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, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-9812
GREASE MONKEY HOLDING CORPORATION
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(Exact name of small business issuer as specified in its charter)
Utah 87-0321320
- --------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
216 16th Street Mall, Suite 1100
Denver, Colorado 80202
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(Address of principal executive offices)
(303) 534-1660
---------------------------
(Issuer's telephone number)
Check whether issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Outstanding at
Class November 3, 1997
----------------------------- ----------------
Common Stock, $0.03 par value 4,618,183 shares
Transitional Small Business Disclosure Format Yes No X
--- ---
GREASE MONKEY HOLDING CORPORATION
COMMISSION FILE NUMBER: 0-9812
QUARTER ENDED SEPTEMBER 30, 1997
FORM 10-QSB
PART I FINANCIAL INFORMATION
Consolidated Statements of Operations........................... Page 1
Consolidated Balance Sheets..................................... Page 2
Consolidated Statements of Stockholders' Equity................. Page 4
Consolidated Statements of Cash Flows........................... Page 5
Notes to Consolidated Financial Statements...................... Page 7
Management's Discussion and Analysis or Plan
of Operation.................................................. Page 10
PART II OTHER INFORMATION
Legal Proceedings............................................... Page 16
Exhibits and Reports on Form 8-K................................ Page 16
Signatures...................................................... Page 17
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1997 1996 1997 1996
---------- --------- ---------- ----------
Operating Revenue:
Royalty fees........................................... $ 828,823 827,617 2,659,034 2,392,110
Franchise sales - center openings...................... 84,000 75,400 172,201 75,400
Product and equipment revenue.......................... 230,971 243,556 574,508 574,164
Sales by Company-owned Centers......................... 3,829,962 3,817,786 11,216,333 10,881,425
Leasing revenue........................................ 388,085 361,590 1,166,957 1,062,392
Other.................................................. 123,769 19,103 325,416 115,499
---------- --------- ---------- ----------
5,485,610 5,345,052 16,114,449 15,100,990
---------- --------- ---------- ----------
Operating Expenses:
Franchise costs - center openings...................... 19,791 20,985 41,209 20,985
Product and equipment costs............................ 115,369 130,626 223,762 241,342
Company-owned Centers.................................. 3,270,698 3,216,101 9,590,148 9,320,816
Leasing expense........................................ 408,958 335,040 1,161,294 1,019,210
General and administrative expenses.................... 1,216,626 1,103,471 3,864,259 3,357,714
Provision for credit losses............................ 30,000 31,761 82,141 90,107
Depreciation........................................... 175,761 177,236 503,974 514,731
Amortization........................................... 72,577 64,222 207,614 180,734
---------- --------- ---------- ----------
5,309,780 5,079,442 15,674,401 14,745,639
---------- --------- ---------- ----------
Operating income......................................... 175,830 265,610 440,048 355,351
---------- --------- ---------- ----------
Other income (expense):
Gain (loss) on sale/disposition/closure of centers..... (282,929) (76,887) (300,392) (80,299)
Undeveloped franchise licenses canceled................ - - - 27,563
Interest income........................................ 15,302 7,795 50,976 17,160
Interest expense....................................... (189,408) (166,314) (555,525) (483,545)
---------- --------- ---------- ----------
(457,035) (235,406) (804,941) (519,121)
---------- --------- ---------- ----------
Net income (loss)........................................ $ (281,205) 30,204 (364,893) (163,770)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Earnings (loss) per common share (Note 5)................ $ (0.07) * (0.10) (0.06)
---------- --------- ---------- ----------
---------- --------- ---------- ----------
Weighted average shares outstanding...................... 4,442,184 4,364,264 4,384,802 4,355,565
---------- --------- ---------- ----------
---------- --------- ---------- ----------
* Less than $.01 per share.
(UNAUDITED)
1
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
ASSETS
Current Assets:
Cash.............................................................. $ 780,945 324,745
Restricted cash including certificates of
deposit......................................................... - 34,927
Accounts receivable, net of allowance for
doubtful accounts of $337,183 at September 30,
1997, and $252,795 at December 31, 1996......................... 1,073,243 1,042,259
Current portion of notes receivable,
net of allowance for uncollectible amounts...................... 281,687 500,705
Current portion of net investment
in direct financing leases...................................... 193,438 225,053
Inventories....................................................... 862,404 887,203
Prepaid expenses and supplies..................................... 72,826 125,208
----------- ----------
TOTAL CURRENT ASSETS............................................ 3,264,543 3,140,100
----------- ----------
Property and Equipment, at Cost, Pledged:...........................
Land.............................................................. 695,917 445,917
Buildings (including buildings under capital leases).............. 6,334,541 5,728,492
Furniture and fixtures............................................ 587,615 562,235
Leasehold improvements............................................ 713,311 662,001
Machinery and equipment........................................... 1,722,757 1,735,844
----------- ----------
10,054,141 9,134,489
Less accumulated depreciation and
amortization.................................................... (3,986,281) (3,540,784)
----------- ----------
NET PROPERTY AND EQUIPMENT...................................... 6,067,860 5,593,705
----------- ----------
Other Assets:.......................................................
Net investment in direct financing leases......................... 3,502,427 3,499,162
Notes receivable, net of allowance for uncollectible
amounts......................................................... 222,081 270,761
Deferred franchising costs........................................ 253,401 211,849
Goodwill and covenants not to compete, net
of accumulated amortization of $1,147,922 at
September 30, 1997, and $966,729 at December 31, 1996........... 2,659,157 2,401,586
Other assets, net of accumulated amortization of $157,175 at
September 30, 1997, and $141,355 at December 31, 1996........... 196,935 99,960
----------- ----------
TOTAL OTHER ASSETS.............................................. 6,834,001 6,483,318
----------- ----------
$16,166,404 15,217,123
----------- ----------
----------- ----------
(UNAUDITED)
(continued on next page)
2
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................. $ 972,590 1,043,149
Accrued salaries and wages........................................ 221,615 203,073
Other accrued liabilities......................................... 354,154 347,158
Current portion of long-term obligations.......................... 767,881 1,066,283
Current portion of obligations
under capital leases............................................ 448,857 427,917
----------- ----------
TOTAL CURRENT LIABILITIES....................................... 2,765,097 3,087,580
----------- ----------
Long-term Obligations............................................... 4,057,052 3,126,148
Obligations Under Capital Leases.................................... 6,976,199 6,649,017
Deferred Franchise Sales Revenue.................................... 977,670 907,371
Stockholders' Equity:
Series C Preferred stock, stated value of $100.00
per share, 20,896 shares issued and outstanding at
September 30, 1997 and December 31, 1996......................... 2,089,638 2,089,638
Common stock, par value $.03, 20,000,000
shares authorized, 4,618,183 and 4,379,860,
shares issued and outstanding at September 30,
1997 and December 31, 1996, respectively........................ 138,545 131,396
Capital in excess of par value.................................... 6,178,793 5,877,670
Accumulated deficit............................................... (7,016,590) (6,651,697)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY.................................... 1,390,386 1,447,007
Commitments and Contingencies.....................................
----------- ----------
$16,166,404 15,217,123
----------- ----------
----------- ----------
(UNAUDITED)
3
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
Preferred Stock --------------------------------
---------------------- Capital in
Number of Number of Excess of Accumulated
Shares Amount Shares Amount Par Value Deficit Total
--------- ---------- --------- -------- ---------- ------------ ---------
Balance at December 31, 1995....... 20,958 $2,095,838 4,336,764 $130,103 5,773,248 (6,074,574) 1,924,615
Issuance of common stock pursuant
to employee benefit plan.......... - - 40,616 1,219 45,025 - 46,244
Conversion of Series C Preferred
stock to common stock,
including payment of
accumulated dividends............. (62) (6,200) 2,480 74 5,397 - (729)
Increase in fair value of
warrants extended................. - - - - 54,000 - 54,000
Net loss........................... - - - - - (577,123) (577,123)
-------- ---------- --------- -------- --------- ---------- ---------
Balance at December 31, 1996....... 20,896 2,089,638 4,379,860 131,396 5,877,670 (6,651,697) 1,447,007
Issuance of common stock pursuant
to employee benefit plan.......... - - 27,847 834 35,500 - 36,334
Issuance of common stock upon
exercise of employee stock
options........................... - - 20,000 600 21,338 - 21,938
Issuance of common stock........... - - 190,476 5,715 244,285 - 250,000
Net loss........................... - - - - - (364,893) (364,893)
-------- ---------- --------- -------- --------- ---------- ---------
Balance at September 30, 1997...... 20,896 $2,089,638 4,618,183 $138,545 6,178,793 (7,016,590) 1,390,386
-------- ---------- --------- -------- --------- ---------- ---------
-------- ---------- --------- -------- --------- ---------- ---------
(UNAUDITED)
4
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996
----------- ---------
Cash flows from operating activities:
Net loss....................................... $ (364,893) (163,770)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Increase in deferred franchise sales
revenue................................... 281,500 442,200
Franchise sales revenue recognized-center
openings.................................. (172,201) (75,400)
Increase in deferred franchising costs..... (82,762) (88,046)
Franchise costs recognized - center
openings.................................. 41,209 20,985
Provision for credit losses................ 82,141 90,107
Depreciation and amortization.............. 711,588 695,465
Undeveloped franchise licenses canceled.... - (27,563)
Loss on sale/disposition/closure of
centers................................... 275,476 55,752
Accrual of Consultant Agreement............ 357,113 -
Other, net................................. 372 (9,193)
Change in assets and liabilities:
Increase in accounts receivable.......... (168,364) (249,705)
Decrease (increase) in notes receivable.. 283,977 (7,016)
Increase in inventories.................. (14,051) (85,417)
Decrease (increase) in prepaid expenses
and supplies............................ 52,382 (39,188)
Increase (decrease) in accounts payable.. (158,604) 202,241
Increase in accrued salaries and wages
and other liabilities................... 54,570 125,104
----------- --------
Net cash provided by operating activities.. $ 1,179,453 886,556
----------- --------
(UNAUDITED)
(continued on next page)
5
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1997 1996
----------- ---------
Cash flows from investing activities:
$ 150,081 130,398
Principal receipts on direct financing leases
Acquisition of centers......................... (573,249) (394,389)
Sale of centers................................ 116,901 31,573
Capital expenditures........................... (249,605) (681,922)
Decrease (increase) in other assets............ (113,709) 2,713
----------- ---------
Net cash used in investing activities.... (669,581) (911,627)
----------- ---------
Cash flows from financing activities:
Proceeds from long-term obligations............ 3,045,000 842,000
Principal payments on long-term obligations.... (3,101,022) (359,463)
Principal payments on capital lease
obligations.................................. (306,821) (253,541)
Issuance of common stock....................... 271,938 -
Payment of accumulated dividends
upon conversion of preferred stock to common
stock........................................ - (729)
Decrease (increase) in restricted cash......... 34,927 (2,224)
Increase in lease deposit obligations.......... 2,306 4,500
----------- ---------
Net cash provided by (used in)
financing activities.................... (53,672) 230,543
----------- ---------
Net increase in cash............................. 456,200 205,472
Cash, beginning of period........................ 324,745 385,167
----------- ---------
Cash, end of period.............................. $ 780,945 590,639
----------- ---------
----------- ---------
Supplemental disclosures of cash flow
information -
Cash paid during the period for interest.... $ 891,569 802,906
----------- ---------
----------- ---------
(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") 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, 1996,
included in the Company's Annual Report on Form 10-KSB filed with the
Securities and Exchange Commission on March 28, 1997.
3. The results for the three-month and nine-month periods ended September 30,
1997, are not necessarily indicative of the results to be expected for the
entire fiscal year of 1997.
4. STOCKHOLDERS' EQUITY
On January 20, 1997, Charles E. Steinbrueck, President and Chief Executive
Officer, entered into an agreement to purchase 190,476 newly issued shares
of the Company's common stock at $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, 1997,
accumulated unpaid dividends totaled $475,344.
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 1997 and 1996, the Company
contributed 27,847 and 30,007 shares to this plan at an average of $1.30
and $1.15 per share, respectively.
5. EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share is determined based on the number of
common and common equivalent shares outstanding and is adjusted for the
assumed conversion of shares issuable upon exercise of options and warrants,
after the assumed repurchase of common shares with the related proceeds
(anti-dilutive for all periods presented). Earnings (loss) per share for
all
(continued)
7
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
periods was computed after reduction for preferred stock dividends
($31,602 for the third quarters of 1997 and 1996, and $93,776 and
$94,163 for the first nine months of 1997 and 1996, respectively). The
assumed conversion of preferred stock was anti-dilutive for all periods
presented.
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. 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,
-------------------------------
1997 1996
-------- ---------
Acquisitions of Centers:
Number of Centers purchased 2 2
-------- ---------
-------- ---------
Number of Centers foreclosed - 5
-------- ---------
-------- ---------
Receivables applied (net of related
allowance) $ - 251,328
Liabilities assumed 375,337 1,218,960
Cash paid 573,249 394,389
-------- ---------
Cost of assets acquired $948,586 1,864,677
-------- ---------
-------- ---------
Sales:
Number of Centers refranchised/
closed 6 * 4
-------- ---------
-------- ---------
Cash received $116,901 31,573
Notes received 26,800 124,776
Liabilities assumed by purchaser 40,875 39,750
Loss on sale 275,476 55,752
Operating/Marketing subsidies granted - (97,750)
Franchise fees 14,000 28,000
Franchise costs - (5,000)
-------- ---------
Net book value of Centers
refranchised/closed $474,052 177,101
-------- ---------
-------- ---------
* Includes one center which was originally developed to be a Company-owned
Center, but was sold to a franchisee prior to opening.
(continued)
8
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the nine months ended September 30, 1997 and 1996, non-cash
transactions consisted of the Company issuing 27,847 and 30,007 shares
of common stock at an average value of $1.30 and $1.15 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 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
the sale, the landlord reduced the Company's obligation from a primary
lessor to a guarantor. Other non-cash transactions during the first
nine months of 1996 included: a settlement agreement with a franchisee,
who owned two Centers, whereby, $109,439 of net receivables, $7,000 of
lease deposits and one undeveloped license of $16,312, were exchanged
for a non-interest bearing note receivable discounted to $86,127 upon
the sale of the Centers to a new franchisee; a franchise license in the
amount of $7,392, net of deferred franchising costs of $2,222, was
cancelled and applied to a franchisee's accounts receivable balance and
a capital lease obligation of $368,000 was recorded.
8. NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE
(Statement 128). Statement 128 supersedes APB Opinion No. 15, EARNINGS
PER SHARE (APB 15) and specifies the computation, presentation, and
disclosure requirements for earnings per share (EPS) for entities with
publicly held common stock or potential common stock. Statement 128 was
issued to simplify the computation of EPS and to make the U.S. standard
more compatible with the EPS standards of other countries and that of
the International Accounting Standards Committee. It replaces the
presentation of primary EPS with a presentation of basic EPS and fully
diluted EPS with diluted EPS. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all
entities with complex capital structures and requires a reconciliation
of the numerator and denominator of the basic EPS computation to the
numerator and denominator of the diluted EPS computation. Statement 128
is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not
permitted. The adoption of Statement 128 is not expected to have a
significant effect on the Company's reported earnings per share.
9
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 ($364,893) for the first nine months
of 1997, as compared to a net loss of ($163,770) for the first nine months of
1996. For the third quarter of 1997, the Company recognized a net loss of
($281,205) compared to income of $30,204 for the same quarter in 1996.
Total revenue increased by $1,013,459 or 7% for the first nine months of
1997, compared to the first nine months of 1996. Revenue during the third
quarter of 1997 increased $140,558 over the same quarter last year, an
increase of 3%. The nine month increase is due primarily to increases in
royalty revenue and other revenue due to a settlement agreement entered into
with a former franchisee. Under the settlement agreement, the Company
recognized approximately $207,000 of royalty fees not previously recognized
and approximately $168,000 of other income related to the reimbursement of
costs previously expensed. For both the nine month and third quarter
periods, the Company experienced modest increases in revenue from center
openings and revenue from Company-owned Centers (the average number of
Company-owned Centers, based on number of months operated, remained
relatively constant). In addition, in the third quarter of 1997, other
income of approximately $99,000 was recognized based on a settlement with a
franchisee.
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 1997 increased by 11% compared to the first nine months of 1996 to
$2,659,034. Royalty fee revenue for the third quarter of 1997 increased
slightly compared to the third quarter of 1996 to $828,823. The nine month
increase is due to the recording of the settlement agreement with a former
franchisee, as discussed previously. 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 1997,
estimated royalties of $89,700 were not accrued under this policy, compared
to $90,325 for the first nine months of 1996. During the third quarter of
1997, estimated royalties of $31,325 were not accrued compared to $28,450 for
the third quarter of 1996. 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 1997, the rebate accrued under
this program was $182,712, compared to $194,051 for the first nine months of
1996. The rebate accrued for the third quarter of 1997, was $62,510,
compared to a rebate of $68,336 for the third quarter of 1996. The rebate is
recorded as a reduction in royalty revenue.
The Company recognized franchise sales revenue net of related costs of
$130,992 during the first nine months of 1997, representing fifteen Center
openings. For the third quarter of 1997, franchise sales net revenue was
$64,209, representing eight Center openings. The Company recognized
franchise sales net revenue of $54,415 for the first nine months and third
quarter of 1996, representing five 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.
(continued)
10
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
At September 30, 1997, the Company operated 30 centers as compared to 32
centers at September 30, 1996. For the first nine months of 1997, the
Company reported an operating margin (Company-owned Center sales less
expenses, excluding interest, depreciation and amortization) of $1,626,185 on
revenue of $11,216,333 at Company-owned Centers, as compared to an operating
margin of $1,560,609 on revenue of $10,881,425 for the same period last year.
This represents an increase of 3% in revenue and 4% in operating margin.
For the third quarters of 1997 and 1996, the Company reported operating
margins of $559,264 and $601,685 on revenue of $3,829,962 and $3,817,786,
respectively, representing an increase in revenue of less than 1% and a
decrease in operating margin of 7%.
On a same center basis, those Company-owned Centers operated continuously
over the period January 1, 1996 through September 30, 1997, representing 24
centers, had an operating margin of $1,406,024 on revenue of $8,931,982 for
the first nine months of 1997, as compared to an operating margin of
$1,410,709 on revenue of $8,745,660 for the first nine months of 1996. This
represents an increase of 2% in revenue and a decrease of less than 1% in
operating margin. The same center statistics for the third quarter of 1997
and 1996 were operating margins of $456,339 on revenue of $3,063,666 and
$528,259 on revenue of $3,006,792, respectively, representing an increase in
revenue of 2% and a decrease in operating margins of 14%.
In the first nine months of 1997, the Company realized marketing
allowances and gross margins on product and equipment sales of $350,746, as
compared to $332,822 in the first nine months of 1996. In the third quarter
of 1997, marketing allowances and gross margins on product and equipment
sales were $115,602, as compared to $112,930 in the third quarter of 1996.
Product and equipment revenue represents the sale of fluid dispensing
equipment and other supplies to franchisees, and marketing allowances relate
to the sale of oil filters, air filters, oil additives, and certain other
products. The number of center openings in a period impacts product and
equipment revenue, thus revenue for 1997 was above that of 1996.
General and administrative expenses for the first nine months and third
quarter of 1997 increased 15% or $506,545 and 10% or $113,155 as compared to
the first nine months and third quarter of 1996. The increase in the first
nine months of 1997 over 1996 is primarily a result of the accrual of the
Company's obligation under a Consultant Agreement with the Company's former
Chairman of the Board, President and Chief Executive Officer. The term of
the agreement is from March 4, 1997 through March 3, 1999. The agreement
requires the former executive to perform such duties and services as may be
assigned to him from time to time at the direction or request of the
Company's President and Chief Executive Officer. Under the agreement, the
former executive will be paid a monthly fee for the term of the agreement.
The Company is obligated to make the payments regardless of whether services
are requested or performed. General and administrative expenses for the
first nine months of 1997 include approximately $379,000 related to this
agreement. Other factors contributing to the increase in 1997 include: an
increase in the general and administrative expenses at the Company-owned
Center Division of approximately $106,000 for the nine month period and
$17,000 for the
(continued)
11
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
quarter; an increase in legal fees of approximately $56,000 for the nine
month period and $25,000 for the quarter; an increase in franchise
development expenses of approximately $61,000 for the nine month period and
$37,000 for the quarter; and severance expenses were incurred of
approximately $64,000 for the nine month period and $36,000 for the quarter.
Offsetting these increases was a decrease in litigation legal fees and
related costs of approximately $179,000 for the nine month period and $34,000
for the quarter.
Depreciation and amortization expense for the first nine months and third
quarter of 1997 remained constant to the periods in 1996. This is due to the
average number of Company-owned Centers operated during the periods remaining
relatively consistent.
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
($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, during the quarter the
Company decided to close two under-performing Company-owned Centers and one
franchise 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.
The loss of ($80,299) for the nine months ended September 30, 1996,
represents the refranchising of four Company-owned Centers.
In the first nine months of 1996, the Company recognized $27,563 in
franchise sales revenue resulting from license cancellations. There have
been no license cancellations in 1997.
Interest expense includes interest on debt financing and interest
recorded on capital leases of Company-owned Centers. The purchase of two
Company-owned Centers accounts for the majority of the increase in interest
expense due to additional borrowings to acquire the Centers. In addition,
the Company also entered into two capital leases (thus incurring interest
expense) at two Company-owned Centers. Interest expense in 1997 also includes
amortization of the discount on the Company's obligation under the Consultant
Agreement, which was initially recorded at its present value.
(continued)
12
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(CONTINUED)
The following schedule summarizes the activity with regard to Grease Monkey
Company-owned Centers as well as Grease Monkey franchised Centers for the nine-
months ended September 30, 1997 and 1996.
NINE MONTHS ENDED:
SEPTEMBER 30, 1997 SEPTEMBER 30, 1996
----------------------------- -----------------------------
COMPANY FRANCHISEE COMPANY FRANCHISEE
OWNED OWNED TOTAL OWNED OWNED TOTAL
------- ---------- -------- ------- ---------- --------
Centers open, beginning 31 184 215 29 181 210
Centers opened (A) 1 15 16 - 5 5
Centers purchased 2 (2) - 2 (2) -
Centers sold (2) 2 - (4) 4 -
Centers terminated or
closed (2) (13) (15) - (5) (5)
Centers reacquired - - - 5 (5) -
-- --- -------- -- --- --------
Centers open, ending (B) 30 186 216 32 178 210
-- --- -------- -- --- --------
-- --- -------- -- --- --------
Vehicles serviced (000's) 2,171 2,139
-------- --------
-------- --------
Franchise licenses issued (C) 11 23
-------- --------
-------- --------
Undeveloped franchise
licenses (D) 50 52
-------- --------
-------- --------
Franchise applications
outstanding (D) 22 17
-------- --------
-------- --------
Franchise license/application
fees received (E) $281,500 $442,200
-------- --------
-------- --------
(A) 1996 includes one franchised Center which was involved in a settlement with
the Company which resulted in the Company assuming possession of the Center
in April 1996 and thus no franchise revenue was recognized.
(B) Includes 20 franchised centers in Mexico in 1997 and 16 franchised centers
in Mexico in 1996.
(C) Represents the number of licenses issued during the period.
(D) Represents the number of licenses/applications outstanding at September 30.
(E) Represents amounts received for franchise licenses/applications during the
period.
(continued)
13
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL RESOURCES
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 shall be used for the purpose of paying off
certain debt, including the Company's current Loan Agreement and Fast Lube
Supply Agreement, and for acquiring, constructing and/or developing Company
Centers. Any draws are evidenced by notes which amortize over ten years and
bear interest at a rate provided under the Loan Agreement plus guarantee fees.
An initial draw of $2,620,000 was made on September 29, 1997, with interest at
9.26% plus guarantee fees.
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,
1997, the Company had drawn approximately $415,000 under this line of credit of
which $190,000 is outstanding.
During April 1995, the Company entered into two agreements with a motor oil
supplier - a Loan Agreement and a Fast Lube Supply Agreement. Under the Loan
Agreement, as amended, a $2,481,000 line of credit was established. All loans
drawn under this line accrued interest at 9% per annum and were repaid in
quarterly installments over a ten year period from date of disbursement. The
line was secured by the assignment of real property, leases and lubrication
equipment of certain Company-owned Centers. The line was paid in full on
September 30, 1997.
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)
14
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(CONTINUED)
LIQUIDITY
Cash provided by operations during the first nine months of 1997 was
$1,179,453 as compared to $886,556 in the first nine months of 1996. The most
significant factors contributing to this variance are the settlement agreement
entered into with a former franchisee and the non-cash accruals for the
Consultant Agreement (as described previously) and the non-cash portion of the
loss on sale/disposition/closure of Centers.
Cash used in investing activities was ($669,581) in the first nine months
of 1997, as compared to cash used in investing activities of ($911,627) in the
first nine months of 1996. Cash provided in both periods consisted primarily of
receipts on direct financing leases which increased slightly over the periods.
Additional cash was received in the first nine months of 1997 and 1996 with the
refranchising of three and four Company-owned Centers, respectively. Cash used
in investing activities for the first nine months of 1997 and 1996 consisted
primarily of cash used to purchase Centers. Additional cash was used in both
periods for capital expenditures, primarily Company Center equipment.
Additionally, cash was used in the first nine months of 1996 for the buy-out of
leases of automobiles used by field employees.
Cash used in financing activities was ($53,672) in the first nine months of
1997 as compared to cash provided by financing activities of $230,543 in the
first nine months of 1996. Cash provided by financing activities in the first
nine months of 1996 consisted primarily of proceeds from long-term debt related
to the purchase of automobiles (as described above), an equipment loan from a
motor oil supplier, and a draw on a line of credit for the financing of the
acquisition of two franchised Centers. Cash provided by financing activities in
the first nine months of 1997 consisted primarily of proceeds from long-term
debt and sale of common stock. Financing activities also included cash used to
reduce long-term debt and capital lease obligations of $3,407,843 in the first
nine months of 1997 and $613,004 in the first nine months of 1996.
The Company does not have any material commitments for capital
expenditures. The Company believes it has the capital resources and liquidity
necessary to meet all of the obligations, debt maturities, and commitments of
the Company during 1997.
15
GREASE MONKEY HOLDING CORPORATION
COMMISSION FILE NUMBER: 0-9812
QUARTER ENDED SEPTEMBER 30, 1997
FORM 10-QSB
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is a party to legal proceedings including claims by franchisees
against the Company that arise in the ordinary course of business. In the
opinion of management, the outcome of these matters will not have a material
effect on the financial condition, results of operations or cash flows of the
Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits (numbered in accordance with Item 601 of regulation S-K)
10. Material Contracts
(a) $5,000,000 Loan Agreement
11. Statement Re: Computation of Per Share Earnings
27. Financial Data Schedule
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the period covered by this report.
16
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
COMMISSION FILE NUMBER: 0-9812
QUARTER ENDED SEPTEMBER 30, 1997
FORM 10-QSB
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GREASE MONKEY HOLDING CORPORATION
By: /s/ T. Timothy Kershisnik
-------------------------------------------
T. Timothy Kershisnik
Vice President, Controller, Treasurer and
Corporate Secretary
(Principal Financial and
Accounting Officer)
Denver, Colorado
November 14, 1997
17