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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 01-13409
MIDAS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 36-4180556
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1300 Arlington Heights Road, 60143
Itasca, Illinois
(Address of Principal Executive
Offices) (Zip Code)
(630) 438-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether 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
The number of shares of the Registrant's Common Stock, $.001 par value per
share, outstanding as of September 28, 2002 was 14,976,099.
PART 1. FINANCIAL INFORMATION
Item 1: Financial Statements
MIDAS, INC.
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In millions, except for earnings and dividends per share)
For the quarter For the nine months
ended fiscal September ended fiscal September
---------------------- ----------------------
2002 2001 2002 2001
---- ---- ---- ----
(13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks)
Sales and revenues .................................. $86.4 $85.9 $258.2 $252.1
Cost of sales and revenues .......................... 41.5 46.5 126.5 136.4
----- ----- ------ ------
Gross profit ................................... 44.9 39.4 131.7 115.7
Selling, general, and distribution expenses ......... 36.4 28.8 108.7 84.5
Special charges ..................................... 4.3 -- 4.3 --
----- ----- ------ ------
Operating income ............................... 4.2 10.6 18.7 31.2
Interest expense .................................... (3.0) (2.1) (8.4) (6.6)
Other income, net ................................... 0.6 -- 0.9 0.4
----- ----- ------ ------
Income before taxes ............................ 1.8 8.5 11.2 25.0
Income taxes ........................................ 0.7 3.3 4.4 9.7
----- ----- ------ ------
Net income ..................................... $ 1.1 $ 5.2 $ 6.8 $ 15.3
===== ===== ====== ======
Earnings per share:
Basic ............................................. $ .07 $ .35 $ .46 $ 1.02
===== ===== ====== ======
Diluted ........................................... $ .07 $ .35 $ .46 $ 1.02
===== ===== ====== ======
Dividends per common share .......................... $ .00 $ .00 $ .00 $ .08
===== ===== ====== ======
Average number of shares
Common shares outstanding ...................... 15.0 14.9 15.0 14.9
Equivalent shares on outstanding stock options . .0 .0 .0 .0
----- ----- ------ ------
Shares applicable to diluted earnings .......... 15.0 14.9 15.0 14.9
===== ===== ====== ======
See notes to condensed financial statements.
1
MIDAS, INC.
CONDENSED BALANCE SHEETS
(In millions)
Fiscal Fiscal
September December
2002 2001
---- ----
(Unaudited)
Assets:
Current assets:
Cash and cash equivalents ........................................ $ 2.5 $ 1.5
Receivables, net ................................................. 60.3 44.9
Inventories ...................................................... 128.8 119.3
Other current assets ............................................. 29.1 26.8
-------- --------
Total current assets .......................................... 220.7 192.5
Property and equipment, net ......................................... 166.9 171.7
Goodwill ............................................................ 20.1 19.8
Other assets ........................................................ 17.2 19.1
-------- --------
Total assets .................................................. $ 424.9 $ 403.1
======== ========
Liabilities and Equity:
Current liabilities:
Short-term debt .................................................. $ -- $ 0.1
Current portion of long-term obligations ......................... 87.7 16.0
Accounts payable ................................................. 50.1 56.7
Accrued expenses ................................................. 28.0 33.3
-------- --------
Total current liabilities ..................................... 165.8 106.1
Long-term debt ...................................................... 30.0 118.0
Obligations under capital leases .................................... 7.6 8.2
Finance lease obligation ............................................ 38.6 --
Deferred income taxes and other liabilities ......................... 31.3 30.7
-------- --------
Total liabilities ............................................. 273.3 263.0
-------- --------
Shareholders' equity:
Common stock ($.001 par value, 100 million shares authorized;
17.3 million shares issued) and paid-in capital ................. 22.8 22.3
Treasury stock, at cost (2.3 million shares and 2.3 million shares) (55.0) (53.0)
Notes receivable from common stock sold to officers ............... -- (4.1)
Unamortized restricted stock awards ............................... (0.7) (2.5)
Retained income ................................................... 191.4 184.6
Cumulative other comprehensive income (loss) ...................... (6.9) (7.2)
-------- --------
Total shareholders' equity ...................................... 151.6 140.1
-------- --------
Total liabilities and equity .................................. $ 424.9 $ 403.1
======== ========
See notes to condensed financial statements.
2
MIDAS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
For the nine months
ended fiscal September
----------------------
2002 2001
---- ----
Cash flows from operating activities:
Net income ................................................. $ 6.8 $ 15.3
Adjustments reconciling net income to
net cash provided by (used in) operating activities:
Depreciation and amortization ......................... 12.3 11.4
Changes in assets and liabilities, exclusive of effects
of acquisitions and dispositions .................... (30.8) (9.7)
------- -------
Net cash provided by (used in) operating activities ........ (11.7) 17.0
------- -------
Cash flows from investing activities:
Capital investments ........................................ (8.7) (18.1)
Cash paid for acquired businesses .......................... (0.4) (8.3)
------- -------
Net cash used in investing activities ...................... (9.1) (26.4)
------- -------
Cash flows from financing activities:
Short-term borrowing repayments, net ....................... (0.1) (3.2)
Long-term debt borrowings (repayments) ..................... (17.1) 14.1
Finance lease obligation borrowings ........................ 39.4 --
Payment of obligations under capital leases ................ (0.6) (0.6)
Cash received for common stock ............................. 0.4 0.3
Cash paid for treasury shares .............................. (0.2) (1.3)
Dividends paid to shareholders ............................. -- (1.5)
------- -------
Net cash provided by financing activities .................. 21.8 7.8
------- -------
Net change in cash and cash equivalents .................... 1.0 (1.6)
Cash and cash equivalents at beginning of period ........... 1.5 1.8
------- -------
Cash and cash equivalents at end of period ................. $ 2.5 $ 0.2
======= =======
See notes to condensed financial statements.
3
MIDAS, INC.
CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(In millions)
Notes
Receivable
Common Stock From
And Common Unamortized Comprehensive
Paid-in Capital Treasury Stock Stock Restricted Income
---------------- --------------- Sold to Stock Retained -------------
Shares Amount Shares Amount Officers Awards Earnings Current Cumulative
------ ------ ------ ------ -------- ----------- -------- ------- ----------
Fiscal year end 2001 ............... 17.3 $22.3 (2.3) $(53.0) $(4.1) $(2.5) $184.6 $(7.2)
Purchase of treasury shares ........ -- -- -- (0.2) -- -- -- --
Stock option transactions .......... -- (0.1) -- 0.3 -- -- -- --
Forfeiture of restricted stock
awards ........................... -- 0.6 -- (2.1) -- 1.5 -- --
Retirement of notes receivable
from officers .................... -- -- -- -- 1.2 -- -- --
Reclassification of notes receivable
due to officer resignation ....... -- -- -- -- 2.5 -- -- --
Reserve for collectibility of
officer notes .................... -- -- -- -- 0.4 -- -- --
Amortization of restricted stock
Awards ........................... -- -- -- -- -- 0.3 -- --
Net income ......................... -- -- -- -- -- -- 6.8 $6.8 --
Other comprehensive income
--foreign currency translation
adjustments ................... -- -- -- -- -- -- -- 0.3 0.3
----
Comprehensive income ............... -- -- -- -- -- -- -- $7.1 --
---- ----- ---- ------ ----- ----- ------ ==== -----
Fiscal third quarter end 2002 ...... 17.3 $22.8 (2.3) $(55.0) $ -- $(0.7) $191.4 $(6.9)
==== ===== ==== ====== ===== ===== ====== =====
See notes to condensed financial statements.
4
MIDAS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Financial Statement Presentation
The condensed interim period financial statements presented herein do not
include all of the information and disclosures customarily provided in annual
financial statements and they have not been audited, as permitted by the rules
and regulations of the Securities and Exchange Commission. The condensed interim
period financial statements should be read in conjunction with the annual
financial statements included in the annual report on Form 10-K. In the opinion
of management, these financial statements have been prepared in conformity with
accounting principles generally accepted in the United States and reflect all
adjustments necessary for a fair statement of the results of operations and cash
flows for the interim periods ended September 28, 2002 ("third quarter fiscal
2002") and September 29, 2001 ("third quarter fiscal 2001") and of its financial
position as of September 28, 2002. All such adjustments are of a normal
recurring nature. The results of operations for the interim fiscal 2002 and 2001
periods are not necessarily indicative of the results of operations for the full
year.
The unaudited condensed financial statements present the consolidated financial
information for Midas, Inc. and its wholly-owned subsidiaries ("Midas" or the
"Company"). The unaudited condensed financial statements for the quarters ended
September 28, 2002 and September 29, 2001 both cover a 13-week period, while the
unaudited condensed financial statements for the nine months ended September 28,
2002 and September 29, 2001 both cover a 39-week period.
Certain reclassifications have been made to the previously reported fiscal 2001
financial statements in order to provide consistency with the fiscal 2002
results. These reclassifications did not affect previously reported operating
income, net income or earnings per share.
2. Supplemental Cash Flow Activity
Net cash provided by operating activities reflect cash payments and receipts for
interest and taxes as follows (in millions):
For the nine months
ended fiscal September
----------------------
2002 2001
---- ----
Interest paid ....................... $ 7.2 $ 5.5
Income tax refunds .................. (3.0) (7.9)
Income taxes paid ................... 3.4 5.4
3. Inventories
Inventories, summarized by major classification, were as follows (in millions):
Fiscal Fiscal
September December
2002 2001
---- ----
(Unaudited)
Raw materials and work in process ... $ 2.2 $ 3.1
Finished goods ...................... 126.6 116.2
------- -------
$ 128.8 $ 119.3
======= =======
5
MIDAS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Continued)
4. Real Estate Sale and Leaseback Transaction
Midas owns retail properties throughout the United States that are leased to
franchisees and operated as Midas shops. During the second quarter of fiscal
2002 the Company sold 77 of these properties to Realty Income Corporation, a
publicly traded real estate investment trust (REIT), and realized approximately
$39.6 million in net proceeds. Simultaneous to that sale, Midas leased these
properties from Realty Income and the sites continue to be leased to Midas
franchisees under currently existing leases. Because these properties will
continue to generate rents to Midas, there will be no effect on revenues.
In accordance with the provisions of Statement of Financial Accounting Standards
No. 98, "Accounting for Leases," the Company recorded a finance lease obligation
on the balance sheet of $39.6 million, equal to the net sale price of the
properties, and no gain on the sale was recognized. The properties remain on the
balance sheet at their historic cost and will continue to be depreciated over
the remainder of their useful lives. Annual lease payments of approximately $4.4
million will be made through the expiration of the lease in 2022.
5. Special Charges
The Company recorded special charges of $4.3 million during the third
quarter of fiscal 2002. The charges include a reserve against loans granted in
1999 to certain current and former executives to purchase Midas shares,
executive separation costs for the Company's former Chief Executive Officer and
former Chief Information Officer, and expenses associated with the closure of
one regional distribution center. The note associated with the 1999 loan to the
former Chief Executive Officer to purchase Midas shares has been reclassified to
Receivables and Other Assets, net of reserves.
6. Debt Agreement
At of the end of the third quarter of fiscal 2002, the Company was in
technical violation of the leverage covenant on its existing unsecured line of
credit facility which expires on January 29, 2003. The violation occurred as a
result of a step-down in the maximum leverage ratio allowable under the terms of
the facility as it approaches maturity. The bank group has amended the agreement
and has waived the violation through maturity. As part of this amendment, the
Company also agreed to reduce the size of the facility from $135 million to $100
million. As of the end of the third quarter of fiscal 2002, the Company had
outstanding borrowings under the line of credit facility of $71.1 million. The
Company has granted the bank group a security interest in certain domestic
assets for advances under the facility above $87.5 million. The first $87.5
million in advances under the facility remain unsecured.
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
LIQUIDITY AND CAPITAL RESOURCES
Midas' cash and cash equivalents increased $1.0 million in the first nine
months of fiscal 2002.
The Company's operating activities used net cash flow of $11.7 million
during the first nine months of fiscal 2002 compared to $17.0 million of cash
flow generated in the first nine months of fiscal 2001. The year-over-year
change of $28.7 million was due to the $8.5 million decline in net income,
partially offset by a $0.9 million increase in depreciation and amortization,
and changes in assets and liabilities requiring $30.8 million in cash as
compared to only $9.7 million required in 2001. The $30.8 million change in
assets and liabilities during the current year (use of cash) consists primarily
of a $15.4 million increase in accounts receivable based on the seasonality of
the business, a $9.5 million increase in inventory related to the expansion of
product lines, and a $6.6 million reduction in accounts payable due to the
expiration of vendor terms granted to support the 2001 growth in inventory. The
fiscal 2001 change in assets and liabilities of $9.7 million (use of cash)
consists primarily of a $9.7 million increase in accounts receivable, a $33.6
million increase in inventory related to the growth of Parts Warehouse, Inc. and
expansion of product lines, offset by an $18.9 million increase in accounts
payable, a $12.2 million increase in income taxes payable due to an overpayment
in the prior year, and a $4.0 million increase in accrued expenses.
Investing activities used $9.1 million in cash during the first nine months
of fiscal 2002 compared to using $26.4 million during the comparable nine month
period one year ago. Fiscal 2002 investing activities consist primarily of
ongoing systems development and capital expenditures to upgrade 72 company-
operated shops acquired during the fourth quarter of fiscal 2001. In the first
nine months of fiscal 2001, investing activities consisted of $18.1 million in
capital investments and $8.3 million in cash paid for acquired businesses.
Capital investments of $18.1 million related to ongoing system projects, upgrade
of acquired company-operated shops, expansion of the PWI wholesale network, and
normal maintenance capital expenditures. The $8.3 million in cash paid to
acquire businesses during the first nine months of fiscal 2001 reflected the
Company's purchase of the assets of Progressive Automotive Systems of Houston,
Texas, a provider of automotive industry point-of-sale software sold under the
name R.O.Writer, as well as the acquisition of 26 company-operated shops.
Net cash generated by financing activities was $21.8 million in the first
nine months of fiscal 2002 compared to net cash generated of $7.8 million in the
first nine months of fiscal 2001. In the first nine months of fiscal 2002, the
cash was generated primarily through the sale of 77 owned properties during the
fiscal second quarter. The Company sold these properties to Realty Income
Corporation, a publicly traded real estate investment trust (REIT). Simultaneous
to the sale, Midas leased these properties from Realty Income and the sites
continue to be leased to Midas franchisees under currently existing leases.
Midas received approximately $39.6 million in net proceeds from the transaction.
Because these properties will continue to generate rents to Midas, there will be
no effect on revenues. As a result of this transaction, the Company recorded a
finance lease obligation on the balance sheet equal to the sale price and no
gain on the sale of the properties was recognized. The properties remain on the
balance sheet at their historic cost and will continue to be depreciated over
the remainder of their useful lives. Proceeds from this transaction were used to
reduce borrowings under the Company's unsecured line of credit and to fund the
working capital requirements of the business. In the first nine months of fiscal
2001, $7.8 million in cash was generated primarily through an increase in
borrowing on the Company's unsecured revolving line of credit, partially offset
by the repayment of short-term borrowings and the payment of dividends to
shareholders. The Company suspended the payment of dividends to shareholders in
fiscal 2002 and does not expect that it will resume dividend payments in the
foreseeable future.
7
The Company is in the process of re-evaluating its overall strategic
direction. All significant capital investments have been halted while the
Company completes this review. As part of this process, the Company is exploring
specific strategic options for its wholesale parts distribution business.
Alternatives under consideration include, but are not limited to: reducing the
number of warehouses, outsourcing parts warehousing and distribution, entering
into long-term distribution agreements with other parts distributors,
outsourcing manufacturing of certain exhaust products, and the possible sale of
certain wholesale business assets.
Throughout 2002, the Company has been structuring its balance sheet to
provide flexibility for its ultimate strategy. This process includes the
reduction of bank debt through the recently completed sale and leaseback of
certain of the Company's owned properties, and creating additional debt capacity
through a refinancing of the Company's existing debt.
The Company's existing unsecured line of credit facility expires on January
29, 2003. All borrowings under the line of credit have been reclassified from
Long-Term Debt, as shown on the fiscal December 2001 balance sheet, to Current
Portion of Long-Term Obligations for the fiscal September 2002 balance sheet. As
of the end of the third quarter of fiscal 2002, the Company was in technical
violation of the leverage covenant on this unsecured line of credit. The
violation occurred as a result of a step-down in the maximum leverage ratio
allowable under the terms of the facility as it approaches maturity. The bank
group has amended the agreement and has waived the violation through maturity.
As part of this amendment, the Company also agreed to reduce the size of the
facility from $135 million to $100 million. As of the end of the third quarter
of fiscal 2002, the Company had outstanding borrowings under the line of credit
facility of $71.1 million. The Company has granted the bank group a security
interest in certain domestic assets for advances under the facility above $87.5
million. The first $87.5 million in advances under the facility remain
unsecured.
The Company has signed a term sheet with an asset-based lender for a new
credit facility. The proposed facility consists of a term loan and a revolving
line of credit. The facility will be secured by substantially all of the
Company's assets, including accounts receivable, inventory, real estate, and
trademarks. Availability under the term loan and revolving line of credit will
be based upon appraisals of the Company's assets, which are currently under way.
At the same time, the Company is in discussions with its existing bank
group on an extension of its existing line of credit facility. It is anticipated
that any such extension would also be secured, and would require a restructuring
of the Company's current $45 million unsecured private placement notes. This
extension would only be necessary if the new asset-based facility cannot be
closed before the January 29, 2003 expiration of the existing facility.
It is the Company's intention to re-finance its debt before the end of the
current fiscal year. However, as capital market conditions can change, there can
be no assurances that such a re-financing will occur.
8
RESULTS OF OPERATIONS
Third Quarter Fiscal 2002 Compared with Third Quarter Fiscal 2001
The following is a summary of the Company's sales and revenues for the
third quarter of fiscal 2002 and 2001: ($ Millions)
Percent Percent
2002 To Total 2001 to Total
---- -------- ---- --------
Replacement parts sales ................ $ 47.8 55.3% $ 54.8 63.7%
Company-operated shop retail sales ..... 13.2 15.3 3.8 4.4
Royalties and license fees ............. 16.0 18.5 17.3 20.2
Real estate rental revenues ............ 9.1 10.5 9.5 11.0
Other .................................. 0.3 0.4 0.5 0.7
------- ------ ------- ------
Sales and revenues ..................... $ 86.4 100.0% $ 85.9 100.0%
======= ====== ======= ======
Sales and revenues for the third quarter of fiscal 2002 increased $0.5
million or 0.6% from the third quarter of fiscal 2001 to $86.4 million, as a
decline in replacement part sales was offset by increased sales from
company-operated shops.
Replacement parts sales decreased $7.0 million to $47.8 million in the
third quarter of fiscal 2002 from $54.8 million in the third quarter of fiscal
2001. Replacement parts sales through the Company's traditional wholesale
distribution channel declined 23%, driven mostly by continued erosion in demand
for replacement exhaust systems and increased just-in-time parts sourcing by
traditional wholesale customers. At the same time, replacement parts sales
through the Company's PWI wholesale distribution channel, which serves the
just-in-time replacement parts needs of Midas dealers and customers outside the
Midas system, increased by 23%. Sales growth in the PWI channel reflects an
expanded network of 76 PWI sites, compared with 70 sites at the end of the same
period a year earlier. The lines between the traditional wholesale business and
PWI continue to blur as Midas dealers increasingly utilize just-in-time
purchasing, resulting in lower in-shop inventory levels and lower purchases
through the traditional wholesale channel.
Within the retail auto service business, revenues from company-operated
shops rose $9.4 million from the same period in fiscal 2001. The sales increase
reflects an approximate increase of 0.4% in comparable shop sales, and an
increase in the average number of shops in operation during the quarter. The
number of company-operated shops was 110 at the end of the third quarter of 2002
versus 36 at the end of third quarter in fiscal 2001. Royalty revenues and
license fees were down 7.5% from the third quarter of 2001 due to an increase in
the number of company-operated shops, whose sales no longer generate royalty
revenue, as well as a decline of approximately 3.2% in system-wide comparable
shop Midas retail sales. Revenues from real estate rentals declined slightly.
The Company's gross profit margin increased from 45.9% in the third quarter
of fiscal 2001 to 52.0% in the third quarter of fiscal 2002. This improvement
was due to the increase in higher-margin retail sales from company-operated
shops, as well as improvement in margins on the sale of replacement parts.
Selling, general and distribution expenses for the third quarter of 2002
increased $7.6 million, or 26.4% from 2001 to $36.4 million. This increase
consists of incremental operating expenses associated with 74 additional
company-operated shops and 6 additional PWI sites, as well as unusually high
medical claim expenses experienced during the quarter. Partially offsetting
these higher costs were lower operating expenses associated with sales declines
in the traditional wholesale parts distribution business and lower corporate
administrative expenses resulting from action taken to reduce corporate staff in
January 2002. As a result of these factors, selling, general and distribution
expenses as a
9
percentage of total sales and revenues increased from 33.5% in the third quarter
of fiscal 2001 to 42.1% in the third quarter of fiscal 2002.
Additionally, the Company recorded special charges of $4.3 million during
the third quarter of 2002. The charges reflect one-time expenses associated with
the closure of one regional distribution center, executive separation expenses
for the Company's former Chief Executive Officer and former Chief Information
Officer, and a reserve against loans that had been granted to certain current
and former executives in 1999 to purchase Midas shares.
As a result of the above changes, operating income declined $6.4 million
from $10.6 million in the third quarter of 2001 to $4.2 million in the third
quarter of 2002. These changes caused a decrease in operating income margin from
12.3% in the third quarter of 2001 to 4.9% in the third quarter of 2002.
Interest expense increased from $2.1 million in the third quarter of 2001
to $3.0 million in the third quarter of 2002 as a result of higher debt levels
associated with funding the Company's expansion of its company-operated shop and
PWI businesses over the past year.
The Company's effective tax rate for the third quarter of both fiscal 2001
and fiscal 2002 was 38.9%.
As a result of the above items, net income decreased $4.1 million from $5.2
million in the third quarter of 2001 to $1.1 million in the third quarter of
2002.
Nine Months Ended Fiscal September 2002 Compared With
Nine Months Ended Fiscal September 2001
The following is a summary of the Company's sales and revenues for the nine
months ended fiscal September 2002 and 2001, respectively: ($ Millions)
Percent Percent
2002 To Total 2001 to Total
---- -------- ---- --------
Replacement parts sales .......... $ 141.1 54.6% $ 163.7 64.9%
Company-operated shop retail sales 41.0 15.9 7.9 3.1
Royalties and license fees ....... 46.9 18.2 50.6 20.1
Real estate rental revenues ...... 28.0 10.8 28.6 11.4
Other ............................ 1.2 0.5 1.3 0.5
-------- ------ -------- ------
Sales and revenues ............... $ 258.2 100.0% $ 252.1 100.0%
======== ====== ======== ======
Sales and revenues for the first nine months of fiscal 2002 increased $6.1
million or 2.4% from the first nine months of fiscal 2001 to $258.2 million, as
a decline in replacement part sales was offset by increased sales from
company-operated shops.
Replacement parts sales for the first nine months of fiscal 2002 decreased
$22.6 million to $141.1 million from $163.7 million in the first nine months of
fiscal 2001. Replacement parts sales through the Company's traditional wholesale
distribution channel declined 26%. This performance, as mentioned above, was
driven mostly by continued erosion in demand for replacement exhaust systems and
increased just-in-time parts sourcing by traditional wholesale customers. At the
same time, replacement parts sales through the Company's PWI wholesale
distribution channel, which serves the just-in-time replacement parts needs of
Midas dealers and customers outside the Midas system, increased by 38%. Sales
growth in the PWI channel reflects an expanded network of PWI sites compared
with the same period a year earlier.
Within the retail auto service business, revenues from company-operated
shops rose $33.1 million from the same period in fiscal 2001. The sales increase
primarily reflects a substantial increase
10
in the average number of shops in operation during the nine-month period.
Royalty revenues and license fees were down 7.3% from the first nine months of
2001 due to an increase in the number of company-operated shops, whose sales no
longer generate royalty revenue, as well as a decline of approximately 3.3% in
system-wide comparable shop Midas retail sales. Revenues from real estate
rentals declined slightly.
The Company's gross profit margin increased from 45.9% in the first nine
months of fiscal 2001 to 51.0% in the first nine months of fiscal 2002. This
improvement was due to the increase in higher-margin retail sales from
company-operated shops, as well as improvement in margins on replacement part
sales as a result of a more favorable product and customer mix in the Company's
PWI sales channel.
Selling, general and distribution expenses for the first nine months of
2002 increased $24.2 million, or 28.6% from 2001 to $108.7 million. This
increase consists of incremental operating expenses associated with additional
company-operated shops and PWI sites, as well as unusually high medical claim
expenses experienced during the third quarter. Partially offsetting these higher
costs were lower operating expenses associated with sales declines in the
traditional wholesale parts distribution business and lower corporate
administrative expense resulting from action taken to reduce corporate staff in
January 2002. As a result of these factors, selling, general and distribution
expenses as a percentage of total sales and revenues increased from 33.5% in the
first nine months of fiscal 2001 to 42.1% in the first nine months of fiscal
2002.
Additionally, as mentioned above, the Company recorded special charges of
$4.3 million during the third quarter of 2002. The charges reflect one-time
expenses associated with the closure of one regional distribution center,
executive separation expenses for the Company's former Chief Executive Officer
and former Chief Information Officer, and a reserve against loans that had been
granted to certain current and former executives in 1999 to purchase Midas
shares.
As a result of the above changes, operating income declined $12.5 million
from $31.2 million in the first nine months of 2001 to $18.7 million in the
first nine months of 2002. These changes caused a decrease in operating income
margin from 12.4% in the first nine months of 2001 to 7.2% in the first nine
months of 2002.
Interest expense increased from $6.6 million in the first nine months of
2001 to $8.4 million in the first nine months of 2002 as result of higher debt
levels associated with funding the Company's expansion of its company-operated
shop and PWI businesses over the past year.
The Company's effective tax rate for the first nine months of both fiscal
2001 and fiscal 2002 was 38.9%.
As a result of the above items, net income decreased $8.5 million from
$15.3 million in the first nine months of 2001 to $6.8 million in the first nine
months of 2002.
11
NEW ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 142 requires that goodwill be tested for impairment under
certain circumstances, and written off when impaired, rather than being
amortized as previous standards required. The Company adopted the provisions of
SFAS No. 142 in the third quarter of fiscal 2001 for new acquisitions. The
Company adopted the provisions of SFAS No. 142 for previously acquired
intangibles in the first quarter of fiscal 2002. The adoption of SFAS No. 142
did not have a material effect on the Company's results of operations or
financial position. The amortization of goodwill in the first nine months of
fiscal 2001 was approximately $271 thousand.
On January 1, 2002 the Company adopted SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment and disposal of long-lived assets.
While SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," it retains many
of the fundamental provisions of that Statement. SFAS No. 144 also supersedes
the accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations, Reporting the Effects of the Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business. However, it retains
the requirement in APB No. 30 to report separately discontinued operations and
extends that reporting to a component of an entity that either has been disposed
of (by sale, abandonment or in a distribution to owners) or is classified as
held for sale. The adoption of SFAS No. 144 did not have any impact on the
Company's financial statements.
FORWARD LOOKING STATEMENTS
This report contains, and certain of the Company's other public documents
and statements and oral statements contain and will contain, forward-looking
statements that reflect management's current assumptions and estimates of future
performance and economic conditions using information currently available. Such
statements are made in reliance upon the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Company cautions investors that
any forward-looking statements are subject to risks and uncertainties that may
cause actual results and future trends to differ materially from those
projected, stated, or implied by the forward-looking statements.
The Company's results of operations and the forward-looking statements
could be affected by, among others things: general economic conditions in the
markets in which the Company operates; economic developments that have a
particularly adverse effect on one or more of the markets served by the Company;
the ability to execute management's internal operating plans; the timing and
magnitude of capital expenditures; the Company's ability to access debt and
equity markets, including the proposed refinancing discussed in Part I, Item 2.;
economic and market conditions in the U.S. and worldwide; currency exchange
rates; changes in consumer spending levels and demand for new products and
services; cost and availability of raw materials; and overall competitive
activities. The Company disclaims any intention or obligation to update or
revise any forward-looking statements, whether as a result of new information,
future events, or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company is subject to certain market risks, including foreign currency
and interest rates. The Company uses a variety of practices to manage these
market risks, including, when considered appropriate, derivative financial
instruments. The Company uses derivative financial instruments only for risk
management and does not use them for trading or speculative purposes. The
Company is exposed to potential gains or losses from foreign currency
fluctuations affecting net investments and earnings denominated in foreign
currencies. The Company's primary exposure is to changes in
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exchange rates for the U.S. dollar versus the Canadian dollar.
Interest rate risk is managed through a combination of fixed rate debt and
variable rate borrowings with varying maturities. The Company is exposed to
credit risk on certain assets, primarily accounts receivable. The Company
provides credit to customers in the ordinary course of business and performs
ongoing credit evaluations. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising the
Company's customer base. The Company believes its allowance for doubtful
accounts is sufficient to cover customer credit risk.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures.
Within the 90 days prior to the date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's management, including the Company's President and Chief Executive
Officer along with the Company's Chief Financial Officer, of the effectiveness
of the design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-14. Our Chief Executive Officer and Chief
Financial Officer have concluded, based on their evaluation within 90 days of
the filing date of this report, that our disclosure controls and procedures are
effective in ensuring that information required to be disclosed in the reports
that we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
(b) Changes in internal controls.
During the past four years, the Company has been in the process of
implementing an enterprise resource planning ("ERP") system on a company-wide
basis. At the same time, the Company has been developing and implementing a new
point-of-sale ("POS") system for use in its company-operated shops and Parts
Warehouse, Inc. locations. As we believe is the case in most system changes, the
implementation of these systems has necessitated changes in operating policies
and procedures and the related internal controls and their method of
application. We believe that throughout this implementation, the company has
maintained internal accounting control systems that are adequate to provide
reasonable assurance that assets are safeguarded from loss or unauthorized use,
and which produce records adequate for preparation of financial information.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
4.11 Amendment No. 6, dated as of November 12, 2002, to $200,000,000
Credit Agreement dated as of January 22, 1998.
10.12 Separation Agreement with former Chief Information Officer
10.13 Separation Agreement with former Chairman and Chief Executive
Officer.
10.14 Compensation Agreement with non-executive Chairman.
10.15 Compensation Agreement with President and acting Chief Executive
Officer.
10.16 Form of Retention Program Agreement (Messrs. Guzik, Shaneyfelt,
Warzecha, Marr)
99.1 Certification of fiscal third quarter 2002 financial statements
pursuant to 18 U.S.C. ss. 1350 adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
During the third quarter of fiscal 2002, Midas filed two reports on form
8-K with the Securities and Exchange Commission reporting matters under Item 5:
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1. The Company filed an 8-K dated August 13, 2002, reporting the
certification of fiscal second quarter 2002 financial statements pursuant to 18
U.S.C. ss. 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
2. The Company filed an 8-K dated September 23, 2002, reporting that
Chairman and Chief Executive Officer Wendel H. Province had resigned as an
officer and director of the Company, and that Robert R. Schoeberl had been named
to the post of non-executive Chairman of the Board, and Gary B. Vonk had been
named President and acting Chief Executive Officer. The Company also provided
its outlook on the third quarter 2002 financial results.
SIGNATURES
Pursuant to the requirements 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.
Date: November 12, 2002: /s/Gary B. Vonk
-----------------------------
Gary B. Vonk
President and acting
Chief Executive Officer
/s/William M. Guzik
-----------------------------
William M. Guzik
Senior Vice President and
Chief Financial Officer
/s/James M. Haeger, Jr.
-----------------------------
James M. Haeger, Jr.
Vice President and Controller
15
CERTIFICATIONS
I, Gary B. Vonk, President and acting Chief Executive Officer of Midas, Inc.
(the registrant), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Midas, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Midas as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Midas's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
16
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002: /s/Gary B. Vonk
-----------------------
Gary B. Vonk
President and acting
Chief Executive Officer
I, William M. Guzik, Senior Vice President and Chief Financial Officer of Midas,
Inc. (the registrant), certify that:
1. I have reviewed this quarterly report on Form 10-Q of Midas, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of Midas as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
17
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect Midas's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses
in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002: /s/William M. Guzik
-------------------------
William M. Guzik
Senior Vice President and
Chief Financial Officer
18