UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------- ----------
Commission file number 000-9812
Grease Monkey Holding Corporation
----------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Utah 87-0321320
------------------------------ -------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
633 17th Street, Suite 400
Denver, Colorado 80202
--------------------------------------
(Address of principal executive offices)
(303) 308-1660
-------------------------
(Issuer's telephone number)
Check whether the 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 October 31, 1998
----------------------------- ----------------
Common Stock, $0.03 par value 4,647,880 shares
Transitional Small Business Disclosure Format Yes [ ] No [X]
GREASE MONKEY HOLDING CORPORATION
Commission File Number: 000-9812
Quarter Ended September 30, 1998
FORM 10-QSB
Part I FINANCIAL INFORMATION
Consolidated Statements of Operations.......................... Page 1
Consolidated Balance Sheets.................................... Page 2
Consolidated Statements of Stockholders' Equity (Deficit)...... Page 4
Consolidated Statements of Cash Flows.......................... Page 5
Notes to Consolidated Financial Statements..................... Page 7
Management's Discussion and Analysis or Plan
of Operation................................................ Page 12
Part II OTHER INFORMATION
Legal Proceedings............................................. Page 20
Defaults Upon Senior Securities............................... Page 20
Other Information............................................. Page 20
Exhibits and Reports on Form 8-K.............................. Page 21
Signatures.................................................... Page 22
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
Operating Revenue:
Royalty fees.............................................. $ 766,172 828,823 2,285,969 2,659,034
Franchise sales - center openings......................... 25,490 84,000 199,090 172,201
Product and equipment revenue............................. 147,202 230,971 514,109 574,508
Sales by Company-owned Centers............................ 3,788,628 3,829,962 11,243,408 11,216,333
Leasing revenue........................................... 248,127 388,085 876,116 1,166,957
Other..................................................... 25,616 123,769 66,435 325,416
-------------- -------------- --------------- ---------------
5,001,235 5,485,610 15,185,127 16,114,449
-------------- -------------- --------------- ---------------
Operating Expenses:
Franchise costs - center openings......................... 15,445 19,791 57,871 41,209
Product and equipment costs............................... 48,875 115,369 218,804 223,762
Company-owned Centers..................................... 3,162,933 3,270,698 9,427,520 9,590,148
Leasing expense........................................... 303,404 408,958 1,000,019 1,161,294
General and administrative expenses....................... 1,886,914 1,216,626 4,550,299 3,864,259
Provision for credit losses............................... 92,555 30,000 184,220 82,141
Depreciation.............................................. 184,381 175,761 522,474 503,974
Amortization.............................................. 72,917 72,577 216,689 207,614
-------------- -------------- --------------- ---------------
5,767,424 5,309,780 16,177,896 15,674,401
-------------- -------------- --------------- ---------------
Operating income (loss)..................................... (766,189) 175,830 (992,769) 440,048
-------------- -------------- --------------- ---------------
Other income (expense):
Loss on sale/disposition/closure of centers............... (80,214) (282,929) (136,157) (300,392)
Undeveloped franchise licenses canceled................... 163,703 - 195,686 -
Interest income........................................... 3,247 15,302 24,567 50,976
Interest expense.......................................... (194,989) (189,408) (620,929) (555,525)
-------------- -------------- --------------- ---------------
(108,253) (457,035) (536,833) (804,941)
-------------- -------------- --------------- ---------------
Net loss................................................... $ (874,442) (281,205) (1,529,602) (364,893)
============== ============== =============== ===============
Loss per common share (Note 5).............................. $ (0.19) (0.07) (0.35) (0.10)
============== ============== =============== ===============
Loss per common share assuming dilution (Note 5)............ $ (0.19) (0.07) (0.35) (0.10)
============== ============== =============== ===============
Weighted average shares outstanding......................... 4,698,337 4,442,184 4,645,707 4,384,802
============== ============== =============== ===============
(UNAUDITED)
1
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
------------- -----------
ASSETS
Current Assets:
Cash.............................................................. $ 68,046 182,214
Accounts receivable, net of allowance for
doubtful accounts of $367,244 at September 30,
1998, and $478,553 at December 31, 1997 .......................... 743,202 1,212,014
Current portion of notes receivable,
net of allowance for uncollectible amounts ....................... 71,799 318,658
Current portion of net investment
in direct financing leases ....................................... 183,899 204,921
Inventories ........................................................ 707,399 758,116
Prepaid expenses and supplies ...................................... 237,524 113,648
------------ ------------
TOTAL CURRENT ASSETS ............................................. 2,011,869 2,789,571
------------ ------------
Property and Equipment, at Cost, Pledged:
Land ............................................................... 512,804 543,838
Buildings (including buildings under capital leases) ............... 6,908,120 6,430,000
Furniture and fixtures ............................................. 624,436 536,329
Leasehold improvements ............................................. 787,204 718,672
Machinery and equipment ............................................ 1,817,623 1,774,196
------------ ------------
10,650,187 10,003,035
Less accumulated depreciation and
amortization ..................................................... (4,328,209) (3,985,940)
------------ ------------
NET PROPERTY AND EQUIPMENT ....................................... 6,321,978 6,017,095
------------ ------------
Other Assets:
Net investment in direct financing leases .......................... 1,988,919 3,154,581
Notes receivable, net of allowance for uncollectible
amounts .......................................................... 92,816 225,177
Deferred franchising costs ......................................... 129,013 189,528
Goodwill and covenants not to compete, net
of accumulated amortization of $1,311,430 at
September 30, 1998, and $1,215,026 at December
31, 1997 ......................................................... 2,395,161 2,688,103
Other assets, net of accumulated amortization of
$59,007 at September 30, 1998, and $167,145 at
December 31, 1997 ................................................ 1,880,296 333,795
------------ ------------
TOTAL OTHER ASSETS ............................................... 6,486,205 6,591,184
------------ ------------
$ 14,820,052 15,397,850
============ ============
(UNAUDITED)
(continued on next page)
2
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
September 30, December 31,
1998 1997
------------ -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................................... $ 1,629,172 1,400,633
Accrued salaries and wages ........................................ 215,048 195,787
Other accrued liabilities ......................................... 344,294 371,143
Current portion of long-term obligations .......................... 1,065,863 715,289
Current portion of obligations
under capital leases ............................................ 485,532 464,955
------------ ------------
TOTAL CURRENT LIABILITIES ....................................... 3,739,909 3,147,807
------------ ------------
Long-term Obligations ............................................... 5,322,805 3,800,082
Obligations Under Capital Leases .................................... 6,024,451 6,848,249
Deferred Franchise Sales Revenue .................................... 630,965 985,470
Stockholders' Equity (Deficit):
Series C Preferred stock, stated value of $100.00
per share, 20,896 shares issued and outstanding at
September 30, 1998 and December 31, 1997 ......................... 2,089,638 2,089,638
Common stock, par value $.03, 20,000,000
shares authorized, 4,647,880 and 4,633,570,
shares issued and outstanding at September 30,
1998 and December 31, 1997, respectively ........................ 139,436 139,007
Capital in excess of par value .................................... 6,212,733 6,197,880
Accumulated deficit ............................................... (9,339,885) (7,810,283)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) .......................... (898,078) 616,242
Commitments and Contingencies
------------ ------------
$ 14,820,052 15,397,850
============ ============
(UNAUDITED)
3
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock Common Stock
---------------------- -----------------------------------------
Capital in
Number of Number of Excess of
Shares Amount Shares Amount Par Value
--------- ------ --------- ------ ----------
Balance at December 31, 1996 ................... 20,896 $2,089,638 4,379,860 $ 131,396 5,877,670
Issuance of common stock pursuant to
employee benefit plan ........................ -- -- 33,234 996 44,262
Issuance of common stock upon
exercise of employee stock options ........... -- -- 30,000 900 31,663
Issuance of common stock ....................... -- -- 190,476 5,715 244,285
Net loss ....................................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 ................... 20,896 2,089,638 4,633,570 139,007 6,197,880
Issuance of common stock pursuant to
employee benefit plan ........................ -- -- 10,810 324 13,145
Issuance of common stock upon
exercise of employee stock options ........... -- -- 3,500 105 3,613
Issuance of common stock ....................... -- -- -- -- (1,905)
Net loss ....................................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Balance at September 30, 1998 .................. 20,896 $2,089,638 4,647,880 $ 139,436 6,212,733
========== ========== ========== ========== ==========
Accumulated
Deficit Total
----------- -----
Balance at December 31, 1996 ................... (6,651,697) 1,447,007
Issuance of common stock pursuant to
employee benefit plan ........................ -- 45,258
Issuance of common stock upon
exercise of employee stock options ........... -- 32,563
Issuance of common stock ....................... -- 250,000
Net loss ....................................... (1,158,586) (1,158,586)
---------- ----------
Balance at December 31, 1997 ................... (7,810,283) 616,242
Issuance of common stock pursuant to
employee benefit plan ........................ -- 13,469
Issuance of common stock upon
exercise of employee stock options ........... -- 3,718
Issuance of common stock ....................... -- (1,905)
Net loss ....................................... (1,529,602) (1,529,602)
---------- ----------
Balance at September 30, 1998 .................. (9,339,885) (898,078)
========== ==========
(UNAUDITED)
4
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
-----------------------
1998 1997
---- ----
Cash flows from operating activities:
Net loss.............................................................. $ (1,529,602) (364,893)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Increase in deferred franchise sales revenue...................... 116,200 281,500
Franchise sales revenue recognized-center openings................ (199,090) (172,201)
Increase in deferred franchising costs............................ (43,485) (82,762)
Franchise costs recognized - center openings...................... 46,771 41,209
Provision for credit losses....................................... 184,220 82,141
Depreciation and amortization..................................... 739,163 711,588
Undeveloped franchise licenses canceled........................... (195,686) --
Loss on sale/disposition/closure of centers....................... 107,267 275,476
Impairment of asset value......................................... 377,871 --
Accrual of Consultant Agreement/Severance
Agreements...................................................... 216,440 357,113
Other, net........................................................ 96,312 372
Change in assets and liabilities:
Decrease (increase) in accounts receivable...................... 148,124 (168,364)
Decrease in notes receivable.................................... 223,542 283,977
Decrease (increase) in inventories.............................. 47,719 (14,051)
Decrease (increase) in prepaid expenses and
supplies...................................................... (123,875) 52,382
Decrease in accounts payable.................................... (98,752) (158,604)
Increase in accrued salaries and wages
and other liabilities......................................... 1,800 54,570
-------------- ------------
Net cash provided by operating activities......................... $ 114,939 1,179,453
-------------- ------------
(UNAUDITED)
(continued on next page)
5
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Nine Months Ended
September 30,
-----------------------
1998 1997
---- ----
Cash flows from investing activities:
Principal receipts on direct financing leases......................... $ 129,846 150,081
Acquisition of centers................................................ -- (573,249)
Sale of centers....................................................... 115,450 116,901
Capital expenditures.................................................. (277,944) (249,605)
Increase in projects and development.................................. (1,544,738) --
Increase in other assets.............................................. (261,901) (113,709)
-------------- ------------
Net cash used in investing activities........................... (1,839,287) (669,581)
-------------- ------------
Cash flows from financing activities:
Proceeds from long-term obligations................................... 2,483,100 3,045,000
Principal payments on long-term obligations........................... (555,926) (3,101,022)
Principal payments on capital lease
obligations......................................................... (326,039) (306,821)
Issuance of common stock.............................................. 1,814 271,938
Decrease in restricted cash........................................... -- 34,927
Increase in lease deposit obligations................................. 7,231 2,306
-------------- ------------
Net cash provided by (used in) financing activities............. 1,610,180 (53,672)
-------------- ------------
Net increase (decrease) in cash......................................... (114,168) 456,200
Cash, beginning of period............................................... 182,214 324,745
-------------- ------------
Cash, end of period..................................................... $ 68,046 780,945
============== =============
Supplemental disclosures of cash flow
information -
Cash paid during the period for interest............................ $ 933,399 891,569
============== =============
(UNAUDITED)
6
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the interim financial statements include
all adjustments, consisting of normal recurring adjustments, necessary
in order to make the financial statements not misleading.
2. Grease Monkey Holding Corporation ("GMHC") and its wholly-owned
subsidiaries, Grease Monkey International, Inc. ("GMI"), Grease Monkey
de Mexico SA de CV ("GMM") and GM Properties, Inc. ("GMP") are
collectively referred to as the "Company". 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, 1997, included in the Company's Annual Report on Form
10-KSB filed with the Securities and Exchange Commission on March 31,
1998.
3. The results for the three-month and nine-month periods ended September
30, 1998, are not necessarily indicative of the results to be expected
for the entire fiscal year of 1998.
4. STOCKHOLDERS' EQUITY (DEFICIT)
On January 20, 1997, Charles E. Steinbrueck, former President and Chief
Executive Officer, entered into an agreement to purchase 190,476 shares
of restricted common stock at a per share price of $1.3125, the last
trade price on January 20, 1997, for a total consideration of $250,000.
The Company's Series C, 6% cumulative, preferred stock is redeemable at
the option of the Company upon 60 days prior written notice. 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, 1998, accumulated unpaid dividends totaled $600,722.
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 1998 and 1997, the
Company contributed 10,810 and 27,847 shares to this plan at an average
of $1.25 and $1.30 per share, respectively.
(continued)
7
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. EARNINGS (LOSS) PER SHARE
Effective for periods ending after December 15, 1997, earnings (loss)
per common share (EPS) is computed using Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128
established standards for computing and presenting EPS and supersedes
all prior EPS guidance found in APB Opinion 15. Basic EPS is computed
by dividing income available to common shareholders by the
weighted-average number of common shares outstanding during the period.
Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common shares. All prior periods have been restated to
conform with SFAS No. 128. The following is a reconciliation between
the basic and diluted earnings per common share for income (loss) as
calculated under SFAS No. 128.
For the Three Months Ended
------------------------------------------------------------------------------------
September 30, 1998 September 30, 1997
Income Income
(Loss) EPS Shares (Loss) EPS Shares
------------ ------------ ------------ ------------ ----------- -----------
Income (loss) ..... (874,442) (281,205)
Preferred
dividends ......... (31,602) (31,602)
---------- ---------- ---------- ---------- ---------- ----------
Basic EPS ......... (906,044) (0.19) 4,698,337 (312,807) (0.07) 4,442,184
Effects of dilutive
securities:
Common stock
equivalents
Convertible
Preferred Stock
---------- ---------- ---------- ---------- ---------- ----------
Diluted EPS ....... (906,044) (0.19) 4,698,337 (312,807) (0.07) 4,442,184
========== ========== ========== ========== ========== ==========
For the Nine Months Ended
------------------------------------------------------------------------------------
September 30, 1998 September 30, 1997
Income Income
(Loss) EPS Shares (Loss) EPS Shares
------------ ------------ ------------ ------------ ----------- -----------
Income (loss) ..... (1,529,602) (364,893)
Preferred
dividends ......... (93,776) (93,776)
---------- ---------- ---------- ---------- ----------- ----------
Basic EPS ......... (1,623,378) (0.35) 4,645,707 (458,669) (0.10) 4,384,802
Effects of dilutive
securities:
Common stock
equivalents
Convertible
Preferred Stock
---------- ---------- ---------- ---------- ------------ ---------
Diluted EPS ....... (1,623,378) (0.35) 4,645,707 (458,669) (0.10) 4,384,802
========== ========== ========== ========== ============ =========
(continued)
8
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. COMMITMENTS AND CONTINGENCIES
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. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
Statement requires that all items that are recognized under accounting
standards as components of comprehensive income be reported in an
annual financial statement displayed with the same prominence as other
annual financial statements. Condensed financial statements of interim
periods are to include a total for comprehensive income. The Company's
total comprehensive income (loss) did not differ from its net income
(loss).
(continued)
9
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. Supplemental Schedule of Cash Flow Information
The following table sets forth, by period, the amount and nature of
amounts paid and received for the acquisition, sale (refranchising) and
closure of Company-owned Centers.
Nine Months Ended September 30,
-------------------------------
1998 1997
---- ----
Acquisitions:
Number of Centers purchased ................. -- 2
======== ========
Number of Centers foreclosed ................ 3 --
======== ========
Receivables applied (net of related
allowance) ................................ $ 83,843 --
Liabilities assumed ......................... 83,159 375,337
Loss on foreclosure ......................... (70,500) --
Cash paid ................................... -- 573,249
-------- --------
Cost of assets acquired ..................... $ 96,502 948,586
======== ========
Sales:
Number of Centers
refranchised/sold/closed .................. 3 6*
======== ========
Cash received ............................... $ 115,450 116,901
Notes received/accounts receivable
granted ................................... 15,769 26,800
Liabilities assumed by purchaser ............ -- 40,875
Loss on sale ................................ 36,767 275,476
Franchise fees .............................. -- 14,000
-------- --------
Net book value of Centers ................... $ 167,986 474,052
refranchised/sold/closed ======== ========
* Includes one center which was originally developed to be a Company-owned
Center, but was sold to a franchisee prior to opening.
(continued)
10
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the nine months ended September 30, 1998 and 1997, non-cash
transactions consisted of the Company issuing 10,810 and 27,847 shares
of common stock at an average value of $1.25 and $1.30 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 1998 included: a franchise license in the amount of
$10,000, net of deferred costs of $2,173, was cancelled and applied to
a franchisee's obligation to the Company; a capital lease obligation of
$196,900 was recorded for a Company-owned Center; a franchisee
abandoned two sites, resulting in two direct financing leases being
cancelled and two capital lease buildings being recorded for an
aggregate amount of $447,384; and the Company wrote off a direct
financing lease receivable and the corresponding capital lease
obligation of $487,527 based on the Company being released from the
lease.
Other non-cash transactions during the first nine months of 1997
included: the write-off of a direct financing lease receivable and the
corresponding capital lease obligation of $153,316 based on the
franchisee re-negotiating the lease resulting in the Company being
released from the lease; a capital lease obligation of $386,045 was
recorded and a direct financing lease receivable and the corresponding
capital lease obligation of $83,619 was written off based on the sale
of the related Center to a third party. As a result of the sale, the
landlord reduced the Company's obligation from a primary lessor to a
guarantor.
11
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
The Company reported a net loss of ($1,529,602) for the first nine months
of 1998, as compared to a net loss of ($364,893) for the first nine months of
1997. For the third quarter of 1998, the Company recognized a net loss of
($874,442) compared to a net loss of ($281,205) for the same quarter in 1997.
Total revenue decreased by $929,322 or 6% for the first nine months of
1998, compared to the first nine months of 1997. Revenue during the third
quarter of 1998 decreased $484,375 over the same quarter last year, a decrease
of 9%. The nine and three month decreases are due primarily to decreases in
royalty revenue, leasing revenue and other revenue. The decreases in royalty
revenue and other revenue can be partially attributed to a settlement agreement
entered into in 1997 with a former franchisee that caused increases in 1997.
Under the settlement agreement, in 1997 the Company recognized approximately
$207,200 of royalty fees not previously recognized and approximately $168,000 of
other income related to the reimbursement of costs previously expensed. In
addition, approximately $99,000 of other revenue was recognized in 1997 based on
a settlement agreement with another franchisee. Further decreases in royalty
revenue in 1998 are due to, on average, eleven fewer franchises open and
operating. Leasing revenue has declined primarily due to: the abandonment of a
franchise site late in the third quarter of 1997 resulting in the Company being
required to subsidize the rent to obtain a new subtenant; three franchise sites
have been acquired by the Company through both purchase and foreclosure; the
Company was released from nine leases at franchised and third party locations,
thus reducing not only rental income, but the matching rent expense; and the
Company sold one of its owned property locations and put another location up for
sale thus losing the third party subtenant income on those sites as well. In
addition, in 1998 a former franchisee abandoned two sites. Currently the Company
is not receiving matching revenue for the expense outlay on these Centers. The
Company is actively engaged in finding new subtenants. New subleases could
require the Company to subsidize the payments for an amount less than what the
Company currently pays the landlords. Should this be the case, the Company would
be required to record lease loss reserves equal to the present value of the
future minimum sublease commitment deficiencies. Currently the Company cannot
estimate the future potential losses associated with these sites. Offsetting
these decreases were the sale/refranchising of two Company-owned Centers where
the Company remained on the lease.
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 1998
decreased by 14% compared to the first nine months of 1997 to $2,285,969.
Royalty fee revenue for the third quarter of 1998 decreased by 8% compared to
the third quarter of 1997 to $766,172. The nine month decrease is due partly to
the recording of the settlement agreement with a former franchisee, as discussed
previously. The remaining decreases are due to an average decrease of eleven
open and operating franchises for the nine and three month periods. In addition,
on August 1, 1998, the Company entered into a Master Franchise Agreement for the
Republic of Mexico ("the Agreement"). The Agreement is for a term of fifteen
years and is renewable for an additional fifteen year term. The Master
Franchisee retains eighty percent of royalties and franchise fees collected from
Mexico franchisees after the effective date of the Agreement (further reducing
royalty income), in exchange, the Master Franchisee is obligated under the
Agreement to provide training and all types of support for franchisees in Mexico
that Grease Monkey International would be obligated to provide under its Grease
Monkey Franchise Agreement.
(continued)
12
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
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 1998, estimated royalties of $172,485 were not accrued under this
policy, compared to $89,700 for the first nine months of 1997. During the third
quarter of 1998, estimated royalties of $59,385 were not accrued compared to
$31,325 for the third quarter of 1997. 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 1998, the rebate accrued under this
program was $178,147, compared to $182,712 for the first nine months of 1997.
The rebate accrued for the third quarter of 1998, was $64,096, compared to a
rebate of $62,510 for the third quarter of 1997. The rebate is recorded as a
reduction in royalty revenue.
The Company recognized franchise sales revenue net of related costs of
$141,219 during the first nine months of 1998, representing nine Center
openings. For the third quarter of 1998, franchise sales net revenue was
$10,045, representing two Center openings. The Company recognized franchise
sales net revenue of $130,992 and $64,209 for the first nine months and third
quarter of 1997, respectively, representing fifteen and eight Center openings.
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.
At September 30, 1998, the Company operated 32 centers as compared to 30
centers at September 30, 1997. For the first nine months of 1998, the Company
reported an operating margin (Company-owned Center sales less expenses,
excluding interest, depreciation and amortization) of $1,815,888 on revenue of
$11,243,408 at Company-owned Centers, as compared to an operating margin of
$1,626,185 on revenue of $11,216,333 for the same period last year. This
represents a slight increase in revenue and a 12% increase in operating margin.
For the third quarters of 1998 and 1997, the Company reported operating margins
of $625,695 and $559,264 on revenue of $3,788,628 and $3,829,962, respectively,
representing a decrease in revenue of 1% and an increase in operating margin of
12%.
In the first nine months of 1998, the Company realized marketing allowances
and gross margins on product and equipment sales of $295,305, as compared to
$350,746 in the first nine months of 1997. In the third quarter of 1998,
marketing allowances and gross margins on product and equipment sales were
$98,327, as compared to $115,602 in the third quarter of 1997. 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.
General and administrative expenses for the first nine months and third
quarter of 1998 increased 18% or $686,040 and 55% or $670,288 as compared to the
first nine months and third quarter of 1997. Negative variances in both the nine
month and three month periods ended September 30, 1998, were caused by several
(continued)
13
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
factors. One such factor was a severance accrual for the Company's former
President and Chief Executive Officer, the former Senior Vice President of
Operations and other employees terminated effective September 30, 1998. Should
either of the executives be employed by a new employer during the remaining term
of the severance accrual, the severance compensation payable to the executive
will be reduced by the amount of compensation that the executive actually
receives from the new employer. The severance accrual totaled approximately
$327,000, but was reduced by approximately $86,000, which was the remaining
amount due under the Consultant Agreement for the Company's previous, now
current President. The Company had also previously entered into an agreement for
the development of a new point of sale system to be used at both Company-owned
and franchised Centers. Upon review of the agreement by current management,
further development was terminated and costs capitalized to date were expensed
in the amount of approximately $230,000. As mentioned previously, during the
quarter the Company entered into a Master Franchise Agreement for the Republic
of Mexico. Based upon this agreement, certain assets related to operations in
Mexico were evaluated and adjusted, resulting in a write-off of approximately
$132,000. During the quarter, the Company entered into a contract for the sale
of real estate in St. Louis, Missouri. Based on the contract, the real estate
was written down by approximately $31,000. Offsetting these increases was the
prior year accrual of the Company's obligation under a Consultant Agreement.
General and administrative expenses for the first nine months of 1997 included
approximately $379,000 related to this agreement. As mentioned previously and
reported in a September 16, 1998, Form 8-K, this individual has returned to the
Company as President and Chief Operating Officer. Other variances in the first
nine months of 1998 as compared to the first nine months of 1997 included: an
increase in salaries, wages and personnel expenses of approximately $194,000; an
increase in litigation expenses, including legal fees and related costs, of
approximately $188,000 and an increase in professional fees, including legal,
tax and accounting of approximately $61,000. Other variances in the third
quarter of 1998 as compared to the same quarter of 1997 included: an increase in
litigation expenses, including legal fees and related costs, of approximately
$11,400; an increase in professional fees, including legal, tax and accounting
of approximately $10,300; and an increase in office expenses primarily due to a
relocation of the corporate offices of $26,500.
Depreciation and amortization expense for the first nine months and third
quarter of 1998 increased 4% as compared to the same periods in 1997. This is
due primarily to the average number of Company-owned Centers operated during the
periods increasing slightly and due to capital acquisitions at the Company-owned
Center level.
Gain (loss) on sale/disposition/closure of Centers represents the net
results of the refranchising/disposal/closure 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 ($136,157)
for the nine months ended September 30, 1998, represents the closure of two
(continued)
14
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(continued)
Company-owned Centers in 1998, marketing allowances paid based on subsidies
granted certain franchisees on the refranchising of Company-owned Centers in
1996, and additional costs incurred in 1998 related to the closure of
Company-owned Centers closed in 1997. In addition, losses were recognized on the
sale of a Company-owned Center to a third party, and the foreclosure of a
franchised Center. The loss of ($300,392) for the nine months ended September
30, 1997, represents the refranchising of two Company-owned Centers, the sale of
one Center, the closure of three Centers, and marketing allowances paid based on
subsidies granted certain franchisees on the refranchising of Company-owned
Centers in 1996. In regards to the closure of three centers, the Company decided
to close two under-performing Company-owned Centers and one franchised Center,
(which was leased from the Company) resulting in $236,101 of the total $300,392.
The loss is a result of costs associated with the closing of the Centers, as
well an impairment assessment at each location.
In the first nine months and the third quarter of 1998, the Company
recognized $195,686 and $163,703, respectively, in franchise sales revenue
resulting from license cancellations. There were no license cancellations in
1997.
Interest expense includes interest on debt financing and interest recorded
on capital leases of Company-owned Centers. The increase in interest expense
from $555,525 in the first nine months of 1997 to $620,929 in the first nine
months of 1998 was due in part to a change in vendor financing. This change
resulted in financing costs being transferred out of cost of goods sold and into
financing costs. In addition, debt outstanding for the nine month periods
increased approximately $1,870,000. This increase is due in part to borrowings
associated with the purchase of two Centers late in the first quarter of 1997,
and one Center purchased late in the second quarter of 1998. In addition, a
capital lease was entered into for a Company-owned Center in the early third
quarter of 1997.
(continued)
15
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, 1998 and 1997.
NINE MONTHS ENDED:
----------------------------------------------------------------------------------
September 30, 1998 | September 30, 1997
------------------------------------ | -----------------------------------
Company Franchisee | Company Franchisee
Owned Owned Total | Owned Owned Total
------- ---------- ----- | -------- ---------- -----
|
Centers open, beginning .................. 31 187 218 | 31 184 215
Centers opened ........................... 1 9 10 | 1 15 16
Centers purchased ........................ -- -- -- | 2 (2) --
Centers sold ............................. (1) -- (1) | (2) 2 --
Centers terminated or |
closed ................................. (2) (17) (19) | (2) (13) (15)
Centers reacquired ....................... 3 (3) -- | -- -- --
--------- --------- --------- | --------- --------- ---------
Centers open, ending (A) ................. 32 176 208 | 30 186 216
========= ========= ========= | ========= ========= =========
Vehicles serviced (000's) ................ 2,049 | 2,171
========= | =========
Franchise licenses issued (B) ............ 6 | 11
========= | =========
Undeveloped franchise |
licenses (C) ........................... 33 | 50
========= | =========
Franchise applications |
outstanding (C) ........................ 10 | 22
========= | =========
Franchise license/application |
fees received (D) ...................... $ 116,200 | $ 281,500
========= | =========
(A) Includes 20 franchised centers in Mexico in 1998 and 21 franchised centers
in Mexico in 1997.
(B) Represents the number of licenses issued during the period.
(C) Represents the number of licenses/applications outstanding at September 30
(D) Represents amounts received for franchise licenses/applications during the
period.
(continued)
16
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(continued)
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL RESOURCES
The Company currently has lines of credit with varying interest rates from
a third party. The lines total $489,000 of which $484,500 was outstanding at
September 30, 1998. Monthly payments are for interest only, and maturities range
from December 1998 to July 1999.
In September 1997, the Company entered into a $5,000,000 Loan Agreement
with a major bank. In connection with the Company entering into a Master Supply
Contract with a motor oil supplier, the supplier agreed to guarantee the line.
Draws under the Loan Agreement were used for the purpose of paying off certain
debt, including the Company's former Loan Agreement and Fast Lube Supply
Agreement, and will be used for acquiring, constructing and/or developing
Company Centers. Any draws are evidenced by notes which amortize over ten years
with a five year balloon payment and bear interest at a rate provided under the
Loan Agreement plus guarantee fees. For an increased guarantee fee, the Company
can extend the payment terms an additional five years. An initial draw of
$2,620,000 was made on September 29, 1997, with interest at 9.26% plus guarantee
fees. Additional draws totalling $1,998,600 were made in the first nine months
of 1998 with an average interest rate of approximately 9% plus guarantee fees.
As of September 30, 1998, approximately $4,411,000 is outstanding under the Loan
Agreement.
In May 1996, the Company entered into a Business Loan Agreement with a
major bank for a $2,000,000 three year line of credit. Funds 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. As of September 30, 1998, there were
no amounts outstanding under this line of credit.
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 the
Company's specifications, then leased to the Company or to a franchisee, by a
third party. Recently, franchisees have moved toward purchasing and developing
the real estate for their own account, thereby creating greater value in their
business.
(continued)
17
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 1998 was
$114,939 as compared to $1,179,453 in the first nine months of 1997. Factors
contributing to the negative variance as compared to prior year include: the
prior year settlement agreements entered into with former franchisees as
discussed previously; a decline in royalty revenue and collections; a decrease
in franchise sales; losses in leasing activities and increased financing costs.
Offsetting these negative factors was an improved operating margin at
Company-owned Centers.
Cash used in investing activities was ($1,839,287) in the first nine months
of 1998, as compared to cash used in investing activities of ($669,581) in the
first nine months of 1997. Cash provided in both periods consisted primarily of
receipts on direct financing leases which decreased over the periods. Additional
cash was received in the first nine months of 1998 and 1997 with the
refranchising/sale of one and three Company-owned Centers, respectively. Cash
used in investing activities for the first nine months of 1998 and 1997
consisted primarily of cash used for the development/purchase of Centers.
Additional cash was used in both periods for capital expenditures, primarily
Company Center equipment.
Cash provided by financing activities was $1,610,180 in the first nine
months of 1998 as compared to cash used in financing activities of ($53,672) in
the first nine months of 1997. Cash provided by financing activities in the
first nine months of 1998 consisted primarily of proceeds from long-term
obligations for the development of Centers. Cash provided by financing
activities in the first nine months of 1997 consisted primarily of proceeds from
long-term obligations and the sale of common stock. Financing activities also
included cash used to reduce long-term obligations and capital lease obligations
of $881,965 in the first nine months of 1998 and $3,407,843 in the first nine
months of 1997.
The Company is aware of the issues associated with the programming code in
existing computer systems as the millennium (Year 2000) approaches. The "Year
2000" problem is pervasive and complex as virtually every computer operation
will be affected in some way by the rollover of the two digit year value to 00.
The issue is whether computer systems will properly recognize date sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The Company has identified as its two main computer systems, the point of
sale terminals at the Company-owned Centers and the corporate network system,
which includes the accounting system. The Company is currently in the process of
evaluating and installing new computers and new software for both systems. The
Company has identified selected vendors and will begin implementation soon.
Although the hardware and software has been represented as being Year 2000
compliant, only testing of the systems once they are actually installed can
guarantee Year 2000 performance. Testing is expected to begin late in the first,
or early in the second quarter and completion is expected in the third quarter.
(continued)
18
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(continued)
The Company will initiate a process of identifying and prioritizing critical
suppliers and communicating with them about their plans and progress in
addressing the Year 2000 problem. Contingency plans may need to be developed
based upon the results of the vendor evaluation. The total cost associated with
required modifications to become Year 2000 compliant is not expected to be
material to the Company's financial position. A significant portion of the
hardware for the corporate computer network has already been purchased.
Corporate business equipment such as the communication system was replaced in
1997. Failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 readiness of third-party suppliers and
customers, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the Company's
results of operations, liquidity or financial condition.
The Company does not have any material commitments for capital expenditures
other than for the required replacement or upgrade of underground storage tanks
at Company-owned Centers.
The Company has incurred substantial losses in 1998 and prior years and is
exploring alternatives to improve operating results and maximize shareholder
value. Such alternatives include cost reduction initiatives, asset sales or a
corporate restructuring. There is no guarantee that the Company will be
successful at improving its results or financial position. The Company is
currently seeking additional financing through equity and or debt to provide
working capital for current and future operating needs. The Company believes,
but cannot guarantee, that such financing will be obtained. Should financing not
be obtained, the Company may not generate sufficient liquidity to timely meet
its financial obligations in 1999.
19
GREASE MONKEY HOLDING CORPORATION
Commission File Number: 000-9812
Quarter Ended September 30, 1998
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 3. DEFAULTS UPON SENIOR SECURITIES.
(b) As of the date of filing this Quarterly Report on Form 10-QSB, the Company
is in arrears in the payment of dividends on the Series C Preferred Stock in the
amount of approximately $616,000. Under Paragraph 5(d) of the Statement of
Designation, Voting Powers, Preferences and Rights of the Series C Preferred
Stock ("Statement of Designation"), if dividends on the Series C Preferred Stock
are in arrears in an aggregate amount equal to at least four quarterly
dividends, the number of members of the Board of Directors of the Company is
automatically increased by the smallest number of directors that will constitute
at least 25% of the Board of Directors after such increase and the holders of
the Series C Preferred Stock (voting as a separate voting group) have the
exclusive right to elect, remove or replace such additional directors of the
Company. The holders of the Series C Preferred Stock have not notified the
Company that they have any intention to elect or serve as Directors.
ITEM 5. OTHER INFORMATION
Effective June 29, 1998, the United States Securities and Exchange
Commission adopted new rules relating to shareholder proposals which
shareholders do not request be included in the Company's proxy statement to be
used in connection with the Company's Annual Meeting of Shareholders. Under
these new rules, proxies that confer discretionary authority will not be able to
be voted on a shareholder proposal to be presented at the Annual Meeting of
Shareholders if the shareholder provides the Company with advance written notice
of the shareholder's proposal on a date in the current year that is at least 45
days prior to the date the prior year's proxy materials were mailed to the
Company's shareholders. If a shareholder fails to so notify the Company, proxies
that confer discretionary authority will be able to be voted when the proposal
is presented at the Annual Meeting of Shareholders.
Unless the Company receives notice of the proposals by no later than April
7, 1999, proxies which confer discretionary authority will be able to be voted
on shareholder proposals that the shareholders do not request be included in the
Company's proxy statement but plan to present at the Company's next Annual
Meeting of Shareholders.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits (numbered in accordance with Item 601 of regulation S-K)
10. Material Contracts
(a) Master Franchise Agreement for the Republic of Mexico
27.1 Financial Data Schedule - 1998
27.2 Financial Data Schedule - 1997 restated
(b) Reports on Form 8-K
A Current Report on Form 8-K dated September 16, 1998, was filed on
September 25, 1998, reporting under Item 5 a change of officers of the
Company.
21
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
Commission File Number: 000-9812
Quarter Ended September 30, 1998
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/ Rex L. Utsler
-------------------------------------------------
Rex L. Utsler
President and Chief Operating Officer
(Chief Financial Officer and Principal Accounting
Officer)
Denver, Colorado
November 13, 1998
22