1 FORM 10-Q (Conformed Copy) SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from to ----------- ----------- Commission File No. 0-19357 ---------- MONRO MUFFLER BRAKE, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) New York 16-0838627 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification #) 200 Holleder Parkway, Rochester, New York 14615 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zipcode) Registrant's telephone number, including area code 716-647-6400 ----------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ---- As of August 7, 1997, 7,866,901 shares of the Registrant's Common Stock, par value $ .01 per share, were outstanding after giving retroactive effect to the five percent stock dividend, payable August 4, 1997, to stockholders of record as of June 20, 1997.
2 MONRO MUFFLER BRAKE, INC. INDEX ----- Part I. Financial Information Page No. Consolidated Balance Sheet at June 30, 1997 and March 31, 1997 3 Consolidated Statement of Income for the quarter ended June 30, 1997 and 1996 4 Consolidated Statement of Changes in Common Stockholders' Equity for the quarter ended June 30, 1997 5 Consolidated Statement of Cash Flows for the quarter ended June 30, 1997 and 1996 6 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 Exhibit Index 14 -2-
3 MONRO MUFFLER BRAKE, INC. CONSOLIDATED BALANCE SHEET (UNAUDITED) <TABLE> <CAPTION> JUNE 30, MARCH 31, 1997 1997 ---- ---- (DOLLARS IN THOUSANDS) <S> <C> <C> ASSETS Current assets: Cash and equivalents, including interest-bearing accounts of $8,022 at June 30, 1997 and $6,438 at March 31, 1997 $ 8,022 $ 6,438 Trade receivables 1,069 1,128 Inventories, at LIFO cost 21,533 20,010 Federal and state income taxes receivable 0 296 Deferred income tax asset 1,790 1,790 Other current assets 2,499 2,935 --------- --------- Total current assets 34,913 32,597 --------- --------- Property, plant and equipment 157,827 151,906 Less - Accumulated depreciation and amortization (44,377) (42,223) --------- --------- Net property, plant and equipment 113,450 109,683 Other noncurrent assets 3,876 3,987 ========= ========= Total assets $ 152,239 $ 146,267 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 3,128 $ 3,128 Trade payables 11,589 8,728 Federal and state income taxes payable 1,772 0 Accrued expenses and other current liabilities Accrued interest 285 270 Accrued payroll, payroll taxes and other payroll benefits 4,053 4,260 Accrued insurance 2,155 2,110 Other current liabilities 3,394 4,522 --------- --------- Total current liabilities 26,376 23,018 Long-term debt 54,010 54,864 Deferred income tax liability 1,760 1,760 --------- --------- Total liabilities 82,146 79,642 --------- --------- Commitments Shareholders' equity: Class C Convertible Preferred Stock, $1.50 par value, $.227 and $.239 conversion value at June 30, 1997 and March 31, 1997, respectively; 150,000 shares authorized; 91,727 shares issued and outstanding 138 138 Common Stock, $.01 par value, 15,000,000 shares authorized; 7,866,901 shares and 7,470,326 shares issued and outstanding at June 30, 1997 and March 31, 1997, respectively 79 75 Additional paid-in capital 29,256 22,190 Retained earnings 40,620 44,222 --------- --------- Total shareholders' equity 70,093 66,625 --------- --------- Total liabilities and shareholders' equity $ 152,239 $ 146,267 ========= ========= </TABLE> These financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K (File No. 0-19357), filed by the Company with the Securities and Exchange Commission on June 27, 1997. -3-
4 MONRO MUFFLER BRAKE, INC. CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) <TABLE> <CAPTION> QUARTER ENDED JUNE 30, 1997 1996 ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> Sales $40,773 $37,745 Cost of sales, including distribution and occupancy costs (a) 22,631 20,666 ------- ------- Gross profit 18,142 17,079 Operating, selling, general and administrative expenses 11,492 10,645 ------- ------- Operating income 6,650 6,434 Interest expense, net of interest income for the quarter of $22 in 1997 and $1 in 1996 (a) 868 814 Other expense, net 85 16 ------- ------- Income before provision for income taxes 5,697 5,604 Provision for income taxes 2,280 2,225 ------- ------- Net income $ 3,417 $ 3,379 ======= ======= Earnings per share $ .40 $ .40 ======= ======= Weighted average number of shares of common stock and common stock equivalents used in computing earnings per share 8,605 8,540 ======= ======= </TABLE> (a) Amounts paid under operating and capital leases with affilliated parties totalled $483 and $496 for the quarters ended June 30, 1997 and 1996, respectively. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K (File No. 0-19357), filed by the Company with the Securities and Exchange Commission on June 27, 1997. -4-
5 MONRO MUFFLER BRAKE, INC. CONSOLIDATED STATEMENT OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (UNAUDITED) <TABLE> <CAPTION> COMMON STOCK ADDITIONAL ----------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS ------ ------ ------- -------- (Amounts in thousands) <S> <C> <C> <C> <C> Balance at March 31, 1997 7,470 75 $ 22,190 $ 44,222 Net income 3,417 Exercise of stock options 23 52 5% stock dividend 374 4 7014 (7,019) -------- -------- -------- -------- Balance at June 30, 1997 7867 79 $ 29,256 $ 40,620 ======== ======== ======== ======== </TABLE> These financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K (File No. 0-19357), filed by the Company with the Securities and Exchange Commission on June 27, 1997. -5-
6 MONRO MUFFLER BRAKE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> QUARTER ENDED JUNE 30, -------- 1997 1996 ---- ---- (DOLLARS IN THOUSANDS) INCREASE (DECREASE) IN CASH <S> <C> <C> Cash flows from operating activities: Net income $ 3,417 $ 3,379 -------- -------- Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 2,234 1,957 Loss (gain) on disposal of property, plant and equipment 14 (40) Decrease in trade receivables 59 121 Increase in inventories (1,523) (2,317) Decrease in other current assets 436 246 Decrease (increase) in other noncurrent assets 40 (15) Increase in trade payables 2,861 1,065 (Decrease) increase in accrued expenses (1,276) 444 Increase in federal and state income taxes payable 2,068 1,939 -------- -------- Total adjustments 4,913 3,400 -------- -------- Net cash provided by operating activities 8,330 6,779 -------- -------- Cash flows from investing activities: Capital expenditures (5,938) (4,737) Proceeds from the disposal of property, plant and equipment 3 2 -------- -------- Net cash used for investing activities (5,935) (4,735) -------- -------- Cash flows from financing activities: Proceeds from the sale of common stock 52 384 Proceeds from borrowings 15,410 11,380 Principal payments on long-term debt and capital lease obligations (16,273) (14,421) -------- -------- Net cash used for financing activities (811) (2,657) -------- -------- Increase (decrease) in cash 1,584 (613) Cash at beginning of year 6,438 5,280 -------- -------- Cash at June 30 $ 8,022 $ 4,667 ======== ======== </TABLE> These financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K (File No. 0-19357), filed by the Company with the Securities and Exchange Commission on June 27, 1997. -6-
7 MONRO MUFFLER BRAKE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Stock Dividend - ----------------------- On May 14, 1997, the Board of Directors declared a five percent stock dividend, payable August 4, 1997, to stockholders of record as of June 20, 1997. The consolidated financial statements, including all share information therein, have been restated to reflect this dividend. Additionally, in accordance with antidilution provisions of the Class C Convertible Preferred Stock, the conversion value of the preferred stock was restated from $.239 per share to $.227 per share. Shares reserved for issuance to officers and key employees under outstanding options and under the 1984, 1987 and 1989 Incentive Stock Option Plans have also been retroactively adjusted for the five percent stock dividend. Note 2: New Accounting Standards - --------------------------------- The Company will adopt the provisions of Financial Accounting Standards ("FAS") No. 128, "Earnings Per Share" effective for financial statements issued for periods ending after December 15, 1997; earlier application is not permitted. FAS 128 requires dual presentation of basic and diluted EPS on the face of the income statement and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS calculation. Basic EPS excludes the effect of common stock equivalents and is computed by dividing income available to common shareowners by the weighted average common shares outstanding for the period. Diluted EPS reflects the potential dilution that could result if securities or other instruments to issue common stock were exercised or converted into common stock. Proforma earnings per share computed in accordance with FAS 128 is presented below: <TABLE> <CAPTION> Three months ended June 30, 1997 1996 ---- ---- <S> <C> <C> Basic earnings per share $ 0.44 $ 0.44 Diluted earnings per share $ 0.40 $ 0.40 </TABLE> Note 3 - Inventories - -------------------- The Company's inventories consist of automotive parts and tires. Substantially all merchandise inventories are valued under the last-in, first-out (LIFO) method. Under the first-in, first-out (FIFO) method, these inventories would have been $628,000 and $544,000 higher at June 30, 1997 and March 31, 1997, respectively. The FIFO value of inventory approximates the current replacement cost. -7-
8 MONRO MUFFLER BRAKE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 4 - Cash and Equivalents - ----------------------------- The Company's policy is to invest cash in excess of operating requirements in income producing investments. Cash equivalents of $8,022,000 at June 30, 1997 and $6,438,000 at March 31, 1997 include money market accounts which have maturities of three months or less. Note 5 - Supplemental Disclosure of Cash Flow Information - --------------------------------------------------------- The following transactions represent noncash investing and financing activities during the periods indicated: QUARTER ENDED JUNE 30, 1997: In connection with the declaration of a five percent stock dividend (see Note 1), the Company increased accrued expenses, common stock and additional paid-in capital by $1,000, $4,000 and $7,014,000, respectively, and decreased retained earnings by $7,019,000. QUARTER ENDED JUNE 30, 1996: In connection with the termination of a capital lease, the Company reduced debt and fixed assets by $112,000. In connection with the declaration of a five percent stock dividend, the Company increased common stock and additional paid-in capital by $4,000 and $4,584,000, respectively, and decreased retained earnings by $4,588,000. CASH PAID DURING THE PERIOD: <TABLE> <CAPTION> 1997 1996 ------ ---- <S> <C> <C> Interest, net $978,000 $981,000 Income taxes 212,000 286,000 </TABLE> Note 6 - Other - -------------- These financial statements should be read in conjunction with the financial statements and notes thereto included in the Annual Report on Form 10-K (File No. 0-19357), filed by the Company with the Securities and Exchange Commission on June 27, 1997. -8-
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The statements contained in this Form 10-Q which are not historical facts, including (without limitation) statements made in the Management's Discussion and Analysis of Financial Condition and Results of Operations, may contain statements of future expectations and other forward-looking statements that are subject to important factors that could cause actual results to differ materially from those in the forward-looking statements, including (without limitation) product demand, the effect of economic conditions, the impact of competitive services and pricing, product development, parts supply restraints or difficulties, industry regulation, the continued availability of capital resources and financing and other risks set forth or incorporated elsewhere herein and in the Company's Securities and Exchange Commission filings. The following table sets forth income statement data of Monro Muffler Brake, Inc. ("Monro" or the "Company") expressed as a percentage of sales for the fiscal periods indicated. <TABLE> <CAPTION> Quarter Ended June 30, ---------------------- 1997 1996 ----- ----- <S> <C> <C> Sales .............................................. 100.0% 100.0% Cost of sales, including distribution and occupancy costs ............................... 55.5 54.8 ----- ----- Gross profit ....................................... 44.5 45.2 Operating, selling, general and administrative expenses ........................... 28.2 28.2 ----- ----- Operating income ................................... 16.3 17.0 Interest expense - net ............................. 2.1 2.1 Other expense ...................................... .2 -- ----- ----- Income before provision for income taxes ........... 14.0 14.9 Provision for income taxes ......................... 5.6 5.9 ----- ----- Net income ......................................... 8.4% 9.0% ===== ===== </TABLE> -9-
10 FIRST QUARTER ENDED JUNE 30, 1997 COMPARED TO FIRST QUARTER ENDED JUNE 30, 1996. Sales were $40.8 million for the quarter ended June 30, 1997 compared with $37.7 million in the quarter ended June 30, 1996. The sales increase of $3.0 million, or 8.0%, was due to an increase in sales of approximately $3.5 million relating to stores opened since the beginning of fiscal 1996, offset by a decrease in comparable store sales of 1.0%. At June 30, 1997, the Company had 324 stores in operation compared to 284 at June 30, 1996. Management believes that year-to-date comparable store sales decreases were driven, in part, by the cold, wet weather during the months of April and May, and the aftermath of a relatively mild winter which have created a softness in the industry. Gross profit for the quarter ended June 30, 1997 was $18.1 million or 44.5% of sales compared with $17.1 million or 45.2% of sales for the quarter ended June 30, 1996. The decline in gross profit as a percentage of sales was due, in part, to an increase in labor costs. During periods of slower sales when technicians may not be fully productive, they will receive a minimum base level wage. Additionally, distribution and occupancy costs increased as a percent of sales for the first quarter of fiscal 1998 as compared to the first quarter of fiscal 1997 primarily due to an increase in the number of stores against a comparable store sales decrease. Operating, selling, general and administrative expenses for the quarter ended June 30, 1997 increased by $.8 million to $11.5 million over the quarter ended June 30, 1996, and remained level at 28.2% of sales compared to the same quarter of the prior year. The increase in total dollars expended is primarily attributable to increased store supervision and increased store support expenses. Although expenses increased during the first quarter of fiscal 1998 as compared to the first quarter of fiscal 1997, these expenses remained constant as a percent of sales primarily due to management's continued focus on discretionary spending and controlling costs, as well as increased cooperative advertising credits. Operating income for the quarter ended June 30, 1997 of approximately $6.7 million increased 3.4% over operating income for the quarter ended June 30, 1996, and decreased as a percentage of sales from 17.0% to 16.3% for the same periods. Net interest expense for the quarter ended June 30, 1997 increased by approximately $.1 million compared to the comparable period in the prior year, and remained level at 2.1% as a percentage of sales. The increase in expense is due to an increase in the average debt outstanding during the quarter, partially offset by a decrease in the weighted average interest rate. Net income for the quarter ended June 30, 1997 of $3.4 million increased 1.1% over net income for the quarter ended June 30, 1996. -10-
11 Interim Period Reporting The data included in this report are unaudited and are subject to year-end adjustments; however, in the opinion of management, all known adjustments (which consist only of normal recurring adjustments) have been made to present fairly the Company's operating results for the unaudited periods. The results for interim periods are not necessarily indicative of results to be expected for the fiscal year. CAPITAL RESOURCES AND LIQUIDITY Capital Resources The Company's primary capital requirement has been the funding of its new store expansion program and the upgrading of facilities and systems in existing stores. For the quarter ended June 30, 1997, the Company spent $5.9 million for equipment and new store construction. Funds were provided by cash flow from operations. Management believes that the Company has sufficient resources available (including cash and equivalents, net cash flow from operations and bank financing) to expand its business as currently planned for the next several years. Liquidity The Company has a line of credit from a commercial bank of $7.5 million. No amounts were outstanding under this short-term borrowing facility at June 30, 1997. Through February 7, 1996, the Company had a real estate line of credit of $25 million to be used for placement of mortgages. This line was terminated in fiscal 1996 at the Company's initiative and replaced by a new unsecured Revolving Credit facility with two banks. In June 1997, the Credit Agreement was modified to increase the amount available under the facility from $30 million to $50 million, and extend the term to March 2000. The facility bears interest at the prime rate or other LIBOR-based rate options tied to the Company's financial performance. Prior to the termination of the real estate line, the Company had utilized $13.2 million of the real estate line of credit for permanent mortgages. The Company has outstanding $3.7 million in principal amount of its 10.65% Senior Notes due 1999 (the "Senior Notes") with Massachusetts Mutual Life Insurance Company pursuant to a Senior Note Agreement. The fourth of six equal annual installments of principal in the amount of $1.8 million was paid on April 1, 1997. The Company has financed its office/warehouse facility via a 10 year mortgage with a current balance of $2.8 million, amortizable over 20 years, and an eight year term loan with a balance of $.6 million. Certain of the Company's long-term debt agreements require, among other things, the maintenance of specified current ratios, interest and rent coverage ratios and amounts of tangible net worth, and also contain restrictions on dividend payments and capital expenditures. -11-
12 MONRO MUFFLER BRAKE, INC. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- a. Exhibits 10.1 - Amendment One to Credit Agreement among the Chase Manhattan Bank, Fleet Bank and the Company, dated June 25, 1997. 11 - Statement of Computation of Per Share Earnings. 27 - Financial Data Schedule. b. Reports on Form 8-K The Company filed a report on Form 8-K on June 10, 1997 in connection with the declaration of a 5% stock dividend by the Company's Board of Directors on May 14, 1997. -12-
13 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MONRO MUFFLER BRAKE, INC. DATE: August 13, 1997 By /s/ Lawrence C. Day ------------------------- Lawrence C. Day President and Chief Executive Officer DATE: August 13, 1997 By /s/ Catherine D'Amico --------------------------- Catherine D'Amico Senior Vice President-Finance, Treasurer and Chief Financial Officer -13-
14 <TABLE> <CAPTION> EXHIBIT INDEX Exhibit No. Description Page No. ----------- ----------- -------- <S> <C> <C> 10.1 Amendment One to Credit Agreement among the Chase Manhattan Bank, Fleet Bank and the Company, dated June 25, 1997. 15 11 Statement of computation of per share earnings. 18 27 Financial Data Schedule. </TABLE> -14-