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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2002.
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 585-647-6400
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 October 26, 2002, 8,508,821 shares of the Registrant's Common
Stock, par value $ .01 per share, were outstanding.
MONRO MUFFLER BRAKE, INC.
INDEX
Part I Financial Information Page No
--------
Item 1. Financial Statements
Consolidated Balance Sheet at
September 28, 2002 and March 30, 2002 3
Consolidated Statement of Income for the quarter
and six months ended September 28, 2002 and
September 29, 2001 4
Consolidated Statement of Changes in
Shareholders' Equity for the six months ended September 28, 2002 5
Consolidated Statement of Cash Flows for the
six months ended September 28, 2002 and
September 29, 2001 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 4. Controls and Procedures 14
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Section 302 Certification 18
Exhibit Index 20
-2-
MONRO MUFFLER BRAKE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
SEPTEMBER 28, MARCH 30,
2002 2002
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
Current assets:
Cash and equivalents, including interest-bearing accounts of
$442 at March 30, 2002 $ 0 $ 442
Trade receivables 1,718 1,226
Inventories 50,788 44,821
Deferred income tax asset 664 664
Other current assets 9,111 6,626
--------- ---------
Total current assets 62,281 53,779
--------- ---------
Property, plant and equipment 214,821 208,768
Less - Accumulated depreciation and amortization (86,991) (81,557)
--------- ---------
Net property, plant and equipment 127,830 127,211
Other noncurrent assets 12,872 8,309
--------- ---------
Total assets $ 202,983 $ 189,299
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 8,408 $ 10,813
Trade payables 22,009 12,739
Federal and state income taxes payable 2,767 608
Accrued interest 147 219
Accrued payroll, payroll taxes and other payroll benefits 5,926 5,326
Accrued insurance 2,212 986
Other current liabilities 9,979 8,952
--------- ---------
Total current liabilities 51,448 39,643
Long-term debt 25,092 34,123
Other long-term liabilities 2,785 3,078
Deferred income tax liability 2,083 2,671
--------- ---------
Total liabilities 81,408 79,515
--------- ---------
Commitments
Shareholders' equity:
Class C Convertible Preferred Stock, $1.50 par value, $.216 conversion
value; 150,000 shares authorized; 65,000 shares and 91,727 shares issued
and outstanding at September 28, 2002 and March 30, 2002, respectively 97 138
Common Stock, $.01 par value, 15,000,000 shares authorized; 8,725,042
shares issued at September 28, 2002; 8,435,324 shares issued at March 30, 2002 87 84
Treasury Stock, 216,800 shares at September 28, 2002 and March 30, 2002, at cost (1,831) (1,831)
Additional paid-in capital 41,123 37,933
Note receivable from shareholder (131) (183)
Other comprehensive income (855) (666)
Retained earnings 83,085 74,309
--------- ---------
Total shareholders' equity 121,575 109,784
--------- ---------
Total liabilities and shareholders' equity $ 202,983 $ 189,299
========= =========
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 28, 2002.
-3-
MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
QUARTER ENDED SIX MONTHS ENDED
FISCAL SEPTEMBER FISCAL SEPTEMBER
---------------- ----------------
2002 2001 2002 2001
------- ------- --------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales $68,003 $60,477 $ 135,912 $121,870
Cost of sales, including distribution and
occupancy costs 39,392 34,908 77,406 69,146
------- ------- --------- --------
Gross profit 28,611 25,569 58,506 52,724
Operating, selling, general and
administrative expenses 20,090 18,546 43,061 38,725
------- ------- --------- --------
Operating income 8,521 7,023 15,445 13,999
Interest expense, net of interest income for
the quarter of $5 in 2002 and $2 in
2001, and year-to-date of $43 in 2002
and $14 in 2001 642 960 1,409 2,118
Other expense (income), net 32 110 (120) 300
------- ------- --------- --------
Income before provision for income taxes 7,847 5,953 14,156 11,581
Provision for income taxes 2,982 2,260 5,380 4,035
------- ------- --------- --------
Net income $ 4,865 $ 3,693 $ 8,776 $ 7,546
======= ======= ========= ========
Earnings per share:
Basic $ .57 $ .45 $ 1.04 $ .92
======= ======= ========= ========
Diluted $ .52 $ .41 $ .93 $ .84
======= ======= ========= ========
Weighted average number of shares of common
stock and common stock equivalents
used in computing earnings per share:
Basic 8,507 8,196 8,402 8,177
======= ======= ========= ========
Diluted 9,375 9,040 9,393 9,010
======= ======= ========= ========
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 28, 2002.
- 4 -
MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
NOTE ACCUMULATED
ADDITIONAL RECEIVABLE OTHER
PREFERRED COMMON TREASURY PAID-IN FROM COMPREHENSIVE RETAINED
STOCK STOCK STOCK CAPITAL SHAREHOLDER INCOME EARNINGS TOTAL
-------- -------- -------- -------- -------- -------- ---------- ----------
Balance at March 30, 2002 $138 $84 $(1,831) $37,933 $(183) $(666) $ 74,309 $ 109,784
Net income 8,776 8,776
Other comprehensive income:
SFAS No. 133 adjustment for the six
months ended September 28, 2002 (189) (189)
----------
Total comprehensive income 8,587
Conversion of Class C convertible
preferred stock into common stock (41) 3 38 --
Exercise of stock options 1,341 1,341
Vesting of non-qualified stock
options 1,811 1,811
Note receivable from shareholder 52 52
-------- -------- -------- -------- -------- -------- ---------- ----------
Balance at September 28, 2002 $ 97 $ 87 $ (1,831) $ 41,123 $ (131) $ (855) $ 83,085 $121,575
======== ======== ======== ======== ======== ======== ========== ==========
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 28, 2002.
-5-
MONRO MUFFLER BRAKE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
SIX MONTHS
ENDED FISCAL SEPTEMBER
----------------------------
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS)
INCREASE (DECREASE) IN CASH
Cash flows from operating activities:
Net income $ 8,776 $ 7,546
----------- -----------
Adjustments to reconcile net income to net cash provided
by operating activities -
Depreciation and amortization 6,338 6,342
Non-qualified stock option expense 1,603 727
Net change in deferred income taxes (605) (291)
Gain on disposal of property, plant and equipment (168) (71)
Change in assets and liabilities net of effects from
purchase of Kimmel Automotive, Inc. in fiscal 2003:
Increase in trade receivables (196) (263)
Increase in inventories (3,953) (2,362)
Increase in other current assets (1,422) (2,047)
(Increase) decrease in other noncurrent assets (80) 276
Increase in trade payables 8,236 5,845
Increase in accrued expenses 279 1,917
Increase in federal and state income taxes payable 2,117 1,626
Decrease in other long-term liabilities (809) (293)
----------- -----------
Total adjustments 11,340 11,406
----------- -----------
Net cash provided by operating activities 20,116 18,952
----------- -----------
Cash flows from investing activities:
Payment for purchase of Kimmel Automotive, Inc., net
of cash acquired (5,461) 0
Capital expenditures (5,230) (4,709)
Proceeds from the disposal of property, plant and equipment 227 69
----------- -----------
Net cash used for investing activities (10,464) (4,640)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowings 52,200 52,500
Principal payments on long-term debt and capital
lease obligations (63,635) (66,822)
Exercise of stock options 1,341 638
----------- -----------
Net cash used for financing activities (10,094) (13,684)
----------- -----------
(Decrease) increase in cash (442) 628
Cash at beginning of period 442 751
----------- -----------
Cash at end of period $ 0 $ 1,379
=========== ===========
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 28, 2002.
-6-
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Acquisition of Kimmel Automotive, Inc.
Effective April 1, 2002, the Company purchased all of the outstanding
common stock, as well as a portion of the preferred stock, of Kimmel Automotive,
Inc. ("Kimmel"), based in Baltimore, Maryland. Kimmel Automotive operated 34
tire and automotive repair stores in Maryland and Virginia, as well as Wholesale
and Truck Tire Divisions (including two commercial stores). The purchase price
for the assets of Kimmel was approximately $6 million in cash, plus the
assumption of approximately $5 million of liabilities. The acquisition was
financed through the Company's existing bank credit facility.
Although the 15 Kimmel Tire and Automotive Centers in Baltimore and 19
Tread Quarters stores in Virginia are in the same general markets in which Monro
competes, Monro and Kimmel are mainly situated in non-overlapping areas. There
are no plans to close any of the Kimmel stores, which will continue to operate
under the current brand names.
In June 2002, the Company purchased the remaining preferred stock of
Kimmel, with a face value of $1.6 million, for approximately $.7 million. This
amount is included in the liabilities assumed in the purchase of Kimmel.
Additionally, effective June 29, 2002, the Company sold Kimmel's Truck Tire
division, including its retread plant and two commercial stores, for
approximately $.4 million in cash and $.5 million in notes receivable. The sale
of these assets effectively reduced the net purchase price of the retail store
operations.
Note 2 - Change in Fiscal Year
During the fiscal year ended March 31, 2001, the Board of Directors of the
Company elected to change the Company's fiscal year end from March 31 to the
last Saturday in March. This change was effective with fiscal year 2002 which
began on April 1, 2001.
The following are the dates represented by each fiscal period:
"Quarter Ended Fiscal September 2002": June 30, 2002 - September 28, 2002 (13 weeks)
"Quarter Ended Fiscal September 2001": July 1, 2001 - September 29, 2001 (13 weeks)
"Six Months Ended Fiscal September 2002": March 31, 2001 - September 28, 2002 (26 weeks)
"Six Months Ended Fiscal September 2001": April 1, 2001 - September 29, 2001 (26 weeks)
Note 3 - Intangible Assets
For acquisitions completed on or before June 30, 2001, the excess of the
cost over the fair value of net assets of purchased businesses is recorded as
goodwill and until March 30, 2002, was amortized on a straight-line basis over
periods of 20 years or less. The cost of other acquired intangibles is amortized
on a straight-line basis over their estimated useful lives.
The Company has adopted Statement of Financial Accounting Standards No.
141 ("SFAS No. 141"), "Business Combinations". All business combinations
consummated on or after July 1, 2001 are accounted for in accordance with the
new pronouncement. In addition, in accordance with Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets", effective March 31, 2002, the Company is no longer required to amortize
goodwill and certain other intangible assets.
The Company has completed its transitional testing of goodwill, as
required by SFAS No. 142, and has concluded that no adjustment to the recorded
balance is necessary.
-7-
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 4 - Derivative Financial Instruments
Effective April 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities", as amended by Statement of Financial
Accounting Standards No. 138 ("SFAS 138"), "Accounting for Certain Derivative
Instruments and Certain Hedging Activities". SFAS 133/138 requires that all
derivative instruments be recorded on the balance sheet at fair value. Changes
in the fair value of derivatives are recorded each period in current earnings
or other comprehensive income, depending on whether the derivative is
designated as part of a hedge transaction, and if it is, depending on the type
of hedge transaction.
The notional amount of derivative financial instruments, which consisted
solely of interest rate swaps used to minimize the risk and/or costs associated
with changes in interest rates, was approximately $42 million at September 28,
2002. At that date, swap maturities ranged from November 2002 through October
2005. These swap contracts require the Company to pay fixed-rates of interest
ranging from 5.21% to 7.15%, and receive variable-rates of interest based on the
30 day LIBOR rate (plus a spread of 80 basis points in the case of the 7.15%
fixed rate contract).
At September 28, 2002, the fair value of the contracts, net of tax, is
recorded as a component of other comprehensive income in the Statement of
Changes in Shareholders' Equity.
Note 5 - Cash and Equivalents
The Company's policy is to invest cash in excess of operating requirements
in income producing investments. Cash equivalents of $442,000 at March 30, 2002
include money market accounts which have maturities of three months or less.
Note 6 - Inventories
The Company's inventories consist of automotive parts and tires.
Note 7 - Earnings Per Share
The computation of diluted earnings per common share for the fiscal
quarter ended September 2002 includes the effect of assumed exercise of all
outstanding options as the exercise price of these options was less than their
average market value. The computation for the fiscal quarter ended September
2001 excludes the effect of assumed exercise of approximately 400,000 stock
options as the exercise price of these options was greater than their average
market value, resulting in an anti-dilutive effect on diluted earnings per
share.
Note 8 - Supplemental Disclosure of Cash Flow Information
The following transactions represent noncash investing and financing
activities during the periods indicated:
SIX MONTHS ENDED SEPTEMBER 28, 2002:
In connection with the sale or disposal of assets, the Company reduced
fixed assets by $15,000 and decreased other current liabilities by $15,000.
In connection with performance-based executive compensation, the Company
recognized compensation expense of $1,603,000, decreased other long term
liabilities by $208,000 and increased additional paid-in-capital by $1,811,000.
-8-
MONRO MUFFLER BRAKE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In connection with recording the value of the Company's swap contracts,
other comprehensive income decreased by $189,000, other current liabilities
increased by $1,033,000, other long-term liabilities decreased by $760,000 and
the deferred income tax liability was reduced by $84,000.
In connection with the acquisition of Kimmel Automotive, Inc. (Note 1),
liabilities were assumed as follows:
Fair value of assets acquired $10,500,000
Cash paid, net of cash acquired 5,500,000
-------------
Liabilities assumed $ 5,000,000
============
The fair value of assets acquired and cash paid has been reduced by the
Kimmel Truck Tire sale proceeds of $400,000 that were received in the second
quarter of fiscal 2003 and will be further reduced upon the collection of the
$500,000 notes receivable related to this sale.
SIX MONTHS ENDED SEPTEMBER 29, 2001:
In connection with the sale or disposal of assets, the Company reduced
fixed assets by $6,000 and decreased other current liabilities by $6,000.
In connection with performance-based executive compensation, the Company
recognized compensation expense of $727,000, increased other long-term
liabilities by $208,000 and increased additional paid-in capital by $519,000.
In connection with recording the value of the Company's swap contracts,
other comprehensive income decreased by $1,032,000, other long-term liabilities
increased by $1,714,000 and the deferred income tax liability was reduced by
$682,000.
CASH PAID DURING THE PERIOD:
2002 2001
---- ----
Interest, net $1,409,000 $2,096,000
Income taxes 1,800,000 2,700,000
Note 9 - Reclassifications
Certain amounts in the Consolidated Statement of Cash Flows have been
reclassified to improve reporting and maintain comparability among the periods
presented.
Note 10 - 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 28, 2002.
-9-
MONRO MUFFLER BRAKE, INC.
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.
QUARTER ENDED SIX MONTHS ENDED
FISCAL SEPTEMBER FISCAL SEPTEMBER
------------------ -------------------
2002 2001 2002 2001
------ ------ ------ ------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales, including distribution
and occupancy costs 57.9 57.7 56.9 56.7
------ ------ ------ ------
Gross profit 42.1 42.3 43.1 43.3
Operating, selling, general and
administrative expenses 29.6 30.7 31.7 31.8
------ ------ ------ ------
Operating income 12.5 11.6 11.4 11.5
Interest expense - net .9 1.6 1.0 1.7
Other expenses - net -- .2 (.1) .3
------ ------ ------ ------
Income before provision for income taxes 11.6 9.8 10.5 9.5
Provision for income taxes 4.4 3.7 4.0 3.3
------ ------ ------ ------
Net income 7.2% 6.1% 6.5% 6.2%
====== ====== ====== ======
-10-
SECOND QUARTER AND SIX MONTHS ENDED SEPTEMBER 28, 2002 COMPARED TO
SECOND QUARTER AND SIX MONTHS ENDED SEPTEMBER 29, 2001
Effective April 1, 2002, the Company purchased all of the outstanding
common stock, as well as a portion of the preferred stock, of Kimmel Automotive,
Inc. ("Kimmel") based in Baltimore, Maryland. In June 2002, the Company
purchased the remaining preferred stock. Kimmel Automotive operated 34 tire and
automotive repair stores in Maryland and Virginia, as well as Wholesale and
Truck Tire Divisions (including two commercial stores). Effective June 29, 2002,
the Company sold the Truck Tire division. The results of operations of Kimmel
since its acquisition are included in the consolidated results of the Company
for the quarter and six months ended September 28, 2002. The acquired operations
were accretive to earnings for the quarter and six months ended September 28,
2002, and are expected to be accretive for the entire fiscal year 2003.
Sales were $68.0 million for the quarter ended September 28, 2002 as
compared with $60.5 million in the quarter ended September 29, 2001. The sales
increase of $7.5 million, or 12.4%, was due to an increase of $6.7 million
related to new stores, including $6.3 million from the acquired Kimmel stores.
Comparable store sales increased 1.5%.
Sales for the six months ended September 28, 2002 were $135.9 million as
compared to $121.9 million for the comparable period in the prior year. The
sales increase of $14.0 million, or 11.5%, was due to an increase in sales from
new stores of $13.4 million. The acquired Kimmel stores accounted for $12.7
million of the new store sales increase year-to-date, net of sales from the
divested Truck Tire division. Comparable store sales increased .7%.
At September 28, 2002 the Company had 550 company-operated stores compared
with 513 stores at September 29, 2001. During the quarter ended September 28,
2002, the Company opened two stores and closed none.
Gross profit for the quarter ended September 28, 2002 was $28.6 million or
42.1% of sales as compared with $25.6 million or 42.3% of sales for the quarter
ended September 29, 2001. Gross profit for the six months ended September 28,
2002 was $58.5 million, or 43.0% of sales, compared to $52.7 million or 43.3% of
sales for the six months ended September 29, 2001. The decrease in gross profit
for the quarter and six months ended September 28, 2002, as a percentage of
sales, is due to the inclusion of Kimmel in the cost of sales numbers. Due to
Kimmel's product mix, which is heavily weighted toward tires, its material costs
including outside purchases, are approximately 140 to 150 basis points higher
than historical Monro's. Separately, Kimmel's gross profit was 35.1% and 34.7%
of sales for the quarter and six months ended September 28, 2002, respectively.
Gross profit for the Monro and Speedy stores for the quarter ended September 28,
2002 was 42.8% of sales as compared to 42.3% last year, and 43.9% of sales as
compared to 43.3% for the six months ended fiscal September 2002 versus 2001.
On a stand-alone basis, Monro's gross profit improved by 50 basis points
over the prior year second quarter primarily due to a reduction in technician
labor. Productivity, as measured by sales per man-hour, improved 3.8% over the
same quarter of last year. Since the Company formally began tracking this
statistic over the last six years, productivity has increased every year, and
since the second quarter of fiscal 1998, is up 28%.
Operating, selling, general and administrative ("SG&A") expenses for the
quarter ended September 28, 2002 increased by $1.5 million to $20.1 million from
the quarter ended September 29, 2001, and were 29.5% of sales as compared to
30.7% in the prior year quarter. For the six months ended September 28, 2002,
these expenses increased by $4.3 million to $43.1 million from the comparable
period of the prior year, and were 31.7% of sales as compared to 31.8%.
The decrease in SG&A expense as a percentage of sales is due primarily to
a decrease in insurance expense in the quarter as compared to the prior year,
primarily related to a difference in the timing of the recognition of expense.
Going forward, the Company will obtain some leverage in the SG&A line due to
the consolidation of the Kimmel administrative functions such as accounting,
human resources and other support operations into the Company's Rochester
headquarters. This transition was completed by the end of the second quarter of
fiscal 2003.
Year-to-date, SG&A expenses as a percentage of sales are
essentially flat, primarily due to the recognition of approximately $1.6 million
of expense related to performance-based options granted to the Company's Chief
Executive Officer in December 1998. This non-cash charge increased SG&A as a
percentage of sales by 118 basis points for the six months ended September 28,
2002. A similar, but smaller charge of $.7 million occurred in the first six
months of fiscal 2002. Without these charges each fiscal year, SG&A would have
been 30.5% of sales for the first six months of this fiscal year as compared to
31.2% of sales for the first six months of the prior year.
-11-
Operating income for the quarter ended September 28, 2002 of approximately
$8.5 million increased 21.3% as compared to operating income for the quarter
ended September 29, 2001, and increased as a percentage of sales from 11.6% to
12.5% for the same periods. On a year-to-date basis, operating income increased
approximately $1.4 million or 10.3% from the same prior year period, but
decreased as a percentage of sales from 11.5% to 11.4%.
Net interest expense for the quarter ended September 28, 2002 decreased by
approximately $.3 million compared to the comparable period in the prior year,
and decreased from 1.6% to .9% as a percentage of sales for the same period. Net
interest expense for the six months ended September 28, 2002 decreased by
approximately $.7 million compared to the same period in the prior year, and
decreased from 1.7% to 1.0% as a percentage of sales for the same period. The
weighted average interest rate for the quarter ended September 28, 2002 was
approximately 80 basis points lower than the rate for the quarter ended
September 29, 2001. Additionally, the weighted average debt outstanding
decreased by approximately $10.3 million, resulting in a decrease in expense
between the two quarters.
Due to its performance for the year ended March 2002, the Company
qualified for a 25 basis point reduction in its interest rate spread over LIBOR
which should remain in effect for the remainder of FY03. This equates to an
annualized interest rate savings of approximately $49,000 at the Company's
current debt levels.
The effective tax rate for the quarters ended September 28, 2002 and
September 29, 2001 was 38% of pre-tax income. For the six months ended fiscal
September 2002 and 2001, the effective tax rates were 38% and 34.8%,
respectively. The Company recorded a one-time tax benefit of $.4 million in the
quarter ended June 30, 2001, due to a reduction in the Company's effective tax
rate. There has been a reduction in the Company's overall effective state income
tax rate because of the Company's growth in lower-taxing states, especially in
connection with the fiscal year 1999 Speedy acquisition. This one-time
adjustment reduced the accrual for amounts provided in prior fiscal years.
Other income increased by approximately $.4 million for the six months
ended September 28, 2002 as compared to the prior year comparable period. The
reason for the increase is primarily due to a gain on the sale of fixed assets
on Monro's books of approximately $.1 million as compared to a loss of $.1
million last year, and a net decrease in amortization expense of approximately
$.1 million. In addition, the Kimmel Truck Tire Division earned approximately
$.1 million on a pre-tax basis in the first quarter of fiscal 2003, and under
Statement of Financial Accounting Standards No. 144, its results are collapsed
to one line on the income statement, recorded here.
Net income for the quarter ended September 28, 2002 of $4.9 million
increased 31.7% from net income for the quarter ended September 29, 2001. For
the six months ended September 28, 2002, net income of $8.8 million increased
16.3%, due to the factors discussed above. Earnings per share on a diluted basis
for the quarter and six months ended September 28, 2002 increased 26.8% and
10.7%, respectively.
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 and financial position 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
In addition to the funding of the Kimmel acquisition, the Company's
primary capital requirement in fiscal 2003 has been the funding of its new store
expansion program and the upgrading of facilities and systems in existing
stores. For the six months ended September 28, 2002, the Company spent $5.2
million for equipment and new store construction. Funds were provided primarily
by cash flow from operations. Management believes that the Company has
sufficient resources available (including cash and equivalents, net cash flow
from operations and bank financing) to expand its business as currently planned
for the next several years.
-12-
Liquidity
Concurrent with the closing of the Speedy acquisition in September 1998,
the Company obtained a $135 million secured credit facility from a syndication
of lenders led by The Chase Manhattan Bank. Approximately $55 million was
borrowed under this Facility to pay the all-cash purchase price, including
transaction expenses of approximately $4 million. In addition, the Company
refinanced approximately $35 million of indebtedness through the Credit
Facility, with the balance of the Facility available for future working capital
needs. More specifically, the financing structure consists of a $25 million term
loan (of which approximately $5.7 million was outstanding at September 28,
2002), a $75 million Revolving credit facility (of which approximately $18.9
million was outstanding at September 28, 2002), and synthetic lease (off-balance
sheet) financing for a significant portion of the Speedy real estate, totaling
$35 million (of which approximately $32.4 million was outstanding at September
28, 2002). The loans bear interest at the prime rate or LIBOR-based rate options
tied to the Company's financial performance. The Company must also pay a
facility fee on the unused portion of the commitment.
The Credit Facility has a five-year term. In September 2002, it was
extended for an additional two months to November 30, 2003. The Company is
currently in negotiations to renew the Credit Facility. Interest only is payable
monthly on the Revolving credit and synthetic lease borrowings throughout the
term. In addition to monthly interest payments, the $25 million term loan
requires quarterly principal payments. Principal payments totalling $19.3
million have been paid through September 28, 2002.
The term loan and Revolving credit facility are secured by all accounts
receivable, inventory and other personal property. The Company has also entered
into a negative pledge agreement not to encumber any real property, with certain
permissible exceptions. The synthetic lease is secured by the real property to
which it relates.
Certain of the Company's stores are financed by mortgages currently
bearing interest at LIBOR plus 100 basis points.
The Company has financed its office/warehouse facility via a 10 year
mortgage with a current balance of $1.9 million, amortizable over 20 years, and
an eight year term loan with a balance of $.1 million.
Certain of the Company's long-term debt agreements require, among other
things, the maintenance of specified interest and rent coverage ratios and
amounts of tangible net worth. They also contain restrictions on cash dividend
payments.
The Company enters into interest rate hedge agreements which involve the
exchange of fixed and floating rate interest payments periodically over the life
of the agreement without the exchange of the underlying principal amounts. The
differential to be paid or received is accrued as interest rates change and is
recognized over the life of the agreements as an adjustment to interest expense.
FINANCIAL ACCOUNTING STANDARDS
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This standard harmonizes the accounting for impaired assets and resolves some of
the implementation issues of Statement of Financial Accounting Standards No. 121
("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". It retains the fundamental provisions of
SFAS 121 for (a) recognition and measurement of the impairment of long-lived
assets to be held and used and (b) measurement of long-lived assets to be
disposed of by sale. It also retains the basic provisions for presenting
discontinued operations in the income statement but broadens the scope to
include a component of an entity rather than a segment of a business. The
Company adopted this standard effective March 31, 2002. This pronouncement did
not have a material impact on the Company's financial position, results of
operations or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses
the financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)".
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SFAS 146 requires that a liability for the cost associated with an exit or
disposal activity be recognized when it is incurred and measured initially at
its fair value. The new guidance will impact the timing of recognition and the
initial measurement of the amount of liabilities the Company recognizes in
connection with exit or disposal activities initiated after December 31, 2002,
the effective date of SFAS 146.
Item 4. Controls and Procedures
Disclosure controls and procedures
The Company has established and currently maintains controls and other
procedures designed to ensure that material information required to be disclosed
in its reports filed under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified by the
Securities and Exchange Commission.
In conjunction with the close of each fiscal quarter, the Company conducts
an update and a review and evaluation of the effectiveness of the Company's
disclosure controls and procedures. It is the opinion of the Company's principal
executive officer and principal accounting officer, based upon an evaluation
completed within 90 days prior to the filing of this report, that the Company's
disclosure controls and procedures are sufficiently effective to ensure that any
material information relating to the Company is recorded, processed, summarized
and reported to its principal officers to allow timely decisions regarding
required disclosures.
Changes in internal controls
There were no significant changes in the Company's internal accounting
processes and control procedures during the quarter.
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MONRO MUFFLER BRAKE, INC.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The 2002 Annual Meeting of Shareholders of the Company (the "2002
Meeting") was held on August 6, 2002. At the 2002 Meeting, the Company's common
shareholders elected the Company's nominees Robert W. August, Donald Glickman,
Lionel B. Spiro and W. Gary Wood to Class 1 of the Board of Directors, to serve
until the election and qualification of their respective successors at the 2004
Annual Meeting of Shareholders. The common shareholders also elected the
Company's nominee, Francis R. Strawbridge, to Class 2 of the Board of Directors,
to serve until the election and qualification of his successor at the 2003
Annual Meeting of Shareholders. Such nominees for director received the
following votes:
Name Votes For Votes Withheld
---- --------- --------------
Robert W. August 7,074,501 631,580
Donald Glickman 7,079,001 627,080
Lionel B. Spiro 7,147,001 559,080
W. Gary Wood 7,147,001 559,080
Francis R. Strawbridge 7,168,388 535,633
In addition, Frederick M. Danziger, Robert G. Gross and Peter J.
Solomon will continue as Class 2 directors until the election and qualification
of their respective successors at the 2003 Annual Meeting of Shareholders.
Also approved by the following votes were:
(I) a proposal to ratify the amendment to the Monro Muffler Brake, Inc.
Non-Employee Directors' Stock Option Plan (6,710,794 shares in
favor, 975,481 shares against, 19,806 shares abstaining and zero
broker non-votes).
(II) a proposal to ratify the adoption of the Monro Muffler Brake, Inc.
Management Incentive Compensation Plan (7,608,722 shares in favor,
77,306 shares against, 20,053 shares abstaining and zero broker
non-votes).
(III) a proposal to ratify the reevaluation of the selection of
independent public accountants (7,551,945 shares in favor, 136,135
shares against, 18,001 shares abstaining and zero broker non-votes).
As required under the Company's Certificate of Incorporation, such
election of directors and other matters were confirmed by the holders of all
65,000 outstanding shares of the Company's Class C Convertible Preferred Stock,
par value $1.50 per share, by written consent dated as of August 6, 2002.
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Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.78 - Merchandising Agreement between Monro Muffler Brake,
Inc. and Morse Automotive Corporation, dated September 1, 2002
***
11 - Statement of Computation of Per Share Earnings.
99.1 - Certification Pursuant to 18 U.S.C. Section 1350
b. Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 28, 2002.
*** Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONRO MUFFLER BRAKE, INC.
DATE: November 12, 2002 By /s/ Robert G. Gross
--------------------------------------------
Robert G. Gross
President and Chief Executive Officer
DATE: November 12, 2002 By /s/ Catherine D'Amico
--------------------------------------------
Catherine D'Amico
Executive Vice President-Finance, Treasurer
and Chief Financial Officer
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Robert G. Gross, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Monro Muffler
Brake, Inc. (the "Company");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit committee of
the Company's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Robert G. Gross
----------------------------------------
Robert G. Gross
President and Chief Executive Officer
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CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
(SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002)
I, Catherine D'Amico, Executive Vice President - Finance and Chief
Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Monro Muffler
Brake, Inc. (the "Company");
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Company, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on
our most recent evaluation, to the Company's auditors and the audit committee of
the Company's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Catherine D'Amico
--------------------------------------
Catherine D'Amico
Executive Vice President - Finance and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No. Description Page No.
- ----------- ----------- --------
10.78 Merchandising Agreement between Monro Muffler Brake,
Inc. and Morse Automotive Corporation, dated September
1, 2002 *** 21
11 Statement of computation of per share earnings 24
99.1 Certification Pursuant to 18 U.S.C. Section 1350 25
*** Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission pursuant to a request for confidential
treatment.
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