1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For Fiscal Year Ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) Commission File Number 0-19357 MONRO MUFFLER BRAKE, INC. (Exact name of registrant as specified in its charter) New York 16-0838627 (State of incorporation) (I.R.S. Employer Identification No.) 200 Holleder Parkway, Rochester, New York 14615 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (716) 647-6400 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share (Title of Class) Indicate by check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K. [X] As of June 1, 1998, the aggregate market value of voting stock held by non-affiliates of the registrant was $93,974,000. As of June 1, 1998, 7,915,797 shares of the registrant's Common Stock, par value $.01 per share, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Portions of the registrant's definitive proxy statement (to be filed pursuant to Regulation 14A) for the 1998 Annual Meeting of Shareholders (the "Proxy Statement") are incorporated by reference into Part III hereof.
2 PART I ------ ITEM 1. BUSINESS GENERAL Monro Muffler Brake, Inc. ("Monro" or the "Company") is a chain of company-operated stores providing automotive undercar repair services in the United States. At March 31, 1998, Monro operated 350 stores in New York, Pennsylvania, Ohio, Connecticut, Massachusetts, West Virginia, Virginia, Maryland, Vermont, New Hampshire, New Jersey, North Carolina, South Carolina and Indiana. The Company's stores typically are situated in high-visibility locations in suburban areas and small towns. Monro serviced approximately 1,568,000 vehicles in fiscal 1998. * The predecessor to the Company was founded by Charles J. August in 1957 as a Midas Muffler franchise in Rochester, New York, specializing in mufflers and exhaust systems. In 1966, the Company discontinued its affiliation with Midas Muffler, and began to diversify into a full line of undercar repair services. An investor group led by Peter J. Solomon and Donald Glickman purchased a controlling interest in the Company in July 1984. At that time, Monro operated 59 stores, located primarily in upstate New York, with approximately $21 million in sales in fiscal 1984. Since 1984, Monro has added 291 stores and expanded its marketing area to include thirteen additional states. In addition, in April 1998, the Company signed a definitive agreement with Speedy Muffler King of Toronto, Canada to acquire 192 company-operated and 13 franchised Speedy stores in the United States. The transaction is scheduled to be consummated in August 1998. On February 17, 1998, Lawrence C. Day resigned his position as President and Chief Executive Officer and Jack M. Gallagher, who had served as President and Chief Executive Officer from 1987 to 1995, returned to serve as the interim President and Chief Executive Officer. The Company was incorporated in the State of New York in 1959. The Company's principal executive offices are located at 200 Holleder Parkway, Rochester, New York 14615, and its telephone number is (716) 647-6400. Monro provides a full range of services on passenger cars, light trucks and vans for mufflers and exhaust systems (estimated at 27% of fiscal 1998 sales); brakes (35%); and steering, drive train, suspension and wheel alignment (19%). The Company also provides other products and services including tires, scheduled maintenance and state inspections (19%). Monro specializes in the repair and replacement of parts which must be periodically replaced as they wear out. Normal wear on these parts generally is not covered by new car warranties. The Company typically does not perform under-the-hood repair services except for oil change services and a heating and cooling system "flush and fill" service. The Company does not sell parts or accessories to the do-it-yourself market. 2
3 The Company has a wholly-owned subsidiary, Monro Service Corporation, which is a Delaware corporation qualified to do business in the State of New York. Monro Service Corporation holds all assets, rights, responsibilities and liabilities associated with the Company's warehousing, purchasing, advertising, accounting, office services, payroll, cash management and certain other operations which are wholly performed within New York State. The Company believes that this structure has enhanced and will continue to enhance operational efficiency and provide cost savings. * References herein to fiscal years are to the Company's fiscal years ending or ended March 31 of each year (e.g., references to "fiscal 1998" are to the Company's fiscal year ended March 31, 1998). 3
4 INDUSTRY OVERVIEW According to industry reports, demand for automotive repair services, including undercar repair services, has increased due to the general increase in the number of vehicles registered, the growth in vehicle miles driven, the increase in the average age of vehicles and the increased complexity of vehicles, which makes it more difficult for a vehicle owner to perform do-it-yourself repairs. At the same time as demand for automotive repair services has grown, the Company believes that the number of general repair outlets has decreased, principally because fewer gas stations now perform repairs, and because there are fewer new car dealers. Monro believes that these factors present opportunities for increased sales by the Company, even though the number of specialized repair outlets (such as those operated by the Company and its direct competitors) has increased to meet the growth in demand. OPERATING STRATEGY Monro's operating strategy is to provide its customers with dependable, high-quality automotive service at a competitive price by emphasizing the following key elements. Products and Services All Monro stores provide a full range of undercar repair services for mufflers and exhaust systems, brakes, steering, drive train, suspension and wheel alignment. These services apply to all makes and models of domestic and foreign cars, light trucks and vans. In addition, Monro's stores provide many of the routine maintenance services (except engine diagnostic and major transmission repair) which automobile manufacturers suggest or require in the vehicle owners' manuals, and which fulfill manufacturers' requirements for new car warranty compliance. At the end of fiscal 1998, the Company introduced "Scheduled Maintenance" services in all of its stores whereby the aforementioned services are offered in a formal, packaged way to consumers based upon the year, make, model, and mileage of specific vehicles. Management believes that the Company is able to offer this service in a more convenient and cost competitive fashion than auto dealers can provide. Substantially all of the stores provide oil change services as well as tire sales and installation. All stores perform a heating and cooling system "flush and fill" service, a transmission "flush and fill" service, and install belts and hoses. Stores in New York, West Virginia, New Hampshire, Pennsylvania, Virginia, Massachusetts and North Carolina also perform annual state inspections. 4
5 Customer Satisfaction The Company has developed "The Monro Doctrine", a set of customer satisfaction principles, which is displayed in each store so that customers and employees will understand the Company's customer service philosophy. These principles are: free inspection of brakes, shocks, front end and exhaust systems; item-by-item review with customers of problem areas; free written estimates; written guarantees; drive-in service without an appointment; fair and reasonable prices as advertised; and repairs by professionally trained undercar specialists, many of whom are Automotive Service Excellence (ASE) certified in brakes and suspension. (See additional discussion under "Store Operations: Quality Control and Warranties.") Competitive Pricing, Advertising and Co-branding Initiatives The Company seeks to set competitive prices for quality services and products. The Company supports its pricing strategy by advertising through direct mail coupon inserts and in-store promotional signage and displays. In addition, the Company advertises through television, radio, yellow pages and newspapers to increase consumer awareness of the services offered. In fiscal 1997, the Company began testing co-branding initiatives to more quickly increase consumer awareness in certain markets. The Company believes that, especially in newer markets, customers may more readily be drawn into its stores because of their familiarity with national brand names. Some of these initiatives have included cross- promotional offers with national fast food chains, video rental stores and gasoline chains, as well as with regional supermarkets. Additionally, the Company introduced Bridgestone/Firestone tires into most of its stores in late fiscal 1997, where it had previously carried a private label tire. Through this initiative, the Company believes that it attracts some brand-loyal tire customers who otherwise might not have visited Monro. This gives the Company the opportunity to introduce itself to this new customer, and potentially sell other needed services. The increased tire sales resulting from adding this branded product have exceeded the Company's expectations thus far. In fiscal 1997, the Company signed a joint venture agreement with Q- Lube, Inc., a subsidiary of Quaker State Corporation. The agreement called for the two companies to jointly develop retail locations which offer both fast lube and undercar services. The centers are located adjacent to either existing or newly-developed Monro stores. After testing the concept in several locations during fiscal 1998, Company management decided to terminate the arrangement with Q-Lube in early fiscal 1999. Liquidation of the joint venture is not expected to have a material effect on fiscal 1999 results of operations. 5
6 Centralized Control Unlike many of its competitors, the Company owns and operates rather than franchises its stores. Monro believes that direct operation of all stores enhances its ability to compete by providing centralized control of such areas of operations as service quality, store appearance, promotional activity and pricing. A high level of technical competence is maintained throughout the Company as Monro requires, as a condition of employment, that employees participate in comprehensive training programs to keep pace with technology changes. Additionally, purchasing, distribution, merchandising, advertising, accounting and other store support functions are centralized in the Company's corporate headquarters in Rochester, New York, and are provided through the Company's subsidiary, Monro Service Corporation. The centralization of these functions results in efficiencies and gives management the ability to closely monitor and control costs. Comprehensive Training The Company provides ongoing, comprehensive training to its store employees. Monro believes that such training provides a competitive advantage by enabling its technicians to provide quality service to its customers in all areas of undercar repair. (See additional discussion under "Store Operations: Store Personnel and Training"). EXPANSION STRATEGY Monro has experienced significant growth due to the opening of new stores and increases in comparable store sales. Management believes that the continued growth in sales and profits of the Company is dependent, in large part, upon its continued ability to open and operate new stores on a profitable basis. In addition, overall profitability of the Company could be reduced if new stores do not attain profitability. As of March 31, 1998, Monro operated 350 stores located in 14 states. The following table shows the growth in the number of stores over the last five fiscal years: STORE OPENINGS AND CLOSINGS <TABLE> <CAPTION> Year ended March 31, -------------------- 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- <S> <C> <C> <C> <C> <C> Stores open at beginning of year......... 184 202 232 274 313 Stores opened during year................ 20 30 43 40 39 Stores closed during year (a)............ (2) 0 (1) (1) (2) ----- ----- ----- ---- ----- Stores open at end of year........ ...... 202 232 274 313 350 ===== ===== ===== ===== ==== </TABLE> (a) These stores were closed because they failed to achieve an acceptable level of profitability or because a new Monro store was opened in the same market at a more favorable location. 6
7 Monro believes that there are expansion opportunities in new as well as existing market areas which will result from a combination of constructing stores on vacant land and acquiring existing store locations. The Company believes that, as the industry consolidates due to the increasingly complex nature of automotive repair and the expanded capital requirements for state-of-the art equipment, there will be more opportunities for acquisitions of existing businesses or store structures. In that regard, the Company signed a definitive agreement in April 1998 with Speedy Muffler King Inc. of Toronto, Canada to acquire 192 company-operated and 13 franchised Speedy stores (the "Acquired Speedy Stores") in the United States (the "Speedy Acquisition"). The Acquired Speedy Stores are located primarily in complementary areas in Monro's existing markets in the Northeast, Mid-Atlantic and Midwest regions of the United States. The Company expects to close less than 20 of the Acquired Speedy Stores related to geographic conflicts and poor performance. (See additional discussion under Item 7: "Management's Discussion and Analysis of Financial Condition and Results of Operations".) Additionally, the Company plans to open approximately 30 new stores in fiscal 1999. The Company has developed a systematic method for selecting new store locations and a more targeted approach to marketing new stores. Key factors in market and site selection include population, demographic characteristics, vehicle population and the intensity of competition. These factors are evaluated through the use of a proprietary computer model developed for the Company. The characteristics of each potential site are compared by the model to the profiles of existing stores, and the model then projects sales for that site. Monro attempts to cluster stores in market areas in order to achieve economies of scale in advertising, supervision and distribution costs. All new sites presently under consideration are within or contiguous to Monro's established marketing areas. In fiscal year 1998, the Company performed a comprehensive analysis of its historical and projected store opening strategy. As a result of this analysis, the Company established major market profiles, as defined by market awareness: mature, existing and new markets. Over the next several years, the Company expects to build a greater percentage of stores in mature and existing markets in order to capitalize on the Company's market presence and consumer awareness. The Company believes that management and operating improvements implemented over the last several fiscal years will enhance its ability to sustain its growth. Monro has a chain-wide computerized inventory control and electronic point-of-sale (POS) management information system, which has increased management's ability to monitor operations as the number of stores has grown. The system includes electronic cataloging which allows store managers to electronically research the specific parts needed for the make and model of car being serviced. In fiscal 1997, the Company upgraded its electronic credit card processing and added electronic mail to its stores. In fiscal 1998, the Company added software which contains data that mirrors the scheduled maintenance requirements in vehicle owner's manuals, specifically by make, model, year and mileage for every automobile. Management believes that this software will facilitate the presentation and sale of Scheduled Maintenance services to customers. 7
8 Enhancements continue to be made to the POS system annually which increase efficiency, improve the quality and timeliness of store reporting and enable the Company to better serve its customers. The financing to open a new store location may be accomplished in one of three ways: a store lease for the land and building (in which case, land and building costs will be financed primarily by the lessor), a land lease with the building constructed by the Company (with building costs paid by the Company), or a land purchase with the building constructed by the Company. In all three cases, each new store also will require approximately $136,000 for equipment (including a point-of-sale system), and approximately $68,000 in inventory. Because Monro generally does not extend credit to its customers, stores generate almost no receivables and a new store's actual net working capital investment is nominal. Total capital required to open a new store ranges, on average (based upon the last three fiscal years' openings), from $233,000 to $877,000 depending on the location and which of the three financing methods is used. In instances where Monro acquires an existing business, it may pay additional amounts for intangible assets such as customer lists, covenants not-to-compete and goodwill. At March 31, 1998 Monro leased the land and/or the building at 71% of its store locations and owned the land and building at the remaining locations. Monro's policy is to situate new stores in the best locations, without regard to the form of ownership required to develop the locations. New stores have average sales of approximately $360,000 in their first twelve months of operation. STORE OPERATIONS Store Format The typical format for a Monro repair store is a free-standing building of approximately 4,500 square feet consisting of a sales area, six fully-equipped service bays and a parts storage area, with a parking lot with space for approximately 17 cars. Most service bays are equipped with aboveground electric vehicle lifts. The typical store carries $68,000 of inventory and 3,000 stock keeping units ("SKUs"). Generally, each store is located within 35 miles of a "key" store which carries approximately 20% more inventory than a typical store and serves as a mini-distribution point of slower moving inventory for other stores in its area. The stores generally are situated in high-visibility locations in suburban areas or small towns and offer easy customer access. The typical store is open from 7:30 a.m. to 7:00 p.m. on Monday through Friday and from 7:30 a.m. to 5:00 p.m. on Saturday. In fiscal 1996, the Company opened its first "small town" concept store in Saranac Lake, New York. The prototypical "small town" concept store is a four, five or six bay store located in a town with a population of 15,000 people or less. In the past, the Company generally did not enter this type of market because it could not 8
9 support the typical six bay store. However, with few or no major competitors and a lower cost of entry, the small markets represent an attractive new growth avenue for the Company. Inventory Control and Management Information System All Monro stores are linked to the central office and warehouse by a computerized inventory control and electronic POS management information system, which enables the Company to collect sales and operational data on a daily basis, to adjust store pricing to reflect local conditions and to control inventory on a "real-time" basis. Additionally, each store has access through the POS system to the inventory carried by the seven stores nearest to it. Management believes that this feature improves customer satisfaction and store productivity by reducing the time required to locate out-of-stock parts. Quality Control and Warranties To maintain quality control, the Company conducts audits to rate its employees' telephone sales manner and the accuracy of pricing information given. All headquarters management personnel participate in the Company's day-in-the-store program by working in a store under the direction of the store manager, once every other month, to better understand the latest developments at the store level. Customer comment cards, pre-addressed to the headquarters office, are available at each store for customers to comment on the Company's services. Customer concerns are addressed via personal follow-up by field management. The Company has a customer survey program to monitor customer attitudes toward service quality, friendliness, speed of service, and several other factors for each store. This program includes four survey mailings per store annually. (Each mailing consists of approximately 90 surveys.) Customer concerns are addressed via letter and personal follow-up by field management. In fiscal 1994, the Company implemented its "Double Check for Accuracy Program." This quality assurance program requires that a technician and supervisory-level employee independently inspect a customer's vehicle, diagnose and document the necessary repairs, and agree on an estimate before presenting it to a customer. This process is formally documented on the written estimate by store personnel. The Company is an active member of the Motorist Assurance Program (MAP). MAP is an organization of automotive retailers, wholesalers and manufacturers which was established as part of an industry-wide effort to address the ethics and business practices of companies in the automotive repair industry. Participating companies are committed to improving consumer confidence and trust in the automotive repair industry by adopting "Uniform Inspection Guidelines" and "Standards of Service" established by MAP. These "Standards of Service" are posted in every Monro store and serve to provide consistent recommendations 9
10 to customers in the diagnosis and repair of a vehicle. Monro was the first major automotive chain to apply for MAP accreditation for all of its stores. Monro offers limited warranties on substantially all of the products and services that it provides. The Company believes that these warranties are competitive with industry practices. Store Personnel and Training The Company supervises store operations primarily through its six district managers who oversee 42 regional managers (as of June 1, 1998). The typical store is staffed by a store manager and four to six technicians, one of whom serves as the assistant manager. All store managers receive a base salary, and assistant managers receive hourly compensation. In addition, all store managers and assistant managers receive other compensation based on their store's customer relations, gross profit, labor cost controls, safety, sales volume and other factors. All store managers and assistant managers are eligible for a quarterly bonus based on performance in these same areas. Monro believes that the ability to recruit and retain qualified technicians is an important competitive factor in the automotive repair industry, which has historically experienced a high turnover rate. Monro makes a concerted effort to recruit individuals who will have a long-term commitment to the Company and offers an hourly rate structure and additional compensation based on productivity; a competitive benefits package, including health, life and disability insurance; profit-sharing and pension plans; as well as the opportunity to advance within the Company. Most of the Company's managers and regional managers started with Monro as technicians. Most of the Company's new technicians join the Company in their early twenties as trainees or apprentices. As they progress, they are promoted to technician and eventually master technician, the latter requiring ASE certification in both brakes and suspension. The Company offers a tool lease program through which trainee technicians can acquire their own set of tools. The Company also will reimburse technicians for the cost of ASE certification registration fees and test fees and encourages all technicians to become certified by providing a higher hourly wage rate following their certification. The Company's training department conducts in-house technical clinics for store personnel and management training programs for new store managers, and coordinates attendance at technical clinics offered by the Company's vendors. Each store maintains a library of 20-25 instructional videos. The Company issues technical bulletins to all stores on innovative or complex repair processes, and maintains a centralized data base for technical repair problems. In addition, the Company has established a telephone technical hotline to provide assistance to store personnel in resolving problems encountered while diagnosing and repairing vehicles. The help line is available during all hours of store operation. 10
11 In fiscal 1998, the Company established Monro University, which purpose is to provide comprehensive training and development of current and prospective store managers. Training is accomplished through an intensive two-week instructional program at a separate facility in Rochester, New York. Topics covered include sales training, customer service, time management, human resources (counseling, recruiting, interviewing, etc.), leadership, inventory control and financial management. The courses employ a variety of instructional techniques including video taping, role playing, and testing. The two week class follows a field training segment which ranges from two to six weeks depending upon the individual's level of experience. Monro management is closely tracking the performance of the managers who have completed the class. Early indications are that the program will lead to increased store profitability as well as longer retention of the store managers. Additionally, the Company trains apprentice technicians through a "buddy system" whereby the apprentice is assigned to work side-by-side with a master technician for approximately three weeks. The master technician receives a weekly stipend during the training period. He is also encouraged to mentor the apprentice technician after the apprentice is assigned to a store, and is rewarded with a bonus if the apprentice is still employed by the Company after 90, and then 180 days. Since most turnover occurs during the first 180 days of employment, management believes that this feature of the program helps to improve retention of these employees. PURCHASING AND DISTRIBUTION The Company, through its wholly-owned subsidiary Monro Service Corporation, selects and purchases parts and supplies for all stores on a centralized basis. Although purchases outside the centralized system are made when needed at the store level, these purchases are low by industry standards, and accounted for approximately 12% of all parts used in fiscal 1998. The Company's ten largest vendors accounted for approximately 55% of its parts purchases, with the largest vendor accounting for slightly over 15% of total purchases in fiscal 1998. The Company purchases parts from over 100 vendors and has no significant long-term contracts with any vendor. Management believes that the Company's relationships with vendors are excellent and that alternative sources of supply exist, at comparable cost, for substantially all parts used in the Company's business. The Company routinely obtains bids from vendors to ensure it is receiving competitive pricing and terms. Most parts are shipped by vendors to the Company's warehouse facility in Rochester, New York, and are distributed to stores through the Company- operated tractor/trailer fleet. Most stores are replenished once every week from the warehouse, and such replenishment fills, on the average, 96% of all items ordered by the stores' automatic POS-driven replenishment system. The warehouse stocks approximately 7,300 SKUs. 11
12 COMPETITION The Company competes in the retail automotive service industry. This industry is generally highly competitive and fragmented, and the number, size and strength of competitors varies widely from region to region. The Company believes that competition in this industry is based on customer service and reputation, store location, name awareness and price. Monro's primary competitors include national and local undercar specialty chains, both franchised and company-operated; car dealerships; and, to a lesser extent, gas stations and independent garages. Monro considers Midas International Corp., Meineke Discount Mufflers Inc. and Speedy Muffler King Inc. to be direct competitors. In most of the new markets that the Company has entered, at least one competitor was already present. In identifying new markets, the Company analyzes, among other factors, the intensity of competition. (See "Expansion Strategy" and "Management's Discussion and Analysis of Financial Condition and Results of Operations.") EMPLOYEES As of March 31, 1998, Monro had 2,141 employees, of whom 1,978 were employed in the field organization, 47 were employed at the warehouse and 116 were employed at the Company's corporate headquarters. Monro's employees are not members of any union. The Company believes that its relations with its employees are good. REGULATION The Company stores new oil and generates and handles used automotive oils and certain solvents, which are disposed of by licensed third-party contractors. Thus, the Company is subject to a number of federal, state and local environmental laws including the Comprehensive Environmental Response Compensation and Liability Act ("CERCLA"). In addition, the United States Environmental Protection Agency (the "EPA"), under the Resource Conservation and Recovery Act ("RCRA"), and various state and local environmental protection agencies regulate the Company's handling and disposal of waste. The EPA, under the Clean Air Act, also regulates the installation of catalytic converters by the Company and all other repair stores by periodically spot checking jobs and has the power to fine businesses that use improper procedures or materials. The EPA has the authority to impose sanctions, including civil penalties up to $25,000 per violation (or up to $25,000 per day for certain willful violations or failures to cooperate with authorities), for violations of RCRA and the Clean Air Act. The Company is subject to various laws and regulations concerning workplace safety, zoning and other matters relating to its business. The Company believes that it is in substantial compliance with all applicable environmental and other laws and regulations, and that the cost of such compliance is not material to the Company. The Company is environmentally conscious, and takes advantage of recycling opportunities both at its headquarters and at its stores. Cardboard, plastic shrink wrap and parts' cores are returned to the warehouse by the stores on the weekly stock truck. There, they are accumulated for sale to recycling companies or returned to parts manufacturers for credit. 12
13 SEASONALITY Although the Company's business is not highly seasonal, customers do require more undercar service during the period of March through October than the period of November through February, when miles driven tend to be lower. As a result, sales and profitability are lower during the latter period. ITEM 2. PROPERTIES The Company, through Monro Service Corporation, owns its office/warehouse facility of approximately 95,000 square feet, which is located on 12.7 acres of land in Holleder Industrial Park, in Rochester, New York. Of Monro's 350 stores at March 31, 1998, 103 were owned, 169 were leased and for 78, the land only was leased. In general, the Company leases store sites for a ten-year period with several five-year renewal options. Giving effect to all renewal options, over 90% of the non-capital leases (210 stores) expire after 2006. Certain of the leases provide for contingent rental payments if a percentage of annual gross sales exceeds the base fixed rental amount. The highest contingent percentage rent of any lease is 6.75%, and no such lease has adversely affected profitability of the store subject thereto. Certain officers and directors of the Company or members of their families are the lessors, or have interests in entities that are the lessors, with respect to 41 of the leases. No related party leases, other than renewals or modifications of leases on existing stores, have been entered into since May 1989, and no new related party leases are contemplated. The existing office and warehouse facility and 36 of the owned stores are subject to mortgages held by commercial banks or private investors. As of March 31, 1998, the outstanding amount under the mortgage on the headquarters office and warehouse facility was $2.6 million and the aggregate outstanding amount under the permanent mortgages on 36 of the owned stores was $10.2 million. There was also $.7 million outstanding under a mortgage held by the City of Rochester, New York, secured by the land on which the new headquarters office and warehouse is located, and a term loan of $.5 million secured by the existing headquarters facility. ITEM 3. LEGAL PROCEEDINGS The Company is not a party or subject to any legal proceedings other than certain routine claims and lawsuits that arise in the normal course of its business. The Company does not believe that such routine claims or lawsuits, individually or in the aggregate, will have a material adverse effect on its financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 1998. 13
14 ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY AS OF JUNE 1, 1998 The following persons are the executive officers of the Company, having been elected by and serving at the discretion of the Board of Directors of the Company: Name Age Position - - ---- --- -------- Jack M. Gallagher 61 Interim President and Chief Executive Officer G. Michael Cox 45 Executive Vice President - Store Operations Robert W. August 46 Sr. Vice President - Store Support, and Secretary Catherine D'Amico 42 Sr. Vice President - Finance, Chief Financial Officer and Treasurer Thomas J. Budreau 41 Vice President - Eastern Operations Michael C. Kucharski 38 Vice President - Central Operations The following is a brief account of the business experience of each of the executive officers of the Company: Jack M. Gallagher has been President and Chief Executive Officer since February 1998 following the resignation of Lawrence C. Day. Mr. Gallagher was Director - Special Projects from April 1995 to February 1998, and was President and Chief Executive Officer from October 1987 to March 31, 1995. Mr. Gallagher has been a member of the Company's Board of Directors since October 1987. Prior to joining the Company, Mr. Gallagher was President of Auto Works, a 240-store chain of discount auto parts stores headquartered in Pontiac, Michigan, from May 1985 to October 1987. Mr. Gallagher has held various other positions in the auto parts and service industries, including 20 years with Firestone Tire & Rubber Company, where he was Chief Executive of the Fidesta Company, a 200-store nationwide chain of tire and service centers. The Company is currently searching for a permanent replacement for Mr. Day. G. Michael Cox has been Executive Vice President - Store Operations since March 1997 and Senior Vice President - Store Operations from January 1995 to March 1997. Prior to joining the Company, Mr. Cox was Director of Affiliated Dealer Operations for Bridgestone/Firestone, Inc. from 1993 to January 1995, Director of Corporate Accounts for Bridgestone/Firestone, Inc. from 1992 to 1993 and a Zone Manager for Bridgestone/Firestone, Inc. from 1990 to 1992. Mr. Cox held various other management positions for Bridgestone/Firestone, Inc. from 1976 to 1990. Robert W. August has been Senior Vice President - Store Support since October 1996, Secretary since July 1984 and a director since June 1982. Mr. August was Senior Vice President - Marketing from May 1992 to October 1996, Vice President-Marketing from July 1989 to May 1992, Executive Vice President from 1984 to July 1989, and has worked for Monro in various other capacities since 1968. 14
15 Catherine D'Amico has been Senior Vice President - Finance, Chief Financial Officer and Treasurer since August 1993. Ms. D'Amico, a certified public accountant, was previously a Senior Audit Manager with Price Waterhouse LLP in Rochester, New York and was affiliated with such firm from 1978 to 1993. Thomas J. Budreau has been Vice President - Eastern Operations since October 1995. Prior to joining the Company, Mr. Budreau was the National Auto Express Service Manager for Montgomery Ward & Co., Incorporated from March 1994 to October 1995. From November 1990 to March 1994, Mr. Budreau was a Regional Auto Express Manager and from March 1988 to November 1990, a District Manager for Montgomery Ward & Co., Incorporated. From 1975 to March 1988, Mr. Budreau held various other management positions with Montgomery Ward & Co., Incorporated. Michael C. Kucharski has been Vice President - Central Operations since May 1997. Mr. Kucharski was a District Manager from February 1996 to May 1997, a Regional Manager from January 1990 to February 1996 and has worked for Monro in various other capacities since 1987. From 1981 through 1987, Mr. Kucharski held management positions with various retail and other companies. 15
16 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Market Information The Common Stock is traded on the over-the-counter market and is quoted on the NASDAQ National Market System under the symbol "MNRO." The following table sets forth, for the Company's last two fiscal years, the range of high and low sales prices on the NASDAQ National Market System for the Common Stock: <TABLE> <CAPTION> FISCAL 1998 FISCAL 1997 ----------- ----------- QUARTER ENDED HIGH LOW HIGH LOW ------------------ ---- --- ---- --- <S> <C> <C> <C> <C> June 30, 18 9/16 15 3/8 18 14 1/16 September 30, 18 1/4 14 1/4 20 3/4 16 7/16 December 31, 15 3/4 13 5/8 20 13 9/16 March 31, 16 3/4 13 7/8 18 1/16 14 3/4 </TABLE> Amounts in these tables have been adjusted to reflect the five percent stock dividends paid in August 1997 and August 1996. Holders At June 1, 1998, the Company's Common Stock was held by approximately 1,820 shareholders of record or through nominee or street name accounts with brokers. Dividends On May 13, 1998, the Company's Board of Directors declared a five percent stock dividend, payable June 18, 1998, to shareholders of record as of June 8, 1998. Information regarding the number of shares of Common Stock outstanding, as set forth in this Form 10-K, does not include any shares of Common Stock to be issued in connection with such dividend. While the Company has not paid any cash dividends on the Common Stock since its inception, any future determination as to the payment of dividends will be at the discretion of the Board of Directors and will depend on the Company's financial condition, results of operations, capital requirements, compliance with charter and contractual restrictions, and such other factors as the Board of Directors deems relevant. 16
17 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial and operating data of the Company for each year in the five-year period ended March 31, 1998. The financial data and certain operating data have been derived from the Company's financial statements which have been examined by Price Waterhouse LLP, independent accountants. This data should be read in conjunction with the Financial Statements and related notes included under Item 8 of this report and in conjunction with other financial information included elsewhere in this Form 10-K. <TABLE> <CAPTION> YEAR ENDED MARCH 31, -------------------- 1998 1997 1996 1995 1994 -------- ------ ------- ------- ------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> <C> INCOME STATEMENT DATA: Sales............................... $154,294 $141,169 $117,104 $109,098 $93,620 Cost of sales including distribution and occupancy costs.............. 87,510 78,792 66,236 59,725 51,196 -------- ------ ------- ------- ------- Gross profit......................... 66,784 62,377 50,868 49,373 42,424 Operating, selling, general and administrative expenses............ 46,120 41,749 35,299 32,304 28,068 -------- -------- ------- ------- ------- Operating income..................... 20,664 20,628 15,569 17,069 14,356 Interest expense - net............... 3,829 3,224 2,637 1,939 2,080 Other expense - net.................. 331 475 330 22 107 ------- -------- ------- ------- ------- Income before provision for income taxes 16,504 16,929 12,602 15,108 12,169 Provision for income taxes........... 6,650 6,738 4,988 6,024 4,818 -------- -------- ------- ------- ------- Net income........................... $ 9,854 $ 10,191 $ 7,614 $ 9,084 $ 7,351 ======== ======== ======= ======= ======= Earnings per share(a) Basic.......... $ 1.25 $ 1.31 $ 1.01 $ 1.22 $ 1.02 ======== ======== ======= ======= ======= Diluted $ 1.15 $ 1.19 $ .90 $ 1.07 $ .87 ======== ======== ======= ======= ======= Weighted average number of Common Stock shares and equivalents (a) Basic 7,863 7,797 7,570 7,436 7,207 ======== ======== ======= ======= ======= Diluted 8,586 8,580 8,482 8,488 8,438 ======== ======== ======= ======= ======= SELECTED OPERATING DATA: Sales growth: Total.............................. 9.3% 20.5% 7.3% 16.5% 19.3% Comparable store (b)............... (0.2%) 7.9% (3.9%) 6.1% 9.5% Stores open at beginning of year..... 313 274 232 202 184 Stores open at end of year........... 350 313 274 232 202 Capital expenditures ................ $ 25,391 $ 27,562 $25,581 $20,299 $14,374 BALANCE SHEET DATA (AT PERIOD END): Net working capital.................. $ 13,517 $ 9,579 $ 8,891 $ 6,863 $ 7,894 Total assets......................... 159,088 146,267 120,055 93,042 77,042 Long-term debt....................... 54,102 54,850 45,459 28,749 24,326 Shareholders' equity................. 76,558 66,625 55,887 48,169 38,815 <FN> (a) Earnings per share for each fiscal year was computed by dividing net income by the weighted average number of shares of Common Stock and Common Stock equivalents outstanding during the respective year. All share and per share information has been adjusted to give retroactive effect to the five percent stock dividends paid in August 1997, August 1996 and in August 1995. (b) Comparable store sales data is calculated based on the change in sales of only those stores open as of the beginning of the preceding fiscal year. </TABLE> 17
18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth income statement data of the Company expressed as a percentage of sales for the fiscal years indicated: <TABLE> <CAPTION> YEAR ENDED MARCH 31, -------------------- 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> Sales.................................................... 100.0% 100.0% 100.0% Cost of sales including distribution and occupancy costs. 56.7 55.8 56.6 ----- ----- ----- Gross profit............................................. 43.3 44.2 43.4 Operating, selling, general and administrative expenses.. 29.9 29.6 30.1 ----- ----- ----- Operating income......................................... 13.4 14.6 13.3 Interest expense - net................................... 2.5 2.3 2.2 Other expense - net...................................... 0.2 0.3 0.3 ----- ----- ----- Income before provision for income taxes................. 10.7 12.0 10.8 Provision for income taxes............................... 4.3 4.8 4.3 ----- ----- ----- Net income............................................... 6.4% 7.2% 6.5% ====== ===== ===== </TABLE> FORWARD-LOOKING STATEMENTS The statements contained in this Annual Report on Form 10-K which are not historical facts, including (without limitation) in particular, statements made in this Item and in "Item 1 - Business," may contain forward-looking statements that are subject to important factors that could cause actual results to differ materially from those in the forward-looking statement, including (without limitation) product demand, the effect of economic conditions, the impact of competitive services, products and pricing, product development, parts supply restraints or difficulties, industry regulation and the continued availability of capital resources and financing and other risks set forth or incorporated herein and in the Company's Securities and Exchange Commission filings. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company. RECENT DEVELOPMENTS In April 1998, the Company signed a definitive agreement with Speedy Muffler King Inc. of Toronto, Canada to acquire 192 company-operated and 13 franchised Speedy stores in the United States. The all-cash purchase transaction will be affected by the payment of $52 million and is subject to customary terms and conditions, including the obtaining of necessary consents and the Company's securing of financing necessary to consummate the transaction. The transaction is expected to close in August 1998. In May 1998, the Company received a favorable determination under the Hart-Scott-Rodino Act. Although the 205 Speedy stores are in the same general markets in which the Company competes, the Company's and Speedy's locations are mainly situated in non-overlapping areas. While Monro has tended to open stores in suburban and small town locations, Speedy has tended to locate in major metropolitan areas. Therefore, the combination represents an excellent geographic fit. The Company expects to close less than 20 Speedy stores related to conflicts and poor performance. 18
19 FISCAL 1998 AS COMPARED TO FISCAL 1997 Sales for fiscal 1998 increased $13.1 million, or 9.3% over sales for fiscal 1997. The increase was due to an increase of approximately $13.6 million for stores opened since April 1, 1996, partially offset by a comparable store sales decrease of .2%. During the year, 39 stores were opened and two were closed. At March 31, 1998, the Company had 350 stores in operation. Management believes that the comparable store sales decrease resulted in part, from a decline in vehicle population in the five to nine year old segment, reflecting the early 1990's recession, as well as the continuing effect of declining exhaust sales related to manufacturers' use of stainless steel mufflers on almost all new cars. However, management believes that these declines were offset, in part, by positive industry factors including an increase in the average age of vehicles, a decrease in the number of service bays, an increase in the number of registered vehicles, and a shift in the consumer mentality from "do-it-yourself" to "do-it-for-me" caused by the increased complexity of cars. Additionally, management believes that its strategy of product diversification and expanded manager training assisted in minimizing the comparable store sales decline vis-a-vis its competitors. The Company introduced "Scheduled Maintenance" services in its stores late in the fourth quarter of fiscal 1998. These services are required by vehicle manufacturers to comply with warranty schedules, and are offered by Monro in a more convenient and cost competitive fashion than auto dealers can provide. Management believes that these services will make a positive contribution to comparable store sales in future years, and help to mitigate the aforementioned challenges which negatively impacted fiscal 1998. Gross profit for fiscal 1998 was $66.8 million or 43.3% of sales, as compared with $62.4 million or 44.2% of sales for fiscal 1997. The reduction in gross profit as a percentage of sales is primarily attributable to an increase in occupancy costs as a percent of sales reflecting the impact of fixed costs (such as rent and depreciation) against a decline in comparable store sales. Additionally, labor costs increased over the prior year. During periods of slower sales when technicians may not be fully productive, they receive a minimum base-level wage which increases labor as a percent of sales. Operating, selling, general and administrative expenses for fiscal 1998 increased by $4.4 million to $46.1 million and, as a percentage of sales, increased by .3% as compared to fiscal 1997. The increase in total dollars expended is due, among other things, to additional supervision and advertising expense in newly added stores and regions, greater costs related to the Company's continuing investment in training, and additional store expenses related to the growth in the number of stores. Although expenses increased during fiscal 1998 as compared to fiscal 1997, the growth rate of these expenses (10.5%) was lower than the percentage increase in the number of stores (12.5%) due to ongoing, concerted efforts by management to control costs and operate within budgetary constraints. Accounting for a portion of the cost reductions were decreases in bonus and profit sharing expenses. Since the Company did not attain the minimum required percentage of targeted profit performance, employee bonus payments 19
20 were significantly reduced and were eliminated for executive officers, and profit sharing contributions were reduced. In addition, there was an increase, as a percent of sales, in the amount of cooperative advertising credits which the Company received during fiscal 1998 as compared to the previous year. Management was effective in improving various programs negotiated with vendors. Operating income in fiscal 1998 of $20.7 million, or 13.4% of sales, increased by $.1 million over the fiscal 1997 level of $20.6 million due to the factors discussed above. Interest expense, net of interest income, increased as a percent of sales from 2.3% in fiscal 1997 to 2.5% in fiscal 1998. The weighted average debt outstanding for the year ended March 31, 1998 was approximately $8.0 million greater than the amount outstanding for the year ended March 31, 1997. This was partially offset by a decrease in the weighted average interest rate of .3 of a percentage point. Other expense, net, at .2% of sales for the year ended March 31, 1998 decreased from .3% of sales for the year ended March 31, 1997. In the prior year, this line included carrying costs for the Company's former warehouse facility which was sold in the fourth quarter of fiscal 1997. The Company's effective tax rate was 40.3% of pre-tax income in fiscal 1998, as compared to 39.8% for fiscal 1997. Net income for fiscal 1998 decreased by $.3 million or 3.3% as compared to fiscal 1997 due to the factors discussed above. FISCAL 1997 AS COMPARED TO FISCAL 1996 Sales for fiscal 1997 increased $24.1 million, or 20.5% over sales for fiscal 1996. The increase was due to a comparable store sales increase of 7.9% and an increase of approximately $16.3 million for stores opened since April 1, 1995. During the year, 40 stores were opened and one was closed. At March 31, 1997, the Company had 313 stores in operation. Management believes that sales increases were driven, in part, by pent-up demand from previously deferred repairs, combined with a number of industry factors. These include an increase in the average age of vehicles, a decrease in the number of service bays, an increase in the number of registered vehicles, and a shift in the consumer mentality from "do-it-yourself" to "do-it-for-me" caused by the increased complexity of cars. Additionally, management believes that successful performance of its operating strategy, centered on owning and operating all of its stores, helped contribute to the sales increase. Company operated stores facilitate focused and consistent execution in key areas such as the Company's unwavering commitment to customer satisfaction, comprehensive training of service technicians and competitive pricing. Gross profit for fiscal 1997 was $62.4 million or 44.2% of sales, as compared with $50.9 million or 43.4% of sales for fiscal 1996. The improvement in gross profit as a percentage of sales is primarily due to increases in selling prices coupled with a reduction in certain material costs as a result of renegotiated pricing with various vendors. 20
21 Operating, selling, general and administrative expenses for fiscal 1997 increased by $6.5 million to $41.7 million and, as a percentage of sales, decreased by .5% as compared to fiscal 1996. The increase in total dollars expended is primarily attributable to increased store supervision and increased store support expenses related to the Company's expansion. These expenses declined as a percentage of sales largely due to management's continued focus on discretionary spending and controlling costs. One area accounting for a more significant portion of the decrease as a percent of sales was an increase in the amount of cooperative advertising credits which the Company received during fiscal 1997 as compared to the previous year. Management was effective in improving various programs negotiated with vendors. Operating income in fiscal 1997 of $20.6 million, or 14.6% of sales increased by $5.1 million over the fiscal 1996 level of $15.6 million due to the factors discussed above. Interest expense, net of interest income, was unchanged as a percent of sales for fiscal 1997 as compared to fiscal 1996. While average debt outstanding for the year ended March 31, 1997 was up approximately $11.0 million over the year ended March 31, 1996, the weighted average interest rate declined by approximately 1.5 percentage points. Other expense, net, at .3% of sales for the year ended March 31, 1997 remained unchanged as a percent of sales from the year ended March 31, 1996. This amount includes carrying costs for the Company's former warehouse facility which was sold in the fourth quarter of fiscal 1997. The Company's effective tax rate was 39.8% of pre-tax income in fiscal 1997 as compared to 39.6% for fiscal 1996. Net income for fiscal 1997 increased by $2.6 million or 33.8% over fiscal 1996, reflecting higher gross profit and lower operating expenses, partially offset by a higher effective tax rate. YEAR 2000 The Company is currently addressing a universal situation commonly referred to as the "Year 2000 Problem." The Year 2000 Problem relates to the inability of certain computer software programs to properly recognize and process date sensitive information relative to the year 2000 and beyond. During fiscal 1997, the Company developed a plan to devote the necessary resources to identify and modify systems impacted by the Year 2000 Problem, or implement new systems to become year 2000 compliant in a timely manner. The cost of executing this plan is not expected to have a material impact on the Company's results of operations or financial condition. In addition, the Company has contacted its major suppliers and vendors to ensure their awareness of the Year 2000 Problem. If the Company, its suppliers or vendors are unable to resolve issues related to the year 2000 on a timely basis, it could result in a material financial risk. 21
22 CAPITAL RESOURCES AND LIQUIDITY Capital Resources The Company's primary capital requirements for fiscal 1998 were the funding of its new store expansion program and the upgrading of facilities and systems in existing stores, totaling $25.6 million, and principal payments on long-term debt and capital leases of $60.6 million. In both fiscal years 1998 and 1997, these capital requirements were met by cash flow from operations and through the use of a Revolving Credit Facility. In fiscal year 1998, the Company also completed sale/leaseback transactions totalling $10.3 million. In fiscal 1999, in addition to the Acquired Speedy Stores, the Company intends to open approximately 30 new stores. Total capital required to open a new store ranges, on average (based upon the last three fiscal years' openings), from $233,000 to $877,000 depending on whether the store is leased, owned or land leased. Management believes that the Company has sufficient resources available (including cash and equivalents, cash flow from operations and bank financing) to expand its business as currently planned for the next several years. The Speedy Acquisition will be effected by a cash payment of $52 million (the "Purchase Price"). The Company is currently in negotiations to obtain financing from its primary lender in the form of a revised credit facility and a synthetic operating lease arrangement for a portion of the Purchase Price and additional working capital requirements. In addition, the Company is seeking financing from other sources to pay a portion of the Purchase Price. Liquidity At March 31, 1998, the Company had a $5.0 million line of credit for the purpose of issuing stand-by-letters of credit on an unsecured basis. The line requires fees aggregating .875% annually of the face amount of each stand-by-letter of credit, payable quarterly in advance. A total of $3.8 million of letters of credit were outstanding under this line at March 31, 1998. As of June 1, 1998, the Company had outstanding $1.8 million in principal amount of its 10.65% Senior Notes due 2000 (the "Senior Notes") with Massachusetts Mutual Life Insurance Company pursuant to a Senior Note Agreement. The fifth of six annual installments of principal of $1.8 million was paid on April l, 1998. Through February 1996, the Company had a real estate line of credit of $25.0 million to be used for the placement of store mortgages. This line was terminated in fiscal 1996 at the Company's initiative and replaced by a new unsecured Revolving Credit Facility. 22
23 Prior to the termination of the real estate line, the Company had utilized $13.2 million for permanent mortgages. Any of these mortgages may be converted from a floating rate to a fixed rate loan during the first five years of its seven-year term. Interest is payable monthly. Equal monthly installments of principal are required based on 20-year amortization periods. During fiscal 1997, the Company completed the modification of its LIBOR-based mortgages, reducing the various interest rates to LIBOR plus 1.0%. In February 1996, the Company finalized an unsecured Revolving Credit Agreement with two banks. Under the terms of the Agreement, the Company may borrow at the prime rate or at a LIBOR-based rate which fluctuates quarterly based upon Company performance. The Company must pay a facility fee of .125% annually on the unused portion of the facility. In fiscal 1998, the Agreement was modified to increase the amount available under the facility from $30 million to $50 million and extend the term to March 2000. Principal payments begin in April 2000 in equal monthly installments based on a five-year amortization period. The Company has available a line of credit of $7.5 million under a short-term borrowing agreement at the lower of the prime rate or other rate options available at the time of borrowing. There are no commitment fees associated with this line of credit. Based upon the Company's ability and intent to refinance the amount outstanding under the line of credit with its expanded Revolving Credit facility, the $1.8 million balance has been classified as long-term debt at March 31, 1997. During fiscal 1995, the Company purchased 12.7 acres of land for $.7 million from the City of Rochester, New York, on which its new office/warehouse facility is located. The City has provided financing for 100 percent of the cost of the land via a 20-year non-interest bearing mortgage, all due and payable in 2014. To finance its new office/warehouse building, the Company obtained permanent mortgage financing consisting of a 10-year mortgage for $2.9 million and an eight-year term loan in the amount of $.7 million. Both obligations require monthly interest payments, and each may be converted from a floating rate to a fixed rate loan before the last two years of their respective terms. The mortgage requires equal monthly installments of principal based on a 20-year amortization period, and the term loan requires equal monthly payments of principal to fully amortize the debt over the eight-year term. The Company entered into an interest rate swap agreement with a major financial institution which effectively fixes the interest rate over the terms of the aforementioned agreements at 7.15%. Certain of the Company's long-term debt agreements require, among other things, the maintenance of specified current ratios, interest and rent coverage ratios and amounts of tangible net worth, and also contain restrictions on dividend payments and capital expenditures. The Company was in compliance with these requirements at March 31, 1998, and does not believe that the covenants materially affect its business. 23
24 As of March 31, 1998, the Company had cash and equivalents of $5.3 million. Inflation The Company does not believe its operations have been materially affected by inflation. The Company has been successful, in many cases, in mitigating the effects of merchandise cost increases principally through the use of volume discounts and alternative vendors. Financial Accounting Standards Statement of Position (SOP) 93-7, "Reporting on Advertising Costs," which provides guidance on financial reporting on advertising costs, was issued in December 1993. This Statement was adopted by the Company in fiscal 1996 and had an immaterial effect on the results of operations. Effective in fiscal 1997, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation". As permitted under SFAS 123, the Company will continue to measure stock-based compensation cost as the excess of the quoted market price of the Company's common stock at the grant date over the amount the employee must pay for the stock. Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share", was issued in February 1997. This Statement establishes standards for computing and presenting earnings per share ("EPS"), and simplifies the standards previously found in APB Opinion No. 15 ("APB 15"). It replaces the presentation of primary EPS with a presentation of basic EPS, and also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures. The Company adopted the Statement in fiscal 1998. Prior periods have been restated to reflect the new standard. 24
25 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Report of Independent Accountants.......................................... 26 Audited Financial Statements: Consolidated Balance Sheet at March 31, 1998 and 1997............. 27 Consolidated Statement of Income for the three years ended March 31, 1998..................................... 28 Consolidated Statement of Changes in Shareholders' Equity for the three years ended March 31, 1998.......... 29 Consolidated Statement of Cash Flows for the three years ended March 31, 1998............................... 30 Notes to Consolidated Financial Statements........................ 31 Selected Quarterly Financial Information (Unaudited)....................... 46 25
26 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Monro Muffler Brake, Inc. In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Monro Muffler Brake, Inc. and its subsidiary at March 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Rochester, New York May 18, 1998 26
27 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET - - -------------------------------------------------------------------------------- <TABLE> <CAPTION> MARCH 31, --------- 1998 1997 ---- ---- (DOLLARS IN THOUSANDS) <S> <C> <C> ASSETS Current assets: Cash and equivalents, including interest-bearing accounts of $5,315 in 1998 and $6,438 in 1997 $ 5,315 $ 6,438 Trade receivables 841 1,128 Inventories 27,492 20,010 Federal and state income taxes receivable 0 296 Deferred income tax asset 1,725 1,790 Other current assets 4,115 2,935 ---------------- -------------- Total current assets 39,488 32,597 ---------------- -------------- Property, plant and equipment 165,839 151,906 Less - Accumulated depreciation and amortization (49,429) (42,223) ---------------- -------------- Net property, plant and equipment 116,410 109,683 Other noncurrent assets 3,190 3,987 ================ ------------- Total assets $159,088 $146,267 ================ ============== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 3,582 $ 3,128 Trade payables 11,633 8,728 Federal and state income taxes payable 2 0 Accrued interest 233 270 Accrued payroll, payroll taxes and other payroll benefits 3,764 4,260 Accrued insurance 2,441 2,110 Other current liabilities 4,316 4,522 ---------------- -------------- Total current liabilities 25,971 23,018 Long-term debt 54,102 54,850 Other long-term liabilities 576 14 Deferred income tax liability 1,881 1,760 ---------------- -------------- Total liabilities 82,530 79,642 ---------------- -------------- Commitments Shareholders' equity: Class C Convertible Preferred Stock, $1.50 par value, $.227 and $.239 conversion value at March 31, 1998 and 1997, respectively; 150,000 shares authorized; 91,727 shares issued and outstanding in 1998 and 1997 138 138 Common Stock, $.01 par value, 15,000,000 shares authorized; 7,876,901 shares and 7,470,326 shares issued and outstanding in 1998 and 1997, respectively 79 75 Additional paid-in capital 29,284 22,190 Retained earnings 47,057 44,222 ---------------- -------------- Total shareholders' equity 76,558 66,625 ---------------- -------------- Total liabilities and shareholders' equity $159,088 $146,267 ================ ============== </TABLE> The accompanying notes are an integral part of these financial statements. 27
28 <TABLE> MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF INCOME - - ------------------------------------------------------------------------------------------------------------------------------- <CAPTION> YEAR ENDED MARCH 31, 1998 1997 1996 ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> Sales $154,294 $141,169 $117,104 Cost of sales, including distribution and occupancy costs (a) 87,510 78,792 66,236 ------------- ----------- ------------ Gross profit 66,784 62,377 50,868 Operating, selling, general and administrative expenses 46,120 41,749 35,299 ------------- ----------- ------------ Operating income 20,664 20,628 15,569 Interest expense, net of interest income of $87 in 1998, $23 in 1997, and $39 in 1996 (a) 3,829 3,224 2,637 Other expense, net 331 475 330 ------------- ----------- ------------ Income before provision for income taxes 16,504 16,929 12,602 Provision for income taxes 6,650 6,738 4,988 ------------- ----------- ------------ Net income $ 9,854 $ 10,191 $ 7,614 ============= =========== ============ Earnings per share: Basic $ 1.25 $ 1.31 $ 1.01 ============= =========== ============ Diluted $ 1.15 $ 1.19 $ .90 ============= =========== ============ Weighted average number of shares of common stock and common stock equivalents used in computing earnings per share: Basic 7,863 7,797 7,570 ============= =========== ============ Diluted 8,586 8,580 8,482 ============= =========== ============ <FN> (a) Costs and expenses include charges for payments under operating and capital leases with affiliated parties totaling $1,786, $1,828, and $1,688 for the years ended March 31, 1998, 1997 and 1996, respectively. </TABLE> The accompanying notes are an integral part of these financial statements. 28
29 <TABLE> MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY - - ------------------------------------------------------------------------------------------------------------------------------------ <CAPTION> CLASS C CONVERTIBLE ADDITIONAL PREFERRED COMMON PAID-IN RETAINED STOCK STOCK CAPITAL EARNINGS TOTAL ----- ----- ------- -------- ----- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> Balance at March 31, 1995 $ 138 $ 65 $10,959 $37,007 $48,169 Net income 7,614 7,614 Exercise of stock options 104 104 Stock dividend 4 5,998 (6,002) ------ ------ --------- ----------- ---------- Balance at March 31, 1996 138 69 17,061 38,619 55,887 Net income 10,191 10,191 Exercise of stock options 2 545 547 Stock dividend 4 4,584 (4,588) ------ ------ --------- ---------- ----------- Balance at March 31, 1997 138 75 22,190 44,222 66,625 Net income 9,854 9,854 Exercise of stock options 79 79 Stock dividend 4 7,015 (7,019) ------ ------ --------- ----------- ---------- Balance at March 31, 1998 $ 138 $ 79 $29,284 $47,057 $76,558 ======= ====== ======== ========== ========== </TABLE> The accompanying notes are an integral part of these financial statements. 29
30 <TABLE> MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS - - ------------------------------------------------------------------------------------------------------------------------ <CAPTION> YEAR ENDED MARCH 31, 1998 1997 1996 ---- ---- ---- (DOLLARS IN THOUSANDS) INCREASE (DECREASE) IN CASH Cash flows from operating activities: Net income $9,854 $10,191 $ 7,614 --------- --------- --------- Adjustments to reconcile net income to net cash provided by operating activities - Depreciation and amortization 9,259 8,099 6,762 Net change in deferred income taxes 186 192 (266) Loss (gain) on disposal of property, plant and equipment 42 (100) (1) Decrease (increase) in trade receivables 287 102 (174) Increase in inventories (7,482) (3,472) (2,721) Increase in other current assets (217) (717) (373) Increase in other noncurrent assets (441) (63) (462) Increase in trade payables 2,905 1,858 1,810 (Decrease) increase in accrued expenses (524) 3,541 270 Increase (decrease) in income taxes payable 298 (278) 10 Increase in other long-term liabilities 17 7 6 --------- --------- --------- Total adjustments 4,330 9,169 4,861 --------- --------- --------- Net cash provided by operating activities 14,184 19,360 12,475 --------- --------- --------- Cash flows from investing activities: Capital expenditures (25,391) (27,562) (25,581) Proceeds from the sale of property, plant and equipment 10,552 97 68 Payment for purchase of miscellaneous acquisitions (2,416) --------- --------- --------- Net cash used for investing activities (14,839) (27,465) (27,929) --------- --------- --------- Cash flows from financing activities: Proceeds from the sale of common stock 79 547 104 Proceeds from borrowings 60,099 58,220 38,514 Principal payments on long-term debt and capital lease obligations (60,646) (49,504) (22,739) --------- --------- --------- Net cash (used for) provided by financing activities (468) 9,263 15,879 --------- --------- --------- (Decrease) increase in cash (1,123) 1,158 425 Cash at beginning of year 6,438 5,280 4,855 --------- --------- --------- <S> <C> <C> <C> Cash at end of year $ 5,315 $ 6,438 $ 5,280 ========= ========= ========= </TABLE> The accompanying notes are an integral part of these financial statements. 30
31 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES BACKGROUND Monro Muffler Brake, Inc. and its wholly owned subsidiary, Monro Service Corporation (the "Company"), had 350 automotive repair centers operating primarily in the northeast region of the United States as of March 31, 1998. The Company experienced a change in control during 1984 which was accounted for as a purchase and required the recording of a new basis for assets and liabilities. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles. The preparation of financial statements in conformity with such principles requires the use of estimates by management during the reporting period. Actual results could differ from those estimates. A description of the Company's major accounting policies follows. FISCAL YEAR The Company's fiscal year ends on March 31. CONSOLIDATION The consolidated financial statements include the Company and its wholly owned subsidiary, Monro Service Corporation, after the elimination of intercompany transactions and balances. REVENUE RECOGNITION Sales are recorded upon completion of automotive undercar repair services provided to customers or upon the sale of incidental products and services to customers. INVENTORIES The Company's inventories consist of automotive parts and tires. Substantially all merchandise inventories are valued under the last-in, first-out (LIFO) method. Under the first-in, first-out (FIFO) method, these inventories would have been $426,000, $544,000 and $647,000 higher at March 31, 1998, 1997 and 1996, respectively. The FIFO value of inventory approximates the current replacement cost. PROPERTY, PLANT AND EQUIPMENT All property, plant and equipment are stated at cost. For assets acquired in conjunction with the 1984 change in control referred to above, cost represents an allocation of the total purchase price to individual assets based on their estimated fair values at the date of acquisition. Depreciation of property, plant and equipment is provided on the straight-line basis. Buildings and improvements are depreciated over lives varying from 10 to 39 years; machinery, fixtures and equipment over lives varying from 5 to 15 years; and vehicles over lives varying from 5 to 7 years. Certain leases have been capitalized and are classified on the balance sheet as fixed assets. These assets are being amortized on a straight-line basis over their estimated lives, which coincide with the terms of the leases (Note 3). 31
32 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- ADVERTISING The Company expenses the production costs of advertising the first time the advertising takes place, except for direct response advertising which is capitalized and amortized over its expected period of future benefits. Direct response advertising consists primarily of coupons for the Company's services. The capitalized costs of this advertising are amortized over the period of the coupon's validity. Advertising expense for the years ended March 31, 1998, 1997 and 1996 was not material to these financial statements. INTEREST RATE HEDGE AGREEMENTS The Company enters into interest rate hedge agreements which involve the exchange of fixed and floating rate interest payments periodically over the life of the agreement without the exchange of the underlying principal amounts. The differential to be paid or received is accrued as interest rates change and is recognized over the life of the agreements as an adjustment to interest expense. EARNINGS PER SHARE In fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 128 that requires the reporting of both basic and diluted earnings per share. Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. Prior periods have been restated to reflect the new standard. All share and per share amounts have also been restated to reflect the five percent stock dividends paid in August 1997, 1996 and 1995 (Note 8). STOCK-BASED COMPENSATION The Company measures stock-based compensation cost as the excess of the quoted market price of the Company's common stock at the grant date over the amount the employee must pay for the stock. The Company's policy is to generally grant stock options at fair market value at the date of grant. STATEMENT OF CASH FLOWS For purposes of the Statement of Cash Flows, the Company considers all highly liquid instruments with a maturity of three months or less to be cash equivalents. RECLASSIFICATIONS Certain amounts in the Consolidated Balance Sheet and the Consolidated Statement of Cash Flows have been reclassified to improve reporting and maintain comparability among the periods presented. NOTE 2 - SUBSEQUENT EVENT: PENDING ACQUISITION OF SPEEDY U.S.A. STORES In April 1998, the Company signed a definitive agreement with Speedy Muffler King Inc. of Toronto, Canada to acquire 192 company-operated and 13 franchised Speedy stores in the United States. The all-cash purchase transaction will be affected by the payment of $52 million and is subject to customary terms and conditions, including the obtaining of necessary consents and the Company's securing of financing necessary to consummate the transaction. The transaction is expected to close in August 1998. In May 1998, the Company received a favorable determination under the Hart-Scott-Rodino Act. Although the 205 Speedy stores are in the same general markets in which the Company competes, the Company's and Speedy's locations are mainly situated in non-overlapping areas. The Company expects to close less than 20 underperforming Speedy stores. 32
33 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- An investment banking firm associated with a principal shareholder/director of the Company is serving as consultant to the Company in connection with the acquisition and related financing (Note 11). NOTE 3 - PROPERTY, PLANT AND EQUIPMENT The major classifications of property, plant and equipment are as follows: <TABLE> <CAPTION> MARCH 31, 1998 MARCH 31, 1997 -------------- -------------- OWNED LEASED TOTAL OWNED LEASED TOTAL ----- ------ ----- ----- ------ ----- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Land $23,772 $ 23,772 $ 21,398 $21,398 Buildings and improvements 76,062 $6,838 82,900 67,751 $6,838 74,589 Equipment, signage and fixtures 47,379 82 47,461 43,773 82 43,855 Vehicles 7,184 620 7,804 6,527 385 6,912 Construction-in- progress 3,902 3,902 5,152 5,152 -------------- -------------- -------------- ----------- ---------- ----------- 158,299 7,540 165,839 144,601 7,305 151,906 Less - Accumulated depreciation and amortization 45,712 3,717 49,429 38,358 3,865 42,223 -------------- -------------- -------------- ----------- ---------- ----------- $112,587 $3,823 $116,410 $106,243 $3,440 $109,683 ============== ============== ============== =========== ========== =========== </TABLE> Interest costs capitalized aggregated $448,000 in 1998 and $568,000 in 1997. Amortization expense recorded under capital leases totaled $434,000, $398,000 and $360,000 for the years ended March 31, 1998, 1997 and 1996, respectively. NOTE 4 - OTHER NONCURRENT ASSETS Other noncurrent assets consist of the following: <TABLE> <CAPTION> MARCH 31, --------- 1998 1997 ---- ---- (DOLLARS IN THOUSANDS) <S> <C> <C> Mortgage receivable $ 975 Deferred debt issuance costs $ 374 460 Non-compete agreements 485 544 Investment in limited partnership 326 339 Goodwill 1,454 1,342 Acquisition-related costs 223 Other 328 327 -------- ------- $3,190 $3,987 ======== ======= </TABLE> Accumulated amortization associated with noncurrent assets at March 31, 1998 and 1997 amounted to $1,837,000 and $1,562,000, respectively. Goodwill is being amortized on a straight-line basis over periods ranging from 5 to 20 years. 33
34 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE 5 - LONG-TERM DEBT Long-term debt consists of the following: <TABLE> <CAPTION> MARCH 31, --------- 1998 1997 ---- ---- (DOLLARS IN THOUSANDS) <S> <C> <C> Revolving Credit Facility $34,800 $30,000 Line of Credit 1,800 10.65% Senior Notes, due in installments through fiscal year 2000 3,667 5,500 Mortgage Notes Payable, LIBOR plus 1.0%, secured by store properties, due in installments through 2003 (a) 9,018 9,578 Mortgage Note Payable, LIBOR plus .8%, secured by new warehouse and office building, due in installments through 2006 (a) 2,607 2,755 Term loan financing, LIBOR plus .8%, secured by new warehouse and office building, due in installments through 2004 (a) 517 609 Mortgage Note Payable, non-interest bearing, secured by new warehouse and office land, due in one installment in 2015 660 660 Other mortgages and notes, prime plus .75% to 8.0%, partially secured by store properties and equipment, due in installments through 2008 (a) 1,225 1,763 Obligations under capital leases, 6.0% to 16.8%, secured by store properties and certain equipment, due in installments through 2012 5,190 5,330 ------------- ------------- 57,684 57,995 Less - Unamortized debt discount (b) 17 ------------- ------------- 57,684 57,978 Less - Current portion 3,582 3,128 ------------- ------------- $54,102 $54,850 ============= ============= <FN> (a) The prime rate at March 31, 1998 was 8.5%. The London Interbank Offered Rate (LIBOR) at March 31, 1998 was 5.69%. (b) The debt discount is the result of valuing the debt at fair market value as of the 1984 purchase date. </TABLE> 34
35 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- At March 31, 1998, the Company has a $5.0 million line of credit for the purpose of issuing stand-by-letters of credit on an unsecured basis. The line requires fees aggregating .875% annually of the face amount of each stand-by-letter of credit, payable quarterly in advance. A total of $3.8 million of letters of credit were outstanding under this line at March 31, 1998. Through February 1996, the Company had a real estate line of credit of $25.0 million to be used for the placement of store mortgages. The real estate line of credit was terminated in fiscal 1996 at the Company's initiative and replaced by a new Revolving Credit facility. Prior to the termination of the real estate line of credit, the Company had utilized $13.2 million for permanent mortgages. Any of these mortgages may be converted from a floating rate to a fixed rate loan during the first five years of its seven-year term. Interest is payable monthly. Equal monthly installments of principal are required based on 20-year amortization periods. During fiscal 1997, the Company completed the modification of its LIBOR-based mortgages, reducing the various interest rates to LIBOR plus 1.0%. In February 1996, the Company finalized an unsecured Revolving Credit Agreement with two banks. Under the terms of the Agreement, the Company may borrow at the prime rate or at a LIBOR-based rate which fluctuates quarterly dependent upon Company performance. The Company must pay a facility fee of .125% annually on the unused portion of the commitment. In fiscal 1998, the Agreement was modified to increase the amount available under the facility from $30 million to $50 million and extend the term to March 2000. Principal payments begin in April 2000 in equal monthly installments based on a five-year amortization period. The Company has available an unsecured line of credit of $7.5 million under a short-term borrowing agreement at the lower of the prime rate or other rate options available at the time of borrowing. There are no commitment fees associated with this line of credit. Based upon the Company's ability and intent to refinance the amount outstanding under the line of credit with its expanded Revolving Credit facility, the $1.8 million balance was classified as long-term debt at March 31, 1997. During fiscal 1995, the Company purchased 12.7 acres of land for $.7 million from the City of Rochester, New York, on which its new office/warehouse facility is located. The City has provided financing for 100 percent of the cost of the land via a 20-year non-interest bearing mortgage, all due and payable in 2015. To finance its new office/warehouse building, the Company obtained permanent mortgage financing consisting of a 10-year mortgage for $2.9 million and an eight-year term loan in the amount of $.7 million. Both obligations require monthly interest payments, and each may be converted from a floating rate to a fixed rate loan before the last two years of their respective terms. The mortgage requires equal monthly installments of principal based on a 20-year amortization period, and the term loan requires constant monthly payments of principal to fully amortize the debt over the eight-year term. The Company entered into an interest rate swap agreement with a major financial institution which effectively fixes the interest rate over the terms of the aforementioned agreements at 7.15%. Certain of the Company's long-term debt agreements require, among other things, the maintenance of specified current ratios, interest and rent coverage ratios and amounts of tangible net worth, and also contain restrictions on dividend payments and capital expenditures. The Company is in compliance with these requirements at March 31, 1998. These agreements permit mortgages and specific financing lease arrangements with other parties with certain limitations. 35
36 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- Aggregate debt maturities over the next five years and thereafter are as follows: <TABLE> <CAPTION> CAPITAL LEASES -------------- AGGREGATE IMPUTED ALL OTHER YEAR ENDED MARCH 31, AMOUNT INTEREST DEBT TOTAL -------------------- ------ -------- ---- ----- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> 1999 $1,197 $(806) $3,191 $ 3,582 2000 1,172 (749) 3,855 4,278 2001 1,178 (682) 9,891 10,387 2002 1,147 (599) 8,967 9,515 2003 877 (523) 9,894 10,248 Thereafter 5,013 (2,035) 16,696 19,674 ---------- Total $57,684 ========== </TABLE> NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS Financial instruments consisted of the following: <TABLE> <CAPTION> MARCH 31, 1998 MARCH 31, 1997 -------------- -------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> Long-term debt, including current portion $52,494 $52,224 $52,665 $52,284 </TABLE> The carrying amount of cash and cash equivalents approximates fair value because their maturity is generally less than one year in duration. Fair value of long-term debt was estimated using either quoted market prices for the same or similar issues, or the current rates offered to the Company for debt with similar maturities. 36
37 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- NOTE 7 - INCOME TAXES The components of the provision (benefit) for income taxes are as follows: <TABLE> <CAPTION> YEAR ENDED MARCH 31, -------------------- 1998 1997 1996 ---- ---- ---- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> Currently payable - Federal $5,435 $5,418 $4,340 State 1,029 1,128 908 ---------- --------- --------- 6,464 6,546 5,248 Deferred - Federal 154 159 (219) State 32 33 (41) ---------- --------- --------- 186 192 (260) ---------- --------- --------- Total $6,650 $6,738 $4,988 ========== ========= ========= </TABLE> Deferred tax (liabilities) assets are comprised of the following: <TABLE> <CAPTION> YEAR ENDED MARCH 31, -------------------- 1998 1997 1996 ---- ---- ---- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> Property and equipment basis differences $(2,232) $(2,014) $(1,352) Prepaid expenses (486) (397) (316) Tax shelter investment (302) (287) (263) Installment sale (180) (265) Other (193) (79) (33) ------------- ------------ ----------- Gross deferred tax liabilities (3,393) (3,042) (1,964) ------------- ------------ ----------- Capital leases 780 755 527 Insurance accruals 959 798 605 Inventory reserves 93 43 65 Vacation accrual 210 174 166 Warranty and other reserves 864 1,034 551 Other 331 268 272 ------------ ------------ ----------- Gross deferred tax assets 3,237 3,072 2,186 ------------ ------------ ----------- Net deferred tax (liability) asset $ (156) $ 30 $ 222 ============ ============ =========== </TABLE> 37
38 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- A reconciliation between the U. S. federal statutory tax rate and the effective tax rate reflected in the accompanying financial statements is as follows: <TABLE> <CAPTION> YEAR ENDED MARCH 31, -------------------- 1998 1997 1996 ---- ---- ---- AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> <C> <C> <C> Federal income tax based on statutory tax rate applied to income before taxes $5,722 34.7 $5,883 34.8 $4,311 34.2 State income tax, net of federal income tax benefit 693 4.2 758 4.5 570 4.5 Other 235 1.4 97 .5 107 .9 ----------- ------- ----------- ----------- ----------- ----------- $6,650 40.3 $6,738 39.8 $4,988 39.6 =========== ======= =========== =========== =========== =========== </TABLE> NOTE 8 - CONVERTIBLE PREFERRED STOCK AND COMMON STOCK A summary of the changes in the number of shares of Class C preferred stock and common stock is as follows: <TABLE> <CAPTION> COMMON CLASS C STOCK CONVERTIBLE PREFERRED SHARES STOCK ------------ --------------------------- <S> <C> <C> Balance at March 31, 1996 6,914,835 91,727 Stock options exercised 209,826 Stock dividend 345,665 ------------ ---------- Balance at March 31, 1997 7,470,326 91,727 Stock options exercised 33,151 Stock dividend 373,424 ------------ ---------- Balance at March 31, 1998 7,876,901 91,727 ============ ========== </TABLE> On May 14, 1997, the Board of Directors declared a five percent stock dividend on the Company's common stock, paid August 4, 1997, to shareholders of record as of June 20, 1997. The Company also paid a five percent stock dividend on August 5, 1996, to shareholders of record as of June 21, 1996, and on August 7, 1995, to shareholders of record as of June 23, 1995. All share and per share information included in the accompanying financial statements and notes have been adjusted to give retroactive effect to these dividends. Additionally, in accordance with antidilution provisions of the Class C convertible preferred stock, the conversion value of the preferred stock was restated to $.227 per share. 38
39 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- Holders of at least 60% of the Class C preferred stock must approve any action authorized by the holders of common stock. In addition, there are certain restrictions on the transferability of shares of Class C preferred stock. Under the 1984 and 1987 Incentive Stock Option Plans, 693,021 shares (as retroactively adjusted for the five percent stock dividends) of the common stock were reserved for issuance to officers and key employees. The 1989 Incentive Stock Option Plan authorized an additional 165,005 shares (as retroactively adjusted for the five percent stock dividends) for issuance. In January 1994, May 1995 and May 1997, the Board of Directors authorized an additional 245,532, 104,737 and 200,000 shares, respectively (as retroactively adjusted for the stock dividends), for issuance under the 1989 Plan. These amounts were approved by shareholders in August 1994, August 1995 and August 1997, respectively. Generally, options vest with respect to 60% of the shares of common stock subject thereto three years after the date of grant. Options on 50% of the remaining shares vest on the fourth anniversary of the date of grant, and the balance vests on the fifth anniversary of the date of grant. The outstanding options have a duration of ten years and are exercisable through February 2008. A summary of changes in outstanding stock options (as retroactively adjusted for the five percent stock dividends) is as follows: <TABLE> <CAPTION> WEIGHTED AVERAGE AVAILABLE EXERCISE PRICE OUTSTANDING EXERCISABLE FOR GRANT -------------- ----------- ----------- --------- <S> <C> <C> <C> <C> AT MARCH 31, 1995 $ 5.79 530,436 391,026 202,600 Authorized 104,737 Granted $ 13.80 174,636 (174,636) Became exercisable 23,031 Exercised $ 1.68 (62,971) (62,971) Canceled $ 13.31 (3,590) (1,702) 3,590 Rounding for stock dividend 10 1 ------------ ------------ ----------- AT MARCH 31, 1996 $ 8.34 638,521 349,384 136,292 Granted $ 14.70 118,239 (118,239) Became exercisable 54,215 Exercised $ 2.49 (220,317) (220,317) Canceled $ 14.19 (22,072) 22,072 Rounding for stock dividend (3) ------------ ------------ ----------- AT MARCH 31, 1997 $ 12.07 514,371 183,282 40,122 Authorized 200,000 Granted $ 14.17 124,175 (124,175) Became exercisable 51,102 Exercised $ 2.41 (33,151) (33,151) Canceled $ 14.24 (206,473) (8,946) 206,473 Rounding for stock dividend 5 ------------ ------------ ----------- AT MARCH 31, 1998 $ 12.40 398,927 192,287 322,420 ============ ============ =========== </TABLE> 39
40 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- The following table summarizes information about fixed stock options outstanding at March 31, 1998: <TABLE> <CAPTION> Options Outstanding Options Exercisable Weighted Weighted Weighted Average Average Average Range of Shares Remaining Exercise Shares Exercise Exercise Prices Under Option Life Price Under Option Price - - ------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> $ 1.00 - $10.00 59,205 2.42 $ 4.88 59,205 $ 4.88 $10.01 - $15.00 281,224 7.46 $13.22 107,714 $12.71 $15.01 - $19.75 58,498 7.29 $16.07 25,368 $15.74 - - ------------------------------------------------------------------------------------------------------------ </TABLE> In August 1994, subject to the approval of shareholders in August 1995, the Board of Directors authorized a non-employee directors' stock option plan. The plan initially reserved 63,669 shares of common stock (as retroactively adjusted for the five percent stock dividends), and provides for (i) the grant to each non-employee director as of August 1, 1994 of an option to purchase 2,894 shares of the Company's common stock (as retroactively adjusted for the five percent stock dividends) and (ii) the annual grant to each non-employee director of an option to purchase 2,894 shares (as retroactively adjusted for the five percent stock dividends) on the date of the annual meeting of shareholders beginning in 1995. The options expire ten years from the date of grant and have an exercise price equal to the fair market value of the Company's common stock on the date of grant. Options vest immediately upon issuance. In May 1997, the Board of Directors authorized an additional 65,000 shares for issuance under the Plan, which were approved by shareholders in August 1997. A summary of changes in these stock options is as follows: <TABLE> <CAPTION> OPTION PRICE AVAILABLE PER SHARE OUTSTANDING EXERCISABLE FOR GRANT --------- ----------- ----------- --------- <S> <C> <C> <C> <C> AT MARCH 31, 1995 $14.85 20,258 20,258 43,410 Granted $13.38 20,258 20,258 (20,258) --------- --------- ------------ AT MARCH 31, 1996 $13.38 - $14.85 40,516 40,516 23,152 Granted $17.86 20,258 20,258 (20,258) --------- --------- ------------ AT MARCH 31, 1997 $13.38 - $17.86 60,774 60,774 2,894 Authorized 65,000 Granted $16.88 20,258 20,258 (20,258) --------- --------- ------------ AT MARCH 31, 1998 $13.38 - $17.86 81,032 81,032 47,636 ========= ========= ============ </TABLE> Effective in fiscal 1997, the Company adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation." As permitted under SFAS 123, the Company will continue to measure stock-based compensation cost as the excess of the quoted market price of the Company's common stock at the grant date over the amount the employee must pay for the stock. 40
41 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- SFAS 123 requires disclosure of pro forma net income and pro forma net income per share as if the fair value-based method had been applied in measuring compensation cost for the stock-based awards granted subsequent to fiscal year 1995. Management believes that 1998 and 1997 pro forma amounts are not representative of the effects of stock-based awards on future pro forma net income and pro forma earnings per share because those pro forma amounts exclude the pro forma compensation expense related to unvested stock options granted before fiscal 1996. Reported and pro forma net income and earnings per share amounts are set forth below: <TABLE> <CAPTION> YEAR ENDED MARCH 31, -------------------- 1998 1997 1996 ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> Net income As reported $9,854 $ 10,191 $ 7,614 Pro forma 9,602 10,000 7,505 Earnings per share - diluted As reported $ 1.15 $ 1.19 $ .90 Pro forma 1.12 1.16 .88 </TABLE> The weighted average fair value per option at the date of grant for options granted during fiscal 1998, 1997 and 1996 was $7.03, $8.61 and $6.77, respectively. The fair values of the options granted were estimated on the date of their grant using the Black-Scholes option-pricing model based on the following weighted average assumptions: <TABLE> <CAPTION> YEAR ENDED MARCH 31, -------------------- 1998 1997 1996 ---- ---- ---- <S> <C> <C> <C> Risk free interest rate 5.85% 6.38% 6.19% Expected life 9 years 9 years 9 years Expected volatility 25.0% 26.0% 26.0% Expected dividend yield 0% 0% 0% </TABLE> Forfeitures are recognized as they occur. NOTE 9 - OPERATING LEASES AND OTHER COMMITMENTS The Company leases retail facilities and store equipment under noncancellable lease agreements which expire at various dates through fiscal year 2013. In addition to stated minimum payments, certain real estate leases have provisions for contingent rentals when retail sales exceed specified levels. Generally, the leases provide for renewal for various periods at stipulated rates. Most of the facilities' leases require payment of property taxes, insurance and maintenance costs in addition to rental payments, and several provide an option to purchase the property at the end of the lease term. During fiscal 1998, the Company entered into an agreement for the sale/leaseback of certain stores, and into a second agreement for the sale/leaseback of store equipment. The Company has lease renewal options under the real estate agreement at projected future fair market values, and has both purchase and renewal options under the equipment lease agreement. At March 31, 1998, real estate with net book values totaling $5.8 million and equipment with net book values totaling $3.9 million have been removed from the balance sheet. Respective gains realized of $.1 million and $.5 million have been deferred and are being credited to income as rent expense adjustments over the lease terms. 41
42 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- Future minimum payments required under noncancellable leases are as follows: <TABLE> <CAPTION> AMOUNT ------ YEAR ENDED MARCH 31, (DOLLARS IN THOUSANDS) - - -------------------- ---------------------- <S> <C> 1999 $ 10,030 2000 9,958 2001 9,460 2002 8,473 2003 7,406 Thereafter 28,664 ------- Total $73,991 ======= </TABLE> Rent expense under operating leases totaled $7,944,000, $6,965,000 and $5,500,000 in 1998, 1997 and 1996, respectively, including contingent rentals of $589,000, $649,000 and $511,000 in each respective year. The Company has an employment agreement with its interim Chief Executive Officer. The Agreement, which commenced in February 1998, requires full-time services of the Executive during the "Interim Term", defined as the period during which the Executive serves as Chief Executive Officer. The "Interim Term" may not be extended beyond six months without the Executive's consent. The Agreement provides that subsequent to the "Interim Term", the Executive will continue in the employ of the Company, providing consulting services, at a reduced salary through February 2003. The Agreement includes a covenant against competition with the Company for two years after termination. NOTE 10 - EMPLOYEE RETIREMENT AND PROFIT SHARING PLANS The Company has a noncontributory defined benefit plan covering most employees. Coverage under the plan begins after completing one year of service and attainment of age twenty-one. Benefits are based primarily on years of service and employees' pay near retirement. The Company's funding policy is consistent with the funding requirements of Federal law and regulations. Plan assets are invested in fixed income funds. Pension cost included the following components: <TABLE> <CAPTION> YEAR ENDED MARCH 31, -------------------- 1998 1997 1996 ---- ---- ---- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> Service cost - benefits earned during the period $ 280 $ 259 $ 230 Interest cost on projected benefit obligation 315 293 277 Return on plan assets (290) (271) (227) Amortization of net transition asset (5) 4 14 -------- ------- ------- Net pension cost $ 300 $ 285 $ 294 ======== ======= ======= </TABLE> 42
43 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- The plan's funded status was as follows: <TABLE> <CAPTION> MARCH 31, --------- 1998 1997 ---- ---- (DOLLARS IN THOUSANDS) <S> <C> <C> Actuarial present value of benefit obligation: Vested benefit obligation $(3,900) $(3,382) ======== ========== Accumulated benefit obligation $(4,150) $(3.590) ======== ========== Projected benefit obligation $(5,080) $(4,325) Plan assets at fair value 4,395 3,566 -------- ---------- Projected benefit obligation in excess of plan assets (685) (759) Unrecognized net loss 1,030 622 Unrecognized prior service cost 20 24 Unrecognized net transition asset (115) (146) -------- ---------- Pension asset (liability) at March 31 $ 250 $ (259) ======== ======== </TABLE> The projected benefit obligation at March 31, 1998 and 1997 assumed discount rates of 7.0% and 7.5%, respectively. Increase in future compensation levels was assumed to be 5% in 1998 and 1997. The assumed long-term rate of return on plan assets at March 31, 1998 and 1997 was 8%. The unrecognized transition asset is being amortized over fifteen years beginning April 1, 1988. The unrecognized prior service cost is being amortized over fifteen years beginning April 1, 1990. The Company also has a profit sharing plan which covers full-time employees who meet the age and service requirements of the plan. The annual contribution to the plan is at the discretion of the Compensation and Benefits Committee of the Board of Directors and, before annual forfeitures which reduce the annual contribution, totaled $419,000 and $500,000 for the years ended March 31, 1998 and 1997, respectively. No contribution was made for the year ended March 31, 1996. The Company's management bonus plan provides for the payment of annual cash bonus awards to participating employees, as selected by the Board of Directors, based primarily on the Company's attaining pre-tax income targets established by the Board of Directors. Charges to expense applicable to the management bonus plan totaled $210,000, $779,000 and $104,000 for the years ended March 31, 1998, 1997 and 1996 respectively. Because the Company did not attain a minimum required percentage of targeted profit performance in fiscal 1998 and 1996, expense for those years does not include any bonus amounts for executive officers. NOTE 11 - RELATED PARTY TRANSACTIONS Certain (a) principal shareholders/directors of the Company, (b) partnerships in which such persons have interests or (c) trusts of which members of their families are beneficiaries are lessors of certain facilities to the Company. Payments under such operating and capital leases amounted to $1,786,000, $1,828,000 and $1,688,000 for the years ended March 31, 1998, 1997 and 1996, respectively. Amounts payable under these lease agreements totaled $82,000 and $88,000, respectively, at March 31, 1998 and 1997. No related party leases, other than renewals or modifications of leases on existing stores, have been entered into since May 1989 and no new leases are contemplated. 43
44 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- Effective July 1991, the Company entered into a management agreement with an investment banking firm associated with a principal shareholder/director of the Company to provide financial advice. The agreement provides for an annual fee of $160,000, plus reimbursement of out-of-pocket expenses. During fiscal 1998, 1997 and 1996, the Company incurred fees of $160,000 annually under this agreement. In addition, this investment banking firm, from time to time, provides additional investment banking services to the Company for customary fees. This firm is providing financial advisory services to the Company in connection with the acquisition of and financing for Speedy Muffler King Inc. (Note 2). NOTE 12 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The following transactions represent noncash investing and financing activities during the periods indicated: YEAR ENDED MARCH 31, 1998 In connection with the declaration of a five percent stock dividend (Note 8), the Company increased common stock and additional paid-in capital by $4,000 and $7,015,000, respectively, and decreased retained earnings by $7,019,000. Capital lease obligations of $236,000 were incurred under various lease agreements. In anticipation of payment-in-full from a mortgagor for its former headquarters property, the Company reclassified $963,000 from other noncurrent assets to other current assets. YEAR ENDED MARCH 31, 1997 In connection with the declaration of a five percent stock dividend (Note 8), the Company increased common stock and additional paid-in capital by $4,000 and $4,584,000, respectively, and decreased retained earnings by $4,588,000. Capital lease obligations of $722,000 were incurred under various lease agreements. In connection with the sale of its former headquarters building, the Company reduced fixed assets and increased other assets (mortgage receivable) by $989,000. In connection with the termination of a capital lease, the Company reduced debt and fixed assets by $112,000. YEAR ENDED MARCH 31, 1996 In connection with the declaration of a five percent stock dividend (Note 8), the Company increased common stock and additional paid-in capital by $4,000 and $5,998,000, respectively, and decreased retained earnings by $6,002,000. Capital lease obligations of $772,000 were incurred under various lease agreements. In connection with the acquisition of several automotive repair stores, liabilities were assumed as follows: <TABLE> <CAPTION> (DOLLARS IN THOUSANDS) <S> <C> Fair value of assets acquired $2,835 Cash paid 2,416 --------- Liabilities assumed $ 419 ========= </TABLE> 44
45 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- <TABLE> <CAPTION> YEAR ENDED MARCH 31, -------------------- 1998 1997 1996 ---- ---- ---- (DOLLARS IN THOUSANDS) <S> <C> <C> <C> Cash paid during the year: Interest, net $4,247 $3,867 $3,205 Income taxes, net $6,166 $6,823 $5,244 </TABLE> NOTE 13 - LITIGATION The Company and its subsidiary are involved in legal proceedings, claims and litigation arising in the ordinary course of business. It is possible that the outcome of such current legal proceedings could have a material effect on quarterly or annual operating results or cash flows when resolved in a future period. However, in the opinion of management, these matters will not materially affect the Company's consolidated financial position. NOTE 14 - SUBSEQUENT EVENT On May 13, 1998, the Board of Directors declared a five percent stock dividend, payable June 18, 1998, to common stockholders of record as of June 8, 1998. Shares of common or preferred stock included in the accompanying financial statements and notes have not been adjusted to reflect this dividend. 45
46 MONRO MUFFLER BRAKE, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following table sets forth income statement data by quarter for the fiscal years ended March 31, 1998 and 1997. <TABLE> <CAPTION> QUARTER ENDED ------------- JUNE 30, SEPT.30, DEC.31, MARCH 31, 1997 1997 1997 1998 ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> Sales..... ............................... $40,773 $41,540 $36,336 $35,645 Cost of sales including distribution and occupancy costs..................... 22,631 23,231 20,996 20,652 ------- ------- ------- ------- Gross profit.............................. 18,142 18,309 15,340 14,993 Operating, selling, general and administrative expenses............. 11,492 11,735 11,409 11,484 ------- ------- ------- ------- Operating income.......................... 6,650 6,574 3,931 3,509 Interest expense - net.................... 868 903 1,005 1,053 Other expense............................. 85 86 95 65 ------- ------- ------- ------- Income before provision for income taxes.. 5,697 5,585 2,831 2,391 Provision for income taxes................ 2,280 2,233 1,131 1,006 ------- ------- ------- ------- Net income................................ $ 3,417 $ 3,352 $ 1,700 $ 1,385 ======= ======= ======= ======= Basic earnings per share (b).............. $ .44 $ .43 $ .22 $ .18 Diluted earnings per share (a)(b)......... $ .40 $ .39 $ .20 $ .16 Weighted average number of shares of common stock and common stock equivalents used in computing earnings per share (b): Basic....... 7,850 7,867 7,867 7,867 Diluted..... 8,606 8,608 8,557 8,586 <CAPTION> 1996 1996 1996 1997 ---- ---- ---- ---- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) <S> <C> <C> <C> <C> Sales..................................... $37,745 $37,799 $33,560 $32,065 Cost of sales including distribution and occupancy costs..................... 20,666 20,291 19,867 17,968 ------- ------- ------- ------- Gross profit.............................. 17,079 17,508 13,693 14,097 Operating, selling, general and administrative expenses............. 10,645 10,386 9,978 10,740 ------- ------- ------- ------- Operating income.......................... 6,434 7,122 3,715 3,357 Interest expense - net.................... 814 851 837 722 Other expense............................. 16 55 205 199 ------- ------- ------- ------- Income before provision for income taxes.. 5,604 6,216 2,673 2,436 Provision for income taxes................ 2,225 2,474 1,064 975 ------- ------- ------- ------- Net income................................ $ 3,379 $ 3,742 $ 1,609 $ 1,461 ======= ======= ======= ======= Basic earnings per share (b).............. $ .44 $ .48 $ .21 $ .19 Diluted earnings per share (a)(b)......... $ .40 $ .43 $ .19 $ .17 Weighted average number of shares of common stock and common stock equivalents used in computing earnings per share (b): Basic.......... 7,670 7,832 7,843 7,844 Diluted........ 8,540 8,620 8,569 8,590 </TABLE> 46
47 (a) Earnings per share for each period was computed by dividing net income by the weighted average number of shares of Common Stock and Common Stock equivalents outstanding during the respective quarters. (b) All share and per share information has been adjusted to give retroactive effect to the five percent stock dividends paid in August 1997, August 1996 and in August 1995. 47
48 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY Information concerning the directors of the Company is incorporated herein by reference to the section captioned "Election of Directors" in the Proxy Statement. Information concerning the executive officers of the Company is set forth in Item 4A of Part I hereof. Information concerning required Section 16(a) disclosure is incorporated herein by reference to the section captioned "Compliance with Section 16(a) of the Exchange Act" in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION Information concerning executive compensation is incorporated herein by reference to the section captioned "Executive Compensation" in the Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference to the sections captioned "Principal Shareholders" and "Election of Directors" in the Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information concerning certain relationships and related transactions is incorporated herein by reference to the sections captioned "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" in the Proxy Statement. 48
49 PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K FINANCIAL STATEMENTS Reference is made to Item 8 of Part II hereof. FINANCIAL STATEMENT SCHEDULES Schedules have been omitted because they are inapplicable, not required, or the information is included elsewhere in the Financial Statements or the notes thereto. EXHIBITS Reference is made to the Index to Exhibits accompanying this Form 10-K as filed with the Securities and Exchange Commission. The Company will furnish to any shareholder, upon written request, any exhibit listed in such Index to Exhibits upon payment by such shareholder of the Company's reasonable expenses in furnishing any such exhibit. REPORTS ON FORM 8-K A report on Form 8-K was filed on February 23, 1998 reporting the resignation of Lawrence C. Day as President and Chief Executive Officer and the appointment of Jack M. Gallagher as the interim President and Chief Executive Officer of the Company. 49
50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MONRO MUFFLER BRAKE, INC. (Registrant) By /s/ Jack M. Gallagher ------------------------------------- Jack M. Gallagher President and Chief Executive Officer Date: June 29, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of June 29, 1998. Signature Title - - --------- ----- /s/ Catherine D'Amico Senior Vice President-Finance, Chief - - ------------------------ Financial Officer and Treasurer Catherine D'Amico (Principal Financial and Accounting Officer) Burton S. August* Director Charles J. August* Director Robert W. August* Director Frederick M. Danziger* Director Donald Glickman* Director Peter J. Solomon* Director Lionel B. Spiro* Director W. Gary Wood* Director *By /s/ Jack M. Gallagher ---------------------------------- Jack M. Gallagher Chief Executive Officer, Director and as Attorney-in-Fact 50
51 INDEX TO EXHIBITS ----------------- The following is a list of all exhibits filed herewith or incorporated by reference herein: Exhibit No. Page Document - - ----------- ---- -------- 3.01* Restated Certificate of Incorporation of the Company, dated July 23, 1991, with Certificate of Amendment, dated November 1, 1991. (1992 Form 10-K, Exhibit No. 3.01) 3.02* Restated By-Laws of the Company, dated July 23, 1991. (Amendment No. 1, Exhibit No. 3.04) 4.01* Revolving Credit Agreement, dated February 7, 1996, among Monro Muffler Brake, Inc., as borrower, and The Chase Manhattan Bank, N.A. and Fleet Bank as lenders, and The Chase Manhattan Bank, N.A. as agent. (1996 Form 10-K, Exhibit No. 4.01) 4.01a* Amendment One to Credit Agreement among the Chase Manhattan Bank, Fleet Bank, and the Company, dated June 25, 1997. (June 1997 Form 10-Q, Exhibit 10.1) 4.02* Senior Note Agreement, dated March 1, 1989, between the Company and Massachusetts Mutual Life Insurance Company. (Form S-1, Exhibit No. 4.02) 4.02a* Amendment No. 1, dated June 17, 1991, to Senior Note Agreement, between the Company and Massachusetts Mutual Life Insurance Company. (Amendment No. 1, Exhibit No. 4.02a) 4.03* 10.65% Senior Notes Due April 1, 1999, dated March 22, 1989, issued by the Company to Massachusetts Mutual Life Insurance Company. (Form S-1, Exhibit No. 4.03) 10.01* 1984 Employees' Incentive Stock Option Plan, as amended through December 23, 1992. (Form S-8, Exhibit No. 4-1)** 10.02* 1987 Employees' Incentive Stock Option Plan, as amended through December 23, 1992. (Form S-8, Exhibit No. 4-2)** 10.03* 1989 Employees' Incentive Stock Option Plan, as amended through December 23, 1992. (Form S-8, Exhibit No. 4-3)** 10.03a* Amendment, dated as of January 25, 1994, to 1989 Employees' Incentive Stock Option Plan. (1994 Form 10-K, Exhibit No. 10.03a)** 10.03b* Amendment, dated as of May 17, 1995 to the 1989 Employees' Incentive Stock Option Plan (1995 Form 10-K, Exhibit No. 10.03) ** 10.03c* Amendment, dated as of May 14, 1997 to the 1989 Employees' Incentive Stock Option Plan (1997 Form 10-K, Exhibit No. 10.03c)** 10.03d Amendment, dated as of January 29, 1998 to the 1989 Employees' Incentive Stock Option Plan** - - --------------------- 51
52 Exhibit No. Page Document - - ----------- ---- -------- 10.04* Retirement Plan of the Company, as amended and restated effective as of April 1, 1989. (September 1993 Form 10-Q, Exhibit No. 10)** 10.05* Profit Sharing Plan, amended and restated as of April 1, 1993. (1995 Form 10-K, Exhibit No. 10.05) ** 10.08* Mortgage, dated July 31, 1987, between the Company and Central Trust Company, with Mortgage Note, dated July 31, 1987, with respect to Shop No. 82. (Form S-1, Exhibit No. 10.09) 10.08a* Amendment, dated June 17, 1991, to Mortgage with respect to Shop No. 82, between the Company and Central Trust Company. (Amendment No. 1, Exhibit No. 10.09a) 10.12* Mortgage and Security Agreement, dated August 1, 1988, between the Company and Chase Lincoln First Bank, N.A., with Mortgage Note, dated August 9, 1988, and Conditional Assignment of Leases and Rents, dated August 1, 1988, with respect to Shop No. 120. (Form S-1, Exhibit No. 10.13) 10.13* Mortgage and Security Agreement, dated August 1, 1988, between the Company and Chase Lincoln First Bank, N.A., with Mortgage Note, dated August 9, 1988, and Conditional Assignment of Leases and Rents, dated August 1, 1988, with respect to Shop No. 124. (Form S-1, Exhibit No. 10.14) 10.14* Mortgage and Security Agreement, dated August 1, 1988, between the Company and Chase Lincoln First Bank, N.A., with Mortgage Note, dated August 9, 1988, and Conditional Assignment of Leases and Rents, dated August 1, 1988, with respect to Shop No. 125. (Form S-1, Exhibit No. 10.15) 10.16* Modification and Extension Agreement, dated August 12, 1991, between AA & L Associates, L.P. and the Company, with respect to Shop No. 1. (1992 Form 10-K, Exhibit No. 10.18) 10.17* Sublease, dated June 1, 1980, among August, August and Lane Co-venture and the Company, with Amendment of Lease, dated July 11, 1984, and assigned by August, August and Lane Co-venture to AA & L Associates, L.P., effective January 2, 1996 with respect to Shop No. 3. (Form S-1, Exhibit No. 10.19) 10.18* Lease, dated March 8, 1972, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, with respect to Shop No. 7. (Form S-1, Exhibit No. 10.20) 10.18a* Confirmation of Assignment of Lease, dated December 31, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and Stoneridge 7 Realty Partnership, with respect to Shop No. 7. (1992 Form 10-K, Exhibit No. 10.20a) - - --------------------- 52
53 Exhibit No. Page Document - - ----------- ---- -------- 10.19* Lease, effective December 1, 1985, among Chase Lincoln First Bank, N.A. and Burton S. August, as Trustees and the Company, with Assignment of Lease, dated June 7, 1991, among Chase Lincoln First Bank, N.A. and Burton S. August, as Trustees, and August, Eastwood & August, with respect to Shop No. 8. (Form S-1, Exhibit No. 10.21) 10.20* Lease, dated February 10, 1972, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company as amended July 11, 1984 and assigned to Lane, August, August Trust on June 7, 1991, and assigned to Lane, August, August LLC effective January 2, 1996, with respect to Shop No. 9. (Form S-1, Exhibit No. 10.22) 10.21* Lease, dated May 1, 1973, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and Assignment of Lease, dated June 7, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and 35 Howard Road Joint Venture, with respect to Shop No. 10. (Form S-1, Exhibit No. 10.23) 10.22* Lease, dated May 7, 1973, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and assigned by Mssrs. August, August and Lane to AA & L Associates, L.P., effective January 2, 1996, with respect to Shop No. 12. (Form S-1, Exhibit No. 10.24) 10.23* Lease, dated July 25, 1974, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and Assignment of Lease, dated June 7, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and AA & L Associates, L. P., with respect to Shop No. 14. (Form S-1, Exhibit No. 10.25) 10.24* Lease, effective April 1, 1975, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and Assignment of Lease, dated June 7, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and Lane, August, August Trust and assigned by Lane, August, August Trust to Lane, August, August LLC, effective January 2, 1996, with respect to Shop No. 15. (Form S-1, Exhibit No. 10.26) 10.25* Lease, dated as of September 25, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with respect to Shop No. 17. (1992 Form 10-K, Exhibit No. 10.27) 10.26* Lease, effective May 1, 1979, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and Assignment of Lease, dated June 7, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and AA & L Associates, L.P., with respect to Shop No. 23. (Form S-1, Exhibit No. 10.28) - - --------------------- 53
54 Exhibit No. Page Document - - ----------- ---- -------- 10.27* Lease, effective May 1, 1980, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and Assignment of Lease, dated June 7, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and AA & L Associates, L.P., with respect to Shop No. 25. (Form S-1, Exhibit No. 10.29) 10.28* Lease, effective March 1, 1980, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and Assignment of Lease, dated June 7, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and AA & L Associates, L.P., with respect to Shop No. 27. (Form S-1, Exhibit No. 10.30) 10.29* Lease, effective July 1, 1980, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and Assignment of Lease, dated June 7, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and AA & L Associates, L.P., with respect to Shop No. 28. (Form S-1, Exhibit No. 10.31) 10.30* Lease, effective November 1, 1980, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and Assignment of Lease, dated June 7, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and AA & L Associates, L.P., with respect to Shop No. 29. (Form S-1, Exhibit No. 10.32) 10.31* Lease, effective August 1, 1983, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and Assignment of Lease, dated June 7, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and AA & L Associates, L.P., with respect to Shop No. 30. (Form S-1, Exhibit No. 10.33) 10.32 62 Lease, dated March 3, 1997, between August, August and Lane of Rochester, LLC, with respect to Store No. 31. 10.33* Modification and Extension Agreement, dated August 12, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, and assigned by Mssrs. August, August and Lane to August, August and Lane of Rochester, LLC, effective January 2, 1996, with respect to Shop No. 33. (1992 Form 10-K, Exhibit No. 10.35) 10.34* Lease, effective December 1, 1981, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and assigned by Mssrs. August, August and Lane to August, August and Lane of Rochester, LLC, effective January 2, 1996, with respect to Shop No. 34. (Form S-1, Exhibit No. 10.36) - - --------------------- 54
55 Exhibit No. Page Document - - ----------- ---- -------- 10.35* Lease, dated April 10, 1984, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and Assignment of Lease, dated June 7, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and AA & L Associates, L.P., with respect to Shop No. 35. (Form S-1, Exhibit No. 10.37) 10.36* Lease, effective October 1, 1983, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, with respect to Shop No. 36. (Form S-1, Exhibit No. 10.38) 10.36a* Assignment of Lease, dated October 1, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and AA & L Associates, L.P., with respect to Shop No. 36. (1992 Form 10-K, Exhibit No. 10.38a) 10.37* Lease, effective July 1, 1983, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and Assignment of Lease, dated June 7, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and AA & L Associates, L.P., with respect to Shop No. 43. (Form S-1, Exhibit No. 10.39) 10.38* Lease, dated as of February 1, 1983, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and assigned by Mssrs. August, August and Lane to AA & L Associates, L.P., effective January 2, 1996, with respect to Shop No. 44. (Form S-1, Exhibit No. 10.40) 10.39* Sublease, dated as of May 1, 1979, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and Assignment of Lease, dated June 7, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and AA & L Associates, L.P., with respect to Shop No. 45. (Form S-1, Exhibit No. 10.41) 10.40* Lease, effective October 1, 1985, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated as of July 11, 1984, and Assignment of Lease, dated June 7, 1991, among Burton S. August, as Trustee, and Lane, August, August Trust, and assigned by Lane, August, August Trust to Lane, August, August LLC, effective January 2, 1996, with respect to Shop No. 48. (Form S-1, Exhibit No. 10.42) 10.41* Lease, dated as of January 1, 1984, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and assigned by Mssrs. August, August and Lane to AA & L Associates, L.P., effective January 2, 1996, with respect to Shop No. 49. (Form S-1, Exhibit No. 10.43) - - --------------------- 55
56 Exhibit No. Page Document - - ----------- ---- -------- 10.42* Lease, dated July 1, 1982, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and assigned by Mssrs. August, August and Lane to AA & L Associates, L.P., effective January 2, 1996, with respect to Shop No. 51. (Form S-1, Exhibit No. 10.44) 10.43* Lease, dated July 1, 1982, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, with respect to Shop No. 52. (Form S-1, Exhibit No. 10.45) 10.44* Lease, dated May 1, 1979, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and Assignment of Lease, dated June 7, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and AA & L Associates, L.P., with respect to Shop No. 53. (Form S-1, Exhibit No. 10.46) 10.45* Lease, dated July 1, 1982, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, with respect to Shop No. 54. (Form S-1, Exhibit No. 10.47) 10.46* Lease, effective September 1, 1983, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and Assignment of Lease, dated June 7, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and AA & L Associates, L.P., with respect to Shop No. 55. (Form S-1, Exhibit No. 10.48) 10.47* Lease, dated as of July 1, 1984, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, and Assignment of Lease, dated June 7, 1991, among Charles J. August, Burton S. August and Sheldon A. Lane and AA & L Associates, L.P., with respect to Shop No. 57. (Form S-1, Exhibit No. 10.49) 10.48* Lease, dated July 1, 1982, among Charles J. August, Burton S. August and Sheldon A. Lane and the Company, with Amendment of Lease, dated July 11, 1984, with respect to Shop No. 58. (Form S-1, Exhibit No. 10.50) 10.49* Modification and Extension Agreement, dated August 12, 1991, between AA & L Associates, L.P. and the Company, with respect to Shop No. 60. (1992 Form 10-K, Exhibit No. 10.51) 10.50* Lease, signed October 22, 1986, between the Company and Conifer Johnstown Associates, with respect to Shop No. 63. (Form S-1, Exhibit No. 10.52) 10.51* Lease, effective October 20, 1986, between the Company and Conifer Wappingers Falls Associates, with respect to Shop No. 79. (Form S-1, Exhibit No. 10.53) - - --------------------- 56
57 Exhibit No. Page Document - - ----------- ---- -------- 10.52* Lease, dated January 25, 1988, between the Company and Conifer Northeast Associates, with Letter Agreement, dated February 3, 1988, amending Lease and Amendment Agreement, dated January 6, 1989, with respect to Shop No. 107. (Form S-1, Exhibit No. 10.54) 10.53* Lease, dated March 16, 1988, between the Company and Conifer Northeast Associates, with Letter Agreement, dated February 3, 1988, amending Lease and Amendment Agreement, dated January 6, 1989, with respect to Shop. No. 109. (Form S-1, Exhibit No. 10.55) 10.54* Lease, dated February 11, 1988, between the Company and Conifer Northeast Associates, with Letter Agreement, dated February 3, 1988, amending Lease and Amendment Agreement, dated January 6, 1989, and Non-disturbance and Attornment Agreement, dated February 11, 1988, between the Company and Central Trust Company, with respect to Shop No. 114. (Form S-1, Exhibit No. 10.56) 10.55* Purchase Agreement, dated December 1, 1987, between the Company and Conifer Northeast Associates, with Lease, dated February 25, 1988, between the Company and Conifer Northeast Associates; Letter Agreement, dated February 3, 1988, amending Lease; Amendment Agreement, dated January 6, 1989; and Non-Disturbance and Attornment Agreement, dated February 25, 1988, between the Company and Central Trust Company, with respect to Shop No. 116. (Form S-1, Exhibit No. 10.57) 10.56* Lease, dated May 12, 1989, between the Company and Conifer Penfield Associates (as successor to Conifer Development, Inc.), with respect to Shop No. 132. (Form S-1, Exhibit No. 10.58) 10.57* Modification and Extension Agreement, dated November 1, 1993, between A & L Associates, L.P. and the Company, with respect to Shop Nos. 1, 23, 25, 27, 28, 29, 35, 53, 57 and 60. (1994 Form 10-K, Exhibit No. 10.57) 10.58* Form of Mortgage and Security Agreement, between the Company and The Chase Manhattan Bank, N.A., with Form of Mortgage Note and Form of Conditional Assignment of Leases and Rents, in connection with each of fifteen mortgages on Shop Nos. 137, 140, 143, 146, 162, 164, 168, 169, 172, 177, 179, 184, 185, 186 and 191 entered into since the filing of the 1992 Form 10-K. (1993 Form 10-K, Exhibit No. 10.57) 10.59* Form of Mortgage and Security Agreement, between the Company and The Chase Manhattan Bank, N.A., with Form of Mortgage Note and Form of Conditional Assignment of Leases and Rents, in connection with each of five mortgages on Shop Nos. 160, 183, 190, 192 and 193 entered into since the filing of the 1993 Form 10-K. (1994 Form 10-K, Exhibit No. 10.59) 10.60* Mortgage Agreement, dated September 28, 1994, between the Company and the the City of Rochester, New York. (1995 Form 10-K, Exhibit No. 10.60) - - --------------------- 57
58 Exhibit No. Page Document - - ----------- ---- -------- 10.61* Lease Agreement, dated October 11, 1994, between the Company and the City of Rochester, New York. (1995 Form 10-K, Exhibit 10.61) 10.62* Mortgage Notes, Collateral Security Mortgage and Security Agreement, Indemnification Agreement and Guarantee, dated September 22, 1995 between Monro Service Corporation, County of Monroe Industrial Development Agency, the Company and The Chase Manhattan Bank, N.A. (September 1995 Form 10-Q, Exhibit No. 10.02) 10.63* Form of Mortgage and Security Agreement, between the Company and The Chase Manhattan Bank, N.A., with Form of Mortgage Note and Form of Conditional Assignment of Leases and Rents, in connection with each of nine mortgages on Store Nos. 205, 207, 210, 213, 216, 226, 229, 230 and 236 entered into September 14, 1995. (September 1995 Form 10-Q, Exhibit No. 10.01) 10.64* Amendment to Lease Agreement, dated September 19, 1995 between the Company and the County of Monroe Industrial Development Agency. (September 1995 Form 10-Q, Exhibit No. 10.00) 10.65 Employment Agreement dated February 18, 1998, between the Company and Jack M. Gallagher.** 10.66* Asset Purchase Agreement by and between Monro Muffler Brake, Inc. as the buyer and Xpress Automotive Group, Inc. as the seller, as entered into July 25, 1995. (September 1995 Form 10-Q, Exhibit No. 10.03) 10.67* Mortgage Modification Agreement, dated October 11, 1996 between the Company and Chase Manhattan Bank, N.A., in connection with each of 33 mortgages for Store Nos. 78, 86, 87, 90, 137, 140, 143, 146, 160, 162, 164, 168, 169, 172, 177, 179, 183, 184, 185, 186, 190, 191, 192, 193, 205, 207, 210, 213, 216, 226, 229, 230 and 236. (September 1996 Form 10-Q, Exhibit No. 10) 10.68* Purchase Agreement between Walker Manufacturing Company, a division of Tenneco Automotive and Monro Muffler Brake, Inc. dated as of November 5, 1996. (December 1996 Form 10-Q, Exhibit 10.1) 10.69* Asset Purchase Agreement by and among Speedy Muffler King Inc., Bloor Automotive Inc., Speedy Car-X Inc., Speedy (U.S.A) Inc., Speedy Holding Corp. and Monro Muffler Brake Inc., dated as of April 13, 1998 (April 1998 Form 8-K, Exhibit 10.1) 10.70 Form of Agreement - "Purchase Agreement and Escrow Instructions" between Realty Income Corporation - buyer and Monro Muffler Brake, Inc. - seller dated November 12, 1997. 11.01 Computation of Per Share Earnings. 21.01 Subsidiaries of the Company. 23.01 Consent of Price Waterhouse. 24.01 Powers of Attorney. - - --------------------- 58
59 ** Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K pursuant to Item 14(c) hereof. * An asterisk "*" following an exhibit number indicates that the exhibit is incorporated herein by reference to an exhibit to one of the following documents: (1) the Company's Registration Statement on Form S-1 (Registration No. 33-41290), filed with the Securities and Exchange Commission on June 19, 1991 ("Form S-1"); (2) Amendment No. 1 thereto, filed July 22, 1991 ("Amendment No. 1"); (3) the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1992 ("1992 Form 10-K"); the Company's Registration Statement on Form S-8, filed with the Securities and Exchange Commission on December 24, 1992 ("Form S-8"); (5) the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1993 ("1993 Form 10-K"); (6) the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1993 ("September 1993 Form 10-Q"); (7) the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1994 ("1994 Form 10-K"); (8) the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1995 ("1995 Form 10-K"); (9) the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1995 ("September 1995 Form 10-Q"); (10) the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1996 ("September 1996 Form 10-Q"); (11) the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1996 ("the December 1996 Form 10-Q"); (12) the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1996 ("1996 Form 10-K"); (13) the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 1997 ("1997 Form 10-K"); (14) the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1997 ("June 1997 Form 10-Q); or (15) the Company's Current Report on Form 8-K filed on April 28, 1998 ("April 1998 Form 8-K"). The appropriate document and exhibit number are indicated in parentheses. 59