<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission File Number 000-9812
GREASE MONKEY HOLDING CORPORATION
---------------------------------
(Exact name of small business issuer as specified in its charter)
Utah 87-0321320
- ---------------------------------- ---------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
633 17th Street, Suite 400
Denver, Colorado 80202
---------------------------
(Address of principal executive offices)
(303) 308-1660
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
Outstanding at
Class May 3, 1999
----------------------------- ----------------
Common Stock, $0.03 par value 4,678,369 shares
Transitional Small Business Disclosure Format Yes No X
----- -----
<PAGE>
GREASE MONKEY HOLDING CORPORATION
COMMISSION FILE NUMBER: 000-9812
QUARTER ENDED MARCH 31, 1999
FORM 10-QSB
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION
Consolidated Statements of Operations..................................... Page 1
Consolidated Balance Sheets............................................... Page 2
Consolidated Statements of Stockholders' Equity (Deficit)................. Page 4
Consolidated Statements of Cash Flows..................................... Page 5
Notes to Consolidated Financial Statements................................ Page 7
Management's Discussion and Analysis or Plan
of Operation............................................................ Page 11
PART II OTHER INFORMATION
Legal Proceedings......................................................... Page 18
Exhibits and Reports on Form 8-K.......................................... Page 19
Signatures................................................................ Page 20
</TABLE>
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
1999 1998
----------- -----------
<S> <C> <C>
Operating Revenue:
Royalty fees....................................... $ 673,093 742,283
Franchise sales - center openings.................. 46,960 -
Product and equipment revenue...................... 113,803 180,929
Sales by Company-owned Centers..................... 3,813,951 3,698,874
Leasing revenue.................................... 227,831 328,699
Other.............................................. 18,376 18,916
----------- -----------
4,894,014 4,969,701
----------- -----------
Operating Expenses:
Franchise costs - center openings.................. 6,166 5,500
Product and equipment costs........................ 42,357 82,593
Company-owned Centers.............................. 3,133,841 3,167,710
Leasing expense.................................... 275,232 356,636
General and administrative expenses................ 900,881 1,272,904
Provision for credit losses........................ 43,503 42,500
Depreciation....................................... 178,013 165,749
Amortization....................................... 73,270 71,333
----------- -----------
4,653,263 5,164,925
----------- -----------
Operating income (loss).............................. 240,751 (195,224)
----------- -----------
Other income (expense):
Loss on sale/disposition/closure of centers........ (9,912) (50,512)
Undeveloped franchise licenses canceled............ - 31,983
Interest income.................................... 3,547 11,235
Interest expense................................... (242,572) (213,717)
----------- -----------
(248,937) (221,011)
----------- -----------
Net loss............................................. $ (8,186) (416,235)
----------- -----------
----------- -----------
Loss per common share (Note 5)....................... $ (0.01) (0.10)
----------- -----------
----------- -----------
Weighted average shares outstanding.................. 4,651,268 4,641,805
----------- -----------
----------- -----------
</TABLE>
(UNAUDITED)
1
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash.............................................................. $ 209,147 145,470
Accounts receivable, net of allowance for
doubtful accounts of $509,036 at March 31, 1999,
and $471,571 at December 31, 1998............................... 734,267 742,169
Current portion of notes receivable, net.......................... 80,432 60,885
Current portion of net investment
in direct financing leases...................................... 211,380 183,775
Inventories....................................................... 618,088 647,530
Prepaid expenses and supplies..................................... 189,915 219,635
------------ ------------
TOTAL CURRENT ASSETS............................................ 2,043,229 1,999,464
------------ ------------
Property and Equipment:
Land.............................................................. 708,838 805,432
Buildings (including buildings under capital leases).............. 6,835,896 6,859,365
Furniture and fixtures............................................ 699,695 674,553
Leasehold improvements............................................ 806,871 823,657
Machinery and equipment .......................................... 1,882,614 1,883,693
------------ ------------
10,933,914 11,046,700
Less accumulated depreciation..................................... (4,415,138) (4,508,081)
------------ ------------
NET PROPERTY AND EQUIPMENT...................................... 6,518,776 6,538,619
------------ ------------
Other Assets:
Net investment in direct financing leases......................... 1,817,009 2,023,193
Notes receivable, net............................................. 87,915 81,919
Deferred franchising costs........................................ 107,653 113,819
Goodwill and covenants not to compete, net of accumulated
amortization of $1,405,035 at March 31, 1999, and $1,373,453
at December 31, 1998............................................ 2,265,470 2,322,422
Land held for development/resale.................................. 800,854 818,300
Other assets, net of accumulated amortization of $86,444 at
March 31, 1999, and $70,126 at December 31, 1998................ 272,680 314,528
------------ ------------
TOTAL OTHER ASSETS.............................................. 5,351,581 5,674,181
------------ ------------
$ 13,913,586 14,212,264
------------ ------------
------------ ------------
</TABLE>
(UNAUDITED)
(continued on next page)
2
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Accounts payable.................................................. $ 1,454,461 1,674,175
Accrued salaries and wages........................................ 216,466 190,982
Other accrued liabilities......................................... 338,632 377,799
Current portion of long-term obligations.......................... 1,102,563 1,084,617
Current portion of obligations under capital leases............... 506,323 479,844
------------ ------------
TOTAL CURRENT LIABILITIES....................................... 3,618,445 3,807,417
------------ ------------
Long-term Obligations............................................... 5,475,489 5,418,008
Obligations Under Capital Leases.................................... 5,661,217 5,801,910
Deferred Franchise Sales Revenue.................................... 428,693 467,253
Stockholders' Deficit:
Series C Preferred stock, stated value of $100.00 per share,
20,896 shares issued and outstanding at March 31, 1999 and
December 31, 1998............................................... 2,089,638 2,089,638
Common stock, par value $.03, 20,000,000 shares authorized,
4,678,369 and 4,647,880 shares issued and outstanding at
March 31, 1999 and December 31, 1998, respectively.............. 140,351 139,436
Capital in excess of par value.................................... 6,348,070 6,328,733
Accumulated deficit............................................... (9,848,317) (9,840,131)
------------ ------------
TOTAL STOCKHOLDERS' DEFICIT................................... (1,270,258) (1,282,324)
Commitments and Contingencies.....................................
------------ ------------
$ 13,913,586 14,212,264
------------ ------------
------------ ------------
</TABLE>
(UNAUDITED)
3
<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, 1997............ 20,896 $ 2,089,638 4,633,570 $ 139,007 6,197,880 (7,810,283) 616,242
Issuance of common stock pursuant
to employee benefit plan.............. - - 10,810 324 13,145 - 13,469
Issuance of common stock upon exercise
of employee stock options............. - - 3,500 105 1,708 - 1,813
Fair value of warrants issued........... - - - - 116,000 - 116,000
Net loss................................ - - - - - (2,029,848) (2,029,848)
------ ----------- --------- --------- --------- ---------- ----------
Balance at December 31, 1998............ 20,896 2,089,638 4,647,880 139,436 6,328,733 (9,840,131) (1,282,324)
Issuance of common stock pursuant
to employee benefit plan.............. - - 30,489 915 19,337 - 20,252
Net loss................................ - - - - - (8,186) (8,186)
------ ----------- --------- --------- --------- ---------- ----------
Balance at March 31, 1999............... 20,896 $ 2,089,638 4,678,369 $ 140,351 6,348,070 (9,848,317) (1,270,258)
------ ----------- --------- --------- --------- ---------- ----------
------ ----------- --------- --------- --------- ---------- ----------
</TABLE>
(UNAUDITED)
4
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................................. $ (8,186) (416,235)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Increase in deferred franchise sales revenue...................... 8,400 39,000
Franchise sales revenue recognized - center openings.............. (46,960) -
Increase in deferred franchising costs............................ - (19,927)
Franchise costs recognized - center openings...................... 6,166 -
Provision for credit losses....................................... 43,503 42,500
Loss realized on sale/retirement of property and equipment........ - 1,453
Depreciation and amortization..................................... 251,283 237,082
Undeveloped franchise licenses canceled........................... - (31,983)
Loss on sale/disposition/closure of centers....................... 10,590 36,767
Fair value of warrants issued..................................... 21,861 -
Net change in operating assets and liabilities:
Increase in accounts receivable................................. (54,746) (45,343)
Decrease in notes receivable.................................... 13,600 18,873
Decrease (increase) in inventories.............................. 27,084 (32,257)
Decrease (increase) in prepaid expenses and supplies............ 7,986 (49,942)
Increase (decrease) in accounts payable......................... (219,713) 52,150
Increase in accrued salaries and wages and other liabilities.... 6,569 140,006
---------- --------
Net cash provided by (used in) operating activities............... $ 67,437 (27,856)
---------- --------
</TABLE>
(UNAUDITED)
(continued on next page)
5
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
---------- ---------
<S> <C> <C>
Cash flows from investing activities:
Principal receipts on direct financing leases......................... $ 40,956 44,219
Proceeds from sale of property and equipment.......................... 88,009 -
Proceeds from sale of centers......................................... - 115,450
Purchase of property and equipment.................................... (110,571) (30,192)
Decrease (increase) in projects and development....................... 17,446 (595,927)
Decrease (increase) in other assets................................... 19,967 (63,588)
---------- --------
Net cash provided by (used in) investing activities............. 55,807 (530,038)
---------- --------
Cash flows from financing activities:
Proceeds from long-term obligations................................... 181,400 710,500
Principal payments on long-term obligations........................... (125,353) (140,729)
Principal payments on capital lease obligations....................... (114,139) (105,955)
Issuance of common stock.............................................. - 751
Increase in restricted cash........................................... - (25,000)
Increase (decrease) in lease deposit obligations...................... (1,475) 3,542
---------- --------
Net cash provided by (used in) financing activities............. (59,567) 443,109
---------- --------
Net increase (decrease) in cash......................................... 63,677 (114,785)
Cash, beginning of period............................................... 145,470 182,214
---------- --------
Cash, end of period..................................................... $ 209,147 67,429
---------- --------
---------- --------
Supplemental disclosures of cash flow information -
Cash paid during the period for interest.............................. $ 343,000 320,416
---------- --------
---------- --------
</TABLE>
(UNAUDITED)
6
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL
The financial statements included herein are unaudited and have been
prepared in accordance with generally accepted accounting principles for
interim financial reporting and Securities and Exchange Commission
regulations. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principals have been condensed or omitted pursuant to such rules
and regulations.
In the opinion of management, the financial statements reflect all
adjustments of a normal and recurring nature which are necessary to present
fairly the financial position, results of operations and cash flows for the
interim periods. These financial statements should be read in conjunction
with the Annual Report of Grease Monkey Holding Corporation (the "Company")
on Form 10-KSB for the year ended December 31, 1998.
The results for the three-month period ended March 31, 1999, are not
necessarily indicative of the results to be expected for the entire fiscal
year of 1999.
2. 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 March 31, 1999, the Company had a working
capital deficit of $1,575,216 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 that
would result in the sale of the Company. As a result of the current merger
agreement, the Company is not actively investigating financing
alternatives. Should the merger not proceed, the Company believes it could
obtain additional financing, however, there can be no assurance that such
financing would be available on a timely basis or on acceptable terms.
3. MERGER AGREEMENT WITH QL 3000, INC.
Effective March 26, 1999, the Company entered into a merger agreement with
QL 3000, Inc., a privately held company. The merger agreement 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.
(continued)
7
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. STOCKHOLDERS' EQUITY (DEFICIT)
The Company's Series C, 6% cumulative, Preferred stock is redeemable at the
option of the Company upon 60 days prior written notice. At the option of
the holder, at any time prior to the close of business on the redemption
date, each share of Series C Preferred stock, plus any accumulated unpaid
dividends, may be converted into shares of common stock at a conversion
price of $2.50 per share of common stock. On March 31, 1999, accumulated
unpaid dividends totaled $663,926.
The Company has an employee deferred compensation 401(k) plan and matches
employee contributions to this plan in an amount equal to 50% of the
employees' contribution, up to a maximum of 6% of the employees'
compensation. The Company's contribution is paid with its $0.03 par value
common stock (net of forfeitures) valued at market on the date of the
contribution. During the first three months of 1999 and 1998, the Company
contributed 30,489 and 10,735 shares to this plan at an average of $0.66
and $1.25 per share, respectively.
5. LOSS PER SHARE
Loss per common share is computed by dividing the net loss after reduction
for dividends on preferred stock ($30,915 in 1999 and $31,602 in 1998) 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 1999 and 1998.
6. 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.
(continued)
8
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has generally denied those claims and believes and has asserted
that they are frivolous and groundless. Barrett has been unable to produce
the alleged contract and the Company believes none was ever created. In
addition, the Company believes Barrett lacks any evidence to support his
claim of the alleged expenditures pursuant to the Southern California
development. The Company intends to defend vigorously said claims and its
liability exposure at the present time appears to be nominal. The Company
believes the likelihood of an unfavorable outcome in this matter is remote.
The Company is involved in various other claims and legal actions arising
in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position, results of
operations or liquidity.
FINANCIAL GUARANTEES
The Company has guaranteed leases of four franchisees. The aggregate
contingent liability under the lease guarantees totals approximately
$1,300,000. In addition, the Company has guaranteed notes payables of two
franchisees totaling approximately $750,000 and has guaranteed notes
payable to oil suppliers for certain franchisees.
The Company is committed to the lease of office and training facilities
under a lease expiring in November 2008. Rent under the lease is
approximately $18,000 per month.
(continued)
9
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SUPPLEMENTAL STATEMENT OF CASH FLOW INFORMATION
The following table sets forth, by period, the amount and nature of amounts paid
and received for the acquisition, sale (refranchising) and closure of
Company-owned Centers.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
Acquisition of Centers:
Number of Centers purchased........................... 1 -
--------- ---------
--------- ---------
Number of Centers foreclosed.......................... - 2
--------- ---------
--------- ---------
Receivables applied (net of related allowance)........ $ - 30,703
Liabilities assumed................................... 19,379 38,400
Cash paid ............................................ - -
--------- ---------
Cost of assets acquired............................... $ 19,379 69,103
--------- ---------
--------- ---------
Sales:
Number of Centers refranchised/sold/closed............ 1 2
--------- ---------
--------- ---------
Cash received......................................... $ - 115,450
Notes received/accounts receivable granted............ 20,000 15,769
Loss on sale.......................................... 10,590 36,767
--------- ---------
Net book value of centers refranchised/sold/closed.... $ 30,590 167,986
--------- ---------
--------- ---------
</TABLE>
During the three months ended March 31, 1999 and 1998, non-cash
transactions consisted of the Company issuing 30,489 and 10,735 shares of
common stock at an average value of $0.66 and $1.25 per share, respectively,
in accordance with its matching requirement under the Company's 401(k) plan.
There were no other non-cash transactions during the first three months of
1999. Other non-cash transactions during the first three months of 1998
included a franchise license in the amount of $10,000, net of deferred costs
of $2,173, that was canceled and applied to a franchisee's obligation to the
Company.
10
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
The Company reported a loss of ($8,186) for the first quarter of 1999,
as compared to a loss of ($416,235) for the first quarter of 1998. Total
revenue remained relatively constant, decreasing by $75,687 or less than 2%.
Royalty fees are a percentage of gross sales paid monthly by all
franchised Grease Monkey Centers. Royalty fee revenue for the first quarter
of 1999 decreased by $69,190 or 9% compared to the first quarter of 1998.
This decrease is due primarily to a reduction in the average number of U.S.
franchised Centers open during the respective periods. In the first quarter
of 1999, an average of 158 franchised Centers were open and operating as
compared to 160 Centers in the first quarter of 1998. Factored into this
average was the loss of twelve mature Centers (includes the acquisition of 2
Centers by the Company) offset by the addition of thirteen new Centers. While
these mature Centers were replaced in number by the new Centers, the new
Centers are in the early stages of development and do not generate the level
of sales of a mature Center. In addition, the Company signed a Master
Franchise Agreement for the Republic of Mexico on August 1, 1998 ("the
Agreement"). The Master Franchisee retains eighty percent of royalties and
franchise fees collected from Mexico franchisees after the effective date of
the Agreement. The decrease in royalty revenue related to this transaction,
when compared with the prior year is approximately $11,000. Based upon many
factors, including the age of amounts owed the Company, the extent of
collateralization, and historical performance, the Company may place certain
financially troubled franchisees on a non-accrual status. For the first
quarter of 1999, estimated royalties of $61,330 were not accrued under this
policy, compared to $50,670 for the first quarter of 1998. The Company has a
royalty rebate program for franchisees under which eligible franchisees can
receive a rebate of royalties paid. For the first quarter of 1999, the rebate
accrued under this program was $49,710 compared to $55,990 for the first
quarter of 1998. The rebate is recorded as a reduction in royalty revenue.
The Company recognized franchise sales net revenue (sales net of related
costs) of $40,794 during the first quarter of 1999 (representing four
centers). Franchise sales revenue represents initial one-time payments
received by the Company from buyers of its franchises. The fee and any
directly related costs are recognized as revenue and expense when the related
franchise center opens for business. There were no center openings during the
first quarter of 1998.
At March 31, 1999, the Company operated 33 Centers as compared to 31
Centers at March 31, 1998. For the first quarter of 1999, the Company
reported an operating margin (Company-owned Center sales less expenses,
excluding interest, depreciation and amortization) of $680,110 on revenue of
$3,813,951 at Company-owned Centers, as compared to an operating margin of
$531,164 on revenue of $3,698,874 for the same period last year. This
represents an increase of 3% in revenue and 28% in operating margin.
In the first quarter of 1999, the Company realized marketing allowances
and gross margins on product and equipment sales of $71,446, as compared to
$98,336 in the first quarter of 1998. Product
(continued)
11
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
and equipment revenue represents the sale of fluid dispensing equipment and
other supplies to franchisees, and marketing allowances relate to the sale of
oil filters, air filters, oil additives, and certain other products.
General and administrative expenses for the first quarter of 1999
decreased 29% or $372,023 as compared to the first quarter of 1998. The
primary factors causing this variance were: a reduction in salaries and
personnel expenses of approximately $246,000 or 38%; a reduction in travel
and entertainment expenses of approximately $63,000 or 38%; and a reduction
in professional fees for legal, tax and accounting services of approximately
$73,000 or 52%.
Depreciation and amortization expense for the first quarter of 1999
increased 6% over the first quarter of 1998. This increase is due primarily
to an increase of two Company-owned Centers over the prior year.
Loss on sale/disposition/closure of centers represents the net results
of the refranchising/disposal of Company-owned Centers. When the Company
refranchises a Center, a franchise license fee is included in the sales price
and included in the resulting gain or loss on sale. The loss of $9,912 for
the quarter ended March 31, 1999, represents the refranchising of one
Company-owned Center, marketing allowances paid based on subsidies granted
certain franchisees on the refranchising of Company-owned Centers in 1996,
and a reimbursement of costs previously expensed upon the closure of a
Company-owned Center in 1997. The loss of $50,512 for the quarter ended March
31, 1998, represents the closure of a Company-owned Center in 1998, marketing
allowances paid based on subsidies granted certain franchisees on the
refranchising of Company-owned Centers in 1996, and additional costs incurred
in 1998 related to the closure of Company-owned Centers closed in 1997. In
addition, a loss was recognized on the sale of a Company-owned Center to a
third party.
Interest expense includes interest on debt financing and interest
recorded on capital leases of Company-owned Centers. The increase in interest
expense from $213,717 in the first quarter of 1998 to $242,572 in the first
quarter of 1999 was due primarily to an increase in average debt outstanding
of approximately $1,700,000. This increase is due in part to borrowings
associated with the purchase/development of two Company-owned Centers, and
the purchase of land for development in 1998. In addition, approximately
$780,000 ($409,000 from a related party) was borrowed for working capital.
(continued)
12
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (CONTINUED)
The following schedule summarizes the activity with regard to Grease
Monkey Company-owned Centers as well as Grease Monkey franchised centers for
the quarters ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED:
MARCH 31, 1999 MARCH 31, 1998
----------------------------------- ------------------------------------
Company Franchisee Company Franchisee
Owned Owned Total Owned Owned Total
------- ---------- ------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Centers open, beginning 33 182 215 31 187 218
Centers opened - 4 4 - - -
Centers purchased - - - - - -
Centers sold (1) 1 - (1) - (1)
Centers terminated or closed - (1) (1) (1) (6) (7)
Centers reacquired 1 (1) - 2 (2) -
---- ----- ------- ---- ----- --------
Centers open, ending (A) 33 185 218 31 179 210
---- ----- ------- ---- ----- --------
---- ----- ------- ---- ----- --------
Vehicles serviced (000's) 652 661
------- --------
------- --------
Franchise licenses issued (B) 1 1
------- --------
------- --------
Undeveloped franchise licenses (C) 22 48
------- --------
------- --------
Franchise applications outstanding (C) 10 20
------- --------
------- --------
Franchise license/application
fees received (D) $ 8,400 $ 39,000
------- --------
------- --------
</TABLE>
(A) Includes 26 franchised centers in Mexico in 1999 and 21 franchised centers
in Mexico in 1998.
(B) Represents the number of licenses issued during the period.
(C) Represents the number of licenses/applications outstanding at March 31.
(D) Represents amounts received for franchise licenses/applications during the
period.
(continued)
13
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
CAPITAL RESOURCES
The Company currently has lines of credit with varying interest rates
from a or guaranteed by a related party. The lines total $489,000 of which
$484,500 was outstanding at March 31, 1999. Monthly payments are interest
only and the balance is due upon demand.
In September 1997, the Company entered into a $5,000,000 Loan Agreement
with a bank. In connection with the Company entering into a Master Supply
Contract with a motor oil supplier, the supplier agreed to guarantee the
loan. Draws under the Loan Agreement were used for the purpose of paying off
certain debt, including the Company's former Loan Agreement and Fast Lube
Supply Agreement, 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 $2,380,000 were made during 1998 and during the first quarter
of 1999, with an average interest rate of approximately 9% plus guarantee
fees. As of March 31, 1999, approximately $4,630,000 is outstanding under the
loan agreement.
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 March 31,
1999, there were no amounts outstanding under this line of credit and the
Company is currently re-negotiating the terms of this agreement.
The growth of the Grease Monkey system is dependent on the ability of
the Company and its franchisees to obtain real estate development capital.
Historically, Grease Monkey Centers have been built utilizing build-to-suit
services, whereby the land is purchased and the building is constructed to
the Company's specifications, then leased to the Company or to a franchisee,
by a third party. Recently, franchisees have moved toward purchasing and
developing the real estate for their own account, thereby creating greater
value in their business.
(continued)
14
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(CONTINUED)
LIQUIDITY
Cash provided by operations during the first quarter of 1999 was $67,437
as compared to cash used in operations of ($27,856) in the first quarter of
1998. The most significant factors contributing to this variance were an
improved operating margin at Company-owned Centers and a decrease in general
and administrative expenses.
Cash provided by investing activities was $55,807 in the first quarter
of 1999, as compared to cash used in investing activities of ($530,038) in
the first quarter of 1998. Cash provided in both periods consisted of
receipts on direct financing leases which decreased over the prior period.
Additional cash was received in the first quarter of 1999 with the sale of a
vacant site, and additional cash was received in the first quarter of 1998
with the sale of a Company-owned Center. Cash used in investing activities
for the first quarter of 1998 consisted primarily of cash used for the
development of Centers. Additional cash was used in both periods for the
purchase of property and equipment, primarily Company-owned Center equipment.
Cash used in financing activities was ($59,567) in the first quarter of
1999 as compared to cash provided by financing activities of $443,109 in the
first quarter of 1998. Cash provided by financing activities in the first
quarter of 1999 consisted primarily of proceeds from long-term obligations
for working capital needs and in 1998 consisted primarily of proceeds from
long-term obligations for the development of Centers. Financing activities
also included cash used to reduce long-term obligations and capital lease
obligations of $239,492 in the first quarter of 1999 and $246,684 in the
first quarter of 1998.
The Company does not have any material commitments for capital
expenditures other than for the required replacement or upgrade of
underground storage tanks at Company-owned Centers and the costs to achieve
Year 2000 compliance.
The Company has incurred losses from operations over the past three
years coupled with a decrease in cash flow from operations for the same
period. As of March 31, 1999, the Company had a working capital deficit of
$1,575,216 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 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.
(continued)
15
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(CONTINUED)
Should the merger not proceed, the Company believes it could obtain
additional financing, however, there can be no assurance that such financing
would be available on a timely basis or on acceptable terms.
The Year 2000 Issue
THE 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 March 31, 1999, have been minimal. Based upon the
findings at March 31, 1999, the Company's estimated costs of becoming Year
2000 compliant are less than $150,000.
(continued)
16
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
(CONTINUED)
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.
CONTINGENCY PLAN
The Company is currently working on a contingency plan for all critical
aspects of the Year 2000 issues.
17
<PAGE>
GREASE MONKEY HOLDING CORPORATION
COMMISSION FILE NUMBER: 000-9812
QUARTER ENDED MARCH 31, 1999
FORM 10-QSB
PART II OTHER INFORMATION
ITEM 1. 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. The Company
believes the likelihood of an unfavorable outcome in this matter is remote.
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect
on the Company's consolidated financial position, results of operations or
liquidity.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
(b) As of the date of filing this Quarterly Report on form 10-QSB, the
Company is in arrears in the payment of dividends on the Series C Preferred
Stock in the amount of approximately $679,000. Under Paragraph 5(d) of the
Statement of Designation, Voting Powers, Preferences and Rights of the Series
C Preferred Stock ("Statement of Designation"), if dividends on the Series C
Preferred Stock are in
18
<PAGE>
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
that the holders of the Series C Preferred Stock (voting as a separate voting
group) have the exclusive right to elect, remove or replace such additional
directors of the Company. The holders of the Series C Preferred Stock have
not notified the Company that they have any intention to elect or serve as
Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits (numbered in accordance with Item 601 of regulation S-K)
27 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K dated March 26, 1999, was filed on March
31, 1999, reporting under Item 5 the signing of a merger agreement
between Grease Monkey Holding Corporation and QL 3000, Inc. The
Agreement and Plan of Merger and a press release were filed as exhibits
under Item 7 of the Current Report on Form 8-K.
19
<PAGE>
GREASE MONKEY HOLDING CORPORATION AND SUBSIDIARIES
COMMISSION FILE NUMBER: 000-9812
QUARTER ENDED MARCH 31, 1999
FORM 10-QSB
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
GREASE MONKEY HOLDING CORPORATION
By: /s/ Rex L. Utsler
--------------------------------
Rex L. Utsler
President and Chief Operating Officer
(Principal Executive Officer, Chief Financial
Officer and Principal Accounting Officer)
Denver, Colorado
May 14, 1999
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 1-3 OF THE COMPANY'S FORM 10-QSB FOR THE YEAR-TO-DATE AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 209,147
<SECURITIES> 0
<RECEIVABLES> 1,411,650
<ALLOWANCES> 509,036
<INVENTORY> 618,088
<CURRENT-ASSETS> 2,043,229
<PP&E> 10,933,914
<DEPRECIATION> 4,415,138
<TOTAL-ASSETS> 13,913,586
<CURRENT-LIABILITIES> 3,618,445
<BONDS> 6,578,052
0
2,089,638
<COMMON> 140,351
<OTHER-SE> (3,500,247)
<TOTAL-LIABILITY-AND-EQUITY> 13,913,586
<SALES> 0
<TOTAL-REVENUES> 4,894,014
<CGS> 0
<TOTAL-COSTS> 4,653,263
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 43,503
<INTEREST-EXPENSE> 242,572
<INCOME-PRETAX> (8,186)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,186)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,186)
<EPS-PRIMARY> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
