<PAGE>
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
GREASE MONKEY HOLDING CORPORATION
---------------------------------
(Name of Registrant as Specified In Its Charter)
------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $.03 per share ("Common Stock") and
Series C Preferred Stock, $100.00 stated value ("Preferred
Stock") of Grease Monkey Holding Corporation
(2) Aggregate number of securities to which transaction applies:
4,690,518 shares of Common Stock and 20,896 shares of
Preferred Stock
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
$1.00 per share of Common Stock and $100.00 per share of
Preferred Stock (plus accrued and unpaid dividends) in
cash-out merger
(4) Proposed maximum aggregate value of transaction:
$7,522,057
(5) Total fee paid:
$1,505
<PAGE>
[X] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
<PAGE>
GREASE MONKEY HOLDING CORPORATION
633 17th Street, Suite 400
Denver, Colorado 80202
October 14, 1999
Dear Shareholders:
You are cordially invited to attend a Special Meeting of
Shareholders of Grease Monkey Holding Corporation ("Grease Monkey" or the
"Company") to be held on November 22, 1999, at 2 p.m., local time, at the
training center of the Company, 633 17th Street, Suite 400, Denver, Colorado
80202. The purpose of the Special Meeting is to consider and vote upon a
merger that, if approved and subsequently consummated, will result in the
shareholders of the Company (other than shareholders who have perfected their
appraisal rights) receiving (a) $1.00 in cash per share for their shares of
Grease Monkey common stock, $.03 par value ("Common Stock") and (b) $100.00
plus an amount equal to any unpaid cumulative dividends in cash per share for
the Series C Preferred Stock, $100.00 stated value (the "Preferred Stock").
The acquiror of Grease Monkey, QL 3000, Inc., a newly formed Florida
corporation ("QL 3000"), was organized at the direction of E. Chester Stokes,
Jr. and David C. Plyler.
The Board of Directors of Grease Monkey has recommended to Grease
Monkey's shareholders that the merger and related agreements be approved. In
connection with its evaluation of the merger, the Board of Directors engaged
Green, Manning & Bunch Securities, Inc. ("GMB") to act as its financial
advisor. GMB has rendered its opinion dated March 8, 1999 that based upon and
subject to the assumptions, limitations and qualifications set forth in such
opinion, the cash merger consideration to be received in the merger is fair
from a financial point of view to the shareholders of the Company. The
written opinion of GMB, dated March 8, 1999, is attached as Appendix B to the
enclosed Proxy Statement and should be read carefully and in its entirety by
the shareholders.
THE BOARD OF DIRECTORS BELIEVES THAT THE TERMS OF THE MERGER ARE
FAIR AND IN THE BEST INTERESTS OF THE COMPANY'S SHAREHOLDERS AND RECOMMENDS
THAT THE SHAREHOLDERS APPROVE THE MERGER.
Approval of the merger at the Special Meeting will require the
affirmative vote of holders of a majority of the outstanding shares of Common
Stock and a majority of the outstanding shares of Preferred Stock entitled to
vote at the Special Meeting, voting as separate groups. The accompanying
Proxy Statement provides you with a summary of the proposed merger and
additional information about the parties involved and their interests. If the
merger is approved by the holders of the Common Stock and Preferred Stock,
the closing of the merger will occur as soon after the Special Meeting as all
of the other conditions to closing the merger are satisfied.
PLEASE GIVE ALL THIS INFORMATION YOUR CAREFUL ATTENTION. WHETHER OR
NOT YOU PLAN TO ATTEND, IT IS IMPORTANT THAT YOUR SHARES ARE REPRESENTED AT
THE SPECIAL MEETING. A FAILURE TO
<PAGE>
VOTE WILL COUNT AS A VOTE AGAINST THE MERGER. ACCORDINGLY, YOU ARE REQUESTED
TO PROMPTLY COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN
THE ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND. THIS WILL NOT
PREVENT YOU FROM VOTING YOUR SHARES IN PERSON IF YOU SUBSEQUENTLY CHOOSE TO
ATTEND.
Sincerely,
James B. Wallace
Chairman
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GREASE MONKEY HOLDING CORPORATION
633 17th Street, Suite 400
Denver, Colorado 80202
---------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 22, 1999
---------------------
Notice is hereby given that a Special Meeting of Shareholders of
Grease Monkey Holding Corporation, a Utah corporation ("Grease Monkey" or the
"Company"), will be held on November 22, 1999 at 2:00 p.m., local time, at
the training center of the Company, 633 17th Street, Suite 400, Denver, CO
80202, for the following purposes:
(1) To consider and vote upon a proposal to approve an Agreement and Plan
of Merger, dated March 26, 1999 (as amended by the Amendment Release
and Extension Agreement, dated July 30, 1999, the "Merger Agreement"),
pursuant to which QL 3000, Inc., a newly formed Florida corporation
("QL 3000"), will be merged with and into the Company and each
shareholder of the Company (other than shareholders who are entitled to
and have perfected their appraisal rights) will become entitled to
receive (a) $1.00 in cash for each outstanding share of common stock,
$.03 par value, of the Company (the "Common Stock") and (b) $100.00
plus an amount equal to any unpaid cumulative dividends in cash per
share for the Series C Preferred Stock, $100.00 stated value (the
"Preferred Stock") owned immediately prior to the effective time of the
merger. A copy of the Merger Agreement is attached as Appendix A to and
is described in the accompanying Proxy Statement.
(2) To consider and act upon such other matters as may properly come before
the Special Meeting or any adjournment or adjournments thereof.
<PAGE>
The Board of Directors has determined that only holders of Common
Stock and Preferred Stock of record at the close of business on October 8,
1999, will be entitled to notice of, and to vote at, the Special Meeting or
any adjournment or adjournments thereof. A form of proxy and a Proxy
Statement containing more detailed information with respect to the matters to
be considered at the Special Meeting accompany and form a part of this notice.
By order of the Board of Directors,
/s/ Rex L. Utsler
Secretary
October 14, 1999 Denver, Colorado
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE
COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY IN THE
ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES.
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
THE MERGER HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR
MERITS OF THE MERGER NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
Any shareholder shall have the right to dissent from the merger and
to receive payment of the "fair value" of his or her shares upon compliance
with the procedures set forth in Sections 16-10a-1301 through 16-10a-1331 of
the Utah Business Corporation Act. See "Rights Of Dissenting Shareholders" in
the Proxy Statement that accompanies this notice and the full text of
Sections 16-10a-1301 through 16-10a-1331 of the Utah Business Corporation
Act, which is attached as Appendix C and is described in the accompanying
Proxy Statement.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Questions and Answers about the Merger....................................... 1
Who Can Help Answer Your Questions........................................... 3
Cautionary Statement Concerning Forward-Looking Information.................. 4
Summary...................................................................... 5
Historical Market Information................................................ 10
Selected Consolidated Financial Data......................................... 11
Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................... 12
Special Factors.............................................................. 29
The Board's Recommendation................................................... 32
Opinion Of Financial Advisor................................................. 35
Purpose and Reasons of QL 3000 for the Merger................................ 38
Conflicts Of Interest........................................................ 39
Certain Effects Of The Merger................................................ 39
Financing Of The Merger...................................................... 40
Conduct Of Grease Monkey's Business After The Merger......................... 41
The Special Meeting.......................................................... 42
Date, Time, And Place Of The Special Meeting................................. 42
Proxy Solicitation........................................................... 42
i
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<CAPTION>
PAGE
<S> <C>
Record Date And Quorum Requirement........................................... 42
Voting Procedures............................................................ 42
Voting And Revocation Of Proxies............................................. 43
Effective Time Of The Merger And Payment For Shares.......................... 43
Other Matters To Be Considered............................................... 44
The Merger................................................................... 45
Terms Of The Merger Agreement................................................ 45
Rights Of Dissenting Shareholders............................................ 49
Federal Income Tax Consequences.............................................. 52
Principal Shareholders....................................................... 54
Certain Information Concerning QL 3000 and QL 3000 Investors................. 55
Purchases Of Common Stock By Certain Persons................................. 55
Independent Auditors......................................................... 55
Shareholder Proposals........................................................ 55
Other Matters................................................................ 56
Incorporation of Certain Documents by Reference.............................. 56
Where You Can Find More Information.......................................... 56
ii
<PAGE>
TABLE OF CONTENTS
(CONTINUED)
<CAPTION>
PAGE
<S> <C>
Financial Statements......................................................... F-1
Appendix A - Merger Agreement and Amendment, Extension
and Release Agreement..................................................... A-1
Appendix B - Opinion of GMB.................................................. B-1
Appendix C - Utah Business Corporation Act - Part 13 Dissenters' Rights...... C-1
</TABLE>
iii
<PAGE>
GREASE MONKEY HOLDING CORPORATION
633 17th Street, Suite 400
Denver, Colorado 80202
---------------------
PROXY STATEMENT
---------------------
The Proxy Statement is dated October 14, 1999 and was first mailed to
Shareholders on approximately October 22, 1999.
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT WILL HAPPEN IN THE MERGER?
A: Upon consummation of the merger, QL 3000 will be
merged with and into Grease Monkey with Grease Monkey being the surviving
corporation. All shareholders of Grease Monkey, other than those
shareholders who exercise their appraisal rights, will receive a cash
payment for their outstanding shares of Common Stock and Preferred Stock.
After the merger, Grease Monkey will become a privately held company owned
by the following investors in QL 3000 (the "QL 3000 Investors"):
E. Chester Stokes, Jr.
David C. Plyler
Thomas C. Bergmann
Ronald E. Smith
Island Food Stores, Ltd.
To review the structure of the merger in greater detail,
see pages 45 through 48.
Q: WHY IS GREASE MONKEY BEING ACQUIRED?
A: The Board of Directors believes that the acquisition
of Grease Monkey is in the best interests of the shareholders of Grease
Monkey, that the merger will enable the shareholders to liquidate their
holdings and that as a private company, Grease Monkey will have reduced
costs, greater access to capital and will have greater operating
flexibility to focus on enhancing value by emphasizing growth and operating
cash flow. To review the background and reasons for the merger in greater
detail, see pages 29 through 32.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: You will receive (a) $1.00 in cash, without interest,
for each share of Common Stock, and (b) $100.00 plus
an amount equal to any unpaid cumulative dividends in
cash, without interest, for each share of Preferred
Stock. This is the "Cash Merger Consideration." For
example: If you own 100 shares of Common Stock, upon
completion of the merger you will receive $100.00 in
cash.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working to complete the merger during
November 1999.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER TO ME?
A: The receipt of the Cash Merger Consideration by you
will be a taxable transaction for federal income tax
purposes. To review the tax consequences to you in
greater detail, see pages 52 through 53.
Your tax consequences will depend on
<PAGE>
your personal situation. You should consult your tax
advisors for a full understanding of the tax consequences
of the merger to you.
Q: WHAT AM I BEING ASKED TO VOTE UPON?
A: You are being asked to approve and adopt the Merger
Agreement, which provides for the acquisition of Grease Monkey by the QL
3000 Investors. After the merger, Grease Monkey will become a privately
held company and you will no longer own an equity
interest in Grease Monkey.
The Grease Monkey Board has approved and adopted the merger and recommends
voting for the approval and adoption of the Merger Agreement.
Q: WHAT DO I NEED TO DO NOW?
A: Just indicate on your proxy card how you want to vote, and sign and mail
it in the enclosed envelope as soon as possible, so that your shares will
be represented at the meeting.
Approval of the proposal requires the affirmative vote of a majority of
the outstanding shares of Common Stock and Preferred Stock, voting as
separate groups. Therefore, a failure to vote or a vote to abstain will
have the same legal effect as a vote against the merger.
The Special Meeting will take place on November 22, 1999 at 2:00 p.m.,
local time, at the training center of the Company, 633 17th Street, Suite
400, Denver, Colorado 80202. You may attend the Special Meeting and vote
your shares in person, rather than voting by proxy. In addition, you may
withdraw your proxy up to and including the day of the Special Meeting and
either change your vote or attend the Special Meeting and vote in person.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER,
WILL MY BROKER VOTE MY SHARES FOR ME?
A: Your broker will vote your shares of Common Stock
only if you provide instructions on how to vote.
You should instruct your broker how to vote your
shares, following the directions your broker
provides. If you do not provide instructions to
your broker, your shares will not be voted and they
will be counted as votes against the proposal to
approve and adopt the Merger Agreement.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, we will send you
written instructions for exchanging your Common Stock and Preferred Stock
certificates for the Cash Merger Consideration.
2
<PAGE>
WHO CAN HELP ANSWER YOUR QUESTIONS
If you would like additional copies of this document, or if you would
like to ask any additional questions about the merger, you should contact:
James B. Wallace
Brownlie, Wallace, Armstrong & Bander Exploration
475 17th Street
Denver, Colorado 80202
Telephone: (303) 308-1660 ext. 3420
You should note that James B. Wallace, as well as certain of the other
directors and executive officers of Grease Monkey, are participants in the
merger.
3
<PAGE>
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
THIS PROXY STATEMENT AND OTHER STATEMENTS MADE FROM TIME TO TIME BY
GREASE MONKEY, QL 3000, OR THEIR AFFILIATES OR REPRESENTATIVES CONTAIN CERTAIN
FORWARD-LOOKING STATEMENTS. THOSE STATEMENTS INCLUDE STATEMENTS REGARDING THE
INTENT, BELIEF, OR CURRENT EXPECTATIONS OF GREASE MONKEY AND QL 3000 AND MEMBERS
OF THEIR RESPECTIVE MANAGEMENT TEAMS, AS WELL AS THE ASSUMPTIONS ON WHICH SUCH
STATEMENTS ARE BASED. SUCH FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF
FUTURE PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, AND ACTUAL RESULTS MAY
DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH FORWARD-LOOKING STATEMENTS.
IMPORTANT FACTORS CURRENTLY KNOWN TO MANAGEMENT OF GREASE MONKEY AND QL 3000
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN
FORWARD-LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THE RISKS DETAILED
HEREIN AND: (i) COMPETITIVE PRESSURES IN THE QUICK LUBE, AUTOMOTIVE SERVICE AND
PETROLEUM INDUSTRIES; (ii) MANAGEMENT AND INTEGRATION OF THE OPERATIONS OF
ACQUIRED BUSINESSES; (iii) GREASE MONKEY'S BUSINESS AND GROWTH STRATEGIES; (iv)
LIMITED ACCESS TO ADDITIONAL NECESSARY CAPITAL; AND (v) GENERAL ECONOMIC
CONDITIONS. GREASE MONKEY AND QL 3000 UNDERTAKE NO OBLIGATION TO UPDATE OR
REVISE FORWARD-LOOKING STATEMENTS TO REFLECT CHANGES IN ASSUMPTIONS, THE
OCCURRENCE OF UNANTICIPATED EVENTS, OR CHANGES IN FUTURE OPERATING RESULTS
OVER TIME.
4
<PAGE>
SUMMARY
This summary highlights selected information from this document and
may not contain all of the information that is important to you. For a more
complete understanding of the merger and for a more complete description of
the legal terms of the merger, you should read this entire document
carefully, as well as the additional documents to which we refer you,
including the Merger Agreement. See "Where You Can Find More Information"
(page 56).
EFFECTS OF THE MERGER
Pursuant to the merger, QL 3000 will be merged with and into Grease Monkey
with Grease Monkey being the surviving corporation (the "Surviving
Corporation"). As a result of the merger, the entire equity interest in the
Company will be owned by the QL 3000 Investors, and the Common Stock will no
longer be publicly traded. The shareholders will no longer be shareholders of
Grease Monkey and they will not participate in Grease Monkey's future
earnings and growth or bear the risk of any decreases in the value of Grease
Monkey. Instead, the shareholders will have the right to receive (a) $1.00 in
cash, without interest, for each share of Common Stock held, and (b) $100.00
plus an amount equal to any unpaid cumulative dividends in cash, without
interest, for each share for the Preferred Stock held (other than shares of
Common Stock and Preferred Stock in respect of which appraisal rights have
been perfected under Utah law). QL 3000 Investors will have the opportunity
to benefit from any future earnings and growth of Grease Monkey and will bear
the risk of any decrease in Grease Monkey's value. In addition, the members
of Grease Monkey's management have interests in the merger as employees
and/or directors which are different from, or in addition to, yours as a
Grease Monkey shareholder. To review these interests, see "-- Conflicts of
Interest" and "Special Factors -- Conflicts of Interest."
THE COMPANIES
Grease Monkey Holding Corporation
633 17th Street, Suite 400
Denver, Colorado 80202
(303) 308-1660
Grease Monkey is a Utah corporation formed in 1976 that is engaged in the
business of owning, operating, leasing, managing and franchising automotive
fast service lubrication and oil change centers under the trade name of
Grease Monkey ("Grease Monkey Centers" or "Centers").
Grease Monkey Centers provide automobile users with convenient preventative
fluid maintenance services. In about ten minutes, without an appointment,
Grease Monkey service technicians change the oil, install a new oil filter,
lubricate the chassis, adjust tire pressure, wash windows and vacuum the
interior of an automobile. At the same time, all fluid levels are checked and
topped off, if necessary. The price for this basic service is $23.99 to
$32.99 in the United States ($11.65 to $19.50 in Mexico), depending upon the
location of the Center. Grease Monkey Centers also offer transmission fluid
changes, differential fluid changes, radiator flushes, air conditioning
recharges, automotive light bulb replacement, an oil additive package, and
will replace air filters and install new wiper blades.
Grease Monkey Centers are two- or three-bay drive-through buildings built to
the Company's specifications. Grease Monkey buildings utilize service
basements from which the
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<PAGE>
underneath portion of the vehicle is serviced at the same time other
technicians service the vehicle from above. The buildings also include a
pleasant customer waiting area.
QL 3000, Inc.
9551 Bay Meadows Road
Jacksonville, Florida 32356
(904) 730-2660
QL 3000 is a Florida corporation, formed in September 1998 for the purpose of
acquiring Grease Monkey and other automotive fast service lubrication and oil
change centers throughout the United States.
THE SPECIAL MEETING (PAGES 42-44)
The Special Meeting will be held on November 22, 1999, at the training center
of the Company, 633 17th Street, Suite 400, Denver, Colorado 80202. At the
Special Meeting, Grease Monkey shareholders will be asked to consider and
vote upon a proposal to approve and adopt the Merger Agreement.
RECORD DATE; VOTING POWER (PAGE 42)
Holders of record of Common Stock and Preferred Stock at the close of
business on October 8, 1999 (the "Record Date") are entitled to receive
notice of, and to vote at, the Special Meeting. As of such date, there were
4,690,518 shares of Common Stock issued and outstanding held by approximately
2,284 holders of record and 20,896 shares of Preferred Stock held by
approximately 50 holders of record. Holders of record of Common Stock or
Preferred Stock on the Record Date are entitled to one vote per share on any
matter that may properly come before the Special Meeting.
VOTE REQUIRED (PAGE 42)
Approval by the Grease Monkey shareholders of the proposal to approve and
adopt the Merger Agreement will require the affirmative vote of a majority of
the shares of Common Stock and Preferred Stock outstanding on the Record
Date, voting as separate groups. Accordingly, a failure to vote or a vote to
abstain will have the same legal effect as a vote against the merger.
Jerry D. Armstrong, James B. Wallace, Ray O. Brownlie, J.H. Bander, Charles
E. Steinbrueck, Cortlandt S. Dietler, George F. Wood, Wayne H. Patterson and
Jim D. Baldwin have agreed to vote all of their Common Stock and Preferred
Stock to approve the merger. Such persons hold an aggregate of 2,017,396
shares of Common Stock (or approximately 43% of the total Common Stock
outstanding) and 7,161 shares of Preferred Stock (or approximately 34% of the
total Preferred Stock outstanding).
A "no" vote on the enclosed proxy card will be a vote against the merger. If
we do not receive "yes" votes from a majority of the outstanding shares of
Common Stock and Preferred Stock, the merger will not be approved and you
will continue to own shares in a publicly traded company.
A shareholder who gives a proxy with respect to voting on the Merger
Agreement may revoke it at anytime before it is voted at the Special Meeting
by (i) filing an instrument with the Secretary of Grease Monkey revoking it,
(ii) submitting a duly executed proxy bearing a later date, or (iii) voting
in person at the Special Meeting.
RECOMMENDATIONS (PAGES 32-35)
The Grease Monkey Board determined that the merger, the Merger Agreement, and
the transactions contemplated thereby were fair and in the best interests of
the Grease Monkey
6
<PAGE>
shareholders and recommended that the shareholders approve the Merger
Agreement. The Grease Monkey Board recommends that the Grease Monkey
shareholders vote "For" the approval of the Merger Agreement. Rex L. Utsler,
President, Chief Operating Officer and a director of the Company, dissented
from the Board's determination and recommendation. You should refer to the
reasons that the Grease Monkey Board considered in determining whether to
approve and adopt the Merger Agreement on pages 32-35.
OPINION OF FINANCIAL ADVISOR (PAGES 35-39)
Green, Manning & Bunch Securities, Inc. ("GMB"), an investment banking firm
that served as financial advisor to the Board, has rendered an opinion dated
March 8, 1999 to the Board that the Cash Merger Consideration is fair from a
financial point of view to the shareholders of Grease Monkey. Upon completion
of the merger, GMB will receive an investment banking fee of $425,000 plus
reimbursement of expenses of up to $20,000, of which $80,000 has already been
paid. A copy of the fairness opinion, setting forth the information reviewed,
assumptions made, and matters considered, is attached to this Proxy Statement
as Appendix B. You should read the fairness opinion of GMB in its entirety.
TERMS OF THE MERGER AGREEMENT (PAGES 45-48)
The Merger Agreement is attached to this Proxy Statement as Appendix A. You
are encouraged to read the Merger Agreement in its entirety. It is the legal
document that governs the merger.
GENERAL. The Merger Agreement provides that QL 3000 will be merged with and
into Grease Monkey, with Grease Monkey being the surviving corporation (the
"Surviving Corporation"). As a result of the merger, the shareholders of
Grease Monkey will receive $1.00 in cash, without interest, for each share of
Common Stock, and (b) $100.00 plus an amount equal to any unpaid cumulative
dividends per share for the Preferred Stock.
CONDITIONS TO THE MERGER. The completion of the merger depends upon the
satisfaction of a number of conditions, including:
- requisite approval of the Merger Agreement by the
Grease Monkey shareholders;
- receipt of all necessary authorizations, consents
and approvals of governmental agencies,
authorities and other third parties; and
- absence of a material adverse effect on the business
of Grease Monkey.
Each party may, at its option, waive the satisfaction of any condition to
such party's obligations under the Merger Agreement. Even if the shareholders
approve the merger, there can be no assurance that the merger will be
consummated.
SOLICITATION. Until consummation or abandonment of the merger, Grease Monkey
and its affiliates are not permitted to initiate or solicit any proposal from
a third party with respect to the disposition of all of its assets, a merger,
consolidation, business combination, or similar transaction involving Grease
Monkey or any of its subsidiaries.
TERMINATION. Either Grease Monkey or QL 3000 may terminate the Merger
Agreement under certain circumstances, including if:
- both parties consent in writing;
- legal restraints or prohibitions prevent
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<PAGE>
the consummation of the merger; or
- the other party breaches in a material manner any of its
representations, warranties or covenants under the Merger Agreement and
such breach is not cured within 10 days of notice.
In addition, Grease Monkey may, under certain circumstances, terminate the
Merger Agreement if the merger is not completed by the later of October 31,
1999 or 10 business days after the meeting described herein, or if the Board
accepts a competing offer.
FEES AND EXPENSES. Grease Monkey and QL 3000 will pay their own fees, costs,
and expenses incurred in connection with the Merger Agreement.
SHARE OWNERSHIP OF GREASE MONKEY FOLLOWING THE MERGER (PAGE 39)
Following the merger, all of the issued and outstanding shares of Grease
Monkey will be owned by the QL 3000 Investors.
ACCOUNTING TREATMENT
QL 3000 believes that the merger will be accounted for as a purchase for
accounting purposes.
FINANCING OF THE MERGER (PAGE 40)
E. Chester Stokes, Jr., has committed to provide or to cause to be provided
all debt and equity financing required to complete the merger. It is
anticipated that debt financing of approximately $12,390,000 will be provided
by Convenient Store Finance Company, LLC ("CSFC"), or one or more other
lenders, and Mobil Oil Corporation ("Mobil"). Shareholder capitalization of
approximately $2,000,000 will be provided by E. Chester Stokes, Jr. and
Island Food Stores, Ltd.
The loans from CSFC and Mobil will be made simultaneously with the closing of
the merger and will be secured by assets of Grease Monkey. To facilitate the
financing with CSFC, E. Chester Stokes, Jr. will guarantee approximately
$4,540,000 of Grease Monkey indebtedness to Mobil and Mobil will release
liens held by it on certain assets of Grease Monkey.
CONFLICTS OF INTEREST (PAGE 39)
GREASE MONKEY MANAGEMENT. Certain members of management have interests in the
merger as employees and/or directors that are different from, or in addition
to, yours as a Grease Monkey shareholder. As described under "Principal
Shareholders," certain of Grease Monkey's officers and directors are also
shareholders and therefore, will participate in the merger if it is
completed. In addition, if the merger is completed, some members of
management may remain as senior management of the Surviving Corporation.
Also, certain indemnification arrangements for existing directors and
officers of Grease Monkey will be continued by the Surviving Corporation
after the merger. QL 3000 and Rex L. Utsler, President and Chief Operating
Officer of Grease Monkey, are currently in negotiations pursuant to which Mr.
Utsler may
8
<PAGE>
invest in the Surviving Corporation after the merger is completed. No
agreements, arrangements or understandings have been made between QL 3000 and
Mr. Utsler as of the date of this Proxy Statement. Certain members of the
Board of Directors are principals of Brownlie, Wallace, Armstrong & Bander
Exploration ("BWAB Exploration"), which has advanced Grease Monkey an
aggregate of approximately $409,000. Such advances will be repaid to BWAB
Exploration upon the closing of the merger.
GMB. GMB served as financial advisor to the Board and has had certain
relationships with Grease Monkey and its management that could be perceived
as adversely affecting its independence. Of GMB's $425,000 investment banking
fee (plus expenses of up to $20,000), $345,000 is contingent on the
completion of the merger. GMB believes that the foregoing arrangements do not
affect its ability to act independently and impartially as financial advisor
to the Board.
APPRAISAL RIGHTS (PAGES 49-51)
Any shareholder of Grease Monkey who does not vote in favor of the proposal
to approve the Merger Agreement and who complies strictly with the applicable
provisions of Sections 16-10a-1301 through 16-10a-1331 of the Utah Business
Corporation Act (the "UBCA") has appraisal rights to be paid cash for the
"fair value" for such holder's shares of Common Stock or Preferred Stock. To
perfect these appraisal rights with respect to the merger, you must follow
the required procedures precisely. The provisions of Sections 16-10a-1301
through 16-10a-1331 are attached to this Proxy Statement as Appendix C.
9
<PAGE>
HISTORICAL MARKET INFORMATION
Since June 1998, the Company's Common Stock has traded on the OTC
Bulletin Board ("OTCBB") under the symbol GMHC. Prior thereto, the Company's
Common Stock was traded on The Nasdaq Small Cap Market tier of The Nasdaq
Stock Market. The Company's Preferred Stock is not listed on any securities
market or exchange. The following table reports high, low and last sales
prices of the Common Stock as reported by Nasdaq (or the OTCBB, as
applicable) for the periods indicated:
<TABLE>
<CAPTION>
Period High Trade Low Trade Last Trade
------ ---------- --------- ----------
<S> <C> <C> <C>
1997:
First Quarter............... $2.13 $1.63 $1.75
Second Quarter.............. $2.06 $1.75 $1.75
Third Quarter............... $2.06 $1.63 $1.63
Fourth Quarter.............. $1.44 $1.19 $1.19
1998:
First Quarter............... $1.27 $1.17 $1.17
Second Quarter.............. $1.17 $1.02 $1.04
Third Quarter............... $0.90 $0.69 $0.73
Fourth Quarter.............. $1.08 $0.60 $0.81
1999:
First Quarter............... $0.94 $0.63 $0.84
Second Quarter.............. $0.97 $0.75 $0.78
Third Quarter............... $0.88 $0.69 $0.69
Fourth Quarter (through
October 14, 1999)........... $0.75 $0.69 $0.75
</TABLE>
Prices represent quotations between dealers and do not include retail
mark-ups, mark-downs, or commissions.
On March 25, 1999, the last trading day prior to the announcement of
the execution of the Merger Agreement, the high, low and closing sales prices
per share of Common Stock as reported by the OTCBB were $0.84, $0.84 and
$0.84, respectively. On October 14, 1999, the last trading day prior to
printing of this Proxy Statement, the high, low and closing sales prices per
share of Common Stock as reported by Nasdaq were $0.75, $0.75 and $0.75,
respectively.
To date, the Company has not paid any cash dividends on its Common
Stock. Holders of the Common Stock are entitled to receive dividends when and
as declared by the Board of Directors out of funds legally available. All
accrued and unpaid dividends on the Company's outstanding shares of Preferred
Stock must be paid before dividends are paid on the Common Stock. As of
September 30, 1999, the Company is in arrears in the declaration and payment
of dividends on the Preferred Stock in the amount of approximately $726,100,
which has not been recognized in the financial statements.
10
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Certain selected consolidated historical financial data derived from
the audited financial statements of the Company are set forth below. The
selected financial data should be read in conjunction with the Consolidated
Financial Statements of the Company, related notes, and other financial
information included in this Proxy Statement.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------ ------------ ------------ ------------ ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating Revenue................... $20,142,793 $21,169,314 $20,101,585 $10,183,892 $10,187,668
Operating Expenses.................. 20,040,889 21,250,719 21,089,952 10,410,472 9,572,419
Operating Income (loss)............. 101,904 (81,405) (988,367) (226,580) 615,249
Other Income (expense).............. (679,027) (1,077,181) (1,041,481) (428,580) (422,017)
Net Income (loss)................... (577,123) (1,158,586) (2,029,848) (655,160) 193,232
Net Income (loss) per share:
-basic........................... (0.16) (0.28) (0.46) (0.15) 0.03
-diluted......................... (0.16) (0.28) (0.46) (0.15) 0.03
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ ------------ ------------ ------------ ------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)........... $ 52,520 $ (358,236) $(1,807,953) $ (781,694) $(1,419,648)
Total assets........................ 15,217,123 15,397,850 14,212,264 15,864,903 13,771,374
Total liabilities................... 13,770,116 14,781,608 15,494,588 15,888,584 14,829,203
Shareholders' equity (deficit)...... 1,447,007 616,242 (1,282,324) (23,681) (1,057,829)
</TABLE>
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1999 COMPARED TO THE QUARTER ENDED JUNE 30, 1998
The Company reported net income of $193,232 for the first half of
1999, as compared to a net loss of ($655,160) for the first half of 1998. For
the second quarter of 1999, the Company reported net income of $201,418
compared to a net loss of ($238,925) for the same quarter in 1998.
Total revenue increased slightly by $3,776 for the first half of
1999, compared to the first half of 1998. Revenue during the second quarter
of 1999 increased $79,463 over the same quarter last year, an increase of 2%.
The increases are due primarily to increases in revenue from Company-owned
Centers.
Royalty fees are a percentage of gross sales paid monthly by all
franchised Grease Monkey Centers. Royalty fee revenue for the first half of
1999 decreased by $108,383 or 7% compared to the first half of 1998. Royalty
fee revenue for the second quarter of 1999 decreased by $39,193 or 5% over
the second quarter of 1998. The average number of U.S. franchised Centers has
remained constant at 159 franchised Centers open and operating during both
the six and three month periods ending June 30, 1999 and 1998. The decreases
in royalty income are caused primarily by the replacement of mature Centers
which have left the system with newer Centers. While these mature Centers
were replaced in number by the new Centers, the new Centers are in the early
stages of development and do not generate the level of sales of a mature
Center. In addition, the Company signed a Master Franchise Agreement for the
Republic of Mexico on August 1, 1998 ("the Agreement"). The Master Franchisee
retains eighty percent of royalties and franchise fees collected from Mexico
franchisees after the effective date of the Agreement. The decrease in
royalty revenue related to this transaction, when compared with the prior
year is approximately $50,000 for the six month period and $39,000 for the
second quarter of 1999. 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 1999, estimated royalties of
$122,530 were not accrued under this policy, compared to $113,100 for the
first half of 1998. During the second quarter of 1999, estimated royalties of
$61,200 were not accrued compared to $62,430 for the second quarter of 1998.
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
1999, the rebate accrued under this program was $110,967, compared to
$114,051 for the first half of 1998. The rebate accrued for the second
quarter of 1999 was $61,257 compared to a rebate of $58,061 for the second
quarter of 1998. The rebate is recorded as a reduction in royalty revenue.
The Company recognized franchise sales net revenue (sales net of
related costs) of $24,024 and $64,818 during the second quarter and first six
months of 1999, respectively, representing six Center openings. During the
first six months and second quarter of 1998, the
12
<PAGE>
Company recognized franchise sales net revenue of $131,174 and $136,674,
respectively, representing seven 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.
At June 30, 1999, the Company operated 34 Centers as compared to 31
Centers at June 30, 1998. The average number of Centers operated during the
quarter and six month period ended June 30, 1999, was 34 and 33 respectively,
as compared to 31 for the same periods in 1998. For the first six months of
1999, the Company reported an operating margin (Company-owned Center sales
less expenses, excluding interest, depreciation and amortization) of
$1,587,980 on revenue of $7,989,365 at Company-owned Centers as compared to
an operating margin of $1,190,193 on revenue of $7,454,780 for the same
period last year. These results represent an increase of 7% in revenue and
33% in operating margin. For the second quarters of 1999 and 1998, the
Company reported operating margins of $907,870 and $659,029 on revenue of
$4,175,414 and $3,755,906, respectively, representing an increase in revenue
of 11% and an increase in operating margin of 38%. The increase in the
operating margin for Company-owned Centers is a result of an increase in
revenue, coupled with concentrated efforts to reduce expenses (specifically
payroll and operating expenses).
In the first six months of 1999, the Company realized marketing
allowances and gross margins on product and equipment sales of $164,480, as
compared to $196,978 in the first six months of 1998. In the second quarter
of 1999, marketing allowances and gross margins on product and equipment
sales were $93,034, as compared to $98,642 in the second quarter of 1998.
Product and equipment revenue represents the sale of fluid dispensing
equipment and other supplies to franchisees, and marketing allowances that
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 1999 decreased $723,277 or 27% and decreased $351,254 or
25%, respectively, as compared to the first six months and second quarter of
1998. Variances in the first six months of 1999 as compared to the first six
months of 1998 consisted primarily of reductions in: salaries, wages and
personnel expenses of approximately $465,000; litigation expenses including
legal fees, related costs and settlements of approximately $118,000; travel
and entertainment expenses of approximately $55,000; franchise sales and
promotional expenses of approximately $42,000; office expenses of
approximately $28,000 and severance expenses of approximately $27,000.
Variances in the second quarter of 1999 as compared to the second quarter of
1998 consisted primarily of reductions in: salaries, wages and personnel
expenses of approximately $220,000; litigation expenses including legal fees,
related costs and settlements of approximately $77,000; and severance
expenses of approximately $27,000.
Depreciation and amortization expense for the first six months and
second quarter of 1999 increased 7% and 8%, respectively, as compared to the
same periods in 1998. This increase is due primarily to an increase of two
Company-owned Centers over the prior year periods.
13
<PAGE>
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 gain of
$11,549 for the six months ended June 30, 1999, represents the refranchising
of one Company-owned Center, the refranchising of one closed Center,
marketing allowances paid based on subsidies granted certain franchisees on
the refranchising of Company-owned Centers in 1996, and a reimbursement of
costs previously expensed upon the closure of a Company-owned Center in 1997
and 1998. In addition, a loss was recognized on the sale of equipment to a
franchisee. 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.
In the first six months and second quarter of 1999, the Company
recognized $17,944 in franchise sales revenue resulting from undeveloped
license cancellations. In the first six months of 1998, undeveloped licenses
were cancelled resulting in $31,983 of revenue. There were no license
cancellations in the second quarter of 1998.
Interest expense includes interest on debt financing and interest
recorded on capital leases of Company-owned Centers. The increase in interest
expense from $425,940 in the first six months of 1998 to $461,018 in the
first six months of 1999 was due primarily to an increase in average debt
outstanding. This increase is due in part to borrowings associated with the
purchase/development of three Company-owned Centers, and for working capital.
14
<PAGE>
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, 1999 and 1998.
<TABLE>
<CAPTION>
SIX MONTHS ENDED:
JUNE 30, 1999 JUNE 30, 1998
----------------------------------------------------------------------
Company Franchise Company Franchise
Owned Owned Total Owned Owned Total
--------- ----------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Centers open, beginning......... 33 182 215 31 187 218
Centers opened.................. - 6 6 1 7 8
Centers purchased............... 2 (2) - - - -
Centers sold.................... (1) 2 1 (1) - (1)
Centers terminated or closed.... - (4) (4) (2) (14) (16)
Centers reacquired.............. - - - 2 (2) -
-------- ----------- -------- - --------- ----------- ---------
Centers open, ending (A)........ 34 184 218 31 178 209
======== =========== ========= ========= =========== =========
Vehicles serviced (000's)....... 1,338 1,354
========= =========
Franchise licenses issued (B)... 2 4
========= =========
Undeveloped franchise
licenses (C)............... 17 44
========= =========
Franchise applications
outstanding (C)............ 10 18
========= =========
Franchise license/application
fees received (D).......... $8,400 $89,800
========= =========
</TABLE>
(A) Includes 26 franchised Centers in Mexico in 1999 and 20 franchised Centers
in Mexico in 1998.
(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.
15
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
The Company reported a net loss of $2,029,848 in 1998 compared to a
net loss of $1,158,586 in 1997 and a net loss of $577,123 in 1996.
The net loss reported in 1998 is in part due to costs associated
with the sale, disposition and closure of Centers of $444,725. In addition,
general and administrative expenses included approximately $796,000 of
non-recurring charges due to terminated projects, severance agreements and
settlements. Royalty revenue and other revenue decreased $472,784 and
$285,834, respectively, primarily due to settlement agreements entered into
with former franchisees in 1997 resulting in approximately $207,000 in
royalty revenue and approximately $283,000 in other revenue. Leasing revenue
has declined $447,662 when compared with 1997, due in part to a former
franchisee abandoning two sites in 1998. During a significant portion of
1998, the Company was not receiving matching revenue for the expense outlay
on these Centers. In addition, the Company acquired three franchised sites
and was released from nine leases at franchised and third party locations,
thus reducing not only rental income, but also the matching rent expense. On
August 1, 1998, the Company entered into a Master Franchise Agreement for the
Republic of Mexico. The Master Franchisee retains eighty percent of royalties
and franchise fees collected from Mexico franchisees after the effective date
of the agreement, which further reduces royalty revenue. Royalty revenue and
product and equipment revenue in 1998 were also affected by the average
number of franchises open and operating. The Company ended 1998 with a net
decrease of five franchised Centers and an increase of two Company-owned
Centers over 1997. During 1998, the Company terminated 18 mature franchised
Centers and replaced them with 16 new franchised Centers. This compares to
the 15 new franchised Center openings in 1997 and 11 franchised Center
terminations in 1997. In 1998, the Company also opened two new Company-owned
Centers, reacquired three Centers from failed franchisees, sold one Center,
and closed two Centers. Franchise sales were down in 1998 with eight new
franchise licenses sold compared to 14 sold in 1997.
The net loss reported in 1997 is in part due to costs associated
with: the sale, disposition and closure of Centers of approximately $368,000;
the accrual of the Company's obligation under a Consultant Agreement with the
Company's previous, now current, President of approximately $379,000;
increases of approximately $435,000 in the general and administrative areas
of salaries, wages and personnel expenses, professional fees, and
Company-owned Center division overhead; and losses incurred and or accrued
for settlements related to employment, real estate and environmental issues
of approximately $176,000. These losses were offset by royalty revenue and
other revenue recognized due to a settlement agreement entered into with a
former franchisee of approximately $375,000. In addition, other income of
approximately $118,000 was recognized based on settlements with two
franchisees. 1997 ended with a net increase of three franchised Centers while
the number of Company-owned Centers remained at 31 for both year ends. During
1997, the Company opened 15 new franchised Centers and terminated 11
franchised Centers. This compares to the 11 new franchised Center openings in
1996 and 6 franchised Center terminations in 1996. In 1997, the Company also
opened one new Company-owned Center, purchased three Centers from
franchisees, sold two Centers and closed two
16
<PAGE>
Centers. Franchise sales were down in 1997 with 14 new franchise licenses
sold compared to 27 sold in 1996.
The net loss reported in 1996 is in part due to costs of $550,608
related to litigation and terminated projects. Similar costs in 1995 were
$106,176. 1996 ended with a net increase of three franchised Centers and two
Company-owned Centers over 1995. During 1996, the Company opened 11 new
franchised Centers and terminated six franchised Centers. This compares to
the 18 new franchised Center openings in 1995 and 13 franchised Center
terminations in 1995. Franchise sales improved significantly in 1996, with 27
new franchise licenses sold compared to seven new franchise licenses sold in
1995. These sales, net of related costs, will be recognized as revenue when
the Centers open for business.
Operating revenue totaled $20,101,585 in 1998 compared to
$21,169,314 in 1997 and $20,142,793 in 1996. The changes in revenue are due
primarily to increases or decreases in the number of Company-owned Centers
operated during the year and the number of Center openings as well as the
number of Centers open and operating. In addition, leasing revenue decreased
significantly in 1998 due to the release from nine leases at franchised and
third party locations, thus reducing not only rental income, but the matching
rent expense, and two sites were abandoned by a former franchisee. An
increase in other revenue was recognized in 1997 due primarily to settlements
with former franchisees.
Royalty fees are a percentage of sales (ranging from 3% to 5%) paid
monthly by all franchised Grease Monkey Centers. Royalty fee revenue
decreased by 14% in 1998 to $2,981,454 and increased 10% in 1997 to
$3,454,238. The decrease in royalty fees from 1997 to 1998 is partially due
to the recording of the settlement agreement with a former franchisee. Under
the settlement agreement, in 1997 the Company recognized approximately
$207,200 of royalty fees not previously recognized. Contributing to the
decline in royalties in 1998 was the signing of a Master Franchise Agreement
for the Republic of Mexico on August 1, 1998, ("the Agreement"). The
Agreement is for a term of fifteen years and is renewable for an additional
fifteen-year term. The Master Franchisee retains eighty percent of royalties
and franchise fees collected from Mexico franchisees after the effective date
of the Agreement. The decrease in revenue related to this transaction, when
compared with the prior year is approximately $40,000. On a same center
basis, royalty income increased 1% or approximately $19,000 over the prior
year. New Centers generated approximately $157,500 more in royalties over the
prior year. These increases were offset by the loss of royalties related to
terminated centers, Centers acquired from franchisees or Centers that were
sold and left the system of approximately $327,000. The increase in royalty
fees from 1996 to 1997 is due to the recording of a settlement agreement with
a former franchisee in 1997, as discussed above. On a same Center basis,
royalty income remained relatively constant increasing 4% or approximately
$130,000 over the prior year. In addition, new Centers generated
approximately $71,000 more in royalties over 1996. These increases were
offset by the loss of royalties related to terminated centers and to Centers
acquired from franchisees of approximately $112,000. The Company has a
"non-accrual" policy wherein royalties are not accrued on certain financially
troubled franchisees. In 1998, estimated royalties totaling $229,095 were not
recognized as revenue pursuant to this policy, as compared
17
<PAGE>
to $146,875 in 1997 and $111,525 in 1996. Any such royalty subsequently
collected is recorded as revenue in the period the funds are received.
The Company has a royalty rebate program for franchisees under which
eligible franchisees can receive a rebate of royalties paid. To be eligible,
franchisees must be in compliance with their franchise agreement, must be
current on amounts owed the Company and pay all amounts coming due the
Company on time during the period of the royalty rebate program. Management
implemented this program to reward those franchisees who comply with their
franchise agreement, have paid the Company on a regular and consistent basis,
to accelerate cash flow, and to provide an incentive for franchisees to
continue to pay on a timely basis. During 1998, the Company paid a total of
$234,142 to franchisees under this program, as compared to $233,486 in 1997
and $259,133 in 1996. The rebate is recorded as a reduction of royalty
revenue. The royalty rebate program is not a requirement of the franchise
agreement. Continuation of the program is reviewed by management on an annual
basis. The royalty rebate program has been extended through December 31, 1999.
The following table presents the activity of operating Centers:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Open at beginning of year........ 218 215 210
Opened during year............... 18 16 11
Terminated....................... (18) (11) (6)
Closed........................... (3) (2) -
------ ------ ------
Open at end of year.............. 215 218 215
=== === ===
</TABLE>
18
<PAGE>
The following table presents the number of Centers open, systemwide
retail sales, royalty fees, total vehicles serviced and average sale per
vehicle for the United States, Mexico and systemwide:
<TABLE>
<CAPTION>
Centers Open: 1998 1997 1996
-------------- --------------- --------------
<S> <C> <C> <C>
US............................... 189 197 195
Mexico........................... 26 21 20
-------------- --------------- --------------
Systemwide....................... 215 218 215
============== =============== ==============
Sales (000's):
US............................... $ 86,621 89,803 88,910
Mexico........................... 3,096 3,457 2,159
-------------- --------------- --------------
Systemwide....................... $ 89,717 93,260 91,069
============== =============== ==============
Percent change in sales:
US............................... (4%) 1% -
============== =============== ==============
Mexico........................... (10%) 60% 63%
============== =============== ==============
Systemwide....................... (4%) 2% 1%
============== =============== ==============
Royalty fees (000's):
US............................... $ 2,910 3,325 3,078
Mexico........................... 71 129 66
-------------- --------------- --------------
Systemwide....................... $ 2,981 3,454 3,144
============== =============== ==============
Percent change in royalties:
US............................... (12%) 8% (2%)
============== =============== ==============
Mexico........................... (45%) 95% 14%
============== =============== ==============
Systemwide....................... (14%) 10% (2%)
============== =============== ==============
Vehicles serviced (000's):
US............................... 2,574 2,730 2,731
Mexico........................... 144 154 103
-------------- --------------- --------------
Systemwide....................... 2,718 2,884 2,834
============== =============== ==============
Average sale per vehicle:
US............................... $ 33.65 32.89 32.55
============== =============== ==============
Mexico........................... $ 21.55 22.41 21.04
============== =============== ==============
Systemwide....................... $ 33.01 32.33 32.14
============== =============== ==============
</TABLE>
Franchise sales revenue represents initial payments received by the
Company from the buyers of its franchise. The fee is $28,000 (less for
franchises purchased prior to September 1992 and for additional franchises
purchased by existing franchisees) and is not refundable. In addition, the
Company collects development fees under exclusive territory development
agreements and area development agreements. Initial franchise fees and certain
development fees are deferred and recognized as revenue when the related Center
opens for
19
<PAGE>
business. The following table presents the number of franchises issued
including related fees and costs, and the nature of franchise sales revenue
recognized:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- --------------- --------------
<S> <C> <C> <C>
Franchise licenses issued:
US (1) .......................... 4 10 20
Mexico........................... 4 4 7
-------------- --------------- --------------
Total.......................... 8 14 27
============== =============== ==============
Franchise fees paid:
US............................... $ 66,000 250,500 386,600
Mexico........................... 74,000 124,000 154,800
-------------- --------------- --------------
Total.......................... $ 140,000 374,500 541,400
============== =============== ==============
Franchise costs deferred:
US............................... $ 27,096 61,976 99,964
Mexico........................... 31,440 7,600 11,177
-------------- --------------- --------------
Total.......................... $ 58,536 69,576 111,141
============== =============== ==============
Franchises opened:
US (1) .......................... 8 14 6
Mexico........................... 8 1 4
-------------- --------------- --------------
Total.......................... 16 15 10
============== =============== ==============
Franchise fees recognized on
openings:
US (2) .......................... $ 171,090 229,401 104,900
Mexico........................... 201,600 28,000 78,400
-------------- --------------- --------------
Total.......................... $ 372,690 257,401 183,300
============== =============== ==============
Franchise costs recognized on
openings:
US (3) .......................... $ 51,187 78,222 11,683
Mexico........................... 37,056 7,600 21,160
-------------- --------------- --------------
Total.......................... $ 88,243 85,822 32,843
============== =============== ==============
Undeveloped franchise licenses/
applications cancelled............. 25 - 5
============== =============== ==============
Income recognized on cancellations. $ 202,491 - 27,563
============== =============== ==============
</TABLE>
(1) Excludes franchise licenses related to refranchised Company-owned
Centers during the year; none in 1998, three in 1997 and five in 1996.
(2) Excludes franchise fees related to refranchised Company-owned Centers;
none in 1998, $58,800 in 1997 and $128,800 in 1996.
(3) Excludes franchise costs related to refranchised Company-owned Centers;
none in 1998 and 1997 and $5,000 in 1996.
20
<PAGE>
At December 31, 1998, 26 franchises had been sold which were not
open and commitment fees for 9 franchises had been paid, representing
$467,253 in deferred franchise sales revenue, compared to 49 unopened
franchises and commitment fees for 24 franchises representing $985,470 in
deferred franchise sales revenue at the end of 1997.
The Company terminated twenty-five undeveloped licenses/applications
in 1998, none in 1997 and five in 1996 for non-performance, representing
income of $202,491 in 1998 and $27,563 in 1996.
In 1998, the Company realized marketing allowances and gross margins
on product and equipment sales of $371,775, as compared to $460,359 in 1997
and $436,033 in 1996. 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. Marketing allowances and gross margins on product and
equipment sales decreased $88,584 in 1998. The number of Center openings and
closures during a period will impact product and equipment revenue. Five of
the Mexico Center openings were completed after the signing of the Master
Franchise Agreement and thus did not purchase product and equipment through
the U.S. vendor programs. Revenue in 1997 was comparable to that of 1996.
Company-owned Centers at December 31, 1998, include 20 Centers
located in Denver, Colorado; 8 Centers in Seattle, Washington; 2 Centers in
California; and 1 Center each in Indiana, Texas and Rhode Island.
21
<PAGE>
The following table shows the Company's activity with respect to
Company-owned Centers over the past three years:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Company-owned Centers at the
beginning of the year............ 31 31 29
New Centers built or purchased... 2 4 2
Centers acquired from failed
franchisees...................... 3 - 5
Centers refranchised............. - (2) (5)
Centers closed................... (3) (2) -
---- ---- ----
Company-owned Centers at the
end of the year.................. 33 31 31
==== ==== ====
Average number of Centers
operated during the year based
on number of months operated..... 31 31 32
==== ==== ====
</TABLE>
Company-owned Centers have become a significant portion of the
Company's business since 1990. Historically, Company-owned Centers were
Centers relinquished by failed franchisees, acquired from franchisees through
the Company's exercise of its right of first refusal, or purchased by the
Company. Centers which, in the past, have been acquired from failed
franchisees were acquired due to the failure of the franchisee to pay amounts
due the Company, principally rents and royalties.
22
<PAGE>
The following table sets forth the results of operations from
Company-owned Centers:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income before depreciation,
amortization and division overhead........ $2,373,964 $2,052,704 $2,011,429
Depreciation................................ (590,569) (564,846) (565,490)
Amortization................................ (246,881) (259,812) (225,518)
Company-owned Centers division
overhead (1) ............................... (695,985) (819,154) (678,476)
---------- ---------- ----------
Operating income from Company-owned
Centers (2) ................................ $ 840,529 408,892 541,945
========== ========== ==========
Number of Centers by category:
Built or purchased........................ 24 25 21
Failed franchises acquired................ 9 6 10
---------- ---------- ----------
Total.................................. 33 31 31
========== ========== ==========
</TABLE>
(1) Consists of management, accounting and administrative personnel and
their related expenses which are directly identifiable to the
Company-owned Centers division and is included in general and
administrative expenses in the Company's financial statements.
(2) Included in the above operating results are results from refranchised
centers through the date of sale.
Leasing revenue represents revenue primarily derived from properties
subleased by the Company to franchisees and third parties. Leasing revenue,
which includes rent and interest income related to capital and operating
leases, was $1,100,214 in 1998; $1,547,876 in 1997 and $1,434,086 in 1996.
Leasing revenue has declined $447,662 from 1997. Factors contributing to the
decline include: the abandonment of a franchise site late in the third
quarter of 1997 resulting in the Company being required to subsidize the rent
to obtain a new subtenant; and a former franchisee abandoned two sites in
1998, and the Company did not receive matching revenue for the expense outlay
on these Centers during the year (the Company has entered into new sublease
agreements for these two centers in 1999). In addition, during 1998 the
Company acquired three franchise sites and was released from nine leases at
franchised and third party locations, thus reducing not only rental income,
but also the matching rent expense. The Company also sold one of its owned
property locations and put another location up for sale, losing the third
party subtenant income on those sites as well.
Leasing expense represents leasing costs incurred in connection with
properties leased by the Company and then subleased to franchisees and third
parties. Leasing expense, which includes rent and interest expense related to
capital and operating leases, was $1,282,530 in 1998; $1,549,315 in 1997 and
$1,376,677 in 1996.
23
<PAGE>
The following table summarizes General and Administrative Expenses:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Salaries, wages and personnel
expenses.............................. $2,121,976 $2,213,725 $2,007,997
Travel and entertainment expenses..... 307,389 374,665 375,460
Office expenses....................... 601,027 631,059 648,552
Franchise development and training
expenses.............................. 163,372 121,467 48,555
Franchise sales and promotional
expenses.............................. 56,084 98,875 90,276
Terminated projects................... 367,156 12,644 206,469
Litigation, including legal fees and
related costs......................... 246,587 137,612 344,139
Professional fees - legal, tax and
accounting............................ 261,281 233,910 145,733
Company-owned Centers division
overhead.............................. 693,941 819,150 678,476
Loss on sale of assets/asset
impairment............................ 60,618 65,490 1,110
Consultant Agreement/severance
expenses.............................. 314,825 459,420 -
Other................................. 403,676 214,456 193,614
---------- ---------- ----------
Total general and administrative
expenses........................... $5,597,932 $5,382,473 $4,740,381
========== ========== ==========
</TABLE>
General and Administrative expenses increased 4% in 1998 over 1997.
This increase is a result of several factors. One such factor was a severance
accrual in the amount of $314,825 for the Company's former President and
Chief Executive Officer, the former Senior Vice President of Operations and
other employees. The Company had also previously entered into an agreement
for the development of a new point of sale system to be used at both
Company-owned and franchised Centers. Upon review of the agreement by current
management, further development was terminated and costs capitalized to date
were expensed in the amount of approximately $230,000. As mentioned
previously, during 1998 the Company entered into a Master Franchise Agreement
for the Republic of Mexico. Based upon this agreement, certain assets related
to operations in Mexico were evaluated and adjusted, resulting in a write-off
of approximately $132,000. Other factors include costs associated with a
potential corporate restructuring of approximately $110,000 and increases in
litigation expenses, including legal fees and related costs of approximately
$109,000. These increases were offset by decreases in costs associated with
salaries, wages and personnel expenses of approximately $91,000, travel and
entertainment expenses of approximately $67,000, and Company-owned Centers
division overhead of approximately $125,000.
The 14% increase in general and administrative expenses from 1996 to
1997 is due primarily to the accrual of the Company's obligation under a
Consultant Agreement with the
24
<PAGE>
Company's previous, now current, President as described above. Other factors
include increases in Company-owned Centers division overhead, professional
fees related to legal issues, salaries, wages and personnel expenses and
franchise development and training expenses.
The provision for credit losses increased in 1998 to $310,708 from
$253,368 in 1997 and from $206,221 in 1996. The increase in 1998 is primarily
attributed to a former franchisee that abandoned two sites in 1998, which
required additional provisions. Additional provisions were also recorded on
all Mexico franchisees that were delinquent on August 1, 1998, when the
Company entered into a Master Franchise Agreement for the Republic of Mexico
discussed previously. The increase in 1997 is due primarily to a more
aggressive policy for addressing non-performing accounts, which resulted in
additional provisions on eight non-performing franchisee accounts.
Depreciation expense totaled $723,115 in 1998 compared to $688,041
in 1997 and $694,241 in 1996. The depreciation expense increased $35,074 in
1998, primarily due to increased capital expenditures in 1998. A new phone
system was installed in the corporate office in addition to new computer
equipment and software programs. This is a part of the process the Company is
currently undertaking to become "Year 2000" compliant. Company-owned Centers
capital expenditures also increased primarily due to two new Center openings.
The depreciation expense in 1997 compared to 1996 remained relatively
constant. Amortization expense totaled $289,829 in 1998 compared to $284,689
in 1997 and $245,454 in 1996. The increase in amortization expense from 1996
to 1997 is due to the purchase of two Company-owned Centers in 1997.
Gain (loss) on sale/disposition/closure of Centers represents the
net results of the refranchising/disposal/closure 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 $444,725 in 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, losses were recognized on the sale of a
Company-owned Center to a third party, and the foreclosure of two franchised
Centers. An impairment assessment was recorded on two Centers that were
abandoned by a franchisee, and one Company-owned Center, which sold in 1999.
The Company signed a Management Agreement at two of its Company-owned
Centers, and recorded an impairment assessment. The loss of $368,169 in 1997
represents the refranchising of two Company-owned Centers, the sale of one
Center, the closure of three Centers, and marketing allowances paid based on
subsidies granted certain franchisees on the refranchising of Company-owned
Centers in 1996.
In 1998, the Company recognized $202,491 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 $774,671 to $827,185 in
25
<PAGE>
1998 was due primarily to an increase in average debt outstanding of
approximately $1,150,000. This increase is due in part to borrowings
associated with the purchase of two Centers late in the first quarter of
1997, and two Centers purchased/developed in 1998. Also, approximately
$600,000 ($409,000 from a related party) was borrowed in 1998 for working
capital. Capital leases were entered into for Company-owned Centers in the
early third quarter of 1997 and the late second quarter of 1998, thus adding
to interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Capital Resources
The Company currently has lines of credit with varying interest
rates from, or guaranteed by, a related party. The lines total $489,000 of
which approximately $484,000 was outstanding at June 30, 1999. Monthly
payments are interest only and the balance is due upon demand.
In September 1997, the Company entered into a $5,000,000 Loan
Agreement with a bank. In connection with the Company entering into a Master
Supply Contract with a motor oil supplier, the supplier agreed to guarantee
the loan. 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, for acquiring, constructing and/or developing Company
Centers and for working capital. 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. The remaining draws totaling $2,380,000 were made during 1998 and
during the first quarter of 1999. As of June 30, 1999, approximately
$4,541,000 is outstanding under the loan agreement.
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.
Liquidity
Cash provided by operations during the first six months of 1999 was
$472,035 as compared to cash provided by operations of $16,490 in the first
six months of 1998. The most significant factors contributing to the positive
variance were an improved operating margin at Company-owned Centers and a
decrease in general and administrative expenses.
Cash provided by investing activities was $43,878 in the first six
months of 1999, as compared to cash used in investing activities of
$1,137,576 in the first six months of 1998. Cash provided in both periods
consisted primarily of receipts on direct financing leases which decreased
slightly over the periods. Additional cash was received in the first six
months of 1999 with the sale of a vacant site, and additional cash was
received in the first six months of 1998
26
<PAGE>
with the refranchising/sale of a Company-owned Center. Cash used in investing
activities for the first six months of 1998 consisted primarily of cash used
for the development of Centers. Additional cash was used in both periods for
the purchase of property and equipment, primarily for Company-owned Center
equipment.
Cash used in financing activities was $380,189 in the first six
months of 1999 as compared to cash provided by financing activities of
$1,009,886 in the first six months of 1998. Cash provided by financing
activities in the first six months of 1999 and 1998 consisted primarily of
proceeds from long-term obligations for working capital and the development
of Centers. Financing activities also included cash used to reduce long-term
debt and capital lease obligations of $563,114 in the first six months of
1999 and $502,520 in the first six months of 1998.
The Company does not have any material commitments for capital
expenditures other than for the required replacement or upgrade of
underground storage tanks at Company-owned Centers and the costs to achieve
Year 2000 compliance.
Prior to the three and six month periods ended June 30, 1999, the
Company had incurred losses from operations over the past three fiscal years
coupled with a decrease in cash flow from operations for the same period. As
of June 30, 1999, the Company had a working capital deficit of $1,419,648 and
total liabilities exceeded total assets. These factors among others may
indicate that the Company may not be able to meet its obligations in a timely
manner without increased cash flow from operations, sale of non-producing
assets or additional financing.
As noted in the results of operations for the six months ended June
30, 1999, the Company has taken steps to reduce losses and generate cash flow
from operations and anticipates the sale of non-producing assets which will
generate sufficient cash flow to meet its obligations in a timely manner.
Should the Company be unable to achieve its projected level of cash flow from
operations or sell its non-producing assets, additional financing could be
necessary. As a result of the current Merger Agreement, the Company is not
actively investigating financing alternatives.
Should the merger not proceed, the Company believes it could obtain
additional financing, however, there can be no assurance that such financing
would be available on a timely basis or on acceptable terms.
THE YEAR 2000 ISSUE
The Year 2000 issue is the result of the inability of hardware,
software and control systems to correctly identify two-digit references to
specific years, beginning with the Year 2000. This could result in system
failures or miscalculations causing disruptions of the Company's operations
and the Company's suppliers.
The Company has instituted a Year 2000 project. The project includes
an evaluation of its computer systems and significant software programs. This
evaluation includes the Company's network hardware and software,
Point-of-Sale hardware and software at the
27
<PAGE>
Company-owned Centers and accounting and business process software. The
Company has developed an implementation plan to replace the systems noted in
its evaluation that did not appear to be Year 2000 compliant.
As part of the Company's Year 2000 project, the Company is currently
in the process of contacting its significant third party suppliers, such as
its oil and parts suppliers, to determine the extent to which the Company is
vulnerable to its suppliers' failure to remediate their Year 2000 issues.
However, the Company cannot assure that third-party suppliers will adequately
address their Year 2000 issues or that failure of the third-party suppliers
to address their Year 2000 issues would not have a material adverse effect on
the Company or its operations.
In addition, the Company has communicated with its franchisees to
determine the extent to which the Company is vulnerable to the franchisees'
failure to remediate their Year 2000 issues. However, the Company cannot
assure that the franchisees will adequately address their Year 2000 issues or
that failure of the franchisees to address their Year 2000 issues would not
have a material adverse effect on the Company or its operations.
Based upon the findings at June 30, 1999, the Company's remaining
costs of becoming Year 2000 compliant are less than $50,000.
The Company's failure to resolve Year 2000 issues on or before
December 31, 1999, could result in system failures or miscalculation causing
disruption in operations and normal business activities. Additionally,
failure to timely remediate Year 2000 issues by third parties upon whom the
Company's business relies could result in disruptions in the Company's supply
of parts and materials or result in other problems related to the Company's
daily operations.
The Company is currently working on a contingency plan for all
critical aspects of the Year 2000 issues.
RECENT EVENTS
On December 15, 1998, a demand for arbitration was made against
Grease Monkey by Navfam, Inc. based upon the alleged breach by Grease Monkey
of a Software License Agreement, dated April 7, 1998. The matter was governed
by the American Arbitration Association in Los Angeles, California, and was
assigned Case No. 72Y1140138198. On October 8, 1999, the arbitrator found
that Grease Monkey International wrongfully repudiated the agreement, and
Navfam, Inc. was awarded approximately $579,000 in damages, plus pre-judgment
interest. The arbitrator's award is binding and not subject to appeal. Grease
Monkey is currently negotiating with Navfam, Inc. regarding the terms of the
payment due to Navfam, Inc.
28
<PAGE>
SPECIAL FACTORS
BACKGROUND OF THE MERGER
During the latter part of 1997 and early 1998, changes in the quick
lube industry were adversely affecting the Company's historical growth rate
and profitability. During the latter part of 1997 and early 1998, management
of the Company observed that due to limited access to capital, increased
competition and aggressive pricing by competitors, internal growth was
becoming more difficult to achieve. In addition, acquisitions were becoming
less attractive because acquisition prices had increased and the Company's
reduced stock price made acquisitions more expensive and dilutive to earnings.
On June 4, 1998, Grease Monkey retained Green Manning & Bunch
Securities, Inc. ("GMB") as the exclusive financial advisor and
representative of the Company with respect to maximizing shareholder value,
including a possible sale of all, or substantially all, of the Company.
During June and July 1998, GMB prepared a Confidential Memorandum, based upon
information provided by the Company, describing the Company, its operations,
management and financial data. Between late July and mid-September 1998, GMB
contacted over 40 prospective purchasers of Grease Monkey, all of whom were
pre-approved by the Company. The prospective purchasers who were contacted by
GMB included companies in the quick lube industry, as well as other strategic
and financial investors. In addition, from the date GMB was initially engaged
by Grease Monkey, GMB has responded to unsolicited offers or inquiries from
parties who expressed an interest in acquiring Grease Monkey.
On July 28, 1998, GMB first spoke to a representative of QL 3000. QL
3000 executed a Confidentiality Agreement, and GMB sent the Confidential
Memorandum to QL 3000. On July 30, 1998, QL 3000 expressed an interest in
acquiring Grease Monkey. On August 4, 1998, Grease Monkey sent additional
information to QL 3000, including individual profit and loss statistics for
the Company-owned centers, lease schedules and average ticket statistics. On
August 6, 1999, GMB sent a center location list to QL 3000. On August 14,
1998, GMB received an unsolicited offer from QL 3000 to buy the assets of
Grease Monkey for $6,000,000. In addition, QL 3000 would have assumed all the
liabilities of Grease Monkey as specified on the projected balance sheet of
Grease Monkey on December 31, 1998.
On August 25, 1998, GMB requested that all interested parties submit
preliminary indications of interest to acquire Grease Monkey to GMB no later
than September 4, 1998. By mid-September 1998, GMB received indications of
interest from QL 3000 and four other parties. QL 3000's amended offer to
purchase Grease Monkey was received on September 4, 1998. QL 3000 offered to
purchase 100% of Grease Monkey's assets for $15,000,000 (inclusive of assumed
debt), assuming current assets of $2,618,000, which would have been adjusted
based on the actual Grease Monkey balance sheet at closing.
On September 15, 1998, GMB updated the Board of Directors of Grease
Monkey on the status of discussions with potential purchasers. GMB
communicated to the Board that there was not a great deal of interest by
prospective purchasers in acquiring Grease Monkey due primarily
29
<PAGE>
to the Company's poor historical financial performance. GMB advised the Board
that any offer to acquire the stock of Grease Monkey was likely to be at or
below the market value.
At this Board meeting, GMB also provided a summary of five
preliminary indications of interest to acquire Grease Monkey. QL 3000's
offer, which equaled approximately $.62 per share of Common Stock
outstanding, was clearly superior to the other four preliminary offers. The
Board of Directors authorized continued discussions with QL 3000.
From October 12-14, 1998, two representatives of QL 3000 visited
Denver to conduct preliminary due diligence on Grease Monkey. During their
visit, representatives from QL 3000 met with several Grease Monkey employees
as part of their due diligence investigation. During these meetings, GMB
informed QL 3000 that their existing offer to acquire Grease Monkey was
inadequate. On October 13, 1998 at a Grease Monkey Board Meeting, the Board
again authorized continued discussions with QL 3000.
On October 27, 1998, representatives from QL 3000 again visited
Denver to meet with the Chairman of the Board of Grease Monkey and GMB.
During a meeting that day, QL 3000 offered to acquire the common stock of
Grease Monkey for $1.00 per share, including paying-off the preferred stock
and accrued dividends, and assuming all of Grease Monkey's liabilities. QL
3000 also proposed that it assume management responsibilities for Grease
Monkey while they completed the acquisition of Grease Monkey. During this
meeting it was agreed that, subject to the approval of the proposed
transaction by the Board of Directors of Grease Monkey, QL 3000's legal
counsel would immediately begin preparing a first draft of the Merger
Agreement.
On November 2, 1998, the Board of Directors of Grease Monkey met to
discuss the proposed transaction with QL 3000. At that meeting, the Board of
Directors agreed to proceed with sale of Grease Monkey to QL 3000. However,
the Board of Directors declined QL 3000's request that they be allowed to
manage Grease Monkey while the acquisition was being completed. The Board
concurred that the appropriate next step was to have QL 3000 prepare a first
draft of the definitive Merger Agreement, which was received by Grease Monkey
and its representatives on November 12, 1998.
In November and December 1998, QL 3000 conducted intensive due
diligence on Grease Monkey and prepared a business plan for the Company for
use in soliciting debt financing for the transaction. On December 7, 1998, QL
3000 sent a due diligence checklist to Grease Monkey, requesting detail on
such information as corporate records and documents, stocks and securities,
general business matters, employee documents and information, technology,
taxes, litigation and claims, government regulation and licensing, material
contracts, and real property.
From December 8-10, 1998, representatives from QL 3000 visited
Denver again. The primary purpose of the trip was to complete the due
diligence checklist described above and to develop very detailed financial
models for use in developing QL 3000's business plan.
During the remainder of December 1998 and in early 1999, QL 3000
continued its due diligence investigation of Grease Monkey. QL 3000 spent the
majority of its time in discussions with various potential debt and equity
financing sources to fund the merger consideration. QL
30
<PAGE>
3000 completed its business plan for Grease Monkey in early January 1999,
which was required by the prospective lenders to QL 3000 to provide debt
financing for the transaction.
Meanwhile, during December 1998 and early 1999, negotiations
continued on the Merger Agreement. Most importantly, QL 3000 needed to
provide evidence that it could secure adequate financing to pay the merger
consideration. On January 26, 1999, GMB, at the request of the Board of
Directors of Grease Monkey, sent a letter to QL 3000 requesting that they
provide Grease Monkey a written summary (by no later than February 3, 1999)
of how QL 3000 intended to secure the required financing for the proposed
merger with Grease Monkey. On February 1, 1999, QL 3000 sent a letter to
Grease Monkey summarizing their proposed financing arrangements for the
proposed merger with Grease Monkey. QL 3000 would provide approximately $3.0
million in equity to finance the transaction. In addition two lenders, had
provided QL 3000 term sheets in which they would each provide up to $11.0
million in debt financing for the transaction. Finally, a vendor would
provide up to $1.5 million in financing via a contractual relationship.
On March 1, 1999, representatives from QL 3000 made another trip to
Denver to finalize their due diligence investigation of Grease Monkey. During
the trip, QL 3000 reviewed the corporate records of Grease Monkey and its
subsidiaries, environmental records, the Mexican franchise agreements and the
Master Franchise Agreement, personnel issues, and software development.
Finally, QL 3000 discussed potential transaction structures for the proposed
merger with Grease Monkey.
On March 8, 1999, GMB gave the oral opinion to the Board of
Directors of Grease Monkey that the proposed merger consideration of $1.00
per share to each common shareholder, and to pay all amounts due in respect
of each share of preferred stock, was an attractive offer to the common
shareholders of the Company. At that meeting, the Board authorized Grease
Monkey to enter into the Merger Agreement with QL 3000.
On March 26, 1999, Grease Monkey signed the Merger Agreement to be
acquired by QL 3000, subject to a financing commitment contingency which had
to be satisfied within 60 days, and certain other conditions. That same day,
Grease Monkey publicly announced that it had signed the Merger Agreement to
be acquired by QL 3000.
After the Merger Agreement was signed, representatives from QL 3000
continued their discussions with various debt and equity sources to finance
the proposed transaction. With respect to debt financing, QL 3000 had ongoing
discussions with several lenders, including CSFC and SunTrust Bank. On May
25, 1999, Grease Monkey received a letter from E. Chester Stokes, Jr., a
principal shareholder of QL 3000, indicating that he would unconditionally
commit to provide or cause to be provided the additional debt financing
required to complete the merger. In a subsequent letter on May 28, 1999, he
enclosed a copy of a commitment letter from Mobil Oil Company evidencing its
agreement to continue its existing loans to Grease Monkey following the
merger. In this letter, Mr. Stokes also agreed to provide or cause to be
provided the balance of all necessary debt and equity financings to complete
the merger. He also stated
31
<PAGE>
that he had completed all necessary due diligence inspections with respect to
the financings. On May 28, 1999, he delivered a copy of his current financial
statement to Grease Monkey.
On May 29, 1999, Grease Monkey announced that the financing
commitment contingency under the Merger Agreement with QL 3000 had been
satisfied.
On July 28, 1999, the Board of Directors met. At such meeting, after
being advised by its counsel and GMB, the Board reiterated its approval of
the Merger Agreement and the merger and authorized James Wallace to negotiate
and enter into an extension to the Merger Agreement.
From July 21, 1999 until August 4, 1999, Grease Monkey and QL 3000,
and their respective counsel negotiated an Amendment, Extension and Release
Agreement.
On August 5, 1999, the Board of Directors approved the Amendment,
Extension and Release Agreement and authorized Grease Monkey's officers to
execute and deliver the agreement and to take action necessary or advisable
to complete the merger.
THE BOARD'S RECOMMENDATION
Following an extensive review and evaluation of the merger, the
Board approved the Merger Agreement and recommended that the shareholders of
the Company approve the Merger Agreement, with Rex L. Utsler, President,
Chief Operating Officer and a director of the Company, dissenting. In
connection with the foregoing, the Board determined that the merger, the
Merger Agreement, and the transactions contemplated thereby were fair and in
the best interests of the shareholders. In connection with their
recommendations, the Board adopted the analyses and findings of the Board's
financial advisor, GMB See "Special Factors --Opinion of Financial Advisor."
THE BOARD RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE
MERGER AGREEMENT.
The Board of Directors determined that it was an appropriate time to
enter into the proposed transaction when QL 3000 made its proposal to the
Company based on recent developments in the quick lube industry and on
contacts which the Company had had with other potential acquirors during the
previous several months. During the latter part of 1997 and early 1998,
changes in the quick lube industry were adversely affecting the Company's
historical growth rate and profitability. The Company had historically grown
in size and profitability through internal growth and acquisitions. During
this time period, management of the Company reported to the Board of
Directors that due to limited access to capital, increased competition and
aggressive pricing by competitors, internal growth was becoming more
difficult to achieve. In addition, acquisitions were becoming less attractive
because acquisition prices had increased and the Company's reduced stock
price made acquisitions more expensive and dilutive to earnings. Based on
these contacts, the Board and the Board of Directors were aware of the terms
on which those potential acquirors were willing to enter into transactions
with the Company. When QL 3000 made their proposal, the Board and the Board
of Directors determined that it was an appropriate time to enter into a
transaction on the proposed terms in light of the foregoing factors and with
the knowledge of the terms on which other acquirors were willing to enter
into a transaction at that time.
32
<PAGE>
The Board met on seven occasions between June 4, 1998 and the date
of this Proxy Statement, in person or by telephone conference, to consider
developments relating to a possible sale of the Company. The Board was
assisted in its deliberations by its financial advisor, GMB, and its legal
counsel, Otten, Johnson, Robinson, Neff & Ragonetti, P.C. At a meeting held
on March 8, 1999, the Board determined that the merger, the Merger Agreement,
and the transactions contemplated thereby were fair and in the best interests
of the shareholders of the Company and recommended that the Shareholders
approve the Merger Agreement. At meetings on July 28, 1999 and August 5, 1999
the Board reiterated its position.
The material factors the Board evaluated in connection with the
merger are described below. Except as otherwise noted below, the Board
considered the following factors to be positive factors supporting its
determination that the merger is fair and in the best interests of the
shareholders. In arriving at its decision, the Board considered:
(i) The Board's view is that the Company has experienced
increased competition and aggressive pricing by competitors. As a
result, internal growth has become more difficult to achieve. In
addition, acquisitions have become less attractive because acquisition
prices have increased and the Company's reduced stock price has made
acquisitions more expensive and dilutive to earnings. These factors
resulted in a lower overall growth rate for the Company which had an
adverse effect on the market price of the Common Stock and on
management's ability to execute the Company's business strategy.
Furthermore, the Company has only limited access to additional
necessary capital. In this connection, the Board considered that the
Company may be managed more effectively as a private company not
subject to pressures from the Shareholders and market professionals to
grow earnings per share consistently. In addition, the Board was
concerned that given the reduced market price of the Common Stock, any
additional equity incentives which the Company might issue to retain
key members of management would have further adverse effects on the
market price of the Common Stock. The Board believes that, as a private
company, the Company would have greater flexibility to consider
business strategies that have long-term benefits (including
acquisitions which are often dilutive in the short-term), but that
would adversely impact earnings per share and the market price of the
Common Stock in the short-term if the Company were public.
(ii) The belief of the Board is that the merger
represents a more desirable alternative than continuing to operate the
Company as a public company. In this connection, the Board gave
consideration to rejecting QL 3000's proposal in favor of maintaining
the Company's independence and enabling the Shareholders to share in
the Company's future earnings and growth potential. However, the Board
believes that continuing to operate the Company as an independent
entity would subject the Company and its shareholders to delays in
implementation or the risk of execution of the Company's business
strategy as described above. After evaluating such risk (including the
factors described under item (i) above), the Board concluded that,
while the Company's business strategy could ultimately prove
successful, the risk that the Company will continue to experience
significant operating events adversely impacting
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<PAGE>
the performance of the Common Stock justifies a sale of the Company.
As alternatives to the merger, the Board considered continuing to
operate the Company as an independent entity and continuing to shop
the Company to potential purchasers that are described above under
" -- Background of the merger."
(iii) Information with respect to the financial condition,
results of operations, and business of the Company.
(iv) The scope of efforts to effect a transaction for the
Company, including the number and identity of potential buyers from
which indications of interest were received. In this connection, the
Board considered that GMB had contacted 40 prospective buyers of Grease
Monkey, that the Company had discussions with the likely strategic
partners for the Company and that none of those discussions led to a
definitive proposal to acquire the Company or reasonable prospects that
a definitive proposal would be forthcoming. The Board determined that
based upon the prior discussions, it was unlikely that another bidder
would make a definitive proposal to acquire the Company, or that if
such a proposal were made, it would result in a transaction that would
provide greater value to the shareholders.
(v) GMB's opinion delivered to the Board on March 8,
1999, that the Cash Merger Consideration to be received by the
shareholders was fair to such holders from a financial point of view.
The Board adopted the analyses and findings of GMB in their
determination that the merger is fair to the Shareholders.
(vi) The proposed terms and conditions of the Merger
Agreement. In particular, the Board considered the fact that the Merger
Agreement did not provide for termination fees and expense
reimbursement obligations which would have the effect of unreasonably
discouraging competing bids and that, subject to the satisfaction of
certain conditions, the Board would be able to withdraw or modify its
recommendation to the shareholders regarding the merger and enter into
an agreement with respect to a more favorable transaction with a third
party, if such a transaction becomes available prior to the
consummation of the merger.
(vii) The market price of the Common Stock, and the
premium over such prices represented by the Cash Merger Consideration
to be received by the shareholders in the merger.
(viii) The Board's belief that there were no potential
merger partners who would be able to pay more than the Cash Merger
Consideration.
(ix) That the Cash Merger Consideration amount was QL
3000's "best and final offer."
(x) The financial ability and willingness of QL 3000 to
consummate the merger. The Merger Agreement conditioned QL 3000's
obligations to consummate the merger on QL 3000's having obtained a
bona fide financing commitment for the merger.
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<PAGE>
In this connection, the Board reviewed proposal letters for debt
financing supplied by a QL 3000 Investor and a potential lender. In
addition, the Board, through its financial and legal advisors,
discussed the proposed financing with the QL 3000 Investors and its
lenders. Based on the foregoing, the Board believed the benefits
outweighed the risk that the financing condition of the Merger
Agreement would not be satisfied.
The Board did not assign relative weights to the factors it
considered, and it did not consider any relative weighting to be necessary in
reaching its fairness determination.
Based on the foregoing, the Board determined that the merger, the
Merger Agreement and the transactions contemplated thereby were advisable,
fair and in the best interests of the shareholders and approved the Merger
Agreement. The Board approved the merger on March 8, 1999, and determined
that the merger is advisable, fair and in the best interests of the
shareholders. Rex L. Utsler, President, Chief Operating Officer and a
director of Grease Monkey, dissented from the Board's approval. The Board is
unaware of any development since its March 8, 1999 meeting that would affect
its March 8, 1999 determination, and, accordingly, the Board reconfirms, as
of the date of this Proxy Statement, its determination that the merger, the
Merger Agreement and the transactions contemplated thereby are advisable,
fair and in the best interests of the Shareholders of the Company. THE BOARD
RECOMMENDS THAT THE SHAREHOLDERS APPROVE THE MERGER.
OPINION OF FINANCIAL ADVISOR
Pursuant to an engagement letter dated June 4, 1998, the Board
retained Green Manning & Bunch Securities, Inc. ("GMB") to act as the
financial advisor and representative of the Company in connection with
handling a process that resulted in the merger and to render to the Board an
opinion with respect to the fairness, from a financial point of view, to the
Company's shareholders of the Cash Merger Consideration to be received in the
merger. GMB was selected as the Board's fairness advisor because of its
familiarity with the Company, and its operations and standing as a recognized
investment banking firm which is continually engaged in the valuation of
business and their securities in connection with mergers and acquisitions,
corporate restructuring, private placements, and valuations for corporate and
other purposes.
GMB delivered its written opinion to the Board to the effect that
the Cash Merger Consideration to be received in the merger is fair to the
shareholders of the Company.
The full text of GMB's opinion dated as of March 8, 1999, which sets
forth the assumptions made, matters considered, and limits on the review
undertaken in connection with the opinion is attached hereto as Appendix B.
The Company's shareholders are urged to carefully read such opinion in its
entirety. GMB's opinion is addressed to the Board, is directed only to the
fairness of the Cash Merger Consideration to be received in the merger by the
holders of Common Stock and Series C Preferred Stock of the Company, and does
not constitute a recommendation to any shareholder of the Company as to how
such shareholder should vote in relation to the merger. The summary of the
opinion of GMB set forth in this Proxy Statement is qualified in its entirety
by reference to the full text of such opinion.
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<PAGE>
In arriving at its opinion, GMB reviewed and analyzed: (i) the
Merger Agreement, (ii) publicly available information concerning the Company
which GMB believed to be relevant to its inquiry, (iii) financial and
operating information with respect to the business, operations, and prospects
of the Company furnished to GMB by the Company, (iv) a trading history of the
Company's Common Stock from June 15, 1992 to March 3, 1999, (v) a comparison
of the historical financial results and present financial condition of the
Company with those of other companies which were deemed relevant, (vi) a
comparison of the financial terms of the merger with the financial terms of
certain other recent transactions which GMB deemed relevant and (vii) certain
historical data relating to acquisitions of publicly traded companies,
including multiples of revenue, earnings before interest, taxes, depreciation
and amortization ("EBITDA") and earnings before interest and taxes ("EBIT")
paid in such acquisitions. In addition, GMB held discussions with the
management of the Company concerning its business, operations, assets,
present condition, and future prospects, and undertook such other studies,
analyses, and investigation as GMB deemed appropriate.
GMB relied upon the accuracy and completeness of the financial and
other information used by GMB in arriving at its opinion without independent
verification. With respect to the financial forecasts of the Company, GMB
assumed that such forecasts had been reasonably prepared on a basis
reflecting the best currently available estimates and judgments of the
Company's management as to the future financial performance of the Company.
GMB did not conduct a physical inspection of the properties and facilities of
the Company and did not make or obtain any evaluations or appraisals of the
assets or liabilities of the Company.
GMB's opinion was necessarily based upon market, economic and other
conditions as they may have existed and could be evaluated as of March 8,
1999. In connection with the preparation of its fairness opinion, GMB
performed certain financial and comparative analyses, the material portions
of which are summarized below. The summary set forth below includes the
financial analyses used by GMB and deemed to be material, but-does not
purport to be a complete description of the analyses performed by GMB in
arriving at its opinion. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances, and, therefore, such an opinion is not readily susceptible to
partial analysis or summary description. In addition, GMB believes that its
analyses must be considered as an integrated whole, and that selecting
portions of such analyses and the factors considered by it, without
considering all of such analyses and factors, could create a misleading or an
incomplete view of the process underlying its analyses set forth in the
opinion. In performing its analyses, GMB made numerous assumptions with
respect to industry and economic conditions and other matters, many of which
are beyond the control of the Company. Any estimates contained in such
analyses are not necessarily indicative of actual past or future results or
values, which may be significantly more or less favorable than as set forth
therein. Estimates of values of companies do not purport to be appraisals or
necessarily reflect the price at which such companies may actually be sold,
and such estimates are inherently subject to uncertainty. No public company
utilized as a comparison is identical to the Company and no merger and
acquisition transaction involved companies identical to the Company. An
analysis of the results of such comparisons is not mathematical; rather, it
involves complex considerations and judgements concerning
36
<PAGE>
differences in financial and operating characteristics of the comparable
companies and transactions and other factors that could affect the values of
companies to which the Company is being compared.
The following is a summary of the presentation by GMB to the Board
of Directors on March 8, 1999 in connection with its March 8, 1999 opinion.
HISTORICAL STOCK PRICE ANALYSIS. GMB analyzed the prices at which
the Common Stock of the Company traded from June 15, 1992 to March 3, 1999.
GMB observed that the all-time high price for the Common Stock was $4.125 on
December 30, 1992, and the all-time low price for the Common Stock was $0.563
on several dates, the latest of which was December 22, 1998.
COMPARABLE PUBLIC COMPANY ANALYSIS. GMB reviewed and compared
certain publicly available financial, operating, and market valuation data
for the Company and ten publicly traded companies. The companies included in
GMB's comparable public company analysis were Lucor, Inc., Precision Auto
Care, Inc., Monroe Muffler Brake Inc., Crown Central Petroleum Corporation,
Penzoil-Quaker State Company, Midas Inc., Sunoco, Inc., Ashland Inc., Earl
Scheib, Inc. and Dairy Mart Convenience Stores, Inc. GMB noted that none of
the comparable public companies were identical to the Company and that,
accordingly, the analysis of the comparable public companies necessarily
involves complex considerations and judgements concerning differences in
financial and operating characteristics of the companies reviewed and other
factors that would affect the market values of comparable companies. GMB
calculated various financial ratios and multiples based upon the closing
prices of the comparable public companies and the most recent publicly
available information for the various companies. The following valuation
ratios were used in determining ranges of implied equity values of the
Company based on annualized fourth quarter 1998 financial performance and an
average of 1993-1998 financial performance of the Company: adjusted market
value (defined as equity value plus debt and preferred stock minus cash and
marketable securities) to a) revenue, b) EBITDA and c) EBIT.
GMB averaged the multiples of the publicly traded comparable
companies in order to apply these multiples to the Company's values. To
accurately reflect average values for statistical purposes, GMB excluded
certain outlying values that differed from the relative groupings of the
other values. GMB believed that these outlying values for certain companies
reflect temporary market aberrations that can skew mean values.
Based upon the average valuation multiples for the group of
Comparable Public Companies, GMB calculated a range of implied equity values
from ($1.39 million) to $0.569 million.
ANALYSIS OF SELECTED MERGER AND ACQUISITION TRANSACTIONS. Among
acquisitions in other industries, GMB reviewed and analyzed two completed
merger and acquisition transactions involving companies in the quick lube
industry. GMB noted that none of the selected transactions reviewed was
identical to the merger and that, accordingly, the analysis of comparable
transactions necessarily involves complex considerations and judgements
concerning differences in financial and operating characteristics of the
companies reviewed and other factors
37
<PAGE>
that would effect the acquisition values of comparable transactions. For each
acquisition, GMB calculated adjusted market value as a multiple of (i) LTM
revenues, (ii) LTM gross margin, (iii) LTM EBITDA, and (iv) LTM EBIT. GMB
averaged the multiples for the selected merger and acquisitions transactions
in order to apply these multiples to the Company based on annualized fourth
quarter 1998 financial performance and an average of 1993-1998 financial
performance of the Company. Based upon the average multiples from the
selected transactions involving quick lube companies, GMB calculated a range
of implied equity values from ($1.639 million) to $2.109 million.
The summary set forth above does not purport to be a complete
description of the analyses conducted or data presented by GMB. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. GMB believes that the
summary set forth above and their analyses must be considered as a whole and
that selecting only portions thereof, without considering all of its
analyses, could create an incomplete view of the processes underlying its
analyses and opinion. GMB based its analyses on assumptions that it deemed
reasonable, including assumptions concerning general business and economic
conditions and industry-specific factors. The preparation of fairness
opinions does not involve a mathematical weighing of the results of the
individual analyses performed, but requires GMB to exercise its professional
judgement, based on its experience and expertise, in considering a wide
variety of analyses taken as a whole. Each of the analyses conducted by GMB
was carried out in order to provide a different perspective on the
transaction and to add to the total mix of information available. GMB did not
form a conclusion as to whether any individual analysis, considered in
isolation, supported or failed to support an opinion as to fairness. Rather,
in reaching its conclusion, GMB considered the results of the analyses in
light of each other and ultimately reached its conclusion based on the
results of all analyses taken as a whole.
Under the terms of the Company's engagement letter with GMB, if the
merger is consummated, a transaction fee of approximately $345,000 (plus
reasonable out-of pocket expenses up to $20,000) will be paid to GMB, in
addition to the $80,000 that has already been paid. In addition, the Company
has agreed to indemnify GMB against certain liabilities, including certain
liabilities under the federal securities laws.
PURPOSE AND REASONS OF QL 3000 FOR THE MERGER
The purpose of QL 3000 Investors for engaging in the transactions
contemplated by the Merger Agreement is to acquire 100% ownership of the
Company. QL 3000 Investors believe that as a private company Grease Monkey
will have greater operating flexibility to focus on enhancing value by
emphasizing growth (both internally and through acquisitions) and operating
cash flow without the constraint of the public market's emphasis on quarterly
earnings. This assessment by QL 3000 Investors is based upon publicly
available information regarding the Company, the QL 3000 Investors' due
diligence investigation of the Company, and the QL 3000 Investors' experience
in investing in companies in the quick lube industry. QL 3000 Investors
determined that it was an appropriate time to make their proposal to the
Company to engage in the transactions contemplated by the Merger Agreement
based on its knowledge of the quick
38
<PAGE>
lube industry and its belief that the public markets were not giving an
appropriate valuation to the Company. As of the date of the Proxy Statement,
GMB has updated the review and analyses underlying its fairness opinion and
concludes that the Cash Merger Consideration to be received in the Merger is
fair to the shareholders of the Company. While QL 3000 Investors believe that
there will be significant opportunities associated with its investment in the
Company, there are also substantial risks that such opportunities may not be
fully realized.
As of the date of this Proxy Statement, GMB has updated the review
and analyses underlying its fairness opinion and concludes that the Cash
Merger Consideration to be received in the merger is fair to the shareholders
of the Company.
CONFLICTS OF INTEREST
In considering the recommendations of the Board with respect to the
merger, shareholders should be aware that certain officers and directors of
Grease Monkey, as well as certain investors in Grease Monkey, have interests
in connection with the merger which may present them with actual or potential
conflicts of interest as summarized below. The Board was aware of these
interests and considered them among the other matters described under "-- The
Board's Recommendation."
GREASE MONKEY MANAGEMENT. The Merger Agreement requires that Grease
Monkey provide indemnification, to the full extent permitted by applicable
law, to its current and former officers and directors against liabilities
(including reasonable attorneys' fees) relating to actions or omissions
arising out of their being a director, officer, employee, or agent of the
Company at or prior to the closing of the merger (including the transactions
contemplated by the Merger Agreement). As described under "Principal
Shareholders," certain of Grease Monkey's officers and directors are also
shareholders and therefore, will participate in the merger if it is
completed. QL 3000 and Rex L. Utsler, President and Chief Operating Officer
of Grease Monkey, are currently in negotiations pursuant to which Mr. Utsler
may invest in the Surviving Corporation after the merger is completed. No
agreements, arrangements or understandings have been made between QL 3000 and
Mr. Utsler as of the date of this Proxy Statement. Certain members of the
Board of Directors are principals of Brownlie, Wallace, Armstrong & Bander
Exploration ("BWAB Exploration"), which has advanced Grease Monkey an
aggregate of approximately $409,000. Such advances will be repaid to BWAB
Exploration upon the closing of the merger.
GMB. GMB served as financial advisor to the Board and has had
certain relationships with Grease Monkey and its management that could be
perceived as adversely affecting its independence. Of GMB's $425,000
investment banking fee, $345,000 is contingent on the completion of the
merger. GMB believes that the foregoing arrangements do not affect its
ability to act independently and impartially as financial advisor to the
Board.
CERTAIN EFFECTS OF THE MERGER
As a result of the merger, the entire equity interest in the Company
will be owned by the QL 3000 Investors. The shareholders will no longer have
any interest in, and will not be shareholders of, Grease Monkey, and
therefore, will not participate in Grease Monkey's future
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<PAGE>
earnings and potential growth. Instead, the shareholders will have the right
to receive the Cash Merger Consideration. An equity investment in the Company
following the merger involves substantial risk resulting from the limited
liquidity of any such investment and the leverage resulting from the
borrowings that will be required to purchase the Common Stock and Preferred
Stock from the shareholders and to fund the capital expenditures and
acquisitions necessary to execute the Company's business strategy.
Nonetheless, if the Company successfully executes its business strategy, the
value of such an equity investment could be considerably greater than the
original cost thereof. See " -- Conflicts of Interest" and "Cautionary
Statement Concerning Forward-Looking Information."
In addition, the Common Stock will no longer be traded on the OTCBB
and price quotations with respect to sales of shares in the public market
will no longer be available. The registration of the Common Stock under the
Securities Exchange Act of 1934, as amended (the "Securities Exchange Act"),
will terminate.
FINANCING OF THE MERGER
GENERALLY. It is estimated that approximately $14,391,000 will be
required to consummate the merger and pay related fees and expenses. The
following table sets forth the estimated sources and use of funds for the
merger:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- ------------------------------
<S> <C> <C>
SOURCE OF FUNDS
SENIOR DEBT FINANCING-CSFC $7,000,000
SENIOR DEBT FINANCING-CITICORP/MOBIL (Store #702) 850,000
SENIOR DEBT FINANCING-CITICORP/MOBIL 4,540,623
OWNERS CAPITAL CONTRIBUTION 2,000,000
---------
TOTAL SOURCES OF FUNDS 14,390,623
==========
USES OF FUNDS
REPAY EXISTING LONG TERM DEBT (BALANCES AS OF 6/30/99):
CITICORP/MOBIL (OLD) $4,540,623
BWAB EXPLORATION 409,000
GLEN & ROBERTA SHIRK (#42 & #45) 578,525
WENGER CORP. (#35) 14,152
US BANK 74,964
------
SUBTOTAL 5,617,264
PURCHASE STOCK (BALANCES AS OF 9/30/99):
COMMON STOCK 4,690,518
PREFERRED STOCK 2,089,638
PREFERRED STOCK ACCRUED DIVIDENDS 726,100
-------
SUBTOTAL 7,506,256
OFFERING, ORGANIZATION AND CLOSING COSTS
GMB INVESTMENT BANKING FEE 365,000
LOAN ORIGINATION FEE/CLOSING COSTS-CSFC (6%) 420,000
LOAN ORIGINATION FEE/CLOSING COSTS-CITICORP/MOBIL RE
STORE #702 IN HIGHLANDS RANCH, COLORADO (6%) 51,000
ORGANIZATION EXPENSES 400,000
PROVISION FOR ADDITIONAL EXPENSES 31,103
------
SUBTOTAL 1,267,103,
----------
TOTAL USES OF FUNDS $14,390,623
===========
</TABLE>
40
<PAGE>
EQUITY FINANCING. The QL 3000 Investors have or will have
contributed approximately $2,000,000 in capital, most of which will be in the
form of subordinated shareholder loans.
DEBT FINANCING. QL 3000 has received a commitment from Mobil, a
current lender of Grease Monkey, to provide loans to Grease Monkey following
the merger in amounts and on terms comparable to Grease Monkey's current
loans. Citicorp North America, Inc. acts as Mobil's agent under this program.
To induce Mobil to release its liens on Grease Monkey's company operated
Centers so that they may be used as collateral for other loans, E. Chester
Stokes, Jr., will guarantee Grease Monkey's Mobil loan in the estimated
amount of $4,540,623. The principal collateral for this loan will be the
Company's franchise royalty revenues.
Mobil also has agreed to provide under its lube center financing
program $850,000 in additional post-merger financing secured by the
Company-owned Center #702 located in Highlands Ranch, Colorado.
QL 3000 is negotiating a $7,000,000 loan facility with CSFC to be
secured by 19 Company operated Centers. Mobil has agreed to release its liens
on these Centers in exchange for Mr. Stokes' guarantee. QL 3000 is also
discussing this proposed financing with other lenders.
ALTERNATIVE FINANCING. In the event the proposed financings are not
completed, E. Chester Stokes, Jr. has committed to provide or cause to be
provided the balance of any required financing.
CONDUCT OF GREASE MONKEY'S BUSINESS AFTER THE MERGER
QL 3000 Investors are continuing to evaluate Grease Monkey's
business, practices, operations, properties, corporate structure,
capitalization, management, and personnel and will discuss what changes, if
any, will be desirable. Subject to the foregoing, QL 3000 Investors expect
that the day-to-day business and operations of Grease Monkey will be
conducted substantially as they are currently being conducted by Grease
Monkey. QL 3000 Investors do not currently intend to dispose of any assets of
Grease Monkey, other than in the ordinary course of business. Additionally,
QL 3000 Investors do not currently contemplate any material change in the
composition of Grease Monkey's current management or personnel, except that
E. Chester Stokes, Jr. will become Chairman and President and Ronald E. Smith
will become Chief Financial Officer. After the merger, the Board will consist
of E. Chester Stokes, Jr., David C. Plyler and Thomas C. Bergmann.
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<PAGE>
THE SPECIAL MEETING
DATE, TIME, AND PLACE OF THE SPECIAL MEETING
The Special Meeting of Grease Monkey will be held on November 22,
1999, at 2:00 p.m., local time, at the training center of the Company, 633
17th Street, Suite 400, Denver, Colorado 80202.
PROXY SOLICITATION
This Proxy Statement is being solicited by the Company. All expenses
incurred in connection with solicitation of the enclosed proxy will be paid
by the Surviving Corporation. Officers, directors, and regular employees of
the Company, who will receive no additional compensation for their services,
may solicit proxies by telephone or personal call. The Company has requested
brokers and nominees who hold stock in their names to furnish this proxy
material to their customers, and the Company will reimburse such brokers and
nominees for their related out-of-pocket expenses. This Proxy Statement and
the accompanying proxy card are being mailed to shareholders on or about
October 22, 1999.
RECORD DATE AND QUORUM REQUIREMENT
The Common Stock is the only outstanding voting security of the
Company. The Board has fixed the close of business on October 8, 1999 as the
Record Date for the determination of shareholders entitled to notice of, and
to vote at, the Special Meeting and any adjournment or adjournments thereof.
Each holder of record of Common Stock and Preferred Stock at the close of
business on the Record Date is entitled to one vote for each share then held
on each matter submitted to a vote of shareholders. At the close of business
on the Record Date, there were 4,690,518 shares of Common Stock issued and
outstanding held by 2,284 holders of record and 20,896 shares of Preferred
Stock issued and outstanding held by 50 holders of record.
The holders of a majority of the outstanding shares entitled to vote
at the Special Meeting must be present in person or represented by proxy to
constitute a quorum for the transaction of business. Abstentions are counted
for purposes of determining the presence or absence of a quorum for the
transaction of business.
VOTING PROCEDURES
Approval of the Merger Agreement, which is attached as Appendix A
hereto, will require the affirmative vote of the holders of a majority of the
outstanding shares of Common Stock and Preferred Stock entitled to vote at
the Special Meeting, each voting as a separate group. A failure to vote or a
vote to abstain will have the same legal effect as a vote cast against
approval. Jerry D. Armstrong, James B. Wallace, Ray O. Brownlie, J.H. Bander,
Charles E. Steinbrueck, Cortlandt S. Dietler, George F. Wood, Wayne H.
Patterson and Jim D. Baldwin have agreed to vote all of their Common Stock
and Preferred Stock to approve the merger. Such persons hold an aggregate of
2,017,396 shares of Common Stock (or approximately 43% of the total Common
Stock outstanding) and 7,161 shares of Preferred Stock (or approximately 34%
of the total
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<PAGE>
Preferred Stock outstanding). Brokers and, in many cases, nominees will not
have discretionary power to vote on the proposal to be presented at the
Special Meeting. Accordingly, beneficial owners of shares should instruct
their brokers or nominees how to vote. A broker non-vote will have the same
effect as a vote against the merger.
If there are insufficient votes to approve the Merger Agreement at
the Special Meeting, proxies voted in favor of the Merger Agreement and
proxies as to which no voting instructions are given may be voted to adjourn
the Special Meeting in order to solicit additional proxies in favor of
approval of the Merger Agreement. If the Special Meeting is adjourned for any
purpose, at any subsequent reconvening of the Special Meeting, all proxies
will be voted in the same manner as such proxies would have been voted at the
original convening of the meeting (except for any proxies which have been
revoked or withdrawn), notwithstanding that they may have been voted on the
same or any other matter at a previous meeting.
Under Utah law, holders of Common Stock who do not vote in favor of
the Merger Agreement and who comply with certain notice requirements and
other procedures will have the right to dissent and to be paid cash for the
"fair value" of their shares as finally determined under such procedures,
which may be more or less than the consideration to be received by other
shareholders of Grease Monkey under the terms of the Merger Agreement.
Failure to follow such procedures precisely may result in loss of appraisal
rights. See "Rights Of Dissenting Shareholders."
VOTING AND REVOCATION OF PROXIES
A shareholder giving a proxy has the power to revoke it at any time
before it is exercised by (i) filing with the Secretary of Grease Monkey an
instrument revoking it, (ii) submitting a duly executed proxy bearing a later
date or (iii) voting in person at the Special Meeting. Subject to such
revocation, all shares represented by each properly executed proxy received
by the Secretary of Grease Monkey will be voted in accordance with the
instructions indicated thereon, and if no instructions are indicated, will be
voted to approve the merger and in such manner as the persons named on the
enclosed proxy card in their discretion determine upon such other business as
may properly come before the Special Meeting or any adjournment thereof.
The shares represented by the accompanying proxy card and entitled
to vote will be voted if the proxy card is properly signed and received by
the Secretary of the Company prior to the Special Meeting.
EFFECTIVE TIME OF THE MERGER AND PAYMENT FOR SHARES
The effective time of the merger, which shall be the date and time
of filing of Certificate of Merger with the Secretary of State of the States
of Florida and Utah (the "Effective Time"), is currently expected to occur as
soon as practicable after the Special Meeting, subject to approval of the
Merger Agreement at the Special Meeting and satisfaction or waiver of the
terms and conditions of the Merger Agreement. Detailed instructions with
regard to the surrender of Common Stock and Preferred Stock certificates,
together with a letter of transmittal, will be forwarded to shareholders by
the Company's paying agent, American Securities Transfer &
43
<PAGE>
Trust, Inc. (the "Paying Agent"), promptly following the Effective Time.
Shareholders should not submit their certificates to the Paying Agent until
they have received such materials. The Paying Agent will send payment of the
Cash Merger Consideration to shareholders as promptly as practicable
following receipt by the Paying Agent of their certificates and other
required documents. No interest will be paid or accrued on the cash payable
upon the surrender of certificates. Shareholders should not send any
certificates at this time. See "The Merger -- Conditions."
OTHER MATTERS TO BE CONSIDERED
The Company's Board of Directors is not aware of any other matters
which will be brought before the Special Meeting. If, however, other matters
are presented, proxies will be voted in accordance with the discretion of the
holders of such proxies.
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<PAGE>
THE MERGER
TERMS OF THE MERGER AGREEMENT
GENERAL. The Merger Agreement provides that subject to satisfaction
of certain conditions, QL 3000 will be merged with and into Grease Monkey,
and that following the merger, the separate existence of QL 3000 will cease
and Grease Monkey will continue as the Surviving Corporation. At the
Effective Time, and subject to the terms and conditions set forth in the
Merger Agreement, each share of issued and outstanding Common Stock (other
than shares as to which appraisal rights are properly perfected and not
withdrawn), will, by virtue of the merger, be canceled and converted into the
right to receive $1.00 in cash, without interest and each share of issued and
outstanding Preferred Stock (other than shares as to which appraisal rights
are properly perfected and not withdrawn) will, by virtue of the merger be
cancelled and converted into the right to receive $100.00 plus an amount
equal to any unpaid cumulative dividends in cash, without interest (the "Cash
Merger Consideration"). As a result of the merger, the Common Stock will no
longer be publicly traded and the equity of the Surviving Corporation will be
100% owned by QL 3000 Investors.
The terms of and conditions to the merger are contained in the
Merger Agreement, which is included in full as Appendix A to this Proxy
Statement and is incorporated herein by reference. The discussion in this
Proxy Statement of the merger and the summary description of the principal
terms of the Merger Agreement are subject to and qualified in their entirety
by reference to the more complete information set forth in the Merger
Agreement.
MERGER CONSIDERATION. Upon consummation of the merger, each share of
Common Stock issued and outstanding immediately prior to the Effective Time
(excluding dissenting shares) will be converted into the right to receive the
Cash Merger Consideration, upon surrender and exchange of the certificate or
certificates which immediately prior to the Effective Time evidenced Common
Stock (the "Certificate(s)"). All such shares of Stock, when converted, will
no longer be outstanding and will automatically be canceled and retired and
will cease to exist, and each Certificate previously evidencing such Shares
will thereafter represent only the right to receive the Cash Merger
Consideration.
PAYMENTS FOR SHARES. As soon as reasonably practicable after the
Effective Time, the Paying Agent will mail to each holder of record of a
Certificate (other than Grease Monkey or QL 3000) a form of letter of
transmittal and instructions for use in effecting the surrender of the
Certificate in exchange for payment therefor. Upon surrender of a Certificate
for cancellation to the Paying Agent, together with such duly executed letter
of transmittal, and any additional requested items, the holder of such
Certificate will be entitled to receive in exchange therefor cash in an
amount equal to the product of (x) the number of shares of Common Stock or
Preferred Stock represented by such Certificate and (y) the Cash Merger
Consideration for such type of capital stock.
CANCELLATION OF GREASE MONKEY STOCK OPTIONS AND WARRANTS. All
options and warrants will be canceled at the Effective Time.
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TRANSFER OF SHARES. At the Effective Time, the stock transfer books
of Grease Monkey will be closed and there will be no further registration or
transfer of shares of Common Stock thereafter on the records of Grease
Monkey. On or after the Effective Time, any certificates presented to the
Surviving Corporation or the Paying Agent for any reason will be converted
into the Cash Merger Consideration.
CONDITIONS TO THE MERGER. Each party's respective obligation to
effect the merger is subject to the satisfaction, prior to the Closing Date,
of each of the following conditions: (i) all authorizations, consents and
approvals of governmental agencies shall have been obtained; (ii) the
approval and adoption of the Merger Agreement and the merger by the
affirmative vote of the holders of the Company's capital stock if such vote
is required by applicable law; (iii) there will have been no law, statute,
rule, regulation, decree, order, injunction or ruling that prohibits,
restrains or restricts consummation of the merger; (iv) no action, suit or
other proceeding is pending to prohibit, restrain, enjoin, restrict or
otherwise prevent the consummation of the merger; (v) the representations and
warranties of each party must remain true; (vi) the fairness opinion of GMB
shall not have been withdrawn or materially modified; (vii) Grease Monkey
shall have obtained and provided to QL 3000 and/or its lender all
authorizations, agreements, consents and approvals of third parties required
to be obtained to consummate the merger or in connection with QL 3000's
financing of the merger or refinancing of Grease Monkey's debt; and (viii)
the number of dissenting shares of Common Stock shall be less than 25% of the
total outstanding shares of Common Stock.
EVEN IF THE SHAREHOLDERS APPROVE THE MERGER, THERE CAN BE NO
ASSURANCE THAT THE MERGER WILL BE CONSUMMATED.
REPRESENTATIONS AND WARRANTIES. Grease Monkey has made
representations and warranties in the Merger Agreement regarding, among other
things, its organization and good standing, authority to enter into the
transaction, its capitalization, its financial statements, the absence of
certain changes in the business of Grease Monkey since September 30, 1998,
the content and submission of forms and reports required to be filed by
Grease Monkey with the Commission, requisite governmental and other consents
and approvals, compliance with all applicable laws, absence of litigation to
which Grease Monkey is a party, brokers and finders fees, requisite tax
filings, absence of defaults under material contracts, real and personal
property, employee benefits, and environmental matters.
QL 3000 has made representations and warranties in the Merger
Agreement regarding, among other things, its organization and good standing,
authority to enter into the transaction, the requisite governmental and other
consents and approvals, and accuracy of information supplied by QL 3000 for
submission on forms and reports required to be filed by Grease Monkey with
the Commission.
The representations, warranties, and agreements in the Merger
Agreement or in any instrument delivered pursuant to the Merger Agreement
will expire at the Effective Time.
COVENANTS. In the Merger Agreement, Grease Monkey has agreed that
prior to the Effective Time, unless otherwise agreed to in writing by QL 3000
or as otherwise expressly
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<PAGE>
contemplated or permitted by the Merger Agreement, Grease Monkey and each of
its subsidiaries will, among other things, conduct business only in the
usual, regular, and ordinary course substantially consistent with past
practice, including, without limitation, not declaring any dividend on its
capital stock or issuing any shares of capital stock.
SOLICITATION OF ACQUISITION PROPOSAL. The Merger Agreement provides
that on and after March 26, 1999, Grease Monkey, its subsidiaries and none of
their respective officers, directors, and agents shall be permitted (a) to
initiate or solicit, directly or indirectly, or encourage submission of
inquiries, proposals or offers from any potential purchaser relating to the
disposition of all or any of the assets of Grease Monkey or any of its
subsidiaries or the sale of securities of Grease Monkey or its subsidiaries,
or any merger, consolidation, business combination or similar transaction or
(b) to engage in any negotiations concerning, and provide any confidential
information or data to, and have any discussions with, any person relating to
any Acquisition Proposal, and otherwise facilitate any effort or attempt to
make or implement an Acquisition Proposal. Grease Monkey will notify QL 3000
immediately after it receives an inquiry or proposal from a third party
regarding an acquisition proposal.
INDEMNIFICATION AND INSURANCE. The Merger Agreement provides that
the Company's current and former directors and officers will be indemnified
by the Surviving Corporation, to the fullest extent permitted under the UBCA,
against any costs, expenses, fines, losses, claims, damages, liabilities, or
judgments, or amounts paid in settlement with the approval of the
indemnifying party in connection with any threatened or actual claim, action,
suit, proceeding, or investigation based in whole or in part on, or arising
in whole or in part out of, or pertaining to the fact that such person is or
was a director or officer of Grease Monkey or any of its subsidiaries,
whether pertaining to any matter existing or occurring at or prior to the
Effective Time.
TERMINATION. The Merger Agreement may be terminated and the merger
may be abandoned at any time prior to the Effective Time, whether before or
after approval of the merger by the shareholders of Grease Monkey: (a) by
mutual consent of Grease Monkey and QL 3000; (b) by Grease Monkey if there
has been a material breach or failure to perform any representation,
warranty, covenant, or agreement on the part of QL 3000, which breach or
failure to perform has not been cured within 10 calendar days following
receipt by QL 3000 of notice of such breach or failure; (c) by QL 3000 if
there has been a material breach or failure to perform any representation,
warranty, covenant, or agreement on the part of Grease Monkey, which breach
or failure to perform has not been cured within 10 calendar days following
receipt by Grease Monkey of notice of such breach or failure; (d) by QL 3000
or Grease Monkey if any governmental entity has promulgated or issued a law,
statute, rule, regulation, decree, order, injunction, or ruling or taken any
other action prohibiting, restraining, enjoining, restricting or otherwise
prohibiting the merger; (e) by Grease Monkey if the merger shall not have
been consummated on or before the later of October 31, 1999 or ten business
days after the Special Meeting; (f) by Grease Monkey upon written notice to
QL 3000 if prior to the Closing Date, any person has made a bona fide
proposal relating to an acquisition transaction relating to Grease Monkey or
the Common Stock, or has commenced a tender or exchange offer for the Common
Stock and the Board of Directors of Grease Monkey determines in good faith
(i) after
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<PAGE>
consultation with its financial advisors, that such transaction constitutes a
better offer than terms of the merger contemplated by the Merger Agreement
and (ii) after consultation with legal counsel, that failure to approve such
proposal and terminate the Merger Agreement could reasonably be expected to
result in a breach of fiduciary duties of the Board of Directors of Grease
Monkey.
FEES AND EXPENSES. Except as otherwise provided in Section 7.4 of
the Merger Agreement and except with respect to claims for damages incurred
as a result of the breach of the Merger Agreement, all costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses.
LIQUIDATED DAMAGES AND ESCROW. Pursuant to the Amendment, Extension
and Release Agreement, dated July 30, 1999, QL 3000 deposited in an escrow
account at U.S. Bank National Association, Denver, Colorado, the sum of
$400,000.00. At the effective time of the merger (if the effective time
occurs) the escrow deposit will be transferred to the paying agent and shall
be used as part of the merger consideration. If (a) all of the conditions to
QL 3000's obligations under the Merger Agreement have not been satisfied or
waived by QL 3000 or (b) Grease Monkey defaults in the observance or
performance of one or more of its covenants or agreements under the Merger
Agreement, which default is not cured within ten (10) days after Grease
Monkey has notice thereof, except for defaults which, individually or in the
aggregate, would not have a material adverse effect or materially impair the
ability of the parties to consummate the transactions contemplated by the
Merger Agreement pursuant to its terms, and Grease Monkey or QL 3000 elects
to terminate the Merger Agreement, or (c) Grease Monkey terminates the Merger
Agreement pursuant to Section 7.3.3 thereof, then the Escrow Deposit shall be
returned to QL 3000. If on or after the Termination Date (a) all of the
conditions to QL 3000's obligations under the Merger Agreement have been
satisfied or waived by QL 3000, (b) the Effective Date has not occurred (for
reasons other than Grease Monkey's failure to close) by the end of the fifth
business day following the date on which the last of such conditions was
satisfied or waived and (c) Grease Monkey terminates the Merger Agreement or
if Grease Monkey terminates the Merger Agreement pursuant to Section 7.3.1
thereof, then the Escrow Deposit will be forfeited to Grease Monkey. If (a)
(i) the effective time does not occur on or before the Termination Date
because Grease Monkey has materially breached its representations, warranties
or covenants contained in the Merger Agreement (other than a breach of a
representation or warranty as to which Grease Monkey had no control or
knowledge), or (ii) the shareholders of Grease Monkey vote to reject the
merger or (iii) all of the conditions to Grease Monkey's obligations under
the Merger Agreement have been satisfied or waived by Grease Monkey and the
effective time has not occurred (for reasons other than QL 3000's failure to
close) by the end of the fifth business day following the date on which the
last of such conditions was satisfied or waived, and (b) QL 3000 has not
materially breached any of its representations, warranties or covenants
contained in the Merger Agreement, then QL 3000 may terminate the Merger
Agreement and will be entitled to liquidated damages from Grease Monkey in
the amount of $400,000.00; provided; however, that Grease Monkey will not be
required to pay liquidated damages if Grease Monkey terminates the Merger
Agreement because it has accepted a competing offer.
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<PAGE>
AMENDMENT. Subject to applicable law, the Merger Agreement may be
amended or modified in writing by the parties to the Merger Agreement.
RIGHTS OF DISSENTING SHAREHOLDERS
Holders of shares of the Company's Common Stock are entitled to
appraisal rights under Sections 16-10a-1301 through 16-10a-1331 of the UBCA.
Sections 16-10a-1301 through 16-10a-1331 are reprinted in their entirety as
Appendix C to this Proxy Statement. All references in Sections 16-10a-1301
through 16-10a-1331 and in this summary to a "shareholder" are to the record
holder of the shares of the Company's Common Stock or Preferred Stock as to
which appraisal rights are asserted. A person having a beneficial interest in
shares of the Company's Common Stock or Preferred Stock that are held of
record in the name of another person, such as a broker or nominee, must act
promptly to cause the record holder to properly follow the steps summarized
below and in a timely manner to perfect whatever appraisal rights the
beneficial owner may have.
The following discussion is not a complete statement of the law
relating to appraisal rights and is qualified in its entirety by reference to
Appendix C, however the following discussion does summarize all of the
material terms relating to appraisal rights. THIS DISCUSSION AND APPENDIX C
SHOULD BE REVIEWED CAREFULLY BY ANY HOLDER WHO WISHES TO EXERCISE STATUTORY
APPRAISAL RIGHTS OR WHO WISHES TO PRESERVE THE RIGHT TO DO SO BECAUSE FAILURE
TO COMPLY STRICTLY WITH THE PROCEDURES SET FORTH HEREIN AND THEREIN WILL
RESULT IN THE LOSS OF APPRAISAL RIGHTS.
To preserve the right to exercise dissenters' rights, a Shareholder
must: (i) deliver to Rex L. Utsler, Secretary of the Company, 633 17th
Street, Suite 400, Denver, Colorado 80202, prior to the vote of the
Shareholders to approve the merger, written notice that the Shareholder
intends to demand payment for his or her shares if the merger is consummated,
and (ii) not vote his or her shares in favor of approval of the merger. The
failure by a Shareholder to vote his or her shares at the Meeting or to
return a proxy in respect of the Special Meeting will not be deemed to be a
vote in favor of approval of the merger. However, return of a blank proxy or
a proxy directing a vote in favor of the merger will be deemed to be a vote
in favor of the merger and will constitute a waiver of the shareholder's
right to dissent from the merger.
After the merger is approved by the Company's shareholders but in no
event later than ten days after the effective time of the merger, the Company
will deliver a written notice (a "Dissenters' Notice") to all of its
shareholders who both notified the Company of their intention to dissent and
did not vote in favor of the merger, (i) stating that the merger was
authorized and the effective time of the merger (or if the merger is not yet
effective, the proposed effective time); (ii) providing the address to which
payment demands must be sent and the address at which the certificates
representing the shares of Common Stock or Preferred Stock with respect to
which dissenters' rights are being exercised must be deposited; (iii) stating
that if a record shareholder is exercising dissenters rights for a beneficial
owner, that any demand for payment in respect of such shares must be
accompanied by a certificate from the beneficial owner certifying that
dissenters' rights have been or will be timely asserted with respect to all
shares of Common
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<PAGE>
Stock or Preferred Stock owned beneficially by such beneficial shareholder
and as to which there is no limitation on such Shareholder's ability to
exercise dissenters' rights, and (iv) stating the date by which the Company
must receive the payment demand and the certificates representing the shares
of Common Stock or Preferred Stock for which dissenters' rights are being
exercised, which date shall not be less than 30 days after the Dissenters'
Notice is given.
The Dissenters' Notice shall be accompanied by a form which may be
used to demand payment and by a copy of the provisions of the UBCA governing
dissenters' rights.
A shareholder who wishes to assert dissenters' rights after
receiving a Dissenters' Notice (the "Dissenting Shareholder") must, by the
date stated in the Dissenters' Notice, (i) make a written demand for payment
for such Dissenting Shareholder's shares of Common Stock or Preferred Stock,
and (ii) deposit the certificates representing such shares as directed in the
Dissenters' Notice. A Dissenting Shareholder retains all rights of a
Shareholder, except the right to transfer his or her shares, until the
effective time of the merger. After the effective time of the merger, the
Dissenting Shareholder has only the right to receive payment for such shares.
A Shareholder who does not demand payment and deposits his or her shares by
the date stated in the Dissenters' Notice is no longer entitled to
dissenters' rights.
Upon the later of the effective time of the merger or the date of
receipt of demand for payment from a Dissenting Shareholder, the Company
shall pay to each Dissenting Shareholder who has complied with the
dissenters' rights provisions of the UCBA the amount that the Company
estimates to be the "fair value" of such Dissenting Shareholder's shares,
plus accrued interest from the effective time of the merger until the date of
payment at an annual rate equal to the rate, which is currently required by
the UBCA. Payment will be made to the address stated in the Dissenting
Shareholder's payment demand or, if none, at the address shown in the
Company's current record of shareholders. The payment will be accompanied by
(i) the Company's financial statements for its most recent fiscal year for
which financial statements have been prepared, (ii) a statement of the
Company's estimate of the "fair value" of the Dissenting Shareholder's
shares; (iii) an explanation of how the amount of interest included in the
payment was calculated; (iv) a statement of the Dissenting Shareholder's
rights if the Dissenting Shareholder is dissatisfied with the payment, and
(v) a copy of the provisions of the UBCA governing dissenters' rights.
If a Dissenting Shareholder believes that the amount paid by the
Company as the "fair value" of his or her shares is inadequate or that the
interest due to the Dissenting Shareholder has been incorrectly calculated,
the Dissenting Shareholder may notify the Company in writing within 30 days
of receipt of payment by the Company of the Dissenting Shareholder's own
estimate of the "fair value" of his or her shares and/or the amount of
interest that the Dissenting Shareholder believes to be due and may demand
payment of such amount less any payments already received by the Dissenting
Shareholder. If a Dissenting Shareholder makes such a payment demand within
the 30-day period, the Company is obligated to pay the amount demanded
unless, within 60 days of receipt of such demand, the Company and the
Dissenting Shareholders agree on the amount payable by the Company to the
Dissenting Shareholder or the Company commences a proceeding in Utah District
Court for the County of Salt Lake
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petitioning the court to determine the "fair value" of such Dissenting
Shareholder's shares and/or the amount of the interest due to the Dissenting
Shareholder.
The costs of any court proceeding to determine the amount due to a
Dissenting Shareholder, including reasonable compensation and expenses of
appraisers appointed by the court, will generally be assessed against the
Company. The court may, however, assess such costs against the Dissenting
Shareholder if the court finds that the Dissenting Shareholder acted
arbitrarily, vexatiously or not in good faith. The court may also assess fees
and expenses of counsel and experts against the Company if the Company did
not substantially comply with the dissenters' rights provisions of the UBCA
or against any party who the court finds acted arbitrarily, vexatiously or
not in good faith.
Once a Dissenting Shareholder demands payment for his or her shares,
the demand is irrevocable unless the merger is not consummated within 60 days
after the date stated in the Dissenters' Notice by which a Dissenting
Shareholder must provide the Company with a demand for payment and must
deposit his or her shares with the Company. If the merger is not consummated
by the end of the 60-day period, the Company must return any deposited shares
to the Dissenting Shareholder and deliver a new Dissenters' Notice to the
Dissenting Shareholder.
To the extent there are any inconsistencies between the foregoing
summary and the UBCA, the UBCA shall control.
FEDERAL INCOME TAX CONSEQUENCES OF EXERCISING DISSENTERS' RIGHTS. If
a Shareholder elects to exercise his or her dissenters' rights, in most
cases, the receipt of cash for shares of Common Stock or Preferred Stock may
be taxable to such Shareholder as a sale of their shares of Common Stock or
Preferred Stock, respectively. Such Shareholder should recognize gain or
loss, as the case may be, measured by the difference between the amount of
cash received and the basis of his or her Common Stock or Preferred Stock.
Such gain or loss will be capital gain or loss if such Shareholder's Common
Stock or Preferred Stock was held as a capital asset, and any such capital
gain or loss will generally be long-term capital gain or loss to the extent
such Shareholder's holding period for his or her Common Stock or Preferred
Stock exceeds twelve months. However, if a Shareholder maintains certain
business or family relationships with other Shareholders of the Company after
the exercise of their dissenters' rights, the receipt of cash for shares of
Common Stock or Preferred Stock could be treated in full as a dividend
subject to tax at the rates applicable to ordinary income. SHAREHOLDERS
CONSIDERING EXERCISING DISSENTERS' RIGHTS SHOULD CONSULT WITH THEIR OWN TAX
ADVISORS WITH REGARD TO THE TAX CONSEQUENCES OF SUCH ACTIONS.
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FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations relevant to the merger that are generally applicable to
holders of Common Stock. This discussion is based on currently existing
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
existing and proposed Treasury Regulations thereunder, and current
administrative rulings and court decisions, all of which are subject to
change. Any such change, which may or may not be retroactive, could alter the
tax consequences to the holders of Common Stock as described herein. Special
tax consequences not described below may be applicable to particular classes
of taxpayers, including financial institutions, broker-dealers, persons who
are not citizens or residents of the United States or who are foreign
corporations, foreign partnerships, or foreign estates or trusts as to the
United States, persons who will own stock of Grease Monkey (actually or
constructively, under certain constructive ownership rules in the Code) after
the merger, and holders who acquired their stock through the exercise of an
employee stock option or otherwise as compensation.
The receipt of the Cash Merger Consideration in the merger by
holders of Common Stock will be a taxable transaction for federal income tax
purposes. Each holder's gain or loss per share of Common Stock will be equal
to the difference between $1.00 and the holder's adjusted tax basis in that
particular share of the Common Stock. Such gain or loss generally will be
treated as capital gain or loss. In the case of individuals, trusts, and
estates, such capital gain will be subject to a maximum federal income tax
rate of 20% for shares of Common Stock held for more than 12 months prior to
the date of disposition.
The receipt of Cash Merger Consideration in the merger by holders of
Preferred Stock will be a taxable transaction for federal income tax
purposes. Each holder's gain or loss per share of Preferred Stock will equal
the difference between $100.00 and the holder's adjusted tax basis in that
particular share of Preferred Stock. Such gain or loss generally will be
treated as capital gain or loss. Additionally, holders of Preferred Stock
will receive an amount equal to any unpaid cumulative dividends. This amount
will be treated as ordinary income for federal tax purposes.
[Review 306 situation]
A holder of Common Stock or Preferred Stock may be subject to backup
withholding at the rate of 31% with respect to Cash Merger Consideration
received pursuant to the merger, unless the holder (a) is a corporation or
comes within certain other exempt categories and, when required, demonstrates
this fact or (b) provides a correct taxpayer identification number ("TIN"),
certifies as to no loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup withholding rules. To
prevent the possibility of backup federal income tax withholding on payments
made with respect to shares of Common Stock pursuant to the merger, each
holder must provide the Paying Agent with his correct TIN by completing a
Form W-9 or Substitute Form W-9. A holder of Common Stock who does not
provide Grease Monkey with his or her correct TIN may be subject to penalties
imposed by the Internal Revenue Service (the "IRS"), as well as backup
withholding. Any amount withheld under these rules will be creditable against
the holder's federal income tax liability. Grease Monkey (or its agent) will
report to the holders of Common Stock and the IRS the amount of any
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"reportable payments," as defined in Section 3406 of the Code, and the amount
of tax, if any, withheld with respect thereto.
THE FOREGOING TAX DISCUSSION IS INCLUDED FOR GENERAL INFORMATION
ONLY AND IS BASED UPON PRESENT LAW. THE FOREGOING DISCUSSION DOES NOT DISCUSS
TAX CONSEQUENCES UNDER THE LAWS OF STATE OR LOCAL GOVERNMENTS OR OF ANY OTHER
JURISDICTION OR TAX CONSEQUENCES TO CATEGORIES OF SHAREHOLDERS THAT MAY BE
SUBJECT TO SPECIAL RULES, SUCH AS FOREIGN PERSONS, TAX-EXEMPT ENTITIES,
INSURANCE COMPANIES, FINANCIAL INSTITUTIONS, AND DEALERS IN STOCKS AND
SECURITIES. THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE TO A SHAREHOLDER
WHO CONTINUES TO OWN STOCK OF THE COMPANY (ACTUALLY OR CONSTRUCTIVELY) AFTER
THE MERGER OR WHO ACQUIRED HIS OR HER SHARES OF THE COMPANY'S COMMON STOCK OR
PREFERRED STOCK PURSUANT TO THE EXERCISE OF STOCK OPTIONS OR OTHERWISE AS
COMPENSATION. EACH HOLDER OF COMMON STOCK OR PREFERRED STOCK SHOULD CONSULT
SUCH HOLDER'S OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE
MERGER TO SUCH HOLDER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL,
STATE, LOCAL, AND OTHER TAX LAWS AND THE POSSIBLE EFFECT OF CHANGES IN SUCH
TAX LAWS.
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PRINCIPAL SHAREHOLDERS
The following table sets forth as of September 30, 1999, the number of
shares of the Company's $0.03 par value Common Stock owned by each person who
owned of record, or was known to own beneficially, more than 5% of the number of
shares of the Company's outstanding Common Stock, sets forth the number of
shares of the Company's outstanding Common Stock beneficially owned by each of
the Company's directors, and sets forth the number of shares of the Company's
Common Stock beneficially owned by all of the Company's directors and officers
as a group:
<TABLE>
<CAPTION>
Shares Underlying Shares Underlying
Shares of Presently Presently Convertible
Common Exercisable Series C Preferred
Name of Beneficial Stock Options and Stock and Unpaid Total Percent of
Owner(1) Owned Warrants (3) Dividends(4) Ownership Class (6)
------------------------- ----- ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Rex L. Utsler(2)(5) 640,315 62,500 58,006 760,821 15.8%
Jerry D. Armstrong(2) 438,820 140,000 89,771 668,591 13.6%
James B. Wallace(2) 443,821 135,000 63,065 641,886 13.1%
Cortlandt S. Dietler(2) 55,556 30,000 21,365 106,921 2.3%
George F. Wood(2) 38,639 35,000 5,341 78,980 1.7%
Wayne H. Patterson(2) - 47,500 26,707 74,207 1.6%
Jim D. Baldwin(2) - 32,500 13,353 45,853 1.0%
All officers and directors
as a group (8 persons) 1,617,151 532,500 277,608 2,427,259 44.1%
Ray O. Brownlie(2) 442,375 100,000 63,065 605,440 12.5%
J. H. Bander(2) 407,709 100,000 63,065 570,774 11.8%
Charles E. Steinbrueck(2) 190,476 330,000 40,060 560,536 11.1%
</TABLE>
(1) All beneficial owners listed have sole voting and/or investment power with
respect to the shares shown unless otherwise indicated.
(2) The address for Rex L. Utsler is 633 17th Street, Suite 400, Denver,
Colorado 80202. The address for Messrs. Armstrong, Wallace, Brownlie and
Bander is 475 17th Street, Suite 1300, Denver, Colorado 80202. The address
for Charles E. Steinbrueck is P.O. Box 6226, Denver, Colorado 80206. The
address for Cortlandt S. Dietler is 2750 Republic Plaza, 370 Seventeenth
St., Denver, Colorado 80202. The address for George F. Wood is 55 Madison
Street, Suite 680, Denver, Colorado 80206. The address for Wayne H.
Patterson is 384 Inverness Drive South, Suite 200, Englewood, Colorado
80112. The address for Jim D. Baldwin is 706 Golf Club Drive, Castle Pines
Village, Colorado 80104.
(3) Represents shares of common stock underlying presently exercisable options
and warrants.
(4) Represents shares of common stock underlying shares of Series C Preferred
stock with a stated value of $100 per share plus accumulated unpaid
dividends, convertible into common stock at $2.50 per share.
(5) Does not include 3,100 shares held by Mr. Utsler's children, of which he
disclaims beneficial ownership.
(6) Assumes all options and warrants are exercised and all Series C Preferred
stock and accumulated dividends are converted.
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CERTAIN INFORMATION CONCERNING QL 3000 AND QL 3000 INVESTORS
QL 3000 is a Florida corporation, incorporated in September 1998 for
the purpose of acquiring Grease Monkey and other automotive fast service
lubrication and oil change centers throughout the United States. Following
the merger, all of the issued and outstanding shares of Grease Monkey will be
owned by the QL 3000 Investors: E. Chester Stokes, Jr., David C. Plyler,
Thomas C. Bergmann, Ronald E. Smith and Island Food Stores, Ltd.
Messrs. Stokes and Bergmann also are significant investors in Island
Food Stores, Ltd. ("Island") and are the directors and principal officers of
its general partner, Island Food Stores of Florida, Inc. Island owns and
operates approximately 50 convenience stores in North and Central Florida and
supplies petroleum and petroleum products to another 50 stores.
PURCHASES OF COMMON STOCK BY CERTAIN PERSONS
As of the date of this Proxy Statement, the QL 3000 Investors have
not purchased any shares of Grease Monkey capital stock.
INDEPENDENT AUDITORS
The consolidated balance sheets as of December 31, 1998 and December
31, 1997, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three year
period ended December 31, 1998, included in this Proxy Statement, have been
audited by KPMG LLP, independent auditors, as stated in their report. A
representative of KPMG LLP will be at the Special Meeting to answer
appropriate questions from shareholders and will have the opportunity to make
a statement, if so desired.
SHAREHOLDER PROPOSALS
If the merger is not consummated for any reason, proposals of
shareholders intended to be presented at the 2000 Annual Meeting of
Shareholders must be received by the Company at its principal executive
offices on or prior to December 21, 1999 to be eligible for inclusion in the
Company's Proxy Statement and form of proxy relating to that meeting.
The Company's bylaws provide that a shareholder proposal may only be
acted upon at an annual meeting of shareholders if the shareholder gives
notice to the Company of such proposal in conformity with the requirements of
the bylaws (not less than 75 days nor more than 120 days prior to the
anniversary date of the immediately preceding annual meeting); provided,
however, that if the annual meeting is scheduled to be held on a date more
than 30 days before the Anniversary Date or more than 60 days after the
Anniversary Date, a shareholders' notice shall be timely if delivered to the
Company not later than the close of business on the later of (i) the 75th day
prior to the scheduled date of such annual meeting or (ii) the 15th day
following the day on which public announcement of the date of such annual
meeting is first made by the Company. If the merger is not consummated for
any reason, the persons named as proxies for the 2000 Annual Meeting will
have discretionary voting authority with respect to any shareholder proposal
55
<PAGE>
submitted to the Company to be considered at such meeting otherwise then in
conformity with such requirements of the Company's bylaws.
OTHER MATTERS
Management knows of no other business to be presented at the Special
Meeting. If other matters do properly come before the meeting, or any
adjournment or adjournments thereof, it is the intention of the persons named
in the proxy to vote on such matters according to their best judgment unless
the authority to do so is withheld in such proxy.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the SEC by Grease Monkey (File
No. 000-9812) are incorporated by reference in this Proxy Statement: (i) the
Annual Report on Form 10-KSB for the year ended December 31, 1998; and (ii)
the Quarterly Report on Form 10-QSB for the quarter ended June 30, 1999.
All documents and reports filed by the Company with the SEC pursuant
to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act after
the date of this Proxy Statement and prior to the date of the Special Meeting
shall be deemed to be incorporated by reference in this Proxy Statement and
to be a part hereof from the respective dates of the filing of such documents
or reports.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Proxy Statement to the extent that a statement contained
herein (or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein) modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement.
A COPY OF THE COMPANY'S 1998 ANNUAL REPORT ON FORM 10-KSB AND
QUARTERLY REPORT ON FORM 10-QSB FOR THE QUARTER ENDED JUNE 30, 1999 ARE BEING
DELIVERED WITH THIS PROXY STATEMENT.
WHERE YOU CAN FIND MORE INFORMATION
Grease Monkey files annual, quarterly, and current reports, proxy
statements, and other information with the Commission. You may read and copy
any reports, statements, or other information that Grease Monkey files at the
Commission's public reference rooms in Washington, D.C., New York, New York,
and Chicago, Illinois. Please call the Commission at 1-800-SEC-0330 for
further information on the public reference rooms. Grease Monkey public
filings are also available to the public from commercial document retrieval
services and at the Internet World Wide Web site maintained by the Commission
at http://www.sec.gov. Reports, proxy statements, and other information
concerning Grease Monkey also may be inspected at the offices of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington,
D.C. 20006. The Commission allows Grease Monkey to "incorporate by reference"
information
56
<PAGE>
into this document, which means that Grease Monkey can disclose important
information to you by referring you to another document filed separately with
the Commission. The information incorporated by reference is deemed to be a
part of this document, except for any information superseded by information
contained directly in this document. This document incorporates by reference
certain documents that Grease Monkey has previously filed with the
Commission. These documents contain important business information about
Grease Monkey and its financial condition. Grease Monkey may have sent to you
some of the documents incorporated by reference, but you can obtain any of
them through Grease Monkey or the Commission or the Commission's Internet
World Wide Web site described above. Documents incorporated by reference are
available from Grease Monkey without charge, excluding all exhibits unless
specifically incorporated by reference as an exhibit to this document.
Shareholders may obtain documents incorporated by reference in this document
upon written or oral request to the following address or telephone number:
Jill Robbins
Grease Monkey Holding Corporation
633 17th Street, Suite 400
Denver, Colorado 80202
Telephone: (303) 308-1660
Grease Monkey will send any document so requested to the requesting
shareholder by first class mail or other equally prompt means within one day
of receiving such request.
57
<PAGE>
INDEX TO
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report................................................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997................................F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.....................................................F-5
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1998, 1997 and 1996...............................................F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.....................................................F-7
Notes to Consolidated Financial Statements..................................................F-9
Consolidated Statements of Operations for the Three Month and Six Month Periods
Ended June 30, 1999 and 1998 (unaudited)............................................F-29
Consolidated Balance Sheets as of June 30, 1999 and
December 31, 1998 (unaudited).......................................................F-30
Consolidated Statements of Stockholders' Equity for the Six Months
Ended June 30, 1999 (unaudited).....................................................F-32
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 (unaudited)............................................F-33
Notes to Consolidated Financial Statements (unaudited).....................................F-35
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND STOCKHOLDERS
GREASE MONKEY HOLDING CORPORATION:
We have audited the accompanying consolidated balance sheets of Grease Monkey
Holding Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Grease Monkey
Holding Corporation and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles.
KPMG LLP
Denver, Colorado
March 15, 1999,
except as to Note K, which
is as of March 27, 1999
F-2
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------
1998 1997
------------------- -------------------
<S> <C> <C>
Current Assets:
Cash.......................................................................... $ 145,470 182,214
Accounts receivable, net of allowance for doubtful
accounts of $471,571 in 1998 and $478,553 in 1997........................... 742,169 1,212,014
Current portion of notes receivable, net (Note D)............................. 60,885 318,658
Current portion of net investment in direct financing
leases (Note F)............................................................. 183,775 204,921
Inventories................................................................... 647,530 758,116
Prepaid expenses and supplies................................................. 219,635 113,648
------------------- -------------------
TOTAL CURRENT ASSETS 1,999,464 2,789,571
------------------- -------------------
Property and Equipment, (Notes E and F):
Land.......................................................................... 805,432 543,838
Buildings (including buildings under capital leases).......................... 6,859,365 6,430,000
Furniture and fixtures........................................................ 674,553 536,329
Leasehold improvements........................................................ 823,657 718,672
Machinery and equipment....................................................... 1,883,693 1,774,196
------------------- -------------------
11,046,700 10,003,035
Less accumulated depreciation................................................. (4,508,081) (3,985,940)
------------------- -------------------
NET PROPERTY AND EQUIPMENT 6,538,619 6,017,095
------------------- -------------------
Other Assets:
Net investment in direct financing leases (Note F)............................ 2,023,193 3,154,581
Notes receivable, net (Note D)................................................ 81,919 225,177
Deferred franchising costs.................................................... 113,819 189,528
Goodwill and covenants not to compete, net of accumulated
amortization of $1,373,453 in 1998 and $1,215,026 in
1997........................................................................ 2,322,422 2,688,103
Land held for development/resale.............................................. 818,300 -
Other assets, net of accumulated amortization of $70,126 in
1998 and $167,145 in 1997................................................... 314,528 333,795
------------------- -------------------
TOTAL OTHER ASSETS 5,674,181 6,591,184
------------------- -------------------
$ 14,212,264 15,397,850
=================== ===================
</TABLE>
(continued on next page)
F-3
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------
1998 1997
------------------ -------------------
<S> <C>
Current Liabilities:
Accounts payable............................................................ $ 1,674,175 1,400,633
Accrued salaries and wages.................................................. 190,982 195,787
Other accrued liabilities................................................... 377,799 371,143
Current portion of long-term obligations (Note E)........................... 1,084,617 715,289
Current portion of obligations under capital leases (Note F)................ 479,844 464,955
------------------ -------------------
TOTAL CURRENT LIABILITIES................................................. 3,807,417 3,147,807
------------------ -------------------
Long-Term Obligations (Note E)................................................ 5,418,008 3,800,082
Obligations Under Capital Leases (Note F)..................................... 5,801,910 6,848,249
Deferred Franchise Sales Revenue.............................................. 467,253 985,470
Stockholders' Equity (Deficit) (Note G):
Series C Preferred stock, stated value of $100.00 per
share, 20,896 shares issued and outstanding in 1998 and
1997...................................................................... 2,089,638 2,089,638
Common stock, par value $0.03, 20,000,000 shares
authorized, 4,647,880, and 4,633,570 shares issued and
outstanding in 1998 and 1997, respectively................................ 139,436 139,007
Capital in excess of par value.............................................. 6,328,733 6,197,880
Accumulated deficit......................................................... (9,840,131) (7,810,283)
------------------ -------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)...................................... (1,282,324) 616,242
Commitments and Contingencies (Notes F and J).................................
------------------ -------------------
$ 14,212,264 15,397,850
================== ===================
</TABLE>
See notes to the consolidated financial statements
F-4
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996
------------------ ------------------ -------------------
<S> <C> <C> <C>
Operating Revenue:
Royalty fees.................................................... $ 2,981,454 3,454,238 3,143,933
Franchise sales - center openings............................... 372,690 257,401 183,300
Product and equipment revenue................................... 658,048 777,285 776,333
Sales by Company-owned Centers.................................. 14,885,285 14,742,786 14,416,201
Leasing revenue................................................. 1,100,214 1,547,876 1,434,086
Other........................................................... 103,894 389,728 188,940
------------------ ------------------ -------------------
20,101,585 21,169,314 20,142,793
------------------ ------------------ -------------------
Operating Expenses:
Franchise costs - center openings............................... 88,243 85,822 32,843
Product and equipment costs..................................... 286,273 316,926 340,300
Company-owned Centers........................................... 12,511,322 12,690,085 12,404,772
Leasing expense................................................. 1,282,530 1,549,315 1,376,677
General and administrative expenses (Note H).................... 5,597,932 5,382,473 4,740,381
Provision for credit losses..................................... 310,708 253,368 206,221
Depreciation.................................................... 723,115 688,041 694,241
Amortization.................................................... 289,829 284,689 245,454
------------------ ------------------ -------------------
21,089,952 21,250,719 20,040,889
------------------ ------------------ -------------------
Operating income (loss)........................................... (988,367) (81,405) 101,904
------------------ ------------------ -------------------
Other income (expense):
Loss on sale/disposition/closure of centers..................... (444,725) (368,169) (83,780)
Undeveloped franchise licenses canceled......................... 202,491 - 27,563
Interest income................................................. 27,938 65,659 37,186
Interest expense (Note F)....................................... (827,185) (774,671) (659,996)
------------------ ------------------ -------------------
(1,041,481) (1,077,181) (679,027)
------------------ ------------------ -------------------
Net loss.......................................................... $ (2,029,848) (1,158,586) (577,123)
================== ================== ===================
Loss per common share (Note B).................................... $ (0.46) (0.28) (0.16)
================== ================== ===================
Weighted average shares outstanding............................... 4,646,255 4,594,083 4,361,163
================== ================== ===================
</TABLE>
See notes to the consolidated financial statements
F-5
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
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, 1995......... 20,958 $2,095,838 4,336,764 $130,103 5,773,248 (6,074,574) 1,924,615
Issuance of common stock pursuant to
employee benefit plan............. - - 40,616 1,219 45,025 - 46,244
Conversion of Series C Preferred stock
to common stock, including payment
of accumulated dividends.......... (62) (6,200) 2,480 74 5,397 - (729)
Increase in fair value of warrants
extended.......................... - - - - 54,000 - 54,000
Net loss............................. - - - - - (577,123) (577,123)
--------- --------- --------- --------- --------- --------- ---------
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 options..................... - - 30,000 900 31,663 - 32,563
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.......... - - 10,810 324 13,145 - 13,469
Issuance of common stock upon
exercise of employee
stock options..................... - - 3,500 105 1,708 - 1,813
Fair value of warrants issued........ - - - - 116,000 - 116,000
Net loss............................. - - - - - (2,029,848) (2,029,848)
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1998......... 20,896 $2,089,638 4,647,880 $139,436 6,328,733 (9,840,131) (1,282,324)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
</TABLE>
See notes to the consolidated financial statements
F-6
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................... $ (2,029,848) (1,158,586) (577,123)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Increase in deferred franchise sales
revenue.............................................. 140,000 374,500 541,400
Franchise sales revenue recognized -
center openings...................................... (372,690) (257,401) (183,300)
Increase in deferred franchising costs................. (58,536) (75,176) (111,141)
Franchise costs recognized - center
openings............................................. 74,321 85,822 32,843
Provision for credit losses............................ 310,708 253,368 206,221
Loss realized on sale/retirement of
property and equipment............................... 14,336 105,132 1,110
Depreciation and amortization.......................... 1,012,944 972,730 939,695
Loss on sale/disposition/closure of centers............ 107,266 327,850 58,421
Impairment of Asset Values............................. 723,726 26,400 -
Accrual of Consultant Agreement/
Severance Agreements................................. 240,763 357,113 -
Undeveloped franchise licenses canceled................ (202,491) - (27,563)
Fair value of warrants issued/extended................. 21,341 - 54,000
Other, net............................................. 84,861 (6,099) 380
Net change in operating assets and
liabilities:
Decrease (increase) in accounts
receivable......................................... 20,161 (582,461) (448,549)
Decrease in notes receivable......................... 53,457 76,799 8,456
Decrease (increase) in inventories................... 107,587 104,109 (153,658)
Decrease (increase) in prepaid expenses
and supplies....................................... (24,622) 11,560 30,453
Increase (decrease) in accounts payable.............. (53,750) 260,656 273,797
Increase in accrued salaries and wages
and other accrued liabilities...................... 11,239 55,591 129,666
------------- ------------- -------------
Net cash provided by operating
activities........................................ $ 180,773 931,907 775,108
------------- ------------- -------------
</TABLE>
(Continued on next page)
F-7
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from investing activities:
Principal receipts on direct financing leases.............. $ 169,562 189,926 177,656
Acquisition of centers..................................... - (688,191) (394,389)
Proceeds from sale of centers.............................. 115,450 116,901 75,354
Purchase of property and equipment......................... (404,570) (297,570) (724,861)
Notes receivable from developers........................... 190,000 225,000 (415,000)
Increase in projects in development........................ (1,594,658) (41,302) -
Decrease (increase) in other assets........................ (294,866) (219,237) 29,247
------------- ------------- -------------
Net cash used in investing activities.................... (1,819,082) (714,473) (1,251,993)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from long-term obligations........................ 2,683,100 3,045,000 1,257,000
Principal payments on long-term obligations................ (666,293) (3,316,796) (493,249)
Principal payments on capital lease
obligations.............................................. (439,362) (409,115) (348,365)
Issuance of common stock................................... 1,814 282,563 -
Payment of accumulated dividends upon
conversion of preferred stock to common
stock.................................................... - - (729)
Decrease (increase) in restricted cash..................... - 34,927 (2,694)
Increase in lease deposit obligations...................... 22,306 3,456 4,500
------------- ------------- -------------
Net cash provided by (used in)
financing activities................................... 1,601,565 (359,965) 416,463
------------- ------------- -------------
Net decrease in cash......................................... (36,744) (142,531) (60,422)
Cash, beginning of year...................................... 182,214 324,745 385,167
------------- ------------- -------------
Cash, end of year............................................ $ 145,470 182,214 324,745
------------- ------------- -------------
------------- ------------- -------------
Supplemental disclosures of cash flow
information -
Cash paid during the year for interest................... $ 1,290,328 1,226,054 1,066,840
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to the consolidated financial statements
F-8
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. DESCRIPTION OF BUSINESS
Grease Monkey Holding Corporation ("GMHC") or ("the Company")
operates, leases, manages and franchises automotive quick-service preventive
fluid maintenance Centers (Grease Monkey Centers or Centers). Grease Monkey
Centers provide the automobile user with convenient preventive fluid maintenance
services. Grease Monkey service technicians change the oil, install a new oil
filter, lubricate the chassis, adjust tire pressure, wash windows and vacuum the
interior of an automobile. At the same time, all fluid levels are checked and
topped off if necessary. Grease Monkey Centers also offer transmission fluid
changes, differential fluid changes, radiator flushes, air conditioning
recharges, automotive light bulb replacement, and oil additive packages, and
will replace air filters and install new wiper blades.
The principal markets in which Grease Monkey or its franchisees
operate include twenty-nine states and Mexico with concentrations in Arizona,
California, Colorado, Iowa, Indiana, North Carolina, New Jersey, Ohio,
Pennsylvania, South Carolina, Virginia and Washington.
The following table summarizes the number of Grease Monkey Centers in
operation at the end of the last three fiscal years:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Franchised Grease Monkey Centers............................................. 182 187 184
Company-owned Grease Monkey Centers.......................................... 33 31 31
----- ----- -----
Total Grease Monkey Centers in operation at year end......................... 215 218 215
===== ===== =====
</TABLE>
Included in Franchised Grease Monkey Centers are twenty-six Centers in 1998,
twenty-one Centers in 1997 and twenty Centers in 1996 located in Mexico. The
twenty-six Centers open at the end of 1998 are operating under a Master
Franchise Agreement for the Republic of Mexico.
F-9
<PAGE>
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The consolidated financial statements include
the accounts of Grease Monkey Holding Corporation and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been
eliminated.
LIQUIDITY - The Company has incurred losses from operations that have
increased over the past three years coupled with a decrease in cash flow from
operations for the same period. As of December 31, 1998, the Company had a
working capital deficit of $1,807,953 and total liabilities exceeded total
assets. These factors among others may indicate that the Company may not be able
to meet its obligations in a timely manner without increased cash flow from
operations, sale of non-producing assets or additional financing.
The Company has taken steps to reduce losses and generate cash flow
from operations and anticipates the sale of non-producing assets which will
generate sufficient cash flow to meet its obligations in a timely manner. Should
the Company be unable to achieve its projected level of cash flow from
operations or sell its non-producing assets, additional financing could be
necessary. The Company has entered into a merger agreement (see Note K) that
would result in the sale of the Company. As a result of the current merger
agreement, the Company is not actively investigating financing alternatives.
Should the merger not proceed, the Company believes it could obtain additional
financing, however, there can be no assurance that such financing would be
available on a timely basis or on acceptable terms.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from those estimates.
INVENTORIES - Inventories are stated at the lower of cost, determined
by the first-in, first-out (FIFO) method, or market. Inventories consist
primarily of automotive service products and promotional materials.
NET INVESTMENT IN DIRECT FINANCING LEASES AND OBLIGATIONS UNDER
CAPITAL LEASES - The Company has entered into leasing arrangements with
franchisees of Grease Monkey Centers. In some cases, the Company leases the
property from an outside party and, in turn, sublets the property to the
franchisee. Certain of these leases and subleases meet the criteria of
capitalized leases and direct financing leases. In addition, the Company leases
buildings at certain Company-owned Grease Monkey Centers. Certain of these
leases are capital leases. Capital leases are recorded at the lesser of the
building's fair market value at the inception of the lease or the net present
value of the minimum lease payments.
F-10
<PAGE>
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost,
less accumulated depreciation and amortization. Depreciation and amortization
are computed using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Buildings accounted for as
capitalized leases................. term of the lease (generally 15 to 20 years)
Buildings............................ 20 years
Furniture and Fixtures............... 10 years
Leasehold improvements............... term of the lease (generally 15 to 20 years)
Machinery and equipment.............. 3 to 10 years
</TABLE>
INTANGIBLE ASSETS - The cost of Grease Monkey Centers acquired in
excess of the fair value of tangible assets acquired at the date of acquisition
is recorded as goodwill and covenants not to compete. Goodwill is amortized on a
straight-line basis over the remaining term of the underlying lease (15-20
years). The covenants not to compete are amortized on a straight-line basis over
the period of the agreements.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF - The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount of fair value less costs to sell.
MARKETING COSTS - The Company participates in various advertising and
marketing programs, individually and in conjunction with product suppliers.
Certain of the Company's costs incurred in connection with these programs are
reimbursed. All costs related to marketing and advertising are expensed in the
period incurred.
DEVELOPMENT FEES, INITIAL FRANCHISE FEES AND RELATED FRANCHISE COSTS -
Development fees and franchise fees are deferred and recognized as franchise
sales when the Grease Monkey Centers open or the right to open has been
terminated. Incremental development costs are deferred, but not in excess of the
deferred revenue, net of the estimated cost to open the Grease Monkey Center,
and are expensed when the corresponding revenue is recognized.
ROYALTY FEES - Royalties as allowed by the franchise agreement are
accrued on a percentage of sales (ranging from 3% to 5%) as reported by
franchisees.
F-11
<PAGE>
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. During 1998, approximately $229,000 ($147,000 in 1997 and $112,000 in
1996) in estimated royalty revenue was not recognized as a result of the
non-accrual policy. The Company actively pursues collection of all receivables,
including receivables that are not recognized as income until collected.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - The allowance for doubtful accounts
is maintained at amounts the Company deems adequate to cover estimated losses on
accounts and notes receivable. In determining the level to be maintained, the
Company evaluates many factors including the franchisees' ability to pay,
historical performance, the collateral value of the franchisees' Centers and any
undeveloped franchises owned by the franchisee, and prevailing and anticipated
economic conditions.
COMPANY-OWNED CENTERS - At December 31, 1998, the Company owned 33
Grease Monkey Centers. The combined revenue and expenses (excluding
depreciation, amortization and interest expense) for those Grease Monkey Centers
operated by the Company are reported on the Consolidated Statements of
Operations as Company-owned Centers.
INCOME TAXES - The Company accounts for income taxes in accordance
with Statement of Financial Accounting Standards SFAS No. 109, ACCOUNTING FOR
INCOME TAXES (SFAS No. 109). Under the asset and liability method of SFAS No.
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS No. 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
STOCK OPTION PLANS - The Company accounts for its stock option plans
in accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations.
As such, compensation expense was recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise price. The
Company adopted the disclosure requirement of SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION and provides pro forma net income (loss) and pro forma
earnings (loss) per share disclosures for employee stock option grants made in
1995 and future years as if the fair-value-based method defined in SFAS No.
123 had been applied.
LOSS PER COMMON SHARE - Loss per common share is computed by dividing
the net loss after reduction for dividends on preferred stock ($125,378 in 1998
and 1997 and $125,766 in 1996) by the weighted average number of common shares
outstanding during each period. The effects of potentially dilutive stock
options and convertible securities outstanding were antidilutive in 1998, 1997
and 1996.
RECLASSIFICATIONS - Certain amounts in the prior year financial
statements have been reclassed to conform to the presentation adopted in the
current year.
F-12
<PAGE>
C. ACQUISITIONS
During 1998, the Company acquired three Grease Monkey Centers from
franchisees. The Company foreclosed on amounts due the Company and assumed
liabilities resulting in total consideration of $96,502 for the Centers.
During 1997, the Company acquired three Grease Monkey Centers from
franchisees. The Company paid cash and assumed liabilities for total
consideration of $1,077,456 for the Centers.
During 1996, the Company acquired seven Grease Monkey Centers from
franchisees (five foreclosed Centers and two purchased Centers). The Company
foreclosed on amounts due the Company, received a note receivable and assumed
liabilities resulting in total consideration of $260,158 for the five foreclosed
Centers, and paid cash and assumed liabilities for total consideration of
$1,604,521 for the two purchased Centers.
The results of operations of the Grease Monkey Centers acquired are
included in the accompanying Consolidated Financial Statements from the date of
acquisition. All acquisitions were recorded under the purchase method of
acquisition accounting.
F-13
<PAGE>
D. NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997
--------------- --------------
<S> <C> <C>
Notes receivable from franchisees. Interest rates ranging
from 6% to 10% at December 31, 1998. Due in
monthly installments of approximately $7,700
including interest (maturities range through February
2006). Generally collateralized by franchise rights,
property and equipment of Grease Monkey Centers,
and undeveloped licenses............................................... $ 90,296 354,694
Notes receivable from franchisees. Interest rates ranging
from 6% to 10% at December 31, 1998. Due in
monthly installments of approximately $8,000
(maturities range through February 2013). Unsecured.................. 114,365 92,339
Notes receivable from developers. Interest at 9.04%.
Monthly payments of interest only, with principal
due April 1998........................................................ - 190,000
Other notes receivable. Interest rates at 7% at
December 31, 1998 (maturities range through
February 2006)........................................................ 91,755 141,399
------------ -----------
296,416 778,432
Less allowance for uncollectible amounts................................. (153,612) (234,597)
Less current portion..................................................... (60,885) (318,658)
------------ -----------
$ 81,919 225,177
============ ===========
</TABLE>
Maturities of notes receivable (excluding the allowance for uncollectible
amounts) are as follows:
<TABLE>
<CAPTION>
Years Ended
December 31,
- -------------
<S> <C>
1999.................................................................... $ 100,056
2000.................................................................... 36,895
2001.................................................................... 25,274
2002.................................................................... 24,388
2003.................................................................... 35,327
Thereafter.............................................................. 74,476
----------------
$ 296,416
================
</TABLE>
F-14
<PAGE>
E. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1998 1997
------------------ -----------
<S> <C> <C>
Notes payable under an aggregate line of credit of
$5,000,000 with interest rates ranging from 8.04% -
9.26% plus guarantee fees, maturing at various times
through August 2007 with options to extend original
maturities for additional five-year terms under an
increased guarantee fee. Guaranteed by a motor oil
supplier with a related Master Supply Contract............................ $ 4,532,831 2,579,775
Notes payable to oil suppliers which are non-interest bearing
and amortized based on product purchases, maturing at
various times through August 2011, secured by lubrication
equipment at Grease Monkey Centers ........................................ 305,288 303,607
Notes payable with interest rates ranging from 9.5% to 10%,
maturing at various times through July 2011, secured by
mortgages on real property ................................................ 328,288 377,686
Notes payable with interest rates ranging from 7.5% to
11.5%, maturing at various times through April 2008,
secured by assets at Grease Monkey Centers ................................ 600,696 648,786
Demand notes payable with interest rates ranging from 8.5%
to 8.75% guaranteed by or owed to a related party.......................... 484,500 -
Notes payable under a line of credit of $2,000,000
guaranteed by a motor oil supplier with interest at 9%
(including a guarantee fee of 3.3%) expired in April 1998.................. - 190,000
Note payable to a former executive with an imputed
interest rate of 9%, cancelled September 1998.............................. - 230,639
Other long-term obligations................................................... 251,022 184,878
------------------ ------------------
6,502,625 4,515,371
Less current portion.......................................................... (1,084,617) (715,289)
------------------ ------------------
$ 5,418,008 3,800,082
================== ==================
</TABLE>
F-15
<PAGE>
E. LONG-TERM OBLIGATIONS (CONTINUED)
Aggregate contractual maturities of long-term obligations over the next five
years and thereafter are as follows:
<TABLE>
<S> <C>
1999........................................................ $ 1,084,617
2000........................................................ 511,361
2001........................................................ 561,100
2002........................................................ 598,439
2003........................................................ 729,429
Thereafter.................................................. 3,017,679
----------------
$ 6,502,625
================
</TABLE>
F. LEASES
The Company leases certain Grease Monkey Center sites and office space
under operating lease agreements. Lease terms range from one to twenty years.
The Company pays the property taxes, insurance, and maintenance costs related to
the leased property where applicable. Rent expense under operating leases was
$2,424,957 for 1998, $2,565,414 for 1997, and $2,524,578 for 1996.
The Company also leases additional Grease Monkey Center sites under
capital lease agreements. These sites are either sublet to franchisees or
operated as Company Centers. The typical lease period is 15 to 20 years and some
leases contain renewal options. These leases are accounted for as capital leases
and are capitalized using interest rates appropriate at the inception of each
lease.
As lessor, the Company sublets 18 sites to franchisees and third
parties. The typical sublease period coincides with the primary lease term, and
some leases contain renewal options. The franchisees or tenants pay the property
taxes, insurance and maintenance costs related to the leased property. Certain
of the subleases are accounted for as direct financing leases. In those cases
where the Company subleases only land, or the lease or sublease does not meet
the criteria for capitalization, the sublease is accounted for as an operating
lease.
F-16
<PAGE>
F. LEASES (CONTINUED)
Future minimum commitments under leasing arrangements for Grease Monkey
Centers at December 31, 1998, are as follows:
<TABLE>
<CAPTION>
Payable as Lessee Receivable as Lessor
----------------- --------------------
Years Ended Capital Operating Capital Operating
December 31, Leases Leases Leases Leases
------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
1999........................................ $ 1,163,170 1,958,882 392,180 724,257
2000........................................ 1,188,684 1,908,745 426,178 740,375
2001........................................ 1,199,170 1,814,279 420,851 701,006
2002........................................ 1,157,669 1,769,391 375,570 628,537
2003........................................ 1,151,478 1,702,958 385,250 579,910
Thereafter.................................. 4,142,517 5,712,431 1,242,717 2,227,689
-------------------- -------------------- --------------- ---------------
Total minimum commitments................... 10,002,688 14,866,686 3,242,746 5,601,774
==================== ===============
Less portion representing interest.......... (3,720,934) (1,035,778)
-------------------- ---------------
Present value of net minimum
commitments................................ 6,281,754 2,206,968
Less current portion........................ (479,844) (183,775)
-------------------- ---------------
Non-current portion......................... $5,801,910 2,023,193
==================== ===============
</TABLE>
Amounts capitalized for Centers under capital leases are included in buildings
(primarily representing Company Centers) and as the net investment in direct
financing leases (representing centers subleased to franchisees). The following
is a summary of Grease Monkey Centers under capital leases included in
buildings:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1997
---------------- -------------------
<S> <C> <C>
Buildings............................................................. $ 4,376,688 4,595,274
Less accumulated depreciation......................................... (1,744,722) (1,481,383)
------------- -------------------
$ 2,631,966 3,113,891
============= ===================
</TABLE>
Interest expense attributable to leases for Centers sublet to
franchisees is included in leasing expense. Interest expense attributable to
capital leases of Company Centers ($369,119, $369,233, and $364,041 in 1998,
1997 and 1996, respectively) is included in interest expense.
F-17
<PAGE>
G. STOCKHOLDERS' EQUITY (DEFICIT)
COMMON AND PREFERRED STOCK
On June 11, 1996, at the Annual Meeting of Shareholders, the Company's
shareholders voted to amend Article IV of the Company's Articles of
Incorporation to increase the authorized shares of common stock with a par value
of $0.03 per share to 20,000,000 shares.
On January 20, 1997, Charles E. Steinbrueck, former 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. During 1996, 62 shares of Series C Preferred stock were
converted into 2,480 shares of common stock. During 1997 and 1998, there were no
conversions of Preferred stock into common stock. As of December 31, 1998,
accumulated unpaid dividends totaled $632,324.
During 1996, the Company extended the expiration date on warrants to
purchase 500,000 shares of common stock to August 1998 as consideration for
the warrant holders agreement to cooperate in an equity and debt financing
then under consideration. The increase in the estimated fair value of the
warrants of $54,000 was recorded as an increase in stockholder's equity and
deferred offering costs. The offering costs were subsequently written off
when the proposed financing was abandoned. The warrants expired unexercised
on August 4, 1998.
As compensation for a guarantee of a standby letter of credit by
four principals of a related party in favor of the Company's landlord for its
corporate office space, the Company issued warrants to purchase 400,000
shares of its common stock for $1.05 per share. The warrants were issued in
four 100,000 increments of which 200,000 were issued to director/shareholders
of the Company and the other 200,000 to principal shareholders of the
Company. The warrants expire on August 1, 2000. The fair value of the
warrants of $116,000 was recorded as an increase in stockholder's equity and
as an other asset which will be amortized over the term of the letter of
credit which expires in February 2000.
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 1998, 1997 and 1996, the Company contributed 10,810,
33,234, and 40,616 shares to this plan at an average of $1.25, $1.36, and
$1.14 per share, respectively.
F-18
<PAGE>
G. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
STOCK COMPENSATION PLANS
At December 31, 1998, the Company has three stock-based compensation
plans. Under the terms of the 1986 and 1993 Plans, the Company may grant
incentive stock options to officers and employees on terms and conditions
determined by the Option Committee. Options are granted at an exercise price
equal to market value on the date of the grant, are exercisable immediately,
expire five years from the date of grant and expire upon termination of
employment. The 1986 Plan reserved 66,667 shares and the 1993 Plan reserved
300,000 shares for grant under the Plan. No further options can be granted
under the 1986 Plan. Under the terms of the 1994 Plan, the Company may grant
to officers, directors, consultants and employees, on terms and conditions
determined by the Option Committee, incentive stock options, cash awards,
stock bonuses or stock appreciation rights. Options granted under the 1994
Plan cannot be exercisable for more than ten years and the exercise price
must be at least 100% of the fair market value of the Company's common stock
on the date of the grant. The 1994 Plan originally reserved 500,000 shares
for grant or awards under the Plan. In June 1997, the Company's shareholders
approved an additional 500,000 shares.
On January 20, 1997, five year options to purchase 650,000 shares of
the Company's common stock at $1.31 per share were granted to Charles E.
Steinbrueck, former President and Chief Executive Officer. These options vest
upon certain performance criteria being achieved and were not granted under
the Company's qualified stock option plans. At December 31, 1998, 200,000 of
these options had vested and are accounted for under a variable basis which
requires the options to be marked-to-market based on the market price of the
Company's common stock. As of December 31, 1998, the option price had been in
excess of the market price and as such, no compensation cost has been
incurred. The remaining options to purchase 450,000 shares were cancelled
upon Mr. Steinbrueck's departure.
The Company applies APB Opinion No. 25 and the related
Interpretations in accounting for its plans. Accordingly, no compensation
cost has been recognized for its fixed stock option plans. Had compensation
cost for the Company's stock-based compensation plans been determined
consistent with FASB No. 123, the Company's net income (loss) and earnings
(loss) per share would have been reduced to the proforma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss As Reported (net of
preferred stock
dividends) $ (2,155,226) (1,283,964) (702,889)
Pro forma $ (2,281,249) (1,408,445) (750,717)
Loss per common share As Reported $ (0.46) (0.28) (0.16)
Pro forma $ (0.49) (0.31) (0.17)
</TABLE>
The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1998 and 1997; no dividend
yield; expected volatility approximating 50%; risk free interest rate of
approximately 4 and 6 percent, respectively; and expected lives of five years.
F-19
<PAGE>
G. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
A summary of the status of the Company's three fixed stock option plans
as of December 31, 1998, 1997 and 1996, and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
Shares Weighted
Outstanding Average
Shares and Exercise
Reserved Exercisable Price
------------------- ------------------ -----------------
<S> <C> <C> <C>
Balances at December 31, 1995....................... 833,333 536,666 $ 1.79
Granted........................................... - 182,200 1.07
Cancelled......................................... - (52,633) 1.62
Expired........................................... (133) - -
---------------- ------------------ -----------------
Balances at December 31, 1996....................... 833,200 666,233 1.60
Additional shares reserved........................ 500,000 - -
Granted........................................... - 100,000 1.31
Exercised......................................... (30,000) (30,000) 1.09
Cancelled......................................... - (103,634) 1.75
Expired........................................... (10,000) - -
---------------- ------------------ -----------------
Balances at December 31, 1997....................... 1,293,200 632,599 1.56
Granted........................................... - 430,000 1.38
Exercised......................................... (3,500) (3,500) 1.06
Cancelled......................................... - (204,833) 1.37
---------------- ------------------ -----------------
Balances at December 31, 1998....................... 1,289,700 854,266 $ 1.51
================ ================== =================
1998 1997
---------------- ------------------
Weighted-average fair value of options
granted during the year........................... $0.47 $0.66
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
----------------------------------------------------------------------------------
Weighted-
Number Average
Outstanding and Remaining Weighted-
Range of Exercisable at Contractual Average
Exercise Prices 12/31/98 Life Exercise Price
- ----------------------- ----------------------- ---------------------- --------------------
<S> <S> <S> <S>
$1.06 - 1.17 131,700 2.63 years $1.07
1.31 - 1.38 335,000 4.23 years 1.36
1.59 - 1.75 317,566 1.57 years 1.71
2.22 70,000 1.30 years 2.22
-----------------------
1.06 - 2.22 854,266 2.21 years 1.51
=======================
</TABLE>
F-20
<PAGE>
H. GENERAL AND ADMINISTRATIVE EXPENSES
The following is a summary of general and administrative expenses:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------------
1998 1997 1996
----------------- ------------------ ------------------
<S> <C> <C> <C>
Salaries, wages and personnel
expenses.................................. $ 2,121,976 2,213,725 2,007,997
Travel and entertainment
expenses.................................. 307,389 374,665 375,460
Office expenses............................. 601,027 631,059 648,552
Franchise development and
training expenses......................... 163,372 121,467 48,555
Franchise sales and promotional
expenses.................................. 56,084 98,875 90,276
Terminated projects......................... 367,156 12,644 206,469
Litigation, including legal fees
and related costs......................... 246,587 137,612 344,139
Professional fees - legal, tax and
accounting................................ 261,281 233,910 145,733
Company-owned Centers division
overhead.................................. 693,941 819,150 678,476
Loss on sale of assets/asset
impairment................................ 60,618 65,490 1,110
Consultant agreement/severance
expenses.................................. 314,825 459,420 -
Other....................................... 403,676 214,456 193,614
-------------- ------------------ ------------------
Total general and
administrative expenses................. $ 5,597,932 5,382,473 4,740,381
============== ================== ==================
</TABLE>
F-21
<PAGE>
I. INCOME TAXES
In 1998, 1997 and 1996, the deferred tax benefit that otherwise would
have been provided for was offset by an increase in the valuation allowance of
$693,000, $447,000 and $184,000, respectively.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1998 and 1997, are presented below:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accounts and notes receivable, principally due to the allowance
for doubtful accounts.......................................................... $ 91,000 143,000
Property and equipment, principally due to differences in basis
and depreciation............................................................... 664,000 630,000
Goodwill......................................................................... 273,000 247,000
Deferred franchise sales revenue, due to deferral for financial
reporting purposes............................................................. 175,000 370,000
Other............................................................................ 307,000 211,000
Net operating loss carry-forwards................................................ 2,304,000 1,548,000
------------ -----------
Total gross deferred tax assets...........................................
3,814,000 3,149,000
Less valuation allowance......................................................... (3,771,000) (3,078,000)
------------ -----------
Net deferred tax assets................................................... 43,000 71,000
------------ -----------
Deferred tax liabilities:
Deferred franchising costs, due to deferral for financial reporting
purposes....................................................................... (43,000) (71,000)
------------ -----------
Total gross deferred tax liabilities...................................... (43,000) (71,000)
------------ -----------
Net deferred tax liability....................................................... $ - -
============ ===========
</TABLE>
The valuation allowance as of December 31, 1998 and 1997 represents
deferred tax assets that, based on the Company's earnings history and
uncertainty regarding the timing of recognition, may not be realized.
The Company has net operating loss carry-forwards at December 31,
1998, of approximately $6,100,000 for income tax purposes. The net operating
loss carry-forwards expire between 2002 and 2013. As a result of change in
control of the Company in March of 1991, these net operating losses are
restricted in their use pursuant to the Internal Revenue Service Regulations.
F-22
<PAGE>
I. INCOME TAXES (CONTINUED)
The Company had deducted approximately $1,692,000 related to the
exercise of non-qualified stock options from 1987 to 1989, which is included
in the net operating loss carry-forward for income tax purposes. If the
$1,692,000 in deductions are realized, the tax benefit will be credited to
capital in excess of par value.
J. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
On December 15, 1998, a demand for arbitration was made against the
Company by Navfam, Inc. based upon the Company's alleged breach of a Software
License Agreement dated April 7, 1998. That matter is governed by the
American Arbitration Association in Los Angeles, California, and has been
assigned Case No. 72Y1140138198. Unspecified damages have been claimed by
Navfam, Inc. in excess of $250,000. In response to the arbitration demand,
the Company has specifically denied Navfam, Inc.'s claim.
On September 16, 1998, a lawsuit was filed against the Company by
Barrett Commercial, Inc. in the United States District Court for the Central
District of California, BARRETT COMMERCIAL, INC. V. GREASE MONKEY
INTERNATIONAL, INC., No. SACV 98-1123GLT(EEx). In that action, Barrett
alleges the existence of a contract with the Company to work as development
partners in Southern California for the purpose of building ten stores.
Barrett claims unsubstantiated losses of $1,300,000 for expenditures made in
pursuing that development which was never completed. Barrett claims the
Company is in breach of the alleged agreement as a result of its refusal to
reimburse it for those alleged expenditures.
The Company has generally denied those claims and believes and has
asserted that they are frivolous and groundless. Barrett has been unable to
produce the alleged contract and the Company believes none was ever created.
In addition, the Company believes Barrett lacks any evidence to support his
claim of the alleged expenditures pursuant to the Southern California
development. The Company intends to defend vigorously said claims and its
liability exposure at the present time appears to be nominal. We believe the
likelihood of an unfavorable outcome in this matter is remote.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect
on the Company's consolidated financial position, results of operations or
liquidity.
FINANCIAL GUARANTEES
The Company has guaranteed leases of four franchisees. At December
31, 1998, the aggregate contingent liability under the lease guarantees
totaled approximately $1,319,000. In addition, the Company has guaranteed
notes payables of two franchisees totaling approximately $750,000 and has
guaranteed notes payable to oil suppliers for certain franchisees.
The Company is committed to the lease of office and training
facilities under a lease expiring in November 2008. Rent under the lease is
approximately $18,000 per month.
F-23
<PAGE>
J. COMMITMENTS AND CONTINGENCIES (CONTINUED)
THE YEAR 2000 ISSUE
THE PROBLEM
The Year 2000 issue is the result of the inability of hardware,
software and control systems to correctly identify two-digit references to
specific years, beginning with the Year 2000. This could result in system
failures or miscalculations causing disruptions of the Company's operations
and the Company's suppliers.
STATE OF READINESS
The Company has instituted a Year 2000 project. The project includes
an evaluation of its computer systems and significant software programs. This
evaluation includes the Company's network hardware and software,
Point-of-Sale hardware and software at the Company-owned Centers and
accounting and business process software. The Company has developed an
implementation plan to replace the systems noted in its evaluation that did
not appear to be Year 2000 compliant.
As part of the Company's Year 2000 project, the Company plans to
contact its significant third party suppliers, such as its oil and parts
suppliers, to determine the extent to which the Company is vulnerable to its
suppliers' failure to remediate their Year 2000 issues. However, the Company
cannot assure that third-party suppliers will adequately address their Year
2000 issues or that failure of the third-party suppliers to address their
Year 2000 issues would not have a material adverse effect on the Company or
its operations.
In addition, the Company has commenced initial communication with
its franchisees to determine the extent to which the Company is vulnerable to
the franchisees' failure to remediate their Year 2000 issues. However, the
Company cannot assure that the franchisees will adequately address their Year
2000 issues or that failure of the franchisees to address their Year 2000
issues would not have a material adverse effect on the Company or its
operations.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES
Expenditures through December 31, 1998, have been minimal. Based
upon the findings at December 31, 1998, the Company's estimated costs of
becoming Year 2000 compliant are less than $150,000.
THE RISKS ASSOCIATED WITH THE COMPANY'S YEAR 2000 ISSUES
The Company's failure to resolve Year 2000 issues on or before
December 31, 1999, could result in system failures or miscalculation causing
disruption in operations and normal business activities. Additionally,
failure to timely remediate Year 2000 issues by third parties upon whom the
Company's business relies could result in disruptions in the Company's supply
of parts and materials or result in other problems related to the Company's
daily operations.
F-24
<PAGE>
J. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONTINGENCY PLAN
The Company is currently working on a contingency plan for all critical
aspects of the Year 2000 issues.
K. SUBSEQUENT EVENT
Effective March 26, 1999, the Company entered into a merger
agreement with QL 3000, Inc., a privately held company. The merger agreement
provides that each shareholder of the Company will receive $1 per outstanding
share of common stock and each preferred shareholder will receive the stated
value of their preferred stock in addition to all applicable unpaid
dividends. The completion of the merger agreement is subject to QL 3000, Inc.
obtaining appropriate financing for the acquisition, in addition to
regulatory and shareholder approval. Should the merger agreement be
consumated, the Company would incur approximately $270,000 of transaction
costs.
F-25
<PAGE>
L. SEGMENT INFORMATION
The Company operates in two principal business segments: the Company
owns and operates automotive quick-service preventive fluid maintenance Centers,
and additionally, franchises automotive quick-service preventive fluid
maintenance Centers. The accounting policies of the two segments are the same as
those described in the summary of significant accounting policies. Franchise
operations includes all corporate overhead costs. Each segment is managed
separately and is evaluated based on profit or loss from operations before
income taxes.
Information on the Company's business segments is as follows:
<TABLE>
<CAPTION>
For the years ended December 31:
1998 1997 1996
----------------- ----------------- ------------------
<S> <C> <C> <C>
Operating revenues:
Franchise and Corporate operations.................... 5,216,300 6,426,528 5,726,592
Company-owned Center operations....................... 14,885,285 14,742,786 14,416,201
----------------- ----------------- ------------------
Total Operating Revenues....................... 20,101,585 21,169,314 20,142,793
================= ================= ==================
Net interest expense:
Franchise and Corporate operations.................... (47,116) (55,912) (35,349)
Company-owned Center operations....................... (752,131) (653,100) (587,461)
----------------- ----------------- ------------------
Total Net Interest Expense..................... (799,247) (709,012) (622,810)
================= ================= ==================
Depreciation and amortization:
Franchise and Corporate operations.................... 175,494 148,071 148,688
Company-owned Center operations....................... 837,450 824,659 791,007
----------------- ----------------- ------------------
Total Depreciation and Amortization............ 1,012,944 972,730 939,695
================= ================= ==================
Net income (loss):
Franchise and Corporate operations.................... (2,118,245) (914,382) (531,608)
Company-owned Center operations....................... 88,397 (244,204) (45,515)
----------------- ----------------- ------------------
Total Net Income (loss)........................ (2,029,848) (1,158,586) (577,123)
================= ================= ==================
At December 31:
Identifiable Assets
Franchise and Corporate operations.................... 5,260,678 6,522,163 6,964,094
Company-owned Center operations....................... 8,951,586 8,875,687 8,253,029
----------------- ----------------- ------------------
Total Assets................................... 14,212,264 15,397,850 15,217,123
================= ================= ==================
</TABLE>
F-26
<PAGE>
M. 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>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------
1998 1997 1996
----------------- ------------------ -------------------
<S> <C> <C> <C>
Acquisition of Centers:
Number of Centers purchased ........................ - 3 2
================= ================== ===================
Number of Centers foreclosed........................ 3 - 5
================= ================== ===================
Receivables applied (net of related
allowance)........................................ $ 83,843 18,430 251,328
Liabilities assumed................................. 83,159 370,835 1,218,962
Loss on foreclosure................................. (70,500) - -
Cash paid .......................................... - 688,191 394,389
----------------- ------------------ -------------------
Cost of assets acquired............................. $ 96,502 1,077,456 1,864,679
================= ================== ===================
Sales:
Number of Centers refranchised/closed............... 3 6* 5
================= ================== ===================
Cash received....................................... $ 115,450 116,901 75,354
Notes received/accounts receivable
granted........................................... 15,769 26,800 124,777
Liabilities assumed by purchaser.................... - 40,875 39,750
Loss on sale........................................ 36,767 327,850 58,421
Operating and marketing subsidies
granted to purchaser.............................. - - (97,750)
Franchise fees...................................... - 14,000 28,000
Franchise costs..................................... - - (5,000)
----------------- ------------------ -------------------
Net book value of Centers
refranchised/closed............................. $ 167,986 526,426 223,552
================= ================== ===================
</TABLE>
* Includes one Center which was originally developed to be a
Company-owned Center, but was sold to a franchisee prior to opening.
During the year ended December 31, 1998, there were the following
non-cash transactions: the Company issued 10,810 shares of stock at an average
value of $1.25 per share in accordance with its matching requirement under the
Company's 401(k) plan; a franchise license in the amount of $10,000, net of
deferred costs of $2,173, 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; a franchisee abandoned two sites, resulting in two direct
financing leases being cancelled and two capital lease buildings being recorded
for an aggregate amount of $447,384; subsequently, one site was re-sublet to a
third party resulting in a direct financing lease replacing the previously
recorded building, less accumulated
F-27
<PAGE>
M. SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION (CONTINUED)
depreciation; and the Company wrote off two direct financing lease receivables
and the corresponding capital lease obligations of $614,412 based on the Company
being released from the leases.
During the year ended December 31, 1997, there were the following
non-cash transactions: the Company issued 33,234 shares of stock at an average
value of $1.36 per share in accordance with its matching requirement under the
Company's 401(k) plan; the Company wrote off 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; a capital lease obligation of $386,045 was recorded; and a direct
financing lease receivable and the corresponding capital lease obligation of
$83,619 was written off based on the sale of the related Center to a third
party. As a result of the sale, the landlord reduced the Company's obligation
from a primary lessor to a guarantor.
During the year ended December 31, 1996, there were the following
non-cash transactions: the Company issued 40,616 shares of stock at an average
value of $1.14 per share in accordance with its matching requirement under the
Company's 401(k) plan; the Company entered into a settlement agreement with a
franchisee, who owned two Centers, whereby $109,439 of receivables, $7,000 of
lease deposits and one undeveloped license of $16,312 were exchanged for a
non-interest bearing note receivable discounted to $86,127 upon the sale of the
Centers to a new franchisee; franchise licenses in the amount of $15,392, net of
deferred costs of $2,222, were canceled and applied to franchisees' obligations
to the Company; a parcel of land and a building were transferred from Real
Estate Held for Sale to Property and Equipment; and a capital lease obligation
of $368,000 was recorded for a Company-owned Center.
N. RELATED PARTY TRANSACTIONS
On February 5, 1997, the Company entered into a Consultant Agreement
with Rex L. Utsler. The original term of the Agreement was from March 4, 1997
through March 3, 1999. The agreement required Mr. Utsler to perform such duties
and services as may be assigned to him from time to time at the direction of the
Company. For these services, Mr. Utsler was paid a fee of $16,071 per month, was
reimbursed for his expenses incurred on behalf of the Company and received
medical benefits provided generally to the Company's employees. When Mr. Utsler
returned to the Company as President, Chief Operating Officer and Director, the
Agreement was amended. The monthly consulting fees of $16,071 were suspended.
The remaining, unpaid consulting fees from the period September 19, 1998 through
March 3, 1999, totaling approximately $86,000, will convert to severance
payments in the event of any change in the employment relationship between Mr.
Utsler and Grease Monkey Holding Corporation, including a change in control of
Grease Monkey Holding Corporation. In addition, Mr. Utsler will accrue one month
of additional severance pay effective beginning September 18, 1998, for each
month of employment as President and Chief Operating Officer, to a maximum
severance compensation of 24 months' pay.
During 1998, the Company borrowed a total of $409,000 from a related
party whose principals are directors and/or shareholders of Grease Monkey
Holding Corporation. The notes are due upon demand and bear interest at one
percent over the Bank National Association Reference Rate. At December 31, 1998,
these rates varied from 8.5 to 8.75 percent. During 1998, the Company expensed
$16,330 in interest, all of which was accrued at December 31, 1998. In addition,
this related party guaranteed a note payable with a bank in the amount of
$75,500.
F-28
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ---------------------------------
1999 1998 1999 1998
--------------- -------------- --------------- --------------
<S> <C> <C> <C> <C>
Operating Revenue:
Royalty fees..........................................$ 738,321 777,514 1,411,414 1,519,797
Franchise sales - center openings..................... 35,500 173,600 82,460 173,600
Product and equipment revenue......................... 116,925 185,978 230,728 366,907
Sales by Company-owned Centers........................ 4,175,414 3,755,906 7,989,365 7,454,780
Leasing revenue....................................... 207,929 299,290 435,760 627,989
Other................................................. 19,565 21,903 37,941 40,819
-------------- -------------- --------------- ---------------
5,293,654 5,214,191 10,187,668 10,183,892
-------------- -------------- --------------- ---------------
Operating Expenses:
Franchise costs - center openings..................... 11,476 36,926 17,642 42,426
Product and equipment costs........................... 23,891 87,336 66,248 169,929
Company-owned Centers................................. 3,267,544 3,096,877 6,401,385 6,264,587
Leasing expense....................................... 283,008 339,979 558,240 696,615
General and administrative expenses................... 1,039,227 1,390,481 1,940,108 2,663,385
Provision for credit losses........................... 29,890 49,165 73,393 91,665
Depreciation.......................................... 188,699 172,344 366,712 338,093
Amortization.......................................... 75,421 72,439 148,691 143,772
-------------- -------------- --------------- ---------------
4,919,156 5,245,547 9,572,419 10,410,472
-------------- -------------- --------------- ---------------
Operating income (loss)................................. 374,498 (31,356) 615,249 (226,580)
-------------- -------------- --------------- ---------------
Other income (expense):
Gain (loss) on sale/disposition/closure of centers.... 21,461 (5,431) 11,549 (55,943)
Undeveloped franchise licenses canceled............... 17,944 - 17,944 31,983
Interest income....................................... 5,961 10,085 9,508 21,320
Interest expense...................................... (218,446) (212,223) (461,018) (425,940)
-------------- -------------- --------------- ---------------
(173,080) (207,569) (422,017) (428,580)
-------------- -------------- --------------- ---------------
Net income (loss).......................................$ 201,418 (238,925) 193,232 (655,160)
============== ============== =============== ===============
Earnings (loss) per common share (Note 6)...............$ 0.04 (.06) 0.03 (.15)
============== ============== =============== ===============
Earnings (loss) per common share assuming dilution
(Note 6)..............................................$ 0.03 (.06) 0.03 (.15)
============== ============== =============== ===============
Weighted average shares outstanding..................... 4,684,377 4,647,409 4,667,914 4,644,623
============== ============== =============== ===============
</TABLE>
F-29
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash.................................................................$ 281,194 145,470
Accounts receivable, net of allowance for
doubtful accounts of $551,029 at June 30, 1999,
and $471,571 at December 31, 1998.................................. 707,992 742,169
Current portion of notes receivable, net............................. 55,933 60,885
Current portion of net investment
in direct financing leases......................................... 208,951 183,775
Inventories.......................................................... 636,217 647,530
Prepaid expenses and supplies........................................ 165,530 219,635
-------------- -------------
TOTAL CURRENT ASSETS............................................... 2,055,817 1,999,464
-------------- -------------
Property and Equipment:
Land................................................................. 708,838 805,432
Buildings (including buildings under capital leases)................. 6,816,041 6,859,365
Furniture and fixtures............................................... 531,784 674,553
Leasehold improvements............................................... 814,075 823,657
Machinery and equipment ............................................. 1,908,122 1,883,693
-------------- -------------
10,778,860 11,046,700
Less accumulated depreciation and
amortization....................................................... (4,389,727) (4,508,081)
-------------- -------------
NET PROPERTY AND EQUIPMENT......................................... 6,389,133 6,538,619
-------------- -------------
Other Assets:
Net investment in direct financing leases............................ 1,781,098 2,023,193
Notes receivable, net................................................ 81,260 81,919
Deferred franchising costs........................................... 91,121 113,819
Goodwill and covenants not to compete, net of
accumulated amortization of $1,464,325 at June 30,
1999, and $1,373,453 at December 31, 1998.......................... 2,319,829 2,322,422
Land held for development/resale..................................... 804,937 818,300
Other assets, net of accumulated
amortization of $102,575 at June 30, 1999,
and $70,126 at December 31, 1998................................... 248,179 314,528
-------------- -------------
TOTAL OTHER ASSETS................................................. 5,326,424 5,674,181
-------------- -------------
$ 13,771,374 14,212,264
============== =============
</TABLE>
F-30
(continued on next page)
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable.....................................................$ 1,297,184 1,674,175
Accrued salaries and wages........................................... 223,578 190,982
Other accrued liabilities............................................ 364,908 377,799
Current portion of long-term obligations............................. 1,066,390 1,084,617
Current portion of obligations
under capital leases............................................... 523,405 479,844
--------------- -------------
TOTAL CURRENT LIABILITIES.......................................... 3,475,465 3,807,417
--------------- -------------
Long-term Obligations.................................................. 5,454,868 5,418,008
Obligations Under Capital Leases....................................... 5,528,677 5,801,910
Deferred Franchise Sales Revenue....................................... 370,193 467,253
Stockholders' Deficit:
Series C Preferred stock, stated value of $100.00 per
share, 20,896 shares issued and outstanding at June
30, 1999 and December 31, 1998..................................... 2,089,638 2,089,638
Common stock, par value $.03, 20,000,000
shares authorized, 4,690,518 and 4,647,880,
shares issued and outstanding at June 30,
1999 and December 31, 1998, respectively........................... 140,716 139,436
Capital in excess of par value....................................... 6,358,716 6,328,733
Accumulated deficit.................................................. (9,646,899) (9,840,131)
--------------- -------------
TOTAL STOCKHOLDERS' DEFICIT...................................... (1,057,829) (1,282,324)
Commitments and Contingencies (Note 5)...............................
--------------- -------------
$ 13,771,374 14,212,264
=============== =============
</TABLE>
F-31
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(UNAUDITED)
<TABLE>
<CAPTION>
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, 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............................ - - 10,810 324 13,145 - 13,469
Issuance of common stock upon
exercise of employee stock
options......................... - - 3,500 105 1,708 - 1,813
Fair value of warrants issued..... - - - - 116,000 - 116,000
Net loss.......................... - - - - - (2,029,848) (2,029,848)
------------ ------------ ------------ ----------- ------------ ----------- ------------
Balance at December 31, 1998...... 20,896 2,089,638 4,647,880 139,436 6,328,733 (9,840,131) (1,282,324)
Issuance of common stock
pursuant to employee benefit
plan............................ - - 42,638 1,280 29,983 - 31,263
Net income........................ - - - - - 193,232 193,232
------------ ------------ ------------ ----------- ------------ ---------- ----------
Balance at June 30, 1999.......... 20,896 $2,089,638 4,690,518 $140,716 6,358,716 (9,646,899) (1,057,829)
============ ============ == ========= =========== ============ ========== ==========
</TABLE>
F-32
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------------------
1999 1998
-------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss).....................................................$ 193,232 (655,160)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Increase in deferred franchise sales revenue...................... 8,400 89,800
Franchise sales revenue recognized-center openings................ (82,460) (173,600)
Increase in deferred franchising costs............................ - (40,506)
Franchise costs recognized - center openings...................... 17,642 36,926
Provision for credit losses....................................... 73,393 91,665
Loss realized on sale/retirement of property and
equipment........................................................ 2,743 4,263
Depreciation and amortization..................................... 515,403 481,865
Undeveloped franchise licenses canceled........................... (17,944) (31,983)
Loss on sale/disposition/closure of centers....................... 10,694 36,767
Fair value of warrants issued..................................... 43,722 -
Other, net........................................................ 125 86,448
Net change in operating assets and liabilities:
Increase in accounts receivable................................. (55,557) (44,210)
Decrease in notes receivable.................................... 55,955 42,596
Decrease in inventories......................................... 22,199 3,870
Decrease (increase) in prepaid expenses and
supplies....................................................... 10,511 (104,351)
Increase (decrease) in accounts payable......................... (376,989) 145,908
Increase in accrued salaries and wages
and other liabilities......................................... 50,966 46,192
------------ ---------------
Net cash provided by operating activities.........................$ 472,035 16,490
------------ ---------------
</TABLE>
F-33
(continued on next page)
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Cash flows from investing activities:
Principal receipts on direct financing leases.........................$ 83,296 88,881
Proceeds from sale of property and equipment.......................... 89,009 -
Proceeds from sale of centers......................................... - 115,450
Purchase of property and equipment.................................... (170,126) (129,538)
Decrease (increase) in projects and development....................... 13,363 (1,062,932)
Decrease (increase) in other assets................................... 28,336 (149,437)
------------- --------------
Net cash provided by (used in) investing activities............. 43,878 (1,137,576)
------------- --------------
Cash flows from financing activities:
Proceeds from long-term obligations................................... 181,400 1,533,200
Principal payments on long-term obligations........................... (330,516) (286,389)
Principal payments on capital lease obligations....................... (232,598) (216,131)
Issuance of common stock.............................................. - 1,814
Increase in restricted cash........................................... - (25,000)
Increase in lease deposit obligations................................. 1,525 2,392
------------- --------------
Net cash provided by (used in) financing activities............. (380,189) 1,009,886
------------- --------------
Net increase (decrease) in cash......................................... 135,724 (111,200)
Cash, beginning of period............................................... 145,470 182,214
------------- --------------
Cash, end of period.....................................................$ 281,194 71,014
============= ==============
Supplemental disclosures of cash flow
information -
Cash paid during the period for interest............................$ 641,329 639,036
============= ==============
</TABLE>
F-34
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles
for interim financial reporting and Securities and Exchange Commission
regulations. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principals have been condensed or omitted pursuant
to such rules and regulations.
In the opinion of management, the financial statements reflect all
adjustments of a normal and recurring nature which are necessary to
present fairly the financial position, results of operations and cash
flows for the interim periods. These financial statements should be
read in conjunction with the Annual Report of Grease Monkey Holding
Corporation (the "Company") on Form 10- KSB for the year ended December
31, 1998.
The results for the three-month and six-month periods ended June 30,
1999, are not necessarily indicative of the results to be expected for
the entire fiscal year of 1999.
2. LIQUIDITY
Prior to the three and six month periods ended June 30, 1999, the
Company had incurred losses from operations that have increased over
the past three fiscal years coupled with a decrease in cash flow from
operations for the same period. As of June 30, 1999, the Company had a
working capital deficit of $1,419,648 and total liabilities exceeded
total assets. These factors among others may indicate that the Company
may not be able to meet its obligations in a timely manner without
increased cash flow from operations, sale of non-producing assets or
additional financing.
As noted in the results of operations for the six months ended June 30,
1999, the Company has taken steps to reduce losses and generate cash
flow from operations and anticipates the sale of non-producing assets
which will generate sufficient cash flow to meet its obligations in a
timely manner. Should the Company be unable to achieve its projected
level of cash flow from operations or sell its non-producing assets,
additional financing could be necessary. The Company has entered into a
merger agreement that would result in the sale of the Company. As a
result of the current merger agreement, the Company is not actively
investigating financing alternatives. Should the merger not proceed,
the Company believes it could obtain additional financing, however,
there can be no assurance that such financing would be available on a
timely basis or on acceptable terms.
3. MERGER AGREEMENT WITH QL 3000, INC.
Effective March 26, 1999, the Company entered into a merger agreement
with QL 3000, Inc., a privately held company. The merger agreement (as
amended on August 5, 1999) provides that each shareholder of the
Company will receive $1 per outstanding share of common stock and each
preferred shareholder will receive the stated value of their preferred
stock in addition to all applicable unpaid dividends. The completion of
the merger agreement is subject to QL 3000, Inc. obtaining appropriate
financing for the acquisition, in addition to regulatory and
shareholder
(continued)
F-35
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
approval. Should the merger agreement be consummated, the Company
would incur approximately $345,000 of transaction costs.
4. STOCKHOLDERS' EQUITY (DEFICIT)
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, 1999, accumulated unpaid dividends totaled $694,498.
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 1999 and 1998, the
Company contributed 42,638 and 10,735 shares to this plan at an average
of $0.73 and $1.25 per share, respectively.
5. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
On May 26, 1999, Hernando and Patricia Cortina, franchisees of the
Company, filed an action against the Company in the Federal District
Court, Mexico City, Mexico, CORTINA GONZALEZ HERNANDO AND PATRICIA
HERNANDEZ JUNGUERA DE CORTINA V. GREASE MONKEY INTERNATIONAL, INC.,
Case No. 582/98. The complaint asserts that the Company breached the
Cortina's franchise agreement by providing false financial projections
based on unrealistic assumptions as to car counts, providing building
plans inappropriate for constructing a GREASE MONKEY Center in Mexico
City, failing to provide adequate initial and ongoing training, failing
to provide equipment maintenance support, failing to update technical
manuals and software and failing to provide sufficient on-going
marketing and consulting support. The Cortinas' seek damages in the
amount of $4,678,464 and moral damages. Based on the arbitration and
venue provisions of the franchise agreement, the Company intends to
move for dismissal of the action and to seek to require the Cortinas'
to arbitrate their claims in Denver, Colorado. In addition, the Company
intends to deny the claims and to vigorously defend this action.
On December 15, 1998, a demand for arbitration was made against the
Company by Navfam, Inc. based upon the Company's alleged breach of a
Software License Agreement dated April 7, 1998. That matter is governed
by the American Arbitration Association in Los Angeles, California, and
has been assigned Case No. 72Y1140138198. Unspecified damages have been
claimed by Navfam, Inc. in excess of $250,000. In response to the
arbitration demand, the Company has specifically denied Navfam, Inc.'s
claim.
(continued)
F-36
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
On September 16, 1998, a lawsuit was filed against the Company by
Barrett Commercial, Inc. in the United States District Court for the
Central District of California, BARRETT COMMERCIAL, INC. V. GREASE
MONKEY INTERNATIONAL, INC., No. SACV 98-1123GLT(EEx). In that action,
Barrett alleges the existence of a contract with the Company to work as
development partners in Southern California for the purpose of building
ten stores. Barrett claims unsubstantiated losses of $1,300,000 for
expenditures made in pursuing that development which was never
completed. Barrett claims the Company is in breach of the alleged
agreement as a result of its refusal to reimburse it for those alleged
expenditures.
The Company has generally denied those claims and believes and has
asserted that they are frivolous and groundless. Barrett has been
unable to produce the alleged contract and the Company believes none
was ever created. In addition, the Company believes Barrett lacks any
evidence to support his claim of the alleged expenditures pursuant to
the Southern California development. The Company intends to defend
vigorously said claims and its liability exposure at the present time
appears to be nominal. The Company believes the likelihood of an
unfavorable outcome in this matter is remote.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a
material adverse effect on the Company's consolidated financial
position, results of operations or liquidity.
FINANCIAL GUARANTEES
The Company has guaranteed leases of four franchisees. The aggregate
contingent liability under the lease guarantees totals approximately
$1,300,000. In addition, the Company has guaranteed notes payables of
two franchisees totaling approximately $750,000 and has guaranteed
notes payable to oil suppliers for certain franchisees.
The Company is committed to the lease of office and training facilities
under a lease expiring in November 2008. Rent under the lease is
approximately $18,000 per month.
(continued)
F-37
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
6. EARNINGS (LOSS) PER SHARE
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. The
following is a reconciliation between the basic and diluted earnings
(loss) per common share.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
------------------------------------------------------------------------------------
JUNE 30, 1999 JUNE 30, 1998
INCOME INCOME
(LOSS) EPS SHARES (LOSS) EPS SHARES
------------ ------------ ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income (loss) 201,418 (238,925)
Preferred
dividends (31,259) (31,259)
------------ ------------ ------------ ------------ ----------- -----------
Basic EPS 170,159 .04 4,684,377 (270,184) (.06) 4,647,409
Effects of dilutive
securities:
Common stock
equivalents
Convertible
Preferred Stock 31,259 1,101,151
------------ ------------ ------------ ------------ ----------- -----------
Diluted EPS 201,418 .03 5,785,528 (270,184) (.06) 4,647,409
============ ============ ============ ============ =========== ===========
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------------------------------------------------------------------
JUNE 30, 1999 JUNE 30, 1998
INCOME INCOME
(LOSS) EPS SHARES (LOSS) EPS SHARES
------------ ------------ ------------ ----------- ----------- ------------
Income (loss) 193,232 (655,160)
Preferred
dividends (62,174) (62,174)
------------ ------------ ------------ ----------- ----------- ------------
Basic EPS 131,058 .03 4,667,914 (717,334) (.15) 4,644,623
Effects of dilutive
securities:
Common stock
equivalents
Convertible
Preferred Stock 62,174 1,088,785
------------ ------------ ------------ ----------- ----------- ------------
Diluted EPS 193,232 .03 5,756,699 (717,334) (.15) 4,644,623
============ ============ ============ =========== =========== ============
</TABLE>
(continued)
F-38
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
7. 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>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------------------------------
1999 1998
------------------------- -------------------------
<S> <C> <C>
ACQUISITIONS:
Number of Centers purchased......................... 2 -
========================= =========================
Number of Centers foreclosed........................ - 2
========================= =========================
Receivables applied (net of related
allowance)........................................ $ - 30,703
Liabilities assumed................................. 167,749 38,400
------------------------- -------------------------
Cost of assets acquired............................. $ 167,749 69,103
========================= =========================
SALES:
Number of Centers
refranchised/sold/closed.......................... 1* 3
========================= =========================
Cash received....................................... $ - 115,450
Notes received/accounts receivable
granted........................................... 20,000 15,769
Loss on sale........................................ 9,693 36,767
------------------------- -------------------------
Net book value of Centers
refranchised/sold/closed.......................... $ 29,693 167,986
========================= =========================
</TABLE>
* Excludes the refranchising of a Center abandoned by a franchisee.
(continued)
F-39
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(UNAUDITED)
During the six months ended June 30, 1999 and 1998, non-cash transactions
consisted of the Company issuing 42,638 and 10,735 shares of common stock at an
average value of $0.73 and $1.25 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 1999 included the Company accepting
a note receivable for $14,000 representing one-half of the franchise fee for a
Center refranchised after it had been abandoned by a franchisee, and the sale of
equipment to a franchisee (previously leased to that franchisee) for $1.00
resulting in a $15,000 loss. 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.
F-40
<PAGE>
Appendix A
AGREEMENT AND PLAN OF MERGER
AMONG
GREASE MONKEY HOLDING CORPORATION
AND
QL 3000, INC.
MARCH 26, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1............................................................................................1
THE MERGER..................................................................................1
1.1 THE MERGER....................................................................1
1.2 ACTIONS BY GMHC; STOCKHOLDERS MEETING;
PROXY STATEMENT...............................................................1
1.3 EFFECTIVE TIME................................................................3
1.4 EFFECT OF MERGER..............................................................3
1.5 ARTICLES OF INCORPORATION AND BYLAWS..........................................3
1.6 DIRECTORS AND OFFICERS........................................................3
1.7 CLOSING.......................................................................3
ARTICLE 2............................................................................................4
MERGER CONSIDERATION........................................................................4
2.1 EFFECT OF MERGER ON CAPITAL STOCK OF CONSTITUENT CORPORATIONS.................4
2.1.1 Conversion and Redemption of GMHC Capital Stock.......................4
2.1.2 Cancellation of Stock.................................................4
2.1.3 Capital Stock of QL 3000..............................................4
2.1.4 Withholding Tax.......................................................5
2.1.5 Shares of Dissenting Stockholders.....................................5
2.2 EXCHANGE OF CERTIFICATES......................................................5
2.2.1 Paying Agent..........................................................5
2.2.2 Exchange Procedure....................................................5
2.2.3 No Further Ownership Rights in GMHC Common Stock......................6
2.2.4 No Liability..........................................................6
2.2.5 Lost, Stolen, or Destroyed Certificates...............................6
2.3 GMHC STOCK OPTIONS AND WARRANTS...............................................7
2.4 RELEASE OF GMHC STOCKHOLDER OBLIGATIONS.......................................7
2.5 PAYMENT OF FEES...............................................................7
ARTICLE 3............................................................................................8
REPRESENTATIONS AND WARRANTIES OF GMHC......................................................8
3.1 CORPORATE EXISTENCE AND AUTHORITY.............................................8
3.2 NO ADVERSE CONSEQUENCES.......................................................9
3.3 CAPITALIZATION................................................................9
3.4 SUBSIDIARIES AND JOINT VENTURES..............................................10
3.5 SEC REPORTS AND FINANCIAL STATEMENTS.........................................10
3.6 INFORMATION SUPPLIED.........................................................11
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
3.7 LEGAL PROCEEDINGS............................................................11
3.8 CONTRACTS AND ARRANGEMENTS...................................................11
3.9 REAL PROPERTY; MATERIAL ASSETS...............................................12
3.10 LEASES.......................................................................13
3.11 STATUS OF CONTRACTS AND LEASES...............................................13
3.12 COMPLIANCE WITH LAWS.........................................................14
3.13 ENVIRONMENTAL MATTERS........................................................15
3.13.1 Definitions..........................................................15
3.13.2 Compliance...........................................................15
3.13.3 Hazardous Substances.................................................15
3.13.4 Storage Tanks........................................................16
3.13.5 Environmental Records................................................16
3.14 TAX MATTERS..................................................................16
3.14.1 Returns..............................................................16
3.14.2 Taxes Paid or Reserved...............................................17
3.14.3 Loss Carryforwards; Investment Tax Credit Carryforwards..............17
3.14.4 Definition...........................................................17
3.14.5 Miscellaneous........................................................17
3.14.6 Tax Sharing Agreements...............................................17
3.15 EMPLOYEES AND LABOR RELATIONS MATTERS........................................17
3.16 EMPLOYEE BENEFITS............................................................19
3.17 ABSENCE OF CERTAIN CHANGES OR EVENTS.........................................20
3.18 UNDISCLOSED LIABILITIES......................................................21
3.19 INSURANCE....................................................................21
3.20 INTELLECTUAL PROPERTY........................................................22
3.21 CAR COUNTS...................................................................23
3.22 FRANCHISES...................................................................23
3.23 YEAR 2000....................................................................23
3.24 GUARANTIES; POWERS OF ATTORNEY...............................................24
3.25 BROKERS......................................................................24
3.26 DISCLOSURE...................................................................24
3.27 TRUE AT CLOSING..............................................................24
ARTICLE 4...........................................................................................25
REPRESENTATIONS AND WARRANTIES OF QL 3000..................................................25
4.1 CORPORATE EXISTENCE AND AUTHORITY............................................25
4.2 NO ADVERSE CONSEQUENCES......................................................25
4.3 LEGAL PROCEEDINGS............................................................25
4.4 PROXY STATEMENT..............................................................25
ARTICLE 5...........................................................................................26
COVENANTS..................................................................................26
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
5.1 CONTINUATION OF BUSINESS.....................................................26
5.2 NO SOLICITATION..............................................................28
5.3 ACCESS.......................................................................29
5.4 OTHER GOVERNMENT CONSENTS....................................................29
5.5 BEST EFFORTS; NO INCONSISTENT ACTION.........................................30
5.6 CHANGED CIRCUMSTANCES........................................................30
5.7 FEES AND EXPENSES............................................................30
5.8 PRESS RELEASES...............................................................30
5.9 INDEMNIFICATION..............................................................30
5.10 FINANCING....................................................................31
ARTICLE 6...........................................................................................31
CONDITIONS TO THE PARTIES' OBLIGATIONS.....................................................31
6.1 GOVERNMENTAL AUTHORIZATIONS..................................................31
6.2 GMHC STOCKHOLDER APPROVAL....................................................31
6.3 NO PROHIBITIONS..............................................................32
6.4 NO PROCEEDINGS...............................................................32
6.5 REPRESENTATIONS AND WARRANTIES...............................................32
6.6 FAIRNESS OPINIONS............................................................32
6.7 OTHER CONSENTS...............................................................32
6.8 DISSENTING STOCKHOLDERS......................................................32
6.9 COMPLETION OF FINANCINGS.....................................................32
ARTICLE 7...........................................................................................33
TERMINATION................................................................................33
7.1 TERMINATION BY QL 3000 AND/OR GMHC...........................................33
7.1.1 Mutual Consent.......................................................33
7.1.2 Injunction or Restraint..............................................33
7.2 TERMINATION BY QL 3000.......................................................33
7.3 TERMINATION BY GMHC..........................................................33
7.4 PROCEDURE; EFFECT OF TERMINATION.............................................34
ARTICLE 8...........................................................................................34
GENERAL PROVISIONS.........................................................................34
8.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.......................34
8.2 FURTHER ACTION...............................................................34
8.3 ENTIRE AGREEMENT.............................................................34
8.4 ASSIGNMENT...................................................................35
8.5 BINDING EFFECT; NO THIRD PARTY BENEFIT.......................................35
8.6 WAIVER.......................................................................35
8.7 GOVERNING LAW................................................................35
8.8 SEVERABILITY.................................................................35
8.9 TIME OF ESSENCE..............................................................35
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
8.10 COUNTERPARTS.................................................................35
8.11 AMENDMENTS...................................................................36
8.12 AUTHORITY....................................................................36
8.13 NOTICES......................................................................36
ARTICLE 9...........................................................................................37
DEFINITIONS................................................................................37
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER made as of March 26, 1999 (the
"Agreement") is among QL 3000, INC., a Florida corporation ("QL 3000"), and
GREASE MONKEY HOLDING CORPORATION, a Utah corporation ("GMHC").
RECITALS
A. The Boards of Directors of GMHC (the "GMHC Board") and QL 3000
have determined that it is advisable and in the best interests of their
respective corporations and stockholders that QL 3000 or a wholly owned
subsidiary or other affiliate of QL 3000 merge with and into GMHC pursuant to
the applicable provisions of the Utah Revised Business Corporation Act (the
"URBCA") and the terms and conditions of this Agreement (such merger, as
described in more detail in Article 2 below, the "Merger"), pursuant to which
GMHC would be the surviving corporation. The transactions described in this
Agreement are subject to the approvals of the shareholders of GMHC and the
satisfaction of certain other conditions described in this Agreement.
B. Jerry D. Armstrong, James B. Wallace, Ray O. Brownlie, J. H.
Bander, Charles H. Steinbrueck, Cortlandt S. Dietler, George F. Woods, Wayne
H. Patterson and Jim Baldwin, each a stockholder of GMHC, have agreed to vote
all of their respective shares of GMHC capital stock (common and preferred)
in favor of the Merger.
NOW, THEREFORE, in consideration of the mutual representations,
warranties, covenants, agreements and conditions contained in this Agreement,
the parties hereto agree as follows:
ARTICLE 1
THE MERGER
1.1 THE MERGER. Subject to and in accordance with the terms and
conditions of this Agreement, at the Effective Time QL 3000 or a wholly owned
subsidiary of QL 3000 will be merged with and into GMHC in accordance with
the applicable provisions of the URBCA. GMHC shall be the Surviving
Corporation resulting from the merger and shall continue to be governed by
the laws of the State of Utah. Alternatively, at QL 3000's option, GMHC will
enter into the Agreement and Plan of Merger attached hereto as Exhibit A
providing for the merger of two of its subsidiaries with and into QL 3000 or
its designee and this Agreement will be terminated.
1.2 ACTIONS BY GMHC; STOCKHOLDERS MEETING; PROXY STATEMENT.
1.2.1 GMHC hereby approves of and consents to the Merger
and represents and warrants that the GMHC Board, at a meeting duly called and
held on March 5, 1999 has (i) determined that this Agreement and the
transactions contemplated hereby, including the Merger, are fair to and in
the best interests of
A-1
<PAGE>
GMHC's stockholders, (ii) approved this Agreement and the transactions
contemplated hereby, including the Merger, and (iii) resolved to recommend
that the stockholders of GMHC, if required by applicable law, approve the
transactions contemplated hereby. GMHC has been advised by each of its
directors that each such person has agreed, subject to the terms and
conditions of this Agreement, to take all action necessary or advisable in
support of the Merger, to vote all Shares owned by such person in favor of
the Merger and to sell to QL 3000 all such Shares.
1.2.2 If required by applicable law in order to
consummate the Merger, GMHC will, in accordance with applicable law and
GMHC's Articles of Incorporation and Bylaws, call and hold a special meeting
of its stockholders (the "Stockholders' Meeting") as soon as practicable for
the purpose of approving the Merger. Subject to the terms and conditions of
this Agreement, the GMHC Board will recommend to its stockholders that the
Merger be approved, and, subject to the terms and conditions of this
Agreement, GMHC will use its best efforts to solicit from its stockholders
proxies in favor of the approval of the Merger, and will take all other
action necessary or advisable to secure the requisite vote or consent of
stockholders.
1.2.3 GMHC will prepare and file a preliminary proxy
statement to solicit Stockholder Approval (the "Proxy Statement") with the
SEC and will use its best efforts to respond to any comments of the SEC or
its staff and to cause the Proxy Statement, as finalized, to be mailed to
GMHC's stockholders as promptly as practicable after responding to all such
comments to the satisfaction of the staff; PROVIDED, HOWEVER, that GMHC shall
not be required to prepare and file such proxy statement until (i) a bona
fide commitment letter from one or more lenders with respect to the Merger
Consideration has been issued to QL 3000 and delivered to GMHC and (ii) QL
3000 elects the form of Agreement and Plan of Merger in accordance with
Section 1.1 of this Agreement. QL 3000 will provide to GMHC in writing all
information regarding QL 3000 necessary for the preparation of the Proxy
Statement. GMHC will notify QL 3000 promptly of the receipt of any comments
from the SEC or its staff and of any request by the SEC or its staff for
amendments or supplements to the Proxy Statement or for additional
information and will supply QL 3000 with copies of all correspondence between
GMHC or any of its representatives, on the one hand, and the SEC or its
staff, on the other hand, with respect to the Proxy Statement or the Merger.
If at any time before the Stockholders' Meeting there occurs any event that
should be set forth in an amendment or supplement to the Proxy Statement,
GMHC will promptly prepare and mail to its stockholders such an amendment or
supplement. GMHC will not mail any Proxy Statement, or any amendment or
supplement thereto, to which QL 3000 reasonably objects. The Proxy Statement
will include the GMHC Board's recommendation that GMHC's stockholders grant
proxies to approve the Merger; provided, however, that such recommendation
may be withdrawn, modified, or amended if and to the extent the GMHC Board
determines, in good faith after consultation with outside legal counsel, that
a failure to do so would be contrary to its fiduciary obligations.
A-2
<PAGE>
1.3 EFFECTIVE TIME. As soon as practicable after satisfaction or
waiver of all of the conditions to the Merger set forth in Article 6 of this
Agreement, a Certificate of Merger prepared in accordance with applicable law
(the "Certificate of Merger") will be executed and filed with the Secretaries
of State of the States of Florida and Utah. The Merger will be effective on
the later of the date and at the time (the "Effective Time") when the
Certificate of Merger has been accepted for filing by the Secretaries of
State of the States of Florida and Utah. The day during which the Effective
Time occurs is referred to herein as the "Effective Date."
1.4 EFFECT OF MERGER. At the Effective Time, QL 3000 or a wholly
owned subsidiary of QL 3000 will be merged with and into GMHC in the manner
and with the effect provided by the URBCA, the separate corporate existence
of QL 3000 or its subsidiary, as the case may be, will cease and thereupon
GMHC and QL 3000 or its subsidiary, as the case may be, will be a single
corporation (the "Surviving Corporation") and will continue to be governed by
the laws of the State of Utah.
1.5 ARTICLES OF INCORPORATION AND BYLAWS. The Articles of
Incorporation and Bylaws of GMHC as in effect at the Effective Time will be
the Articles of Incorporation and Bylaws of the Surviving Corporation, until
each has been duly amended in accordance with the terms thereof and of the
URBCA.
1.6 DIRECTORS AND OFFICERS. The directors of QL 3000 at the
Effective Time will be the directors of the Surviving Corporation, until
their respective successors have been duly elected or appointed and
qualified. The officers of QL 3000 at the Effective Time will be the officers
of the Surviving Corporation and will hold office from the Effective Time in
accordance with the Bylaws of the Surviving Corporation.
1.7 CLOSING. Unless this Agreement has been terminated and the
transactions contemplated by it have been abandoned pursuant to Article 7,
the closing of the Merger (the "Closing") will take place at the offices of
Otten, Johnson, Robinson, Neff & Ragonetti at 10:00 a.m. on the date five
business days after the date on which the last of the conditions set forth in
Article 6 hereof (other than conditions that by their terms are to occur at
"Closing") will have been fulfilled or waived or on such other date as QL
3000 and GMHC may agree (the "Closing Date").
ARTICLE 2
MERGER CONSIDERATION
2.1 EFFECT OF MERGER ON CAPITAL STOCK OF CONSTITUENT CORPORATIONS.
As of the Effective Time, by virtue of the Merger and without any action on
the part of QL 3000, GMHC or the holders of any Shares:
A-3
<PAGE>
2.1.1 CONVERSION AND REDEMPTION OF GMHC CAPITAL STOCK.
(a) Each Share issued and outstanding immediately prior to
the Effective Time (other than Shares to be canceled in accordance
with Section 2.1.2 and Dissenting Shares (as defined below)) will be
converted into the right to receive from the Surviving Corporation a
cash payment in the amount of $1.00 (the "Merger Consideration"). As
of the Effective Time, all of the Shares will no longer be outstanding
and will automatically be canceled and retired and will cease to
exist, and each holder of a certificate representing any such Shares
(other than Shares referred to in Section 2.1.2 and Dissenting Shares
(as defined below)) will cease to have any rights with respect
thereto, except the right to receive the Merger Consideration, without
interest.
(b) As of the Effective Date, all shares of GMHC Series C
Preferred Stock will no longer be outstanding and will automatically
be canceled and retired and will cease to exist and each holder of a
certificate representing any such preferred stock will cease to have
any rights with respect thereto, except the right to receive the
liquidation price of $100.00 per share plus an amount equal to any
unpaid cumulative dividends (whether or not declared), if any, without
interest, to the Effective Date.
2.1.2 CANCELLATION OF STOCK. Each issued and outstanding
Share that is held in the treasury of GMHC or held by any direct or indirect
subsidiary of GMHC and each issued and outstanding Share held by QL 3000 or
held by any direct or indirect subsidiary of QL 3000 immediately before the
conversion pursuant to Section 2.1.1 will automatically be canceled and
retired and will cease to exist, and no consideration will be delivered in
exchange therefor.
2.1.3 CAPITAL STOCK OF QL 3000. Immediately following the
Effective Time the issued and outstanding shares of capital stock of QL 3000,
$.01 par value per share, will be converted into a like number of shares of
GMHC Common Stock without any further action on the part of the holders
thereof, will be validly issued, fully paid and nonassessable shares of GMHC
Common Stock and will constitute all of the issued and outstanding shares of
the Surviving Corporation.
2.1.4 WITHHOLDING TAX. The right of any stockholder to
receive the Merger Consideration will be subject to and reduced by the amount
of any required tax withholding obligation.
2.1.5 SHARES OF DISSENTING STOCKHOLDERS. Notwithstanding
anything in this Agreement to the contrary, if any shareholder of GMHC who
has not voted such Shares in favor of or consented to the Merger and who is
entitled to dissent from the Merger and require appraisal for his or her
Shares under applicable law (a "Dissenting Stockholder") and complies with
all the provisions thereof concerning the right of holders
A-4
<PAGE>
of Shares to dissent from the Merger and require appraisal of their Shares
("Dissenting Shares") then such Dissenting Shares will not be converted as
described in Section 2.1.1 but will represent only the right to receive such
consideration as may be determined to be due to such Dissenting Stockholder
pursuant to applicable law. If, after the Effective Time, such Dissenting
Stockholder (if any) withdraws his or her demand for appraisal or fails to
perfect or otherwise loses his or her right of appraisal, in any case
pursuant to applicable law, each of his or her Shares will be deemed to be
converted as of the Effective Time into the right to receive the Merger
Consideration. GMHC will give QL 3000 (i) prompt notice of any demands for
appraisal of Shares received by GMHC and (ii) the opportunity to participate
in and direct all negotiations and proceedings with respect to any such
demands. GMHC will not, without the prior written consent of QL 3000, make
any payment with respect to, or settle, offer to settle, or otherwise
negotiate, any such demands except as required by applicable law.
2.2 EXCHANGE OF CERTIFICATES.
2.2.1 PAYING AGENT. Before the Effective Time, QL 3000
and GMHC will designate a mutually acceptable bank or trust company to act as
paying agent in the Merger (the "Paying Agent"). From time to time on, before
or after the Effective Time, QL 3000 will make available, or cause the
Surviving Corporation to make available, to the Paying Agent funds in amounts
and at the times necessary for the payment of the Merger Consideration for
each share entitled to payment under Section 2.2.1 upon surrender of
certificates representing such Shares, it being understood that any and all
interest earned on funds made available to the Paying Agent pursuant to this
Agreement will be turned over to QL 3000.
2.2.2 EXCHANGE PROCEDURE. As soon as reasonably
practicable after the Effective Time, the Paying Agent will mail to each
holder of record of a certificate or certificates that immediately before the
Effective Time represented Shares (the "Certificates"), (i) a notice
(advising the holders that the Merger has become effective) and a letter of
transmittal in customary and appropriate form (which will specify that
delivery will be effected, and risk of loss and title to the Certificates
will pass, only upon proper delivery of the Certificates to the Paying Agent)
and (ii) instructions for use in effecting the surrender of the Certificates
in exchange for the Merger Consideration per share. Upon surrender of a
Certificate for cancellation to the Paying Agent or to such other agent or
agents as may be appointed by QL 3000, together with such letter of
transmittal, properly completed and duly executed, and such other customary
documents as may reasonably be required by the Paying Agent, the holder of
such Certificate will be entitled to receive in exchange therefor the amount
of cash into which the Shares theretofore represented by such Certificate
have been converted pursuant to Section 2.1, and the Certificate so
surrendered will be canceled. In the event of a transfer of ownership of
Shares that is not registered in the transfer records of GMHC, payment may be
made to a Person (as defined in Section 2.2.4 below) other than the Person in
whose name the Certificate so surrendered is registered, if such Certificate
is properly endorsed
A-5
<PAGE>
or otherwise is in proper form for transfer and the Person requesting such
payment pays any transfer or other taxes required by reason of the payment to
a Person other than the registered holder of such Certificate or establishes
to the satisfaction of the Surviving Corporation that such tax has been paid
or is not applicable. Until surrendered as contemplated by this Section
2.2.2, each Certificate will be deemed at any time after the Effective Time
to represent only the right to receive upon such surrender the Merger
Consideration, without interest, into which the Shares theretofore
represented by such Certificate will have been converted pursuant to Section
2.1.1. No interest will be paid or will accrue on the cash payable upon the
surrender of any Certificate.
2.2.3 NO FURTHER OWNERSHIP RIGHTS IN GMHC COMMON STOCK.
All cash paid upon the surrender of Certificates in accordance with the terms
of Sections 2.1 will be deemed to have been paid in full satisfaction of all
rights pertaining to the Shares theretofore represented by such Certificates.
At the Effective Time, the stock transfer books of GMHC will be closed, and
there will be no further registration of transfers on the stock transfer
books of the Surviving Corporation of the Shares that were outstanding
immediately before the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation or the Paying Agent
for any reason, they will be canceled and exchanged as provided in
Section 2.1.
2.2.4 NO LIABILITY. None of QL 3000, GMHC, the Surviving
Corporation or the Paying Agent will be liable to any Person in respect of
any cash or security delivered to a public official pursuant to any
applicable abandoned property, escheat, or similar law. As used in this
Agreement, the term "Person" means any individual, corporation, general
partnership, limited partnership, limited liability company, joint venture,
trust, cooperative or other association, Governmental Entity (as defined in
Section 3.2(b) below), or any other organization.
2.2.5 LOST, STOLEN, OR DESTROYED CERTIFICATES. In the
event that any Certificate has been lost, stolen, or destroyed, upon the
making of an affidavit of that fact by the Person claiming such Certificate
to be lost, stolen, or destroyed, GMHC will issue in exchange for such lost,
stolen, or destroyed Certificate, the Merger Consideration deliverable in
respect thereof as determined in accordance with this Agreement; PROVIDED,
HOWEVER, that GMHC may, in its sole discretion and as a condition precedent
to the issuance thereof, require the owner of such lost, stolen, or destroyed
Certificate to indemnify GMHC or to give GMHC a bond in such sum as it may
reasonably direct as indemnity against any claim that may be made against
GMHC with respect to the certificate alleged to have been lost, stolen, or
destroyed.
2.3 GMHC STOCK OPTIONS AND WARRANTS. GMHC shall use its best
efforts to enter into an agreement with each holder of stock options, vested
and unvested, outstanding under GMHC's 1986 Incentive Stock Option Plan, 1993
Incentive Stock Option Plan, 1993 Amendment to 1993 Incentive Stock Option
Plan, 1994 Stock Incentive Plan and Amendment to 1994 Stock Incentive Plan
(the "Stock Option Plans")
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and all outstanding warrants to purchase GMHC common stock, which agreement
provides that, immediately after the Effective Date, each option or warrant
that is then outstanding, whether or not then exercisable or vested, shall be
canceled by GMHC, and each holder of a canceled option or warrant shall be
entitled to receive from GMHC as of the Effective Time, in consideration for
the cancellation of such option or warrant, an amount in cash equal to the
product of (i) the number of Shares previously subject to such option or
warrant, and (ii) the excess, if any, of the Merger Consideration over the
exercise price per Share previously subject to such option or warrant,
reduced by any applicable withholding. In any event as of the Effective Time
all such Stock Option Plans, options issued pursuant thereto and outstanding
warrants shall be cancelled and of no further effect.
2.4 RELEASE OF GMHC STOCKHOLDER OBLIGATIONS. On or before the
Effective Date, QL 3000 shall cause to be released or cancelled the GMHC
stockholder guarantees and letters of credit described in Schedule 2.4
attached hereto.
2.5 PAYMENT OF FEES. On the Effective Date, QL 3000 shall cause
all outstanding and unpaid legal, accounting and investment banking fees
incurred by GMHC in connection with the Merger to be paid in full by QL 3000
or the Surviving Corporation. The total legal, accounting and investment
banking fees incurred by GMHC in connection with the merger subsequent to
September 30, 1998 shall not exceed $435,000.
2.6 REPAYMENT OF ADVANCES. On the Effective Date, QL 3000 shall
cause the Surviving Corporation to repay all amounts advanced to GMHC by
Brownlie Wallace Armstrong & Bander Exploration and its affiliates described
in Schedule 2.6 attached hereto.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF GMHC
In this Agreement, the term "Material Adverse Effect" used in
connection with a party means any event, change or effect that is materially
adverse to the condition (financial or otherwise), properties, assets,
liabilities, businesses, operations or results of operations of such party in
excess of $100,000. "Combined Material Adverse Effect" means any individual
or combination of events, changes or effects that are materially adverse to
the condition (financial or otherwise), properties, assets, liabilities,
businesses, operations or results of operations of such party in excess of
$250,000. "Material Adverse Change" means any change that has resulted, will
result or is likely to result in a Material Adverse Effect. The term
"Disclosure Schedule" means the document delivered by GMHC to QL 3000 on the
date hereof that sets forth certain exceptions to the representations and
warranties contained in this Agreement under captions referencing each and
every Section to which such exceptions apply (whether or not referred to in a
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particular representation or warranty), provided that information
appropriately and expressly disclosed or qualified with respect to one
representation or warranty in the Disclosure Schedule shall be deemed to have
been disclosed or qualified with respect to any other applicable
representation or warranty to the extent that the disclosure contains a clear
statement of the relevant fact or facts so as to provide reasonable notice of
the applicability of the disclosure to the unreferenced representation or
warranty.
GMHC hereby represents and warrants to QL 3000 as follows:
3.1 CORPORATE EXISTENCE AND AUTHORITY. GMHC is a corporation duly
organized, validly existing, and in good standing under the laws of the State
of Utah and has the requisite corporate power and authority to own, operate
and lease its properties and assets and to carry on its business as it is now
being conducted. GMHC is duly qualified to do business as a foreign
corporation in each jurisdiction in which the conduct of business or the
ownership or lease of property requires or makes it desirable for GMHC to be
so qualified except where the failure to be so qualified would not have a
Material Adverse Effect. GMHC has the full corporate power and authority to
enter into this Agreement and carry out its terms, subject to the conditions
set forth in the Agreement. The Board of Directors of GMHC has, by
resolutions duly adopted, authorized and approved the Merger, which
resolutions have not been rescinded or otherwise modified and remain in full
force and effect. Except for the approval of its stockholders, GMHC has taken
all corporate action necessary to authorize the execution, delivery, and
performance of this Agreement. This Agreement has been duly and validly
executed and delivered by GMHC and is binding upon and enforceable against
GMHC in accordance with its terms, and the Articles of Merger, when executed
and delivered by GMHC, will constitute the valid and binding obligation of
GMHC. GMHC has heretofore delivered to QL 3000 correct and complete copies of
its Articles of Incorporation and Bylaws as in effect on the date of this
Agreement.
3.2 NO ADVERSE CONSEQUENCES. Neither the execution and delivery of
this Agreement by GMHC nor the consummation of the transactions contemplated
by this Agreement will:
(a) violate or conflict with any provision of the Articles of
Incorporation or Bylaws of GMHC or any of its subsidiaries;
(b) violate any law, judgment, order, injunction, decree,
rule, regulation, or ruling of any court, legislature, administrative
agency or commission or other governmental or other regulatory
authority or agency (a "Governmental Entity") applicable to GMHC or any
of its subsidiaries, except as such would not have a Material Adverse
Effect, individually or in the aggregate;
(c) either alone, or with the giving of notice or the passage
of time or both, conflict with, constitute grounds for termination or
acceleration of, result
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in the breach of the terms, conditions, or provisions of, result in the
loss of any benefit to GMHC or any of its subsidiaries, or constitute
a default under any agreement, instrument, license, or permit to which
GMHC or any of its subsidiaries is a party or by which GMHC or any of
its subsidiaries is bound, or result in the creation or imposition of
any lien, charge or encumbrance on any of the assets of GMHC or any of
its subsidiaries except as such would not have a Material Adverse
Effect, individually or in the aggregate; or
(d) require any notices to or consent of any third party,
including without limitation any Governmental Entity.
3.3 CAPITALIZATION. GMHC has authorized capital stock consisting
of (i) 20,000,000 shares of GMHC Common Stock, par value $.03 per Share (each
a "Share," collectively the "Shares"), of which 4,647,880 Shares were
outstanding on March 1, 1999 and no Shares are in treasury and (ii) 200,000
shares of GMHC Preferred Stock, no par value per share, of which 20,896
shares of Series C Convertible Preferred Stock, no par value per share and
liquidation value $100.00 plus accrued unpaid dividends per share, were
outstanding on March 1, 1999 (the "Preferred Shares") and no shares are in
treasury. Options to purchase 854,266 Shares were outstanding on March 1,
1999 under grants made pursuant to the Stock Option Plans. Warrants to
purchase 400,000 Shares were outstanding on March 1, 1999. All of the
outstanding shares of capital stock of GMHC have been duly authorized and are
validly issued, fully paid, and nonassessable, and no shares were issued in
violation of preemptive or similar rights of any stockholder or in violation
of any applicable securities laws. Except as set forth above, there are no
shares of capital stock of GMHC authorized, issued, or outstanding, and,
except as set forth above, there are no preemptive rights or any outstanding
subscriptions, options, warrants, rights, convertible securities, or other
agreements or commitments of GMHC of any character relating to the issued or
unissued capital stock or other securities of GMHC. There are no outstanding
obligations of GMHC to repurchase, redeem, or otherwise acquire any of the
Shares.
3.4 SUBSIDIARIES AND JOINT VENTURES. Except as disclosed on the
Disclosure Schedule, GMHC has no subsidiaries and owns no stock or other
interest in any other corporation or in any partnership or limited liability
company, or other venture or entity. Each subsidiary of GMHC is duly
organized, validly existing, and in good standing under the laws of its
jurisdiction of incorporation or formation and is duly qualified to do
business as a foreign corporation in each jurisdiction in which the conduct
of business or the ownership or lease of property requires or makes it
desirable for such subsidiary to be so qualified except where the failure to
be so qualified would not have a Material Adverse Effect. All of the
outstanding shares of capital stock of each subsidiary are validly issued,
fully paid and nonassessable and owned by GMHC free and clear of all liens,
claims or encumbrances. There are no options, calls or commitments of any
character relating to the issued or unissued capital stock of any subsidiary.
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3.5 SEC REPORTS AND FINANCIAL STATEMENTS. GMHC has filed with the
SEC, and has made available to QL 3000 true and complete copies of, all
forms, reports, schedules, statements, and other documents required to be
filed by it since December 31, 1997 under the Exchange Act or the Securities
Act of 1933, as amended (the "Securities Act") (each of such forms, reports,
schedules, statements, and other documents, to the extent filed and publicly
available before the date of this Agreement, other than preliminary filings,
is referred to as a "GMHC SEC Document"). Each GMHC SEC Document, at the time
filed, (a) did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (b) complied in all material respects with the
applicable requirements of the Exchange Act and the Securities Act, as the
case may be, and the applicable rules and regulations of the SEC thereunder.
The financial statements of GMHC and its subsidiaries included in the GMHC
SEC Documents comply as to form in all material respects with applicable
accounting requirements and with the published rules and regulations of the
SEC with respect thereto, have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis during the
periods involved (except as may be indicated in the notes thereto or, in the
case of the unaudited statements, as permitted by Form 10-Q of the SEC) and
fairly present (subject, in the case of the unaudited statements, to normal,
recurring audit adjustments) the consolidated financial position of GMHC and
its subsidiaries as of and at the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended.
3.6 INFORMATION SUPPLIED. None of the information supplied or to
be supplied by GMHC specifically for inclusion or incorporation by reference
in the Proxy Statement will at the time the Proxy Statement is first mailed
to GMHC's stockholders or at the time of the Stockholders' Meeting, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading, except that no representation or warranty is made by GMHC with
respect to statements made or incorporated by reference therein based on
information supplied by QL 3000 in writing specifically for inclusion or
incorporation by reference therein.
3.7 LEGAL PROCEEDINGS. Except as disclosed in a GMHC SEC Document
or in the Disclosure Schedule, there is neither pending nor to GMHC's
knowledge threatened by or against GMHC or any of its subsidiaries any legal
action, claim, arbitration, investigation, or administrative proceeding
before any Governmental Entity that could (i) have a Material Adverse Effect
on the parties or the financial condition, assets, liabilities, business or
results of operations of GMHC following the Closing; or (ii) enjoin or
restrict the right or ability of GMHC to perform its obligations under this
Agreement; and (iii) to the best knowledge of GMHC, there is no basis for any
such claim, litigation, proceeding, or investigation; and (iv) there is not
in existence any
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judgment, injunction, order or decree requiring GMHC to take any action of
any kind, or to which GMHC is subject or by which it or its assets are bound
or affected.
3.8 CONTRACTS AND ARRANGEMENTS. The Disclosure Schedule contains a
complete and accurate list of all agreements of the following types,
organized by type of agreement, to which GMHC or any of its subsidiaries is a
party or by which GMHC or any of its subsidiaries is bound or otherwise
affected and which are material to GMHC or any of its subsidiaries (the
"Contracts"):
(a) any mortgage, note, or other instrument or agreement
relating to the borrowing of money or the incurrence of indebtedness by
GMHC or any of its subsidiaries or any guaranty of any obligation for
the borrowing of money;
(b) contracts, agreements, purchase orders, or acknowledgment
forms for the purchase, sale, lease or other disposition of GMHC's or
any of its subsidiaries' equipment, products, materials, or capital
assets, or for the performance of services which exceed $5,000.00
individually or on an annual commitment basis;
(c) contracts or agreements for the joint performance of work
or services and all other joint venture agreements;
(d) contracts or agreements with agents, brokers, consignees,
sales representatives, or distributors relating to the sale of GMHC's
products or services;
(e) contracts or agreements relating to the employment or
compensation of GMHC's or any of its subsidiaries' officers, directors,
or employees, including without limitation any collective bargaining
agreements, and agreements with former officers, directors or employees
which remain in effect, other than disclosed in the Disclosure Schedule
in response to Section 3.16;
(f) franchise agreements; and
(g) any other contract, instrument, agreement, or obligation
not described in any other section of this Agreement to which GMHC or
any of its subsidiaries is a party or by which it or any such
subsidiary is bound and which contains unfulfilled obligations of GMHC
or any of its subsidiaries in excess of $5,000.
3.9 REAL PROPERTY; MATERIAL ASSETS. The Disclosure Schedule
contains a list of (i) all real property owned by GMHC or any of its
subsidiaries (the "Material Properties") and (ii) all other assets owned by
GMHC or any of its subsidiaries having an original cost of more than $2,500
(together, the "Material Properties and Assets"). Except as set forth in the
Disclosure Schedule, GMHC or a subsidiary of
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GMHC has good and marketable title to all of its respective Material
Properties and Assets subject to no encumbrance, lien, charge, or other
restriction (including, without limitation, any restriction on transfer) of
any kind or character and there is no condition, restriction, or reservation
affecting the title to or utility of any of the Material Properties and
Assets, other than (i) such imperfections or irregularities of title,
encumbrances, claims, liens, charges or other conditions, restrictions or
reservations set forth on the Disclosure Schedule, (ii) statutory liens
securing payments (including taxes) not yet due and (iii) such other minor
imperfections or irregularities of title, encumbrances, claims, liens,
charges or other conditions, restrictions or reservations as do not
materially affect the use and value of the properties or assets subject
thereto or affected thereby or otherwise materially impair business
operations at such properties. All facilities located on the Material
Properties set forth on the Disclosure Schedule are in satisfactory condition
and are suitable for the purpose for which they are being used, subject in
each case to ordinary wear and tear and to ordinary repair, maintenance and
periodic replacement.
All of the buildings and improvements upon such Material
Properties comply with all applicable size, height, setback and other zoning
restrictions and regulations. Neither GMHC nor any subsidiary has been denied
any special exception, variance or other zoning permit or approval required
for the construction, operation and maintenance thereof by GMHC or a
subsidiary. There presently is located within such Material Properties an
adequate number of automobile parking spaces to satisfy the requirements of
all applicable zoning ordinances and regulations as modified by duly issued
zoning variances. To the best knowledge of GMHC, there is not existing, or
presently contemplated or proposed, (i) any condemnation or similar action,
or rezoning action or proceeding, with respect to any portion of such
Material Properties or (ii) any moratorium upon or similar impediment to land
development or building construction or hook-up to or usage of water or sewer
or other utility services that could affect the use or development thereof.
Such Material Properties are zoned commercial/industrial in a manner
sufficient to enable QL 3000 to continue to conduct the businesses as
presently conducted by GMHC and its subsidiaries. Sewer or septic services
and water services are available now and, to GMHC's knowledge, will be
available after Closing to enable QL 3000 to conduct the businesses presently
conducted by GMHC and its subsidiaries. Adequate access, ingress and egress
are available now and, to GMHC's knowledge, will be provided to such Material
Properties.
3.10 LEASES. The Disclosure Schedule contains a list of all
material leases for the lease of any real or personal property with terms in
excess of one year to which GMHC or any of its subsidiaries is a party (the
"Leases" and the real property covered by a Lease the "Leased Properties").
Except as described in the Disclosure Schedule, GMHC or any subsidiary enjoys
undisturbed possession to each leasehold interest it holds under the Leases.
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All of the buildings and improvements upon the Leased
Properties comply with all applicable size, height, setback and other zoning
restrictions and regulations. Neither GMHC nor any subsidiary has been denied
any special exception, variance or other zoning permit or approval required
for the construction, operation and maintenance thereof by GMHC or a
subsidiary. There presently is located upon the Leased Properties an adequate
number of automobile parking spaces to satisfy the requirements of all
applicable zoning ordinances and regulations as modified by duly issued
zoning variances. To the best knowledge of GMHC, there is not existing, or
presently contemplated or proposed, (i) any condemnation or similar action,
or rezoning action or proceeding, with respect to any portion of the Leased
Properties or (ii) any moratorium upon or similar impediment to land
development or building construction or hook-up to or usage of water or sewer
or other utility services that could affect the use or development thereof.
The Leased Properties are zoned commercial/industrial in a manner sufficient
to enable QL 3000 to continue to conduct the businesses as presently
conducted by GMHC and its subsidiaries. Sewer or septic services and water
services are available now and, to GMHC's knowledge, will be available after
Closing to enable QL 3000 to conduct the businesses presently conducted by
GMHC and its subsidiaries. Adequate access, ingress and egress are available
now and, to GMHC's knowledge, will be provided to the Leased Properties.
3.11 STATUS OF CONTRACTS AND LEASES.
(a) Each of the Contracts and Leases is valid, binding, and
enforceable by GMHC or its subsidiaries in accordance with its terms
and is in full force and effect, except as enforceability may be
limited or affected by applicable bankruptcy, insolvency,
reorganization or other laws of general application relating to or
affecting the rights of creditors and except as enforceability may be
limited by principles of equity governing specific performance,
injunctive relief or other equitable remedies. There is no existing
default or violation by GMHC or its subsidiaries under any Contract or
Lease and no event has occurred which (whether with or without notice,
lapse of time, or both) would constitute a default of GMHC or its
subsidiaries under any Contract or Lease, except for such defaults as
would not have a Material Adverse Effect.
(b) To the best knowledge of GMHC, neither GMHC nor any of its
subsidiaries is aware of any default by any other party to any Contract
or Lease or of any event which (whether with or without notice, lapse
of time, or both) would constitute a default by any other party with
respect to obligations of that party under any Contract or Lease,
except for such defaults set forth on the Disclosure Schedule.
(c) Except as set forth on the Disclosure Schedule, neither
GMHC nor its subsidiaries is a party to, or is bound by, any Contract
that:
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(i) will result in any material loss to it upon the
performance thereof, including any material liability for
penalties or damages, whether liquidated, direct, indirect,
incidental or consequential, or
(ii) is not terminable by GMHC with 90 days or fewer
notice and which termination will not cause a Material Adverse
Effect.
3.12 COMPLIANCE WITH LAWS. Except for those whose absence, either
individually or in the aggregate, would not have a Material Adverse Effect,
and, with the passage of time will not have a Material Adverse Effect, GMHC
and its subsidiaries possess all governmental and other licenses,
certificates, consents, permits, and other authorizations of Governmental
Entities (collectively, the "Licenses") legally required to carry on its
business as now conducted. No material violation exists in respect of, and no
proceeding is pending or threatened to revoke or limit, any such License.
Except as disclosed in the GMHC SEC Documents or the Disclosure Schedule, the
businesses of GMHC and its subsidiaries are not being conducted in violation
of any laws, rules, regulations, ordinances, codes, judgments, orders, writs,
or decrees applicable to its business where such violation would have a
Material Adverse Effect. Except as set forth on the Disclosure Schedule or
disclosed in the GMHC SEC Documents, there have been no violations of such
laws, rules, regulations, ordinances, codes, judgments, orders, writs, and
decrees since December 31, 1993 where such violation, either individually or
in the aggregate, would have a Material Adverse Effect.
3.13 ENVIRONMENTAL MATTERS.
3.13.1 DEFINITIONS. As used in this Agreement,
"Environmental Law" means any federal, state, or local statute, regulation,
or ordinance pertaining to the protection of human health or the environment
and any applicable orders, judgments, decrees, permits, licenses, or other
authorizations or mandates under such laws. "Hazardous Substance" means any
hazardous, toxic, radioactive, or infectious substance, material, or waste as
defined, listed, or regulated under any Environmental Law, and includes
without limitation petroleum oil and its fractions. "Contamination" means the
existence (actual or reasonably suspected) in the environment of a Hazardous
Substance, if the existence or suspected existence of such Hazardous
Substance requires any investigatory, remedial, removal, or other response
action under any Environmental Law, if such response action legally could be
required by any Governmental Entity under prevailing Environmental Laws.
3.13.2 COMPLIANCE. Except as disclosed on the Disclosure
Schedule, the businesses and the assets of GMHC and it subsidiaries are in
material compliance with all Environmental Laws and those entities have all
permits required under Environmental Laws in connection with the
construction, ownership or operation of those assets and the businesses. GMHC
is not aware of and has not received notice of any past, present or
anticipated future events, conditions, activities, investigation, studies,
plans or proposals
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that (a) would interfere with or prevent compliance by GMHC with any
Environmental Law, or (b) may give rise to any common law or other liability,
or otherwise form the basis of a claim, action, suit, proceeding, hearing or
investigation, involving GMHC and related in any way to Hazardous Substances
or Environmental Laws.
3.13.3 HAZARDOUS SUBSTANCES. Except as disclosed on the
Disclosure Schedule, no Hazardous Substance has been disposed of, spilled,
leaked or otherwise released on, in, under or from, or otherwise come to be
located in the soil or water (including surface and ground water) on or
under, any real property owned, leased or occupied by GMHC or its
subsidiaries now or in the past. Except as disclosed on the Disclosure
Schedule, none of the assets of GMHC or its subsidiaries have incorporated
into them any asbestos, urea formaldehyde foam insulation, polychlorinated
biphenyls (in electrical equipment or otherwise), lead-based paint or any
other Hazardous Substance which is prohibited, restricted or regulated when
present in buildings, structures, fixtures or equipment. Except as disclosed
on the Disclosure Schedule, all wastes generated in connection with the
businesses of GMHC or its subsidiaries are and have been transported to and
disposed of at an authorized waste disposal facility in compliance with all
Environmental Laws. Except as disclosed on the Disclosure Schedule, GMHC is
not liable under any Environmental Law for investigation, remedial, removal
or other response costs, natural resources damages or other damages or for
any other claims (including administrative orders) arising out of the release
or threatened release of, or exposure to, any Hazardous Substance and no
basis exists for any such liability. GMHC has not entered any contract
pursuant to which it has assumed the liability of any other person or entity,
or agreed to indemnify any other person or entity for any liability, under
any Environmental Law or arising out of the release or threatened release of,
or exposure to, any Hazardous Substance.
3.13.4 STORAGE TANKS. Except as disclosed on the
Disclosure Schedule, there are no underground or other storage tanks on any
real property owned, leased or occupied by GMHC or its subsidiaries now or in
the past (whether or not regulated and whether or not out of service, closed
or decommissioned). To the extent GMHC has or has had underground or other
storage tanks, it has complied with all federal, state and local laws, and
rules applicable thereto (including financial responsibility and required
upgrades).
3.13.5 ENVIRONMENTAL RECORDS. Except as disclosed on the
Disclosure Schedule, GMHC has disclosed and made available to QL 3000 true,
complete and correct copies of any reports, studies, analysis, tests,
monitoring, correspondence with any Governmental Entity or other documents in
the possession of or initiated by GMHC or otherwise known to GMHC, pertaining
to Hazardous Substances, the existence of Contamination, compliance with
Environmental Laws, or any other environmental concern relating to the assets
or the businesses of GMHC or its subsidiaries.
3.14 TAX MATTERS.
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3.14.1 RETURNS. GMHC has filed on a timely basis all
federal, state, foreign, and other returns, reports, forms, declarations, and
information returns required to be filed by it with respect to Taxes (as
defined below) that relate to the business, results of operations, financial
condition, properties, or assets of GMHC and its subsidiaries (collectively,
the "GMHC Returns"), all GMHC Returns filed are complete and accurate, and
GMHC has paid on a timely basis all Taxes. Except as disclosed on the
Disclosure Schedule, GMHC is not part of, nor has it been part of, an
affiliated group of corporations that files or has the privilege of filing
consolidated tax returns pursuant to Section 1501 of the Internal Revenue
Code of 1986, as amended (the "Code") or any similar provisions of state,
local, or foreign law, and GMHC is not a party to, nor has been a party to,
any tax-sharing or tax-allocation agreement. Except as set forth on the
Disclosure Schedule, GMHC has not received any notice of audit and neither
GMHC nor any director, officer or employee responsible for tax matters of
GMHC has knowledge of any intention of any authority to assess additional
Taxes against GMHC or of any dispute with any authority with respect to such
Taxes. There are no outstanding agreements or waivers extending the
applicable statutory periods of limitation for such Taxes for any period.
GMHC has provided QL 3000 with complete and accurate copies of GMHC Returns
for each of GMHC's fiscal years 1993 through 1997 and the Forms 1139 related
to any loss or credit carryback claim for those years.
3.14.2 TAXES PAID OR RESERVED. The reserves for taxes
reflected in the current balance sheet most recently filed as part of a GMHC
SEC Document are adequate for payment of Taxes in respect of periods ending
on the date thereof. All reserves for Taxes have been determined in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved and with prior periods. All Taxes that GMHC
has been required to collect or withhold have been collected or withheld and,
to the extent required, have been paid to the proper taxing authority.
3.14.3 LOSS CARRYFORWARDS; INVESTMENT TAX CREDIT
CARRYFORWARDS. The Disclosure Schedule contains a complete and accurate list
of net operating loss ("NOL") carryforwards and investment tax credit
carryforwards available to GMHC or one or more of its subsidiaries for
federal income tax purposes that originated in taxable years 1988 through
1997.
3.14.4 DEFINITION. As used in this Agreement, the term
"Taxes" means all federal, state, local, or foreign taxes, charges, fees,
levies, or other assessments, including without limitation all net income,
gross income, gross receipts, premium, sales, use, ad valorem, transfer,
franchise, profits, license, withholding, payroll, employment, excise,
estimated severance, stamp, occupation, property, or other taxes, fees,
assessments, or charges of any kind whatsoever, together with any interest
and any penalties (including penalties for failure to file in accordance with
applicable information reporting requirements), and additions to tax.
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3.14.5 MISCELLANEOUS. GMHC has not filed a consent under
IRC Section 341(f) concerning collapsible corporations. GMHC has not made any
payments, is not obligated to make any payments, nor is a party to any
agreement that in certain circumstances could obligate it to make any
payments that will not be deductible under IRC Section 280G. GMHC has not
been a United States real property holding corporation within the meaning of
IRC Section 897(c)(2) during the applicable period specified in IRC Section
897(c)(1)(A)(ii). GMHC has disclosed on its federal income tax returns all
positions taken therein that could give rise to a substantial understatement
of federal income tax within the meaning of IRC Section 6662. GMHC shall
deliver to QL 3000 all necessary certificates and documents confirming that
no withholding under IRC Section 1445 is required in connection with payment
of the purchase price.
3.14.6 TAX SHARING AGREEMENTS. GMHC is not a party to any
Tax allocation or sharing agreement.
3.15 EMPLOYEES AND LABOR RELATIONS MATTERS. Except as set forth on
the Disclosure Schedule or as provided in this Agreement:
(a) No GMHC key employee or executive has communicated to GMHC
any plans to terminate employment with GMHC.
(b) GMHC and its subsidiaries have complied in all material
respects with all labor and employment laws, including provisions
thereof relating to wages, hours, equal opportunity, discrimination,
collective bargaining, and the payment of social security and other
taxes, except where the failure to comply would not have a Material
Adverse Effect;
(c) There is no unfair labor practice charge, complaint,
representation, petition, or other action against GMHC or any of its
subsidiaries pending or to GMHC's best knowledge threatened before the
National Labor Relations Board or any other Governmental Entity and
neither GMHC nor any of its subsidiaries is subject to any order to
bargain by the National Labor Relations Board;
(d) There is no labor strike, request for representation,
slowdown, or work stoppage actually occurring, pending, or to GMHC's
best knowledge threatened against GMHC or any of its subsidiaries;
(e) To GMHC's knowledge, no questions concerning
representation have been raised or are threatened with respect to
employees of GMHC or any of its subsidiaries;
(f) No grievance that might have a Material Adverse Effect on
GMHC or any of its subsidiaries and no arbitration proceeding arising
out of or under any
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collective bargaining agreement is pending and to GMHC's best knowledge
no basis exists for any such grievance or arbitration proceeding; and
(g) To GMHC's knowledge, no employee of GMHC or any of its
subsidiaries is subject to any noncompetition, nondisclosure,
confidentiality, employment, consulting, or similar agreements with
Persons other than GMHC or its subsidiaries relating to the present
business activities of GMHC.
(h) All employees of GMHC and its subsidiaries are at-will
employees, and GMHC is not a party or otherwise subject to any
collective bargaining or other agreement governing the wages, hours or
terms of employment of its employees. GMHC has no written severance pay
plan, policy, practice or agreement with any of its employees, except
as described in the Disclosure Schedule.
(i) GMHC has not experienced any primary work stoppage or
other organized work stoppage involving its employees in the past five
years.
(j) There are no pending claims, and to GMHC's best knowledge,
no threatened claims by or on behalf of any of the employees of GMHC or
any of its subsidiaries under any federal, state or local labor or
employment laws or regulations.
3.16 EMPLOYEE BENEFITS. The Disclosure Schedule lists all pension,
retirement, profit sharing, deferred compensation, bonus, commission,
incentive, life insurance, health and disability insurance, hospitalization,
and all other employee benefit plans or arrangements (including, without
limitation, any contracts or agreements with trustees, insurance companies or
others relating to any such employee benefit plans or arrangements)
established, maintained, or contributed to by GMHC that are currently in
effect or that have been terminated within the past twelve months, and
complete and accurate copies of all those plans or arrangements have been
provided to QL 3000. The employee pension and employee welfare benefit plans
(within the meaning of Sections 3(1) and 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) established and maintained
by GMHC that are subject to ERISA are listed separately as ERISA Plans on the
Disclosure Schedule (the "ERISA Plans"). The ERISA Plans comply in all
material respects with the applicable requirements of ERISA and any other
applicable laws and regulations. With respect to ERISA Plans intended to
qualify under Section 401(a) of the Code, GMHC has received from the Internal
Revenue Service ("IRS") a favorable determination for each of the ERISA Plans
that each of the ERISA Plans is qualified. There has been no event subsequent
to that determination of which GMHC has received notice from IRS or has
otherwise become aware that has adversely affected the tax qualified status
of any of the ERISA Plans or the exemption of the related trusts. As to any
such ERISA Plan that has been terminated, any legally-required notices to
employees and to the Pension Benefit Guaranty Corporation (if applicable)
have been
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provided as required, all other legally-required actions have been taken to
accomplish the termination, and a favorable IRS determination letter has been
requested with respect to such termination. In response to any such request
for a determination letter on plan termination, a favorable letter has been
received from the IRS or, if the requested favorable letter has not yet been
received, there has been no event or absence of a necessary action that would
prevent the issuance of a favorable determination letter on the termination
in due course. No accumulated funding deficiency as defined in Section
302(a)(2) of ERISA or Section 412(a) of the Code exists, with respect to any
of the ERISA Plans. Neither GMHC nor a controlled group of corporations of
which GMHC is a member have any actual or potential withdrawal liability, as
defined in Section 4201 and related provisions of ERISA. To the knowledge of
GMHC, none of the ERISA Plans, their related trusts or any trustee,
investment manager or administrator thereof has engaged in a nonexempt
prohibited transaction, as such term is defined in Section 406 of ERISA and
Section 4975 of the Code. There are not and have not been any excess
deferrals or excess contributions as defined in Code Sections 401(k)(8)(B)
and 402(g)(2)(a) under any ERISA Plan that have not been corrected. Each
ERISA Plan is, and to the knowledge of GMHC has been, operated and
administered in all material respects in conformance with the requirements of
all applicable laws and regulations, whether or not the ERISA Plan documents
have been amended to reflect such requirements. Except as set forth in the
Disclosure Schedule, GMHC has no obligation of any kind (whether under the
terms of the ERISA Plans or under any understanding with employees) to make
payments under, or to pay contributions to, any plan, agreement, or other
arrangement for deferred compensation of employees, whether or not tax
qualified, including, without limitation, a single employer tax qualified
plan, a tax qualified plan of a controlled group of corporations, a
multi-employer pension plan, a nonqualified deferred compensation plan or an
individual employment or compensation agreement, or any commitment to provide
medical benefits to retirees.
3.17 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as disclosed in
the Disclosure Schedule, since September 30, 1998, there has not been:
(a) Any event, occurrence, development, or state of
circumstances or facts which could reasonably be expected to result in
(i) a Material Adverse Effect on the business, results of operations,
financial position, assets, or properties of GMHC or its subsidiaries
or (ii) any transaction, contract or commitment except in the ordinary
and usual course of business and not requiring the payment in any case
of an amount in excess of $10,000.00 annually;
(b) Any damage, destruction, or casualty loss, whether insured
against or not, to the assets or properties of GMHC or its subsidiaries
that would result in a Material Adverse Effect;
(c) Except as permitted by Section 5.1(k), any increase in the
rate or terms of compensation payable or to become payable by GMHC to
its directors,
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officers, or key employees; any increase in the rate or terms of any
bonus, insurance, pension, or other employee benefit plan, payment,
or arrangement made to, for or with any such directors, officers, or
key employees; any special bonus or remuneration paid; or any written
employment, severance or change of control contract executed
or amended;
(d) Any amendment to GMHC's Articles of Incorporation or
Bylaws or any entry into any material agreement, commitment, or
transaction (including, without limitation, any borrowing, capital
expenditure or capital financing or any amendment, modification, or
termination of any existing agreement, commitment, or transaction) by
GMHC, except agreements, commitments, or transactions in the ordinary
course of business and consistent with past practices or as expressly
contemplated in this Agreement;
(e) Any direct or indirect declaration, setting aside, or
payment of any dividend or other distribution (whether in cash, stock,
property, or any combination thereof) in respect of the common stock of
GMHC, or any direct or indirect repurchase, redemption, or other
acquisition by GMHC of any shares of its stock or any option, warrant
or other agreement relating thereto;
(f) Any issuance or sale of any stock of GMHC (other than
issuances pursuant to the exercise of options or warrants outstanding
on September 30, 1998) or any issuance or granting of any option,
warrant, or right to purchase any stock of GMHC or any commitment to do
any of the foregoing;
(g) Any conduct of business that is outside the ordinary
course of business or not substantially in the manner that GMHC or its
subsidiaries have previously conducted their business (including any
change in their accounting method, principles or practices);
(h) Any material purchase or other acquisition of property by
GMHC or its subsidiaries; any sale, lease, or other disposition of
property by GMHC or its subsidiaries; or any expenditure by GMHC or its
subsidiaries, except in the ordinary course of business;
(i) Any incurrence of any noncontract liability which, either
singularly or in the aggregate is material to the business, results of
operations, financial condition, or prospects of GMHC or its
subsidiaries; or
(j) Any encumbrance or consent to encumbrance of any material
property or assets of GMHC or its subsidiaries except in the ordinary
course of business and except for the types of encumbrances listed in
Section 3.9.
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3.18 UNDISCLOSED LIABILITIES. Except for liabilities or
obligations described in the GMHC SEC Documents or the Disclosure Schedule,
or liabilities or obligations that would not in the aggregate have a Combined
Material Adverse Effect, neither GMHC or any of its subsidiaries nor any of
the property of GMHC or any of its subsidiaries is subject to any material
liability or obligation of any kind, whether accrued, absolute, contingent,
known, unknown or otherwise, whether or not such liabilities or obligations
would have been required to be contained or disclosed in a GMHC SEC Document
or any financial statement of GMHC and its subsidiaries. Without limiting the
generality of the foregoing, GMHC and its subsidiaries have no liability (and
to GMHC's knowledge there is no basis for any present or future charge,
complaint, action, suit, proceeding, hearing, investigation, claim or demand
against GMHC or any of its subsidiaries giving rise to any liability) arising
out of any injury to persons or property as a result of the ownership,
possession or use of any product manufactured, sold, leased or delivered or
service provided by GMHC or any of its subsidiaries.
3.19 INSURANCE. GMHC and its subsidiaries are now maintaining with
financially responsible insurance companies, the policies of insurance (the
"Policies") on their products, tangible assets and business as are listed in
the Disclosure Schedule, and all such Policies are currently in full force
and effect. There are no disputes with insurers under the Policies, and all
premiums due and payable thereto have been paid. To GMHC's knowledge, (i)
there are no pending or threatened cancellations or nonrenewals with respect
to any of the Policies, and GMHC or its subsidiaries, as the case may be, is
in compliance with all material conditions contained in the Policies, and
(ii) there are no pending or threatened claims against GMHC or any of its
subsidiaries related to product liability.
3.20 INTELLECTUAL PROPERTY.
(a) The term "Intellectual Property Assets" means collectively:
(i) all registered and unregistered trademarks,
service marks, and applications (collectively, "Marks");
(ii) all patents and patent applications
(collectively, "Patents");
(iii) all copyrights in both published works and
unpublished works that are material to GMHC's businesses
(collectively, "Copyrights");
(iv) all trade secrets; and
(v) all trade names, technology, know-how, processes
and related applications used in the conduct of the businesses
of GMHC and its subsidiaries. The Disclosure Schedule contains
a list and summary description of all Marks, Patents and
Copyrights.
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(b) GMHC owns, has the right to use, sell, license, dispose
of, and to bring actions for the misappropriation of all of the
Intellectual Property Assets, material to the conduct of its business
without any conflict with or infringement of the rights of others, free
and clear of all liens, charges, encumbrances, or other restrictions of
any kind.
(c) The Disclosure Schedule contains a list of all material
agreements, licenses, permits and other instruments relating to the
Intellectual Property Assets material to the conduct of its business to
which GMHC or any of its subsidiaries is a party, together with a brief
description of the Intellectual Property Asset.
(d) To GMHC's knowledge, no Intellectual Property Asset
material to the conduct of business of GMHC and its subsidiaries is
infringed or has been challenged.
(e) There is no action, suit, proceeding, judgment, order, or
writ pending or to GMHC's knowledge, threatened against GMHC or any of
its subsidiaries contesting the validity, ownership, or right to use,
sell, license, dispose of, or to bring actions for the misappropriation
of the Intellectual Property Assets material to the conduct of their
business.
3.21 CAR COUNTS. GMHC has delivered to QL 3000 the car counts
broken down for each of GMHC's and its subsidiaries' stores (including
franchise stores) for 1997 and for each month through December 1998. Copies
of the car counts are contained on the Disclosure Schedule. The car counts,
as of their respective dates are accurate, correct and complete.
3.22 FRANCHISES. The Disclosure Schedule sets forth all franchises
GMHC and its subsidiaries have with franchisees. Except as set forth on the
Disclosure Schedule, all franchises are in good standing, neither GMHC nor
any of its subsidiaries is in default under any franchise and, to GMHC's
knowledge, no franchisees are in default under any franchise. Also included
in the Disclosure Schedule is the following information: (i) the beginning
date, ending date and franchise renewal options (either by franchisee or
franchisor) for each franchise, (ii) 1997 franchise fees collected from each
franchise, (iii) 1997 franchise fees outstanding for each franchisee, (iv)
1997 royalty fees collected from each franchisee, (v) 1997 royalty fees
outstanding for each franchisee and (vi) any reserve amount for uncollectible
franchise fees or royalty fees. GMHC shall provide to QL 3000 a file
containing correspondence from all persons with whom GMHC or any subsidiary
has discussed the prospect of becoming a franchisee within the past three
years.
3.23 YEAR 2000. Except as set forth on the Disclosure Schedule,
GMHC has analyzed and to GMHC's knowledge has identified both internally
developed and acquired software which is material to its operations or which
has been or is being provided or delivered to customers or franchisees and
utilizes data embedded codes that may
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experience operations problems when the Year 2000 is reached and, where
problems have arisen, has made, or has coordinated with customers,
franchisees, suppliers, financial institutions and others with which it has
business relationships that are material to GMHC's business, to make all
necessary modifications to the identified software to make such software Year
2000 compliant. Except as disclosed in a GMHC SEC Document or in the
Disclosure Schedule, to GMHC's knowledge GMHC and its subsidiaries have not
incurred, and do not expect to incur, significant operating expenses or been
required, or expect to be required, to invest heavily in computer systems
improvements to be Year 2000 compliant, and business operations have not been
disrupted and, to GMHC's knowledge, its customers and franchisees have not
experienced any material interruption of service as a result of making such
software Year 2000 compliant. The Disclosure Schedule identifies all
outstanding Year 2000 compliance problems known to GMHC relating to its
software (including, without limitation, software provided or delivered to
customers or franchisees), with a correct and materially complete statement
of the status of GMHC's efforts to correct such problems. "Year 2000
compliant" means, with respect to GMHC's information technology, the
information technology is designed to be used prior to, during and after the
calendar Year 2000 A.D., and the information technology used during each such
time period will accurately receive, provide and process date/time data
(including, without limitation, calculating, comparing and sequencing) from,
into and between the 20th and 21st centuries, including the years 1999 and
2000, and leap-year calculations and will not materially malfunction, cease
to function, or provide invalid or incorrect results as a result of date/time
data, to the extent that other information technology, used in combination
with the information technology being acquired, properly exchanges date/time
data with it. "Information technology" means computer software, computer
firmware, computer hardware (whether general or specific purpose), and other
similar or related items of automated, computerized or software system(s)
that are used or relied on by GMHC and its subsidiaries and franchisees in
the conduct of their business.
3.24 GUARANTIES; POWERS OF ATTORNEY. Except as set forth in the
Disclosure Schedule, neither GMHC nor any of its subsidiaries is a guarantor
or otherwise liable for any liability or material obligation (including
without limitation any indebtedness) of any other Person. To GMHC's
knowledge, there are no outstanding powers of attorney executed on behalf of
GMHC.
3.25 BROKERS. No broker, investment banker, financial advisor, or
other Person, other than Green Manning & Bunch, LTD., the fees and expenses
of which will be paid by GMHC, is entitled to any broker's, finder's,
financial advisor's, or other similar fee or commission in connection with
the transactions contemplated by this Agreement based upon arrangements made
by or on behalf of GMHC. GMHC has provided QL 3000 true and correct copies of
all agreements between GMHC and Green Manning & Bunch, LTD.
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3.26 DISCLOSURE. None of the representations and warranties made
by GMHC in this Agreement contains any untrue statement of a material fact or
omits a material fact necessary to make each statement contained therein not
misleading. To GMHC's best knowledge, neither GMHC nor any responsible
officer or director of GMHC has intentionally concealed any fact known by
such Person to have a Material Adverse Effect.
3.27 TRUE AT CLOSING. The representations, warranties, covenants
and agreements of GMHC set forth in this Article 3, and made to third parties
in connection with the transactions contemplated in this Agreement, are and
will be true both on the date of this Agreement and on and as of the Closing,
except for representations, warranties, covenants and agreements made as of a
specific date, which shall be true as of such specific date.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF QL 3000
QL 3000 represents and warrants to GMHC as follows:
4.1 CORPORATE EXISTENCE AND AUTHORITY. QL 3000 is a corporation
duly organized, validly existing, and in good standing under the laws of the
State of Florida. QL 3000 has the full corporate power and authority to enter
into this Agreement and carry out its terms. QL 3000 has taken all corporate
action necessary to authorize the execution, delivery, and performance of
this Agreement. This Agreement has been duly and validly executed and
delivered by QL 3000 and is binding upon and enforceable against QL 3000 in
accordance with its terms.
4.2 NO ADVERSE CONSEQUENCES. Neither the execution and delivery
of this Agreement by QL 3000 nor the consummation of the transactions
contemplated hereby will:
(a) violate or conflict with any provision of the charter or
bylaws of QL 3000;
(b) violate any law, judgment, order, injunction, decree,
rule, regulation, or ruling of any Governmental Entity applicable to QL
3000, except as such would not individually or in the aggregate prevent
QL 3000 from performing its obligations under this Agreement and
consummating the transactions contemplated hereby; or
(c) require any notices to or consent of any third party,
including without limitation any Governmental Entity, except where the
failure to obtain such consents, approvals or authorizations would not
prevent or delay
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consummation of the Offer or the Merger or otherwise prevent QL 3000
from performing its obligations under this Agreement.
4.3 LEGAL PROCEEDINGS. There is neither pending nor, to the best
knowledge of QL 3000, threatened by or against QL 3000 any legal action,
claim, arbitration, investigation, or administrative proceeding before any
Governmental Entity that could enjoin or restrict the right or ability of QL
3000 to perform its obligations under this Agreement and, to the best
knowledge of QL 3000, there is no basis for any such claim, litigation,
proceeding, or investigation.
4.4 PROXY STATEMENT. The information supplied by QL 3000 for
inclusion in the Proxy Statement to be sent to the stockholders of GMHC in
connection with the Stockholders' Meeting will not, on the date the Proxy
Statement (or any amendment or supplement thereto) is first mailed to
stockholders of GMHC or, at the time of the Stockholders' Meeting, contain
any statement which, at such time and in light of the circumstances under
which it is made, is false or misleading with respect to any material fact,
or omit to state any material fact required to be stated therein or necessary
in order to make the statements therein not false or misleading or necessary
to correct any statement in any earlier communication with respect to the
solicitation of proxies for the Stockholders' Meeting which shall have become
false or misleading; PROVIDED, HOWEVER, that QL 3000 makes no representation
or warranty with respect to information supplied by GMHC for inclusion in any
of the foregoing documents.
ARTICLE 5
COVENANTS
5.1 CONTINUATION OF BUSINESS. From and after the execution date
of this Agreement until Closing, GMHC covenants and agrees to use its best
efforts to and shall cause its subsidiaries to: (i) keep the business and
organization of GMHC and its subsidiaries intact until the Closing; and (ii)
carry on the business of GMHC and its subsidiaries in its usual and ordinary
course of business and in a manner consistent with past practice until
Closing. Without limiting the generality of the foregoing, except as
expressly provided to the contrary in this Agreement or with the prior
written consent of QL 3000, until the Closing, GMHC covenants and agrees that:
(a) GMHC and its subsidiaries will not declare, pay, or set
aside for payment any dividend or other distribution of money or
property in respect of its capital stock;
(b) GMHC and its subsidiaries will not issue any shares of its
capital stock (except upon the valid exercise of currently outstanding
options under the Stock Option Plans, or currently outstanding
warrants), or issue or sell any
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securities convertible into, or exchangeable for, options or warrants
to purchase, or rights to subscribe to, any shares of its capital
stock or subdivide or in any way reclassify any shares of its capital
stock, or repurchase, reacquire, cancel, or redeem any such shares;
(c) GMHC and its subsidiaries will use their best efforts to
ensure that (i) the assets, property and rights now owned by GMHC and
its subsidiaries will be used, preserved, and maintained, as far as
practicable, in the ordinary course of business, to the same extent and
in the same condition as said assets, property, and rights are on the
date of this Agreement, and no unusual or novel methods of manufacture,
purchase, sale, management, or operation of said properties or business
or accumulation, disposition, or valuation of inventory will be made or
instituted; (ii) GMHC will not encumber any of its material assets or
make any material commitments relating to such assets, property, or
business, except in the ordinary course of its business. GMHC will use
its commercially reasonable best efforts to ensure that GMHC and its
subsidiaries will pay all debts when due in the usual course of
business;
(d) GMHC will use its best efforts to ensure that it and its
subsidiaries will comply in all material respects with all statutes,
laws, ordinances, rules, and regulations applicable to it in the
ordinary course of business;
(e) GMHC will use its best efforts to ensure that it and its
subsidiaries will keep or cause to be kept the Policies (or substantial
equivalents) in such amounts duly in force until the Closing Date and
will give QL 3000 notice of any material change in the Policies;
(f) GMHC or its subsidiaries will not incur additional debt
(including without limitation obligations under leases for real or
personal property whether or not required to be capitalized under
generally accepted accounting principles), incur or increase any
obligation or liability (fixed, contingent, or other, including without
limitation liabilities as a guarantor or otherwise with respect to
obligations of others) except in the ordinary and usual course of its
business and consistent with past practices, forgive or release any
material debt or claim, give any waiver of any right of material value,
or voluntarily suffer any extraordinary loss;
(g) GMHC or its subsidiaries will not make any payment to
discharge or satisfy any lien or encumbrance or pay any obligation or
liability (fixed or contingent) other than (i) current liabilities
(including the current portion of any long-term liabilities) included
in the financial statements contained in the GMHC SEC Documents and
(ii) current liabilities incurred or maturing in the ordinary course of
business since the date of the current balance sheet most recently
filed as part of a GMHC SEC Document or (iii) payments under its
revolving credit facility with Citibank N.A. made in the ordinary
course of business and consistent
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with past practices; provided, however, that notwithstanding anything
in this Agreement to the contrary, GMHC may pay any legal, accounting
or investment banking fees relating to this Agreement and the
transactions contemplated hereby;
(h) GMHC or its subsidiaries will not acquire any assets other
than assets acquired in the ordinary and usual course of its business
and consistent with past practices;
(i) GMHC or its subsidiaries will not purchase or otherwise
acquire, or agree to purchase or otherwise acquire, any debt or equity
securities of any Person other than equity securities issued by a money
market fund registered as an investment company under the Investment
Company Act of 1940;
(j) GMHC or its subsidiaries will not enter into any
transaction or contract or make any commitment to do the same, except
in the ordinary and usual course of business and not requiring the
payment in any case of an amount in excess of $10,000 annually and will
promptly advise QL 3000 in writing of any written proposal or formal
negotiations or discussions relating to any such transaction, contract
or commitment;
(k) GMHC or its subsidiaries will not increase the wages,
salaries, compensation, pension, or other benefits payable, or to
become payable by them, to any of their officers, employees, or agents,
including without limitation any bonus payments or severance or
termination pay, other than increases in wages and salaries required by
employment arrangements existing on the execution date of this
Agreement or otherwise in the ordinary and usual course of its
business;
(l) GMHC or its subsidiaries will not implement or agree to
any implementation of, or amendment or supplement to, any employee
profit sharing, stock option, stock purchase, pension, bonus,
commission, incentive, retirement, medical reimbursement, life
insurance, deferred compensation, severance pay, or any other employee
benefit plan or arrangement;
(m) GMHC or its subsidiaries will not change its accounting
methods, policies or practices and will maintain its books and records
in accordance with Generally Accepted Accounting Principles;
(n) When the consent of any third party to the transactions
contemplated by this Agreement is required under the terms of any
Contract to which GMHC or its subsidiaries is a party or by which
either is bound, GMHC will use its best efforts to obtain such consent
on terms and conditions not materially less favorable than those in
effect on the execution date of this Agreement;
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(o) GMHC and its subsidiaries will pay and discharge all
taxes, assessments, governmental charges, and levies imposed upon it,
its income or profits, or upon any property belonging to it, in all
cases before the date on which penalties attach thereto; and
(p) GMHC and its subsidiaries will not amend their respective
Articles of Incorporation or Bylaws.
5.2 NO SOLICITATION. Until such time, if any, as this Agreement is
terminated pursuant to Article 7, neither GMHC nor any of its subsidiaries
will, directly or indirectly, through an officer, director, agent or
otherwise, (i) solicit or initiate, directly or indirectly, or encourage
submission of inquiries, proposals, or offers from any potential purchaser
(other than QL 3000) relating to the disposition of all or any assets of GMHC
or any of its subsidiaries (other than sales of inventory in the ordinary
course of business and collection of accounts and notes receivable), or the
sale of any securities of GMHC or any of its subsidiaries or any merger,
consolidation, business combination, or similar transaction involving GMHC or
any of its subsidiaries (or any other transaction, such as option or
management agreements, that could have a similar economic result) or (ii)
participate in any discussion or negotiations regarding, or furnish any
person any information with respect to, the disposition of the assets or any
securities of GMHC or any of its subsidiaries or any part thereof or any
merger, consolidation, business combination, or similar transaction involving
GMHC or any of its subsidiaries (or any other transaction, such as option or
management agreements, that could result in a similar economic result);
provided, however, that in connection with any proposal relating to any of
the foregoing, GMHC may, to the extent required by fiduciary obligations as
advised by counsel, participate in any discussions or negotiations regarding,
and may furnish to any other person information with respect to, any of the
foregoing. GMHC shall immediately advise QL 3000 of, and communicate the
terms of, any such inquiry or proposal GMHC may receive.
5.3 ACCESS. For the period up to and including the Closing Date,
GMHC will provide, and cause each GMHC subsidiary to provide, to QL 3000 and
its authorized agents reasonable access to all of their physical assets,
facilities, financial information, production records, contracts and other
corporate records and documents as QL 3000 deems reasonably necessary,
provided that such activities do not unreasonably interfere with or hinder
the business or operation of GMHC. QL 3000 will have reasonable access during
normal working hours to all GMHC and GMHC subsidiary premises, properties,
and facilities and will be allowed to meet with their management personnel,
employees, and any outside consultants, including without limitation auditors
and accountants, investment and other bankers, tax and financial advisors,
and environmental consultants. In addition, GMHC will exercise its best
efforts to make available to QL 3000 any items, agreements and materials as
may be reasonably requested by QL 3000 or its lender in connection with QL
3000's financing of the Merger and refinancing of GMHC's debt, including but
not limited to copies of all leases, estoppel letters and consents of
landlords,
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franchisees and other parties, subordination and attornment agreements,
supply agreements, non-disturbance agreements and franchise agreements.
5.4 OTHER GOVERNMENT CONSENTS. Promptly following the execution of
this Agreement, the parties will proceed to prepare and file with the
appropriate Governmental Entities any requests for approval or waiver, if
any, that are required from Governmental Entities in connection with the
transactions contemplated by this Agreement, and the parties will diligently
and expeditiously prosecute and cooperate fully in the prosecution of such
requests for approval or waiver and all proceedings necessary to secure such
approvals and waivers.
5.5 BEST EFFORTS; NO INCONSISTENT ACTION. Subject to the terms and
conditions hereof, and to the fiduciary duties of the GMHC Board under
applicable law as advised by counsel, each party will use its best efforts to
effect the transactions contemplated by this Agreement and to fulfill the
conditions to the obligations of the opposing parties set forth in Article 6
of this Agreement. No party will take any action inconsistent with its
obligations under this Agreement or that could hinder or delay the
consummation of the transactions contemplated by this Agreement without legal
authority or basis, except that nothing in this Section 5.5 will limit the
rights of the parties under Article 6 of this Agreement.
5.6 CHANGED CIRCUMSTANCES. Each of GMHC and QL 3000 will notify the
other party promptly of any fact or occurrence between the date of this
Agreement and the Closing Date of which it becomes aware which makes any of
its representations contained in this Agreement untrue or causes any breach
of its obligations under this Agreement.
5.7 FEES AND EXPENSES. All fees and expenses incurred in connection
with the Merger, this Agreement, and the transactions contemplated by this
Agreement will be paid by the party incurring such fees or expenses, whether
or not the Merger is consummated.
5.8 PRESS RELEASES. No press releases or other public announcements
or disclosure of information to any third party concerning the transactions
contemplated by this Agreement may be made by either party without the prior
written consent of the other party, which consent will not be unreasonably
withheld; PROVIDED, HOWEVER, that nothing in this provision will prevent a
party from making such releases or announcements as are necessary for a party
to satisfy its legal obligations or the requirements of applicable law, but
in any such case the affected party will promptly notify the other party.
5.9 INDEMNIFICATION.
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(a) From and after the Effective Time, QL 3000 shall, and
shall cause the Surviving Corporation to indemnify, defend and hold harmless
the present and former officers, directors, employees and agents of GMHC and
its subsidiaries (the "Indemnified Parties") against all losses, claims,
damages, expense or liabilities arising out of or related to actions or
omissions or alleged actions or omissions occurring at or prior to the
Effective Time (i) to the full extent permitted by Utah law or, if the
protection afforded thereby to an Indemnified Party are greater, and (ii) to
the same extent and on the same terms and conditions (including with respect
to the advancement of expenses) provided for in GMHC's Articles of
Incorporation and By-Laws and agreements in effect at the date hereof (to the
extent consistent with applicable law), which provisions shall survive the
Merger and continue in full force and effect after the Effective Time.
Without limiting the foregoing, (i) QL 3000 shall, and shall cause the
Surviving Corporation to, periodically advance expenses (including attorney's
fees) as incurred by an Indemnified Party with respect to the foregoing to
the full extent permitted under applicable law, and (ii) any determination
required to be made with respect to whether an Indemnified Party shall be
entitled to indemnification shall, if requested by such Indemnified Party, be
made by independent legal counsel selected by the Surviving Corporation and
reasonably satisfactory to such Indemnified Party.
(b) This Section 5.9 shall survive the consummation of the
Merger at the Effective Time, is intended to benefit GMHC, the Indemnified
Parties and the Surviving Corporation, shall be binding on all successors and
assigns of QL 3000 and the Surviving Corporation and shall be enforceable by
the Indemnified Parties.
5.10 FINANCING. QL 3000 shall use its best efforts to cause CSFC
Retail Energy Finance or another lender to issue a bona fide commitment
letter in an amount not less than $11,000,000 within 60 days from the date of
execution of this Agreement. On or prior to the Closing Date, QL 3000 shall
use its best efforts to cause CSFC Retail Energy Finance or another lender
and Exxon Company or another supplier or equity or debt investor to advance
an amount not less than $11,000,000 and $1,500,000, respectively, for the
purpose of completing the Merger. On or prior to the Closing Date, QL 3000 or
an affiliated company shall use its best efforts to sell and issue not less
than $4,000,000 of equity securities of such company, for the purpose of
completing the Merger.
ARTICLE 6
CONDITIONS TO THE PARTIES' OBLIGATIONS
The obligations of each party to consummate the Merger are subject
to the conditions set forth in Sections 6.1 - 6.6, any of which may be waived
by QL 3000 and GMHC. The obligations of QL 3000 are subject to Sections 6.7,
6.8 and 6.9.
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<PAGE>
6.1 GOVERNMENTAL AUTHORIZATIONS. Each of the parties will have
obtained all authorizations, consents, and approvals of all governmental
agencies and authorities required to be obtained in order to permit
consummation of the transactions contemplated by this Agreement, in a form
satisfactory to each of QL 3000 and GMHC in its reasonable discretion.
6.2 GMHC STOCKHOLDER APPROVAL. If necessary to approve the Merger
under applicable law, this Agreement and the Merger shall have been duly
adopted and approved, at a duly called and held Stockholders' Meeting (or by
action in writing, if appropriate), acting in accordance with applicable law
and the Articles of Incorporation and Bylaws of GMHC, by the requisite vote
of the holders of the Shares, the Preferred Shares and any other capital
shares of GMHC ("Stockholder Approval").
6.3 NO PROHIBITIONS. There has not been promulgated or issued a
law, statute, rule, regulation, decree, order, injunction or ruling by any
Governmental Entity that remains in effect and prohibits, restrains, enjoins
or restricts the consummation of the Merger.
6.4 NO PROCEEDINGS. No action, suit or other proceeding is pending
against any party to this Agreement to prohibit, restrain, enjoin, restrict
or otherwise prevent the consummation of the transactions contemplated by
this Agreement.
6.5 REPRESENTATIONS AND WARRANTIES. With respect to the obligations
of each party's representations and warranties to the other party, the
representations and warranties shall be true and correct as of the date of
this Agreement and as of the Effective Date.
6.6 FAIRNESS OPINIONS. A fairness opinion relating to the Merger
shall have been issued by Green Manning & Bunch and shall not have been
withdrawn or materially modified.
6.7 OTHER CONSENTS. GMHC shall have obtained and provided to QL
3000 and/or its lender all authorizations, agreements, consents and approvals
of third parties, required to be obtained to permit the consummation of the
transactions contemplated by this Agreement, under any contract, lease,
instrument or other document to which GMHC or any of its subsidiaries is a
party or by which GMHC or any of its subsidiaries is bound or in connection
with QL 3000's financing of the Merger or refinancing of GMHC's debt except
such authorizations, agreements, consents and approvals, the failure of which
to obtain would not have a Material Adverse Effect.
6.8 DISSENTING STOCKHOLDERS. As of the Effective Date, the total
number of Dissenting Shares shall be less than 20% of the total outstanding
Shares.
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<PAGE>
6.9 COMPLETION OF FINANCINGS. QL 3000 shall have completed debt
financings with CSFC Retail Energy Finance or another lender in an amount not
less than $11,000,000 and Exxon Company or another supplier or equity or debt
investor in an amount not less than $1,500,000 and equity financing of not
less than $4,000,000.
ARTICLE 7
TERMINATION
7.1 TERMINATION BY QL 3000 AND/OR GMHC. This Agreement may be
terminated without further liability at any time before the Closing Date:
7.1.1 MUTUAL CONSENT. By mutual consent of QL 3000 and GMHC; or
7.1.2 INJUNCTION OR RESTRAINT. By either QL 3000 or GMHC, if
any Governmental Entity has promulgated or issued a law, statute, rule,
regulation, decree, order, injunction, or ruling or taken any other action
prohibiting, restraining, enjoining, restricting or otherwise prohibiting the
Offer or the Merger, that has become final and nonappealable.
7.2 TERMINATION BY QL 3000. QL 3000, if not then in default, may
terminate this Agreement at any time before the Closing Date upon written
notice to GMHC of the occurrence of a breach by GMHC of one or more of its
representations or warranties or a default in the observance or performance
of one or more of its covenants or agreements under this Agreement, which
breach or default is not cured within ten (10) days after GMHC has notice
thereof, except for breaches and defaults which, individually or in the
aggregate, would not have a Combined Material Adverse Effect or materially
impair the ability of the parties to consummate the transactions contemplated
by the Agreement.
7.3 TERMINATION BY GMHC.
7.3.1 GMHC, if not then in default, may terminate this
Agreement at any time before the Closing Date upon written notice to QL 3000
of the occurrence of a breach by QL 3000 of one or more of its
representations or warranties or a default in the observance or performance
of one or more of its covenants or agreements under this Agreement, which
default is not cured within ten (10) days after QL 3000 has notice thereof,
except for defaults which, individually or in the aggregate, would not
materially impair the ability of the parties to consummate the transactions
contemplated by this Agreement.
7.3.2 GMHC may terminate this Agreement at any time before the
Closing Date upon written notice to QL 3000 if (i) the Effective Time has not
occurred
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<PAGE>
within 120 days after the execution of this Agreement; or (ii) QL 3000 has
not received and provided GMHC with a copy of a bona fide commitment letter
from CSFC Retain Energy Finance or another lender with respect to the
financing of the Merger Consideration within 60 days after the execution of
this Agreement; or (iii) CSFC Retail Energy Finance or such other lender
withdraws its commitment letter after such commitment letter has been issued
and no other commitment letter has been issued.
7.3.3 GMHC may terminate this Agreement at any time before the
Closing Date upon written notice to QL 3000 if prior to the Closing Date, any
person has made a bona fide proposal relating to an acquisition transaction
relating to GMHC or the Shares, or has commenced a tender or exchange offer
for the Shares and the Board of Directors of GMHC determines in good faith
(i) after consultation with its financial advisors, that such transaction
constitutes a better offer than terms of Merger contemplated hereby and (ii)
after consultation with legal counsel, that failure to approve such proposal
and terminate this Agreement could reasonably be expected to result in a
breach of fiduciary duties of the Board of Directors of GMHC; PROVIDED,
HOWEVER, that notwithstanding anything in this Agreement to the contrary, the
termination of this Agreement by GMHC pursuant to this Section 7.3.3 shall
not be deemed to violate any other obligations of GMHC under this Agreement.
7.4 PROCEDURE; EFFECT OF TERMINATION. If either QL 3000 or GMHC
elects to terminate this Agreement pursuant to this Article 7, the
terminating party will promptly give written notice thereof to the other
party. In the event of termination pursuant to this Article 7, the parties
will be released from all liabilities and obligations under this Agreement,
other than the obligations under Section 5.8 and except that nothing herein
shall relieve any party from liability for damages to the extent arising from
a breach of this Agreement before termination.
ARTICLE 8
GENERAL PROVISIONS
8.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS. The
representations, warranties, and covenants in this Agreement will not survive
the Effective Time, and shall terminate at the Effective Time or upon
termination of this Agreement pursuant to Section 7.1. This Section 8.1 will
not limit any covenant or agreement of the parties that by its terms provides
for performance after the Effective Time or such termination.
8.2 FURTHER ACTION. GMHC and QL 3000 will execute any documents and
take any additional action reasonably required to fully implement this
Agreement.
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<PAGE>
8.3 ENTIRE AGREEMENT. This Agreement contains the entire agreement
and understanding among GMHC and QL 3000 regarding the subject matter hereof
and thereof and supersedes and replaces all prior or contemporaneous
negotiations, representations, or agreements, written or oral.
8.4 ASSIGNMENT. This Agreement may not be assigned by either party
by operation of law or otherwise without the prior written consent of the
other party, except that QL 3000 may assign all or any of its rights and
obligations to any wholly owned subsidiary or other affiliate of QL 3000;
PROVIDED, HOWEVER, that no such assignment shall relieve the assigning party
of its obligations hereunder if the assignee does not perform the
obligations. An Affiliate of a person shall include any other person
controlling, controlled by or under other common control with such person.
8.5 BINDING EFFECT; NO THIRD PARTY BENEFIT. This Agreement will
inure to the benefit of and be binding upon each of the parties and their
respective successors and assigns, subject to the restrictions on assignment
contained in Section 8.4. Nothing express or implied in this Agreement is
intended or will be construed to confer upon or give to any Person other than
the parties to this Agreement any rights or remedies under or by reason of
this Agreement or any transaction contemplated by it.
8.6 WAIVER. Failure of any party at any time to require
performance of any provision of this Agreement will not limit such party's
right to enforce such provision, nor will any waiver of any breach of any
provision of this Agreement constitute a waiver of any succeeding breach of
such provision or a waiver of such provision itself. Any waiver of any
provision of this Agreement will be effective only if set forth in writing
and signed by the party to be bound.
8.7 GOVERNING LAW. This Agreement will be governed and construed
in accordance with the laws of the State of Florida.
8.8 SEVERABILITY. If any term or provision of this Agreement or
the application thereof to any Person or circumstance is to any extent held
to be invalid or unenforceable, the remainder of this Agreement and the
application of such term or provision to Persons or circumstances other than
those as to which it is held invalid or unenforceable will not be affected
thereby, and each term or provision of this Agreement will be valid and
enforceable to the fullest extent permitted by law.
8.9 TIME OF ESSENCE. GMHC and QL 3000 hereby acknowledge and agree
that time is strictly of the essence with respect to each and every term,
condition, obligation, and provision of this Agreement.
8.10 COUNTERPARTS. This Agreement may be executed in counterparts,
each of which will be deemed an original, but all of which taken together
will constitute one and the same instrument, binding on the parties. If this
Agreement is executed in
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<PAGE>
counterparts, each party will transmit by facsimile a copy of the signed
counterpart upon execution and will cause an executed original counterpart to
be transmitted by courier service to the other parties.
8.11 AMENDMENTS. This Agreement may not be modified or amended
except by the written agreement of GMHC and QL 3000. This Agreement may not
be terminated other than pursuant to Article 7 except by the written
agreement of GMHC and QL 3000. A party may waive one or more of its rights
under this Agreement only in a written instrument signed by the party.
8.12 AUTHORITY. The person executing this Agreement on behalf of
each party warrants that she/he has the authority to execute this Agreement
and to so bind that party as provided in this Agreement.
8.13 NOTICES. All notices or other communications required or
permitted under this Agreement must be in writing and must be personally
delivered, sent by registered or certified mail, postage prepaid, return
receipt requested, or sent by facsimile. Any notice, if mailed, will be
deemed given when received; any notice, if transmitted by facsimile, will be
deemed given when transmitted and electronically confirmed. Notices will be
given to the following Persons:
To QL 3000: QL 3000, Inc.
9551 Baymeadows Road
Jacksonville, Florida 32256
Attention: David Plyler
Telephone: (904) 730-2660
Facsimile No.: (904) 733-6619
With a copy to: Smith Hulsey & Busey
1800 First Union Bank Tower
225 Water Street
Jacksonville, Florida 32202
Attention: John R. Smith, Jr., Esq.
Telephone: (904) 359-7700
Facsimile No.: (904) 359-7712
To GMHC: Grease Monkey Holding Corporation
633 17th Street, Suite 400
Denver, Colorado 80202
Attention: James Wallace
Telephone: (303) 295-0565
Facsimile No.: (303) 295-0565
A-35
<PAGE>
With a copy to: Otten, Johnson, Robinson, Neff & Ragonetti, P.C.
950 17th Street, 16th Floor
Denver, Colorado 80202
Attention: Douglas R. Wright, Esq.
Telephone: (303) 575-7571
Facsimile No.: (303) 825-6525
ARTICLE 9
DEFINITIONS
The following terms are defined in this Agreement in the sections
identified below:
<TABLE>
<CAPTION>
TERM Definition Section
<S> <C>
Affiliate 8.4
Agreement Preamble
Certificate of Merger 1.4
Certificates 2.2.2
Closing and Closing Date 1.8
Code 3.14.1
Combined Material Adverse Effect Introduction to Article 3
Contamination 3.13.1
Contracts 3.8
Copyrights 3.20
Disclosure Schedule Introduction to Article 3
Dissenting Stockholders 2.1.5
Dissenting Shares 2.1.5
Effective Date 1.4
Effective Time 1.4
Environmental Law 3.13.1
ERISA 3.16
ERISA Plans 3.16
GMHC Preamble
GMHC Board Recitals
GMHC Returns 3.14.1
GMHC SEC Document 3.5
Governmental Entity 3.2
Hazardous Substance 3.13.1
Information Technology 3.23
Intellectual Property Assets 3.20
IRS 3.16
</TABLE>
A-36
<PAGE>
<TABLE>
<CAPTION>
TERM Definition Section
<S> <C>
Leased Properties 3.10
Leases 3.10
Licenses 3.12
Marks 3.20
Material Adverse Change Introduction to Article 3
Material Adverse Effect Introduction to Article 3
Material Properties 3.9
Material Properties and Assets 3.9
Merger Recitals
Merger Consideration 2.1.1
NOL 3.14.3
Patents 3.20
Paying Agent 2.2.1
Person 2.2.4
Policies 3.19
Preferred Shares 3.3
Proxy Statement 1.2.2
QL 3000 Preamble
Securities Act 3.5
Share, Shares 3.3
Stock Option Plans 2.3
Stockholder Approval 6.2
Stockholders' Meeting 1.2.2
Surviving Corporation 1.5
Taxes 3.14.4
URBCA Recitals
Year 2000 Compliant 3.23
</TABLE>
IN WITNESS WHEREOF, the parties have executed this Agreement,
effective the day and year first written above.
QL 3000, INC. GREASE MONKEY HOLDING
CORPORATION
By /S/ DAVID PLYLER By /S/ JAMES B. WALLACE
-------------------------- ----------------------------
Name: DAVID PLYLER Name: JAMES B. WALLACE
--------------------- ------------------------
Title: PRESIDENT AND Title: CHAIRMAN OF THE BOARD
CHIEF OPERATING OFFICER -----------------------
--------------------
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<PAGE>
AMENDMENT, EXTENSION AND RELEASE AGREEMENT
THIS AMENDMENT, EXTENSION AND RELEASE AGREEMENT (this "Agreement")
is entered into as of the 30th day of July, 1999, by and AMONG GREASE MONKEY
HOLDING CORPORATION, a Utah corporation (the "Grease Monkey"), QL 3000, INC.,
a Florida corporation ("QL 3000") and E. CHESTER STOKES, JR. ("Stokes").
RECITALS
A. Grease Monkey and QL 3000 have entered into an Agreement and
Plan of Merger, dated March 26, 1999 (the "Merger Agreement").
B. The Merger Agreement provides that Grease Monkey may terminate
the Merger Agreement if the transactions contemplated thereby have not been
consummated on or before July 24, 1999.
C. The parties hereto desire to extend the July 24, 1999
termination date to the later of (a) the date ten business days after Grease
Monkey holds a special meeting, or any adjournment thereof, of its
shareholders for the purpose of obtaining approval under the URBCA for the
Merger, and (b) October 31, 1999 (the "Termination Date").
D. The parties hereto desire to ensure that Grease Monkey will
not suffer undue hardship or damages as a result of such extension or in the
event that the transactions are not consummated by the Termination Date.
AGREEMENT
In consideration of the mutual covenants and obligations contained
herein and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties hereto agree as follows:
1. EXTENSION. Section 7.3.2 of the Merger Agreement is hereby
amended to replace the phrase "within 120 days after the execution of this
Agreement" with the phrase "on or before the later of (a) the date ten
business days after Grease Monkey holds a special meeting, or any
adjournment thereof, of its shareholders for the purpose of obtaining
approval under the URBCA for the Merger, and (b) October 31, 1999."
2. ESCROW DEPOSIT. Upon the execution of this Agreement, QL 3000
shall deposit or cause to be deposited in an escrow account at U.S. Bank
National Association, Denver, Colorado, the sum of $400,000.00 (the "Escrow
Deposit"). At the Effective Time (if the Effective Time occurs) the Escrow
Deposit shall be transferred to the Paying Agent and shall be used as part of
the Merger Consideration. If (a) all of the conditions to QL 3000's
obligations under the Merger Agreement have not been satisfied or waived by
QL 3000 or (b) Grease Monkey defaults in the observance or performance of
one or more of its covenants or agreements under the Merger Agreement, which
default is not cured within ten (10) days after Grease Monkey has notice
thereof, except for defaults which, individually or in the aggregate, would
not have a Combined Material Adverse Effect or materially impair the ability
of the parties to consummate the transactions contemplated by the Merger
Agreement pursuant to its terms, and
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<PAGE>
Grease Monkey or QL 3000 elects to terminate the Merger Agreement, or (c)
Grease Monkey terminates the Merger Agreement pursuant to Section 7.3.3
thereof, then the Escrow Deposit shall be returned to QL 3000 (or its
designee). If on or after the Termination Date (a) all of the conditions to
QL 3000's obligations under the Merger Agreement have been satisfied or
waived by QL 3000, (b) the Effective Date has not occurred (for reasons other
than Grease Monkey's failure to close) by the end of the fifth business day
following the date on which the last of such conditions was satisfied or
waived and (c) Grease Monkey terminates the Merger Agreement or if Grease
Monkey terminates the Merger Agreement pursuant to Section 7.3.1 thereof,
then the Escrow Deposit shall be forfeited to Grease Monkey. If (a) (i) the
Effective Time does not occur on or before the Termination Date because
Grease Monkey has materially breached its representations, warranties or
covenants contained in the Merger Agreement (other than a breach of a
representation or warranty as to hich Grease Monkey had no control or
knowledge), or (ii) the shareholders of Grease Monkey vote to reject the
Merger or (iii) all of the conditions to Grease Monkey's obligations under
the Merger Agreement have been satisfied or waived by Grease Monkey and the
Effective Time has not occurred (for reasons other than QL 3000's failure to
close) by the end of the fifth business day following the date on which the
last of such conditions was satisfied or waived, and (b) QL 3000 shall have
not materially breached any of its representations, warranties or covenants
contained in the Merger Agreement, then QL 3000 may terminate the Merger
Agreement and will be entitled to liquidated damages from Grease Monkey in
the amount of $400,000.00; provided; however, that Grease Monkey shall not be
required to pay liquidated damages if Grease Monkey terminates the Merger
Agreement pursuant to Section 7.3.3 thereof. The parties agree that the
provisions regarding the Escrow Deposit and liquidated damages are an
integral part of this Agreement, and that, without these provisions, the
parties would not enter into this Agreement.
3. EXCLUSIVE REMEDY. The forfeiture of the Escrow Deposit and
payment of liquidated damages provided for in Section 2 hereof shall be the
sole and exclusive respective remedies for the breach of any representation,
warranty or covenant in the Merger Agreement or related thereto, including
the commitment by Stokes to provide financing.
4. DELETED CONDITION. Section 6.9 of the Merger Agreement is
hereby deleted.
5. DISSENTING SHARES. Section 6.8 of the Merger Agreement is
hereby amended to replace the number "20%" with the number "25%".
6. DISCLOSURE SCHEDULE. The Disclosure Schedule is hereby
amended to include the items listed on Schedule 1 hereof. QL 3000 hereby
waives, discharges and releases Grease Monkey from any claim of breach of the
Merger Agreement relating to the transactions listed on such Schedule 1.
7. REAFFIRMATION OF COMMITMENT LETTER. Stokes hereby reaffirms
his unconditional commitment to provide or cause to be provided all necessary
debt and equity financings to complete the merger described in the Merger
Agreement.
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<PAGE>
8. STATUTORY MERGER ELECTION. QL 3000 hereby irrevocably elects
the form of statutory merger described in the Merger Agreement. Grease
Monkey shall not be required to enter into the agreement attached as Exhibit
A to the Merger Agreement.
9. BINDING EFFECT. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their successors and assigns.
10. DEFINED TERMS. Capitalized terms used but not defined herein
shall have the meaning ascribed to them in the Merger Agreement.
11. BOARD APPROVAL. This Agreement shall be of no force or effect
until approved by the Board of Directors of Grease Monkey. Unless and until
such approval occurs, Grease Monkey shall not be deemed to have waived any
provision of the Merger Agreement, including, without limitation, its right
to terminate the Merger Agreement pursuant to Section 7.3.2 thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first set forth above.
GREASE MONKEY HOLDING QL 3000, INC., a Florida corporation
CORPORATION, a Utah corporation
By By
-------------------------------- -------------------------------------
Name: Name:
----------------------------- ----------------------------------
Title: Title:
---------------------------- ---------------------------------
- ----------------------------------
E. Chester Stokes, Jr.
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<PAGE>
SCHEDULE 1
A-41
<PAGE>
APPENDIX B
OPINION OF GMB
[Letterhead of Green, Manning & Bunch Securities, Inc.]
March 8, 1999
The Board of Directors
Grease Monkey Holding Corporation
633 17th Street, Suite 400
Denver, Colorado 80202
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of shares of Common Stock, par value $.03 per share (the
"Common Shares"), and shares of Series C Preferred Stock, $100.00 stated
value (the "Preferred Shares") (collectively, the "Shares"), of Grease Monkey
Holding Corporation, a Utah corporation (the "Company"), of the consideration
to be received by such holders in the merger (the "Merger") of the Company
pursuant to the Agreement and Plan of Merger (the "Agreement") made as of
March 26, 1999, by and among the Company and QL 3000, Inc., a Florida
corporation ("QL 3000"). The Agreement provides that the Company will be the
surviving corporation in the Merger. The Agreement further provides that
each Common Share issued and outstanding immediately prior to the effective
time of the Merger (the "Effective Time") will be converted into the right to
receive a cash payment in the amount of $1.00 and each Preferred Share will
be converted into the right to receive a cash payment in the amount of $100
plus accrued but unpaid dividends (collectively, the "Merger Consideration").
As of the Effective Time, all of the Shares will no longer be outstanding
and will automatically be canceled, and each holder of Shares (except for
dissenting shares) will cease to have any rights with respect thereto, except
the right to receive the Merger Consideration. The terms and conditions of
the Merger are set forth in more detail in the Agreement.
In connection with rendering our opinion, we have reviewed the Agreement. We
have also reviewed and analyzed certain publicly available business and
financial information relating to the Company for recent years and interim
periods to date, as well as certain internal financial and operating
information, including financial forecasts, projections and analyses prepared
by or on behalf of the Company and provided to us for purposes of our
analysis, and we have met with certain representatives of the Company to
review and discuss such information and, among other matters, the Company's
business, financial condition, results of operations and prospects.
We have reviewed and considered certain financial and stock market data
relating to the Company, and we have compared that data with similar data for
certain other publicly traded
<PAGE>
The Board of Directors
Grease Monkey Holding Corporation
March 8, 1999
Page 2
companies that we believe may be comparable in certain respects to the
Company or its business. We have also reviewed and considered the financial
terms of certain recent acquisitions and business combination transactions
that we believe to be reasonably comparable to the Merger or otherwise
relevant to our inquiry. We have also performed such other studies, analyses
and investigations and reviewed such other information as we considered
appropriate for purposes of this opinion.
In our review and analysis, and in formulating our opinion, we have assumed
and relied upon the accuracy and completeness of all the financial and other
information provided to us, discussed with us or made available to us,
including the Company's financial projections referenced above, and we have
not assumed any responsibility for independent verification of, and express
no opinion as to the accuracy of, any of such information. With respect to
the Company's forward looking financial information, we have relied upon the
reasonableness and accuracy of the information furnished to us, and have
assumed that such information was reasonably prepared in good faith and on a
basis reflecting the best currently available judgments and estimates of the
Company's management as of the date thereof. We have also assumed that
management of the Company is unaware of any facts not disclosed to us that
would make any of the information provided to us materially incomplete or
misleading. We have not reviewed any of the books and records of the Company
or conducted, or assumed any responsibility for conducting, a physical
inspection of the properties or facilities of the Company or for making or
obtaining an independent valuation or appraisal of the assets or liabilities
of the Company, and no such independent valuation or appraisal was provided
to us. Our opinion is necessarily based on economic and market conditions
and other circumstances as they currently exist and can be evaluated by us as
of the date hereof. Finally, we have assumed that the Merger will be
consummated in a manner consistent with the terms and conditions set forth in
the Agreement in its present form without material waiver or modification.
We have acted as financial advisor to the Company in connection with the
Merger and will receive a fee for our services relating to the Merger, which
services include rendering this opinion. A significant portion of such fee
is contingent upon consummation of the Merger.
Our opinion addresses only the fairness from a financial point of view to the
holders of the Shares of the Merger Consideration to be received by such
holders pursuant to the Agreement and does not address the Company's
underlying business decision to effect the Merger.
Our advisory services and the opinion expressed herein are provided for the
benefit and use of the Board of Directors of the Company in its evaluation of
the Merger and may not be used for any other purpose or reproduced,
disseminated, quoted or referred to at any time, in any manner or for any
purpose without our prior written consent, provided, however, that the Proxy
Statement to be filed in connection with the Merger (the "Proxy Statement")
may refer to our opinion, disclose the analysis performed by us in connection
with our opinion, and include our
B-2
<PAGE>
The Board of Directors
Grease Monkey Holding Corporation
March 8, 1999
Page 3
opinion as an exhibit. Our opinion is not intended to be and does not
constitute a recommendation to any stockholder as to how such stockholder
should vote on the proposed Merger. We have been engaged and are acting
solely as an advisor to the Company and not as an advisor to or agent of any
other person.
Based upon and subject to the foregoing, including the various assumptions
and limitations set forth herein, it is our opinion that, as of the date
hereof, the Merger Consideration to be received by the holders of the Shares
in the Merger is fair to such holders from a financial point of view.
Very truly yours,
GREEN MANNING & BUNCH SECURITIES, INC.
B-3
<PAGE>
APPENDIX C
TEXT OF SECTIONS 16-10a-1301 THROUGH 16-10a-1331 OF THE UTAH BUSINESS
CORPORATION ACT
UTAH BUSINESS CORPORATION ACT - PART 13 DISSENTERS' RIGHTS
16-10a-1301 DEFINITIONS.--For purposes of Part 13:
(1) "Beneficial shareholder" means the person who is a beneficial
owner of shares held in a voting trust or by a nominee as the record
shareholder.
(2) "Corporation" means the issuer of the shares held by a
dissenter before the corporate action, or the surviving or acquiring
corporation by merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under Section 16-10a-1302 and who exercises that right when
and in the manner required by Sections 16-10a-1320 through 16-10a-1328.
(4) Fair value" with respect to a dissenter's shares, means the
value of the shares immediately before the effectuation of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action.
(5) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the statutory rate set forth
in Section 15-1-1, compounded annually.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares
that are registered in the name of a nominee to the extent the beneficial
owner is recognized by the corporation as the shareholder as provided in
Section 16-10a-723.
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
16-10a-1302 RIGHT TO DISSENT.
(1) A shareholder, whether or not entitled to vote, is entitled to
dissent from, and obtain payment of the fair value of shares held by him in
the event of, any of the following corporate actions:
(a) consummation of a plan of merger to which the corporation is a
party if:
(i) shareholder approval is required for the merger by Section
16-10a-1103 or the articles of incorporation; or
(ii) the corporation is a subsidiary that is merged with its parent
under Section 16-10a-04;
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(b) consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be acquired;
(c) consummation of a sale, lease, exchange, or other disposition
of all, or substantially all, of the property of the corporation for which a
shareholder vote is required under Subsection 16-10a-1202(1), but not
including a sale for cash pursuant to a plan by which all or substantially
all of the net proceeds of the sale will be distributed to the shareholders
within one year after the date of sale; and
(d) consummation of a sale, lease, exchange, or other disposition
of all, or substantially all, of the property of an entity controlled by the
corporation if the shareholders of the corporation were entitled to vote upon
the consent of the corporation to the disposition pursuant to Subsection
16-10a-1202(2).
(2) A shareholder is entitled to dissent and obtain payment of the
fair value of his shares in the event of any other corporate action to the
extent the articles of incorporation, bylaws, or a resolution of the board of
directors so provides.
(3) Notwithstanding the other provisions of this part, except to
the extent otherwise provided in the articles of incorporation, bylaws, or a
resolution of the board of directors, and subject to the limitations set
forth in Subsection (4), a shareholder is not entitled to dissent and obtain
payment under Subsection (1) of the fair value of the shares of any class or
series of shares which either were listed on a national securities exchange
registered under the federal Securities Exchange Act of 1934, as amended, or
on the National Market System of the National Association of Securities
Dealers Automated Quotation System, or were held of record by more than 2,000
shareholders, at the time of:
(a) the record date fixed under Section 16-10a-707 to determine the
shareholders entitled to receive notice of the shareholders' meeting at which
the corporate action is submitted to a vote;
(b) the record date fixed under Section 16-10a-704 to determine
shareholders entitled to sign writings consenting to the proposed corporate
action; or
(c) the effective date of the corporate action if the corporate
action is authorized other than by a vote of shareholders.
(4) The limitation set forth in Subsection (3) does not apply if
the shareholder will receive for his shares, pursuant to the corporate
action, anything except
(a) shares of the corporation surviving the consummation of the
plan of merger or share exchange;
(b) shares of a corporation which at the effective date of the plan
of merger or share exchange either will be listed on a national securities
exchange registered under the federal Securities Exchange Act of 1934, as
amended, or on the National Market System of the National
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Association of Securities Dealers Automated Quotation System, or will be held
of record by more than 2,000 shareholders;
(c) cash in lieu of fractional shares; or
(d) any combination of the shares described in Subsection (4), or
cash in lieu of fractional shares.
(5) A shareholder entitled to dissent and obtain payment for his
shares under this part may not challenge the corporate action creating the
entitlement unless the action is unlawful or fraudulent with respect to him
or to the corporation.
16-10a-1303 DISSENT BY NOMINEES AND BENEFICIAL OWNERS
(1) A record shareholder may assert dissenters' rights as to fewer
than all the shares registered in his name only if the shareholder dissents
with respect to all shares beneficially owned by any one person and causes
the corporation to receive written notice which states the dissent and the
name and address of each person on whose behalf dissenters' rights are being
asserted. The rights of a partial dissenter under this subsection are
determined as if the shares as to which the shareholder dissents and the
other shares held of record by him were registered in the names of different
shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to
shares held on his behalf only if:
(b) the beneficial shareholder causes the corporation to receive
the record shareholder's written consent to the dissent not later than the
time the beneficial shareholder asserts dissenters' rights; and
(a) the beneficial shareholder dissents with respect to all shares of
which he is the beneficial shareholder.
(3) The corporation may require that, when a record shareholder
dissents with respect to the shares held by any one or more beneficial
shareholders, each beneficial shareholder must certify to the corporation
that both he and the record shareholders of all shares owned beneficially by
him have asserted, or will timely assert, dissenters' rights as to all the
shares unlimited on the ability to exercise dissenters' rights. The
certification requirement must be stated in the dissenters' notice given
pursuant to Section 16-10a-1322.
16-10a-1320 NOTICE OF DISSENTERS' RIGHTS.
(1) If a proposed corporate action creating dissenters' rights
under Section 16-10a-1302 is submitted to a vote at a shareholders' meeting,
the meeting notice must be sent to all shareholders of the corporation as of
the applicable record date, whether or not they are entitled to vote at the
meeting. The notice shall state that shareholders are or may be entitled to
assert dissenters' rights under this part. The notice must be accompanied by
a copy of this part and the
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materials, if any, that under this chapter are required to be given the
shareholders entitled to vote on the proposed action at the meeting. Failure
to give notice as required by this subsection does not affect any action
taken at the shareholders' meeting for which the notice was to have been
given.
(2) If a proposed corporate action creating dissenters' rights
under Section 16-10a-1302 is authorized without a meeting of shareholders
pursuant to Section 16-10a-704, any written or oral solicitation of a
shareholder to execute a written consent to the action contemplated by
Section 16-10a-704 must be accompanied or preceded by a written notice
stating that shareholders are or may be entitled to assert dissenters' rights
under this part, by a copy of this part, and by the materials, if any, that
under this chapter would have been required to be given to shareholders
entitled to vote on the proposed action if the proposed action were submitted
to a vote at a shareholders' meeting. Failure to give written notice as
provided by this subsection does not affect any action taken pursuant to
Section 16-10a-704 for which the notice was to have been given.
16-10a-1321 DEMAND FOR PAYMENT--ELIGIBILITY AND NOTICE OF INTENT.
(1) If a proposed corporate action creating dissenters' rights
under Section 16-10a-1302 is submitted to a vote at a shareholders' meeting,
a shareholder who wishes to assert dissenters' rights:
(a) must cause the corporation to receive, before the vote is
taken, written notice of his intent to demand payment for shares if the
proposed action is effectuated; and
(b) may not vote any of his shares in favor of the proposed action.
(2) If a proposed corporate action creating dissenters' rights
under Section 16-10a-1302 is authorized without a meeting of shareholders
pursuant to Section 16- 10a-704, a shareholder who wishes to assert
dissenters' rights may not execute a writing consenting to the proposed
corporate action.
(3) In order to be entitled to payment for shares under this part,
unless otherwise provided in the articles of incorporation, bylaws, or a
resolution adopted by the board of directors, a shareholder must have been a
shareholder with respect to the shares for which payment is demanded as of
the date the proposed corporate action creating dissenters' rights under
Section 16-10a-1302 is approved by the shareholders, if shareholder approval
is required, or as of the effective date of the corporate action if the
corporate action is authorized other than by a vote of shareholders.
(4) A shareholder who does not satisfy the requirements of
Subsections (1) through (3) is not entitled to payment for shares under this
part.
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16-10a-1322 DISSENTERS' NOTICE.
(1) If a proposed corporate action creating dissenters' rights
under Section 16- 10a-1302 is authorized, the corporation shall give a
written dissenters' notice to all shareholders who are entitled to demand
payment for their shares under this part.
(2) The dissenters' notice required by Subsection (1) must be sent
no later than ten days after the effective date of the corporate action
creating dissenters' rights under Section 16-10a-1302, and shall:
(a) state that the corporate action was authorized and the
effective date or proposed effective date of the corporate action;
(b) state an address at which the corporation will receive payment
demands and an address at which certificates for certificated shares must be
deposited;
(c) inform holders of uncertificated shares to what extent transfer
of the shares will be restricted after the payment demand is received;
(d) supply a form for demanding payment, which form requests a
dissenter to state an address to which payment is to be made;
(e) set a date by which the corporation must receive the payment
demand and by which certificates for certificated shares must be deposited at
the address indicated in the dissenters' notice, which dates may not be fewer
than 30 nor more than 70 days after the date the dissenters' notice required
by Subsection (1) is given;
(f) state the requirement contemplated by Subsection
16-10a-1303(3), if the requirement is imposed; and
(g) be accompanied by a copy of this part.
16-10a-1323 PROCEDURE TO DEMAND PAYMENT.
(1) A shareholder who is given a dissenters' notice described in
Section 16-10a-1322, who meets the requirements of Section 16-10a-1321, and
wishes to assert dissenters' rights must, in accordance with the terms of the
dissenters' notice:
(a) cause the corporation to receive a payment demand, which may be
the payment demand form contemplated in Subsection 16-10a-1322(2)(d), duly
completed, or may be stated in another writing;
(b) deposit certificates for his certificated shares in accordance
with the terms of the dissenters' notice; and
(c) if required by the corporation in the dissenters' notice
described in Section 16-10a-1322, as contemplated by Section 16-10a-1327,
certify in writing, in or with the payment
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demand, whether or not he or the person on whose behalf he asserts
dissenters' rights acquired beneficial ownership of the shares before the
date of the first announcement to news media or to shareholders of the terms
of the proposed corporate action creating dissenters' rights under Section
16-10a-1302.
(2) A shareholder who demands payment in accordance with Subsection
(1) retains all rights of a shareholder except the right to transfer the
shares until the effective date of the proposed corporate action giving rise
to the exercise of dissenters' rights and has only the right to receive
payment for the shares after the effective date of the corporate action.
(3) A shareholder who does not demand payment and deposit share
certificates as required, by the date or dates set in the dissenters' notice,
is not entitled to payment for shares under this part.
16-10a-1324 UNCERTIFICATED SHARES.
(1) Upon receipt of a demand for payment under Section 16-10a-1323
from a shareholder holding uncertificated shares, and in lieu of the deposit
of certificates representing the shares, the corporation may restrict the
transfer of the shares until the proposed corporate action is taken or the
restrictions are released under Section 16-10a-1326.
(2) In all other respects, the provisions of Section 16-10a-1323
apply to shareholders who own uncertificated shares.
16-10A-1325 PAYMENT.
(1) Except as provided in Section 16-10a-1327, upon the later of
the effective date of the corporate action creating dissenters' rights under
Section 16-10a-1302, and receipt by the corporation of each payment demand
pursuant to Section 16-10a-1323, the corporation shall pay the amount the
corporation estimates to be the fair value of the dissenters' shares, plus
interest to each dissenter who has complied with Section 16-10a-1323, and who
meets the requirements of Section 16-10a-1321, and who has not yet received
payment.
(2) Each payment made pursuant to Subsection (1) must be
accompanied by:
(a) (i) (A) the corporation's balance sheet as of the end of
its most recent fiscal year, or if not available, a fiscal year ending not
more than 16 months before the date of payment;
(B) an income statement for that year;
(C) a statement of changes in shareholders' equity for that year
and a statement of cash flow for that year, if the corporation customarily
provides such statements to shareholders; and
(D) the latest available interim financial statements, if any;
(ii) the balance sheet and statements referred to in Subsection must
be audited if the corporation customarily provides audited financial
statements to shareholders;
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(b) a statement of the corporation's estimate of the fair value of
the shares and the amount of interest payable with respect to the shares;
(c) a statement of the dissenter's right to demand payment under
Section 16-10a-1328; and
(d) a copy of this part.
16-10a-1326 FAILURE TO TAKE ACTION.
(1) If the effective date of the corporate action creating
dissenters' rights under Section 16-10a-1302 does not occur within 60 days
after the date set by the corporation as the date by which the corporation
must receive payment demands as provided in Section 16-10a-1322, the
corporation shall return all deposited certificates and release the transfer
restrictions imposed on uncertificated shares, end all shareholders who
submitted a demand for payment pursuant to Section 116-10a-1323 shall
thereafter have all rights of a shareholder as if no demand for payment had
been made.
(2) If the effective date of the corporate action creating
dissenters' rights under Section 16-10a-1302 occurs more than 60 days after
the date set by the corporation as the date by which the corporation must
receive payment demands as provided in Section 16-10a-1322, then the
corporation shall send a new dissenters' notice, as provided in Section
16-10a-1322, and the provisions of Sections 16-10a-1323 through 16-10a-1328
shall again be applicable.
16-10a-1327 SPECIAL PROVISIONS RELATING TO SHARES ACQUIRED AFTER ANNOUNCEMENT
OF PROPOSED CORPORATE ACTION.
(1) A corporation may, with the dissenters' notice given pursuant
to Section 16-10a-1302, state the date of the fist announcement to news media
or to shareholders of the terms of the proposed corporate action creating
dissenters' rights under Section 16-10a-1302 and state that a shareholder who
asserts dissenters' rights must certify in writing, in or with the payment
demand, whether or not he or the person on whose behalf he asserts
dissenters' rights acquired beneficial ownership of the shares before that
date. With respect to any dissenter who does not certify in writing, in or
with the payment demand that he or the person on whose behalf the dissenters'
rights are being asserted, acquired beneficial ownership of the shares before
that date, the corporation may, in lieu of making the payment provided in
Section 16-10a-1325, offer to make payment if the dissenter agrees to accept
it in full satisfaction of the demand.
(2) An offer to make payment under Subsection (1) shall include or
be accompanied by the information required by Subsection 16-10a-1325(2).
16-10a-1328 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
(1) A dissenter who has not accepted an offer made by a corporation
under Section 16-10a-1327 may notify the corporation in writing of his own
estimate of the fair value of his shares
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and demand payment of the estimated amount, plus interest, less any payment
made under Section 16-10a-1325, if:
(a) the dissenter believes that the amount paid under Section
16-10a-1325 or offered under Section 16-10a-1327 is less than the fair value
of the shares;
(b) the corporation fails to make payment under Section 16-10a-1325
within 60 days after the date set by the corporation as the date by which it
must receive the payment demand; or
(c) the corporation, having failed to take the proposed corporate
action creating dissenters' rights, does not return the deposited
certificates or release the transfer restrictions imposed on uncertificated
shares as required by Section 16-10a-1326.
(2) A dissenter waives the right to demand payment under this
section unless he causes the corporation to receive the notice required by
Subsection (1) within 30 days after the corporation made or offered payment
for his shares.
16-10a-1330 JUDICIAL APPRAISAL OF SHARES--COURT ACTION.
(1) If a demand for payment under Section 16-10a-1328 remains
unresolved, the corporation shall commence a proceeding within 60 days after
receiving the payment demand contemplated by Section 16-10a-1328, and
petition the court to determine the fair value of the shares and the amount
of interest. If the corporation does not commence the proceeding within the
60-day period, it shall pay each dissenter whose demand remains unresolved
the amount demanded.
(2) The corporation shall commence the proceeding described in
Subsection (1) in the district court of the county in this state where the
corporation's principal office, or if it has no principal office in this
state, the county where its registered office is located. If the corporation
is a foreign corporation without a registered office in this state, it shall
commence the proceeding in the county in this state where the registered
office of the domestic corporation merged with, or whose shares were acquired
by, the foreign corporation was located.
(3) The corporation shall make all dissenters who have satisfied
the requirements of Sections 16-10a-1321, 16-10a-1323, and 16-10a-1328,
whether or not they are residents of this state whose demands remain
unresolved, parties to the proceeding commenced under Subsection (2) as an
action against their shares. All such dissenters who are named as parties
must be served with a copy of the petition. Service on each dissenter may be
by registered or certified mail to the address stated in his payment demand
made pursuant to Section 16-10a-1328. If no address is stated in the payment
demand, service may be made at the address stated in the payment demand given
pursuant to Section 16-10a-1323. If no address is stated in the payment
demand, service may be made at the address shown on the corporation's current
record of shareholders for the record shareholder holding the dissenter's
shares. Service may also be made otherwise as provided by law.
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(4) The jurisdiction of the court in which the proceeding is
commenced under Subsection (2) is plenary and exclusive. The court may
appoint one or more persons as appraises to receive evidence and recommend
decision on the question of fair value. The appraisers have the powers
described in the order appointing them, or in any amendment to it. The
dissenters are entitled to the same discovery rights as parties in other
civil proceedings.
(5) Each dissenter made a party to the proceeding commenced under
Subsection (2) is entitled to judgment:
(a) for the amount, if any, by which the court finds that the fair
value of his shares, plus interest, exceeds the amount paid by the
corporation pursuant to Section 16-10a-1325; or
(b) for the fair value, plus interest, of the dissenter's
after-acquired shares for which the corporation elected to withhold payment
under Section 16-10a-1327.
16-10a-1331 COURT COSTS AND COUNSEL FEES.
(1) The court in an appraisal proceeding commenced under Section
16-10a-1330 shall determine all costs of the proceeding, including the
reasonable compensation and expenses of appraisers appointed by the court.
The court shall assess the costs against the corporation, except that the
court may assess costs against all or some of the dissenters, in amounts the
court finds equitable, to the extent the court finds that the dissenters
acted arbitrarily, vexatiously, or not in good faith in demanding payment
under Section 16-10a-1328.
(2) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) against the corporation and in favor of any or all dissenters
if the court finds the corporation did not substantially comply with the
requirements of Sections 16-10a-1320 through 16-10a-1328; or
(b) against either the corporation or one or more dissenters, in
favor of any other party, if the court finds that the party against whom the
fees and expenses are assessed acted arbitrarily, vexatiously, or not in good
faith with respect to the rights provided by this part.
(3) If the court finds that the services of counsel for any
dissenter were of substantial benefit to other dissenters similarly situated,
and that the fees for those services should not be assessed against the
corporation, the court may award to those counsel reasonable fees to be paid
out of the amounts awarded the dissenters who were benefited.
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PROXY
GREASE MONKEY HOLDING CORPORATION
633 17th Street, Suite 400
Denver, Colorado 80202
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD
ON MONDAY, NOVEMBER 22, 1999 AT 2:00 P.M.
The undersigned hereby appoints James B. Wallace and Jerry D. Armstrong, and
each of them, proxies, with full power of substitution and resubstitution,
for and in the name of the undersigned, to vote all shares of common stock,
par value $.03 per share, of Grease Monkey Holding Corporation, held by the
undersigned at the close of business on October 8, 1999, which the
undersigned would be entitled to vote if personally present at the Special
Meeting of Shareholders to be held on November 22, 1999 at 2:00 p.m., local
time, at the training center of the Company, 633 17th Street, Suite 400,
Denver, Colorado 80202, and at any adjournment thereof, upon the matters
described in the accompanying Notice of Special Meeting of Shareholders and
Proxy Statement, receipt of which is hereby acknowledged, and upon any other
business that may properly come before the meeting or any adjournment
thereof. Said proxies are directed to vote on the matters described in the
Notice of Special Meeting of Shareholders and Proxy Statement as follows, and
otherwise in their discretion upon such other business as may properly come
before the meeting or any adjournment thereof.
PROPOSAL OF THE BOARD OF DIRECTORS TO APPROVE THE AGREEMENT AND PLAN OF
MERGER, DATED AS OF MARCH 26, 1999 (AS AMENDED BY THE AMENDMENT, EXTENSION
AND RELEASE AGREEMENT, DATED JULY 30, 1999), BY AND BETWEEN GREASE MONKEY
HOLDING CORPORATION AND QL 3000, INC.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The undersigned hereby revokes any proxy or proxies heretofore given to vote
upon or act with respect to such stock and hereby ratifies and confirms all
that said proxies, their substitutes, or any of them, may lawfully do by
virtue hereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF GREASE MONKEY
HOLDING CORPORATION.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO DIRECTION IS INDICATED, THE
PROXY WILL BE VOTED FOR THE PROPOSAL LISTED ABOVE.
FAILURE TO RETURN THIS PROXY WILL HAVE THE EFFECT OF A VOTE AGAINST THE
PROPOSAL.
Dated: __________, 1999
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Signature
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Please sign exactly as your
name(s) appear(s) hereon. Where more than one
owner is shown above, each should sign. When
signing in a fiduciary or representative
capacity, please add your full title as such. If
this proxy is submitted by a corporation, it
should be executed in the full corporate name by a
duly authorized officer. If a partnership, please
sign in partnership name by authorized person.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. IF
YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF
YOU HAVE PREVIOUSLY RETURNED YOUR PROXY.
<PAGE>
PROXY
GREASE MONKEY HOLDING CORPORATION
633 17th Street, Suite 400
Denver, Colorado 80202
PROXY FOR THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD
ON MONDAY, NOVEMBER 22, 1999 AT 2:00 P.M.
The undersigned hereby appoints James B. Wallace and Jerry D. Armstrong, and
each of them, proxies, with full power of substitution and resubstitution,
for and in the name of the undersigned, to vote all shares of Series C
preferred stock, $100.00 stated value, of Grease Monkey Holding Corporation,
held by the undersigned at the close of business on October 8, 1999, which
the undersigned would be entitled to vote if personally present at the
Special Meeting of Shareholders to be held on November 22, 1999 at 2:00 p.m.,
local time, at the training center of the Company, 633 17th Street, Suite
400, Denver, Colorado 80202, and at any adjournment thereof, upon the matters
described in the accompanying Notice of Special Meeting of Shareholders and
Proxy Statement, receipt of which is hereby acknowledged, and upon any other
business that may properly come before the meeting or any adjournment
thereof. Said proxies are directed to vote on the matters described in the
Notice of Special Meeting of Shareholders and Proxy Statement as follows, and
otherwise in their discretion upon such other business as may properly come
before the meeting or any adjournment thereof.
PROPOSAL OF THE BOARD OF DIRECTORS TO APPROVE THE AGREEMENT AND PLAN OF
MERGER, DATED AS OF MARCH 26, 1999 (AS AMENDED BY THE AMENDMENT, EXTENSION
AND RELEASE AGREEMENT, DATED JULY 30, 1999), BY AND BETWEEN GREASE MONKEY
HOLDING CORPORATION AND QL 3000, INC.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
The undersigned hereby revokes any proxy or proxies heretofore given to vote
upon or act with respect to such stock and hereby ratifies and confirms all that
said proxies, their substitutes, or any of them, may lawfully do by virtue
hereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF GREASE MONKEY
HOLDING CORPORATION.
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO DIRECTION IS INDICATED, THE
PROXY WILL BE VOTED FOR THE PROPOSAL LISTED ABOVE.
FAILURE TO RETURN THIS PROXY WILL HAVE THE EFFECT OF A VOTE AGAINST THE
PROPOSAL.
Dated: __________, 1999
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Signature
<PAGE>
Please sign exactly as your
name(s) appear(s) hereon. Where more than one
owner is shown above, each should sign. When
signing in a fiduciary or representative
capacity, please add your full title as such. If
this proxy is submitted by a corporation, it
should be executed in the full corporate name by a
duly authorized officer. If a partnership, please
sign in partnership name by authorized person.
PLEASE COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT PROMPTLY IN THE
ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. IF
YOU ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH, EVEN IF
YOU HAVE PREVIOUSLY RETURNED YOUR PROXY.
