1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1998. ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from __________ to ___________ Commission File No. 0-19357 ------- 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) (Zip code) Registrant's telephone number, including area code 716-647-6400 ------------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- --------- As of February 1, 1999, 8,321,701 shares of the Registrant's Common Stock, par value $ .01 per share, were outstanding after giving effect to the five percent stock dividend, paid June 18, 1998 to stockholders of record as of June 8, 1998.
2 MONRO MUFFLER BRAKE, INC. INDEX ----- Part I. Financial Information Page No. -------- Consolidated Balance Sheet at December 31, 1998 and March 31, 1998 3 Consolidated Statement of Income for the quarter and nine months ended December 31, 1998 and 1997 4 Consolidated Statement of Changes in Common Shareholders' Equity for the nine months ended December 31, 1998 5 Consolidated Statement of Cash Flows for the nine months ended December 31, 1998 and 1997 6 Notes to Consolidated Financial Statements 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 Exhibit Index 17 - 2 -
3 MONRO MUFFLER BRAKE, INC. CONSOLIDATED BALANCE SHEET (UNAUDITED) <TABLE> <CAPTION> DECEMBER 31, MARCH 31, 1998 1998 ---- ---- (DOLLARS IN THOUSANDS) <S> <C> <C> ASSETS Current assets: Cash and equivalents, including interest-bearing accounts of $852 at $ 852 $ 5,315 December 31, 1998 and $5,315 at March 31, 1998 Trade receivables 1,231 841 Inventories, at LIFO cost 41,601 27,492 Deferred income tax asset 1,725 1,725 Other current assets 5,264 4,115 --------- --------- Total current assets 50,673 39,488 --------- --------- Property, plant and equipment 202,786 165,839 Less - Accumulated depreciation and amortization (56,511) (49,429) --------- --------- Net property, plant and equipment 146,275 116,410 Other noncurrent assets 9,327 3,190 --------- --------- Total assets $ 206,275 $ 159,088 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 4,832 $ 3,582 Trade payables 9,845 11,633 Federal and state income taxes payable 34 2 Accrued expenses and other current liabilities Accrued interest 216 233 Accrued payroll, payroll taxes and other payroll benefits 4,316 3,764 Accrued insurance 2,142 2,441 Accrued restructuring costs 3,000 Other current liabilities 7,114 4,316 --------- --------- Total current liabilities 31,499 25,971 Long-term debt 82,862 54,102 Other long-term liabilities 3,469 576 Accrued long-term restructuring costs 4,484 Deferred income tax liability 1,768 1,881 --------- --------- Total liabilities 124,082 82,530 --------- --------- Commitments Shareholders' equity: Class C Convertible Preferred Stock, $1.50 par value, $.216 and $.227 conversion value at December 31, 1998 and March 31, 1998, respectively; 150,000 shares authorized; 91,727 shares issued and outstanding 138 138 Common Stock, $.01 par value, 15,000,000 shares authorized; 8,321,701 shares and 7,876,901 shares issued and outstanding at December 31, 1998 83 79 and March 31, 1998, respectively Additional paid-in capital 36,370 29,284 Retained earnings 45,602 47,057 --------- --------- Total shareholders' equity 82,193 76,558 --------- --------- Total liabilities and shareholders' equity $ 206,275 $ 159,088 ========= ========= </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 29, 1998. - 3 -
4 MONRO MUFFLER BRAKE, INC. CONSOLIDATED STATEMENT OF INCOME (UNAUDITED) <TABLE> <CAPTION> QUARTER ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, 1998 1997 1998 1997 ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> Sales $ 53,672 $ 36,336 $144,169 $118,649 Cost of sales, including distribution and occupancy costs (a) 33,844 20,996 84,933 66,858 -------- -------- -------- -------- Gross profit 19,828 15,340 59,236 51,791 Operating, selling, general and administrative expenses 19,449 11,409 46,168 34,637 -------- -------- -------- -------- Operating income 379 3,931 13,068 17,154 Interest expense, net of interest income for the quarter of $18 in 1998 and $21 in 1997 (a) 1,598 1,005 3,579 2,775 Other expense, net 322 95 625 267 -------- -------- -------- -------- (Loss) income before provision for income taxes (1,541) 2,831 8,864 14,113 (Recovery of) provision for income taxes (618) 1,131 3,518 5,644 -------- -------- -------- -------- Net (loss) income $ (923) $ 1,700 $ 5,346 $ 8,469 ======== ======== ======== ======== Basic (loss) earnings per share (b) $ (.11) $ .21 $ .64 $ 1.03 ======== ======== ======== ======== Diluted (loss) earnings per share $ (.11) $ .19 $ .59 $ .94 ======== ======== ======== ======== Weighted average number of shares of common stock and common stock equivalents used in computing earnings per share: Basic 8,322 8,260 8,301 8,254 ======== ======== ======== ======== Diluted (b) 8,322 8,984 9,002 9,019 ======== ======== ======== ======== <FN> (a) Amounts paid under operating and capital leases with affiliated parties totaled $408 and $417 for the quarters ended December 31, 1998 and 1997, respectively, and $1,371 and $1,374 for the nine months ended December 31, 1998 and 1997, respectively. (b) The antidilutive effect of the Class C Convertible Preferred Stock and outstanding options resulted in their exclusion from the calculation of weighted average diluted shares outstanding, and thereby increased the loss per share by $.01. </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 29, 1998. - 4 -
5 MONRO MUFFLER BRAKE, INC. CONSOLIDATED STATEMENT OF CHANGES IN COMMON SHAREHOLDERS' EQUITY Nine Months Ended December 31, 1998 (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, 1998 7,877 $ 79 $ 29,284 $ 47,057 Net income 5,346 Other comprehensive income: Minimum pension liability adjustment (171) Exercise of stock options 49 462 5% stock dividend 396 4 6,625 (6,629) Rounding (1) (1) -------- -------- -------- -------- Balance at December 31, 1998 8,322 $ 83 $ 36,370 $ 45,602 ======== ======== ======== ======== </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 29, 1998. - 5 -
6 MONRO MUFFLER BRAKE, INC. CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> NINE MONTHS ENDED DECEMBER 31, ----------------- 1998 1997 ---- ---- (DOLLARS IN THOUSANDS) INCREASE (DECREASE) IN CASH <S> <C> <C> Cash flows from operating activities: Net income $ 5,346 $ 8,469 --------- --------- Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 8,164 6,921 (Gain) loss on disposal of property, plant and equipment (101) 36 (Increase) decrease in trade receivables (390) 388 Increase in inventories (4,262) (7,475) Decrease in other current assets 1,061 1,201 (Increase) decrease in other noncurrent assets (1,867) 67 (Decrease) increase in trade payables (2,792) 935 (Decrease) in accrued expenses (921) (1,082) Increase in federal and state income taxes payable 32 1,197 Increase in other long-term liabilities 1,330 Decrease in deferred tax liability (113) --------- --------- Total adjustments 141 2,188 --------- --------- Net cash provided by operating activities 5,487 10,657 --------- --------- Cash flows from investing activities: Capital expenditures (17,575) (18,792) Proceeds from the disposal of property, plant and equipment 81 6,228 Payment for purchase of Speedy stores (21,488) --------- --------- Net cash used for investing activities (38,982) (12,564) --------- --------- Cash flows from financing activities: Proceeds from the sale of common stock 462 52 Proceeds from borrowings 130,755 47,631 Principal payments on long-term debt and capital lease obligations (102,185) (45,359) --------- --------- Net cash provided by financing activities 29,032 2,324 --------- --------- (Decrease) increase in cash (4,463) 417 Cash at beginning of year 5,315 6,438 --------- --------- Cash at December 31 $ 852 $ 6,855 ========= ========= </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 29, 1998. - 6 -
7 MONRO MUFFLER BRAKE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Acquisition of Speedy Stores - ------------------------------------- In September 1998, the Company completed the acquisition of 189 company-operated and 14 franchised Speedy stores, all located in the United States, from SMK Speedy International Inc. of Toronto Canada. Speedy stores provide automotive repair services, specializing in undercar care, in 11 states located primarily in the Northeast. The acquisition was accounted for as a purchase, and accordingly, the operating results of Speedy have been included in the Company's consolidated financial statements since the date of the acquisition. Approximately $51 million was borrowed under a new $135 million secured credit facility to pay the all-cash purchase price, with an additional $16 million to be borrowed to provide for the closing of up to 20 underperforming or redundant Speedy stores, capital expenditures at remaining Speedy stores and transaction expenses. The excess of the aggregate purchase price over the fair value of net assets acquired is being amortized on a straight-line basis over 20 years. The accrued restructuring charge of approximately $7.5 million at December 31, 1998 represents estimated closing costs associated with poorly performing or duplicative Speedy store locations resulting from the acquisition. Note 2 - Stock Dividend - ----------------------- On May 13, 1998, the Board of Directors declared a five percent stock dividend, paid June 18, 1998, to stockholders of record as of June 8, 1998. The consolidated financial statements, including all share information therein, have been restated to reflect this dividend. Additionally, in accordance with antidilution provisions of the Class C Convertible Preferred Stock, the conversion value of the preferred stock was restated from $.227 per share to $.216 per share. Shares reserved for issuance to officers and key employees under outstanding options under the 1984, 1987 and 1989 Incentive Stock Option Plans have also been retroactively adjusted for the five percent stock dividend. Note 3 - Inventories - -------------------- The Company's inventories consist of automotive parts and tires. Substantially all merchandise inventories are valued under the last-in, first-out (LIFO) method. Under the first-in, first-out (FIFO) method, these inventories would have been $534,000 and $426,000 higher at December 31, 1998 and March 31, 1998, respectively. The FIFO value of inventory approximates the current replacement cost. Note 4 - Cash and Equivalents - ----------------------------- The Company's policy is to invest cash in excess of operating requirements in income producing investments. Cash equivalents of $852,000 at December 31, 1998 and $5,315,000 at March 31, 1998 include money market accounts which have maturities of three months or less. - 7 -
8 MONRO MUFFLER BRAKE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 5 - Supplemental Disclosure of Cash Flow Information - --------------------------------------------------------- The following transactions represent noncash investing and financing activities during the periods indicated: NINE MONTHS ENDED DECEMBER 31, 1998: Capital lease obligations of $754,000 were incurred under various lease obligations. In connection with the declaration of a five percent stock dividend (see Note 2), the Company increased accrued expenses common stock and additional paid-in capital by $1,000, $4,000 and $6,624,000, respectively, and decreased retained earnings by $6,629,000. In connection with the acquisition of Speedy stores (see Note 1), liabilities were assumed as follows: Fair value of assets acquired $36,134,000 Cash paid 21,488,000 ----------- Liabilities assumed $14,646,000 =========== NINE MONTHS ENDED DECEMBER 31, 1997: Capital lease obligations of $236,000 were incurred under various lease obligations. In connection with the declaration of a five percent stock dividend (see Note 1), the Company increased common stock and additional paid-in capital by $4,000 and $7,015,000, respectively, and decreased retained earnings by $7,019,000. CASH PAID DURING THE PERIOD: <TABLE> <CAPTION> NINE MONTHS ENDED DECEMBER 31, --------------- 1998 1997 ---- ---- <S> <C> <C> Interest, net $3,835,000 $ 3,041,000 Income taxes, net 3,488,000 4,448,000 </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 29, 1998. - 8 -
9 MONRO MUFFLER BRAKE, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in this Form 10-Q which are not historical facts, including (without limitation) statements made in the Management's Discussion and Analysis of Financial Condition and Results of Operations, may contain statements of future expectations and other forward-looking statements that are subject to important factors that could cause actual results to differ materially from those in the forward-looking statements, including (without limitation) product demand, the effect of economic conditions, the impact of competitive services and pricing, product development, parts supply restraints or difficulties, industry regulation, the continued availability of capital resources and financing and other risks set forth or incorporated elsewhere herein and in the Company's Securities and Exchange Commission filings. RESULTS OF OPERATIONS The following table sets forth income statement data of Monro Muffler Brake, Inc. ("Monro" or the "Company") expressed as a percentage of sales for the fiscal periods indicated. <TABLE> <CAPTION> Quarter Ended December 31, Nine Months Ended December 31, -------------------------- ------------------------------ 1998 1997 1998 1997 ---- ---- ---- ---- <S> <C> <C> <C> <C> Sales ......................................... 100.0% 100.0% 100.0% 100.0% Cost of sales, including distribution and occupancy costs .......................... 63.1 57.8 58.9 56.3 ------- ------- ------- ------- Gross profit .................................. 36.9 42.2 41.1 43.7 Operating, selling, general and administrative expenses ...................... 36.2 31.4 32.0 29.2 ------- ------- ------- ------- Operating income .............................. .7 10.8 9.1 14.5 Interest expense - net ........................ 3.0 2.8 2.5 2.4 Other expenses - net .......................... .6 .2 .5 .2 ------- ------- ------- ------- (Loss) income before provision for income taxes ....................................... (2.9) 7.8 6.1 11.9 Provision for income taxes .................... (1.2) 3.1 2.4 4.8 ------- ------- ------- ------- Net (loss) income ............................. (1.7)% 4.7% 3.7% 7.1% ======= ======= ======= ======= </TABLE> - 9 -
10 THIRD QUARTER AND NINE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THIRD QUARTER AND NINE MONTHS ENDED DECEMBER 31, 1997. In December 1998, the Company appointed Robert G. Gross as President and Chief Executive Officer, replacing Jack M. Gallagher who returned as interim President and Chief Executive Officer in February 1998. Mr. Gross began full-time responsibilities on January 1, 1999. On September 17, 1998, the Company completed its acquisition of 189 company-owned and 14 franchised Speedy stores, all located in the United States, from SMK Speedy International Inc. of Toronto Canada (the "Acquisition"). Sales for the fiscal year ended January 3, 1998 for the 189 company-operated stores, some of which were opened only part of the year, were approximately $86 million. While management expects the acquisition to have a dilutive impact on earnings in the current 1999 fiscal year, management anticipates that the acquired operations should begin to contribute to earnings per share during fiscal 2000, and should be increasingly accretive in subsequent years. Sales were $53.7 million for the quarter ended December 31, 1998 compared with $36.3 million for the quarter ended December 31, 1997. The sales increase of $17.4 million, or 47.7%, was due to an increase in sales of approximately $18.1 million relating to stores opened since the beginning of fiscal 1998, including $15.7 million from the newly-acquired Speedy stores. This increase was partially offset by a decrease in comparable store sales of 0.8%. Sales for the nine months ended December 31, 1998 were $144.2 million compared with $118.6 million for the same period of the prior year. The sales increase of $25.5 million, or 21.5%, was due to an increase in sales of approximately $27.3 million relating to stores opened since the beginning of fiscal 1998, including $18.2 million from the newly-acquired Speedy stores. This increase was partially offset by a decrease in comparable store sales of 0.7%. At December 31, 1998, the Company had 532 company-operated stores (including the stores acquired from Speedy) compared to 341 at December 31, 1997. In the third quarter of fiscal 1999, the weakness of Speedy's sales represents a continuation of a decline which was most pronounced prior to the Acquisition in September 1998. The conversion of systems and inventory at all Speedy stores also impacted the performance of these locations. These conversions, all of which occurred during this quarter, involved the installation of new point-of-sale systems in all Speedy stores, as well as the lifting of slow moving items and restocking with more popular parts, representing approximately half of the inventory in the Speedy stores. Although essential to margin improvement in future periods, this conversion process was very disruptive to the operations of the Speedy stores in the quarter ended December 31, 1998. Gross profit for the quarter ended December 31, 1998 was $19.8 million, or 36.9% of sales, compared with $15.3 million, or 42.2% of sales, for the quarter ended December 31, 1997. Gross profit for the nine months ended December 31, 1998 was $59.2 million, or 41.1% of sales, compared to $51.8 million or 43.7% of sales, for the nine months ended December 31, 1997. The decline in gross profit as a percentage of sales for Monro stores was due, in part, to an increase in outside purchases. During periods of slower sales, store personnel will more readily accept repair work outside of the normal recurring services the store usually provides. In addition, Company personnel assigned to controlling outside purchases were diverted during the Speedy due diligence process, away from the Monro stores. However, beginning late in the second quarter of fiscal 1999, the Company has refocused its resources in order to reduce outside purchases at the Monro stores. In that regard, the Company will be lifting older, slow moving inventory from the Monro stores, and restocking them with faster moving items during the fourth quarter of fiscal 1999. Secondly, there was an increase in distribution and occupancy costs as a percent of sales for the third quarter of fiscal 1999 as compared to the third quarter of fiscal 1998, primarily due to an increase in the number of stores and increased occupancy costs against negative comparable store sales. In addition, labor costs increased as a percentage of sales during the third quarter of fiscal 1999 as compared to the same quarter of the prior year. During periods of slower sales when technicians may not be fully productive, they will receive a minimum base level wage. - 10 -
11 Additionally, the Speedy stores accounted for 2.5 percentage points of the decline in gross profit as a percent of sales, in part in the "cost of goods" component of cost of sales. Historically, Speedy's cost of goods has averaged approximately six percentage points more than the Company's due to more expensive parts acquisition costs. This resulted from a higher percentage of outside purchases, and Speedy's distribution methods (store-door from vendors vs. Monro's central distribution facility). Management is confident that, over time, the Speedy stores will experience the same lower cost of goods as the Monro stores. One measure leading to this is the inclusion of all Speedy stores in the Company's central distribution/automatic replenishment system. As of December 31, 1998, all Speedy stores were receiving product from the Company's central warehouse facility in Rochester, New York. The Company experienced improved margins during the few weeks after conversion of the Speedy stores from Speedy's distribution system to Monro's distribution system. Since all stores were not converted until mid-December, the real impact of the improvement will not be seen until the fourth quarter of fiscal 1999. The Speedy stores also experienced higher than anticipated labor and occupancy costs as a percentage of sales due to the weakness in Speedy sales in the quarter. Operating, selling, general and administrative expenses for the quarter ended December 31, 1998 increased by $8.0 million to $19.4 million over the quarter ended December 31, 1997, and were 36.2% of sales compared to 31.4% in the same quarter of the prior year. For the nine months ended December 31, 1998, these expenses increased by $11.5 million to $46.2 million over the comparable period of the prior year and were 32.0% of sales compared to 29.2% in the comparable period of the prior year. During the third quarter of fiscal 1999, costs associated with the Speedy stores and acquisition-related activities accounted for 4.0 percentage points of the increase. The remainder is primarily due to increases in fixed, store-related operating and support costs (such as store supervision and utilities) against negative comparable store sales. Net interest expense for the quarter ended December 31, 1998, increased by approximately $.6 million compared to the same period in the prior year, and increased from 2.8% to 3.0% as a percentage of sales for the same periods. Net interest expense for the nine months ended December 31, 1998, increased by approximately $.8 million compared to the comparable period in the prior year, and rose from 2.4% to 2.5% as a percentage of sales for the same periods. The increase in expense is due to an increase in the weighted average debt outstanding for the quarter and nine months ended December 31, 1998 as compared to the same periods in the previous year. The net loss for the quarter ended December 31, 1998 of approximately $.9 million represents a 154.3% decrease from the net income reported for the quarter ended December 31, 1997. For the nine months ended December 31, 1998, net income of approximately $5.3 million decreased 36.9%, due to the factors discussed above. Interim Period Reporting The data included in this report are unaudited and are subject to year-end adjustments; however, in the opinion of management, all known adjustments (which consist only of normal recurring adjustments) have been made to present fairly the Company's operating results for the unaudited periods. The results for interim periods are not necessarily indicative of results to be expected for the fiscal year. - 11 -
12 Year 2000 Computer Issue As the year 2000 approaches, the Company, along with other companies, could experience potentially serious operational problems, since many computer programs that were developed in the past may not properly recognize calendar dates beginning with the year 2000. Further, there are embedded chips contained within equipment that may be date sensitive. PLANS: The Company's overall plan for dealing with the Year 2000 problem covers Information Technology ("IT") systems, non-IT systems, and third party providers. The Company has established a dedicated Year 2000 team to lead the Company's activities relating to its Year 2000 issues. The Company's current state of readiness with respect to each of these elements is discussed below. 1.) All IT SYSTEMS that the Company considers to be critical at this time have been evaluated for Year 2000 problems. In connection with this process, the Company has developed detailed plans that establish phases of the work to be done for each major area: 1.) An assessment of all systems and equipment. 2.) Development of detailed workplans and timelines for remediation. 3.) Remediation/modification. 4.) Testing and validation. 5.) Acceptance and deployment. 6.) Independent validation and 7.) Contingency planning. Although the Company has identified seven different phases of the project, in some cases the phases are done concurrently. For example, certain component systems may be completely tested and redeployed, while others are still being remediated. Management of the Company believes these systems will have been diagnosed, modified, tested and deployed by September 1, 1999. 2.) NON-IT SYSTEMS typically include embedded technology such as microcontrollers. The Company's non-IT systems include machinery and equipment in its buildings such as elevators, telephone equipment, HVAC, security and alarm systems, copiers, fax machines and computerized alignment equipment. The Company is reviewing these systems for Year 2000 compliance with third party providers, and believes that full compliance will be achieved by September 1, 1999. 3.) The Company uses a variety of third party providers and vendors in the normal course of conducting its day to day operations. Year 2000 problems may result in a loss of service from these providers/vendors. The Company believes that loss of electric power, phone, banking or certain outsourced processing services, as well as a vendor's inability to deliver product on a timely basis, could have an immediate and critical adverse material impact on the Company's operations. The Company is contacting each of its major third party providers and vendors to determine if the provider/vendor is Year 2000 compliant. If a provider is not currently Year 2000 compliant, and its plans to become Year 2000 compliant are uncertain, then the Company intends to seek other providers/vendors. - 12 -
13 CONTINGENCY PLANS: The Company's Year 2000 plans also include the development and implementation of contingency plans in the event of Year 2000 failures, both within the Company and by third parties. The Company expects to have these plans completed during calendar 1999 for all major systems. As discussed above with regard to third party providers/vendors, if a provider is not currently Year 2000 compliant, and its plans to become Year 2000 compliant are uncertain, then the Company intends to seek other providers/vendors. COSTS: The Company's incremental costs to address the Year 2000 issues did not have a material impact on the Company's operations in fiscal 1998 or during the nine months ended December 31, 1998, and are not expected to have a material impact on the remainder of fiscal 1999 or fiscal 2000. RISKS: The failure to correct for Year 2000 problems, either by the Company or third parties, could result in significant disruptions of the Company's operations. At this point in time, based upon the progress to date and information received from third parties, the Company is unable to determine its most likely worst case scenario. Certain statements included in this discussion regarding Year 2000 compliance are forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934. These statements include management's best estimates for completion dates for the various phases and testing to be performed, costs to be spent for compliance, and the risks associated with non-compliance either by the Company or third parties. These forward-looking statements are subject to various factors, which may materially affect the Company's efforts with Year 2000 compliance. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, which could cause a change in the estimated completion date of a particular phase, the ability to locate and correct all relevant software and embedded components, the compliance of critical vendors, and similar uncertainties. The Company's assessments of the effects of Year 2000 on the Company are based, in part, upon information received from third parties, and the Company's reasonable reliance on that information. Therefore, the risk that inaccurate information is supplied by third parties upon which the Company reasonably relied must be considered as a risk factor that might affect the Company's Year 2000 efforts. The Company is attempting to reduce the risks by utilizing an organized approach, extensive testing and allowance of contingency time to address issues identified by tests. Despite the Company's efforts to address its Year 2000 issues, there can be no assurances that Year 2000 related failures of the Company's software, or that Year 2000 related failures by third parties with which the Company interacts, will not have a material adverse affect on the Company. CAPITAL RESOURCES AND LIQUIDITY Capital Resources Other than the funding of the Acquisition, the Company's primary capital requirement has been the funding of its new store expansion program and the upgrading of facilities and systems in existing shops. For the nine months ended December 31, 1998, the Company spent $18.4 million for equipment and new store construction. Funds for equipment and new store construction were provided primarily by cash flow from operations. Management believes that the Company has sufficient resources available (including cash and equivalents, cash flow from operations and bank financing) to expand its business as currently planned for the next several years. - 13 -
14 Liquidity Concurrent with the closing of the Acquisition, Monro obtained a new $135 million secured credit facility from lenders led by The Chase Manhattan Bank. Approximately $51 million was borrowed under this facility to pay the all-cash purchase price in the Acquisition, with an additional $16 million to be borrowed to provide for the closing of up to 20 underperforming or redundant Speedy stores, capital expenditures at remaining Speedy stores and transaction expenses. In addition, Monro refinanced approximately $35 million of indebtedness through the new credit facility, with the balance of the facility available for future working capital needs. More specifically, the new financing structure consists of a $25 million term loan (all of which was outstanding at December 31, 1998), a $75 million Revolving Credit facility (of which approximately $42 million was outstanding at December 31, 1998), and synthetic lease (off-balance sheet) financing for a significant portion of the Speedy real estate, totaling $35 million. The loans bear interest at the prime rate or other LIBOR-based rate options tied to the Company's financial performance. The Company has outstanding $1.8 million in principal amount of its 10.65% Senior Notes due 1999 (the "Senior Notes") with Massachusetts Mutual Life Insurance Company pursuant to a Senior Note Agreement. The fifth of six equal annual installments of principal in the amount of $1.8 million was paid on April 1, 1998. Certain of the Company's stores were financed by mortgages currently bearing interest at LIBOR plus 100 basis points. The Company has financed its office/warehouse facility via a 10 year mortgage with a current balance of $2.5 million, amortizable over 20 years, and an eight year term loan with a balance of $.5 million. Certain of the Company's long-term debt agreements require, among other things, the maintenance of specified current ratios, interest and rent coverage ratios and amounts of tangible net worth. They also contain requirements concerning Y2K compliance and restrictions on cash dividend payments. The Company enters into interest rate hedge agreements which involve the exchange of fixed and floating rate interest payments periodically over the life of the agreement without the exchange of the underlying principal amounts. The differential to be paid or received is accrued as interest rates change and is recognized over the life of the agreements as an adjustment to interest expense. - 14 -
15 MONRO MUFFLER BRAKE, INC. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- a. Exhibits 10.1 - Amended and Restated Employment Agreement, dated February 16, 1999, by and between the Company and Robert G. Gross. 10.2 - Amended and Restated Secured Loan Agreement, dated February 16, 1999, by and between the Company and Robert G. Gross. 10.3 - Company's 1998 Stock Option Plan Amendment. (*Subject to the approval of the shareholders of the Company.) 11 - Statement of Computation of Per Share Earnings. b. Reports on Form 8-K. The Company filed a report on Form 8-K on December 3, 1998 in connection with the appointment of Robert G. Gross as President and Chief Executive Officer of the Company. c. Reports on Form 8-K/A The Company filed a report on Form 8-K/A on December 1, 1998 presenting financial statements and pro forma financial information related to the acquisition of 189 company-owned and 14 franchised stores from Bloor Automotive and Speedy Car-X on September 17, 1998. - 15 -
16 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MONRO MUFFLER BRAKE, INC. DATE: February 12, 1999 By /s/ Robert G. Gross --------------------------------------- Robert G. Gross President and Chief Executive Officer DATE: February 12, 1999 By /s/ Catherine D'Amico --------------------------------------- Catherine D'Amico Senior Vice President-Finance, Treasurer and Chief Financial Officer - 16 -
17 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 10.1 Amended and Restated Employment Agreement, dated February 16, 1999, by and between the Company and Robert G. Gross. 10.2 Amended and Restated Secured Loan Agreement, dated February 16, 1999, by and between the Company and Robert G. Gross. 10.3 Company's 1998 Stock Option Plan Amendment. (*Subject to the approval of the shareholders of the Company.) 11 Statement of Computation of Per Share Earnings. 27 Financial Data Schedule - 17 -