<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 000-9812
GREASE MONKEY HOLDING CORPORATION
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Utah 87-0321320
--------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
633 17th Street, Suite 400
Denver, Colorado 80202
----------------------------------------
(Address of principal executive offices)
(303) 308-1660
---------------------------
(Issuer's telephone number)
216 16th Street, Suite 1100, Denver, Colorado 80202
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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
----- -----
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Outstanding at
Class July 31, 1998
----------------------------- ----------------
Common Stock, $0.03 par value 4,647,805 shares
Transitional Small Business Disclosure Format Yes No X
----- -----
<PAGE>
GREASE MONKEY HOLDING CORPORATION
COMMISSION FILE NUMBER: 000-9812
QUARTER ENDED JUNE 30, 1998
FORM 10-QSB
PART I FINANCIAL INFORMATION
Consolidated Statements of Operations . . . . . . . . . Page 1
Consolidated Balance Sheets . . . . . . . . . . . . . . Page 2
Consolidated Statements of Stockholders' Equity . . . . Page 4
Consolidated Statements of Cash Flows . . . . . . . . . Page 5
Notes to Consolidated Financial Statements . . . . . . . Page 7
Management's Discussion and Analysis or Plan
of Operation . . . . . . . . . . . . . . . . . . . . . Page 12
PART II OTHER INFORMATION
Legal Proceedings . . . . . . . . . . . . . . . . . . . Page 18
Defaults Upon Senior Securities . . . . . . . . . . . . Page 18
Submission of Matters to a Vote of Security Holders. . . Page 18
Other Information . . . . . . . . . . . . . . . . . . . Page 19
Exhibits and Reports on Form 8-K . . . . . . . . . . . . Page 19
Signatures . . . . . . . . . . . . . . . . . . . . . . . Page 20
ii
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Revenue:
Royalty fees. . . . . . . . . . . . . . . . . . . . $ 777,514 1,052,721 1,519,797 1,830,211
Franchise sales - center openings . . . . . . . . . 173,600 72,721 173,600 88,201
Product and equipment revenue . . . . . . . . . . . 185,978 177,763 366,907 343,537
Sales by Company-owned Centers . . . . . . . . . . 3,755,906 3,802,717 7,454,780 7,386,371
Leasing revenue . . . . . . . . . . . . . . . . . . 299,290 389,804 627,989 778,872
Other . . . . . . . . . . . . . . . . . . . . . . . 21,903 180,466 40,819 201,647
----------- ---------- ----------- -----------
5,214,191 5,676,192 10,183,892 10,628,839
----------- ---------- ----------- -----------
Operating Expenses:
Franchise costs - center openings . . . . . . . . . 36,926 17,454 42,426 21,418
Product and equipment costs . . . . . . . . . . . . 87,336 65,053 169,929 108,393
Company-owned Centers . . . . . . . . . . . . . . . 3,096,877 3,250,766 6,264,587 6,319,450
Leasing expense . . . . . . . . . . . . . . . . . . 339,979 380,342 696,615 752,336
General and administrative expenses . . . . . . . . 1,390,481 1,118,985 2,663,385 2,647,633
Provision for credit losses . . . . . . . . . . . . 49,165 22,578 91,665 52,141
Depreciation . . . . . . . . . . . . . . . . . . . 172,344 166,477 338,093 328,213
Amortization . . . . . . . . . . . . . . . . . . . 72,439 69,754 143,772 135,037
----------- ---------- ----------- -----------
5,245,547 5,091,409 10,410,472 10,364,621
----------- ---------- ----------- -----------
Operating income (loss) . . . . . . . . . . . . . . . (31,356) 584,783 (226,580) 264,218
----------- ---------- ----------- -----------
Other income (expense):
Loss on sale/disposition/closure of centers . . . . (5,431) (11,481) (55,943) (17,463)
Undeveloped franchise licenses canceled . . . . . . - - 31,983 -
Interest income . . . . . . . . . . . . . . . . . . 10,085 14,021 21,320 35,674
Interest expense . . . . . . . . . . . . . . . . . (212,223) (194,066) (425,940) (366,117)
----------- ---------- ----------- -----------
(207,569) (191,526) (428,580) (347,906)
----------- ---------- ----------- -----------
Net income (loss) . . . . . . . . . . . . . . . . . . $ (238,925) 393,257 (655,160) (83,688)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Earnings (loss) per common share (Note 5) . . . . . . $ (.06) .08 (.15) (.03)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Earnings (loss) per common share assuming dilution
(Note 5) . . . . . . . . . . . . . . . . . . . . . $ (.06) .07 (.15) (.03)
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Weighted average shares outstanding . . . . . . . . . 4,647,409 4,598,092 4,644,623 4,568,124
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
</TABLE>
(UNAUDITED)
1
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
JUNE 30, DECEMBER 31,
ASSETS 1998 1997
----------- ------------
<S> <C> <C>
Current Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71,014 182,214
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 -
Accounts receivable, net of allowance for
doubtful accounts of $517,808 at June 30, 1998,
and $478,553 at December 31, 1997. . . . . . . . . . . . . . . . . . . . 1,137,686 1,212,014
Current portion of notes receivable,
net of allowance for uncollectible amounts . . . . . . . . . . . . . . . 295,419 318,658
Current portion of net investment
in direct financing leases . . . . . . . . . . . . . . . . . . . . . . . 193,603 204,921
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 741,747 758,116
Prepaid expenses and supplies . . . . . . . . . . . . . . . . . . . . . . 217,999 113,648
----------- ----------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . 2,682,468 2,789,571
----------- ----------
Property and Equipment, at Cost, Pledged:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 543,838 543,838
Buildings (including buildings under capital leases) . . . . . . . . . . 6,377,646 6,430,000
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . 534,922 536,329
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . 794,123 718,672
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . 1,785,083 1,774,196
----------- ----------
10,035,612 10,003,035
Less accumulated depreciation and
amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,186,583) (3,985,940)
----------- ----------
NET PROPERTY AND EQUIPMENT . . . . . . . . . . . . . . . . . . . . . . 5,849,029 6,017,095
----------- ----------
Other Assets:
Net investment in direct financing leases . . . . . . . . . . . . . . . . 3,050,034 3,154,581
Notes receivable, net of allowance for uncollectible
amounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123,830 225,177
Deferred franchising costs . . . . . . . . . . . . . . . . . . . . . . . 177,918 189,528
Goodwill and covenants not to compete, net
of accumulated amortization of $1,249,406 at June 30, 1998,
and $1,215,026 at December 31, 1997. . . . . . . . . . . . . . . . . . . 2,457,185 2,688,103
Other assets, net of accumulated
amortization of $188,869 at June 30, 1998,
and $167,145 at December 31, 1997. . . . . . . . . . . . . . . . . . . . 1,524,439 333,795
----------- ----------
TOTAL OTHER ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . 7,333,406 6,591,184
----------- ----------
$15,864,903 15,397,850
----------- ----------
----------- ----------
</TABLE>
(UNAUDITED)
(continued on next page)
2
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
<TABLE>
JUNE 30, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
----------- ------------
<S> <C> <C>
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,546,538 1,400,633
Accrued salaries and wages . . . . . . . . . . . . . . . . . . . . . . . 266,043 195,787
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . 334,007 371,143
Current portion of long-term obligations . . . . . . . . . . . . . . . . 837,158 715,289
Current portion of obligations
under capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . 480,416 464,955
----------- ----------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . 3,464,162 3,147,807
----------- ----------
Long-term Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,940,924 3,800,082
Obligations Under Capital Leases . . . . . . . . . . . . . . . . . . . . . 6,636,828 6,848,249
Deferred Franchise Sales Revenue . . . . . . . . . . . . . . . . . . . . . 846,670 985,470
Stockholders' Equity:
Series C Preferred stock, stated value of $100.00 per
share, 20,896 shares issued and outstanding at June
30, 1998 and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . 2,089,638 2,089,638
Common stock, par value $.03, 20,000,000
shares authorized, 4,647,805 and 4,633,570,
shares issued and outstanding at June 30,
1998 and December 31, 1997, respectively . . . . . . . . . . . . . . . . 139,434 139,007
Capital in excess of par value . . . . . . . . . . . . . . . . . . . . . 6,212,690 6,197,880
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (8,465,443) (7,810,283)
----------- ----------
TOTAL STOCKHOLDERS' EQUITY. . . . . . . . . . . . . . . . . . . . . . . (23,681) 616,242
Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . . .
----------- ----------
$15,864,903 15,397,850
----------- ----------
----------- ----------
</TABLE>
(UNAUDITED)
3
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
PREFERRED STOCK COMMON STOCK
----------------------- -------------------------------------
CAPITAL IN
NUMBER OF NUMBER OF EXCESS OF ACCUMULATED
SHARES AMOUNT SHARES AMOUNT PAR VALUE DEFICIT TOTAL
--------- ---------- --------- ------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 . . 20,896 $2,089,638 4,379,860 $131,396 5,877,670 (6,651,697) 1,447,007
Issuance of common stock pursuant
to employee benefit plan. . . . - - 33,234 996 44,262 - 45,258
Issuance of common stock upon
exercise of employee stock - - 30,000 900 31,663 - 32,563
options . . . . . . . . . . . .
Issuance of common stock . . . . - - 190,476 5,715 244,285 - 250,000
Net loss . . . . . . . . . . . . - - - - - (1,158,586) (1,158,586)
------ ---------- --------- -------- --------- ---------- ----------
Balance at December 31, 1997 . . 20,896 2,089,638 4,633,570 139,007 6,197,880 (7,810,283) 616,242
Issuance of common stock pursuant
to employee benefit plan. . . . - - 10,735 322 13,102 - 13,424
Issuance of common stock upon
exercise of employee stock - - 3,500 105 3,613 - 3,718
options . . . . . . . . . . . .
Issuance of common stock . . . . - - - - (1,905) - (1,905)
Net loss . . . . . . . . . . . . - - - - - (655,160) (655,160)
------ ---------- --------- -------- --------- ---------- ----------
Balance at June 30, 1998 . . . . 20,896 $2,089,638 4,647,805 $139,434 6,212,690 (8,465,443) (23,681)
------ ---------- --------- -------- --------- ---------- ----------
------ ---------- --------- -------- --------- ---------- ----------
</TABLE>
(UNAUDITED)
4
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1998 1997
------------ ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $ (655,160) (83,688)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Increase in deferred franchise sales revenue . . . . . 89,800 137,600
Franchise sales revenue recognized-center openings . . (173,600) (88,201)
Increase in deferred franchising costs . . . . . . . . (40,506) (70,984)
Franchise costs recognized - center openings . . . . . 36,926 21,418
Provision for credit losses. . . . . . . . . . . . . . 91,665 52,141
Depreciation and amortization. . . . . . . . . . . . . 481,865 463,250
Undeveloped franchise licenses canceled. . . . . . . . (31,983) -
Loss on sale/disposition/closure of centers. . . . . . 36,767 11,083
Accrual of Consultant Agreement. . . . . . . . . . . . - 357,113
Other, net . . . . . . . . . . . . . . . . . . . . . . 90,711 6,742
Change in assets and liabilities:
Increase in accounts receivable. . . . . . . . . . . (44,210) (408,167)
Decrease in notes receivable . . . . . . . . . . . . 42,596 35,293
Decrease (increase) in inventories . . . . . . . . . 3,870 (24,382)
Decrease (increase) in prepaid expenses and
supplies . . . . . . . . . . . . . . . . . . . . . (104,351) 13,705
Increase in accounts payable . . . . . . . . . . . . 145,908 108,632
Increase in accrued salaries and wages
and other liabilities. . . . . . . . . . . . . . . 46,192 45,057
----------- --------
Net cash provided by operating activities. . . . . . . . $ 16,490 576,612
----------- --------
</TABLE>
(UNAUDITED)
(continued on next page)
5
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from investing activities:
Principal receipts on direct financing leases . . . $ 88,881 103,274
Acquisition of centers . . . . . . . . . . . . . . - (554,859)
Sale of centers . . . . . . . . . . . . . . . . . . 115,450 73,900
Capital expenditures . . . . . . . . . . . . . . . (129,538) (142,386)
Increase in projects and development . . . . . . . (1,062,932) -
Increase in other assets . . . . . . . . . . . . . (149,437) (84,197)
------------ ------------
Net cash used in investing activities . . . . (1,137,576) (604,268)
------------ ------------
Cash flows from financing activities:
Proceeds from long-term obligations . . . . . . . . 1,533,200 425,000
Principal payments on long-term obligations . . . . (286,389) (305,299)
Principal payments on capital lease obligations . . (216,131) (200,165)
Issuance of common stock . . . . . . . . . . . . . 1,814 258,656
Decrease (increase) in restricted cash . . . . . . (25,000) 34,926
Increase in lease deposit obligations . . . . . . . 2,392 800
------------ ------------
Net cash provided by financing activities . . 1,009,886 213,918
------------ ------------
Net increase (decrease) in cash . . . . . . . . . . . (111,200) 186,262
Cash, beginning of period . . . . . . . . . . . . . . 182,214 324,745
------------ ------------
Cash, end of period . . . . . . . . . . . . . . . . . $ 71,014 511,007
------------ ------------
------------ ------------
Supplemental disclosures of cash flow
information -
Cash paid during the period for interest. . . . . $ 639,036 585,600
------------ ------------
------------ ------------
</TABLE>
(UNAUDITED)
6
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the interim financial statements include all
adjustments, consisting of normal recurring adjustments, necessary in
order to make the financial statements not misleading.
2. Grease Monkey Holding Corporation ("GMHC") and its wholly-owned
subsidiaries, Grease Monkey International, Inc. ("GMI"), Grease Monkey de
Mexico SA de CV ("GMM") and GM Properties, Inc. ("GMP") are collectively
referred to as the "Company". The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information.
Accordingly, they do not include all the information and footnotes required
by generally accepted accounting principles for financial statements. For
further information, refer to the audited consolidated financial statements
and notes thereto for the year ended December 31, 1997, included in the
Company's Annual Report on Form 10-KSB filed with the Securities and
Exchange Commission on March 31, 1998.
3. The results for the three-month and six-month periods ended June 30, 1998,
are not necessarily indicative of the results to be expected for the entire
fiscal year of 1998.
4. STOCKHOLDERS' EQUITY
On January 20, 1997, Charles E. Steinbrueck, President and Chief Executive
Officer, entered into an agreement to purchase 190,476 shares of restricted
common stock at a per share price of $1.3125, the last trade price on
January 20, 1997, for a total consideration of $250,000.
The Company's Series C, 6% cumulative, preferred stock is redeemable at the
option of the Company upon 60 days prior written notice. At the option of
the holder, at any time prior to the close of business on the redemption
date, each share of Series C Preferred stock, plus any accumulated unpaid
dividends, may be converted into shares of common stock at a conversion
price of $2.50 per share of common stock. On June 30, 1998, accumulated
unpaid dividends totaled $569,120.
The Company has an employee deferred compensation 401(k) plan and matches
employee contributions to this plan in an amount equal to 50% of the
employees' contribution, up to a maximum of 6% of the employees'
compensation. The Company's contribution is paid with its $0.03 par value
common stock (net of forfeitures) valued at market on the date of the
contribution. During the first six months of 1998 and 1997, the Company
contributed 10,735 and 21,438 shares to this plan at an average of $1.25
and $1.14 per share, respectively.
(continued)
7
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. EARNINGS (LOSS) PER SHARE
Effective for periods ending after December 15, 1997, earnings (loss) per
common share (EPS) is computed using Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128 established
standards for computing and presenting EPS and supersedes all prior EPS
guidance found in APB Opinion 15. Basic EPS is computed by dividing income
available to common shareholders by the weighted-average number of common
shares outstanding during the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common shares. All prior periods
have been restated to conform with SFAS No. 128. The following is a
reconciliation between the basic and diluted earnings per common share for
income (loss) as calculated under SFAS No. 128.
<TABLE>
FOR THE THREE MONTHS ENDED
--------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
------------------------------- ---------------------------
INCOME INCOME
(LOSS) EPS SHARES (LOSS) EPS SHARES
------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) (238,925) 393,257
Preferred dividends (31,259) (31,259)
------------------------------- ---------------------------
Basic EPS (270,184) (.06) 4,647,409 361,998 .08 4,598,092
Effects of dilutive securities:
Common stock equivalents 215,736
Convertible Preferred Stock 31,259 1,000,848
------------------------------- ---------------------------
Diluted EPS (270,184) (.06) 4,647,409 393,257 .07 5,814,676
------------------------------- ---------------------------
------------------------------- ---------------------------
<CAPTION>
FOR THE SIX MONTHS ENDED
-----------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1997
------------------------------- ------------------------------
INCOME INCOME
(LOSS) EPS SHARES (LOSS) EPS SHARES
------------------------------- ------------------------------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) (655,160) (83,688)
Preferred dividends (62,174) (62,174)
------------------------------- ------------------------------
Basic EPS (717,334) (.15) 4,644,623 (145,862) (.03) 4,568,124
Effects of dilutive securities:
Common stock equivalents
Convertible Preferred Stock
------------------------------- ------------------------------
Diluted EPS (717,334) (.15) 4,644,623 (145,862) (.03) 4,568,124
------------------------------- ------------------------------
------------------------------- ------------------------------
</TABLE>
(continued)
8
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. CONTINGENCIES
The Company is a party to legal proceedings including claims by franchisees
against the Company that arise in the ordinary course of business. In the
opinion of management, the outcome of these matters will not have a
material effect on the financial condition, results of operations or cash
flows of the Company.
7. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This
Statement requires that all items that are recognized under accounting
standards as components of comprehensive income be reported in an annual
financial statement displayed with the same prominence as other annual
financial statements. Condensed financial statements of interim periods
are to include a total for comprehensive income. The Company's total
comprehensive income (loss) did not differ from its net income (loss).
(continued)
9
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
The following table sets forth, by period, the amount and nature of amounts
paid and received for the acquisition, sale (refranchising) and closure of
Company-owned Centers.
<TABLE>
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
-------- -------
<S> <C> <C>
Acquisitions:
Number of Centers purchased. . . . . . . . . - 2
-------- -------
-------- -------
Number of Centers foreclosed . . . . . . . . 2 -
-------- -------
-------- -------
Receivables applied (net of
related allowance). . . . . . . . . . . . . $ 30,703 -
Liabilities assumed. . . . . . . . . . . . . 38,400 375,337
Cash paid. . . . . . . . . . . . . . . . . . - 554,859
-------- -------
Cost of assets acquired. . . . . . . . . . . $ 69,103 930,196
-------- -------
-------- -------
Sales:
Number of Centers
refranchised/sold/closed. . . . . . . . . . 3 2*
-------- -------
-------- -------
Cash received. . . . . . . . . . . . . . . . $115,450 73,900
Notes received/accounts
receivable granted. . . . . . . . . . . . . 15,769 26,800
Liabilities assumed by purchaser . . . . . . - 40,875
Loss on sale . . . . . . . . . . . . . . . . 36,767 11,083
Franchise fees . . . . . . . . . . . . . . . - 14,000
-------- -------
Net book value of centers
refranchised/sold/closed. . . . . . . . . . $167,986 166,658
-------- -------
-------- -------
</TABLE>
* Includes one center which was originally developed to be a Company-owned
Center, but was sold to a franchisee prior to opening.
(continued)
10
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the six months ended June 30, 1998 and 1997, non-cash transactions
consisted of the Company issuing 10,735 and 21,438 shares of common stock
at an average value of $1.25 and $1.14 per share, respectively, in
accordance with its matching requirement under the Company's 401(k) plan.
Other non-cash transactions during the first six months of 1998 included a
franchise license in the amount of $10,000, net of deferred costs of
$2,173, that was cancelled and applied to a franchisee's obligation to the
Company; a capital lease obligation of $196,900 was recorded for a
Company-owned Center; and a franchisee abandoned a site, resulting in a
direct financing lease being cancelled and a capital lease building being
recorded in the amount of $181,677. Other non-cash transactions during the
first six months of 1997 included the cancellation of a direct financing
lease receivable and the corresponding capital lease obligation of $153,316
based on the franchisee re-negotiating the lease resulting in the Company
being released from the lease.
11
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
The Company reported a net loss of ($655,160) for the first half of 1998,
as compared to a net loss of ($83,688) for the first half of 1997. For the
second quarter of 1998, the Company reported a net loss of ($238,925) compared
to net income of $393,257 for the same quarter in 1997.
Total revenue decreased 4% or $444,947 for the first half of 1998, compared
to the first half of 1997. Revenue during the second quarter of 1998 decreased
$462,001 over the same quarter last year, a decrease of 8%. The decreases are
due primarily to decreases in royalty revenue and other revenue due to a
settlement agreement entered into with a former franchisee in 1997. Under the
settlement agreement, the Company recognized approximately $207,200 of royalty
fees not previously recognized and approximately $168,000 of other income
related to the reimbursement of costs previously expensed. Offsetting these
decreases were increases in revenue from center openings and the related product
and equipment revenue. Revenue from Company-owned Centers remained relatively
constant as the average number of Company-owned Centers (based on number of
months operated) remained constant.
Royalty fees are a percentage of gross sales paid monthly by all franchised
Grease Monkey Centers. Royalty fee revenue for the first half of 1998 decreased
by $310,414 or 17% compared to the first half of 1997. Royalty fee revenue for
the second quarter of 1998 decreased by $275,207 or 26% over the second quarter
of 1997. The decreases are due primarily to the recording of the settlement
agreement with a former franchisee, as discussed previously. In addition, the
average number of franchised Centers open during the respective periods
decreased from a six month average in 1997 of 190 Centers to a six month average
in 1998 of 179 Centers. The quarterly average for 1997 was 193 Centers as
compared to 178 Centers in 1998. Based upon many factors, including the age of
amounts owed the Company, the extent of collateralization, and historical
performance, the Company may place certain financially troubled franchisees on a
non-accrual status. For the first half of 1998, estimated royalties of $113,100
were not accrued under this policy, compared to $58,375 for the first half of
1997. During the second quarter of 1998, estimated royalties of $62,430 were
not accrued compared to $ 32,625 for the second quarter of 1997. The Company
has a royalty rebate program for franchisees under which eligible franchisees
can receive a rebate of royalties paid. For the first half of 1998, the rebate
accrued under this program was $114,051, compared to $120,202 for the first half
of 1997. The rebate accrued for the second quarter of 1998 was $58,061,
compared to a rebate of $61,257 for the second quarter of 1997. The rebate is
recorded as a reduction in royalty revenue.
The Company recognized franchise sales net revenue (sales net of related
costs) of $136,674 and $131,174 during the second quarter and first six months
of 1998, respectively, representing seven Center openings. During the first six
months of 1997, the Company recognized franchise sales net revenue of $66,783,
representing seven Center openings. For the second quarter of 1997, franchise
sales net revenue was $55,267 representing four Center openings. Franchise
sales revenue represents initial one-time payments received by the Company from
buyers of its franchises. The fee and any directly related costs are recognized
as revenue and expense when the related franchise Center opens for business.
(continued)
12
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
At June 30, 1998, the Company operated 31 Centers as compared to 30 Centers
at June 30, 1997. However, the average number of Centers operated during the
quarters and six month periods ended June 30, 1998 and June 30, 1997, was
constant at 31 Centers. For the first six months of 1998, the Company reported
an operating margin (Company-owned Center sales less expenses, excluding
interest, depreciation and amortization) of $1,190,193 on revenue of $7,454,780
at Company-owned Centers as compared to an operating margin of $1,066,921 on
revenue of $7,386,371 for the same period last year. These results represent an
increase of 1% in revenue and 12% in operating margin. For the second quarters
of 1998 and 1997, the Company reported operating margins of $659,029 and
$551,951 on revenue of $3,755,906 and $3,802,717 respectively, representing a
decrease in revenue of 1% and an increase in operating margin of 19%.
In the first six months of 1998, the Company realized marketing allowances
and gross margins on product and equipment sales of $196,978, as compared to
$235,144 in the first six months of 1997. In the second quarter of 1998,
marketing allowances and gross margins on product and equipment sales were
$98,642, as compared to $112,710 in the second quarter of 1997. Product and
equipment revenue represents the sale of fluid dispensing equipment and other
supplies to franchisees, and marketing allowances relate to the sale of oil
filters, air filters, oil additives, and certain other products.
General and administrative expenses for the first six months and second
quarter of 1998 increased $15,752 or 1% and increased $271,496 or 24% as
compared to the first six months and second quarter of 1997. Variances in the
first six months of 1998 as compared to the first six months of 1997 included:
an increase in salaries, wages and personnel expenses of approximately $247,000;
an increase in litigation expenses, including legal fees and related costs, of
approximately $159,000; and an increase in professional fees, including legal,
tax and accounting of approximately $43,000. Offsetting these increases was the
prior year accrual of the Company's obligation under a Consultant Agreement with
the Company's former Chairman of the Board, President and Chief Executive
Officer. General and administrative expenses for the first six months of 1997
included approximately $379,000 related to this agreement. Variances in the
second quarter of 1998 as compared to the second quarter of 1997 included: an
increase in salaries, wages and personnel expenses of approximately $127,000; an
increase in litigation expenses, including legal fees and related costs, of
approximately $101,000; and an increase in Company-owned Center division
overhead of approximately $46,000.
Depreciation and amortization expense for the first six months and second
quarter of 1998 remained relatively constant to the same periods in 1997. This
is due to the average number of Company-owned Centers operated during the
periods remaining consistent.
(continued)
13
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
Gain (loss) on sale/disposition/closure of centers represents the net
results of the refranchising/disposal of Company-owned Centers. When the
Company refranchises a Center, a franchise license fee is included in the sales
price and included in the resulting gain or loss on sale. The loss of ($55,943)
for the six months ended June 30, 1998, represents the closure of two Company-
owned Centers in 1998, marketing allowances paid based on subsidies granted
certain franchisees on the refranchising of Company-owned Centers in 1996, and
additional costs incurred in 1998 related to the closure of Company-owned
Centers closed in 1997. In addition, a loss was recognized on the sale of a
Company-owned Center to a third party. The loss of ($17,463) for the six months
ended June 30, 1997, represents the refranchising of one Company-owned Center,
the sale of one Center, which was originally developed to be a Company-owned
Center, and marketing allowances paid based on subsidies granted certain
franchisees on the refranchising of Company-owned Centers in 1996.
In the first half of 1998, the Company recognized $31,983 in franchise
sales revenue resulting from license cancellations. There were no license
cancellations in 1997.
Interest expense includes interest on debt financing and interest recorded
on capital leases of Company-owned Centers. The increase in interest expense
from $366,117 in the first six months of 1997 to $425,940 in the first six
months of 1998 was due in part to a change in vendor financing. This change
resulted in financing costs being transferred out of cost of goods sold and into
financing costs. In addition, average debt outstanding for the six month
periods increased approximately $550,000. This increase is due in part to
borrowings associated with the purchase of one center late in the first quarter
of 1997 and one center purchased late in the second quarter of 1998.
(continued)
14
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)
The following schedule summarizes the activity with regard to Grease Monkey
Company-owned Centers as well as Grease Monkey franchised Centers for the six
months ended June 30, 1998 and 1997.
<TABLE>
SIX MONTHS ENDED:
JUNE 30, 1998 JUNE 30, 1997
-----------------------------------------------------------------
COMPANY FRANCHISE COMPANY FRANCHISE
OWNED OWNED TOTAL OWNED OWNED TOTAL
------- --------- ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Centers open, beginning 31 187 218 31 184 215
Centers opened 1 7 8 - 7 7
Centers purchased - - - 2 (2) -
Centers sold (1) - (1) (1) 1 -
Centers terminated or
closed (2) (14) (16) (2) (1) (3)
Centers reacquired 2 (2) - - - -
--- --- ------- --- --- --------
Centers open, ending (A) 31 178 209 30 189 219
--- --- ------- --- --- --------
--- --- ------- --- --- --------
Vehicles serviced (000's) 1,354 1,426
------- --------
------- --------
Franchise licenses
issued (B) 4 7
------- --------
------- --------
Undeveloped franchise
licenses (C) 44 50
------- --------
------- --------
Franchise applications
outstanding (C) 18 17
------- --------
------- --------
Franchise license/
application fees
received (D) $89,800 $137,600
------- --------
------- --------
</TABLE>
(A) Includes 20 franchised Centers in Mexico in 1998 and 1997.
(B) Represents the number of licenses issued during the period.
(C) Represents the number of licenses/applications outstanding at June 30.
(D) Represents amounts received for franchise licenses/applications during the
period.
(continued)
15
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(continued)
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL RESOURCES
The Company currently has lines of credit with varying interest rates
available to them from a third party. The lines total $430,000 of which $75,500
was outstanding at June 30, 1998.
In September 1997, the Company entered into a $5,000,000 Loan Agreement
with a major bank. In connection with the Company entering into a Master Supply
Contract with a motor oil supplier, the supplier agreed to guarantee the line.
Draws under the Loan Agreement were used for the purpose of paying off certain
debt, including the Company's former Loan Agreement and Fast Lube Supply
Agreement, and will be used for acquiring, constructing and/or developing
Company Centers. Any draws are evidenced by notes which amortize over ten years
with a five year balloon payment and bear interest at a rate provided under the
Loan Agreement plus guarantee fees. For an increased guarantee fee, the Company
can extend the payment terms an additional five years. An initial draw of
$2,620,000 was made on September 29, 1997, with interest at 9.26% plus guarantee
fees. Additional draws totaling $1,186,800 were made in the first six months of
1998 with an average interest rate of approximately 9% plus guarantee fees. As
of June 30, 1998, approximately $3,936,000 is outstanding under the Loan
Agreement.
In May 1996, the Company entered into a Business Loan Agreement with a
major bank for a $2,000,000 three year line of credit. Funds drawn under the
line are restricted to the development of new Centers. The Company has the
right to select an optional interest rate as described in the agreement,
however, in no case will the interest rate exceed the bank's reference rate. In
exchange for a supply agreement on any Centers built utilizing the line of
credit, a motor oil supplier agreed to guarantee the line. As of June 30, 1998,
$190,000 is outstanding under this line of credit.
The growth of the Grease Monkey system is dependent on the ability of the
Company and its franchisees to obtain real estate development capital.
Historically, Grease Monkey Centers have been built utilizing build-to-suit
services, whereby the land is purchased and the building is constructed to the
Company's specifications, then leased to the Company or to a franchisee, by a
third party. Recently, franchisees have moved toward purchasing and developing
the real estate for their own account, thereby creating greater value in their
business.
(continued)
16
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(continued)
LIQUIDITY
Cash provided by operations during the first six months of 1998 was $16,490
as compared to cash provided by operations of $576,612 in the first six months
of 1997. Factors contributing to the negative variance as compared to prior
year include: the prior year settlement agreement entered into with a former
franchisee as discussed previously; a decrease in franchise sales over the prior
year; losses in leasing activities; and increased financing costs. Offsetting
these negative factors was an improved operating margin at Company-owned
Centers.
Cash used in investing activities was ($1,137,576) in the first six months
of 1998, as compared to cash used in investing activities of ($604,268) in the
first six months of 1997. Cash provided in both periods consisted primarily of
receipts on direct financing leases which decreased over the periods.
Additional cash was received in the first six months of 1998 and 1997 with the
refranchising/sale of one and two Company-owned Centers, respectively. Cash
used in investing activities for the first six months of 1998 consisted
primarily of cash used for the development of Centers. Cash used in investing
activities for the first six months of 1997 consisted primarily of cash used to
purchase Centers. Additional cash was used in both periods for capital
expenditures, primarily Company Center equipment.
Cash provided by financing activities was $1,009,886 in the first six
months of 1998 as compared to cash provided by financing activities of $213,918
in the first six months of 1997. Cash provided by financing activities in the
first six months of 1998 consisted primarily of proceeds from long-term
obligations for the development of Centers. Cash provided by financing
activities in the first six months of 1997 consisted primarily of proceeds from
long-term obligations for the purchase of property related to the acquisition of
a center and sale of common stock. Financing activities also included cash used
to reduce long-term debt and capital lease obligations of $502,520 in the first
six months of 1998 and $505,464 in the first six months of 1997.
The Company does not have any material commitments for capital expenditures
other than for the required replacement or upgrade of underground storage tanks.
The Company is currently seeking additional financing through equity and or debt
to provide working capital for current and future operating needs as well as to
fund development projects. The Company believes, but cannot guarantee, that
such financing will be obtained. If new financing is not secured, the Company's
ability to grow would be substantially limited.
17
<PAGE>
GREASE MONKEY HOLDING CORPORATION
COMMISSION FILE NUMBER: 000-9812
QUARTER ENDED JUNE 30, 1998
FORM 10-QSB
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company is a party to legal proceedings including claims by franchisees
against the Company that arise in the ordinary course of business. In the
opinion of management, the outcome of these matters will not have a material
effect on the financial condition, results of operations or cash flows of the
Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
(b) As of the date of filing this Quarterly Report on Form 10-QSB, the Company
is in arrears in the payment of dividends on the Series C Preferred Stock in the
amount of approximately $585,000. Under Paragraph 5(d) of the Statement of
Designation, Voting Powers, Preferences and Rights of the Series C Preferred
Stock ("Statement of Designation"), if dividends on the Series C Preferred Stock
are in arrears in an aggregate amount equal to at least four quarterly
dividends, the number of members of the Board of Directors of the Company is
automatically increased by the smallest number of directors that will constitute
at least 25% of the Board of Directors after such increase and the holders of
the Series C Preferred Stock (voting as a separate voting group) have the
exclusive right to elect, remove or replace such additional directors of the
Company. The holders of the Series C Preferred Stock have not notified the
Company that they have any intention to elect or serve as Directors.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 15, 1998, the Company held its annual meeting of shareholders. The
Company's shareholders elected the following seven persons as directors, each to
serve until the next annual meeting of shareholders or until his successor is
elected and qualified: Jerry D. Armstrong, Jim D. Baldwin, Cortlandt S.
Dietler, Wayne H. Patterson, Charles E. Steinbrueck, James B. Wallace and
George F. Wood. The number of shares voted and withheld with respect to each
director were as follows:
18
<PAGE>
<TABLE>
ELECTION OF DIRECTORS FOR WITHHELD
<S> <C> <C>
Jerry D. Armstrong 2,653,328 46,705
Jim D. Baldwin 2,185,175 514,858
Cortlandt S. Dietler 2,653,181 46,852
Wayne H. Patterson 2,185,124 514,909
Charles E. Steinbrueck 2,185,368 514,665
James B. Wallace 2,653,073 46,960
George F. Wood 2,654,068 45,965
</TABLE>
ITEM 5. OTHER INFORMATION
Effective June 29, 1998, the United States Securities and Exchange
Commission adopted new rules relating to shareholder proposals which
shareholders do not request be included in the Company's proxy statement to be
used in connection with the Company's Annual Meeting of Shareholders. Under
these new rules, proxies that confer discretionary authority will not be able to
be voted on a shareholder proposal to be presented at the Annual Meeting of
Shareholders if the shareholder provides the Company with advance written notice
of the shareholder's proposal on a date in the current year that is at least 45
days prior to the date the prior year's proxy materials were mailed to the
Company's shareholders. If a shareholder fails to so notify the Company,
proxies that confer discretionary authority will be able to be voted when the
proposal is presented at the Annual Meeting of Shareholders.
Unless the Company receives notice of the proposals by no later than April
7, 1999, proxies which confer discretionary authority will be able to be voted
on shareholder proposals that the shareholders do not request be included in the
Company's proxy statement but plan to present at the Company's next Annual
Meeting of Shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits (numbered in accordance with Item 601 of regulation S-K)
27.1 Financial Data Schedule - 1998
27.2 Financial Data Schedule - 1997 restated
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period covered by this report.
19
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
COMMISSION FILE NUMBER: 000-9812
QUARTER ENDED JUNE 30, 1998
FORM 10-QSB
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GREASE MONKEY HOLDING CORPORATION
By: /s/ Charles E. Steinbrueck
---------------------------------------------
Charles E. Steinbrueck
President and Chief Executive Officer
(Principal Executive Officer, Chief Financial
Officer and Principal Accounting Officer)
Denver, Colorado
August 11, 1998
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 1-3 OF THE COMPANY'S FORM 10-QSB FOR THE YEAR TO DATE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 71,014
<SECURITIES> 0
<RECEIVABLES> 2,074,743
<ALLOWANCES> 517,808
<INVENTORY> 741,747
<CURRENT-ASSETS> 2,682,468
<PP&E> 10,035,612
<DEPRECIATION> 4,186,583
<TOTAL-ASSETS> 15,864,903
<CURRENT-LIABILITIES> 3,464,162
<BONDS> 5,778,082
0
2,089,638
<COMMON> 139,434
<OTHER-SE> (2,252,753)
<TOTAL-LIABILITY-AND-EQUITY> 15,864,903
<SALES> 0
<TOTAL-REVENUES> 10,183,892
<CGS> 0
<TOTAL-COSTS> 10,410,472
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 91,665
<INTEREST-EXPENSE> 425,940
<INCOME-PRETAX> (655,160)
<INCOME-TAX> 0
<INCOME-CONTINUING> (655,160)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (655,160)
<EPS-PRIMARY> (0.15)
<EPS-DILUTED> (0.15)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 1-3 OF THE COMPANY'S FORM 10-QSB FOR THE YEAR TO DATE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 511,007
<SECURITIES> 0
<RECEIVABLES> 2,381,562
<ALLOWANCES> 308,390
<INVENTORY> 900,749
<CURRENT-ASSETS> 3,603,705
<PP&E> 9,711,260
<DEPRECIATION> 3,849,265
<TOTAL-ASSETS> 16,540,982
<CURRENT-LIABILITIES> 3,762,873
<BONDS> 5,000,656
0
2,089,638
<COMMON> 137,978
<OTHER-SE> (581,124)
<TOTAL-LIABILITY-AND-EQUITY> 16,540,982
<SALES> 0
<TOTAL-REVENUES> 10,628,839
<CGS> 0
<TOTAL-COSTS> 10,364,621
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 52,141
<INTEREST-EXPENSE> 366,117
<INCOME-PRETAX> (83,688)
<INCOME-TAX> 0
<INCOME-CONTINUING> (83,688)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (83,688)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
