<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________ to________________ .
Commission File Number: 000-9812
GREASE MONKEY HOLDING CORPORATION
---------------------------------
(Name of small business issuer
in its charter)
Utah 87-0321320
----------------------------- --------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
633 17th Street, Suite 400
Denver, Colorado 80202
-------------------- -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (303) 308-1660
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
$0.03 Par Value Common Stock
----------------------------
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
The issuer's revenue for its most recent fiscal year was: $20,101,585
The aggregate market value of the issuer's voting stock held as of February
26, 1999, by nonaffiliates of the issuer was $2,651,888.
As of February 26, 1999, the issuer had 4,647,880 shares of its $0.03 par
value common stock outstanding.
Transitional Small Business Disclosure Format. Yes / / No /X/
<PAGE>
GREASE MONKEY HOLDING CORPORATION
Annual Report on Form 10-KSB
December 31, 1998
Table of Contents
<TABLE>
<CAPTION>
PART I PAGE
------ ----
<S> <C>
Item 1 - Description of Business.................................... 1
Item 2 - Description of Property.................................... 6
Item 3 - Legal Proceedings.......................................... 7
Item 4 - Submission of Matters to a Vote of Security Holders........ 7
PART II
-------
Item 5 - Market for Common Equity and Related
Stockholder Matters........................................ 8
Item 6 - Management's Discussion and Analysis or Plan
of Operation .............................................. 9
Item 7 - Financial Statements ...................................... 23
Item 8 - Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure..................... 23
PART III
--------
Item 9 - Directors, Executive Officers, Promoters and
Control Persons, Compliance with
Section 16(a) of the Exchange Act.......................... 24
Item 10 - Executive Compensation..................................... 28
Item 11 - Security Ownership of Certain Beneficial Owners and
Management................................................. 32
Item 12 - Certain Relationships and Related Transactions............. 33
Item 13 - Exhibits and Reports on Form 8-K........................... 36
</TABLE>
ii
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Grease Monkey Holding Corporation ("GMHC") or ("the Company") 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").
THE CONCEPT. Grease Monkey Centers provide the automobile user 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 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.
COMPANY-OWNED CENTERS. As of January 31, 1999, the Company owned and
operated a total of 31 Grease Monkey Centers and owned an additional two
Centers which are operated by a third party under a Management Agreement. The
Grease Monkey Centers owned by the Company were either opened by the Company
(4), acquired from franchisees through purchase (19), acquired as a result of
the Company's exercise of its right of first refusal (1), or taken over from
failed franchisees (9). The Company believes the operation of Company-owned
Centers is important to its overall success and expects to continue to
purchase and develop Company-owned Centers.
THE FRANCHISE. The Company licenses franchisees to operate Grease
Monkey Centers pursuant to a franchise agreement. A franchisee is required to
pay a franchise fee totaling $28,000 for the initial license and $16,800 for
each additional license. If three or more licenses are purchased
concurrently, an Exclusive Territory Development Agreement ("ETD Agreement")
may be executed. When an ETD Agreement is executed, the franchisee pays a
development fee equal to $28,000 for the first Center to be developed and
$8,400 for the second and each subsequent Center to be developed. The
development fee is nonrefundable. The initial franchise fee of $28,000 is
charged for the first franchise and $16,800 for the second and each
subsequent franchise acquired under the ETD Agreement. The portion of the
development fee paid for each Center to be developed is applied toward the
initial franchise fee for that franchise. The Company also offers to select
qualified persons the opportunity to acquire a larger nonexclusive area
("Development Area") than under the ETD Agreement. If a Development Area is
1
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purchased, an Area Development Agreement ("AD Agreement") is executed. When
an AD Agreement is executed, the franchisee pays an area development fee
equal to $5,000 times the estimated number of franchises which may be
established in the Development Area. The initial franchise fee of $28,000 is
charged for the first franchise and $16,800 for the second and each
subsequent franchise acquired under the AD Agreement.
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CENTERS. On January 31, 1999, the Company had a total of 216 Grease
Monkey Centers open. The following table provides certain information
pertaining to Grease Monkey Centers as of January 31, 1999:
<TABLE>
<CAPTION>
Centers Open
Franchise ----------------------------------
Applicants Franchises Sold (1) Franchised Company-Owned Total
========== =================== ==================================
<S> <C> <C> <C> <C> <C>
Arizona 1 5 5 5
California 13 11 2 13
Colorado 3 40 33 20 53
Florida 3 3 3
Georgia 1 1 1
Idaho 3 3 3
Illinois 1 1 1
Indiana 10 10 1 11
Iowa 7 6 6
Kansas 5 5 5
Kentucky 1 1 1
Maryland 5 4 4
Missouri 4 4 3 3
Montana 1 1 1
Nebraska 2 2 2
New Jersey 9 8 8
New Mexico 1 1 1
New York 2 1 1
North Carolina 8 7 7
North Dakota 1 1 1
Ohio 12 9 9
Pennsylvania 10 9 9
Rhode Island 1 1
South Carolina 11 11 11
Tennessee 1
Texas 3 3 1 4
Virginia 8 8 8
Washington 5 5 8 13
West Virginia 4 3 3
Wyoming 2 2 2
Mexico 1 31 26 26
----- ----- ----- ----- -----
TOTALS: 9 209 183 33 216
===== ===== ===== ===== =====
</TABLE>
(1) Does not include those Centers operated by the Company.
During 1998, eight franchise licenses were sold and sixteen
franchised Grease Monkey Centers were opened. In 1998, ten franchise
agreements were terminated for non-performance, three franchise agreements
were canceled concurrently with the Company taking over the
3
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operations of the Centers, and eight franchises of open Grease Monkey Centers
were terminated, in accordance with the franchise agreement when the Centers
were closed or sold.
PATENTS, TRADEMARKS AND LICENSES. The Company owns no patents or
concessions. As described above, the sale of franchises is materially
important to the operations and growth of the Company.
The Company is the owner of, and has registered with the United
States Patent and Trademark Office on the Principal Register, the following
trademarks and service marks: "GREASE MONKEY", "GREASE MONKEY, THE 10 MINUTE
LUBE PROS" (including variations thereof), "MONKEY TALK", "SEYMORE MILES" and
"MONKEY SHINE", as well as various designs and logotypes associated with and
used in connection therewith. The trademark and service mark registrations
expire between 2001 and 2009 and may be renewed for successive periods of 10
years. The Company intends to maintain the above stated registrations in the
manner required by applicable statute, namely, the Trademark Act of 1946, as
amended.
The mark, "GREASE MONKEY, 10 MINUTE LUBE & OIL PROS" and Design, was
registered in the State of Colorado and is effective until November of 2004.
The mark "GREASE MONKEY, THE TEN MINUTE LUBE PROS" was registered in the
State of Colorado and is effective to March 2009.
The Company has also registered its mark "GREASE MONKEY, THE 10
MINUTE LUBE PROS" and Design with the Canadian Register of Trademarks, its
mark "GREASE MONKEY" and Design with the Mexico Register of Trademarks and
the Trinidad and Tobago Register of Trademarks, and the monkey design with
the United Kingdom Register of Trademarks. These foreign registrations expire
between 1999 and 2007 and may be renewed for successive periods.
COMPETITION. The Company experiences competition for customers at the
retail level and also experiences competition from other fast lube operators for
franchisees and sites for Centers.
At the retail level, the Centers experience competition from
automobile dealers, independent mechanic shops, other fast lube operations,
department store auto centers, and full service gas stations. The largest
source of competition, however, may be the do-it-yourself market.
The Company believes that the Grease Monkey Centers comprise the 4th
largest fast lube chain with 216 Grease Monkey Centers operating at February
28, 1999. The largest chain is Jiffy Lube International, Inc., owned by
Pennzoil, which has 1,588 centers open, followed by Quaker State Minit-Lube,
Inc. (also d/b/a Q Lube), owned by Quaker State Oil Company with 585 centers
open. Ashland Oil Co. (d/b/a Rapid Oil Co. or Valvoline Instant Oil Change)
follows with 581 open centers.
4
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The Company recognizes that the barriers to enter the fast
lubrication business are significant, and in the future the Company may
experience additional direct competition from other companies with greater
strength and financial resources than those of the Company.
ENVIRONMENTAL REGULATIONS. The Company and its franchisees are
subject to various federal, state, and local provisions regarding the storage
and disposal of waste materials, including the collection and disposal of
used lubricating oils and other automotive fluids and waste oil filters. Each
Grease Monkey Center is equipped with facilities for the collection of waste
materials that comply with all applicable laws and regulations. Waste
materials are disposed of with fully qualified and licensed collection
services. Some used oil and used filters are sold to recyclers. Compliance
with current and anticipated future federal, state and local requirements
regarding the collection and disposal of these materials and storage and
transfer of used oil and used oil filters to recyclers is not expected to
materially affect capital expenditures, earnings, or the competitive position
of the Company.
The Company (with respect to any Center it owns or operates) and its
franchisees are subject to federal, state or local regulations regarding the
design, construction, operation and closure of storage tanks, including
regulations applicable to underground storage tanks ("UST's"). In those
locales where required, the operator of a Center must register the number and
location of UST's. The registration fee is not a significant capital
expenditure and the registration requirement does not place the Company at a
competitive disadvantage. In 1998, Federal regulations required UST's either
be removed, equipped with leak monitoring devices or meet temporary closure
requirements. Temporary closure requires that support of corrosion protection
and release detection devices be maintained and that vent lines are left open
and functioning and all other lines, pumps, manways, and ancillary equipment
are capped and secure. Release detection is not required as long as the UST
system is empty. The Company has complied with Federal regulations by
installing leak monitoring devices on the underground storage tanks at two of
its Centers, has removed underground storage tanks at four of its Centers,
has above ground storage tanks at thirteen of its Centers and has met the
requirements of temporary closure at fourteen of its Centers, including the
removal of contents. Costs associated with the removal of the remaining UST's
at Company-owned Centers and at franchised Centers which have UST's where the
Company is on the lease is not expected to exceed $150,000.
The regulations issued by the Environmental Protection Agency and
the parallel state regulations require insurance or proof of the financial
ability of the owner or operator of a UST to cover any damage caused by leaks
from the UST. The fee will vary from state to state. However, all lubrication
centers in the same state will be required to purchase the insurance and,
therefore, this requirement should not place the Company or its franchisees
at a competitive disadvantage, but may result in an increase in the cost of
the service.
Some states have passed regulations that designate used oil and oil
filters and their contents as hazardous waste. Such regulations require the
Center operator to first crush the filter and then dispose of it and the used
oil through use of a regulated hazardous waste carrier. Other states are
considering such regulations. These regulations are imposed on all fast lube
operators
5
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and do not place the Company or its franchisees at a competitive
disadvantage, but may result in an increase in the cost of the service.
EMPLOYEES. At January 31, 1999, the Company had 28 full-time employees
at its corporate offices, 8 full-time employees at its field offices, and 240
full-time employees in its Company-owned Grease Monkey Centers for a total of
276 employees. From time to time the Company hires part-time employees at its
Company-owned Centers.
POTENTIAL MERGER. On March 26, 1999, the Board of Directors of the
Company entered into a merger agreement with QL 3000, Inc., a privately held
company based in Jacksonville, Florida. The merger agreement provides that
each shareholder of the Company will receive $1.00 for each share of the
Company's common stock. Holders of the Company's preferred stock will receive
the stated value of their preferred stock plus all accrued and unpaid
dividends. QL 3000 must complete debt and equity financing to fund the merger
consideration. The Company may terminate the Merger Agreement if QL 3000 has
not received a commitment letter for the debt financing by May 25, 1999. In
addition, completion of the merger is subject to regulatory and shareholder
approvals.
ITEM 2. DESCRIPTION OF PROPERTY
At January 31, 1999, the Company owned the buildings, on leased
land, at eight Grease Monkey Centers. Of the eight properties, one is leased
to a franchisee, and seven are used for Company-owned Centers.
In addition, the Company owned one developed parcel of real estate
in St. Louis, Missouri, two parcels of developed real estate in metropolitan
Denver, Colorado, and one parcel of developed real estate in Warwick, Rhode
Island. The property in Missouri was sold on February 9, 1999, and the
properties in Colorado and Rhode Island house Company-owned Centers. The
Company also owns three undeveloped parcels of bare land, two in Colorado and
one in Washington.
The Company's offices and training facility are located at 633 17th
Street, Suite 400, Denver, Colorado, 80202. The Company leases a total of
17,907 rentable square feet, which includes offices and a training facility,
pursuant to a lease from an unaffiliated entity. The lease expires on
November 30, 2008. Rent is approximately $18,000 per month.
The Company has guaranteed leases or leased and subleased real
estate for franchised Grease Monkey Centers. The Company is directly liable
on the leases at 22 locations if the franchisees or third parties do not make
the lease payments. (See Note F to the Consolidated Financial Statements.)
6
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ITEM 3. 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 action
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the Company's fourth fiscal quarter of the year ended
December 31, 1998, no matter was submitted to a vote of the Company's
security holders, either by proxy solicitation or otherwise.
7
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION.
Since June 1998, the Company's common stock has traded on The OTC
Bulletin Board 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 following table reports high, low and last sales prices of the
common stock as reported by Nasdaq 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
</TABLE>
Prices represent quotations between dealers and do not include
retail mark-ups, mark-downs, or commissions.
(b) HOLDERS.
As of February 26, 1999, the Company had 2,314 shareholders of
record.
(c) DIVIDENDS.
To date, the Company has not paid any cash dividends on its common
stock. Holders of the Company's 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 Series C Preferred stock must be paid before dividends are paid on
the Company's common stock. As of the date of filing of this Annual Report on
Form 10-KSB, the Company is in arrears in the payment of dividends on the
Series C Preferred Stock in the amount of approximately $665,000, which has
not been recognized in the financial
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statements. Under Paragraph 5(d) of the Statement of Designation, Voting
Powers, Preferences and Rights of the Series C Preferred Stock ("Statement of
Designation"), if dividends on the Series C Preferred Stock are in arrears in
an aggregate amount equal to at least four quarterly dividends, the number of
members of the Board of Directors of the Company is automatically increased
by the smallest number of directors that will constitute at least 25% of the
Board of Directors after such increase and the holders of the Series C
Preferred Stock (voting as a separate voting group) have the exclusive right
to elect, remove or replace such additional directors of the Company. The
holders of the Series C Preferred Stock have not notified the Company that
they have any intention to elect or serve as Directors.
As compensation for a guarantee of a standby letter of credit by
Jerry D. Armstrong, James B. Wallace, Ray O. Brownlie and J.H. Bander in
favor of the Company's landlord for its corporate office space, Messrs.
Armstrong and Wallace, who are directors of the Company, and Messrs. Brownlie
and Bander who are significant shareholders of the Company, were granted two
year warrants to purchase 100,000 shares each of the Company's common stock
for $1.05 per share. The warrants were issued in reliance upon the exemption
from registration provided by Section 4(a) of the Securities Act of 1933, as
amended. Such persons represented to the Company that they acquired the
warrants for their own accounts and not with a view to distribution. Each
person had available all material information concerning the Company. The
certificates evidencing the warrants bear a restrictive legend under the
Securities Act of 1933, as amended, and no underwriter was involved in the
transaction.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
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
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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 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
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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 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.
11
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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>
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>
12
<PAGE>
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 ETD and AD Agreements as discussed
previously. Initial franchise fees and certain development fees are deferred and
recognized as revenue when the related Center opens for 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>
13
<PAGE>
(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.
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.
14
<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.
15
<PAGE>
The following table sets forth the results of operations from
Company-owned Centers:
<TABLE>
<CAPTION>
Year 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; 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.
16
<PAGE>
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.
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
17
<PAGE>
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 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.
18
<PAGE>
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 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.
19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL RESOURCES
The Company currently has lines of credit with varying interest
rates from a or guaranteed by a related party. The lines total $489,000 of
which $484,500 was outstanding at December 31, 1998. Monthly payments are for
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, and will be used 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 ballon payment and
bear interest at a rate provided under the Loan Agreement plus guarantee
fees. For an increased guarantee fee, the Company can extend the payment
terms an additional five years. An initial draw of $2,620,000 was made on
September 29, 1997, with interest at 9.26% plus guarantee fees. Additional
draws totaling $2,198,600 were made in 1998 with an average interest rate of
approximately 9% plus guarantee fees. As of December 31, 1998, approximately
$4,533,000 is outstanding under the loan agreement. The remaining $181,400
available for draw on the Loan Agreement was drawn in the first quarter of
1999.
In May 1996, the Company entered into a Business Loan Agreement with
a bank for a $2,000,000 three year line of credit. Funds drawn under the line
are restricted to the development of new Centers. The Company has the right
to select an optional interest rate as described in the agreement, however,
in no case will the interest rate exceed the bank's reference rate. In
exchange for a supply agreement on any Centers built utilizing the line of
credit, a motor oil supplier agreed to guarantee the line. As of December 31,
1998, there were no amounts outstanding under this line of credit.
The growth of the Grease Monkey system is dependent on the ability
of the Company and its franchisees to obtain real estate development capital.
Historically, Grease Monkey Centers have been built utilizing build-to-suit
services, whereby the land is purchased and the building is constructed to
the Company's specifications, then leased to the Company or to a franchisee,
by a third party. Recently, franchisees have moved toward purchasing and
developing the real estate for their own account, thereby creating greater
value in their business.
LIQUIDITY
Cash provided by operations during 1998 was $180,773 as compared to
$931,907 in 1997. The most significant factors contributing to this variance
were the prior year settlement agreements entered into with former
franchisees as discussed previously; a decline in royalty revenue and
collections; a decrease in franchise sales; losses in leasing activities and
increased
20
<PAGE>
financing costs. Offsetting these negative factors was an improved operating
margin at Company-owned Centers.
Cash used for investing activities was $1,819,082 in 1998 and
$714,473 in 1997. Cash provided in both periods consisted primarily of
receipts on direct financing leases, of $169,562 in 1998 and $189,926 in 1997
and receipt of payment on notes receivable from developers of $190,000 in
1998 and $225,000 in 1997. Additional cash was received in 1998 and 1997 of
$115,450 and $116,901 with the sale/refranchising of one and three
Company-owned Centers, respectively. Cash used in investing activities for
1998 and 1997 consisted primarily of cash used for the development/purchase
of Centers of $1,594,658 and $729,493. Additional cash was used in both
periods for the purchase of property and equipment, primarily at the
Company-owned Centers.
Cash provided by financing activities was $1,601,565 in 1998 and
cash used in financing activities was $359,965 in 1997. Cash provided by
financing activities in 1998 consisted primarily of proceeds from long-term
obligations for the development of Centers and working capital of $2,683,100.
Cash provided by financing activities in 1997 included proceeds from
long-term debt of $3,045,000 (of which approximately $2,048,000 was used to
repay existing debt), and proceeds from the sale of common stock of $282,563.
Cash used to reduce long-term debt was $666,293 in 1998 and $3,316,796 in
1997 and cash used to reduce capital lease obligations was $439,362 in 1998
and $409,115 in 1997.
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.
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 to the
Consolidated Financial Statements) 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.
21
<PAGE>
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. As part of the
project, the Company has completed an initial evaluation of its computer
systems and significant software programs. This evaluation included the
Company's network hardware and software, Point-of-Sale hardware and software
at the Company-owned Centers and accounting and business process software.
Based on the results of the initial evaluation, the Company has developed an
implementation plan to replace the systems noted in the Company's initial
evaluation that did not appear to be Year 2000 compliant. The Company
estimates this process to be completed by August 1999.
As part of the Company's Year 2000 project, the Company plans to
contact its significant third party suppliers, such as the Company's oil and
parts suppliers, to determine the extent to which the Company is vulnerable
to its suppliers' failure to remediate their Year 2000 issues. The Company
plans to complete the contacts with suppliers by the end of the second
quarter 1999. 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. The Company
plans to complete the contacts with its franchisees by the end of the second
quarter 1999. 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
22
<PAGE>
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.
CONTINGENCY PLAN
The Company is currently working on a contingency plan for all
critical aspects of the Year 2000 issues and anticipates to have such a plan
completed by the second quarter of 1999.
FORWARD-LOOKING STATEMENTS
The foregoing discussion contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934, which are intended to be covered
by the safe harbors created thereby. These statements include the plans and
objectives of management for future operations. Such statements are dependent
on certain risks and uncertainties including such factors among others as,
obtaining financing, construction delays that may be encountered in opening
new Centers, market or customer acceptance, market demand, competition,
pricing, changing regulatory environment, changing economic conditions, risks
in new service development, and other risk factors. The forward-looking
statements included herein are based on current expectations that involve
numerous risks and uncertainties. Assumptions relating to the foregoing
involve judgments with respect to, among other things, future economic,
competitive and market conditions and future business decisions, all of which
are difficult or impossible to predict accurately and many of which are
beyond the control of the Company. Although the Company believes that the
assumptions underlying the forward-looking statements are reasonable, any of
the assumptions could be inaccurate and, therefore, there can be no assurance
that the forward-looking statements included in this Form 10-KSB will prove
to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
ITEM 7. FINANCIAL STATEMENTS
All financial statements required to be filed hereunder are attached
hereto following the signature page.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
23
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
(a) IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS.
DIRECTORS.
The present term of office of each director will expire at the next
Annual Meeting of Shareholders. The name and position with the Company and age
of each director and the period during which each director has served are as
follows:
<TABLE>
<CAPTION>
Name and Position, if Director
any, in the Company Age Since
--------------------- -------- ---------
<S> <C> <C>
James B. Wallace 70 1991
(Chairman of the Board
and Chief Executive Officer)
Rex L. Utsler 53 1998*
(President, Chief
Operating Officer and
Corporate Secretary)
Jerry D. Armstrong 68 1991
Jim D. Baldwin 66 1994
Cortlandt S. Dietler 77 1995
Wayne H. Patterson 53 1994
George F. Wood 55 1991
</TABLE>
There are no arrangements or understanding between any director and any other
person pursuant to which any director was selected as such.
* Mr. Utsler previously held the positions of President and Chairman of the
Board of Grease Monkey Holding Corporation, Grease Monkey International, and all
other wholly-owned subsidiaries of the Company from March 1991 through February
1996.
24
<PAGE>
EXECUTIVE OFFICERS.
The executive officers of the Company are elected annually at the first
meeting of the Company's Board of Directors held after each Annual Meeting of
Shareholders. Each executive officer will hold office until his or her successor
is duly elected and qualified or until his or her death or resignation or until
he or she shall have been removed in the manner provided in the Company's
Bylaws. The current executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name of Executive Officer Officer
and Position in Company Age Since
------------------------- ------- --------
<S> <C> <C>
James B. Wallace 70 1998
(Chairman of the
Board and Chief
Executive Officer)
Rex L. Utsler 53 1998*
(President, Chief
Operating Officer
and Corporate Secretary)
Michael J. Brunetti 42 1995
(Vice President -
Franchise Sales, Development & Real Estate)
</TABLE>
* Mr. Utsler previously held the positions of President and Chairman of the
Board of Grease Monkey Holding Corporation, Grease Monkey International, and all
other wholly-owned subsidiaries of the Company from March 1991 through February
1996.
25
<PAGE>
BUSINESS EXPERIENCE.
The following is a brief account of the business experience for at
least the last five years of each director and executive officer of the Company:
<TABLE>
<CAPTION>
Name of Director
or Executive Officer Principal Occupation During the Last Five Years
-------------------- -----------------------------------------------
<S> <C>
Rex L. Utsler President, Chief Operating Officer and Director of
Grease Monkey Holding Corporation ("GMHC"), Grease
Monkey International, Inc. ("GMI"), and all other
wholly-owned subsidiaries of the Company since
September 1998. Consultant to GMHC March 1996 -
September 1998. President and Chairman of the
Board of GMHC, GMI and all other wholly-owned
subsidiaries of the Company March 1991 - February
1996. President and Chief Executive Officer of
both First of September Corporation, a financial
investment group, and its predecessor, Bountiful
Corporation, which was involved in crude oil
gathering, transporation and marketing from 1979 -
June 1997. Director and Vice President of
FanEnergy Inc. since 1997.
Michael J. Brunetti Vice President, Franchise Sales, Development and
Real Estate of GMI since September 1998; Vice
President, Franchise Development of GMI from July
1995 to September 1998; Director of Region
Development - Western Region for Moto Photo Inc.,
a franchisor of photography imaging centers, from
March 1993 to July 1995. Employed by Taco Johns
International, Inc., a franchisor of fast food
Mexican style restaurants, most recently as Vice
President of Franchise Development, from August
1987 to August 1992.
Jerry D. Armstrong Partner in Brownlie, Wallace, Armstrong and Bander
Exploration (BWAB), an oil and gas company, since
1992; Senior Vice President and member of the Board
of Directors of BWAB Incorporated from 1980 to 1992.
Jim D. Baldwin Retired President of King Soopers, a retail
grocery store chain owned by Dillon Companies, a
subsidiary
26
<PAGE>
of The Kroger Company, from 1979 to 1990. Mr.
Baldwin was with Dillon Companies for over 40 years.
Mr. Baldwin is on the Board of Directors for Channel
6 KRMA TV.
Cortlandt S. Dietler Chairman and CEO of TransMontaigne Oil Company, an
oil and gas company, since April 1995; Chairman,
Founder and CEO of Associated Natural Gas
Corporation, a gas gathering, processing and
marketing company from 1980 to 1994. Mr. Dietler
is also on the Board of Directors for the
following public companies: Forest Oil
Corporation, Key Production Company, Inc., and
Hallador Petroleum Corporation.
Wayne H. Patterson Chairman, QuickPen International, a commercial
software and systems company, since December 1992;
Principal, Patterson Consulting, a management
consulting firm, since December 1991; Chairman,
Live Entertainment, 1990 to 1991; Chairman, Pace
Membership Warehouse, from 1988 to 1990.
James B. Wallace Partner in Brownlie, Wallace, Armstrong and Bander
Exploration (BWAB) since 1992; President and
member of the Board of Directors of BWAB
Incorporated from 1980 to 1992. Mr. Wallace is
also a member of the Board of Directors of Tom
Brown, Inc., (a public company).
George F. Wood President of Wood and Co., an investment
management firm, since 1982.
</TABLE>
(b) IDENTIFICATION OF SIGNIFICANT EMPLOYEES: None.
(c) FAMILY RELATIONSHIPS. None
(d) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS. None.
(e) SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors and persons who own more than ten percent of
the Company's outstanding common stock to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC").
Officers, directors and greater than ten percent shareholders are required by
SEC regulations to furnish the Company with copies of all Section 16(a) forms
they file.
27
<PAGE>
Based solely on a review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company during and for the Company's fiscal year ended December
31, 1998, the following directors, officers and more than ten percent
shareholders of the Company who failed to timely file a Form 3, Form 4 or Form 5
were: Jerry D. Armstrong, James B. Wallace and George F. Wood who each have not
filed a Form 4 reporting two transactions, and Ray O. Brownlie, J.H. Bander,
Cortlandt S. Dietler, Wayne H. Patterson, and Jim D. Baldwin who each have not
filed a Form 4 reporting one transaction.
ITEM 10. EXECUTIVE COMPENSATION
(a) and (b) GENERAL AND SUMMARY COMPENSATION TABLE
The following table shows all plan and non-plan compensation paid by
the Company and its subsidiaries to the below named executive officers of the
Company for services rendered for the fiscal years ended December 31, 1998, 1997
and 1996. No other executive officers of the Company received total cash
compensation from the Company and its subsidiaries that exceeded $100,000 for
the fiscal year ended December 31, 1998:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term
Securities
Other Annual Underlying
Name Principal Position Year Salary Compensation Options/SAR's(#)
---- ------------------ ---- ------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
Rex L. Utsler President and Chief Operating Officer and
Director of GMHC and GMI(1) 1998 $177,907 2,400 (2) -
1997 $179,868 8,386 (2) -
1996 $163,417 11,450 (2) 12,500
Charles E. President and Chief Executive Officer and
Steinbrueck Director of GMHC and GMI (3) 1998 $130,481 - -
1997 $114,182 - 750,000
1996 $ - - 10,000
</TABLE>
(1) Mr. Utsler resigned as the Chairman of the Board and President of the
Company on February 6, 1997, and returned to the Company as President and Chief
Operating Officer on September 17, 1998, and was also named a Director on that
date. Mr. Utsler was paid under a consulting contract during the interim period
(amounts paid under the contract are included above). See "Item 12. Certain
Relationships and Related Transactions."
(2) Includes costs of a leased car, country club dues and the Company's 401(k)
matching contribution in 1996 and 1997 and costs of a leased car in 1998.
(3) Mr. Steinbrueck became President and Chief Executive Officer on February 6,
1997, and resigned from those positions on September 16, 1998. Mr. Steinbrueck
served as a Director from 1994 - 1998. Mr. Steinbrueck continues to be paid
under an Employment Agreement with the Company through January 2000. See "Item
12. Certain Relationships and Related Transactions."
28
<PAGE>
COMPENSATION UNDER PLANS
On May 4, 1992, GMI adopted the Grease Monkey International, Inc.
401(k) Savings and Retirement Plan and Trust Agreement (the "Plan"), effective
as of April 1, 1992, and as amended September 1, 1998. U.S. Bank National
Association is Trustee under the Plan. At present, the Company contributes to
the Plan on a quarterly basis 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 valued at
market on the date of the contribution. During 1998, the Company contributed
10,810 shares to the Plan at an average of $1.25 per share. During 1997, the
Company contributed 33,234 shares to the Plan at an average of $1.36 per share.
(c) and (d) STOCK OPTION, GRANTS AND EXERCISES .
STOCK OPTION PLANS
The Company adopted the 1986 Incentive Stock Option Plan ("1986 Plan")
which was approved by the shareholders on February 17, 1987, in which the
employees of the Company and its subsidiaries are eligible to participate. The
1986 Plan authorized the granting of options to purchase up to 66,667 shares of
the Company's common stock. No further options can be granted under the 1986
Plan.
The Company adopted the 1993 Incentive Stock Option Plan ("1993 Plan")
which was approved by the shareholders on June 30, 1993. All employees of the
Company and its subsidiaries are eligible to participate. The 1993 Plan
authorizes the granting of options to purchase 300,000 shares of the Company's
common stock.
The Company adopted the 1994 Stock Incentive Plan ("1994 Plan") which
was approved by the shareholders on July 11, 1994. All employees, officers,
directors and consultants of the Company and its subsidiaries are eligible to
participate. 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.
The 1986, 1993 and 1994 Plans are administered by an Option Committee
of not less than three persons appointed by the Board of Directors. The members
of the Option Committee for 1998 were Jerry D. Armstrong, Jim D. Baldwin and
George F. Wood. The Option Committee did not meet during 1998. New members of
the Option Committee will be selected after the Annual Meeting of Shareholders.
The Option Committee selects the persons to whom options are
granted, determines the time or times when any option granted becomes
exercisable, determines the period within which it becomes exercisable and
determines the price per share at which the option is exercisable, provided
that no option may be exercised more than 10 years after it is granted and
the exercise price must be at least the fair market value of the Company's
common stock on the date of the
29
<PAGE>
grant. If an employee owns more than 10% of the Company's outstanding common
stock, then the Option Committee may grant an incentive option to such
employee only if the exercise price of the option is at least 110% of the
fair market value of the Company's common stock on the date of the grant. An
incentive option granted to any employee owning more than 10% of the
Company's outstanding common stock may not be exercisable for longer than
five years from the date of the grant.
Payment for shares of common stock purchased upon exercise of any
option must be in full and in cash or, with certain restrictions, the surrender
of other shares of common stock of the Company owned by the employee at the time
the option is exercised.
No options were granted to or exercised by Rex L. Utsler or Charles E.
Steinbrueck during the year ended December 31, 1998.
30
<PAGE>
The following table sets forth information pertaining to the options
that were held by Rex L. Utsler and Charles E. Steinbrueck as of December 31,
1998. Neither Mr. Utsler nor Mr. Steinbrueck exercised any options during the
year ended December 31, 1998.
Aggregated Option/SAR Exercises in Last Fiscal Year and Option/SAR Values
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised In-the-
Underlying Unexercised Money Options/SARs at
Options/SARs at FY-End(#) FY-End
------------------------- -------------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable
------------------------- -------------------------
<S> <C> <C>
Charles E.
Steinbrueck 330,000/0 - 0 - (1)
Rex L. Utsler 62,500/0 - 0 - (1)
</TABLE>
(1) The exercise prices were above the market price of the common stock on
December 31, 1998.
(e) LONG-TERM INCENTIVE PLAN. None.
(f) COMPENSATION OF DIRECTORS.
Directors of the Company who are not employees or officers are granted
stock options as compensation. Options are granted for services provided as a
director, with additional options granted for committee participation. Options
for 5,000 shares are granted annually for service as a director, options for
2,500 shares are granted annually for service on the Option/Compensation and
Audit Committees and options for 5,000 shares are granted annually for service
on the Executive Committee.
Options were granted on March 24, 1998, for services rendered for the
period June 1997 to June 1998.
(g) EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS. See "Item 12. Certain Relationships and
Related Transactions" for information pertaining to a consultant agreement
with Rex L. Utsler and an employment agreement with Charles E. Steinbrueck.
(h) REPORT ON REPRICING OF OPTIONS/SARS. None.
31
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a) and (b) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth as of February 26, 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
Presently
Shares Convertible
Underlying Series C
Shares of Presently Preferred
Name of Common Exercisable Stock
Beneficial Stock Options and 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 56,473 759,288 15.9%
Jerry D. Armstrong(2) 438,820 140,000 87,406 666,226 13.7%
James B. Wallace(2) 443,821 135,000 61,410 640,231 13.2%
Cortlandt S. Dietler(2) 55,556 30,000 20,797 106,353 2.3%
George F. Wood(2) 38,639 35,000 5,199 78,838 1.7%
Wayne H. Patterson(2) - 47,500 25,997 73,497 1.6%
Jim D. Baldwin(2) - 32,500 12,998 45,498 1.0%
All officers and directors as
a group (8 persons) 1,617,151 532,500 270,280 2,419,931 44.4%
Ray O. Brownlie(2) 442,375 100,000 61,410 603,785 12.6%
J. H. Bander(2) 407,709 100,000 61,410 569,119 11.8%
Charles E. Steinbrueck(2) 190,476 330,000 38,995 559,471 11.2%
</TABLE>
(1) All beneficial owners listed have sole voting and/or investment
power with respect to the shares shown unless otherwise indicated.
32
<PAGE>
(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,
6% 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.
(c) CHANGES IN CONTROL. On March 26, 1999, the Board of Directors of
the Company entered into a definitive merger agreement with QL 3000, Inc., a
privately held company based in Jacksonville, Florida. The merger agreement
provides that each shareholder of the Company will receive $1.00 for each
share of the Company's common stock. Holders of the Company's preferred stock
will receive the stated value of their preferred stock plus all accrued and
unpaid dividends. QL 3000 must complete debt and equity financing to fund the
merger consideration. The Company may terminate the merger agreement if QL
3000 has not received a commitment letter for the debt financing by May
25,1999. In addition, completion of the merger is subject to regulatory and
shareholder approvals.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED 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 18, 1998 through March 3, 1999, will convert
to severance payments in the event of any change in the employment
relationship between Mr. Utsler and the Company, including a change in
control of the Company. 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.
33
<PAGE>
On August 5, 1991, the Company issued warrants to First of September
Corporation to purchase 500,000 shares of its common stock for $1.50 per
share. In exchange, First of September Corporation provided the Company with
a $750,000 line of credit which was repaid on March 23, 1994, and was
canceled. The warrants were to expire on August 4, 1996, but were extended in
March 1996 by the Board of Directors to August 4, 1998, as consideration for
First of September Corporation's 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. On June 30, 1997,
First of September Corporation was dissolved and any ownership of the
Company's common stock, preferred stock and the warrants mentioned previously
were transferred to First of September Corporation's shareholders. The
warrants were allowed to expire.
During 1998, the Company borrowed a total of $409,000 from Brownlie,
Wallace, Armstrong and Bander Exploration, a related party of the Company.
The principals of Brownlie, Wallace, Armstrong and Bander Exploration, James
B. Wallace and Jerry D. Armstrong, are directors and shareholders, and Ray O.
Brownlie and J.H. Bander are shareholders of the Company. 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.
As compensation for a guarantee of a standby letter of credit in
favor of the Company's landlord for its corporate office space, the four
principals of the previously mentioned related party were granted two year
warrants to purchase 100,000 shares each of the Company's common stock for
$1.05 per share. The $292,000 letter of credit expires on February 1, 2000,
and the balance decreases on a quarterly basis beginning January 1, 1999. The
fair value of the warrants (approximately $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.
On March 12, 1998, the Company entered into an Employment Agreement
("Agreement") with Charles E. Steinbrueck pursuant to which the Company
employed Mr. Steinbrueck as the President and Chief Executive Officer of the
Company effective January 20, 1997. Upon Mr. Steinbrueck's resignation in
September 1998, the Company began paying Mr. Steinbrueck under said agreement
and payments will continue through January 2000, at his then current annual
salary of $125,000. Pursuant to the Agreement, Mr. Steinbrueck was granted
stock options for 750,000 shares of the Company's common stock that have an
exercise price of $1.3125 per share. The options vested as to 100,000 shares
as of January 20, 1997, and options for the remaining 650,000 shares were to
vest over a three year period, subject to the attainment by the Company of
certain performance criteria, so that options with respect to 200,000 shares
would become exercisable on December 31, 1997, options with respect to
200,000 shares would become exercisable on December 31, 1998, and options for
250,000 shares would become exercisable on December 31, 1999. The options
were only to become exercisable if the Company attained minimum corporate
earnings for the years ended December 31, 1997, 1998 and 1999 of $500,000,
$1,000,000 and $1,500,000, respectively, if the Company achieved a compounded
growth rate in gross revenue of 20% for each year from 1997 through 1999 and
if the Company was within
34
<PAGE>
75% of the growth target for new unit openings in the business plan
established by the Board of Directors for the Company. Although the Company
did not meet the performance criteria for the year ended December 31, 1997,
the Board of Directors of the Company and the Compensation Committee
determined that 200,000 shares would be exercisable as of December 31, 1997,
pursuant to the option granted to Mr. Steinbrueck. The options expire on
December 31, 2002, if not previously exercised. The remaining 450,000 options
were cancelled upon Mr. Steinbrueck's departure.
The Agreement provides that Mr. Steinbrueck will not compete with
the Company during the term of the Agreement and for a period of two years
following the termination thereof.
On January 20, 1997, the Company sold 190,476 shares of the
Company's common stock to Mr. Steinbrueck for a total of $250,000.
On January 30, 1998, the Company entered into an Employment
Agreement with Gary L. Wofford pursuant to which the Company employed Mr.
Wofford as Vice President of System Sales and Support. Upon Mr. Wofford's
resignation in September 1998, the Company began paying Mr. Wofford under the
Employee Agreement and payments will continue through September 1999 at his
then current annual salary of $97,500.
The Employment Agreement provided that Mr. Wofford will not compete
with the Company during the term of the Employment Agreement and for a period
of two years following the termination thereof.
35
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) (3) LIST OF EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-B.
-------------------------------------------------------
<S> <C> <C>
3. Articles of Incorporation and Bylaws.
(a) Bylaws, as amended through March 4, 1991,
incorporated by reference to the Annual Report on
Form 10-KSB for the fiscal year ended December 31,
1992.
(b) Restated Articles of Incorporation, filed November 1,
1991, incorporated by reference to the Annual Report
on Form 10-K for the fiscal year ended December 31,
1991.
(c) Articles of Amendment to Articles of Incorporation
filed June 29, 1992 incorporated by reference to the
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1992.
(d) Articles of Amendment to the Articles of
Incorporation filed August 15, 1996, incorporated by
reference to the Quarterly Report on Form 10-QSB for
the quarter ended June 30, 1996.
4. Instruments Defining the Rights of Holders Including Indentures.
(a) Statement of Designation, Voting Powers, Preferences,
and Rights of the Series C Preferred stock of Grease
Monkey Holding Corporation incorporated by reference
to the Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1993.
10. Material Contracts.
(a) 1986 Incentive Stock Option Plan, incorporated by
reference to the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1993.
(b) 1993 Incentive Stock Option Plan, incorporated by
reference to the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1994.
36
<PAGE>
(c) Amendment to 1993 Incentive Stock Option Plan,
incorporated by reference to the Annual Report on
Form 10-KSB for the fiscal year ended December 31,
1996.
(d) 1994 Stock Incentive Plan, incorporated by reference
to the Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994.
(e) Amendment to 1994 Stock Incentive Plan, incorporated
by reference to the Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996.
(f) Sublease Agreement dated April 9, 1998, between
Wells Fargo Bank, N.A. and Grease Monkey
International, Inc.
(g) Current form of Grease Monkey Franchise Agreement
currently in effect, incorporated by reference to the
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997.
(h) Mobil Oil Company Supply Contract dated February 24,
1993, for Center #234 (similar contract form used for
all centers), incorporated by reference to Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 1992.
(i) Business Loan Agreement with Bank of America for
$2,000,000 three year line of credit, incorporated by
reference to the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996.
(j) Consultant Agreement between Grease Monkey Holding
Corporation and Rex L. Utsler, incorporated by
reference to the Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1996.
(k) Amendment to Consultant Agreement between Grease Monkey
Holding Corporation and Rex L. Utsler.
(l) $5,000,000 Loan Agreement with Citicorp Leasing,
Inc., incorporated by reference to the Quarterly
Report on Form 10-QSB for the period ended September
30, 1997.
37
<PAGE>
(m) Master Supply Contract dated September 29, 1997, with
Mobil Oil Corporation, incorporated by reference to
the Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997.
(n) Employment Agreement dated March 12, 1998, with
Charles E. Steinbrueck, incorporated by reference to
the Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997.
(o) Employment Agreement dated January 30, 1998, with
Gary L. Wofford, incorporated by reference to the
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997.
(p) Master Franchise Agreement for the Republic of
Mexico, incorporated by reference to the Quarterly
Report on Form 10-QSB for the quarter ended September
30, 1998.
(q) Agreement and Plan of Merger among Grease Monkey
Holding Corporation and QL 3000, Inc. dated March 26,
1999, incorporated by reference to the Current Report
on Form 8-K dated March 26, 1999.
(r) Form of warrants issued to related parties.
21. Subsidiaries of the Registrant
(a) Grease Monkey International, Inc., incorporated in
the State of Colorado (100% owned).
(b) GM Properties, Inc., incorporated in the State of
Colorado (100% owned).
(c) Grease Monkey de Mexico SA de CV., incorporated in
Mexico (100% owned).
23. Consent of Experts and Counsel
(a) Consent of KPMG LLP.
27. Financial Data Schedule - 1998.
</TABLE>
38
<PAGE>
(b) REPORTS ON FORM 8-K.
No Reports on Form 8-K were filed during the last quarter of the period
covered by this report.
39
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Dated: April 15, 1999
GREASE MONKEY HOLDING CORPORATION,
a Utah corporation
By: /s/ Rex L. Utsler
--------------------------------------------
Rex L. Utsler, President and Chief Operating
Officer
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the Registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Date Name and Title Signature
- -------------- --------------------------- ----------------------
<S> <C> <C>
April 15, 1999 REX L. UTSLER, President /s/ Rex L. Utsler
and Chief Operating Officer --------------------------
(Principal Executive Officer, Rex L. Utsler
Chief Financial Officer and
Principal Accounting Officer)
April 15, 1999 JAMES B. WALLACE, Director, /s/ James B. Wallace
Chairman of the Board and --------------------------
Chief Executive Officer James B. Wallace
April 15, 1999 JERRY D. ARMSTRONG, Director /s/ Jerry D. Armstrong
--------------------------
Jerry D. Armstrong
April 15, 1999 JIM D. BALDWIN, Director /s/ Jim D. Baldwin
--------------------------
Jim D. Baldwin
April 15, 1999 CORTLANDT S. DIETLER, Director /s/ Cortlandt S. Dietler
--------------------------
Cortlandt S. Dietler
April 15, 1999 WAYNE H. PATTERSON, Director /s/ Wayne H. Patterson
--------------------------
Wayne H. Patterson
April 15, 1999 GEORGE F. WOOD, Director /s/ George F. Wood
--------------------------
George F. Wood
</TABLE>
40
<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-1
<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-2
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1997
----------- ----------
<S> <C> <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-3
<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-4
<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-5
<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 ........... $ 180,773 931,907 775,108
activities ----------- ----------- -----------
</TABLE>
(Continued on next page)
F-6
<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-7
<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-8
<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-9
<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-10
<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-11
<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-12
<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-13
<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 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-14
<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-15
<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-16
<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-17
<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-18
<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> <C> <C> <C>
$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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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 renegotiating 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-27
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DOCUMENT PAGE
- ---------- -------- ----
<S> <C> <C>
3. Articles of Incorporation and Bylaws.
(a) Bylaws, as amended through March 4, 1991,
incorporated by reference to the Annual Report on
Form 10-KSB for the fiscal year ended December 31,
1992. N/A
(b) Restated Articles of Incorporation, filed November 1,
1991, incorporated by reference to the Annual Report
on Form 10-K for the fiscal year
ended December 31, 1991. N/A
(c) Articles of Amendment to Articles of Incorporation
filed June 29, 1992 incorporated by reference to the
Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1992. N/A
(d) Articles of Amendment to the Articles of
Incorporation filed August 15, 1996, incorporated by
reference to the Quarterly Report on Form 10-BB
QSB for the quarter ended June 30, 1996. N/A
4. Instruments Defining the Rights of Holders Including Indentures.
(a) Statement of Designation, Voting Powers, Preferences,
and Rights of the Series C Preferred stock of Grease
Monkey Holding Corporation incorporated by reference
to the Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1993. N/A
10. Material Contracts.
(a) 1986 Incentive Stock Option Plan, incorporated by
reference to the Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1993. N/A
(b) 1993 Incentive Stock Option Plan, incorporated by
reference to the Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1994. N/A
(c) Amendment to 1993 Incentive Stock Option Plan,
incorporated by reference to the Annual Report on
Form 10-KSB for the fiscal year ended December 31,
1996. N/A
(d) 1994 Stock Incentive Plan, incorporated by reference
to the Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1994. N/A
i
<PAGE>
(e) Amendment to 1994 Stock Incentive Plan, incorporated
by reference to the Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996. N/A
(f) Sublease Agreement dated April 9, 1998, between
Wells Fargo Bank, N.A. and Grease Monkey
International, Inc. ___
(g) Current form of Grease Monkey Franchise Agreement
currently in effect, incorporated by reference to
the Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997. N/A
(h) Mobil Oil Company Supply Contract dated February 24,
1993, for Center #234 (similar contract form used for
all centers), incorporated by reference to Annual
Report on Form 10-KSB for the fiscal
year ended December 31, 1992. N/A
(i) Business Loan Agreement with Bank of America for
$2,000,000 three year line of credit, incorporated by
reference to the Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1996. N/A
(j) Consultant Agreement between Grease Monkey Holding
Corporation and Rex L. Utsler, incorporated by
reference to the Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1996. N/A
(k) Amendment to Consultant Agreement between Grease Monkey
Holding Corporation and Rex L. Utsler. ___
(l) $5,000,000 Loan Agreement with Citicorp Leasing,
Inc., incorporated by reference to the Quarterly
Report on Form 10-QSB for the period ended
September 30, 1997. N/A
(m) Master Supply Contract dated September 29, 1997, with
Mobil Oil Corporation, incorporated by reference to
the Annual Report on Form 10-KSB for
the fiscal year ended December 31, 1997. N/A
(n) Employment Agreement dated March 12, 1998, with
Charles E. Steinbrueck, incorporated by reference to
the Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997. N/A
(o) Employment Agreement dated January 30, 1998, with
Gary L. Wofford, incorporated by reference to the
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 1997. N/A
ii
<PAGE>
(p) Master Franchise Agreement for the Republic of
Mexico, incorporated by reference to the Quarterly
Report on Form 10-QSB for the quarter ended
September 30, 1998. N/A
(q) Agreement and Plan of Merger among Grease Monkey
Holding Corporation and QL 3000, Inc., dated March
26, 1999, incorporated by reference to the Current
Report on Form 8-K dated March 26, 1999. N/A
(r) Form of warrants issued to related parties. ___
21. Subsidiaries of the Registrant
(a) Grease Monkey International, Inc., incorporated in
the State of Colorado (100% owned).
(b) GM Properties, Inc., incorporated in the State of
Colorado (100% owned).
(c) Grease Monkey de Mexico SA de CV., incorporated in
Mexico (100% owned).
23. Consent of Experts and Counsel ___
(a) Consent of KPMG LLP.
27. Financial Data Schedule - 1998. ___
</TABLE>
iii
<PAGE>
SUBLEASE AGREEMENT
SUBLESSOR:
WELLS FARGO BANK, N.A.,
A NATIONAL BANKING ASSOCIATION
SUBLESSEE:
GREASE MONKEY INTERNATIONAL, INC.,
A COLORADO CORPORATION
PREMISES LOCATED AT:
633 17TH STREET
DENVER, COLORADO
<PAGE>
SUBLEASE AGREEMENT
THIS SUBLEASE AGREEMENT (this "Sublease") is made and entered
into as of the 10th day of April, 1998, by and between WELLS FARGO BANK,
N.A., a national banking association ("Sublessor"), and GREASE MONKEY
INTERNATIONAL, a Colorado corporation ("Sublessee").
RECITALS
A. Sublessor is presently the lessee of certain office
premises (the "Master Premises") consisting of the basement and the first
through twelfth floors of that certain office building commonly known as 633
17th Street, Denver, Colorado (the "Building") pursuant to an Indenture of
Lease dated as of January 25, 1973 (the "Original Lease"), between
U.I.D.C.-Denver, Inc. ("UIDC"), as landlord, and The First National Bank of
Denver ("FNB"), as tenant. The Original Lease was amended by instruments
dated as of July 15, 1974, January 1, 1975, April 21, 1978, April 10, 1981,
November 30, 1981, January 1, 1985, May 1, 1985 and February 3, 1987, and as
so amended is hereinafter referred to as the "Master Lease"). Prudential
Insurance Company of America ("Master Lessor") has succeeded to the interests
of UIDC as the landlord under the Master Lease, and Sublessor has succeeded
to the interests of FNB as the tenant under the Master Lease.
B. Sublessor desires to sublease a portion of the Master
Premises (the "Sublease Premises") to Sublessee, and Sublessee desires to
sublease the Sublease Premises from Sublessor, pursuant to the terms,
covenants and conditions set forth below.
C. Except as expressly set forth below, all capitalized
terms used below without definition shall be as defined in the Basic Sublease
Information contained in Article 1 below.
AGREEMENT
NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION, the
receipt and sufficiency of which are hereby acknowledged, and intending to be
legally bound hereby, the parties hereby agree as follows:
1. BASIC SUBLEASE INFORMATION. The information set
forth in this Section (the "Basic Sublease Information") is intended to
supplement or summarize the provisions set forth in the balance of this
Sublease. Each reference in this Sublease to any of the terms set forth
below shall mean the respective information set forth next to such term as
amplified, construed or supplemented by any particular section of the
Sublease pertaining to such information. In the event of a conflict between
the provisions of this Section and the balance of the Sublease, the balance
of the Sublease shall control.
<PAGE>
Sublessor: WELLS FARGO BANK, N.A., a national banking association
Sublessor's Wells Fargo Bank, N.A.
Address: Corporate Properties Group
111 Sutter Street, 22nd Floor
San Francisco, California 94163
Attn: Lease Administration
with copy to:
Wells Fargo Bank, N.A.
Corporate Properties Group
333 South Grand Avenue, Suite 700
Los Angeles, California 90071
Attn: Manager
Sublessee: GREASE MONKEY INTERNATIONAL, INC., a Colorado corporation
Sublessee's
Tax ID No.: 84-0769552
Sublessee's Prior to the Commencement Date:
Address:
Grease Monkey International, Inc.
216 Sixteenth Street, Suite 1100
Denver, Colorado 80202
Attn: Dana Cohen
Following the Commencement Date:
Grease Monkey International, Inc.
633 17th Street, Suite 400
Denver, Colorado 80202
Attn: Dana Cohen
Sublease
Premises: That portion of the Master Premises consisting of the entire
fourth floor of the Building, comprising approximately 17,907
square feet of "Rentable Area" (as hereinafter defined), as
delineated on EXHIBIT A attached hereto. The actual rentable
square footage ("Rentable Area") of the Sublease Premises shall
be determined based on the approved "Space Plan" (as defined in
the "Work Letter") in accordance with the Standard Method for
Measuring Floor Area in Office Buildings, ANSI Z65.1-1996, as
promulgated by the Building Owners and Managers Association
(BOMA) International for calculating rentable area in office
buildings
3
<PAGE>
Permitted
Use: Business and professional offices consistent with the character
of the Building as a "Class-A" office building
Monthly
Base Rent: The Monthly Base Rent shall be as set forth in Section 5.2 of
this Sublease.
Security
Deposit: $55,000.00, payable contemporaneously with the execution of this
Sublease by Sublessee
Sublessee's
Share: 8.27%, representing the ratio that the Rentable Area of the
Sublease Premises bears to the Rentable Area of the Master
Premises
Term: Approximately ten years and four months, commencing as of the
Commencement Date and expiring, unless earlier terminated in
accordance with the terms of this Sublease, on the Expiration
Date
Commence-
ment Date: The latter of June 27, 1998 or upon tender of possession of the
Sublease Premises to Sublessee in accordance with the "Work
Letter" (as hereinafter defined)
Expiration
Date: The last day of the calendar month in which the day which is ten
years and four months after the Commencement Date occurs
2. SUBLEASE.
2.1 PREMISES. Sublessor hereby subleases to
Sublessee, and Sublessee hereby subleases from Sublessor, the Sublease
Premises upon all of the terms, covenants and conditions in this
Sublease.
2.2 SUBLEASE SUBJECT TO MASTER LEASE. This Sublease
is and shall be at all times subject to all of the terms, covenants and
conditions of the Master Lease, attached hereto as EXHIBIT B, and shall
in all respects be limited to the estate granted to Sublessor by Master
Lessor pursuant to the Master Lease. Excluding only the obligations
with regard to the payment of basic rental and excluding any rights, if
applicable, with regard to extension options, expansion options, options
to purchase, or rights of first refusal contained in the Master Lease,
Sublessee assumes and agrees to be bound by the terms of and to perform
all of the obligations and duties of Sublessor under the Master Lease
with respect to the Sublease Premises, as if Sublessee were the tenant
named thereunder. Sublessee shall not commit or permit to be committed
any act or omission which shall violate any terms, covenants or
conditions of the Master Lease. Sublessee agrees that it shall promptly
forward to Sublessor any and all notices or other communications
received by Sublessee from the Master Lessor under the Master Lease.
Sublessee acknowledges that Sublessor has no duty or obligation to
Sublessee under the
4
<PAGE>
Master Lease other than to maintain the Master Lease in full force
and effect during the Term of this Sublease. In the event that the
Master Lease shall terminate for any reason prior to the Expiration
Date of this Sublease through no fault of Sublessor, this Sublease
shall also terminate and the parties hereunder shall have no further
obligations or liabilities to each other; provided that any such
termination shall not impair the rights of Sublessor under Section 17
hereof. Where any approval or consent shall be required of Master
Lessor pursuant to the provisions of the Master Lease, Sublessor may,
without limitation, condition its approval or consent upon
Sublessee's obtaining the approval or consent of the Master Lessor.
To the extent that the terms of this Sublease are more restrictive
than the terms of the Master Lease, the terms of this Sublease shall
prevail.
2.3 DELIVERY OF POSSESSION. The parties contemplate
that the Sublease Premises shall be remodeled and improved as set forth
in the Work Letter (the "Work Letter") attached hereto as EXHIBIT C.
Sublessor shall deliver the Sublease Premises to Sublessee upon
substantial completion of the Improvements, as defined in, and in the
manner required by, the Work Letter. Upon delivery of possession, the
Sublease Premises shall be in broom clean condition and, except for the
Improvements, in substantially the same condition as the Sublease
Premises are in as of the date of this Sublease, reasonable wear and
tear excepted. Sublessor shall use commercially reasonable efforts to
complete the Improvements on or before June 27, 1998; provided, that in
no event shall failure by Sublessor to complete the Improvements and
deliver the Sublease Premises to Sublessee by such date result in
termination of this Sublease or liability to Sublessor. Notwithstanding
anything to the contrary herein, if Sublessor fails to deliver the
Sublease Premises to Sublessee on or before September 1, 1998 (which
date shall be extended by any period of delay caused by an event of
"Force Majeure" (as hereinafter defined) or the acts or omissions of
Sublessee), Sublessee may by 30 days advance written notice to Sublessor
terminate this Sublease, provided that if Sublessor shall tender
possession of the Sublease Premises to Sublessee within such 30-day
period, such termination notice shall not be effective and this Sublease
shall not terminate. In the event of any such termination, this
Sublease shall be of no force or effect and the parties shall have no
further rights, obligations or liabilities to each other with regard to
the subject matter hereof.
2.4 PARKING. So long as no "Event of Default" (as
hereinafter defined) exists, Sublessee shall have the non-exclusive
right to rent and use, on a monthly basis, up to one parking space in
the parking facility serving the Building commonly known as the "Plaza
Parking Garage" (the "Garage") for every 1,000 square feet of Rentable
Area within the Sublease Premises. In addition, Sublessee shall have
the non-exclusive right to use in common with other tenants of the
Building on an "as-available" basis short-term or daily parking spaces
within the Garage. Sublessee's right to use such parking spaces shall
be subject to all rules and regulations applicable thereto from time to
time imposed by Master Lessor or any third party operator of the Garage,
including, without limitation, payment of parking rent and other fees
assessed for the use of such parking spaces.
5
<PAGE>
3. CONDITION OF SUBLEASE PREMISES.
3.1 DUE DILIGENCE INVESTIGATION. As of the date of
this Sublease, Sublessee acknowledges that Sublessee has conducted or
has had the opportunity to conduct a comprehensive investigation ("Due
Diligence Investigation") of the Sublease Premises and all other matters
which in Sublessee's judgment may affect the value or suitability of the
Sublease Premises for Sublessee's purposes or which may influence
Sublessee's willingness to enter this Sublease, including, without
limitation, an inspection or examination of (i) the physical condition,
size and configuration of the Sublease Premises, including access,
parking, location or accessibility of utilities, the condition of the
improvements, or the existence of any hazardous materials; (ii) the
Master Lease; (iii) title; (iv) taxes, (v) income and expense data, (vi)
insurance costs, (vii) permissible uses and zoning or development
entitlements; (viii) any applicable covenants, conditions and
restrictions; and (ix) compliance with any federal, state or local law,
statute, rule or regulation now or hereafter in effect, including,
without limitation, the Americans With Disabilities Act of 1990, 42
U.S.C. Section 12101 (the "ADA").
3.2 REPRESENTATIONS AND WARRANTIES; DISCLAIMER.
Sublessor represents and warrants to Sublessee that: (i) to the best of
Sublessor's knowledge, without investigation, there are no hazardous
substances present upon the Sublease Premises in violation of any
applicable law or regulation; and (ii) upon completion of the Base
Building Improvements (as defined in the Work Letter), the Sublease
Premises will, to the best of Sublessor's knowledge, comply with all
applicable requirements of the ADA. Sublessee acknowledges that
Sublessor would not sublease the Sublease Premises except on an "AS-IS"
basis, and agrees that (i) subject to completion of the Improvements,
Sublessee accepts the Sublease Premises "AS-IS" and with all faults;
(ii) except as expressly set forth in this Section 3.2, neither
Sublessor nor any of its officers, agents, employees or representatives
has made any representations or warranties of any kind or nature,
whether express or implied, with respect to the Sublease Premises or any
of the matters relating thereto (including without limitation the
matters referred to in Section 3.1 above); (iii) Sublessor has no duty
to make any disclosures concerning the condition of the Sublease
Premises and/or the fitness of the Sublease Premises for Sublessee's
intended use, and Sublessee expressly waives any duty which Sublessor
might have to make any such disclosures; (iv) Sublessee is relying
solely on Sublessee's own Due Diligence Investigation; (v) neither
Sublessor nor Master Lessor (except as expressly provided in the Master
Lease) shall be required to perform any work of construction,
alteration, repair or maintenance of or to the Sublease Premises, except
as expressly provided in the Work Letter; and (vi) in the event
Sublessee subleases all or any portion of the Sublease Premises or
assigns its interest in this Sublease, Sublessee shall indemnify and
defend Sublessor (in accordance with Section 17 below) for, from and
against any matters which arise as a result of Sublessee's failure to
disclose any relevant information about the Sublease Premises to any
subtenant or assignee of Sublessee. If Sublessor obtains or has
obtained or provides to Sublessee any services, opinions, or work
product of surveyors, architects, soil engineers, environmental
auditors, engineers, title insurance companies, governmental authorities
or any other person or entity with respect to the Sublease Premises,
Sublessee and Sublessor agree that
6
<PAGE>
Sublessor does so only for the convenience of the parties, Sublessor
does not vouch for the accuracy or completeness of any such items and
the reliance of Sublessee upon any such items shall not create or
give rise to any liability of or against Sublessor.
3.3 RELEASE. Except as to the representations and
warranties expressly set forth in this Article 3, Sublessee hereby fully
releases and discharges Sublessor, and its officers, directors,
employees and agents, from and relinquishes all rights, claims and
actions that Sublessee may have against Sublessor, or its officers,
directors, employees or agents which arise out of or are in any way
connected with the condition of the Sublease Premises and the matters
addressed in this Article 3, including but not limited to the matters
referred to in Section 3.1 above. This release applies to all described
rights, claims, and actions, whether known or unknown, foreseen or
unforeseen, present or future.
4. TERM.
4.1 TERM. All obligations of Sublessee hereunder
shall commence on the Commencement Date. Promptly after the
Commencement Date, Sublessor shall deliver to Sublessee written notice
of such date. Within ten days after Sublessee's receipt of such written
notice, Sublessee shall either confirm or object to such date in
writing. If Sublessee should fail to respond to such written notice
within the time prescribed, Sublessee shall be deemed to have confirmed
that the date set forth in such notice is the Commencement Date.
4.2 OPTION TO EXTEND THE TERM. Sublessee shall have
the option to extend the Term for an additional term ending on June 30,
2011 (the "Extended Term") upon the same terms, covenants and conditions
set forth in this Sublease, except that the minimum Monthly Base Rent
for the Extended Term shall be an amount equal to the greater of (i) the
Monthly Base Rent for year 9 through the end of the Term, or (ii) an
amount equal to ninety-five percent (95%) of the Fair Rental Value (as
defined in Section 5.2 below) of the Sublease Premises as of the date on
which Sublessee delivers the "Exercise Notice" (as hereinafter defined).
Sublessee's option to extend the Term may be exercised only by delivery
to Sublessor of written notice (the "Exercise Notice") of such exercise
by Sublessee no earlier than one year and no later than six months prior
to the expiration of the initial Term. Notwithstanding the above,
Sublessee's right to extend the Term shall be conditioned upon Sublessee
not being (i) in default (whether or not subsequently cured) under the
Sublease more than one time per year during the Term; or (ii) in default
either at the time of Sublessee's exercise of the option or at the time
of the commencement of the Extended Term. In the event of any such
default or any purported exercise of the option to extend the Sublease
delivered prior to one year or later than six months before the
expiration of the Term, such purported exercise shall be null and void
and the term of this Sublease shall expire at the end of the Term. Fair
Rental Value shall be determined in accordance with the procedures of
Section 5.3 of this Sublease, with the thirty-day period referred to in
subsection 5.3.1. commencing on the date of the Exercise Notice.
7
<PAGE>
4.3 SURRENDER. Upon the expiration or earlier
termination of the Term of this Sublease, Sublessee shall surrender the
Sublease Premises, together with any personal property therein belonging
to Sublessor, and any Alterations (as defined in Section 11 below) made
thereto (other than any such Alterations which Sublessee is required to
remove as set forth in Section 11 below), broom clean and free of
debris, and in good working order, repair and condition, except for
reasonable wear and tear. All furniture, trade fixtures and other
personal property of Sublessee shall be removed from the Sublease
Premises on or before such expiration or earlier termination, if such
removal can be undertaken without material damage to the Sublease
Premises, and Sublessee shall immediately repair any damage resulting
from such removal. In no event shall the heating, ventilating and air
conditioning equipment (the "HVAC equipment"), plumbing or sprinkler
system components, air lines, power panels, electrical distribution
systems, lighting fixtures, fencing or any other component from any
major building system be removed from the Sublease Premises.
4.4 HOLDING OVER. Subject to the terms of the
Master Lease, if Sublessee shall, with Sublessor's written consent,
remain in possession of the Sublease Premises or any part thereof after
the expiration of the Term hereof, such occupancy shall constitute a
tenancy from month to month, terminable upon 30 days notice by either
party, upon all of the terms, covenants and conditions of this Sublease,
except that the Monthly Base Rent shall be increased to 150% of the
amount last due under this Sublease. Otherwise, any such occupancy
shall constitute a tenancy at sufferance, and Sublessee shall be liable
to Sublessor for any and all claims, damages, liabilities, costs and
expenses (including attorneys' fees and expenses) incurred by Sublessor
and arising out of Sublessee's failure to timely surrender the Sublease
Premises in accordance with the requirements of this Sublease.
5. RENT.
5.1 DEFINITION. As used in this Sublease, the term
"Rent" shall include: (i) the Monthly Base Rent; and (ii) all other
amounts which Sublessee is obligated to pay under the terms of this
Sublease.
5.2 MONTHLY BASE RENT. The Monthly Base Rent for
each month of the first five years of the Sublease Term shall be as set
forth in the table below, in each case based on the annual rate per
square foot of Rentable Area set forth in the table below multiplied by
the estimated number of square feet of Rentable Area of the Sublease
Premises. The actual Monthly Base Rent shall be adjusted, as
appropriate, upon determination of the actual Rentable Area of the
Sublease Premises. Month one of the Sublease shall begin on the
Commencement Date and each subsequent month of the Sublease shall begin
on the same day of each subsequent month.
8
<PAGE>
<TABLE>
<CAPTION>
MONTHLY ANNUAL RATE PER
MONTHS BASE RENT SQUARE FOOT
<S> <C> <C>
Months 1-4 0 N/A
Months 5-12 17,907.00 12.00
Months 13-24 18,653.13 12.50
Months 25-36 19,399.25 13.00
Months 37-48 20,145.38 13.50
Months 49-60 20,891.50 14.00
</TABLE>
Commencing on the fifth anniversary of the Commencement Date (the "Adjustment
Date"), and subject to the condition stated below, the Monthly Base Rent for
each month of the remainder of the Sublease Term shall be adjusted to the Fair
Rental Value. (as hereinafter defined) of the Sublease Premises as of the
Adjustment Date. For the purposes of this Section 5.2 the term "Fair Rental
Value" means the fair market rental rate for the Sublease Premises calculated
based on the following criteria: Fair Rental Value shall be based upon the
square footage of the Sublease Premises and market conditions in Denver,
Colorado, for space similar to the Sublease Premises in comparable buildings;
shall take into account the fact that Sublessor has already provided a tenant
improvement allowance and free rent and other rental concessions, and paid
brokerage commissions and leasing fees based upon the full term of the Sublease
which includes the period for which the Fair Rental Value is being determined;
and any calculation of Fair Rental Value shall take into account Sublessee's
obligations under Section 6.2 of this Sublease to pay a share of the costs and
expenses which Sublessor is required to pay under the Master Lease and a
comparison of such obligation with the amount of operating costs and expenses
which tenants in comparable buildings are required to pay. Fair Rental Value
shall be determined in accordance with the provisions of Section 5.3 of this
Sublease. If Sublessee shall have achieved on or before the first anniversary
of the Commencement Date an EBITDA Coverage Ratio (as defined below) of not less
than 1.25 to 1 and shall have maintained such EBITDA Coverage Ratio throughout
the first five years of the Lease, then the Monthly Base Rent shall not adjust
to the Fair Rental Value on the Adjustment Date. In such event, Sublessor and
Sublessee shall execute an amendment to this Sublease to reflect that the
Monthly Base Rent for each month of the remainder of the Sublease Term shall be
as set forth in the table below, in each case based on the annual rate per
square foot of Rentable Area set forth in the table below multiplied by the
estimated number of square feet of Rentable Area of the Sublease Premises. The
actual Monthly Base Rent shall be adjusted, as appropriate, upon determination
of the actual Rentable Area of the Sublease Premises. "EBITDA" shall mean net
profits before tax plus interest expense (net of capitalized interest expense),
depreciation expense, amortization expense and leasehold expense under this
Sublease. "EBITDA Coverage Ratio" shall be calculated annually at Sublessee's
fiscal year end and shall mean EBITDA divided by the aggregate of total interest
expense plus the prior period current maturity of long-term debt, the prior
period current maturity of subordinated debt and the prior period leasehold
expense under this Sublease (and in the first year of the Sublease, under the
prior lease for Sublessee's administrative offices).
<TABLE>
<CAPTION>
MONTHLY ANNUAL RATE PER
MONTHS BASE RENT SQUARE FOOT
<S> <C> <C>
Months 61-72 21,637.63 14.50
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C>
Months 73-84 22,383.75 15.00
Months 85-96 23,129.88 15.50
Month 97 through end of Term 23,876.00 16.00
</TABLE>
5.3 PROCEDURE TO DETERMINE FAIR RENTAL VALUE. The
procedure to determine the Fair Rental Value as of the Adjustment Date
shall be as follows:
5.3.1 No sooner than 210 days and no later
than 180 days prior to the Adjustment Date, Sublessor
shall give Sublessee notice of the impending Adjustment
Date, and upon the giving of that notice, Sublessor and
Sublessee shall meet and attempt in good faith to reach
a mutual written agreement as to the Fair Rental Value
of the Sublease Premises as of the upcoming Adjustment
Date. If Sublessor and Sublessee agree in writing as to
the Fair Rental Value, such agreement shall constitute
the Fair Rental Value for the Adjustment Date. In the
event Sublessor and Sublessee are unable to reach
written agreement within thirty (30) days following
Sublessor's notice, the Fair Rental Value shall be
determined in accordance with the appraisal procedures
set forth in this Section 5.3.
5.3.2 Within ten (10) days following
expiration of the thirty (30) day period described in
subsection 5.3.1 above, Sublessor shall appoint a senior
commercial real estate broker with at least ten (10)
years experience in leasing properties similar to the
Building in the downtown Denver, Colorado area (a
"Qualified Broker"; a Qualified Broker selected by
Sublessor shall be referred to herein as "Sublessor's
Broker"). Sublessor shall give Sublessee notice of the
identity of Sublessor's Broker contemporaneously with
his appointment. Within thirty (30) days after such
appointment, Sublessor's Broker shall render his
appraisal of the Fair Rental Value of the Sublease
Premises for the ensuing remainder of the Sublease Term
and shall give Sublessor and Sublessee written notice of
such determination.
5.3.3 If Sublessee agrees with the
determination of the Fair Rental Value of the Sublease
Premises rendered by Sublessor's Broker, the Monthly
Base Rent hereunder for the remainder of the Term
following the Adjustment Date shall be as determined
therein, and Sublessor and Sublessee shall execute an
amendment to this Sublease evidencing such Monthly Base
Rent. If Sublessee does not so agree, Sublessee shall
have the right to appoint its own Qualified Broker
("Sublessee's Broker") to determine Fair Rental Value of
the Premises, which appointment shall be made within ten
(10) days after Sublessee receives the appraisal of
Sublessor's Broker. Sublessee shall give Sublessor
written notice identifying Sublessee's Broker
contemporaneously with his appointment. Within thirty
(30) days after being appointed by Sublessee,
Sublessee's Broker shall render an appraisal of the Fair
Rental Value of the Premises
10
<PAGE>
for the ensuing Extension Term and shall give Sublessor
and Sublessee written notice of such determination.
5.3.4 If the appraisals of Sublessor's Broker
and Sublessee's Broker vary from one another, then the
two Appraisers shall meet and attempt to reach a written
agreement on the Fair Rental Value of the Premises for
the ensuing Extension Term; if such written agreement is
made, the same shall be binding upon Sublessor and
Sublessee. If the two Brokers are unable to so agree in
writing on the Fair Rental Value within fifteen (15)
days after Sublessee's Broker gives the notice of its
appraisal, then within ten (10) days after the
expiration of that 15-day period, the two Brokers shall
agree upon and select a third Qualified Broker (the
"Third Broker"). If the two Brokers are unable to agree
upon a Third Broker, either Sublessor or Sublessee may
petition the District Court for the City and County of
Denver, Colorado, to appoint the Third Broker, provided
that ten (10) days prior written notice is given to the
other party hereto. Within ten (10) days after being
appointed, the Third Broker shall, pursuant to an
exercise of his best professional judgment, choose one
or the other of the appraisals rendered by Sublessor's
Broker and Sublessee's Broker as being the more accurate
reflection of the Fair Rental Value of the Premises for
the ensuing Extension Term. Upon making this choice,
the Third Broker shall immediately give the parties
hereto written notice thereof, the appraisal that is so
selected by the Third Broker shall determine the Fair
Rental Value and the Monthly Base Rent hereunder for the
remainder of the Term following the Adjustment Date,
and Sublessor and Sublessee shall execute an amendment
to this Lease evidencing such Monthly Base Rent.
5.4 PAYMENT. Upon execution of this Sublease,
Sublessee shall pay to Sublessor the Security Deposit. Commencing on
the date which is four months after the Commencement Date and continuing
on the first day of each calendar month thereafter during the Term of
this Sublease, Sublessee shall pay to Sublessor the Monthly Base Rent
(prorated if the payment is for a portion of a month) in advance. Rent
for any portion of a month shall be prorated on the basis of a 30-day
month. Monthly Base Rent and all other amounts owing hereunder shall be
payable to Sublessor at Wells Fargo Bank, N.A., 333 South Grand Avenue,
Los Angeles, California 90071, Attention: Asset Manager, or such other
address as Sublessor may specify in accordance with the provisions of
Section 19.1 of this Sublease. It is understood that Sublessor shall
receive the Monthly Base Rent set forth above free and clear of any and
all impositions, taxes, liens, charges or other expenses of any nature
whatsoever required to be paid with regard to the Sublease Premises or
Sublessee's use or occupancy thereof. In addition to the Monthly Base
Rent reserved above, Sublessee shall pay to the parties respectively
entitled thereto all impositions, insurance premiums, operating charges,
maintenance charges, construction costs, and other charges, costs and
expenses which arise or may be contemplated under any provisions of this
Sublease during the term hereof. All such charges, costs and expenses
shall constitute additional Rent, and upon the failure of
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Sublessee to pay any of such costs, charges or expenses, Sublessor
shall have the same rights and remedies as otherwise provided in this
Sublease for the failure of Sublessee to pay Monthly Base Rent. It
is the intention of the parties hereto that, except as expressly
provided herein, this Sublease shall not be terminable for any reason
by Sublessee, and Sublessee shall in no event be entitled to any
abatement of or reduction in rent payable under this Sublease. All
Rent payable hereunder shall be paid in lawful money of the United
States and without prior notice or demand, deduction or offset for
any cause whatsoever. Any delay or failure of Sublessor in computing
or billing for any of the rental adjustments or additional Rent as
provided in this Sublease shall not constitute a waiver of or in any
way impair the continuing obligation of Sublessee to pay any and all
Rent.
5.5 LATE CHARGE AND INTEREST. Sublessee
acknowledges that its late payment of Rent will cause Sublessor to incur
certain costs and expenses not contemplated by this Sublease, including
without limitation administrative and collection costs and processing
and accounting expenses, the exact amount of which is extremely
difficult or impractical to fix. Accordingly, if any installment of
Rent is not paid within five days after the date such Rent is due,
Sublessee shall pay to Sublessor, in addition to the installment of Rent
then owing, a late payment charge equal to 5% of the amount of the
delinquent installment, regardless of whether a notice of default or
notice of termination has been given by Sublessor. The parties agree
that this late charge represents a reasonable estimate of the costs and
expenses incurred by Sublessor from, and is fair compensation to
Sublessor for its loss suffered by, such nonpayment by Sublessee. In
addition to the 5% late charge, any Rent or other amounts owing under
this Sublease which are not paid within five days after the date they
are due shall thereafter bear interest at the rate (the "Interest Rate")
which is the lesser of (a) that rate per annum announced from time to
time by Sublessor as its prime or reference rate plus 5% per annum, or
(b) the maximum rate permitted by law. Notwithstanding the foregoing,
for one installment of Rent per calendar year, no late charge shall be
assessed until such time as Sublessor has provided written notice of the
failure to pay Rent to Sublessee and such failure has continued for a
period of two business days following such notice, but such failure
shall still constitute an Event of Default under Section 16.1(i) of this
Sublease. Nothing in this Section shall relieve Sublessee of its
obligation to pay any Rent at the time and in the manner provided by
this Sublease or constitute a waiver of any default of Sublessee with
regard to any nonpayment of Rent.
5.6 LETTER OF CREDIT. In order to secure
Sublessee's obligations under this Sublease, on or before May 5, 1998,
Sublessee shall cause to be issued and delivered to Sublessor a letter
of credit, for the account of Sublessee and the benefit of Sublessor,
issued by a financial institution reasonably acceptable to Sublessor, in
the face amount of $200,000.00 and otherwise meeting the requirements of
this Section 5.6 (which together with any replacements required by this
Section 5.6 shall be referred to as the "Letter of Credit"). Each
Letter of Credit shall provide that it may be drawn by presentation of a
sight draft of Sublessor to the issuer. If any Letter of Credit, has an
expiry date prior to the second anniversary of the Commencement Date,
Sublessee shall on or before the date that is fifteen (15) days prior to
the expiry cause to be delivered to Sublessor a
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replacement Letter of Credit meeting the requirements of this Section
5.6. Any replacement Letter of Credit issued after the first
anniversary of the Commencement Date shall be in the face amount of
$100,000.00. On the second anniversary of the Commencement Date,
Sublessor shall surrender the Letter of Credit if it has not
previously been drawn and there then exists no Event of Default or
event which with the giving of notice, passage of time or both would
constitute an Event of Default.
6. TAXES, UTILITIES AND SERVICES.
6.1 PERSONAL PROPERTY TAXES. Sublessee shall pay
prior to delinquency any and all taxes and assessments against and
levied upon trade fixtures, furnishings, equipment, and personal
property (including any personal property leased by Sublessor to
Sublessee hereunder) contained in the Sublease Premises. Whenever
possible, Sublessee shall cause such items to be assessed and billed
separately from the real property portion of the Sublease Premises.
Sublessee shall be responsible for any taxes and assessments
attributable to any such items assessed against the real property
portion of the Sublease Premises.
6.2 COSTS AND EXPENSES UNDER MASTER LEASE.
Excluding only the monthly rent owed under the Master Lease, Sublessee
shall pay Sublessee's Share of all costs and expenses of every kind and
nature for which Sublessor is responsible under the Master Lease over
the amount of such costs and expenses paid or payable by Sublessor for
the Sublease Premises for calendar year 1998. Such costs and expenses
shall (i) be paid by Sublessee to Sublessor within ten days after
Sublessor's written demand therefor; and (ii) include, without
limitation, the cost of all taxes and assessments, utilities and
services, parking charges, insurance, sewer charges, janitorial and
disposal services. To the extent not provided under the Master Lease,
Sublessee shall procure, at its sole cost and expense, any and all
facilities necessary to supply the Sublease Premises with water, sewer,
gas, electricity, telephone and all other services required for its use
and occupancy of the Sublease Premises hereunder. Sublessee shall make
payment for any such services directly to the person or entity supplying
such services.
7. MASTER LESSOR'S OBLIGATIONS. It shall be the obligation
of Master Lessor to provide to the Sublease Premises all services and utilities
to be provided by Master Lessor under the terms of the Master Lease, and
Sublessee acknowledges that Sublessor shall be under no obligation to provide
any such services and utilities. Sublessor, upon written notice by Sublessee,
shall diligently attempt to enforce all obligations of Master Lessor under the
Master Lease; provided, that Sublessor shall not be required to initiate or
otherwise participate in any legal action in connection with such enforcement.
If Sublessor is prevented from performing any of its obligations under this
Sublease by a breach by Master Lessor of the Master Lease, then Sublessor's sole
obligation under this Sublease shall be to cooperate with Sublessee, at
Sublessee's sole cost and expense, in pursuing the correction or cure of Master
Lessor's default and in enforcing the terms of the Master Lease. Sublessor
shall not be liable for any claims, costs or damages, including, without
limitation, loss or injury to person or property, and Sublessee shall not be
entitled to any reduction or abatement of rent or other charges hereunder, on
account of any failure of Master Lessor to deliver the services and utilities
described above.
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8. SECURITY DEPOSIT. The Security Deposit shall secure
Sublessee's obligations under this Sublease to pay Rent and any other monetary
amounts, to maintain the Sublease Premises and repair damages thereto, to
surrender the Sublease Premises to Sublessor in the condition required by
Section 4.3 above and to discharge Sublessee's other obligations hereunder.
Notwithstanding the above, Sublessee acknowledges and agrees that the amount of
the Security Deposit shall not in any way be deemed to be a limitation of
Sublessee's liability under this Sublease. Sublessor may use and commingle the
Security Deposit with other funds of Sublessor. If Sublessee fails to perform
Sublessee's obligations hereunder, Sublessor may, but without any obligation to
do so, apply all or any portion of the Security Deposit towards fulfillment of
Sublessee's unperformed obligations. If Sublessor does so apply any portion of
the Security Deposit, Sublessee shall immediately remit to Sublessor cash in an
amount to restore the Security Deposit to its original amount. If Sublessee
fails to restore the Security Deposit to its original amount within five days
after receipt of Sublessor's written demand to do so, Sublessee shall be in
default of this Sublease. Upon termination of this Sublease, if Sublessee has
then performed all of Sublessee's obligations under this Sublease, Sublessor
shall return the Security Deposit, or whatever amount remains of the Security
Deposit after Sublessor applied all or a portion of the Security Deposit to
perform Sublessee's obligations hereunder, to Sublessee without payment of
interest.
9. USE; COMPLIANCE WITH LAWS; PERMITS.
9.1 USE. The Sublease Premises are to be used for
operation of business and professional offices, including any and all
related activities, and for no other purpose or business.
9.2 COMPLIANCE WITH LAW; PROHIBITED ACTIVITIES.
Sublessee shall observe and comply with the requirements of all
covenants, conditions and restrictions of record regarding the Sublease
Premises and all federal, state and local laws, statutes, rule and
regulations now or hereafter in effect (the "Laws"), including but not
limited to the ADA, which apply to the Sublease Premises or the use or
occupancy thereof by Sublessee, including, but not limited to, the
obligation to alter, maintain, repair, improve or restore the Sublease
Premises, and all parts thereof structural and otherwise, in compliance
and conformity with all such Laws. Sublessee shall not commit, or
suffer to be committed or exist, any waste or nuisance on the Sublease
Premises. Sublessee shall not use, store, generate, transit or dispose
of any hazardous substances upon, in about, or under the Sublease
Premises, except any use or storage of any such hazardous substances
customarily used in Sublessee's business, provided that such use or
storage complies with all applicable laws. As used herein, hazardous
substances means any and all hazardous, ultra-hazardous, or toxic
substances, wastes or materials regulated under any laws or regulations
applicable to the environment or the protection of human health.
9.3 PERMITS AND LICENSES. Sublessee shall apply for
and obtain, at its sole expense, all permits, licenses, consents,
permissions or other approvals of any governmental or quasi-governmental
authorities which may be required in order that Sublessee may do any of
the things that Sublessee is required or permitted to do under the
provisions of this Sublease. Sublessor agrees that in all such cases,
whenever reasonably
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requested by Sublessee, Sublessor shall cooperate with Sublessee in
obtaining such permits, licenses, consents, permissions and other
approvals, provided that Sublessor shall not be required to incur any
direct or indirect cost or expense as a result of such cooperation.
10. ASSIGNMENT AND SUBLETTING.
10.1 SUBLESSOR'S CONSENT. Sublessee shall not
transfer or assign this Sublease, or any right or interest hereunder, or
sublet the Sublease Premises or any part thereof (a "Transfer"), without
first obtaining the prior written consent and approval of Sublessor,
which consent shall not be unreasonably withheld or delayed so long as
(i) such Transfer is permissible pursuant to the terms and conditions of
the Master Lease, and (ii) as a result of such Transfer, the Sublease
Premises will not be used for the conduct of any business activities
which would be competitive with any activity which a bank or other
financial institution may lawfully engage in, including, without
limitation, consumer and commercial lending and banking activities,
sales of securities or insurance products or other financial services.
If Sublessee desires to sublease or assign all or a portion of the
Sublease Premises, it shall first provide Sublessor notice that it
intends to undertake marketing efforts and identify the portion of the
Sublease Premises it desires to assign or sublet. Sublessor shall have
the right, to be exercised upon written notice to Sublessee within 45
days following receipt of Sublessee's notice, to terminate this Sublease
as to the portion of the Sublease Premises designated in Sublessee's
notice, such termination to be effective as of 60 days from the date of
Sublessee's notice. If Sublessor does not exercise the right to
terminate, then Sublessee may market the portion of the Sublease
Premises identified in its notice. No later than 30 days prior to the
date of a proposed sublet or assignment, Sublessee shall deliver to
Sublessor written notice of the proposed sublet or assignment, the
identity and legal composition of the proposed assignee or sublessee,
audited financial statements of the proposed sublessee or assignee for
the past three years, the terms (including the intended use of the
Sublease Premises) of the proposed sublet or assignment and, if a
sublet, the portion of the Sublease Premises involved, and any other
information reasonably requested by Sublessor. Sublessor shall notify
Sublessee of its consent or denial of consent within 15 days after
Sublessee has provided Sublessor the information specified in the
preceding sentence. Sublessor shall not unreasonably withhold its
consent to the proposed sublet or assignment. If Sublessor consents to
a proposed Transfer of this Sublease, Sublessee shall pay to Sublessor a
transfer fee of $500.00. If Sublessor's withholding of consent is found
to be unreasonable by a court of competent jurisdiction, Sublessee's
sole remedy shall be to have the proposed Transfer declared valid as if
Sublessor's consent had been given, and Sublessee waives any other
remedy at law or in equity. Sublessee shall deliver to Sublessor
complete, fully executed documentation with regard to the transfer,
assignment or sublease upon execution and delivery of the same.
Sublessor and Sublessee agree that the options to extend the Term hereof
are personal to Sublessee and may not be assigned by Sublessee to any
other party, whether or not in conjunction with a Transfer by Sublessee
of its interest in this Sublease.
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10.2 INVALID TRANSFERS. No Transfer, whether
voluntary or involuntary, by operation of law or under legal process or
proceedings, shall be valid or effective without Sublessor's prior
written consent and approval. The transfer, assignment or hypothecation
of any assets, stock or other ownership interest in Sublessee which in
the aggregate exceeds 50% shall be deemed an assignment within the
meaning of this Section. Should Sublessee attempt to make or suffer to
be made any Transfer of this Sublease without Sublessor's prior written
consent and approval, or should any of Sublessee's rights under this
Sublease be sold or otherwise transferred by or under court order or
legal process or otherwise, or should Sublessee be adjudged insolvent or
bankrupt, then and in any of the foregoing events Sublessor may, at its
sole option, terminate this Sublease upon written notice thereof to
Sublessee.
10.3 NO WAIVERS. Should Sublessor consent to any
transfer, assignment or subletting, such consent shall not constitute a
waiver of any of the requirements or restrictions of this Section, and
the same shall apply to each successive transfer, assignment or
subletting of this Sublease, if any.
10.4 RENTS. If the rents or other payments or
consideration received by Sublessee pursuant to any transfer, sublease
or assignment of this Sublease exceed the Rent due under this Sublease,
or in the case of a sublease of a portion of the Sublease Premises, in
excess of such Rent fairly allocable to such portion, Sublessee shall,
within five days after Sublessee's receipt of same, pay to Sublessor as
additional Rent 1/2 of such excess rents. For purposes of this Section,
"consideration" shall include, without limitation, all monies or other
economic consideration of any kind, if such monies or economic
consideration are related (whether directly or indirectly) to
Sublessee's interest in this Sublease, the Sublease Premises or any
improvements or other property thereon, including without limitation,
bonus money or payments (in excess of book value thereof) for
Sublessee's assets, accounts, good will, general intangibles, personal
property or equity interests in Sublessee.
10.5 NO RELEASE OF SUBLESSEE. Under no circumstances
shall any sublease or assignment of this Sublease by Sublessee in any
way modify, affect or limit the liability of Sublessee under this
Sublease.
11. ALTERATIONS. Sublessee shall not make or suffer to be
made any alterations, additions or improvements (collectively "Alterations") in,
on, or to the Sublease Premises without the prior written consent of Sublessor,
which consent may be granted or withheld in Sublessor's sole discretion. In the
event that Sublessor consent to any such Alterations, Sublessee shall strictly
comply with each and every term or condition applicable thereto contained in the
Master Lease.
12. REPAIRS AND MAINTENANCE. Subject to Master Lessor's
obligations under Article VI of the Master Lease, Sublessee shall during the
term and at Sublessee's sole cost and expense keep the Sublease Premises in as
good order, condition and repair as they were at the time Sublessee took
possession of the Sublease Premises, reasonable wear and tear and damage from
time and other casualties excepted. Sublessee shall keep the Sublease Premises
in a neat and sanitary condition and shall not (a) commit any nuisance or waste
on the Sublease Premises,
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or in, on, or about the Building, (b) dispose of sweepings, rubbish, rags,
coffee grounds or other similar substances in the plumbing facilities, nor
(c) waste any utilities provided by Master Lessor. In addition, Sublessee
shall, at Sublessee's sole expense, immediately repair any damage to the
Sublease Premises or Building caused by Sublessee, Sublessee's agents,
employees, licensees, invitees and visitors. All maintenance, repairs and
replacement by Sublessee hereunder shall be undertaken in accordance with,
and shall be governed by, the requirements of Section 11 above. Sublessor
shall use its best efforts to cause Master Lessor to comply with its
obligations under Article VII of the Master Lease. Sublessee acknowledges
that other than the Improvements, Sublessor is under no duty to make any
repairs or improvements to the Sublease Premises. Sublessee hereby waives
the benefit of any statute or principle of law or equity, now or hereinafter
in effect, which would afford Sublessee the right to make repairs at
Sublessor's expense or to terminate this Sublease because of Sublessor's
failure to keep the Sublease Premises in good order, condition and repair.
13. INSURANCE POLICIES. During the Term, Sublessee shall
procure and maintain in full force and effect and at Sublessee's sole cost
and expense each of the policies of insurance required by the Master Lease.
Each policy of insurance required to be maintained by Sublessee hereunder
shall be issued by an insurance company authorized to do business in the
State of Colorado, with a rating classification of at least an A-, Class VIII
status as rated from time to time in the most current edition of Best's
Insurance Reports and shall provide for only such deductibles as are
reasonably acceptable to Sublessor. Such policies shall be primary and
non-contributing and shall name Sublessor (and Master Lessor, to the extent
required by the Master Lease) as an additional named insured.
13.1 WAIVER OF SUBROGATION. Any policy or policies
of insurance, which either party obtains in connection with the Sublease
Premises, shall, to the extent the same can be obtained without undue
expense, include a clause or endorsement denying the insurer any rights
of subrogation against the other party to the extent rights have been
waived by the insured prior to the occurrence of injury or loss.
Sublessee and Sublessor waive any rights of recovery against the other
for injury or loss due to hazards covered by insurance containing such a
waiver of subrogation clause or endorsement to the extent of the injury
or loss covered thereby.
13.2 INSURANCE CERTIFICATES. Prior to the
Commencement Date (and from time to time, no later than 30 days prior to
the expiration of each insurance policy), Sublessee shall furnish to
Sublessor a certificate of insurance issued by the insurance carrier of
each policy of insurance carried by Sublessee pursuant hereto. Such
certificates of insurance shall reflect (i) that Sublessor (and Master
Lessor, if required by the Master Lease) is an additional named insured;
and (ii) that such insurance policies shall not be cancelable, subject
to reduction of coverage or any other material amendment without a
minimum of 30 days prior written notice to Sublessor and any other
additional named insureds.
14. DAMAGE AND DESTRUCTION.
14.1 TERMINATION OF MASTER LEASE. If as the result
of any damage or destruction, Master Lessor or Sublessor either mutually
agree or exercise any option
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either may have to terminate the Master Lease as to all or any portion
of the Sublease Premises, this Sublease shall terminate to the same
extent, effective as of the date of such termination of the Master
Lease.
14.2 CONTINUATION OF SUBLEASE. If this Sublease is
not terminated following any damage or destruction as provided above,
this Sublease shall remain in full force and effect. Sublessor shall
use its best efforts to cause Master Lessor to comply with its repair
obligations under Article VI, Section F of the Master Lease. To the
extent Sublessor receives any abatement of rent under the Master Lease
on account of damages to the Sublease Premises, Sublessee's obligation
to pay rent under the Sublease shall be reduced in the same proportion
(i.e., the proportion which the reduction attributable to the Sublease
Premises bears to the total rent attributable to the Sublease Premises
under the Master Lease. Subject to the Master Lessor's obligations
under the Master Lease, Sublessee shall diligently repair, restore or
rebuild the Sublease Premises as nearly as practicable to substantially
the condition in which the Sublease Premises existed immediately prior
to such damage or destruction; provided, that Sublessor shall make
available to Sublessee for such purpose any insurance proceeds actually
received by Sublessor as a result of such damage or destruction.
Sublessee waives the provisions of any statute or other principle of law
or equity which relate to the right to terminate a lease when the thing
leased is destroyed and agrees that such event shall be governed by the
terms hereof. Unless this Sublease shall terminate as provided in
Section 14.1 above and except as set forth above, there shall be no
abatement of Rent payable by Sublessee hereunder by reason of any damage
or destruction of the Sublease Premises. If this Sublease is terminated
as a result of any damage or destruction as provided in Section 14.1
above, or if Sublessee shall fail to promptly and diligently repair,
restore or rebuild the Sublease Premises after any such damage or
destruction as required hereby, all proceeds of insurance resulting from
such damage or destruction shall be paid to Sublessor, and Sublessee
hereby assigns such proceeds to Sublessor in any such event. Payment
and assignment to Sublessor of any such insurance proceeds shall not be
construed as a waiver of any right or remedy Sublessor may have against
Sublessee arising from any breach of this Section.
15. EMINENT DOMAIN.
15.1 TERMINATION OF MASTER LEASE. If as the result
of any condemnation by eminent domain, inverse condemnation or sale in
lieu of condemnation, for any public or a quasi-public use or purpose
("Condemned" or "Condemnation"), Master Lessor or Sublessor either
mutually agree or exercise any option either may have to terminate the
Master Lease as to all or any portion of the Sublease Premises, this
Sublease shall terminate to the same extent, effective as of the date of
such termination of the Master Lease. If all of the Sublease Premises
(or such part thereof that Sublessee cannot reasonably operate in the
remainder substantially the same business being conducted in the
Sublease Premises) is Condemned, Sublessee may terminate this Sublease.
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15.2 PARTIAL CONDEMNATION. If this Sublease is not
terminated following any such Condemnation as set forth above, this
Sublease shall remain in full force and effect. In such event,
Sublessor shall use its best efforts to cause Master Lessor to comply
with its obligation to repair, alter or restore the Sublease Premises
under Article XI of the Master Lease. Subject to Master Lessor's
obligations under the Master Lease, Sublessee shall repair, restore or
rebuild the Sublease Premises as nearly as practicable to substantially
the condition in which the Sublease Premises existed immediately prior
to such Condemnation, provided that Sublessor shall make available to
Sublessee for such purpose that portion of the Condemnation award
allowed for physical damage to that portion of the Sublease Premises not
taken in such Condemnation. Sublessee hereby waives the provisions of
any applicable statute or principal of law or equity permitting
termination this Sublease upon Condemnation. To the extent Sublessor
receives any rental reduction under the Master Lease attributable to the
Sublease Premises, the Monthly Base Rent shall be reduced in the same
proportion (i.e., the proportion which the reduction attributable to the
Sublease Premises bears to the total rent attributable to the Sublease
Premises under the Master Lease). Unless this Sublease shall terminate
as a result of any Condemnation, there shall be no abatement of Rent
payable by Sublessee hereunder as a result of any Condemnation.
15.3 SUBLESSEE'S AWARD. Sublessor reserves all
rights to damages to the Sublease Premises and Sublessor 's interest in
the subleasehold created by this Sublease hereafter accruing by reason
of any Condemnation. However, as between Sublessor and Sublessee, and
subject to all rights of the Master Lessor under the Master Lease,
Sublessee reserves the right to the equitable portion of any award for
damages for the value to Sublessee of any unexpired term of this
Sublease (in the event such Condemnation causes a termination of the
Sublease). Article XI of the Master Lease sets forth procedures for
determining the value of Sublessor's rights to a share of any
Condemnation award attributable to early termination of the Master
Lease. Sublessee shall be entitled to a share of a Condemnation award
for the unexpired term of the Sublease only if Sublessor receives a
share of such Condemnation award for the value of the unexpired term of
the Master Lease and then only the equitable share of such Condemnation
award received by Sublessor as is attributable to the Sublease Premises
for the term of this Sublease. If Sublessor and Sublessee cannot agree
upon the share of any Condemnation award attributable to the Sublease
Premises for the term of the Sublease, the matter shall be determined by
arbitration in accordance with the provisions set forth in the Master
Lease.
16. DEFAULT.
16.1 EVENTS OF DEFAULT. The occurrence of any one or
more of the following events shall constitute an "Event of Default" on
the part of Sublessee with or with-out notice from Sublessor (except as
required by Section 16.1(ii) below):
(i) Payment. Sublessee's failure to pay any
installment of Rent on or before five days after such payment is due;
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(ii) Performance. Sublessee's failure to perform any
of Sublessee's covenants, agreements or obligations here-under (other
than the nonpayment of Rent which shall be governed by Section 16.1(i)
above or to provide any required Letter of Credit which shall be
governed by Section 16.1(viii) below) on or before 30 days after written
notice thereof from Sublessor;
(iii) Assignment. A general assignment by Sublessee
for the benefit of creditors;
(iv) Bankruptcy. The filing of a voluntary petition
by Sublessee, or the filing of an involuntary petition by any of
Sublessee's creditors seeking the rehabilitation, liquidation or
reorganization of Sublessee under any law relating to bankruptcy,
insolvency or other relief of debtors;
(v) Receivership. The appointment of a receiver or
other custodian to take possession of substantially all of Sublessee's
assets or of this lease-hold;
(vi) Insolvency, Dissolution, Etc. Sublessee shall
become insolvent or unable to pay its debts, or shall fail generally to
pay its debts as they be-come due; or any court shall enter a decree or
order directing the winding up or liquidation of Sublessee or of
substantially all of its assets; or Sublessee shall take any action
toward the dissolution or winding up of its affairs or the cessation or
suspension of its use of the Sublease Premises;
(vii) Attachment. Attachment, execution or other
judicial seizure of substantially all of Sublessee's assets or this
leasehold; or
(viii) Letter of Credit. Sublessee's failure to
provide any Letter of Credit required pursuant to Section 5.6 of this
Sublease on the date required.
16.2 SUBLESSOR'S REMEDIES.
(i) Abandonment. If Sublessee vacates or abandons
the Sublease Premises, this Sublease shall continue in effect unless and
until terminated by Sublessor in writing, and Sublessor shall have all
of the rights and remedies provided by applicable laws.
(ii) Termination. Following the occurrence of any
Event of Default, Sublessor shall have the right, so long as the default
continues, to terminate this Sublease by written notice to Sublessee
setting forth: (i) the default; (ii) the requirements to cure it; and
(iii) a demand for possession, which shall be effective three days after
it is given. Sublessor shall not be deemed to have terminated this
Sublease other than by delivering written notice of termination to
Sublessee.
(iii) Possession. Following termination of the
Sublease, without prejudice to any other remedies Sublessor may have by
reason of Sublessee's default or of such termination, Sublessor may then
or at any time thereafter (i) peaceably reenter the
20
<PAGE>
Sublease Premises, or any part thereof, upon voluntary surrender by
Sublessee, or, expel or remove Sublessee and any other persons
occupying the Sublease Premises, using such legal proceedings as may
be available; (ii) repossess and enjoy the Sublease Premises, or
relet the Sublease Premises or any part thereof for such term or
terms (which may be for a term extending beyond the Term), at such
rental or rentals and upon such other terms and conditions as
Sublessor in Sublessor's sole discretion shall determine, with the
right to make reasonable alterations and re-pairs to the Sublease
Premises; and (iii) remove all personal property from the Sublease
Premises.
(iv) Recovery. Following termination of the
Sublease, Sublessor shall have all the rights and remedies of a
Sublessor provided by applicable law, including the right to recover (i)
the worth at the time of the award of the unpaid rent which had been
earned at the time of termination; (ii) the worth at the time of the
award of the amount by which the unpaid rent which would have been
earned after termination until the time of the award exceeds the amount
of such rental loss that Sublessee proves could have been reasonably
avoided; (iii) the worth at the time of the award of the amount by which
the unpaid rent for the balance of the Term after the time of award
exceeds the amount of such rental loss that Sublessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate
Sublessor for all detriment proximately caused by Sublessee's failure to
per-form Sublessee's obligations under the Sublease or which in the
ordinary course of things would be likely to result therefrom. The
"worth at the time of award" of the amounts referred to in (i) and (ii)
of this subsection, shall be computed by allowing interest at the
Interest Rate. The "worth at the time of the award" of the amount
referred to in (iii) above shall be computed by discounting such amount
at the discount rate of the Federal Reserve Bank of San Francisco at the
time of award plus one percent (1%).
(v) Other. If Sublessee causes or threatens to
cause a breach of any of the covenants, terms or conditions contained in
this Sublease, Sublessor shall be entitled to retain all sums held by
Sublessor, any trustee or in any account provided for herein, to enjoin
such breach or threatened breach, and to invoke any remedy al-lowed at
law, in equity, by statute or otherwise as though re-entry, summary
proceedings and other remedies were not provided for in this Sublease.
(vi) Cumulative. Each right and remedy of Sublessor
provided for in this Sublease shall be cumulative and shall be in
addition to every other right or remedy pro-vided for now or hereafter
existing at law, in equity, by statute or otherwise. The exercise or
beginning of the exercise by Sublessor of any one or more of the rights
or remedies provided for in this Sublease, or now or hereafter existing
at law, in equity, by statute, or otherwise, shall not preclude the
simultaneous or later exercise by Sublessor of any or all other rights
or remedies provided for in this Sublease or now or here-after existing
at law, in equity, by statute, or otherwise.
(vii) No Waiver. No failure by Sublessor to insist
upon the strict performance of any term hereof or to exercise any right
or remedy consequent upon a breach thereof, and no acceptance of full or
partial payment of rent during the
21
<PAGE>
continuance of any such breach shall constitute a waiver of any such
breach or of any such term. Efforts by Sublessor to mitigate the
damages caused by Sublessee's breach of this Sublease shall not be
construed to be a waiver of Sublessor's right to recover damages
under this Section.
(viii) Sublessor's Right to Perform. Upon Sublessee's
failure to perform any obligation of Sublessee hereunder, including,
without limitation, payment of Sublessee's insurance premiums and
charges of contractors who have supplied materials or labor to the
Sublease Premises, Sublessor shall have the right, but not the
obligation, to perform such obligations of Sublessee on behalf of
Sublessee or to make payment on behalf of Sublessee to such parties, or
both. Upon demand, Sublessee shall reimburse Sublessor for the cost of
Sublessor's performing such obligations on Sublessee's behalf,
including, without limitation, reimbursement of any amounts that may be
expended by Sublessor and Sublessor's reasonable attorneys' fees, plus
interest at the Interest Rate, from the date of any such expenditure
until the same is repaid.
(ix) Additional Remedies. In addition to the
foregoing remedies and so long as this Sublease is not terminated,
Sublessor shall have the right to maintain or improve the Sublease
Premises without terminating this Sublease; to incur expenses on behalf
of Sublessee in seeking a subtenant or assignee, including, without
limitation, brokers' commissions, expenses of remodeling the Sublease
Premises, and any other inducements which Sublessor determines, in
Sublessor's sole discretion, are necessary; to cause a receiver to be
appointed to administer the Sublease Premises and any new or existing
subleases; and to add to the Rent payable hereunder all of Sublessor's
costs in so doing, including reasonable attorneys' fees, with interest
at the Interest Rate from the date of such expenditure until the same is
repaid.
(x) Additional Rent. For purposes of any unlawful
detainer action by Sublessor against Sublessee, Sublessor shall be
entitled to recover as Rent not only such sums specified as the Monthly
Base Rent which may then be overdue, but also any and all additional
sums of money as may then be overdue.
(xi) Indemnification. Sublessor's exercise of any
one or more of the remedies set forth in this Section shall not affect
the rights of Sublessor or the obligations of Sublessee under the
indemnification set forth in Section 17 hereof.
(xii) After Default. Sublessor shall be under no
obligation to observe or perform any covenant of this Sublease on its
part to be observed or performed which accrues after the date of any
Event of Default, and for so long as the Event of Default continues.
(xiii) Letter of Credit. Sublessor may draw upon the
Letter of Credit and apply the proceeds thereof to any of Sublessee's
obligations under this Sublease in any order or manner as Sublessor
deems appropriate or, after termination, to any amounts Sublessor is
entitled to recover under subsection 16.2(iv) above.
22
<PAGE>
17. EXCULPATION AND INDEMNIFICATION OF SUBLESSOR.
17.1 EXCULPATION. Sublessor shall not be liable to
Sublessee, and Sublessee hereby waives all claims arising from any loss,
injury, or other damage to any person or property (including, but not
limited to, Sublessee or Sublessee's property), in or about the Sublease
Premises from any cause (including, but not limited to, defects in the
Sublease Premises or any equipment or other personal property in the
Sublease Premises; fire, explosion, or other casualty; damage to or
defects in any telephone wiring or cabling; or bursting, rupture,
leakage, or overflow of any plumbing or other pipes, piping, tubes,
tubing, lines, sprinklers, tanks, drains, drinking fountains, or wash
basins or stands), except to the extent that such claims arise by the
willful misconduct or grossly negligent acts or omissions of Sublessor.
In no event, however, shall Sublessor be liable to Sublessee for any
punitive or consequential damage or damages for loss of business by
Sublessee.
17.2 INDEMNIFICATION BY SUBLESSEE. Sublessee shall
indemnify, defend with counsel reasonably acceptable to Sublessor, and
hold Sublessor, and its officers, directors, employees and agents,
harmless from and against any and all liabilities, penalties, losses,
damages, costs and expenses, demands, causes of action, claims or
judgments (including, without limitation, attorneys' fees and expenses)
(collectively referred to as the "Claims") arising, claimed or incurred
against or by Sublessor, or its officers, directors, employees or
agents, from any matter or thing arising from (i) the use or occupancy
of the Sublease Premises by Sublessee or any of its partners, employees,
agents, licensees and invitees, the conduct of Sublessee's business, or
from any activity, work or other thing done, permitted or suffered by
Sublessee in or about the Sublease Premises; (ii) any accident, injury
to or death of Sublessee or its partners, employees, agents, invitees or
licensees or any other person or loss of or damage to property of
Sublessee or any such persons occurring on or about the Sublease
Premises or any part thereof during the term hereof; or (iii) any breach
or default in the performance of any obligation on Sublessee's part or
to be performed under the terms of this Sublease or the Master Lease.
Sublessee shall have no obligation to indemnify, defend and hold
Sublessor harmless from and against any Claims resulting solely from
Sublessor's breach of this Sublease or from the negligence or willful
misconduct of Sublessor. Notwithstanding any provision hereof to the
contrary, the indemnification provided in this Section shall survive any
termination of this Sublease or expiration of the Term hereof.
Sublessee shall give prompt notice to Sublessor in case of casualty or
accidents known to Sublessee on or about the Sublease Premises.
17.3 INDEMNIFICATION BY SUBLESSOR. Sublessor shall
indemnify, defend with counsel reasonably acceptable to Sublessee, and
hold Sublessee, and its officers, directors, employees and agents,
harmless from and against any and all Claims arising, claimed or
incurred against or by Sublessee or its officers, directors, employees
or agents, from any matter or thing arising from any breach or default
in the performance of any obligation on Sublessor's part to be performed
under the terms of this Sublease or the Master Lease. Sublessor shall
have no obligation to indemnify, defend and hold Sublessee harmless from
and against any Claims resulting solely from Sublessee's breach
23
<PAGE>
of this Sublease or from the negligence or willful misconduct of
Sublessee. Notwithstanding any provision hereof to the contrary, the
indemnification provided in this Section shall survive a termination
of this Sublease or expiration of the term hereof.
18. BROKERAGE COMMISSION. Sublessee represents and warrants
to Sublessor that except for The Staubach Company, which has represented
Sublessee in connection with the sublease of the Sublease Premises contemplated
hereby, no other broker or finder can properly claim a right to a commission or
a finder's fee based upon contacts between the claimant and Sublessee with
respect to Sublessor, this Sublease or the Sublease Premises. Sublessee shall
indemnify, defend (with counsel reasonably acceptable to Sublessor) and hold
Sublessor harmless from and against any loss, cost or expense, including, but
not limited to, attorneys' fees and court costs, resulting from any claim for a
fee or commission by any other broker or finder in connection with the Sublease
Premises and this Sublease.
19. GENERAL PROVISIONS.
19.1 NOTICES. All notices or demands of any kind
required or desired to be given hereunder shall be in writing and mailed
postage prepaid by certified or registered mail, return receipt
requested, or by personal delivery, to the appropriate address indicated
in the Basic Sublease Information, or at such other place or places as
either Sublessor or Sublessee may, from time to time, designate in a
written notice given to the other. Notices shall be deemed to be
delivered two business days after the date of mailing thereof, or upon
earlier receipt.
19.2 ENTRY BY SUBLESSOR. Sublessor and its
authorized representatives shall have the right to enter the Sublease
Premises at all reasonable times and upon reasonable notice (provided
that in the event of an emergency, notice need not be given) for the
purpose of inspecting the same or taking any action or doing any work
permitted hereunder (but nothing herein contained in this Lease shall
create or imply any duty on the part of Sublessor to make any such
inspection or to take any such action or do any such work). No such
entry shall constitute an eviction of Sublessee. In connection with any
such entry, Sublessor will use reasonable efforts not to disrupt or
interfere with the normal operation of Sublessee's business.
19.3 ESTOPPEL CERTIFICATES. Each party shall, from
time to time upon not less than 30 days prior written notice from the
other execute, acknowledge and deliver to the other a statement in
writing (a) certifying that this Sublease is unmodified and in full
force and effect (or, if modified, stating the nature of such
modification), and the date to which the Rent and other charges are paid
in advance, if any, (b) acknowledging that there are not, to such
party's knowledge, any uncured defaults on the part of the other
hereunder, or specifying such defaults if any are claimed, and (c)
setting forth the date of expiration of the term hereof.
19.4 LIENS. Sublessee covenants that it will not,
during the Term hereof, suffer or permit any lien to be attached to or
upon the Sublease Premises, or any portion thereof, by reason of any act
or omission on the part of Sublessee, and hereby agrees to save and hold
harmless Sublessor from or against any such lien or claim of lien.
24
<PAGE>
In the event any such lien does attach or any claim of lien is made
against the Sublease Premises which may be occasioned by any act or
omission upon the part of Sublessee, and shall not be released
within 30 days after notice from Sublessor to Sublessee so to do,
Sublessor in its sole discretion, except as provided below, may pay
and discharge the same and remove any such lien from the Sublease
Premises. Sublessee agrees to repay and reimburse Sublessor, upon
demand, for any amount which may have been paid by Sublessor in
discharging such lien, together with interest at the Interest Rate
from the date of the expenditure by Sublessor to the date of
repayment by Sublessee.
19.5 TIME. Time is of the essence of this Sublease.
If any date set forth for the performance of any obligation or for the
delivery of any instrument or notice should be on a Saturday, Sunday or
legal holiday, compliance with such obligations or delivery shall be
deemed acceptable on the next business day following such Saturday,
Sunday or legal holiday. As used herein, the term "legal holiday" means
any state or federal holiday for which financial institutions and post
offices are generally closed in the State of Colorado for observance
thereof. Except as expressly provided to the contrary in this Sublease,
all references to days shall mean calendar days.
19.6 ENTIRE AGREEMENT. This Sublease contains all of
the covenants, conditions and agreements between the parties concerning
the Sublease Premises, and shall supersede all prior correspondence,
agreements and understandings concerning the Sublease Premises, both
oral and written. No addition or modification of any term or provision
of this Sublease shall be effective unless set forth in writing and
signed by both Sublessor and Sublessee.
19.7 SUCCESSORS AND ASSIGNS. Subject to the
provisions of this Sublease relating to assignment, mortgaging and
subletting, this Sublease is intended to and does bind the heirs,
executors, administrators, successors and assigns of any and all of the
parties hereto.
19.8 AUTHORITY. Each individual executing this
Sublease on behalf of Sublessee represents and warrants that he or she
is duly authorized to execute and deliver this Sublease on behalf of
Sublessee, and that this Sublease is binding upon Sublessee in
accordance with its terms. As a condition precedent to the legal
effectiveness of this Sublease, Sublessor may, at Sublessor's option,
require corporate or partnership resolutions as are reasonably necessary
to establish the authority of Sublessee to execute this Sublease.
19.9 EXHIBITS. The exhibits attached hereto are made
a part of this Sublease by this reference.
19.10 ATTORNEYS' FEES; WAIVER OF JURY TRIAL. If any
party commences an action against the other party arising out of or in
connection with this Sublease, (a) the prevailing party shall be
entitled to recover from the losing party the cost and expenses of such
action, including reasonable collection fees, attorneys' fees (including
without limitation the allocated cost of in-house counsel) and court
costs; and (b) the parties agree
25
<PAGE>
that the matter shall be tried by the court without a jury, and each
party specifically waives the right to a jury trial in any such
action.
19.11 GOVERNING LAW. This Sublease shall be governed
by and construed in accordance with the laws of the State of Colorado
applicable to contracts to be performed in such State.
19.12 CAPTIONS. All captions and headings in this
Sublease are for the purposes of reference and convenience and shall not
limit or expand the provisions of this Sublease.
19.13 MASTER LESSOR'S CONSENT. This Sublease is
conditioned upon Master Lessor's written approval of this Sublease. If
for any reason Master Lessor does not consent to this Sublease within
the 30 days after the full execution of this Sublease, then this
Sublease shall terminate, Sublessor shall return to Sublessee the
Security Deposit (if previously delivered to Sublessor) and any prepaid
rent, and neither party shall have any other continuing obligation to
the other with respect to the Sublease Premises or this Sublease.
19.14 DEFINITION OF SUBLESSOR. As used in this
Sublease, the term "Sublessor" means only the current owner of the
leasehold interest of the lessee under the Master Lease at the time in
question. Each Sublessor is obligated to perform the obligations of the
Sublessor hereunder only during the time such Sublessor owns such
leasehold interest. Any Sublessor who transfers title to its leasehold
interest in the Sublease Premises is relieved of all liabilities of
Sublessor under this Sublease to be performed on or after the date of
such transfer.
19.15 FORCE MAJEURE. As used in this Sublease, the
term "Force Majeure" as applied to the obligations of Sublessor shall
mean strikes, lockouts or labor unrest, shortages of labor or materials,
disease, pestilence or epidemic, acts of God, governmental actions or
restrictions, war, enemy action, riot, civil commotion, fire, accident
or unavoidable casualty, or other causes beyond the reasonable control
of Sublessor.
19.16 JOINT AND SEVERAL LIABILITY. If more than one
person and/or entity is Sublessee, the obligations imposed under this
Sublease shall be joint and several.
19.17 WAIVERS. No provision of this Sublease shall be
deemed to have been waived, unless such waiver is in writing signed by
the party against whom the waiver is sought to be enforced and addressed
to the other party, nor shall any custom or practice which may evolve
between the parties in the administration of the terms hereof be
construed to waive either party's right to require the obligations of
the other party be performed in strict accordance with the terms of this
Sublease.
19.18 QUIET USE AND ENJOYMENT. So long as Sublessee
is not in default hereunder, Sublessee's quiet use and enjoyment of the
Sublease Premises shall not be disturbed.
26
<PAGE>
IN WITNESS WHEREOF, the parties shall be deemed to have executed
this Sublease as of the date first set forth above.
SUBLESSOR:
WELLS FARGO BANK, N.A.
By: /s/ Leo J. Bauman
Name: Leo J. Bauman
Title: Vice President
By: /s/ Mark A. Ingram
Name: Mark A. Ingram
Title: SVP
SUBLESSEE:
GREASE MONKEY INTERNATIONAL, INC.,
a Colorado corporation
By: /s/ Dana Klapper Cohen
Name: Dana Klapper Cohen
Title: Vice President
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
27
<PAGE>
CONSENT OF MASTER LESSOR
The undersigned, Master Lessor of the Sublease Premises, hereby consents
to the foregoing Sublease.
"MASTER LESSOR"
PRUDENTIAL INSURANCE COMPANY OF
AMERICA, a ______________________
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
28
<PAGE>
AMENDMENT
TO
CONSULTANT AGREEMENT
BETWEEN
GREASE MONKEY HOLDING CORPORATION,
A UTAH CORPORATION
AND
REX L. UTSLER
THE CONSULTANT AGREEMENT DATED February 5, 1997 by and between Rex L.
Utsler, an individual ("Utsler") and Grease Monkey Holding Corporation, a Utah
corporation ("Grease Monkey") is hereby amended upon the appointment of Utsler
as President and Chief Operating Officer effective September 18, 1998.
1. CONSULTING FEES. The monthly consulting fees of $16,071.00 are hereby
suspended. The remaining, unpaid consulting fees from the period
September 19, 1998 through March 3, 1999 will convert to severance
payments in the event of any change in the employment relationship
between Utsler and Grease Monkey, including a change in control of
Grease Monkey.
2. SEVERANCE PAYMENTS. Utsler will begin accruing one month of additional
severance pay effective beginning September 18, 1998, for each month of
employment as President and Chief Operating Officer, or such other
position as may be mutually agreed upon between Utsler and Grease
Monkey, to a maximum severance compensation of 24 months' pay.
3. ADDITIONAL TERMS. All other terms and conditions of Utsler's employment
with Grease Monkey effective September 18, 1998 are contained in the
minutes of the meeting of the Board of Directors dated November 2,
1998.
IN WITNESS WHEREOF, the parties have executed this Amendment to the
Consultant Agreement as of the day and year first above written.
Grease Monkey Holding Corporation, a
Utah corporation
By: /s/ James B. Wallace
-------------------------
James B. Wallace, Chairman
/s/ Rex L. Utsler
----------------------------
Rex L. Utsler
<PAGE>
WARRANTS TO PURCHASE
100,000 SHARES OF COMMON STOCK
GREASE MONKEY HOLDING CORPORATION
INCORPORATED UNDER THE LAWS
OF THE STATE OF UTAH
This certifies that, for value received, __________________, the
registered holder hereof or assigns ("Warrantholder") is entitled to purchase
from Grease Monkey Holding Corporation ("Company"), at any time during the
period commencing at 9:00 a.m., Colorado time, on August 1, 1998 and ending at
5:00 p.m., Colorado time, on August 1, 2000, at the purchase price per share of
$1.05 per share ("Exercise Price"), 100,000 shares of the Company's $0.03 par
value common stock ("Common Stock").
The Warrants evidenced hereby may be exercised in whole or in part by
presentation of this Warrant Certificate with the Purchase Form attached hereto
duly executed and simultaneous payment of the warrant price at the principal
office of the Company. Payment of the warrant price shall be made at the option
of the Warrantholder in cash or by cashier's check.
Upon any partial exercise of the Warrants evidenced hereby, there shall
be signed and issued to the Warrantholder a new Warrant Certificate in respect
of the shares as to which the Warrants evidenced hereby shall not have been
exercised. These Warrants may be exchanged at the office of the Company by
surrender of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of shares as here evidenced by the Warrant
or Warrants exchanged. No fractional shares of Common Stock will be issued upon
the exercise of rights to purchase hereunder, but the Company shall pay the cash
value of any fraction upon the exercise of one or more Warrants. These Warrants
are transferable at the office of the Company.
This Warrant Certificate does not entitle any Warrantholder to any of
the rights of a stockholder of the Company.
GREASE MONKEY HOLDING CORPORATION
By:
-----------------------------------------
Charles E. Steinbrueck, President and C.E.O.
Dated:
Attest:
By:
--------------------------
Dana Klapper Cohen, Secretary
<PAGE>
PURCHASE FORM
Dated __________________________
The undersigned hereby irrevocably elects to exercise the Warrant represented by
this Warrant Certificate to the extent of purchasing _________ shares of Common
Stock of the Company and hereby tenders payment of the Exercise Price thereof.
If the number of shares purchased is not all the shares purchasable pursuant to
the Warrants represented by this Warrant Certificate, a new Warrant Certificate
should be issued and delivered to the undersigned at the address stated below,
INSTRUCTIONS FOR REGISTRATION OF STOCK
Name ________________________________________________________________________
Address ______________________________________________________________________
<PAGE>
ASSIGNMENT FORM
FOR VALUE RECEIVED, __________________________, hereby sells, assigns and
transfers unto
Name __________________________________________________________________________
(Please type or print in block letters)
Address________________________________________________________________________
the rights to purchase shares of the Company represented by this Warrant
Certificate to the extent of _____________ shares as to which such right is
exercisable and does hereby irrevocably constitute and appoint
________________________ attorney, to transfer the same on the books of the
Company with full power of substitution in the premises. IF the number of Shares
assigned is not all the shares purchasable pursuant to the Warrants represented
by this Warrant Certificate, a new Warrant Certificate should be issued and
delivered to the undersigned.
Signature __________________________________ Dated ____________________
NOTICE: THE SIGNATURE ON THE ASSIGNMENT MUST CORRESPOND WITH THE NAME AS IT
APPEARS UPON THE FACE OF THIS WARRANT CERTIFICATE IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
<PAGE>
Exhibit 23(a)
THE BOARD OF DIRECTORS
GREASE MONKEY HOLDING CORPORATION:
We consent to incorporation by reference in the registration statement (No.
33-80376) on Form S-8 and the registration statement (No. 33-79616) on Form
S-3 of Grease Monkey Holding Corporation of our report dated March 15, 1999,
except as to Note K, which is as of March 27, 1999, relating to the
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, which report
appears in the December 31, 1998, annual report on Form 10-KSB of Grease
Monkey Holding Corporation.
KPMG LLP
Denver, Colorado
April 15, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES F-2 THROUGH F-4 OF THE COMPANY'S FORM 10-KSB FOR THE YEAR AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 145,470
<SECURITIES> 0
<RECEIVABLES> 1,356,544
<ALLOWANCES> 471,571
<INVENTORY> 647,530
<CURRENT-ASSETS> 1,999,464
<PP&E> 11,046,700
<DEPRECIATION> 4,508,081
<TOTAL-ASSETS> 14,212,264
<CURRENT-LIABILITIES> 3,807,417
<BONDS> 6,502,625
0
2,089,638
<COMMON> 139,436
<OTHER-SE> (3,511,398)
<TOTAL-LIABILITY-AND-EQUITY> 14,212,264
<SALES> 0
<TOTAL-REVENUES> 20,101,585
<CGS> 0
<TOTAL-COSTS> 21,089,952
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 310,708
<INTEREST-EXPENSE> 827,185
<INCOME-PRETAX> (2,029,848)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,029,848)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,029,848)
<EPS-PRIMARY> (0.46)
<EPS-DILUTED> (0.46)
</TABLE>
