ITEM 1. BUSINESS
GENERAL
Monro Muffler Brake, Inc. ("Monro" or the "Company") is a chain of company-operated stores providing automotive undercar repair services in the United States. At March 31, 1996, Monro operated 274 stores in New York, Pennsylvania, Ohio, Connecticut, Massachusetts, West Virginia, Virginia, Maryland, Vermont, New Hampshire, New Jersey, North Carolina, South Carolina and Indiana. The Company's stores typically are situated in high-visibility locations in suburban areas and small towns. Monro serviced approximately 1,296,000 vehicles in fiscal 1996. *
The predecessor to the Company was founded by Charles J. August in 1957 as a Midas Muffler franchise in Rochester, New York, specializing in mufflers and exhaust systems. In 1966, the Company discontinued its affiliation with Midas Muffler, and began to diversify into a full line of undercar repair services. An investor group led by Peter J. Solomon and Donald Glickman purchased a controlling interest in the Company in July 1984. At that time, Monro operated 59 stores, located primarily in upstate New York, with approximately $21 million in sales in fiscal 1984. Since 1984, Monro has added 215 stores and expanded its marketing area to include thirteen additional states. In 1987, Jack M. Gallagher succeeded Charles J. August as President and Chief Executive Officer. On April 1, 1995, Lawrence C. Day, who has over 19 years of experience in the automotive parts and service industries and previously served as Chief Operating Officer of the Company since July 1993, succeeded Jack M. Gallagher as President and Chief Executive Officer.
The Company was incorporated in the State of New York in 1959. The Company's principal executive offices are located at 200 Holleder Parkway, Rochester, New York 14615, and its telephone number is (716) 647-6400.
Monro provides a full range of services on passenger cars, light trucks and vans for mufflers and exhaust systems (estimated at 32% of fiscal 1996 sales); brakes (35%); and steering, drive train, suspension and wheel alignment (19%). The Company also provides other products and services including tires and state inspections (14%). Monro specializes in the repair and replacement of parts which must be periodically replaced as they wear out. Normal wear on these parts generally is not covered by new car warranties. The Company typically does not perform under-the-hood repair services except for oil change services and a heating and cooling system "flush and fill" service. The Company does not sell parts or accessories to the do-it-yourself market.
In fiscal 1993, the Company formed a wholly-owned subsidiary, Monro Service Corporation, a Delaware corporation qualified to do business in the State of New York. The Company contributed to Monro Service Corporation all assets, rights, responsibilities and liabilities associated with the Company's warehousing, purchasing, advertising, accounting, office services, payroll, cash management, semi-truck maintenance and certain other operations which are wholly performed within New York State. The Company believes that this restructuring has enhanced and will continue to enhance operational efficiency and provide cost savings.
* References herein to fiscal years are to the Company's fiscal years ending or ended March 31 of each year (e.g., references to "fiscal 1996" are to the Company's fiscal year ended March 31, 1996).
INDUSTRY OVERVIEW
According to industry reports, demand for automotive repair services, including undercar repair services, has increased due to the general increase in the number of vehicles registered, the growth in vehicle miles driven, the increase in the average age of vehicles and the increased complexity of vehicles, which makes it more difficult for a vehicle owner to perform do-it-yourself repairs.
At the same time as demand for automotive repair services has grown, the Company believes that the number of general repair outlets has decreased, principally because fewer gas stations now perform repairs, and because there are fewer new car dealers. Monro believes that these factors present opportunities for increased sales by the Company, even though the number of specialized repair outlets (such as those operated by the Company and its direct competitors) has increased to meet the growth in demand.
OPERATING STRATEGY
Monro's operating strategy is to provide its customers with dependable, high-quality automotive service at a competitive price by emphasizing the following key elements.
Complete Undercar Service
All Monro stores provide a full range of undercar repair services for mufflers and exhaust systems, brakes, steering, drive train, suspension and wheel alignment. These services apply to all makes and models of domestic and foreign cars, light trucks and vans. In addition, substantially all of the stores provide oil change services as well as tire sales and installation. Stores in New York, West Virginia, New Hampshire, Pennsylvania, Virginia, Massachusetts and North Carolina also perform annual state inspections. In fiscal 1996, a heating and cooling system "flush and fill" service was added to all stores.
Customer Satisfaction
The Company has developed "The Monro Doctrine", a set of customer satisfaction principles, which is displayed in each store so that customers and employees will understand the Company's customer service philosophy. These principles are: free inspection of brakes, shocks, front end and exhaust systems; item-by-item review with customers of problem areas; free written estimates; written guarantees; drive-in service without an appointment; fair and reasonable prices as advertised; and repairs by professionally trained undercar specialists, many of whom are Automotive Service Excellence (ASE) certified in brakes and suspension.
Competitive Pricing/Advertising
The Company seeks to set competitive prices for quality services and products. The Company supports its pricing strategy by advertising through newspaper and direct mail coupon inserts and in-store promotional signage and displays. In addition, the Company advertises through television, radio and yellow pages to increase consumer awareness of the services offered.
Centralized Control
Unlike many of its competitors, the Company owns and operates rather than franchises its stores. Monro believes that direct operation of all stores enhances its ability to compete by providing centralized control of such areas of operations as service quality, store appearance, promotional activity and pricing. A high level of technical competence is maintained throughout the Company as Monro requires, as a condition of employment, that employees participate in comprehensive training programs to keep pace with technology changes. Additionally, purchasing, distribution, merchandising, advertising, accounting and other store support functions are centralized in the Company's corporate headquarters in Rochester, New York, and provided through the Company's subsidiary, Monro Service Corporation. The centralization of these functions results in efficiencies and gives management the ability to closely monitor and control costs.
Comprehensive Training
The Company provides ongoing, comprehensive training to its store employees. Monro believes that such training provides a competitive advantage by enabling its technicians to provide quality service to its customers in all areas of undercar repair.
EXPANSION STRATEGY
Monro has experienced significant growth due to the opening of new stores and increases in comparable store sales. In fiscal 1996, comparable store sales declined in the first three quarters of the year, but the company experienced a strong comparable store sales increase in its fourth fiscal quarter. Management believes that the continued growth in sales and profits of the Company is dependent, in large part, upon its continued ability to open and operate new stores on a profitable basis. In addition, overall profitability of the Company could be reduced if new stores do not attain profitability.
As of March 31, 1996, Monro operated 274 stores located in 14 states. The following table shows the growth in the number of stores over the last five fiscal years:
Monro believes that there are expansion opportunities in new as well as existing market areas and expects to open a total of 40-50 stores in fiscal 1997. This expansion will result from a combination of constructing stores on vacant land and acquiring existing store locations. The Company believes that as the industry consolidates due to the increasingly complex nature of automotive repair and the expanded capital requirements for state-of-the art equipment, there will be more opportunities for acquisitions of existing businesses or store structures.
The Company has developed a systematic method for selecting new store locations and a more targeted approach to marketing new stores. Key factors in market and site selection include population, demographic characteristics, vehicle population and the intensity of competition. These factors are evaluated through the use of a proprietary computer model developed for the Company. The characteristics of each potential site are compared by the model to the profiles of existing stores, and the model then projects sales for that site. Monro attempts to cluster stores in market areas in order to achieve economies of scale in advertising, supervision and distribution costs. All new sites presently under consideration are within or contiguous to Monro's established marketing areas.
The Company believes that management and operating improvements implemented over the last several fiscal years will enhance its ability to sustain its growth. Monro has a chain-wide computerized inventory control and electronic point-of-sale (POS) management information system, which has increased management's ability to monitor operations as the number of stores has grown. In fiscal 1995, the Company added electronic cataloging to its POS system. This feature allows store managers to electronically research the specific parts needed for the make and model of car being serviced. Enhancements continue to be made to the system annually which increase efficiency, improve the quality and timeliness of store reporting and enable the Company to better serve its customers.
The financing to open a new store location may be accomplished in one of three ways: a store lease for the land and building (in which case, land and building costs will be financed primarily by the lessor), a land lease with the building constructed by the Company (with building costs paid by the Company), or a land purchase with the building constructed by the Company. In all three cases, each new store also will require approximately $136,000 for equipment (including a point-of-sale system), and approximately $53,000 in inventory. Because Monro generally does not extend credit to its customers, stores generate almost no receivables and a new store's actual net working capital investment is nominal. Total capital required to open a new store ranges, on average (based upon the last three fiscal years' openings), from $210,000 to $790,000 depending on the location and which of the three financing methods is used. In instances where Monro acquires an existing business, it may pay additional amounts for intangible assets such as customer lists, covenants not-to-compete and goodwill.
At March 31, 1996, Monro leased the land and/or the building at 73% of its store locations and owned the land and building at the remaining locations. Monro's policy is to situate new stores in the best locations, without regard to the form of ownership required to develop the locations.
New stores have average sales of approximately $340,000 in their first twelve months of operation.
STORE OPERATIONS
Store Format
The typical format for a Monro repair store is a free-standing building of approximately 4,500 square feet consisting of a sales area, six fully-equipped service bays and a parts storage area, with a parking lot with space for approximately 20 cars. Most service bays are equipped with aboveground electric vehicle lifts. The typical store carries $53,000 of inventory and 2,500 stock keeping units ("SKUs"). Generally, each store is located within 35 miles of a "key" store which carries approximately 20% more inventory than a typical store and serves as a mini-distribution point for other stores in its area.
The stores generally are situated in high-visibility locations in suburban areas or small towns and offer easy customer access. The typical store is open from 7:30 a.m. to 8:00 p.m. on Mondays, Tuesdays, Thursdays and Fridays; from 7:30 a.m. to 6:00 p.m. on Wednesdays; and from 7:30 a.m. to 5:00 p.m. on Saturdays.
Inventory Control and Management Information System
All Monro stores are linked to the central office and warehouse by a computerized inventory control and electronic POS management information system, which enables the Company to collect sales and operational data on a daily basis, to adjust store pricing to reflect local conditions and to control inventory on a "real-time" basis. Additionally, each store has access through the POS system to the inventory carried by the seven stores nearest to it. Management believes that this feature improves customer satisfaction and store
productivity by reducing the time required to locate out-of-stock parts.
Quality Control and Warranties
To maintain quality control, the Company conducts audits to rate its employees' telephone sales manner and the accuracy of pricing information given. All headquarters management personnel participate in the Company's day-in-the-store program by working in a store under the direction of the store manager, once every other month, to better understand the latest developments at the store level.
Customer comment cards, pre-addressed to the headquarters office, are available at each store for customers to comment on the Company's services. The Company's Chief Executive Officer personally reads and responds to these completed comment cards, and customer concerns are addressed via personal follow-up by field management.
The Company has a customer survey program to monitor customer attitudes toward service quality, friendliness, speed of service, and several other factors for each store. This program includes four survey mailings per store annually. (Each mailing consists of 100 surveys.) Completed surveys are read by the Chief Executive Officer, and at his direction, customer concerns are addressed via letter and personal follow-up by field management.
Additionally, in fiscal 1994, the Company implemented its "Double Check for Accuracy Program." This quality assurance program requires that a technician and supervisory-level employee independently inspect a customer's vehicle, diagnose and document the necessary repairs, and agree on an estimate before presenting it to a customer. This process is formally documented on the written estimate by store personnel.
The Company is an active member of the Motorist Assurance Program (MAP). MAP is an organization of automotive retailers, wholesalers and manufacturers which was established as part of an industry-wide effort to address the ethics and business practices of companies in the automotive repair industry. Participating companies are committed to improving consumer confidence and trust in the automotive repair industry by adopting "Uniform Inspection Guidelines" and "Standards of Service" established by MAP. These "Standards of Service" are posted in every Monro store and serve to provide consistent recommendations to customers in the diagnosis and repair of a vehicle.
Monro offers limited warranties on substantially all of the products and services that it provides. The Company believes that these warranties are competitive with industry practices.
Store Personnel and Training
The Company supervises store operations primarily through its five district managers who oversee 27 regional managers. The typical store is staffed by a store manager and four to six technicians, one of whom serves as the assistant manager.
All store managers receive a base salary, and assistant managers receive hourly compensation. In addition, all store managers and assistant managers receive other compensation based on their store's customer relations, gross profit, labor cost controls, safety, sales volume and other factors. A quarterly bonus is awarded to all store managers and assistant managers based on performance against these goals.
Monro believes that the ability to recruit and retain qualified technicians is an important competitive factor in the automotive repair industry, which has historically experienced a high turnover rate. Monro makes a concerted effort to recruit individuals who will have a long-term commitment to the Company and offers an hourly rate structure and additional compensation based on productivity; a competitive benefits package, including health, life and disability insurance; profit-sharing and pension plans; as well as the opportunity to advance within the Company. Most of the Company's managers and regional managers started with Monro as technicians.
Most of the Company's new technicians join the Company in their early twenties as trainees or apprentices. As they progress, they are promoted to technician and eventually master technician, the latter requiring ASE certification in both brakes and suspension. The Company offers a tool lease program through which trainee technicians can acquire their own set of tools. The Company also will reimburse technicians for the cost of ASE certification test fees and encourages all technicians to become certified by providing a higher hourly wage rate following their certification.
The Company's training department conducts in-house technical clinics for store personnel and management training programs for new store managers, and coordinates attendance at technical clinics offered by the Company's vendors. Each store maintains a library of 20-25 instructional videos. The Company issues technical bulletins to all stores on innovative or complex repair processes, and maintains a centralized data base for technical repair problems. In addition, the Company has established a telephone technical hotline to provide assistance to store personnel in resolving problems encountered while diagnosing and repairing vehicles. The help line is available during all hours of store operation.
During fiscal 1995, the Company began testing a "training store" concept in one of its regions. This involves a six-week comprehensive training program for a group of entry-level technicians which occurs in a fully functioning Monro store. The program is taught by a full- time training manager who is permanently assigned to the store, along with the store manager. In the past, new technicians were trained in a less formal manner by an experienced technician at the store for which they were hired. In addition to providing a more focused training effort, this new training structure relieves the store managers and more experienced technicians of the initial training burden. The structure also contributes to more efficient and profitable store environments. Technicians completing this program are assigned to stores within the region. Based upon the success of the program, the Company established training stores in two other
regions during fiscal 1996, and plans to expand the number of training stores in the future.
PURCHASING AND DISTRIBUTION
The Company, through its wholly-owned subsidiary Monro Service Corporation, selects and purchases parts and supplies for all stores on a centralized basis. Although purchases outside the centralized system are made when needed at the store level, these purchases accounted for approximately 12% of all parts used in fiscal 1996.
The Company's ten largest vendors accounted for approximately two thirds of its parts purchases, with the largest vendor accounting for slightly over 18% of total purchases in fiscal 1996. The Company purchases parts from over 100 vendors and has no long-term contracts with any vendor. Management believes that the Company's relationships with vendors are excellent and that alternative sources of supply exist, at comparable cost, for substantially all parts used in the Company's business. The company routinely obtains bids from vendors to ensure it is receiving competitive pricing and terms.
Parts are shipped by vendors to the Company's warehouse facility in Rochester, New York, and are distributed to stores through the Company's owned and operated tractor/trailer fleet. Most stores are replenished once every week from the warehouse, and such replenishment fills, on the average, 97% of all items ordered by the stores' automatic POS-driven replenishment system. The warehouse stocks approximately 10,000 SKUs.
COMPETITION
The Company competes in the retail automotive service industry. This industry is generally highly competitive and fragmented, and the number, size and strength of competitors varies widely from region to region. The Company believes that competition in this industry is based on customer service and reputation, store location, name awareness and price. Monro's primary competitors include national and local undercar specialty chains, both franchised and company-operated; car dealerships; and, to a lesser extent, gas stations and independent garages. Monro considers Midas International Corp., Meineke Discount Mufflers Inc. and Speedy Muffler King Inc. to be direct competitors. In most of the new markets that the Company has entered, at least one competitor was already present. In identifying new markets, the Company analyzes, among other factors, the intensity of competition. See "Expansion Strategy."
EMPLOYEES
As of March 31, 1996, Monro had 1,694 employees, of whom 1,564 were employed in the field organization, 44 were employed at the warehouse and 86 were employed at the Company's corporate headquarters. Monro's employees are not members of any union. The Company believes that its relations with its employees are good.
REGULATION
The Company stores new oil and generates and handles used automotive oils and certain solvents, which are disposed of by licensed third-party contractors. Thus, the Company is subject to a number of federal, state
and local environmental laws including the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"). In addition, the United States Environmental Protection Agency (the "EPA"), under the Resource Conservation and Recovery Act ("RCRA"), and various state and local environmental protection agencies regulate the Company's handling and disposal of waste. The EPA, under the Clean Air Act, also regulates the installation of catalytic converters by the Company and all other repair stores by periodically spot checking jobs and has the power to fine businesses that use improper procedures or materials. The EPA has the authority to impose sanctions, including civil penalties up to $25,000 per violation (or up to $25,000 per day for certain willful violations or failures to cooperate with authorities), for violations of RCRA and the Clean Air Act. The Company is subject to various laws and regulations concerning workplace safety, zoning and other matters relating to its business. The Company believes that it is in substantial compliance with all applicable environmental and other laws and regulations, and that the cost of such compliance is not material to the Company.
In 1992, two national chains with which the Company competes were the subject of investigations by consumer protection agencies and the Attorneys General of various states, including several states in which the Company does business. These occurrences caused a heightened awareness on the part of the automotive service industry of the need to make certain a properly informed consumer is making the decision on the auto service needs of his or her car. They have also precipitated the introduction of proposed legislation in various states where the Company operates which would further regulate the auto service industry. Throughout its 39-year history, the Company has believed that a satisfied customer is its best advertisement and continues to place strong emphasis on customer satisfaction. To date, none of this legislation has been enacted. The Company continues to monitor such proposed legislation and believes that because of its method of operation and strength of its systems, it will be in a strong position, relative to its competition, to comply with any legislation which may be enacted.
SEASONALITY
Although the Company's business is not highly seasonal, customers do require more undercar service during the period of March through October than the period of November through February, when miles driven tend to be lower. As a result, sales and profitability are lower during the latter period.
ITEM 2.
ITEM 2. PROPERTIES
The Company, through Monro Service Corporation, owns its office/warehouse facility of approximately 95,000 square feet, which is located on 12.7 acres of land in Holleder Industrial Park, located in Rochester, New York.
Of Monro's 274 stores at March 31, 1996, 75 were owned, 142 were leased and for 57, the land only was leased. In general, the Company leases store sites for a ten-year period with several five-year renewal options. Giving effect to all renewal options, over 90% of the non-capital leases (160 stores) expire after 2003. Certain of the leases provide for contingent rental payments if a percentage of annual gross sales exceeds the base fixed rental amount. The highest contingent percentage rent of
any lease is 6.75%, and no such lease has adversely affected profitability of the store subject thereto. Certain officers and directors of the Company or members of their families are the lessors, or have interests in entities that are the lessors, with respect to 41 of the leases. No related party leases, other than renewals or modifications of leases on existing stores, have been entered into since May 1989, and no new related party leases are contemplated.
The existing and former headquarters office and warehouse facility and 38 of the owned stores are subject to mortgages held by commercial banks or private investors. As of March 31, 1996, the outstanding amount under the mortgage on the existing headquarters office and warehouse facility was $2.9 million, the outstanding amount under the mortgage on the former headquarters office and warehouse facility was $.2 million and the aggregate outstanding amount under the permanent mortgages on 38 of the owned stores was $11.8 million. There was also $.7 million outstanding under a mortgage held by the City of Rochester, New York, secured by the land on which the new headquarters office and warehouse is located, and a term loan of $ .7 million secured by the existing headquarters facility.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party or subject to any legal proceedings other than certain routine claims and lawsuits that arise in the normal course of its business. The Company does not believe that such routine claims or lawsuits, individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY AS OF JUNE 1, 1996
The following persons are the executive officers of the Company, having been elected by and serving at the discretion of the Board of Directors of the Company:
The following is a brief account of the business experience of each of the executive officers of the Company:
Lawrence C. Day has been President and Chief Executive Officer since April 1995 and a director since July 1993. Mr. Day was Executive Vice President and Chief Operating Officer from July 1993 to April 1995. Prior to joining the Company, Mr. Day was Vice President of the Auto Express Division of Montgomery Ward & Co., Incorporated from December 1991 to June 1993, Field Director of the Auto Express Division of Montgomery Ward & Co., Incorporated from December 1989 to December 1991 and Vice President of Automotive Industries, Inc. from February 1989 to December 1989. From September 1976 to January 1989, Mr. Day held various management positions for the Firestone Tire & Rubber Company.
John W. August has been Senior Vice President - Business Development since November 1994. Mr. August was Senior Vice President - Store Operations from May 1992 to November 1994, Vice President - Western Operations from August 1988 to May 1992, Vice President - Real Estate from June 1985 to August 1988, and has worked for Monro in various other capacities since 1972.
Robert W. August has been Senior Vice President - Marketing since May 1992, Secretary since July 1984 and a director since June 1982. Mr. August was Vice President - Marketing from July 1989 to May 1992, Executive Vice President from 1984 to July 1989, and has worked for Monro in various other capacities since 1968.
G. Michael Cox has been Senior Vice President - Store Operations since January 1995. Prior to joining the Company, Mr. Cox was Director of Affiliated Dealer Operations for Bridgestone/Firestone, Inc. from 1993 to January 1995, Director of Corporate Accounts for Bridgestone/Firestone, Inc. from 1992 to 1993 and a Zone Manager for Bridgestone/Firestone, Inc. from 1990 to 1992. Mr. Cox held various other management positions for Bridgestone/Firestone, Inc. from 1976 to 1990.
Catherine D'Amico has been Senior Vice President - Finance, Chief Financial Officer and Treasurer since August 1993. Ms. D'Amico, a certified public accountant, was previously a Senior Audit Manager with Price Waterhouse LLP in Rochester, New York and was affiliated with such firm from 1978 to 1993.
Thomas J. Budreau has been Vice President - Eastern Operations since October 1995. Prior to joining the Company, Mr. Budreau was the National Auto Express Service Manager for Montgomery Ward & Co., Incorporated from March 1994 to October 1995. From 1975 to March 1994, Mr. Budreau held various other management positions with Montgomery Ward & Co., Incorporated.
William E. Thackrah has been Vice President - Western Operations since May 1994. From May 1992 through April 1994, Mr. Thackrah was a district manager, and a regional manager from August 1987 through April 1992. Mr. Thackrah has worked for Monro in various other capacities since February 1978, excluding the period from June 1985 through July 1987 when he was self-employed as a sales representative for Snap-On Tool.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
The Common Stock is traded on the over-the-counter market and is quoted on the NASDAQ National Market System under the symbol "MNRO." The following table sets forth, for the Company's last two fiscal years, the range of high and low sales prices on the NASDAQ National Market System for the Common Stock:
Amounts in these tables have been adjusted to reflect the five percent stock dividends paid in August 1995 and in August 1994.
Holders
At June 1, 1996, the Company's Common Stock was held by approximately 1,421 shareholders of record or through nominee or street name accounts with brokers.
Dividends
On January 26, 1996, the Company's Board of Directors declared a five percent stock dividend, payable August 5, 1996, to shareholders of record as of June 21, 1996. Information regarding the number of shares of Common Stock outstanding, as set forth in this Form 10-K, does not include any shares of Common Stock to be issued in connection with such dividend.
While the Company has not paid any cash dividends on the Common Stock since its inception, any future determination as to the payment of dividends will be at the discretion of the Board of Directors and will depend on the Company's financial condition, results of operations, capital requirements, compliance with charter and contractual restrictions, and such other factors as the Board of Directors deems relevant.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating data of the Company for each year in the five-year period ended March 31, 1996. The financial data and certain operating data have been derived from the Company's financial statements which have been examined by Price Waterhouse LLP, independent accountants. This data should be read in conjunction with the Financial Statements and related notes included under Item 8 of this report and in conjunction with other financial information included elsewhere in this Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth income statement data of the Company expressed as a percentage of sales for the fiscal years indicated:
FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-K which are not historical facts, including (without limitation) in particular, statements made in this Item and in "Item 1 - Business," may contain forward-looking statements that are subject to important factors that could cause actual results to differ materially from those in the forward-looking statement, including (without limitation) product demand, the effect of economic conditions, the impact of competitive services, products and pricing, product development, parts supply restraints or difficulties, industry regulation and the continued availability of capital resources and financing and other risks set forth or incorporated herein and in the Company's 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.
FISCAL 1996 AS COMPARED TO FISCAL 1995
Sales for fiscal 1996 increased $8.0 million, or 7.3%, over sales for fiscal 1995. This increase was due to an increase of approximately $17.3 million for stores opened since April 1, 1995, partially offset by a comparable store sales decrease of 3.9%. During the year, 43 stores were opened and one was closed. At March 31, 1996, the Company had 274 stores in operation.
Management believes that the comparable store sales decrease resulted from a slowdown in consumer spending for most of calendar 1995, caused by a general decline in economic conditions, particularly in the northeastern part of the country where most of the Company's stores are located.
Gross profit for fiscal 1996 was $50.9 million or 43.4% of sales, as compared with $49.4 million or 45.3% of sales for fiscal 1995. The reduction in gross profit as a percent of sales was due, in part, to an increase in purchases at the store level of certain higher-cost parts. During periods of slower sales, store personnel more readily accept undercar repair work outside of the normal recurring services the store usually provides. This repair work often involves parts not stocked by the
Company. In addition, labor costs increased as a percent of sales because, during periods of slower sales when technicians may not be fully productive, they will receive a minimum base level wage. Lastly, distribution and occupancy costs increased as a percent of sales for fiscal 1996 primarily due to an increase in the number of stores versus sales increases.
Operating, selling, general and administrative expenses for fiscal 1996 increased by $3.0 million to $35.3 million and, as a percentage of sales, increased by .4% as compared to fiscal 1995. This increase in total dollars expended is due, among other things, to additional supervision and advertising expense in newly-added stores and regions, greater costs related to the Company's continuing investment in training, and additional store expenses related to the growth in the number of stores. Although expenses increased during fiscal 1996 as compared to fiscal 1995, the growth rate of these expenses (9.3%) was lower than the percentage increase in the number of stores (18.5%), due to ongoing, concerted efforts by management to control costs and to operate within budgetary constraints. Accounting for a large portion of the cost reductions were decreases in bonus and profit sharing expenses. Since the Company did not attain the minimum required percentage of targeted profit performance, employee bonus payments were significantly reduced and were eliminated for executive officers, and profit sharing contributions were eliminated.
Operating income in fiscal 1996 of $15.6 million, or 13.3% of sales, decreased by $1.5 million from the fiscal 1995 level of $17.1 million due to the factors discussed above.
Interest expense, net of interest income, increased as a percent of sales from 1.8% in fiscal 1995 to 2.2% in fiscal 1996 primarily due to increased borrowings. Average debt outstanding for the year ended March 31, 1996 was up approximately $9.7 million as compared to the year ended March 31, 1995.
Other expense, net, of $.3 million in fiscal 1996 represents costs incurred to move to the Company's new office/warehouse facility as well as carrying costs for the former warehouse facility through fiscal 1997.
The Company's effective tax rate decreased to 39.6% of pre-tax income in fiscal 1996 from 39.9% in fiscal 1995 primarily due to reductions in state tax rates in two of the states in which the Company operates.
Net income for fiscal 1996 decreased by $1.5 million or 16.2% compared to fiscal 1995 due to the factors discussed above.
FISCAL 1995 AS COMPARED TO FISCAL 1994
Sales for fiscal 1995 increased $15.5 million, or 16.5%, over sales for fiscal 1994. This increase was due to a comparable store sales increase of 6.1%, and an increase of approximately $10.2 million for stores opened since the beginning of fiscal 1994. During the year, 30 stores were opened and none were closed. At March 31, 1995, the Company had 232 stores in operation.
Management believes that successful execution of key elements of its operating strategy, including an unwavering commitment to customer satisfaction, comprehensive training of service technicians and competitive pricing, helped contribute to the sales increase.
Gross profit for fiscal 1995 at $49.4 million increased from $42.4 million for fiscal 1994, but was unchanged as a percent of sales at 45.3%.
Operating, selling, general and administrative expenses for fiscal 1995 increased by 15.1% or $4.2 million to $32.3 million and, as a percentage of sales, declined by .3% as compared to fiscal 1994. This increase in total dollars expended is due, among other things, to additional supervision and advertising expense in newly-added stores and regions, greater costs related to the Company's continuing investment in training, and additional store expenses related to the growth in the number of stores. Although expenses increased during fiscal 1995 as compared to fiscal 1994, the growth rate of expenses was lower than the sales growth rate, due to ongoing, concerted efforts by management to control costs and to operate within budgetary constraints. One area accounting for a more significant portion of the decline as a percent of sales was workers compensation expense. Management believes that continued emphasis on safety programs has contributed to a decline in the severity of job-related injuries.
Operating income in fiscal 1995 of $17.1 million, or 15.6% of sales, increased by $2.7 million over the fiscal 1994 level of $14.4 million due to the factors discussed above.
Interest expense, net of interest income, decreased as a percent of sales from 2.2% in fiscal 1994 to 1.8% in fiscal 1995 due to the Company's funding of new store construction during most of fiscal 1995 with cash flow from operations, paydown of $1.8 million on a term loan on April 1, 1994 and increased capitalized construction period interest. The increase in capitalized construction period interest is due to an increase in interest rates and an increase in construction-in-progress.
The Company's effective tax rate increased to 39.9% of pre-tax income in fiscal 1995 from 39.6% in fiscal 1994 due to the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," in fiscal year 1994 which resulted in a one-time decrease in the provision for income taxes of $70,000.
Net income for fiscal 1995 increased by $1.7 million or 23.6% over fiscal 1994 due to the factors discussed above.
CAPITAL RESOURCES AND LIQUIDITY
Capital Resources
The Company's primary capital requirements for fiscal 1996 were the funding of its new store expansion program, the upgrading of facilities and systems in existing stores and the construction of the new headquarters office and warehouse facility, totalling $27.0 million, and principal payments on long-term debt and capital leases of $22.7 million.
In fiscal 1995, the Company's primary capital requirements were the funding of its new store expansion program and the upgrading of facilities and systems in existing stores totaling $20.3 million, and principal payments on long-term debt and capital lease obligations totaling $6.9 million.
In both fiscal years 1996 and 1995, these capital requirements were met by cash flow from operations and by interim and permanent mortgage financing of new stores. Additionally, in fiscal 1996, capital requirements were met through the use of a Revolving Credit Facility. (See additional discussion under "Liquidity".)
In fiscal 1997, the Company intends to open 40-50 new stores. Total capital required to open a new store ranges, on average (based upon the last three fiscal years' openings), from $210,000 to $790,000 depending on whether the store is leased, owned or land leased. 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.
Liquidity
At March 31, 1996, the Company had a $3.5 million line of credit for the purpose of issuing stand-by-letters of credit on an unsecured basis. The line requires fees aggregating .875% annually of the face amount of each stand-by-letter of credit, payable quarterly in advance. A total of $2.9 million was outstanding under this line at March 31, 1996.
As of June 1, 1996, the Company had outstanding $5.5 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 third of six annual installments of principal of $1.8 million was paid on April 1, 1996.
The Company has available a line of credit of $7.5 million under a short-term borrowing agreement at the lower of the prime rate or other rate options available at the time of borrowing. There are no commitment fees associated with this line of credit and no amounts were outstanding at year end.
Through February 1996, the Company had a real estate line of credit of $25.0 million to be used for the placement of store mortgages. This line was terminated in fiscal 1996 at the Company's initiative and replaced by a new unsecured Revolving Credit Facility with two banks. Under the terms of the Agreement, the Company may borrow up to $30.0 million through February 1999. The Company must pay a facility fee of .125% annually on the unused portion of the commitment.
Prior to the termination of the real estate line, the Company had utilized $13.2 million for permanent mortgages. Any mortgage may be converted from a floating rate to a fixed rate loan during the first five years of its seven-year term. Interest is payable monthly. Monthly installments of principal are required based on 20-year amortization periods.
During fiscal 1995, the Company purchased 12.7 acres of land for $.7 million from the City of Rochester, New York, on which its new office/warehouse facility is located. The City has provided financing for 100 percent of the cost of the land via a 20-year non-interest bearing mortgage, all due and payable in 2014.
To finance its new office/warehouse building, the Company obtained permanent mortgage financing consisting of a 10-year mortgage for $2.9 million and an eight-year term loan in the amount of $.7 million. Both obligations require monthly interest payments, and each may be converted from a floating rate to a fixed rate loan before the last two years of their respective terms. The mortgage requires equal monthly installments of principal based on a 20-year amortization period, and the term loan requires equal monthly payments of principal to fully amortize the debt over the eight-year term. The Company entered into an interest rate swap agreement with a major financial institution which effectively fixes the interest rate over the terms of the aforementioned agreements at 7.15%.
The Company also obtained a commitment for a $.5 million term loan to finance equipment for the new office/warehouse building. The obligation requires equal monthly principal payments to fully amortize the debt over a five-year term. Interest is payable monthly, and the obligation may be converted from a floating rate to a fixed rate loan during the first three years. No amounts had been borrowed under this term loan as of March 31, 1996.
Certain of the Company's long-term debt agreements require, among other things, the maintenance of specified current ratios, interest and rent coverage ratios and amounts of tangible net worth, and also contain restrictions on dividend payments and capital expenditures. The Company is in compliance with these requirements at March 31, 1996, and does not believe that the covenants materially affect its business.
As of March 31, 1996, the Company had cash and equivalents of $5.3 million.
Inflation
The Company does not believe its operations have been materially affected by inflation. The Company has been successful, in many cases, in mitigating the effects of merchandise cost increases principally through the use of volume discounts and alternative vendors.
Financial Accounting Standards
Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109), was adopted by the Company as of April 1, 1993. The adoption of SFAS 109 resulted in a one-time decrease in the provision for income taxes of $70,000.
Statement of Position (SOP) 93-7, "Reporting on Advertising Costs," which provides guidance on financial reporting on advertising costs, was issued in December 1993. This Statement was adopted by the Company in fiscal 1996 and had an immaterial effect on the results of operations.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," was issued in October 1995 and has not yet been adopted by the Company. This Statement encourages entities to adopt a fair value based method of accounting for employee stock option plans (whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the employee service period) rather than the current intrinsic value based method of accounting (whereby compensation cost is measured at the grant date as the difference between market value and the price for the employee to acquire the stock). The Company plans to adopt the Statement in fiscal 1997, and plans to continue using the intrinsic value method of accounting which will require pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting had been applied.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Monro Muffler Brake, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Monro Muffler Brake, Inc. and its subsidiary at March 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP Rochester, New York May 20, 1996
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET
The accompanying notes are an integral part of these financial statements.
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME
The accompanying notes are an integral part of these financial statements.
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these financial statements.
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS
The accompanying notes are an integral part of these financial statements.
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
BACKGROUND
Monro Muffler Brake, Inc. and its wholly owned subsidiary, Monro Service Corporation (the "Company"), had 274 automotive repair centers operating primarily in the northeast region of the United States as of March 31, 1996. The Company experienced a change in control during 1984 which was accounted for as a purchase and required the recording of a new basis for assets and liabilities.
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles. The preparation of financial statements in conformity with such principles requires the use of estimates by management during the reporting period. Actual results could differ from those estimates.
A description of the Company's major accounting policies follows.
FISCAL YEAR
The Company's fiscal year ends on March 31.
CONSOLIDATION
The consolidated financial statements include the Company and its wholly owned subsidiary, Monro Service Corporation, after the elimination of intercompany transactions and balances.
REVENUE RECOGNITION
Sales are recorded upon completion of automotive undercar repair services provided to customers or upon the sale of incidental products and services to customers.
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 $647,000, $556,000 and $434,000 higher at March 31, 1996, 1995 and 1994, respectively. The FIFO value of inventory approximates the current replacement cost.
PROPERTY, PLANT AND EQUIPMENT
All property, plant and equipment are stated at cost. For assets acquired in conjunction with the 1984 change in control referred to above, cost represents an allocation of the total purchase price to individual assets based on their estimated fair values at the date of acquisition. Depreciation of property, plant and equipment is provided on the straight-line basis. Buildings and improvements are depreciated over lives varying from 10 to 39 years; machinery, fixtures and equipment over lives varying from 5 to 15 years; and vehicles over lives varying from 5 to 7 years.
Certain leases have been capitalized and are classified on the balance sheet as fixed assets. These assets are being amortized on a straight-line basis over their estimated lives, which coincide with the terms of the leases (Note 4).
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ADVERTISING
The Company expenses the production costs of advertising the first time the advertising takes place, except for direct response advertising which is capitalized and amortized over its expected period of future benefits.
Direct response advertising consists primarily of coupons for the Company's services. The capitalized costs of this advertising are amortized over the period of the coupon's validity.
Advertising expense for the years ended March 31, 1996, 1995 and 1994 was not material to these financial statements.
INTEREST RATE HEDGE AGREEMENTS
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.
EARNINGS PER SHARE
Earnings per share was computed by dividing net income by the weighted average number of shares of common stock and common stock equivalents outstanding during the respective year. Common stock equivalents consist of shares of common stock (i) issuable upon exercise of outstanding stock options and (ii) issuable upon conversion of the Class C convertible preferred stock (the "Class C preferred stock"). The weighted average number of shares for all periods presented in the accompanying financial statements has been adjusted for the five percent stock dividends paid in August 1995 and in August 1994 (Note 9).
STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, the Company considers all highly liquid instruments with a maturity of three months or less to be cash equivalents.
NOTE 2 - CHANGE IN ACCOUNTING METHOD
Effective April 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes." The adoption of SFAS 109 changes the Company's method of accounting for income taxes from the deferred method (APB 11) to an asset and liability approach. Previously, the Company deferred the past tax effects of timing differences between financial reporting and taxable income. The asset and liability approach requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of other assets and liabilities.
The adjustments to the April 1, 1993 balance sheet to adopt SFAS 109 resulted in a $70,000 net increase in income. This amount is not considered material to the financial statements as a whole. It primarily represents the impact of adjusting deferred taxes to reflect the current tax rate as opposed to the higher tax rates that were in effect when the deferred taxes originated.
Under SFAS 109, assets and liabilities acquired in purchase business combinations are assigned their fair values assuming equal tax bases, and deferred taxes are provided for lower or higher tax bases. Under APB 11, assigned values were net of tax. In adopting SFAS 109, the Company adjusted the carrying amounts of assets acquired in 1984 in the change of control (Note 1). Pretax income from operations for the year ended March 31, 1994 was reduced by approximately $50,000 representing the increase in depreciation expense resulting from the higher carrying amounts.
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 - ACQUISITIONS
During fiscal 1996, the Company completed the acquisition of 14 existing automotive repair stores in five separate transactions totalling $2.8 million. The largest of the acquisitions was the purchase of the operating assets of seven Muffler Xpress stores located in North and South Carolina and Virginia for $1.2 million in September 1995. These acquisitions were accounted for as purchases and did not have a significant effect on the Company's consolidated financial statements.
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
The major classifications of property, plant and equipment are as follows:
Interest costs capitalized aggregated $617,000 in 1996 and $492,000 in 1995.
Amortization expense recorded under capital leases totaled $360,000, $326,000 and $356,000 for the years ended March 31, 1996, 1995 and 1994, respectively.
NOTE 5 - OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following:
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated amortization associated with noncurrent assets at March 31, 1996 and 1995 amounted to $1,211,000 and $1,009,000, respectively.
Goodwill is being amortized on a straight-line basis over periods ranging from 5 to 20 years.
NOTE 6- LONG-TERM DEBT
Long-term debt consists of the following:
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has available an unsecured line of credit of $7.5 million under a short-term borrowing agreement at the lower of the prime rate or other rate options available at the time of borrowing. There are no commitment fees associated with this line of credit and no amounts were outstanding at year end.
At March 31, 1996, the Company has a $3.5 million line of credit for the purpose of issuing stand-by-letters of credit on an unsecured basis. The line requires fees aggregating .875% annually of the face amount of each stand-by-letter of credit, payable quarterly in advance. A total of $2.9 million was outstanding under this line at March 31, 1996.
Through February 1996, the Company had a real estate line of credit of $25.0 million to be used for the placement of store mortgages, inclusive of a $5.0 million sublimit which existed to finance land acquisition and construction costs of new stores until permanent mortgages had been granted. A total of $5.0 million was outstanding under this sublimit at March 31, 1995.
The real estate line of credit was terminated in fiscal 1996 at the Company's initiative and replaced by a new Revolving Credit Facility. Amounts outstanding under the sublimit were repaid in full.
Prior to the termination of the real estate line of credit, the Company had utilized $13.2 million for permanent mortgages. Any mortgage may be converted from a floating rate to a fixed rate loan during the first five years of its seven-year term. Interest is payable monthly. Equal monthly installments of principal are required based on 20-year amortization periods.
In February 1996, the Company finalized an unsecured Revolving Credit Agreement with two banks. Under the terms of the Agreement, the Company may borrow up to $30.0 million through February 1999 at the prime rate or at a LIBOR based rate which fluctuates quarterly dependent upon Company performance. The Company must pay a facility fee of .125% annually on the unused portion of the commitment.
During fiscal 1995, the Company purchased 12.7 acres of land for $.7 million from the City of Rochester, New York, on which its new office/warehouse facility is located. The City has provided financing for 100 percent of the cost of the land via a 20-year non-interest bearing mortgage, all due and payable in 2014.
To finance its new office/warehouse building, the Company obtained permanent mortgage financing consisting of a 10-year mortgage for $2.9 million and an eight-year term loan in the amount of $.7 million. Both obligations require monthly interest payments, and each may be converted from a floating rate to a fixed rate loan before the last two years of their respective terms. The mortgage requires equal monthly installments of principal based on a 20-year amortization period, and the term loan requires constant monthly payments of principal to fully amortize the debt over the eight-year term. The Company entered into an interest rate swap agreement with a major financial institution which effectively fixes the interest rate over the terms of the aforementioned agreements at 7.15%.
The Company also has obtained a commitment for a $.5 million term loan to finance equipment for the new office/warehouse building. The obligation requires equal monthly principal payments to fully amortize the debt over a five-year term. Interest is payable monthly at LIBOR plus .8%, and the obligation may be converted from a floating rate to a fixed rate loan during the first three years. No amounts had been borrowed under this term loan as of March 31, 1996.
Certain of the Company's long-term debt agreements require, among other things, the maintenance of specified current ratios, interest and rent coverage ratios and amounts of tangible net worth, and also contain restrictions on dividend payments and capital expenditures. The Company is in compliance with these requirements at March 31, 1996. These agreements permit mortgages and specific financing lease arrangements with other parties with certain limitations.
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Aggregate debt maturities (excluding amortization of debt discount) over the next five years and thereafter are as follows:
NOTE 7 - FAIR VALUE OF FINANCIAL INSTRUMENTS
Financial instruments consisted of the following:
The carrying amount of cash and cash equivalents approximates fair value because their maturity is generally less than one year in duration. Fair value of long-term debt was estimated using either quoted market prices for the same or similar issues, or the current rates offered to the Company for debt with similar maturities.
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES
Effective April 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income Taxes" (Note 2).
The components of the provision (benefit) for income taxes are as follows:
Deferred tax (liabilities) assets are comprised of the following:
The Company believes that it is more likely than not that the net deferred tax asset will be realized through taxable earnings or alternative tax strategies.
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation between the U. S. federal statutory tax rate and the effective tax rate reflected in the accompanying financial statements is as follows:
NOTE 9 - CONVERTIBLE PREFERRED STOCK AND COMMON STOCK
A summary of the changes in the number of shares of Class C preferred stock and common stock is as follows:
On May 17, 1995, the Board of Directors declared a five percent stock dividend on the Company's common stock, paid August 7, 1995, to shareholders of record as of June 23, 1995. On May 17, 1994, the Board of Directors declared a five percent stock dividend on the Company's common stock, paid August 1, 1994, to shareholders of record as of June 17, 1994. All share and per share information included in the accompanying financial statements and notes have been adjusted to give retroactive effect to these dividends.
Additionally, in accordance with antidilution provisions of the Class C convertible preferred stock, the conversion value of the preferred stock was restated to $.251 per share.
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Holders of at least 60% of the Class C preferred stock must approve any action authorized by the holders of common stock. In addition, there are certain restrictions on the transferability of shares of Class C preferred stock.
Under the 1984 and 1987 Incentive Stock Option Plans, 628,590 shares (as retroactively adjusted for the five percent stock dividends) of the common stock were reserved for issuance to officers and key employees. The 1989 Incentive Stock Option Plan authorized an additional 149,664 shares (as retroactively adjusted for the five percent stock dividends) for issuance.
In January 1994, the Board of Directors authorized an additional 222,705 shares (as retroactively adjusted for the five percent stock dividends) for issuance under the 1989 Plan, which was approved by shareholders in August 1994.
In May 1995, the Board of Directors authorized an additional 95,000 shares (as retroactively adjusted for the five percent stock dividends) for issuance under the 1989 Plan, which was approved by shareholders in August 1995.
Generally, options vest with respect to 60% of the shares of common stock subject thereto three years after the date of grant. Options on 50% of the remaining shares vest on the fourth anniversary of the date of grant, and the balance vests on the fifth anniversary of the date of grant. Options to purchase 316,902 shares, 354,672 shares and 603,605 shares were exercisable at March 31, 1996, 1995 and 1994, respectively, at prices ranging from $1.67 to $14.51 per share (as retroactively adjusted for the five percent stock dividends).
The outstanding options have a duration of ten years and are exercisable through January 2006.
A summary of changes in outstanding stock options (as retroactively adjusted for the five percent stock dividends) is as follows:
In August 1994, subject to the approval of shareholders in August 1995, the Board of Directors authorized a non-employee directors' stock option plan. The plan initially reserves 57,750 shares of common stock (as retroactively adjusted for the five percent stock dividends), and provides for (i) the grant to each non-employee director as of August 1, 1994 of an option to purchase 2,625 shares of the Company's common stock (as retroactively adjusted for the five percent stock dividends) and (ii) the annual grant to each non-employee director of an option to purchase 2,625 shares (as retroactively adjusted for the five percent stock dividends) on the date of the annual meeting of shareholders beginning in 1995. The options expire ten years from the date of grant and have an exercise price equal to the fair market value of the Company's common stock on the date of grant. Options vest immediately upon issuance.
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of changes in these stock options is as follows:
NOTE 10 - 1996 STOCK DIVIDEND
On January 26, 1996, the Board of Directors declared a five percent stock dividend, payable August 5, 1996, to common stockholders of record as of June 21, 1996. Shares of common or preferred stock included in the accompanying financial statements and notes have not been adjusted to reflect this dividend.
NOTE 11 - OPERATING LEASES AND OTHER COMMITMENTS
The Company leases retail facilities and computer equipment under noncancellable lease agreements which expire at various dates through 2012. In addition to stated minimum payments, certain real estate leases have provisions for contingent rentals when retail sales exceed specified levels. Generally, the leases provide for renewal for various periods at stipulated rates. Most of the facilities' leases require payment of property taxes, insurance and maintenance costs in addition to rental payments, and several provide an option to purchase the property at the end of the lease term.
Future minimum payments required under noncancellable leases are as follows:
Rent expense under operating leases totaled $5,500,000, $4,681,000 and $3,941,000 in 1996, 1995 and 1994, respectively, including contingent rentals of $511,000, $587,000 and $550,000 in each respective year.
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 - EMPLOYEE RETIREMENT AND PROFIT SHARING PLANS
The Company has a noncontributory defined benefit plan covering most employees. Coverage under the plan begins after completing one year of service and attainment of age twenty-one. Benefits are based primarily on years of service and employees' pay near retirement. The Company's funding policy is consistent with the funding requirements of Federal law and regulations. Plan assets are invested in fixed income funds.
Pension cost included the following components:
The plan's funded status was as follows:
The projected benefit obligation at March 31, 1996 and 1995 assumed discount rates of 7.5%. Increase in future compensation levels was assumed to be 5% in 1996 and 1995. The assumed long-term rates of return on plan assets at March 31, 1996 and 1995 were 8% and 7.5%, respectively. In 1995, assumptions concerning turnover and mortality were also revised to better reflect the Company's demographics. The net effect of assumption changes was to increase net pension cost in fiscal 1995 by approximately $27,000.
The unrecognized transition asset is being amortized over fifteen years beginning April 1, 1988. The unrecognized prior service cost is being amortized over fifteen years beginning April 1, 1990.
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also has a profit sharing plan which covers full-time employees who meet the age and service requirements of the plan. The annual contribution to the plan is at the discretion of the Compensation and Benefits Committee of the Board of Directors and totaled $475,000 and $450,000 for the years ended March 31, 1995 and 1994, respectively. No contribution was made for the year ended March 31, 1996.
The Company's management bonus plan provides for the payment of annual cash bonus awards to participating employees, as selected by the Board of Directors, based primarily on the Company's attaining pre-tax income targets established by the Board of Directors. Charges to expense applicable to the management bonus plan totaled $104,000, $764,000 and $500,000 for the years ended March 31, 1996, 1995 and 1994, respectively. Because the Company did not attain a minimum required percentage of targeted profit performance in fiscal 1996, 1996 expense does not include any bonus amounts for executive officers.
NOTE 13 - RELATED PARTY TRANSACTIONS
Certain (a) principal shareholders/directors of the Company, (b) partnerships in which such persons have interests or (c) trusts of which members of their families are beneficiaries are lessors of certain facilities to the Company. Payments under such operating and capital leases amounted to $1,688,000, $1,812,000 and $1,705,000 for the years ended March 31, 1996, 1995 and 1994, respectively. Amounts payable under these lease agreements totaled $79,000 and $51,000, respectively, at March 31, 1996 and 1995.
No related party leases, other than renewals or modifications of leases on existing stores, have been entered into since May 1989 and no new leases are contemplated.
Effective July 1991, the Company entered into a management agreement with an investment banking firm associated with a principal shareholder/director of the Company to provide financial advice. The agreement provides for an annual fee of $160,000, plus reimbursement of out-of-pocket expenses. During fiscal 1996, 1995 and 1994, the Company incurred fees of $160,000 annually under this agreement.
NOTE 14 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following transactions represent noncash investing and financing activities during the periods indicated:
YEAR ENDED MARCH 31, 1996 In connection with the declaration of a five percent stock dividend (Note 9), the Company increased common stock and additional paid-in capital by $4,000 and $5,998,000, respectively, and decreased retained earnings by $6,002,000.
Capital lease obligations of $772,000 were incurred under various lease agreements.
In connection with the acquisition of several automotive repair stores, liabilities were assumed as follows:
YEAR ENDED MARCH 31, 1995 In connection with the declaration of a five percent stock dividend (Note 9), the Company increased common stock and additional paid-in capital by $3,000 and $5,310,000, respectively, and decreased retained earnings by $5,313,000.
A capital lease obligation of $35,000 was incurred under a lease agreement.
MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED MARCH 31, 1994 Capital lease obligations of $386,000 were incurred under various lease agreements.
In connection with the remeasurement of assets to fair value under SFAS 109 (Note 2), adjustments were made increasing buildings, accumulated depreciation and deferred taxes by $494,000, $216,000 and $278,000, respectively.
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth income statement data by quarter for the fiscal years ended March 31, 1996 and 1995.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Part III --------
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information concerning the directors of the Company is incorporated herein by reference to the section captioned "Election of Directors" in the Proxy Statement.
Information concerning the executive officers of the Company is set forth in Item 4A of Part I hereof.
Information concerning required Section 16(a) disclosure is incorporated herein by reference to the section captioned "Compliance with Section 16(a) of the Exchange Act" in the Proxy Statement.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein by reference to the section captioned "Executive Compensation" in the Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference to the sections captioned "Principal Shareholders" and "Election of Directors" in the Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is incorporated herein by reference to the sections captioned "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" in the Proxy Statement.
Part IV -------
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS Reference is made to Item 8 of Part II hereof.
FINANCIAL STATEMENT SCHEDULES Schedules have been omitted because they are inapplicable, not required, or the information is included elsewhere in the Financial Statements or the notes thereto.
EXHIBITS Reference is made to the Index to Exhibits accompanying this Form 10-K as filed with the Securities and Exchange Commission. The Company will furnish to any shareholder, upon written request, any exhibit listed in such Index to Exhibits upon payment by such shareholder of the Company's reasonable expenses in furnishing any such exhibit.
REPORTS ON FORM 8-K No reports on Form 8-K were filed during the last quarter of fiscal 1996.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. (Registrant)
By /s/ Lawrence C. Day ------------------------------------- Lawrence C. Day President and Chief Executive Officer
Date: June 27, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of June 27, 1996.
Signature Title - --------- -----
/s/ Catherine D'Amico Senior Vice President-Finance, Chief - ------------------------ Financial Officer and Treasurer Catherine D'Amico (Principal Financial and Accounting Officer)
Burton S. August* Director
Charles J. August* Director
Robert W. August* Director
Frederick M. Danziger* Director
Jack M. Gallagher* Director
Donald Glickman* Director
Peter J. Solomon* Director
Lionel B. Spiro* Director
W. Gary Wood* Director
*By /s/ Lawrence C. Day --------------------------------------- Lawrence C. Day Chief Executive Officer, Director and as Attorney-in-Fact
INDEX TO EXHIBITS
The following is a list of all exhibits filed herewith or incorporated by reference herein:
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* An asterisk "*" following an exhibit number indicates that the exhibit is incorporated herein by reference to an exhibit to one of the following documents: (1) the Company's Registration Statement on Form S-1 (Registration No. 33-41290), filed with the Securities and Exchange Commission on June 19, 1991 ("Form S-1"); (2) Amendment No. 1 thereto, filed July 22, 1991 ("Amendment No. 1"); (3) the Company's Annual Report on Form 10-K for the fiscal year ended March 31,1992 ("1992 Form 10-K"); the Company's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on December 24, 1992 ("Form S-8"); (5) the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1993 ("1993 Form 10-K"); (6) the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1993 ("September 1993 Form 10-Q"); (7) the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1994 ("December 1994 Form 10-Q"); (8) the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994 ("1994 Form 10-K"); (9) the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995 ("1995 Form 10-K") or (10) the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995 ("September 1995 Form 10-Q"). The appropriate document and exhibit number are indicated in parentheses.