operations and bank
financing) to expand its business as currently planned for the next several
years.
Liquidity
Concurrent with the closing of the Speedy acquisition in September
1998, the Company obtained a new $135 million secured credit facility from a
syndication of lenders led by The Chase Manhattan Bank. Approximately $55
million was borrowed under this facility to pay the all-cash purchase price,
including transaction expenses of approximately $4 million. In addition, the
Company 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 (of which approximately $24 million was outstanding at
September 30, 1999), a $75 million Revolving Credit facility (of which
approximately $38 million was outstanding at September 30, 1999), and synthetic
lease (off-balance sheet) financing for a significant portion of the Speedy real
estate, totaling $35 million (of which approximately $34 million was outstanding
at September 30, 1999). The loans bear interest at the prime rate or LIBOR-based
rate options tied to the Company's financial performance. The Company must also
pay a facility fee on the unused portion of the commitment.
The credit facility has a five-year term. Interest only is payable
monthly on the Revolving Credit and synthetic lease borrowings throughout the
term. In addition to monthly interest payments, the $25 million term loan
requires quarterly principal payments beginning September 30, 1999. The first
principal payment of $1.3 million was paid on September 30, 1999.
The term loan and Revolving Credit Facility are secured by all accounts
receivable, inventory and other personal property. The Company has also entered
into a negative pledge agreement not to encumber any real property, with certain
permissible exceptions. The synthetic lease is secured by the real property to
which it relates.
At March 31, 1999, the Company had outstanding $1.8 million in
principal amount of its 10.65% of Senior Notes due 2000 with Massachusetts
Mutual Life Insurance Company pursuant to a Senior Note Agreement. The sixth and
final annual installment of principal of $1.8 million was paid on April 1, 1999.
Certain of the Company's stores are 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 $2.4 million, amortizable over 20 years, and
an eight year term loan with a balance of $.4 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.
FINANCIAL ACCOUNTING STANDARDS
On June 17, 1998 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities" effective for fiscal years
beginning after June 15, 2000. This statement standardizes the accounting for
derivatives and hedging activities and requires that all derivatives be
recognized in the statement of financial position as either assets or
liabilities at fair value. Changes in the fair value of derivatives that do not
meet the hedge accounting criteria are to be reported in earnings. Adoption of
this standard is not expected to have a material effect on the Company's
financial position, results of operations or cash flows.
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14
MONRO MUFFLER BRAKE, INC.
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of Shareholders of the Company (the
"1999 Meeting") was held on August 2, 1999. At the 1999 Meeting, the Company's
common shareholders elected management's nominees, Charles J. August, Frederick
M. Danziger, Jack M. Gallagher, Robert G. Gross and Peter J. Solomon to Class 2
of the Board of Directors, to serve until the election and qualification of
their respective successors at the 2001 Annual Meeting of Shareholders. Such
nominees for director received the following votes:
NAME VOTES FOR VOTES WITHHELD
---- --------- --------------
Charles J. August 6,562,971 14,065
Frederick M. Danziger 6,563,416 13,620
Jack M. Gallagher 6,563,416 13,620
Robert G. Gross 6,563,416 13,620
Peter J. Solomon 6,563,416 13,620
As required under the Company's Certificate of Incorporation,
such election of directors and other matters were confirmed by the holders of
all 91,727 outstanding shares of the Company's Class C Convertible Preferred
Stock, par value $1.50 per share, by written consent dated as of August 2, 1999.
In addition, Burton S. August, Robert W. August, Donald
Glickman, Lionel B. Spiro and W. Gary Wood will continue as Class 1 directors
until the election and qualification of their respective successors at the 2000
Annual Meeting of Shareholders.
Also approved by the following votes were:
(i) a proposal to ratify the adoption of the Monro
Muffler Brake,Inc. 1998 Employees' Stock Option
Plan (4,756,044 shares in favor, 109,125 shares
against, 14,469 shares abstaining and zero
broker non-votes).
(ii) a proposal to ratify the amendment to the Monro
Muffler Brake, Inc. Non-Employee Directors'
Stock Option Plan to increase the number of
authorized shares (4,625,958 shares in favor,
217,760 shares against, 36,420 shares
abstaining).
(iii) a proposal to ratify the re-appointment of
PricewaterhouseCoopers LLP as the independent
auditors of the Company for the fiscal year
ending March 31, 2000 (6,556,736 shares in
favor, 8,646 shares against, 11,654 shares
abstaining and zero broker non-votes).
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15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
10.01 - Amendment to Credit Agreement, dated as of May 31, 1999,
by and among the Company, The Chase Manhattan Bank, as agent,
and certain lenders party thereto.
11 - Statement of Computation of Per Share Earnings.
b. Reports on Form 8-K
The Company was not required to file reports on Form 8-K during
the quarter ended September 30, 1999.
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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: November 15, 1999 By /s/ Robert G. Gross
-----------------------------------------
Robert G. Gross
President and Chief Executive Officer
DATE: November 15, 1999 By /s/ Catherine D'Amico
-----------------------------------------
Catherine D'Amico
Senior Vice President-Finance,
Treasurer and Chief Financial Officer
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17
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.01 Amendment to Credit Agreement, dated as of
May 31, 1999, by and among the Company, The
Chase Manhattan Bank, as agent, and certain
lenders party thereto.
11 Statement of computation of per share
earnings
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