FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

For the quarterly period ended September 25, 2004.

OR

For the transition period from                     to                    

Commission File No. 0-19357

MONRO MUFFLER BRAKE, INC.

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 [    ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes [ X ]                      No [    ]

As of October 22, 2004, 13,442,863 shares of the Registrant’s Common Stock, par value $ .01 per share, were outstanding.

MONRO MUFFLER BRAKE, INC.

INDEX

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MONRO MUFFLER BRAKE, INC.

The accompanying notes are an integral part of these financial statements.

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MONRO MUFFLER BRAKE, INC.

The accompanying notes are an integral part of these financial statements.

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MONRO MUFFLER BRAKE, INC.

(Dollars in thousands)

The accompanying notes are an integral part of these financial statements.

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MONRO MUFFLER BRAKE, INC.

The accompanying notes are an integral part of these financial statements.

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MONRO MUFFLER BRAKE, INC.

Note 1 – Condensed Consolidated Financial Statements

     The consolidated balance sheet as of September 25, 2004, the consolidated statements of income for the quarters and six months ended September 25, 2004 and September 27, 2003, the consolidated statements of cash flows for the six months ended September 25, 2004 and September 27, 2003 and the consolidated statement of changes in shareholders’ equity for the six months ended September 25, 2004, include Monro Muffler Brake, Inc. and its wholly owned subsidiaries (the “Company”). These unaudited condensed consolidated financial statements have been prepared by the Company and are subject to year-end adjustments. In the opinion of management, all known adjustments (consisting of normal recurring accruals or adjustments) have been made to present fairly the financial position, results of operations and cash flows for the unaudited periods presented.

     Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 27, 2004. The results of operations for the interim periods being reported on herein are not necessarily indicative of the operating results for the full year.

     The Company reports its results on a 52/53 week fiscal year with the fiscal year ending on the last Saturday in March of each year. The following are the dates represented by each fiscal period reported in these condensed financial statements:

     Certain reclassifications have been made to the prior year’s consolidated financial statements to conform to the current year’s presentation.

Note 2 – Acquisition of Mr. Tire

     Effective March 1, 2004, the Company acquired 36 tire and automotive repair locations in the Baltimore, Maryland and Arlington, Virginia areas from Mr. Tire, Inc. (the “Seller”) and its sole shareholder, Atlantic Automotive Corp. (the “Mr. Tire Acquisition”). The acquired locations include 26 leased retail stores and 10 kiosks which operate in Atlantic automotive dealerships. (Three kiosks have since been closed.) The Company purchased certain of Seller’s assets, including inventory, fixed assets and intellectual property and assumed certain of Seller’s liabilities, including Seller’s obligations pursuant to the real property leases for each of the 26 retail store locations, certain warranty obligations outstanding to customers and certain other liabilities. The purchase price amounted to approximately $29 million and has been adjusted post-closing to reflect final purchase accounting procedures as well as settlement of substantially all purchase price adjustments provided for in the related acquisition agreement.

Note 3 – Buyout of Synthetic Lease Properties

     On June 27, 2003, the Company purchased the land and buildings under its existing synthetic lease facility through the acquisition of the general and limited partnership interests in Brazos Automotive Properties, L.P. (“BAP”), for approximately $935,000 in cash (the “Lease Buyout”). The Lease Buyout was financed through the Company’s existing credit facility. BAP held the title related to 86 properties leased, under an operating lease, to a subsidiary of the Company and used in the conduct of the Company’s auto service business. BAP was also the debtor on a $26.6 million loan related to these properties. BAP, which became a wholly owned subsidiary of the Company as a result of the Lease Buyout, was established in 1998 for the purpose of acquiring certain properties and leasing them to the Company.

     As a result of this Lease Buyout, land and buildings, at their fair value of approximately $27.5 million including acquisition costs, have been reflected on the Company’s balance sheet. Additionally, long-term debt of $26.6 million has also been reflected. The debt is non-amortizing and is due in September 2006.

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MONRO MUFFLER BRAKE, INC.

     In fiscal 2005, payments on the debt are reported as interest expense. Depreciation expense is also recorded on these properties. Prior to the Lease Buyout in June 2003, these payments on the debt were reported as rent expense, and no depreciation was recorded.

Note 4 – Derivative Financial Instruments

     The Company reports derivatives and hedging activities in accordance with Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities”, as amended. This statement 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 an interest rate swap used to minimize the risk and/or costs associated with changes in interest rates, was approximately $1.6 million at September 25, 2004. This swap matures in October 2005. This swap contract requires the Company to pay a fixed-rate of interest of 7.15% plus a spread of 80 basis points, and receive variable rates of interest based on the 30-day LIBOR rate.

     At September 25, 2004, the fair value of this contract, net of tax, is recorded as a component of accumulated other comprehensive income in the consolidated Statement of Changes in Shareholders’ Equity.

Note 5 - Vendor Rebates and Cooperative Advertising Credits

     In accordance with Emerging Issues Task Force (“EITF”) 02-16 of the Financial Accounting Standards Board (“FASB”), for vendor agreements entered into or modified after December 31, 2002, the Company accounts for vendor rebates and cooperative advertising credits as a reduction of the cost of products purchased, except where the rebate or credit is a reimbursement of costs incurred to sell the vendor’s product, in which case it is offset against the costs incurred. Vendor rebates and credits associated with vendor agreements entered into prior to December 31, 2002 are recognized as cooperative advertising income as earned and are classified as a reduction of selling, general and administrative expenses.

Note 6 - Earnings Per Share

     The following is a reconciliation of basic and diluted earnings per common share for the respective quarters:

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MONRO MUFFLER BRAKE, INC.

     The computation of diluted earnings per share for the three and six months ended fiscal September 2004 includes all outstanding stock options and warrants to purchase shares of the Company’s common stock and excludes the effect of the assumed exercise of 139,000 and 60,000 outstanding stock options, respectively, and 100,000 warrants for the six months ended September 2004, as the exercise prices of these options and warrants exceeded the average market price of the Company’s common stock for those periods. Outstanding stock options excluded from the computation of diluted earnings per share for the three and six months ended fiscal September 2003 were 31,500 and 37,500, respectively.

Note 7 – Stock-Based Compensation

     The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretations including FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25”, issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the exercise price. The Company’s policy generally is to grant stock options at fair market value at the date of grant.

     Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, (“SFAS 123”) established accounting and disclosure requirements using a fair value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS 123. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period.

     The fair values of the options granted were estimated on the date of their grant using the Black-Scholes option-pricing model.

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 25, 2004:

     In connection with the sale or disposal of assets, the Company reduced fixed assets by $164,000 and decreased other current liabilities by $164,000.

     In connection with the recording of capital leases, the Company increased fixed assets by $350,000 and increased long-term debt by $350,000.

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MONRO MUFFLER BRAKE, INC.

     In connection with recording the value of the Company’s swap contracts, other comprehensive income increased by $15,000, other long-term liabilities decreased by $24,000 and the deferred income tax liability was increased by $9,000.

     During the six months ended September 2004, the Company recorded purchase accounting adjustments for the Mr. Tire acquisition that increased goodwill by $435,000, comprised primarily of adjustments to deferred income tax assets, inventory, property, plant and equipment and other current liabilities.

SIX MONTHS ENDED SEPTEMBER 27, 2003:

     In connection with the sale or disposal of assets, the Company reduced fixed assets by $421,000 and decreased other current liabilities by $421,000.

     In connection with recording the value of the Company’s swap contracts, other comprehensive income increased by $375,000, other current liabilities decreased by $575,000, other long-term liabilities decreased by $30,000 and the deferred income tax liability was increased by $230,000.

     In connection with the purchase of Brazos Automotive Properties, L.P. in June 2003 (see Note 3), the Company paid $935,000 as follows:

CASH PAID DURING THE PERIOD:

Note 9 – Stock Split

     On September 16, 2003, the Company’s Board of Directors declared a three-for-two stock split to be effected in the form of a 50% stock dividend. The stock split was distributed on October 31, 2003 to shareholders of record as of October 21, 2003. All basic and diluted earnings per share, average shares outstanding information and all applicable footnotes have been adjusted to reflect the aforementioned stock split.

Note 10 – Subsequent Event

     On October 17, 2004, the Company completed its purchase of five retail tire stores from Donald B. Rice Tire Co., Inc. These stores are located in the Baltimore market and have annualized sales of $6.5 million. The Company purchased all of the operating assets of the five retail stores, including fixed assets and certain inventory, and assumed certain liabilities, including obligations pursuant to the real property leases for each of the retail store locations. The purchase price was approximately $3.6 million.

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MONRO MUFFLER BRAKE, INC.

Results of Operations

     The statements contained in this Form 10-Q that 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 made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results to differ materially from those expressed. These factors include, but are not necessarily limited to, product demand, dependence on and competition within the primary markets in which the Company’s stores are located, the need for and costs associated with store renovations and other capital expenditures, the effect of economic conditions, the impact of competitive services and pricing, product development, parts supply restraints or difficulties, industry regulation, risks relating to leverage and debt service (including sensitivity to fluctuations in interest rates), continued availability of capital resources and financing, risks relating to integration of acquired businesses and other factors set forth or incorporated elsewhere herein and in the Company’s other Securities and Exchange Commission filings. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.

     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.

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Second Quarter Ended September 25, 2004 Compared To Second Quarter Ended September 27, 2003

     Sales were $88.4 million for the quarter ended September 25, 2004 as compared with $74.1 million in the quarter ended September 27, 2003. The sales increase of $14.3 million, or 19.3%, was due to an increase of $14.2 million related to new stores and a comparable store sales increase of .6%. The acquired Mr. Tire stores contributed $13.0 million. There were 77 selling days in the quarter ended September 25, 2004 as compared to 76 selling days in the quarter ended September 27, 2003.

     Sales for the six months ended September 25, 2004 were $175.8 million as compared to $147.7 million for the comparable period in the prior year. The sales increase of $28.0 million is due to a comparable store sales increase of ..8%, as well as an increase of $27.6 million from new stores, including the acquired Mr. Tire stores which added $25.4 million.

     At September 25, 2004 the Company had 599 company-operated stores and 7 kiosk locations compared with 562 stores at September 27, 2003. During the quarter ended September 25, 2004, the Company opened three stores and closed one store and three kiosks.

     Gross profit for the quarter ended September 25, 2004 was $37.1 million or 42.0% of sales as compared with $31.5 million or 42.4% of sales for the quarter ended September 27, 2003. The decrease in gross profit for the quarter ended September 25, 2004, as a percentage of sales, is due to an increase in total material costs caused by a shift in sales mix to the maintenance and tire categories which have higher material costs than brakes and exhaust. Without Mr. Tire, gross profit for the quarter increased from 42.4% last year to 42.9% this year, partially due to a reduction in material costs as well as through increased leveraging of distribution and occupancy costs which are included in cost of sales.

     The improvement in material costs apart from the Mr. Tire stores was due in large part to a reduction in outside purchases. The Company has added approximately $3.0 million of inventory in fiscal 2005 in a concerted effort to reduce outbuys. This was partially offset by the fact that included in the maintenance category are oil changes which increased approximately 15% on a comparable store basis over the prior year quarter. The Company promoted oil changes to drive traffic during the quarter by slightly lowering the selling price, while experiencing an increase in the cost of oil for the quarter. This had the effect of lowering margin in the maintenance category as compared to the prior year quarter.

     The shift in mix to increased tire sales also reduced margin to some extent. However, price increases in the quarter as well as the recognition of vendor rebates against cost of goods in concert with inventory turns, in accordance with the new accounting rules, more than offset the aforementioned margin pressures and helped to improve margin in the non Mr. Tire stores.

     Technician labor, as a percent of sales, decreased between the two quarters, also due to the increase in tire sales as a percent of total sales.

     Gross profit for the six months ended September 25, 2004 was $74.4 million, or 42.3% of sales, as compared to $63.7 million or 43.1% of sales. Without Mr. Tire, gross profit for the six months increased from 43.1% last year to 43.5% this year, primarily due to improved leveraging of distribution and occupancy costs.

     On a consolidated basis, the shift in sales mix to tires and maintenance services drove up material costs as previously discussed for the quarter.

     Operating, selling, general and administrative (“SG&A”) expenses for the quarter ended September 25, 2004 increased by $4.5 million to $25.6 million from the quarter ended September 27, 2003, and were 28.9% of sales as compared to 28.4% in the prior year quarter. The increase in SG&A expense as a percentage of sales is due primarily to an increase in benefits expense, Sarbanes Oxley costs, Mr. Tire integration costs and lower cooperative advertising credits. Within benefit expense, health insurance costs increased as a percent of sales as compared to the prior year quarter. With regard to cooperative advertising credits, there was a slight decrease in the amount recorded against SG&A cost. In accordance with EITF 02-16, a portion of these credits is now recorded as a reduction of cost of sales.

     Regarding Mr. Tire, the Company successfully installed its point of sale system in the Mr. Tire retail stores, and its merchandising system in Mr. Tire’s warehouse and wholesale center during the quarter ended September 2004. Some of the costs associated with both the system and other integration related activities are not capitalizable, thereby increasing SG&A costs as percent of sales.

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     For the six months ended September 25, 2004, SG&A expenses increased by $7.7 million to $50.9 million from the comparable period of the prior year, and were 28.9% of sales as compared to 29.2%. This was primarily due to a planned reduction in advertising expense as the Company shifted dollars from more expensive radio, newspaper and electronic advertising to more efficient and cost-effective direct mail marketing.

     Operating income for the quarter ended September 25, 2004 of approximately $11.5 million increased 11.4% as compared to operating income for the quarter ended September 27, 2003, and decreased as a percentage of sales from 14.0% to 13.1% for the same periods.

     Net interest expense for the quarter ended September 25, 2004 decreased by approximately $.3 million as compared to the same period in the prior year, and decreased from 1.2% to .7% as a percentage of sales for the same periods. The weighted average debt outstanding for the quarter ended September 25, 2004 increased by approximately $1.6 million. Offsetting this, however, was a decrease in the weighted average interest rate for the current year quarter of approximately 250 basis points as compared to the prior year. Net interest expense for the six months ended September 25, 2004 decreased by $.3 million to $1.2 million and decreased with the prior year as a percentage of sales by .3%.

     The effective tax rate for the quarters and six months ended September 25, 2004 and September 27, 2003 was 38.0% of pre-tax income.

     Net income for the quarter ended September 25, 2004 of $6.7 million increased 13.1% from net income for the quarter ended September 27, 2003. Earnings per share on a diluted basis for the quarter ended September 25, 2004 increased 15.0%.

     For the six months ended September 25, 2004, net income of $13.6 million increased 15.5% and diluted earnings per share increased 14.6%.

     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

     The Company’s primary capital requirements in fiscal 2005 are the upgrading of facilities and systems in existing stores and the funding of its store expansion program, including potential acquistions of existing store chains. For the six months ended September 25, 2004, the Company spent $9.3 million principally for equipment. 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.

     Liquidity

     In March 2003, the Company renewed its credit facility agreement. The amended financing arrangement consists of an $83.4 million Revolving Credit facility (of which approximately $21.6 million was outstanding at September 25, 2004), and a non-amortizing credit loan (formerly synthetic lease financing) totaling $26.6 million (all of which was outstanding at September 25, 2004).

     The Revolving Credit portion of the facility has a three-year term expiring in September 2006. On June 27, 2003, the Company purchased the entity holding title to the properties and debt under the synthetic lease and, accordingly, consolidated both the assets and debt related to such lease on its balance sheet at that date. In accordance with the Company’s credit facility agreement, the synthetic lease was converted to a three year, non-amortizing revolving credit loan, also expiring in September 2006.

     The loans bear interest at the prime rate or other LIBOR-based rate options tied to the Company’s financial performance. Interest only is payable monthly on the Revolving Credit facility and credit loan throughout the term. The Company must also pay a facility fee on the unused portion of the commitment.

     The credit facility is secured by most of the Company’s assets, with certain permissible exceptions.

     The Company has financed its office/warehouse facility via a 10-year mortgage with a current balance of $1.6 million, amortizable over 20 years, and a mortgage note payable of $.7 million due in a balloon payment in 2015. In addition, the Company

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has financed certain store properties and equipment with capital leases, which amount to $3.2 million and are due in installments through 2018.

     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. At September 25, 2004, the Company is in compliance with the applicable debt covenants.

     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.

Recent Accounting Pronouncements

     In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities, and Interpretation of ARB No. 51”, which requires all variable interest entities (VIEs) to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the variable interest entity. In addition, the Interpretation expands disclosure requirements for both VIEs that are consolidated as well as VIEs from which the entity is the holder of a significant amount of the beneficial interests, but not the majority. See Note 3 regarding the Company’s fiscal 2004 buyout of the properties under its synthetic lease arrangement.

     In March 2004, the FASB issued a proposed SFAS - “Share-based Payment: an Amendment of FASB Statements No. 123 and 95.” The proposed standard would require companies to expense share-based payments to employees, including stock options, based on the fair value of the award at the grant date. The proposed statement would eliminate the intrinsic value method of accounting for stock options permitted by APB No. 25, “Accounting for Stock Issued to Employees,” which we currently follow. The Company will assess the impact, if any, on our consolidated financial statements of any final standard.

Item 4. Controls and Procedures

     Disclosure controls and procedures

     The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

     In conjunction with the close of each fiscal quarter, the Company conducts an update, a review and an evaluation of the effectiveness of the Company’s disclosure controls and procedures. It is the conclusion of the Company’s Chief Executive Officer and Chief Financial Officer, based upon an evaluation completed as of the end of the most recent fiscal quarter reported on herein, 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 changes in the Company’s internal accounting processes and control procedures or other factors subsequent to the date of the evaluation referred to above that could significantly affect the Company’s disclosure controls.

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MONRO MUFFLER BRAKE, INC.

PART II - OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

     The 2004 Annual Meeting of Shareholders of the Company (the “2004 Meeting”) was held on August 10, 2004. At the 2004 Meeting, the Company’s common shareholders elected the Company’s nominees Richard A. Berenson, Donald Glickman, Robert E. Mellor and Lionel B. Spiro to Class 1 of the Board of Directors, to serve until the election and qualification of their respective successors at the 2006 Annual Meeting of Shareholders. Such nominees for director received the following votes:

     In addition, Frederick M. Danziger, Robert G. Gross, Peter J. Solomon and Francis R. Strawbridge will continue as Class 2 directors until the election and qualification of their respective successors at the 2005 Annual Meeting of Shareholders.

     Also approved by the following votes were:

(I)

a proposal to ratify the appointment of PricewaterhouseCoopers as the independent public accountants of the Company for the fiscal year ending March 26, 2005 (12,108,838 shares in favor, 304,431 shares against, 44,740 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, 2004.

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MONRO MUFFLER BRAKE, INC.

PART II - OTHER INFORMATION

Item 6. Exhibits

31.1 – Certification of Robert G. Gross pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

31.2 - - Certification of Catherine D’Amico pursuant to Section 302 of the Sarbanes – Oxley Act of 2002

32.1 – Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes – Oxley Act of 2002.

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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.

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EXHIBIT INDEX

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