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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 26, 1998.
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
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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
Incorporation or Organization) Identification No.)
225 North Michigan Avenue, Chicago, Illinois 60601
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (312) 565-7500
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
Registered
Common Stock, par value $.001 New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 [ ]
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 the 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. [_]
As of December 26, 1998, the aggregate market value of the Registrant's
voting and non-voting common equity held by non-affiliates was $537,392,830
(based on closing sale price of $31.9375 as reported for the New York Stock
Exchange-Composite Transactions on December 24, 1998).
The number of shares of the Registrant's Common Stock, $.001 par value
per share, outstanding as of December 26, 1998 was 16,826,390.
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TABLE OF CONTENTS
PART I
1. Business..............................................................1
2. Properties............................................................6
3. Legal Proceedings.....................................................6
4. Submission of Matters to a Vote of Security Holders...................6
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters..............................................................7
6. Selected Financial Data...............................................8
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................9
7A. Quantitative and Qualitative Disclosures about Market Risk...........15
8. Financial Statements and Supplementary Data..........................15
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure............................................15
PART III
10. Directors and Executive Officers of the Registrant...................16
11. Executive Compensation...............................................17
12. Security Ownership of Certain Beneficial Owners and Management.......17
13. Certain Relationships and Related Transactions.......................17
PART IV
14. Exhibits, Financial Statements, Financial Statement Schedules and
Reports on Form 8-K.................................................18
Signatures.................................................................19
Exhibit Index...............................................................i
PART 1
Item 1. Business
Background
Midas, Inc. ("Midas" or the "Company") was incorporated under the laws
of the State of Delaware on August 29, 1997. At the time of its incorporation,
the Company was a wholly-owned subsidiary of Whitman Corporation, a Delaware
Corporation ("Whitman").
On January 30, 1998 (the "Distribution Date"), Whitman distributed (the
"Distribution" or "Spin-off'") all of the issued and outstanding shares of
common stock, par value $.001 per share, of the Company (the "Midas Common
Stock") to the shareholders of record of Whitman's common stock as of January
16, 1998. The Distribution was made pursuant to the terms of a Distribution and
Indemnity Agreement (the "Distribution Agreement") dated as of December 31, 1997
by and among Whitman, the Company and Midas International Corporation, a
Delaware corporation ("Midas International") and wholly-owned subsidiary of the
Company.
Pursuant to the Distribution Agreement and prior to the Distribution
Date, the Company and Whitman executed a series of steps in order to separate
from Whitman any assets related to the business of Midas. Such steps involved,
among other things, the transfer to Midas from Whitman of Midas International
and all of the non-U.S. businesses conducted by Midas International which were
previously held by a Netherlands company owned by Whitman. As a result of the
Distribution, Midas became an independent public company.
Midas has been engaged in the retail automotive exhaust business since
1954, and has granted franchises for and operated Midas shops since 1956. Midas
International Corporation was incorporated in Delaware in 1959. Midas' principal
executive offices are located at 225 North Michigan Avenue, Chicago, Illinois
60601 and its telephone number is (312) 565-7500.
Overview
Midas provides retail automotive services in the U.S., Canada, France
and other locations in Europe, Australia, Southeast Asia, the Middle East, Latin
America and the Caribbean. Franchised and company-operated shops offer exhaust,
brake, suspension, air conditioning and maintenance services. In addition, Midas
manufactures and sells Midas brand products for resale at Midas shops. Midas
also manufactures exhaust products under the IPC brand name for sale to
distributors. Domestic manufacturing plants produce approximately 2,000
different types of mufflers and 3,200 types of exhaust and tail pipes to service
approximately 1,200 makes and models of automobiles. As used herein, the term
"company-operated shop" means a shop operated by Midas and excludes shops
operated by franchisees.
As of December 1998, there were 2,732 Midas shops worldwide, of which
2,116 were located in the U.S. and Canada. Company-operated shops totaled 58
shops at year-end.
Midas brand products are sold at wholesale to franchised Midas shops
and at retail by company-operated shops. IPC brand exhaust products are sold to
distributors. Midas also manufactures and sells shop equipment under the Huth
trademark. Midas Realty Corporation, a Midas subsidiary ("Midas Realty"),
selects, leases, acquires and constructs sites for Midas shops.
Page 1
Market Overview
Increased technological complexity and durability of vehicles have been
the dominant forces in the evolution of the automotive repair industry since the
1970s. As a result, the types of service providers, as well as the type and
frequency of repairs being performed, has changed. The total number of service
outlets in the U.S. has been declining over the past 15 years. The largest
decrease is attributable to a reduction in the number of local service stations
offering automotive repair. As the number of service stations offering
automotive repair has decreased, more sophisticated service providers have
emerged. The number of independent maintenance and repair shops and large
automotive repair chains has increased slightly. In addition, certain automobile
companies and dealers have announced their intention to pursue more repair
business by separating repair shops from showrooms and offering more convenient
service.
The technological sophistication of modern automobiles has also
affected the types of service needed over the lifetime of a vehicle. In general,
the automotive aftermarket has grown as the number of vehicles in operation, the
average age of these vehicles and the annual number of miles driven per vehicle
have increased. This aftermarket growth is limited by improved vehicle
durability. Vehicles are now assembled with more durable parts, such as
stainless steel exhaust systems, and suspension parts such as shocks and struts
are now more technologically advanced. As a result, the services performed over
the lifetime of today's vehicles are more likely to be maintenance services and
light repair work.
Beginning in 1996 and carrying forward into 1997, the Company began to
experience declines in earnings and returns on assets and equity. These trends
were due to a combination of: slow growth, or in some cases declines in sales
and revenues from certain business activities, increasing operating expenses and
an expanding asset base. These trends, coupled with an expected substantial
increase in the Company's long-term debt as a result of the Spin-off of Midas as
an independent company by Whitman Corporation, led management to conduct an
in-depth review of current strategies and potential alternative strategies to
reverse these trends.
Forthcoming from this strategic review was a business strategy to:
focus the Company's management and financial resources on expanding the North
American and European franchise network by adding services and new shops,
improving relationships with franchisees, improving the efficiency of the
wholesale replacement part distribution system, reducing operating expenses and
redeploying assets by franchising company-operated shops.
In 1998, the Company reached an agreement with Magneti Marelli, S.p.A.
a member of the Fiat Group, to form a strategic alliance to accelerate the
development of the Midas system in Europe and South America. Midas management
concluded that Magneti Marelli had the financial and human resources to
accelerate the development of the Midas business in Europe and South America at
a much faster pace than the Company. Midas management also concluded that the
proceeds from a transaction with Magneti Marelli could provide the Company with
additional financial resources which would enable the Company to accelerate the
execution of its strategy to transform and grow the North American franchise
network.
Accordingly, Midas sold its interests in Europe and South America to
Magneti Marelli for $100 million in October 1998, and entered into a licensing
agreement for the Midas trademarks and know-how as a part of the transaction.
As a result of the foregoing, the Company's business strategy was
further modified to the current strategy which is to become a focused and
efficient operator of a North American franchise and wholesale parts
distribution network and a licensor of Midas trademarks and know-how outside of
North America.
The business transformation process and the resulting costs associated
with this strategy are discussed in Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations and in Note 3 to the Financial
Statements.
Page 2
Franchises and the Midas System
Midas has developed a system for the establishment and operation of
Midas shops that is used in both franchised, licensed and company-operated shops
worldwide. This system includes site selection, shop construction and layout,
equipment selection and installation, purchasing and inventory control methods,
accounting methods, merchandising, advertising, sales and promotional
techniques, installation techniques, personnel training and other matters
relating to the efficient and successful operation of Midas shops and the
maintenance of high standards of quality.
Midas identifies and qualifies franchisees through a well-organized
recruitment program in each region of the world in which it operates.
Franchisees are qualified based primarily upon a candidate's financial
suitability and operational experience, among other criteria. Midas also
considers a franchisee's ability to work within the Midas franchise system. Each
franchisee enters into a standard franchise and trademark agreement with Midas.
The franchise and trademark agreement varies by country but these variances do
not substantially alter the franchise arrangement. The following summarizes
portions of the franchise and trademark agreement used in the U.S. (the "U.S.
Franchise Agreement").
Term and Fees; Estimated Costs; Royalty Payments. The initial term of
the U.S. Franchise Agreement, as well as most Midas franchise and trademark
agreements throughout the world, is twenty years. The U.S. Franchise Agreement
may be terminated by the franchisee upon thirty days written notice. In most
instances in the U.S., Midas retains, through real estate agreements between
franchisees and Midas Realty (described below), the ability to occupy a site in
the event of a termination of the applicable franchise and trademark agreement
in order to assure that the site may continue to be operated as a Midas shop.
An initial franchise fee is charged upon execution of a franchise and
trademark agreement. In opening a Midas shop, a franchisee makes additional
expenditures relating to fixtures, machinery and equipment and initial product
inventory. None of the fees and expenses is financed by Midas and, with the
exception of a portion of the initial franchise fee, none is refundable.
Franchisees pay Midas monthly royalties based on a percentage of sales.
As described more fully below, in most countries in which Midas does business,
it is obligated to use one-half of the royalty payments it receives for
advertising.
Realty Agreements. Since the mid-1970s, Midas has required each U.S.
franchisee to enter into an agreement with Midas Realty giving Midas Realty the
ability to occupy a site in the event of a termination of the related franchise
and trademark agreement in order to ensure that the site may continue to be
operated as a Midas shop if Midas chooses. The agreement with Midas Realty
remains in effect throughout the term of the related franchise and trademark
agreement. When Midas Realty owns the real estate or has the primary lease on a
Midas shop, the franchisee is required to lease or sublease the Midas shop from
Midas Realty. If the franchisee owns the real estate, the franchisee is required
to provide Midas with real estate control through one of two alternative means.
The first alternative provides for the lease by the franchisee to Midas Realty
of the premises, which in turn leases the premises back to the franchisee. So
long as the franchisee continues to be both the landowner and the franchisee of
that shop, no rent is exchanged between the franchisee and Midas Realty. If the
real estate is sold to a third party or if the franchised Midas shop is sold to
a new franchisee to whom the sublease is assigned, Midas Realty will then
collect rent from the franchisee and pay rent to the landowner. Under the second
alternative the franchisee enters into a conditional option to lease with Midas
Realty which grants Midas Realty the option to lease the premises in the event
that the related franchise agreement is terminated. If the franchisee leases
real estate from a third-party upon which the Midas shop is located, Midas
requires that the franchisee grant to Midas Realty a conditional assignment of
the lease to take effect upon the termination of the related franchise and
trademark agreement. Approximately 81% of existing North American franchised
Midas shops are subject to various forms of agreements with Midas. See Note 10
to the Financial Statements of Midas included in this annual report.
Page 3
Sites and Site Selection. Midas assists franchisee candidates by
identifying and developing a site on which a Midas shop will be constructed.
Midas may also approve or disapprove of a site located by the candidate. Midas
approves a particular site based upon a review of the demographic
characteristics of the site, traffic counts and patterns, population patterns,
income statistics, parking, competition, proximity of other businesses and other
commercial criteria.
Training. Franchisees are required to complete the Midas initial
training program. The first part of the program includes a minimum of three
weeks observing a franchised Midas shop in operation as well as completion of a
self-training program. The second part of the initial training program is held
at a Midas training center and lasts at least three weeks. Supplemental training
sessions are also offered by Midas at certain regional facilities. Midas also
makes training materials available and conducts training seminars in the field.
Machinery, Fixtures, Inventory and Other Goods. Midas recommends
sources for machinery, equipment, furniture and fixtures necessary to outfit a
Midas shop for operation. In the U.S. and Canada, franchisees are required to
purchase from Midas a sufficient quantity of genuine Midas products, principally
mufflers, shock absorbers, struts and brake pads and shoes, adequate to meet the
public demand for genuine Midas products and to promptly fill customers'
requests for replacement under the terms of various Midas warranties. Midas is
the sole supplier of these products. Other products, which are not warranted,
such as pipe and brake parts, are sold by Midas, but may be purchased by
franchised shops from other sources. Shop equipment, such as lifts, alignment
equipment, lathes, racking and tools may also be purchased through Midas or from
other sources.
Warranty Program. An important feature of the Midas system is the
requirement that the retail customer be provided a written warranty from Midas
on certain Midas products that will be honored at all Midas shops. Each Midas
shop is required to honor such warranties in accordance with their terms and
with policies as issued from time to time by Midas.
Advertising. Midas is obligated to use one-half of the royalty payments
it receives from franchisees for advertising placed during the calendar year the
royalties are received or during the following calendar year. Midas directs all
use of advertising funds, and all decisions regarding the creative concepts and
materials used, whether national, regional or local advertising will be used,
the particular media and advertising content, and the advertising agencies to be
used are controlled by Midas. Midas administers cooperative advertising programs
for its franchisees. In addition, Midas incurs advertising costs that are
included in its selling, general and administrative expenses.
International Midas Dealers Association. The International Midas
Dealers Association (the "IMDA") is an independent association of Midas
franchisees. Approximately 62% of the Midas franchisees in the United States and
Canada belong to the IMDA. Midas' management communicates on a regular basis
with IMDA representatives and various IMDA committees to solicit franchisee
input.
Proprietary Information
Midas holds various patents, trademarks, trade names and copyrights,
none of which, other than the Midas name, is considered by Midas to be material
to its financial condition and results of operations. Midas vigorously defends
the Midas name throughout the world and the name is registered as a trademark in
more than 80 countries in addition to the U.S. Midas also owns certain trade
secrets including product catalogs, price lists, training manuals and inventory
systems.
Page 4
Manufacturing and Resale Operations
Midas manufactures and resells parts for the North American automotive
aftermarket. These products include mufflers, exhaust pipes and tail pipes
manufactured by Midas and shock absorbers, brakes, suspension, steering and
front end parts resold by Midas. Exhaust systems are manufactured by Midas at
its Bedford Park, Illinois and Hartford, Wisconsin facilities. These parts are
sold at wholesale to Midas franchised shops and at retail by company-operated
shops and are required to be stocked by Midas shops in order to serve the demand
for genuine Midas parts. Midas IPC brand products are also manufactured at both
the Bedford Park and Hartford locations. Huth brand products are manufactured at
the Huth manufacturing plant in Hartford. Midas manufacturing plants have
limited backlogs of unprocessed orders.
Midas purchases the raw materials for the products it manufactures,
primarily steel and packaging, from various suppliers through both long-term and
short-term contracts, depending upon anticipated market conditions. Midas
purchases products for resale from various suppliers through contracts that
generally range from one to three years in duration. These raw materials and
products are available from multiple suppliers, and Midas has not experienced
any significant shortages. Midas believes it enjoys good relationships with its
suppliers.
Competition
The automotive repair industry is highly competitive and fragmented,
and the number, size and strength of competitors vary from region to region.
Midas' primary competitors include national and local specialty chains, both
franchised and company-operated, car dealerships, independent repair shops and
service bays operated by mass merchandisers. Certain of these competitors are
well-capitalized and a number of them have instituted expansion plans. Midas
believes that competition in the industry is primarily based on customer service
and reputation, shop location, name awareness and price. Midas believes that it
generally has a favorable competitive position with respect to each of these
variables.
Customers
The Midas business is not dependent upon a single customer or small
group of customers.
Seasonality
Midas experiences the greatest demand for its services in the second
and third quarters of the year, with approximately 54% of annual sales and
revenues occurring during that period in 1998, 1997 and 1996, respectively.
Approximately 70% of net income before business transformation costs and the
gain on the sale of the Company's European operations was reported in the second
and third quarters of 1998 compared to approximately 80% in both 1997 and 1996.
The Company expects the seasonality of its quarterly earnings will continue to
moderate.
Regulatory Compliance
Franchising Matters. Midas is subject to a variety of federal and state
laws governing franchise sales and marketing and franchise trade practices.
Applicable laws and regulations generally require disclosure of business
information in connection with the sale of franchises. Certain state regulations
also affect the ability of the franchisor to revoke or refuse to renew a
franchise. Midas deals with franchisees in good faith and seeks to comply with
regulatory requirements. From time to time Midas and one or more franchisees may
become involved in a dispute regarding the franchise relationship, including,
among other things, payment of royalties, location of shops, advertising,
purchase of Midas products by franchisees, compliance with Midas system
standards and franchise renewal criteria. There can be no assurance that
compliance problems will not be encountered from time to time, or that material
disputes with one or more franchisees will not arise.
Page 5
Consumer Protection Matters. National automotive repair chains have
been the subject of investigations and reports by consumer protection agencies
and the Attorneys General of various states. Publicity in connection with such
investigations can have an adverse effect on the financial condition and results
of operations of a company. In addition to such investigations, state and local
governments have enacted numerous consumer protection laws. Midas has instituted
procedures, including uniform standards of service to be followed by all Midas
shops, to improve customer satisfaction, which also aids in regulatory
compliance.
Environmental and Occupational Safety Matters. Midas shops handle used
automotive oils and certain solvents that are disposed of by licensed
third-party contractors. As a result, Midas is subject to a number of federal,
state and local laws designed to protect the environment. Midas, through its
company-operated shops, is also subject to regulation regarding the installation
of catalytic converters. In addition to environmental laws, Midas is subject to
the Federal Occupational Safety and Health Act and other laws regulating safety
and health. Midas maintains a program to facilitate compliance with these laws,
the costs of which are not material to its financial condition and results of
operations.
Employees
As of December 1998, Midas had approximately 1,500 employees, including
approximately 670 who were covered by collective bargaining agreements. Labor
contracts with respect to approximately 357, 264 and 49 employees expire in
1999, 2000 and 2001, respectively. Midas considers its relationships with
employees to be generally satisfactory. Midas franchisees hire their own
employees. As a result of the shortage of qualified mechanics in the automotive
industry, individual franchisees may have difficulty hiring qualified personnel.
Item 2. Properties
Midas owns two manufacturing facilities located in Bedford Park,
Illinois (180,000 square feet) and Hartford, Wisconsin (200,000 square feet).
Midas also owns an engineering and technical services facility in Chicago,
Illinois. Midas also leases 20,000 square feet of space in Hartford, Wisconsin.
In addition, Midas leases office space in Chicago, where its corporate
headquarters are located, and owns two and leases ten warehouses in the United
States and Canada.
As discussed in Note 3 to the Financial Statements, business
transformation process, Midas will be relocating its corporate headquarters to a
Chicago suburban location in 1999. The Company will also be consolidating its
United States and Canadian distribution network during 1999 and early 2000.
Midas owns real estate in various communities thoughout the United
States that it leases to franchisees. As of December 1998, the Company had 341
leased sites with a net book value of $103.0 million.
Item 3. Legal Proceedings
Neither Midas nor any of its subsidiaries are currently involved in any
material legal proceedings. Midas has certain contingent liabilities arising
from various pending claims and litigation related to a number of matters. While
the amount of liability that may result from these matters cannot be determined,
in the opinion of Midas counsel, the ultimate liability will not materially
affect the financial position or results of operations of Midas.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Page 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Midas Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "MDS". As of March 9, 1998, there were 8,728 holders
of record of the Common Stock.
"When issued" trading of the Midas Common Stock commenced on the NYSE
on January 20, 1998. Prior to that date, the Common Stock was not listed or
quoted on any securities exchange or quotation system.
1998
Common Stock
------------
High Low Dividend
---- --- --------
1st Quarter..................... $ 21.00 $ 15.25 $ -
2nd Quarter..................... 22.00 18.06 -
3rd Quarter..................... 26.00 19.75 .02
4th Quarter..................... 32.63 22.88 .02
Page 7
Item 6. Selected Financial Data
SUMMARY OF OPERATIONS
The following table presents selected historical financial information
of Midas. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of Midas and the notes thereto. The
operating results data set forth below for each of the years ended December
1998, 1997 and 1996 and the balance sheet data as of December 1998 and 1997 are
derived from, and are qualified by reference to, the audited financial
statements of Midas, and should be read in conjunction with those financial
statements and the notes thereto. The operating results data for each of the
years ended December 1995 and 1994 and the balance sheet data as of December
1996, 1995 and 1994 are derived from audited financial statements of Midas not
included herein.
The historical financial information presented below may not
necessarily reflect future results of operations or financial position of Midas
or what the results of operations or financial position of Midas would actually
have been had Midas operated as an independent company during the periods prior
to its Spin-off on January 30, 1998.
For the years ended December
----------------------------
(In millions) 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Operating results data:
Sales and revenues ................... $ 519.1 $ 596.4 $ 604.2 $ 576.1 $ 543.2
Operating income before business
Transformation costs (a) ........... 69.6 66.8 78.0 82.5 75.2
Operating margin before business
Transformation costs (a) ........... 13.4% 11.2% 12.9% 14.3% 13.8%
Operating income (loss) .............. $ 13.9 $ (0.8) $ 78.0 $ 82.5 $ 75.2
Income (loss) before taxes ........... 40.0 (27.1) 51.6 55.9 46.5
Net income (loss) .................... 28.2 (23.5) 30.4 31.7 26.6
Earnings (loss) per share - diluted
(pro forma in 1997) (b): ............ $ 1.63 $ (1.21)
Balance sheet data:
Total assets ......................... $ 325.3 $ 443.1 $ 482.7 $ 451.4 $ 418.4
Obligations under capital
leases and long-term debt ........... 113.0 18.1 13.6 16.2 15.2
Loans and advances from Whitman ...... -- 55.5 77.2 70.3 70.0
Total shareholders' equity ........... $ 123.4 $ 234.1 $ 277.1 $ 258.5 $ 231.1
Return on average shareholders' equity 23.0% (8.8)% 11.4% 13.0% 12.1%
(a) Business transformation costs are described in Note 3 to the Financial
Statements.
(b) Earnings per share information is presented only for 1998 because the
Spin-off from Whitman occurred in early 1998. In accordance with Securities
and Exchange Commission regulations, pro forma earnings per share
information is presented for the year preceding the Spin-off; such
information is based on the assumption that the 17.0 million shares
distributed in the Spin-off had been outstanding throughout 1997.
Page 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table presents, for the periods indicated, selected
financial information as a percentage of total sales and revenues and the
percentage change in dollar amounts of such information compared to the
preceding period.
Percentage of Sales and Revenues Percentage Change
1998 vs 1997 vs
1998 1997 1996 1997 1996
---- ---- ---- ---- ----
Replacement parts sales .......... 48.9% 46.0% 48.9% (7.5)% (7.2)%
Company-operated shop retail sales 28.3 35.3 33.5 (30.1) 4.0
Royalties ........................ 14.0 11.4 11.3 7.2 (0.8)
Real estate rental revenues ...... 7.2 6.0 5.7 5.4 2.8
Other ............................ 1.6 1.3 0.6 (1.4) 145.6
----- ----- ----- ----- -----
Sales and revenues ............... 100.0 100.0 100.0 (13.0) (1.3)
----- ----- ----- ----- -----
Cost of sales and revenues ....... 48.8 46.5 46.6 (8.8) (1.5)
Selling, general and
administrative expenses ....... 37.8 42.3 40.5 (22.1) 3.2
----- ----- ----- ----- -----
Operating income before business
transformation costs ........... 13.4 11.2 12.9 4.2 (14.4)
Business transformation costs .... 10.7 11.3 --
----- ----- -----
Operating income (loss) .......... 2.7 (0.1) 12.9
Other (income) expense, net ...... (7.5) 2.9 2.7
Interest expense ................. 2.5 1.5 1.7
----- ----- -----
Income (loss) before taxes ....... 7.7 (4.5) 8.5
Income taxes (benefit) ........... 2.3 (0.6) 3.5
----- ----- -----
Net income (loss) ................ 5.4% (3.9)% 5.0%
===== ===== =====
Introduction
Beginning in 1996 and carrying forward into 1997, the Company began to
experience declines in earnings and returns on assets and equity. These trends
were due to a combination of: slow growth, or in some cases declines in sales
and revenues from certain business activities, increasing operating expenses and
an expanding asset base. These trends, coupled with an expected substantial
increase in the Company's long-term debt as a result of the Spin-off of Midas as
an independent company by Whitman Corporation, led management to conduct an
in-depth review of current strategies and potential alternative strategies to
reverse these trends.
Forthcoming from this strategic review was a business strategy to:
focus the Company's management and financial resources on expanding the North
American and European franchise network by adding services and new shops,
improving relationships with franchisees, improving the efficiency of the
wholesale replacement part distribution system, reducing operating expenses and
redeploying assets by franchising company-operated shops.
In 1998, the Company reached an agreement with Magneti Marelli, S.p.A.
a member of the Fiat Group, to form a strategic alliance to accelerate the
development of the Midas system in Europe and South America. Midas management
concluded that Magneti Marelli had the financial and human resources to
accelerate the development of the Midas business in Europe and South America at
a much faster pace than the Company. Midas management also concluded that the
proceeds from a transaction with Magneti Marelli could provide the Company with
additional financial resources which would enable the Company to accelerate the
execution of its strategy to transform and grow the North American franchise
network.
Page 9
Accordingly, Midas sold its interests in Europe and South America to
Magneti Marelli for $100 million in October 1998, and entered into a licensing
agreement for the Midas trademarks and know-how as a part of the transaction.
As a result of the foregoing, the Company's business strategy was
further modified to the current strategy which is to become a focused and
efficient operator of a North American franchise and wholesale parts
distribution network and a licensor of Midas trademarks and know-how outside of
North America.
The business transformation process resulted in costs that were
recorded in both 1998 and 1997, which are summarized in the following table.
(In millions) 1998 1997
---- ----
Franchisee incentive payments ..................... $32.3 $ --
Disposition of company-operated shops ............. 2.1 35.5
Corporate office relocation ....................... 7.0 --
Integration of Canadian administration function ... 4.0 --
Consolidation of North American distribution system 4.1 --
Special one-time return program ................... -- 7.8
Changes to U.S. franchisee advertising program .... -- 4.4
Asset write-downs to recognize impairments ........ 4.2 12.5
Severance and other costs ......................... 2.0 7.4
----- -----
Business transformation costs before tax benefits . 55.7 67.6
Income tax benefits ............................. 20.9 21.4
----- -----
Business transformation costs, net of tax benefits $34.8 $46.2
===== =====
Additional information regarding each of the business transformation
costs listed in the above summary is presented in Note 3 to the Financial
Statements.
Because of changes in the Company's business strategy, the type of
operational, legal and financial control of the Midas shops changed
substantially in 1998. The geographic location and the method of operation of
the shops in operation at December 1998, 1997 and 1996, are presented below.
Midas Retail Shops
Year Ended December
-------------------
1998 1997 1996
---- ---- ----
North America:
Franchised..................... 2,073 1,968 1,970
Company-operated............... 43 169 167
-------- -------- --------
Total North America............ 2,116 2,137 2,137
-------- -------- --------
International:
Franchised/ licensed........... 601 373 331
Company-operated............... 15 208 210
-------- -------- --------
Total International............ 616 581 541
-------- -------- --------
Worldwide:
Franchised/ licensed........... 2,674 2,341 2,301
Company-operated............... 58 377 377
-------- -------- --------
Total Worldwide................ 2,732 2,718 2,678
======== ======== ========
Although the number of shops in operation remained relatively constant
over the past year, the number of shops operated by the Company declined by 311
shops or 84% and the number of shops operating under a franchise or license
agreement increased by 325 shops or almost 14%. This shift in the type of shop
operation reflects the sale of Midas Europe and the strategy to focus on
franchising. By mid-1999, it is expected that virtually all of the Midas shops
worldwide will be operated by either franchisees or licensees.
Page 10
The approximately 2,700 Midas shops currently in operation worldwide
offer some or all of the following services; exhaust, brake, suspension, air
conditioning, batteries and a number of other routine maintenance services. The
Company's business strategy is to expand these service offerings in the future.
The business strategy of focusing the Company on growing the North
American franchisee network is expected to have a significant impact on the
future sources of revenue for the Company.
The European operations and company-operated shops outside of Europe
accounted for $163.9 million or almost 32% of the $519.1 million of the
Company's sales and revenues for 1998. If the sale of the Midas business in
Europe had occurred at the beginning of the year, and all non-European
company-operated shops had been franchised or licensed as of the start of 1998,
the Company would have reported sales and revenues for 1998 in the $360-$365
million range. Employing these same assumptions, operating income for 1998 would
have been modestly higher.
FISCAL REPORTING PERIODS
Fiscal 1998 and 1997 were each comprised of 53 weeks, while fiscal 1996
was comprised of 52 weeks.
RESULTS OF OPERATIONS - 1998 COMPARED TO 1997
Sales and revenues for 1998 declined $77.3 million or 13% from one year
ago to $519.1 million. 82% of the decrease was due to the elimination of retail
sales from company-operated shops in 1998 as a result of the franchising or sale
and licensing of a net 311 shops during the year. The remainder of the decrease
in 1998 was attributable to lower replacement parts sales due to: the pass
through of negotiated cost decreases to franchisees in the form of wholesale
price decreases, the elimination of unprofitable wholesale distribution points
and programs, fluctuations in foreign currency exchange rates, and lower retail
customer traffic in certain services which resulted in lower wholesale parts
sales. Partially offsetting these decreases were increased royalty and real
estate rental revenues primarily due to the franchising of former
company-operated shops.
Cost of sales and revenues for 1998 decreased $24.4 million or 8.8%
versus one year ago due to a combination of the franchising of company-operated
shops, lower wholesale parts sales and lower wholesale parts costs. Cost of
sales and revenues as a percent of total sales and revenues increased 2.3
percentage points to 48.8% in 1998 versus one year ago, due to the reduction in
retail sales from company-operated shops in 1998, which carried a substantially
higher gross margin to cover service and other costs at the retail level.
Selling, general and administrative expenses for 1998 decreased $55.7
million or 22.1% from a year ago to a total of $196.4 million. Almost 60% of the
decrease in expenses was due to the franchising of company-operated shops in
1998. The balance of the decrease was due to a combination of cost reduction
programs across the majority of expense categories and the sale of Midas
operations in Europe. Operating expenses as a percent of total sales and
revenues decreased 4.5 percentage points in 1998 versus one year ago to 37.8%.
The decrease was due to the franchising of company-operated shops in 1998 which
carry a relatively higher operating expense ratio and cost reduction programs
across the majority of expense categories.
In the fourth quarter of 1998 and the third quarter of 1997, Midas
recorded charges related to business transformation activities of $55.7 million
and $67.6 million, respectively. These charges are described above under
"Introduction" and in Note 3 to the Financial Statements.
Operating income in 1998 was $13.9 million versus an operating loss of
$0.8 million in 1997. Both years were impacted by business transformation costs
as noted previously. Excluding these costs, operating income in 1998 increased
$2.8 million or 4.2% above the prior year. Excluding business transformation
costs from both years, the operating income margin in 1998 was 13.4% or 2.2
percentage points above 1997.
Income before taxes in 1998 was $40.0 million versus a $27.1 million
loss in 1997. The improvement in 1998 was due to the combination of the
following: a $38.0 million gain from the sale of the Midas business in Europe, a
sharp reduction in Whitman charges due to the Spin-off in early 1998, and higher
operating income. These positive factors were partially offset by increased
interest expense primarily due to the additional debt incurred by the Company in
connection with the Spin-off.
Net income in 1998 was $28.2 million versus a loss of $23.5 million in
1997.
Page 11
RESULTS OF OPERATIONS - 1997 COMPARED TO 1996
Sales and revenues for 1997 declined $7.8 million or 1.3% from 1996 to
$596.4 million. Excluding the extra week of operations in the U.S. and Canadian
operations, sales and revenues were down $16.1 million. The decrease was due to
a combination of: lower wholesale parts sales in the U.S. due to lower retail
traffic in certain core services and fluctuations in foreign currency exchange
rates. These factors were partially offset by an increase in the number of shops
in operation, both franchised and company-operated.
Cost of sales and revenues for 1997 decreased $4.3 million or 1.5%
versus 1996 due to lower wholesale parts sales. Cost of sales and revenues as a
percentage of total sales and revenues was 46.5% versus 46.6% in 1996.
Selling, general and administrative expenses for 1997 increased $7.7
million or 3.2% to $252.1 million. Almost 60% of the increase was due to higher
company-operated shop expenses attributable to an increase in the number of
shops in operation and higher company-operated shop sales. The balance of the
increase was spread across all expense categories. Operating expenses as a
percent of total sales and revenues increased 1.8 percentage points to 42.3% in
1996. The variance was due to generally higher operating expenses and lower
sales and revenues. The extra week of operations in 1997 was also a contributing
factor to the year over year increase in operating expenses.
In the third quarter of 1997, Midas recorded a charge related to
business transformation activities of $67.6 million. These charges are described
above under "Introduction" and in Note 3 to the Financial Statements.
The Company reported a $0.8 million operating loss in 1997 versus
$78.0 million of operating income in 1996. The primary factor in the decrease in
1997 was the previously noted business transformation costs recorded in the
third quarter of 1997. Excluding these costs, 1997 operating income declined
$11.2 million or 14.4% from 1996 due to a combination of lower sales and
revenues and higher operating expenses. The Company's operating income margin,
excluding business transformation costs, was 11.2% in 1997 versus 12.9% in 1996.
The 1.7 point decline was due to higher operating expenses.
The Company reported a $27.1 million loss before taxes in 1997 versus
an income before taxes of $51.6 million in 1996. The variance between years was
primarily due to lower operating income as Whitman charges, interest expense and
other income (expense), were comparable for both years.
For 1997 the Company reported a net loss of $23.5 million versus net
income of $30.4 million in 1996.
Page 12
LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES
Following is a summary of the Company's cash flows from operating,
investing and financing activities for the years ended December 1998, 1997 and
1996, respectively (in millions):
Years Ended December
--------------------
1998 1997 1996
---- ---- ----
Net cash provided by operating activities before cash
outlays for business transformation costs............ $ 79.7 $ 56.0 $ 34.5
Business transformation costs.......................... (58.4) (1.9) -
------- -------- -------
Net cash provided by operating activities.............. 21.3 54.1 34.5
------- -------- -------
Net cash provided (used) by investing activities....... 106.1 (24.2) (26.0)
------- -------- -------
Net cash provided (used) by financing activities....... (103.0) (34.6) (1.8)
------- -------- -------
Other - (1.0) (0.1)
------- -------- -------
Net change in cash and cash equivalents for year....... $ 24.4 $ (5.7) $ 6.6
======= ======== =======
The Company generated net cash flows from operating activities of $21.3
million, $54.1 million and $34.5 million during 1998, 1997 and 1996,
respectively. The 1998 decrease of $32.8 million in cash flows from operating
activities from 1997 was due to a $56.5 million increase in cash outlays for
business transformation costs. Excluding cash outlays for business
transformation costs, 1998 net cash flows increased $23.7 million from 1997 due
to higher earnings and lower working capital requirements. The 1997 increase of
$19.6 million in cash flows from operating activities over 1996 was also due to
lower working capital requirements.
Investing activities provided $106.1 million in cash in 1998 and used
cash of $24.2 million and $26.0 million in 1997 and 1996, respectively. During
all periods presented, cash flows for investing activities were comprised of
capital investments for property and equipment offset by proceeds from sales of
property and equipment and with respect to 1998 the sale of a business. The
proceeds from the sale of Midas business in Europe and the franchising of a
substantial number of North American company-operated shops in 1998 were the
primary sources of cash flows from investing activities in 1998. In addition,
1998 capital investments of $11.0 million were abnormally low by historical
standards. For 1999, management projects capital spending in the $20-25 million
range.
Net cash used by financing activities was $103.0 million, $34.6 million
and $1.8 million during 1998, 1997 and 1996, respectively. In conjunction with
the Spin-off on January 30, 1998, the Company paid Whitman a total of $210.0
million which represented a special dividend and settlement of advances and
loans. The debt arrangements to finance these payments are presented in Note 5
to the Financial Statements. These debt arrangements and subsequent payments
were the primary factors in the change in cash used by financing activities
between 1998 and 1997. The principal factor in the increase in cash used by
financing activities in 1997 versus 1996 was the increase in payments to Whitman
in 1997 to settle cash advances and loans.
Midas' cash and cash equivalents totaled $36.9 million at December 1998
compared to $12.5 million and $18.2 million at December 1997 and 1996,
respectively.
In February 1999, the Company's Board of Directors authorized a share
repurchase plan for up to 3.0 million of the Company's 16.8 million common
shares currently outstanding. The repurchase plan covers up to 17.8 percent of
the Company's outstanding shares. Purchases of the shares are expected to be
made from time to time over the next 24 months, depending on market and business
conditions, and will use available cash.
Midas management believes that cash flows from operations and unused
amounts available under the revolving credit facility will be sufficient to
satisfy Midas' future working capital, capital investment, share repurchase and
other financing requirements for the foreseeable future.
Page 13
YEAR 2000
In 1997, the Company instituted a Year 2000 project to evaluate and
remediate Year 2000 issues. The project is divided into three sections:
. The Company's computer hardware, hardware operating systems and application
software.
. Franchisee computer hardware and application software, including point of
sale hardware and software.
. Supplier computer systems.
The Company's State of Readiness. With respect to the Company's
application hardware, hardware operating systems and application software,
substantial progress has been made, utilizing both internal and external
resources in remediating those systems deemed not to be Year 2000 compliant.
Management expects that by the end of third quarter of 1999 (September 1999) all
of the Company's internal computer systems will be Year 2000 compliant.
With respect to franchisee systems, the Company has conducted surveys
and engaged in discussions with current franchisee systems vendors and it has
been determined that a substantial number of the franchisee systems are not Year
2000 compliant. The Company is currently discussing solutions with both current
and potential new vendors to ensure compliance. Management believes that it may
be until the fourth quarter of 1999 before substantially all of the franchisee
systems are Year 2000 compliant.
With respect to the Company's suppliers, the Company initiated
discussions with major suppliers in the fourth quarter of 1998 to determine
their state of readiness and/or plans to become Year 2000 compliant.
The Cost to Address the Company's Year 2000 Issues. Through December
1998, the Company has spent approximately $3.6 million in connection with the
Year 2000 project. Management estimates that an additional $1.6 million will be
required to be spent to ensure all of the Company's systems are Year 2000
compliant. Management is unable to project at this time the cost to the Company,
if any, of ensuring that substantially all franchisee systems are Year 2000
compliant.
The Risks Associated with the Company's Year 2000 Issues. The failure
to correct a material Year 2000 problem could result in an interruption in, or a
failure of, normal business activities and operations. Such interruptions or
failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of franchisees and third-party suppliers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's results of operations, liquidity or
financial condition. The Year 2000 project is expected to significantly reduce
the Company's level of uncertainty about the Year 2000 problem. The Company
believes that the Year 2000 project should reduce the possibility of significant
interruptions of normal operations.
Contingency Plans. The Company has not developed contingency plans as
of this date. The Company has engaged a third party to assess the Company's
readiness for the Year 2000 issue. Should progress in completing the Year 2000
project fall behind schedule, a contingency plan will be developed.
Page 14
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; 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 7A. Quantitative and Qualitative Disclosures About Market Risk
Management believes that the Company has no material market risks
related to its interest swap, disclosed in Note 5 to the Financial Statements,
or to foreign currency exposures either related to non-U.S. subsidiaries or to
transactions denominated in foreign currencies.
Item 8. Financial Statements and Supplementary Data
See Index to Financial Information on page F-1
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
Page 15
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this item is set forth under the headings
"Proposal 1: Election Of Directors" and "Beneficial Ownership of Common Stock -
Section 16 (a) Beneficial Ownership Reporting Compliance" in the Company's proxy
statement (the" 1999 Proxy Statement") for the Annual Meeting of Shareholders to
be held on May 6, 1999, and is incorporated herein by reference.
Information with respect to those individuals who serve as executive
officers of the Company is set forth below.
Name, Age and Position Background and Experience
- ---------------------- -------------------------
Wendel H. Province (51) Mr. Province has served as Chairman and Chief Executive Officer of
Chairman and Midas since January 1998. He joined The Pep Boys--Manny, Moe & Jack
Chief Executive Officer in 1989 as Senior Vice President of Merchandising, eventually
becoming Executive Vice President and Chief Operating Officer of
Pep Boys . Mr. Province's entire career has been in the automotive
service industry, having previously served as Senior Vice President
of Whitlock and Vice President of Autozone.
R. Lee Barclay (56) Mr. Barclay joined Midas in 1980 as Vice President-Controller. He
Executive Vice President and became Vice President and Chief Financial Officer in 1982, and has
Chief Financial Officer served in his present position since 1989. He spent eight years as
an audit manager for Price Waterhouse in the 1970's.
Ronald McEvoy (51) Mr. McEvoy has served in his current position since he joined Midas
Executive Vice President and in September 1998. His career in the retail industry spans more
Chief Information Officer than 25 years. He has held a variety of management and information
technology positions at May Department Stores, Carter Hawley Hale,
British American Tobacco and Fred Meyer. He most recently served as
Senior Vice President and Chief Information Officer at Pep Boys.
Terrence E. Reynolds (60) Mr. Reynolds joined Midas in 1985 as Vice President-U.S.
Senior Vice President and Operations. He became a Senior Vice President in 1989 and assumed
General Manager - U.S. Operations his current position in 1997.
John A. Warzecha (50) Mr. Warzecha served as Vice President and General Manager of Midas'
Senior Vice President and company-operated shops from 1989 to 1993, and as Senior Vice
General Manager - Midas U.S. President-U.S. Franchise Operations from 1993 to 1997. He joined
Midas in 1973.
James D. Hamrick (51) Mr. Hamrick has served in his current position since joining Midas
Senior Vice President, in March 1998. Mr. Hamrick's career in automotive aftermarket and
Merchandising retailing spans more than 25 years. He has held a variety of
management and marketing positions at Ameron Automotive Centers,
which is a division of Kelly Springfield Tire Co., Western Auto and
Pep Boys. Prior to joining Midas, he held the position of Vice
President of Merchandise at Pep Boys.
D. Bruce Hutchison (49) Mr. Hutchison joined Midas in August 1998. His 25-year marketing
Vice President, career includes launching, building and revitalizing national brands
Marketing such as Mr. Goodwrench, Pontiac, Cadillac, RCA, ProScan and GE. Mr.
Hutchison began at D'Arcy Masius Benton & Bowles advertising in 1974
and rose to Vice President before joining RCA in 1986. He most recently
served as Vice President, Advertising and Market Research at Thomson
Multimedia (RCA, GE and ProScan).
Page 16
Item 10. Directors and Executive Officers of the Registrant - Continued
Robert H. Sorensen (52) Mr. Sorensen joined Midas in 1995. From 1990 to 1995, Mr. Sorensen
Vice President, General Counsel & Secretary was a partner with the law firm of Kaufman, Chaiken & Sorensen.
Prior to 1990, he served as chief legal officer with Rollins, Inc.
and Burger King Corporation.
Gerard M. Klaisle (45) Mr. Klaisle has served as Senior Vice President-Human Resources of
Senior Vice President - Midas since 1997. From 1987 to 1997 he was Midas' Vice
Human Resources President-Human Resources for U.S. operations. He joined Midas in
1982.
Edwin A. Grell (54) Mr. Grell has been with Midas since 1979. He has held various
Vice President - Controller accounting positions, including Treasurer and Assistant Corporate
Controller, before becoming Vice President-Controller in 1997.
Christian C. Pappas (39) Mr. Pappas joined Midas in 1997. From 1995 to 1997, Mr. Pappas
Vice President - Treasurer served as Assistant Treasurer of U.S. Robotics. From 1991 to 1995,
he served in several positions at Sara Lee Corporation, his
last position being Director-Domestic Treasury. Prior to 1991,
Mr. Pappas served in various financial positions at Premark
International, Inc. and Centel Corporation.
Item 11. Executive Compensation.
Information required by this item is set forth under the headings
"Election of Directors - Compensation of Directors" and "Executive Compensation
And Other Information" (other than "Report on Executive Compensation" and
"Performance Graph") in the 1999 Proxy Statement, and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information required by this item is set forth under the heading
"Beneficial Ownership of Common Stock" in the 1999 Proxy Statement, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
Information required by this item is set forth under the heading
"Certain Transactions" in the 1999 Proxy Statement, and is incorporated herein
by reference.
Page 17
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
See Index to Financial Statements on page F-1.
2. Financial Statement Schedules
See Index to Financial Statements on page F-1.
(b) Reports on Form 8-K
During the fourth quarter of 1998, the Company filed a report on
Form 8-K to disclose the sale of its European operations.
(Incorporated herein by reference from the Company's Report on
Form 8-K, dated October 30, 1998).
(c) Exhibits
Exhibit
Number Document Description
- ------- --------------------
3(i).1 Certificate of Incorporation (incorporated by reference to
Exhibit 3(i).1 to the Midas, Inc. Registration Statement on
Form 10/A No.3 (Post-Effective Amendment No. 1)
(Commission File No. 1-13409) (the "Form 10")).
3(i).2 Certificate of Amendment of the Certificate of
Incorporation, dated December 30, 1997 (incorporated by
reference to Exhibit 3(i).2 to the Form 10).
3(ii) By-Laws (as amended December 31, 1997) (incorporated by
reference to Exhibit 4.4 to the Midas, Inc. Registration
Statement on Form S-8 relating to its Retirement Savings
Plans (Registration No. 333-44625) (the "RSP Form S-8")).
4.1 Certificate of Designation of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 4.3
to the RSP Form S-8).
4.2 Rights Agreement, dated as of December 31, 1997, between
Midas, Inc. and First Chicago Trust Company of New York
(incorporated by reference to Exhibit 4.5 to the RSP Form
S-8).
4.3* Midas' Canadian operations revolving credit agreement,
dated June 29, 1998 with the ABN-AMRO Bank.
10.1 Distribution and Indemnity Agreement dated as of December
31, 1997 among Midas, Inc., Midas International Corporation
and Whitman Corporation (incorporated by reference to
Exhibit 2.1 to the Midas, Inc. Current Report on Form 8-K
dated January 30, 1998 (the "Form 8-K")).
10.2 Tax Sharing Agreement dated as of December 31, 1997 among
Midas, Inc., Midas International Corporation and Whitman
Corporation (incorporated by reference to Exhibit 2.2 to
the Form 8-K).
10.3 **Stock Incentive Plan (incorporated by reference to
Exhibit 4.4 to the Midas, Inc. Registration Statement on
Form S-8 relating to its Stock Incentive Plan (Registration
No. 333-44797)).
10.4* **Form of Option Agreement.
10.5 **Form of Restricted Stock Award (incorporated by reference
to Exhibit 10.5 to the Midas, Inc. Annual Report on Form
10-K for the year ended December 20, 1997 (File No.
01-13409)).
10.6 **Form of Change in Control Agreement (incorporated by
reference to Exhibit 10.5 to the Midas, Inc.'s Registration
Statement on Form 10/A No.1 (Commission File No. 01-13409))
10.7 **Agreement with former Chief Executive Officer
(incorporated by reference to Exhibit 10.7 to the Midas,
Inc. Annual Report on Form 10-K for the year ended December
20, 1997 (File No. 01-13409)).
10.8* **Form of Restricted Stock Agreement and promissory note.
21* Subsidiaries of Midas, Inc.
23* Consent of KPMG LLP.
27* Financial Data Schedule.
* Filed herewith
** Management Compensatory Plan or Contract
Page 18
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, this 23rd day of
March, 1999.
MIDAS, INC.
By: /s/ R.LEE BARCLAY
------------------------------
R.Lee Barclay
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities
indicated on behalf of the registrant, this 23rd day of March, 1999.
/s/ WENDEL H. PROVINCE Chairman and Chief Executive
- ---------------------------------- Officer and Director
Wendel H. Province (principal executive officer)
/s/ R.LEE BARCLAY Executive Vice President and
- ---------------------------------- Chief Financial Officer
R.Lee Barclay (principal financial officer)
/s/ EDWIN A. GRELL Vice President - Controller
- ---------------------------------- (principal accounting officer)
Edwin A. Grell
/s/ HERBERT M. BAUM Director
- ----------------------------------
Herbert M. Baum
/s/ THOMAS L. BINDLEY Director
- ----------------------------------
Thomas L. Bindley
/s/ ARCHIE R. DYKES Director
- ----------------------------------
Archie R. Dykes
/s/ JAROBIN GILBERT, Jr. Director
- ----------------------------------
Jarobin Gilbert, Jr.
/s/ ROBERT R. SCHOEBERL Director
- ----------------------------------
Robert R. Schoeberl
Page 19
MIDAS
Index to Financial Statements
Report of Management........................................... F-2
Independent Auditors' Report................................... F-3
Statements of Operations for the years ended
December 1998, 1997 and 1996.................................. F-4
Balance Sheets as of December 1998 and 1997.................... F-5
Statements of Cash Flows for the years ended
December 1998, 1997 and 1996.................................. F-6
Statements of Changes in Shareholders' Equity for the years
ended December 1998, 1997 and 1996.......................... F-7
Notes to the Financial Statements.............................. F-8
Financial statement schedules are omitted because they are not applicable or the
required information is presented in the financial statements or related notes.
F-1
REPORT OF MANAGEMENT
We have prepared the accompanying financial statements and related
information included herein for the years ended December 1998, 1997 and 1996.
The report KPMG LLP, the Company's independent auditors, on those financial
statements is included herein. The primary responsibility for the integrity of
the financial information included in this annual report rests with management.
Such information was prepared in accordance with generally accepted accounting
principles appropriate in the circumstances based on our best estimates and
judgements.
Midas, Inc., maintains internal accounting control systems which 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. The system and controls and compliance therewith are
reviewed by a program of internal audits and by our independent auditors. There
are limits inherent in all systems of internal accounting control based on the
recognition that the cost of such a system should not exceed the benefits to be
derived. We believe the Company's system provides this appropriate balance.
The Audit Committee of the Board of Directors is responsible for
reviewing and monitoring the Company's financial reports and accounting
practices to ascertain that they are within acceptable limits of sound practice
in such matters. The membership of the Committee consists of independent
Directors. At periodic meetings, the Audit Committee discusses audit and
financial reporting matters and the internal audit function with representatives
of financial management and with representatives from KPMG LLP.
/s/ R. Lee Barclay
R. Lee Barclay
Executive Vice President & Chief Financial Officer
February 10, 1999
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Midas, Inc.
We have audited the accompanying balance sheets of Midas as of December
1998 and 1997, and the related statements of operations, cash flows, and changes
in shareholders' equity for each of the years in the three-year period ended
December 1998. These financial statements are the responsibility of Midas'
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Midas as of December
1998 and December 1997, and the results of operations and cash flows for each of
the years in the three-year period ended December 1998 in conformity with
generally accepted accounting principles.
/S/ KPMG LLP
Chicago, Illinois
February 10, 1999
F-3
MIDAS
STATEMENTS OF OPERATIONS
(In millions, except for earnings and dividends per share)
For the years ended December
----------------------------
1998 1997 1996
---- ---- ----
Sales and revenues........................................... $ 519.1 $ 596.4 $ 604.2
Cost of sales and revenues................................... 253.1 277.5 281.8
Selling, general, and administrative expenses................ 196.4 252.1 244.4
Business transformation costs................................ 55.7 67.6 -
-------- -------- --------
Operating income........................................... 13.9 (0.8) 78.0
-------- -------- --------
Gain on sale of European operations.......................... 38.0 - -
-------- -------- --------
Whitman charges.............................................. (1.1) (18.1) (17.2)
-------- -------- --------
Interest expense:
Whitman................................................... (0.5) (6.8) (7.3)
Other..................................................... (12.2) (2.3) (2.7)
-------- -------- --------
Total interest expense................................... (12.7) (9.1) (10.0)
-------- -------- --------
Other income (expense), net.................................. 1.9 0.9 0.8
-------- -------- --------
Income (loss) before taxes................................. 40.0 (27.1) 51.6
Income taxes (benefit)....................................... 11.8 (3.6) 21.2
-------- -------- --------
Net income (loss)............................................ $ 28.2 $ (23.5) $ 30.4
======== ======== ========
Earnings (loss) per share:
Basic...................................................... $ 1.67
========
Diluted.................................................... $ 1.63
========
Pro forma basic and diluted................................ $ (1.21)
========
Dividends per common share................................... $ .06
========
Average number of shares
Common shares outstanding.................................. 16.9
Equivalent shares on outstanding stock options............. 0.4
--------
Shares applicable to diluted earnings...................... 17.3
========
Pro forma common shares outstanding........................ 17.0
========
See accompanying notes to financial statements.
F-4
MIDAS
BALANCE SHEETS
(In millions)
December
--------
1998 1997
---- ----
Assets:
Current assets:
Cash and cash equivalents.................................. $ 36.9 $ 12.5
Receivables, net........................................... 39.4 65.7
Inventories................................................ 63.2 79.8
Other current assets....................................... 24.8 30.8
------- -------
Total current assets..................................... 164.3 188.8
Property and equipment, net................................... 142.8 198.2
Intangible assets, net........................................ 2.1 29.3
Other assets.................................................. 16.1 26.8
------- -------
Total assets............................................. $ 325.3 $ 443.1
======= =======
Liabilities and Equity:
Current liabilities:
Short-term debt............................................ $ 1.6 $ 1.8
Accounts and dividends payable............................ 19.5 40.3
Income taxes payable....................................... - 2.1
Accrued expenses........................................... 42.2 62.8
------- -------
Total current liabilities............................... 63.3 107.0
Loans and advances from Whitman............................... - 55.5
Long-term debt................................................ 102.2 3.5
Obligations under capital leases.............................. 10.8 14.6
Deferred income taxes and other liabilities................... 25.6 28.4
------- -------
Total liabilities........................................ 201.9 209.0
------- -------
Shareholders' equity:
Combined capital accounts of Whitman...................... - 26.6
Common stock ($.001 par value, 100 million shares
authorized, 17.0 million shares issued) and
paid-in capital........................................ 27.1 -
Treasury stock (.2 million shares, at cost)............... (4.2) -
Retained income........................................... 106.9 217.3
Accumulated other comprehensive income (loss)............. (6.4) ( 9.8)
------- -------
Total shareholders' equity................................ 123.4 234.1
------- -------
Total liabilities and equity............................. $ 325.3 $ 443.1
======= =======
See accompanying notes to financial statements.
F-5
MIDAS
STATEMENTS OF CASH FLOWS
(In millions)
For the years ended December
----------------------------
1998 1997 1996
---- ---- ----
Cash flows from operating activities:
Net income............................................ $ 28.2 $ (23.5) $ 30.4
Adjustments reconciling net income to
net cash provided by operating activities:
Depreciation and amortization..................... 17.0 21.3 20.3
Business transformation costs...................... 55.7 67.6 -
Cash outlays for business transformation costs..... (58.4) (1.9) -
Gain on sale of European operations................ (38.0) - -
Deferred income taxes.............................. (0.2) (13.8) (0.6)
Changes in assets and liabilities, exclusive
of effects of dispositions:
(Increase) decrease in receivables................ 4.8 6.5 (6.1)
(Increase) decrease in inventories................ (2.0) 9.8 (11.8)
Increase (decrease) in accounts payable.......... 4.2 (15.3) 7.6
Increase (decrease) in accrued expenses.......... 5.8 10.4 (6.3)
Increase (decrease) in income taxes payable...... 0.6 (10.8) 2.1
Other............................................ 3.6 3.8 (1.1)
-------- ------- -------
Net cash provided (used) by operating activities........ 21.3 54.1 34.5
-------- ------- -------
Cash flows from investing activities:
Capital investments.................................. (11.0) (29.4) (30.7)
Proceeds from sale of European operations
net of cash of $13.2 million in operations sold... 86.8 - -
Proceeds from sales of property and equipment........ 30.3 5.2 4.7
-------- ------- -------
Net cash provided (used) in investing activities........ 106.1 (24.2) (26.0)
-------- ------- -------
Cash flows from financing activities:
Net increase (decrease) in short-term debt........... - (2.5) 3.2
Payment of obligations under capital leases.......... (1.8) (0.8) (1.0)
Long-term debt incurred.............................. 291.4 3.5 -
Long-term debt repayments............................ (192.6) - -
Cash received for common stock....................... 3.8 - -
Cash paid for treasury shares........................ (9.8) - -
Net increase (decrease) in loans and
advances from Whitman............................. (55.5) (20.8) 6.9
Dividends to Whitman................................. (137.6) (14.0) (10.9)
Dividends to shareholders............................ (0.9) - -
-------- ------- -------
Net cash provided (used) by financing activities........ (103.0) (34.6) (1.8)
-------- ------- -------
Effect of exchange rate changes on
cash and cash equivalents.............................. - (1.0) (0.1)
-------- ------- -------
Net change in cash and cash equivalents................. 24.4 (5.7) 6.6
Cash and cash equivalents at beginning of period........ 12.5 18.2 11.6
-------- ------- -------
Cash and cash equivalents at end of period.............. $ 36.9 $ 12.5 $ 18.2
======== ======= =======
See accompanying notes to financial statements.
F-6
MIDAS
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In millions)
Combined Common Accumulated
Capital Stock and Compre- Compre-
Accounts of Paid-in Treasury Hensive Retained hensive
Whitman Capital Stock Income Earnings Income
----------- --------- -------- ------- -------- -----------
December 1995........................ $ 24.3 $ - $ - $ 235.3 $ (1.1)
Net income........................... - - - $ 30.4 30.4
Other comprehensive income -
foreign currency
translation adjustments........... - - - (0.9) - (0.9)
Comprehensive income................. $ 29.5
=========
Dividends to Whitman................. - - - (10.9) -
-------- -------- -------- ---------- --------
December 1996........................ 24.3 - - 254.8 (2.0)
Net income........................... - - - $ (23.5) (23.5)
Other comprehensive income -
foreign currency
translation adjustments........... - - - (7.8) - (7.8)
Comprehensive income................. $ (31.3)
=========
Capital contribution from
Whitman.......................... 2.3 - - - -
Dividends to Whitman................. - - - (14.0) -
-------- -------- -------- ---------- --------
December 1997........................ 26.6 - - 217.3 (9.8)
Net income........................... - - - $ 0.4 0.4
Other comprehensive income -
foreign currency
translation adjustments........... - - - (1.3) - (1.3)
Capital contribution from
Whitman.......................... 0.6 - - - -
Dividends to Whitman................. - - - - (137.6) -
-------- -------- -------- ---------- --------
Balances prior to Spin-off........... 27.2 - - (0.9) 80.1 (11.1)
Initial capitalization of
Midas*............................. (27.2) 27.2 - - -
Purchase of treasury shares*......... - - (9.8) - -
Stock option transactions*........... - (0.1) 5.6 - -
Net income........................... - - - 27.8 27.8 -
Other comprehensive income -
foreign currency
translation adjustments........... - - - 4.7 - 4.7
---------
Comprehensive income................. - - - $ 31.6
=========
Dividends to shareholders............ - - - (1.0) -
-------- -------- -------- ---------- --------
December 1998........................ $ - $ 27.1 $ (4.2) $ 106.9 $ (6.4)
======== ======== ======== ========== ========
* Whitman distributed 17.0 million shares of Midas common stock to its
shareholders. Midas subsequently acquired 0.4 million shares for its
treasury, of which 0.2 million shares were issued as a result of the
exercise of stock options.
See accompanying notes to financial statements.
F-7
MIDAS
NOTES TO FINANCIAL STATEMENTS
(1) Introduction
Basis of Presentation
Midas, Inc. became an independent, publicly held company on January 30, 1998
as a result of its spin-off ("Spin-off") from Whitman Corporation
("Whitman"). Prior to that time, the companies that comprised Midas were
direct or indirect wholly-owned subsidiaries of Whitman. For periods prior
to the Spin-off, the financial statements are presented on a combined basis;
for subsequent periods, they are presented on a consolidated basis. As
required by the context, "Midas" or the "Company" refers to Midas, Inc. and
subsidiaries or to the group of companies that became wholly-owned
subsidiaries of Midas, Inc. in conjunction with the Spin-off.
Common Stock and Paid-in Capital at Spin-off Date
The combined capital accounts of Whitman were recorded as common stock and
paid-in capital of Midas as of the date of the Spin-off.
Pro Forma Basic and Diluted Earnings (Loss) Per Share (Unaudited)
Pro forma basic and diluted earnings (loss) per share have been calculated
on the assumption that the 17.0 million shares of Midas Common Stock that
were distributed in the Spin-off had been outstanding since the beginning of
1997. Pro forma adjustments have been made to give effect to increases or
decreases in costs that would have been incurred by Midas as an independent,
publicly held company, rather than a subsidiary of Whitman. The pro forma
adjustments are summarized as follows (in millions):
1997
----
Incremental administrative expenses
of an independent, publicly held company..................... $ (2.8)
Elimination of Whitman charges................................ 18.1
Elimination of interest paid to Whitman....................... 6.8
Incremental interest expense of an independently-capitalized
company..................................................... (17.2)
Incremental income tax provision.............................. (1.9)
------
Pro forma reduction of net loss......................... $ 3.0
======
(2) Summary of Significant Accounting Policies
Nature of Business
Midas provides retail automotive services principally through franchised or
licensed shops in the U.S., Canada, Europe and other countries. Midas also
manufactures exhaust system components and purchases other automotive
aftermarket replacement parts for distribution to North American franchisees
and other automotive aftermarket customers.
Fiscal Periods
The 1998, 1997, and 1996 fiscal years ended on December 26, 20, and 14,
respectively. The 1998 and 1997 fiscal years consisted of 53 weeks, while
the 1996 fiscal year consisted of 52 weeks. The operations outside the U.S.
and Canada have fiscal years that end in November.
F-8
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(2) Summary of Significant Accounting Policies (Continued)
Foreign Currency Translation and Transactions
All assets and liabilities of non-U.S. operations are translated into U.S.
dollars using exchange rates as of the end of each fiscal period. Income and
expense items are translated at average exchange rates prevailing during
each fiscal period. The resulting translation adjustments are recorded as a
component of shareholders' equity. Gains and losses from foreign currency
transactions are included in net earnings.
Cash and Cash Equivalents
Cash and cash equivalents consist of deposits with banks and financial
institutions which are unrestricted as to withdrawal or use, and which have
an original maturity of three months or less.
Fair Value of Financial Instruments
Midas' financial instruments include cash and cash equivalents, receivables,
short-term debt, accounts payable, and long-term debt. The fair value of the
long-term debt exceeds its carrying value by $3.4 million as of December
1998. The carrying amounts of the other assets and liabilities approximate
fair values because of the short maturity of those instruments.
Inventories
Inventories are valued at the lower of cost, determined using the first-in,
first-out method, or net realizable value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using
the straight-line method and includes amortization of assets held under
capital leases. When property is sold or retired, the cost and accumulated
depreciation are eliminated from the accounts and gains or losses are
recorded in other income (expense), net.
Expenditures for maintenance and repairs are expensed as incurred. The
approximate ranges of annual depreciation rates are 2% to 10% for buildings
and improvements and 8% to 20% for machinery and equipment and 20% to 33%
for computer software and hardware.
Intangible Assets
Intangible assets primarily consist of the excess of cost over fair market
value of net tangible assets of acquired businesses, substantially all of
which arose from business combinations accounted for under the purchase
method. Such excess amounts (goodwill) are being amortized on straight-line
basis over periods of 20 or 40 years. In addition, there are other minor
amounts of intangible assets that are being amortized on straight-line basis
over periods of 10 to 20 years.
Carrying Values of Long-lived Assets
Midas evaluates the carrying values of its long-lived assets to be held and
used in the business by reviewing undiscounted cash flows by operating unit.
Such evaluations are performed whenever events and circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of
the projected undiscounted cash flows over the remaining lives of the
related assets does not exceed the carrying values of the assets, the
carrying values would be adjusted for the differences between the fair
values and the carrying values.
F-9
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(2) Summary of Significant Accounting Policies (Continued)
Revenue Recognition
Product sales are recognized as revenues at the time products are shipped,
at which time provision is made for estimated product returns. Sales and
revenues of company-operated shops are recognized when customer vehicles are
repaired or serviced.
Revenues derived from initial franchise fees are recognized when the
franchised shop opens. Costs related to securing initial franchise
agreements and performing the required services under such agreements are
charged to expenses as incurred. Franchise renewal fees are recognized when
the renewal period commences. Royalties are recognized in the periods that
correspond to the periods when retail sales and revenues are recognized by
franchisees.
Selected products carry warranties ranging from one year to the lifetime of
a vehicle, so long as the retail customer owns the vehicle. Midas estimates
and records the net costs related to its warranty program as required, in
the period the sales are reported, based on its historical experience.
Advertising
Advertising costs are expensed as incurred.
Use of Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and disclosures of contingencies to
prepare the financial statements in conformity with generally accepted
accounting principles. Actual results could differ from these estimates.
(3) Business Transformation
The Business Transformation Process
Midas is undergoing fundamental changes in how it conducts business. The
Company is transforming itself from a worldwide operator of both franchised
and company-operated shops to a focused and efficient operator of a North
American franchise and wholesale parts distribution network and a licensor
of Midas trademarks and know-how outside of North America. Within North
America the business transformation process includes: changing consumer
perceptions about Midas and the products and services offered, improving
relationships with franchisees and redeploying assets to improve returns.
The Company has entered into a strategic alliance relating to Europe and
South America, as described in Note 4. The Company is in the process of
disposing of its Australian subsidiary; the related asset write-down is
described below.
F-10
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(3) Business Transformation (Continued)
Business Transformation Costs
The costs associated with the business transformation process are summarized
as follows (in millions):
1998 1997
---- ----
Franchisee incentive payments............................. $ 32.3 $ -
Disposition of company-operated shops..................... 2.1 35.5
Corporate office relocation............................... 7.0 -
Integration of Canadian administration function........... 4.0 -
Consolidation of North American distribution system....... 4.1 -
Special one-time return program........................... - 7.8
Changes to U.S. franchisee advertising program............ - 4.4
Asset write-downs to recognize impairments................ 4.2 12.5
Severance and other costs................................. 2.0 7.4
-------- --------
Business transformation costs before tax benefits......... 55.7 67.6
Income tax benefits..................................... 20.9 21.4
-------- --------
Business transformation costs, net of tax benefits........ $ 34.8 $ 46.2
======== ========
Franchisee Incentive Payments
During 1998, Midas launched a new image and consumer perception program. The
program is directed at "freshening" the Midas image with consumers and
changing their perceptions about the scope of product and service offerings.
To launch the program, Midas made up-front cash incentive payments to
franchisees who have agreed to modify existing shops and enhance information
systems. The planned modifications include installing new signs and making
improvements to building exteriors and customer service areas. Franchisees
that wish to expand their product and service offerings may also need to
enhance their information systems. The incentive payments, which were
disbursed in lump sum amounts based on the number of shops operated by each
participating franchisee, were recorded as expenses as the disbursements
were made. The incentive payments, together with other costs associated with
the program launch (principally costs of special regional meetings attended
by the franchisees), were recorded as expenses in the fourth quarter of
1998. Midas intends to monitor franchisee performance to ensure compliance
with the program and does not expect to receive any refunds of incentive
payments. The incentive payments cover approximately 99% of the franchised
shops located in the U.S. and Canada.
F-11
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(3) Business Transformation (Continued)
Disposition of Company-operated Shops
During the third quarter 1997, management adopted a plan for the disposition
of substantially all of its 150 company-operated shops in the United States.
Under the 1997 plan, 119 shops were expected to be franchised and 16 shops
closed. By the end of December 1998, substantially all aspects of the 1997
disposition program had been completed. In the fourth quarter of 1998,
management decided to franchise the remaining company-operated shops in the
United States, and all company-operated shops in Canada. The estimated
losses and costs associated with the program are summarized as follows (in
millions):
1998 1997
---- ----
Asset write-downs....................... $ 1.3 $ 21.5
Non-recoverable lease costs............. - 7.7
Severance and other costs............... 0.8 6.3
----- ------
$ 2.1 $ 35.5
===== ======
Asset Write-downs. The assets of the U.S. company-operated shops to be
disposed were written down to net realizable values, based on estimated
proceeds (net of transaction costs) from sales of tangible and intangible
assets of shops to be franchised and from sales or recoveries of tangible
assets of shops to be closed.
Non-recoverable Lease Costs. Certain U.S. company-operated shops occupied
leased facilities. Management estimated that $7.7 million of costs under
such leases would not be recovered through future operations due to shop
closings or because subleases in connection with franchising transactions
were not expected to result in full recovery of the related lease payments.
Severance and Other Costs. Severance and other costs recorded in 1997
include $4.7 million of termination benefits for 202 employees and other
costs of $1.6 million. Severance and other costs recorded in 1998 include
$0.3 million of termination benefits for employees. Cash expenditures
relating to employee severance costs are incurred as the shops are closed or
sold. Cash outlays were $0.2 million during 1997 and $3.1 million during
1998.
Corporate Office Relocation
In December 1998, Midas determined that it would relocate its corporate
headquarters and entered into a lease for a new facility. Relocation costs
recorded in 1998 include: (a) estimated costs of $5.7 million related to
subleasing the existing headquarters after the relocation, based on the
differential between the amounts due under the existing noncancellable lease
and estimated proceeds from subleasing; and (b) the write-down ($1.3
million) of leasehold improvements and equipment that will not be used in
the new facility, based on the estimated net realizable value of the assets
at the time of relocation.
Integration of Canadian Administration Function
During the fourth quarter of 1998, management adopted a plan to integrate
the administration of the Canadian franchising operations into the worldwide
headquarters. Costs include $0.5 million in asset write-downs to net
realizable values, $2.1 million of termination benefits for 61 employees,
$0.5 million of lease termination costs, and other costs of $0.9 million.
Cash expenditures relating to employee severance costs and the lease
terminations will be incurred when the integration is carried out in 1999;
there were no cash outlays during 1998.
F-12
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(3) Business Transformation (Continued)
Consolidation of North American Distribution System
During the fourth quarter 1998, management adopted a plan to consolidate the
North American distribution system, reducing the number of distribution
centers from 18 to 10. Costs include $1.2 million of termination benefits
for 78 employees, and other costs of $2.9 million. The distribution system
consolidation is expected to be completed during 1999 and early 2000; there
were no cash outlays in 1998.
Special One-time Product Return Program
Midas policies restrict the level of excess products that may be returned by
franchisees. A special one-time program was adopted in 1997, under which
franchisees were permitted to return products in excess of the amounts that
would have been permitted under those policies. The $7.8 million charge
covered the estimated costs associated with returns of products sold to
franchisees in prior periods.
Changes in U.S. Franchisee Advertising Program
Under the terms of its franchising agreements, Midas is obligated to use
one-half of the royalty payments received from franchisees for advertising
expenditures. Advertising expenditures in 1997 under the U.S. program
exceeded the amounts received from franchisees. Although it is not obligated
to do so under the franchising agreements, Midas provided a one-time
supplement to the program amounting to $4.4 million. Concurrently, Midas
discontinued financial participation in a cooperative advertising program
administered for U.S. franchisees.
Asset Write-downs to Recognize Impairments
Asset write-downs in 1997 to recognize impairments include: $5.5 million
related to company-owned real estate and improvements, which are leased to
franchisees under leases that are not expected to result in full recovery of
the investments in such assets; $5.3 million related to impaired goodwill of
certain non-U.S. operating units, based on past and projected operating
results; and $1.2 million related to computer hardware deemed obsolete due
to changes in operating procedures. Asset write-downs in 1998 of $4.2
million are related to the Company's investment in its Australian
subsidiary, which is expected to be disposed of in 1999.
Severance and Other Costs
Severance and other costs in 1997 include $4.4 million of termination
benefits for 61 employees resulting from staff reductions and $3.0 million
of other non-recurring costs. The staff reductions occurred in early 1998.
Severance payments were $1.9 million in 1998, and $1.1 million in 1997.
Other costs of $0.6 million were paid in 1997. Severance and other costs in
1998 of $2.0 million include $0.7 million of termination benefits for
employees in Midas' Australian and Asia-Pacific operations and $0.5 million
of disposition costs associated with those operations.
Other Information
In the aggregate, business transformation costs have resulted in asset
write-downs of $30.0 million in 1997 and $9.5 million in 1998. Cash outlays
were $1.9 million in 1997 and $58.4 million in 1998; future cash outlays are
expected to be $14.4 million in 1999 and $11.4 million in subsequent years;
the accruals for such future cash outlays are classified in other accrued
liabilities and other liabilities, respectively.
F-13
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(4) Strategic Alliance
Midas, Inc. and Magneti Marelli, S.p.A., a member of the Fiat Group, formed
a strategic alliance to develop the Midas program in the business of fast
auto service repair in Europe and South America.
As part of the alliance, Midas sold its interests in its European operations
to Magneti Marelli on October 30, 1998 and entered into a long-term license
agreement for which Midas received $100 million. Midas will also receive
on-going royalties throughout the term of the license agreement, as the 438
automotive service shops in Europe will continue to operate using the Midas
name.
The gain on sale of the European operations was $38.0 million before taxes
or $28.1 million after taxes.
(5) Debt Agreements
In anticipation of the Spin-off, Midas entities entered into three new debt
agreements in January 1998. Midas, Inc. and its wholly-owned subsidiary,
Midas International, entered into a five-year, unsecured revolving credit
facility with a syndicate of commercial banks and financial institutions
that enable the Company to borrow funds at variable interest rates on a
revolving credit basis up to an aggregate principal amount of $200 million.
Midas International also entered into a seven-year $50 million unsecured
term loan arrangement with an institutional investor. Also in January 1998,
Midas France S.A. entered into a 100 million French franc, five-year
amortizing term loan.
In March 1998, Midas entered into an interest rate swap transaction under
which $25 million of variable rate borrowings under the revolving credit
facility were covered by an agreement that fixed the borrowing rate at 5.79%
with an all-in cost of 6.31% over a two year period. The counterparty to the
swap transaction is a commercial bank; management believes the risk of loss
to Midas in the event of nonperformance by the counterparty is not
significant.
In April, Midas arranged a private placement of $75 million in unsecured
debt at a fixed rate of 6.89% with an investment grade (BBB) rating. The
maturity date of the debt is April 15, 2005. The proceeds were used to
retire the $50 million term loan and $25 million in bank debt. The French
franc loan was also retired prior to the sale of the Company's European
operations.
Long-term debt consisted of the following (in millions):
December
--------
1998 1997
---- ----
Revolving credit line.................................... $ 25.0 $ -
Unsecured debt, due April 2005, 6.89% interest rate...... 75.0 -
Notes payable, due 2000 and 2002, 9.5% interest rate..... 3.1 4.5
------ ------
Total debt............................................ 103.1 4.5
Less: amounts due within one year.................... 0.9 1.0
------ ------
Long-term debt....................................... $102.2 $ 3.5
====== ======
During 1998, the Company's Canadian operations arranged a variable rate
credit facility under which unsecured borrowings of Canadian $18 million (US
$11.7 million) are available for periods up to 364 days. There are no
outstanding borrowings under this facility at year-end.
F-14
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(6) Transactions with Whitman
Cash Management and Advances
Whitman managed the cash not considered necessary for current operating
requirements of certain of its subsidiaries, including the U.S. operations
of Midas. Cash not needed for current operations was advanced to Whitman at
the then-current commercial bank prime lending rate; cash was advanced by
Whitman on the same basis. All advances to or from Whitman are included in
loans and advances from Whitman in the balance sheets. Interest income and
expense on such advances are included in interest expense-Whitman in the
statements of operations.
Whitman Charges
Whitman allocated portions of its corporate office general and
administrative expenses and interest expense to its subsidiaries. Midas'
share of such costs amounted to $1.1 million in 1998, $18.1 million in 1997,
and $17.2 million in 1996.
Dividends and Capital Contributions
Midas has paid dividends to Whitman and received capital contributions from
Whitman, as summarized in the statements of changes in shareholders' equity.
In January 1998, Midas settled its Whitman obligations of $210 million,
which consisted of a $137.6 million dividend and $72.4 million of
intercompany loans and advances.
(7) Supplemental Balance Sheet and Cash Flow Information
Receivables
Receivables are stated net of allowance for doubtful accounts of $1.5
million at December 1998, and $3.0 million at December 1997.
Inventories
Inventories consisted of the following (in millions):
December
--------
1998 1997
---- ----
Raw materials.............. $ 2.5 $ 2.7
Work in process............ 1.2 1.1
Finished goods............. 59.5 76.0
------ ------
$ 63.2 $ 79.8
====== ======
F-15
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(7) Supplemental Balance Sheet and Cash Flow Information (Continued)
Other Current Assets
Other current assets consisted of the following (in millions):
December
--------
1998 1997
---- ----
Income taxes receivable............. $ 1.7 $ 4.6
Deferred income taxes............... 13.2 11.3
Other 9.9 14.9
------ -------
$ 24.8 $ 30.8
====== ======
Property and Equipment
Property and equipment consisted of the following (in millions):
December
1998 1997
---- ----
Land $ 50.4 $ 52.0
Buildings and improvements................. 115.8 127.3
Machinery and equipment.................... 87.8 155.2
------- -------
Total property and equipment............... 254.0 334.5
Accumulated depreciation................... (111.2) (136.3)
------- -------
Property and equipment, net................ $ 142.8 $ 198.2
======= =======
Intangible Assets
Intangible assets are stated net of accumulated amortization of $2.4 million
at December 1998, and $18.9 million at December 1997.
Accrued Expenses
Accrued expenses consisted of the following (in millions):
December
1998 1997
---- ----
Salaries and wages........................ $ 5.3 $ 8.5
Taxes other than income taxes............. 3.3 8.3
Advertising............................... 4.4 7.2
Accrued business transformation costs..... 14.4 19.5
Other expenses and interest............... 14.8 19.3
------- -------
$ 42.2 $ 62.8
======= =======
F-16
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(7) Supplemental Balance Sheet and Cash Flow Information (Continued)
Supplemental Cash Flow Information
Net cash provided by operating activities includes cash payments for
interest and income taxes as follows (in millions):
1998 1997 1996
---- ---- ----
Interest paid - Whitman............. $ 0.5 $ 6.8 $ 7.0
Interest paid - other............... 10.9 2.3 2.1
Income taxes paid................... 11.0 21.9 20.1
(8) Advertising
Under the terms of its franchise agreements, Midas is obligated to use
one-half of the royalty payments received from franchisees for advertising
expenditures. Amounts received from franchisees are recorded as liabilities
until disbursed. In prior years, Midas also administered cooperative
advertising programs under which amounts received from franchisees were
recorded as liabilities until they were disbursed. Aggregate expenditures
under these programs by Midas' North American operations amounted to $58.9
million, $61.3 million, and $74.7 million in 1998, 1997, and 1996,
respectively.
Midas also incurs certain advertising costs that are included in selling,
general and administrative expenses, which amounted to $13.6 million, $21.3
million, and $21.4 million in 1998, 1997, and 1996, respectively.
(9) Income Taxes
Income taxes (benefit) consisted of (in millions):
1998 1997 1996
---- ---- ----
Current:
U.S. Federal.................. $ 6.5 $ 4.9 $ 15.0
Non-U.S....................... 4.1 4.3 4.3
U.S. state and local.......... 1.4 1.0 2.5
------ ------ -------
Total current............... 12.0 10.2 21.8
------ ------ -------
Deferred:
U.S. Federal.................. (0.4) (11.8) (0.9)
Non-U.S....................... (1.3) (0.3) 0.4
U.S. state and local.......... 1.5 (1.7) (0.1)
------ ------ -------
Total deferred.............. (0.2) (13.8) (0.6)
------ ------ -------
Income taxes (benefit).......... $ 11.8 $ (3.6) $ 21.2
====== ====== =======
F-17
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(9) Income Taxes (Continued)
The items which gave rise to differences between the income taxes in the
statements of operations and income taxes computed at the U.S. statutory
rate are summarized as follows:
1998 1997 1996
---- ---- ----
Income taxes (benefit) computed at
U.S. statutory rate................................ 35.0% (35.0)% 35.0%
U.S. state and local taxes, net of U.S.
income tax benefits................................ 4.7 (1.8) 2.9
Higher non-U.S. effective tax rates................. 2.5 6.6 4.5
Lower non-U.S. effective tax rates on sale of
European operations............................... (12.2) - -
Non-deductible write-offs of
intangible assets.................................. - 10.3 -
Non-deductible expenses............................. (2.0) 3.7 -
Other items, net.................................... 1.5 2.9 (1.3)
----- ----- -----
Income taxes (benefit).............................. 29.5% (13.3)% 41.1%
===== ===== =====
Pretax income from non-U.S. operations amounted to $18.2 million, $6.3
million, and $8.7 million in 1998, 1997 and 1996, respectively.
Historically, Midas' practice has been to reinvest its earnings in its
non-U.S. subsidiaries. With the sale of its European operations, the Company
now intends to repatriate these earnings. As a result, Midas recorded
deferred taxes of $1.4 million on the previously undistributed earnings it
expects to repatriate in 1999.
Deferred income taxes are created by "temporary differences" between amounts
of assets and liabilities for financial reporting purposes and such amounts
as reported under income tax regulations. Deferred tax assets and
liabilities at December 1998 and 1997 consisted of (in millions):
1998 1997
---- ----
Deferred tax assets attributable to:
Employee benefits and vacation accruals............... $ 4.0 $ 6.4
Capitalized leases.................................... 1.0 1.5
Business transformation costs......................... 10.3 17.8
Other items........................................... 6.3 6.4
------- -------
Total deferred tax assets.............................. 21.6 32.1
------- -------
Deferred tax liabilities attributable to:
Depreciation and amortization......................... (2.6) (13.3)
Pension plan expense.................................. (3.0) (3.2)
Undistributed non-U.S. earnings,
net of non-U.S. taxes withheld..................... (1.4) -
Other items........................................... (4.5) (8.1)
------- -------
Total deferred tax liabilities......................... (11.5) (24.6)
------- -------
Net deferred tax asset (liability)..................... $ 10.1 $ 7.5
======= =======
Net deferred tax asset (liability) included in:
Other current assets.................................. $ 13.2 $ 11.3
Deferred income taxes and other liabilities........... (3.1) (3.8)
------- -------
Net deferred tax asset (liability)..................... $ 10.1 $ 7.5
======= =======
Management believes it is more likely than not that all deferred tax assets
will be realized and, accordingly, no valuation allowance is required.
F-18
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(10) Franchise Agreements
Midas' franchise agreements generally cover a 20-year period and provide for
renewals. A franchise agreement can be canceled by Midas only in the event a
franchisee fails to comply with the provisions of the agreement.
Franchise agreements provide for initial and renewal fees and continuing
royalty payments based on a percentage of sales.
Worldwide shops in operation as of year-end consisted of (unaudited):
1998 1997 1996
---- ---- ----
Franchised and licensed....... 2,674 2,341 2,301
Company-operated.............. 58 377 377
------ ------ ------
Total 2,732 2,718 2,678
====== ====== ======
U.S. franchisees are required to purchase Midas genuine products. In some
cases, franchisees also lease real estate from Midas.
U.S. revenues from the sale of guaranteed and nonguaranteed products to
franchisees, excluding the sale of machinery and related parts, amounted to
$173.7 million in 1998, $191.0 million in 1997, and $205.5 million in 1996.
These product sales represented 48% of Midas' U.S. sales and revenues in
1998, 46% in 1997, and 49% in 1996.
Rental revenue derived from real estate leased to U.S. franchisees amounted
to $33.1 million in 1998, and $30.8 million in both 1997 and 1996. Rental
revenue represented 9% of Midas' U.S. sales and revenues in 1998, and 7% in
1997 and 1996.
U.S. franchisees also purchased $3.5 million of shop equipment from Midas in
1998, compared to $4.0 million in 1997 and $3.9 million in 1996.
(11) Leases
Control of the real estate used by Midas shops is a fundamental strength of
the Midas program. Midas employs a number of methods to ensure continued
dedication of the real estate to the Midas program. Midas leases real estate
that is subleased to franchisees and owns real estate in the U.S. that is
leased to franchisees. Midas has also entered into contingent operating
lease agreements that are described below. At December 1998, approximately
81% of the real estate associated with the North American shops was
controlled by Midas, using one of these methods.
F-19
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(11) Leases (Continued)
Leased Real Estate
Midas' gross rent expense, applicable to operating leases, relates to
rentals of shops, distribution facilities, corporate administration
facilities and other miscellaneous items.
Midas' gross rent expense, the sublease rental income from franchisees that
reduced gross rent expense, and the resulting net rent expense for 1998,
1997 and 1996 are presented below (in millions):
Gross rent Sublease Net rent
expense rental income expense
--------- ------------- --------
1998............... $ 27.2 $ 20.7 $ 6.5
1997............... 37.1 22.6 14.5
1996............... 36.5 22.6 13.9
Substantially all operating leases provide that Midas pay taxes,
maintenance, insurance, and certain other operating expenses. The subleases
with franchisees contain provisions for Midas to recover such costs.
At December 1998, annual minimum rental payments due under capital and
operating leases that have initial or remaining noncancelable terms in
excess of one year, along with sublease rentals on real estate due under
noncancelable subleases were as follows (in millions):
Capital Operating Sublease
leases leases rentals
------- --------- --------
1999 $ 1.8 $ 26.3 $ 20.2
2000 1.8 24.8 18.5
2001 1.7 23.1 17.0
2002 1.7 21.8 15.7
2003 1.7 20.1 13.8
Thereafter...................................... 10.8 93.4 67.4
------ ------- --------
Total minimum lease payments.................... 19.5 $ 209.5 $ 152.6
======= ========
Less imputed interest........................... 8.0
------
Present value of minimum lease payments......... 11.5
Less current portion included in
short-term debt............................... 0.7
------
Obligations under capital leases-noncurrent..... $ 10.8
======
F-20
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(11) Leases (Continued)
At December 1998 and 1997, the net book value of property under capital
leases included in the balance sheets amounted to $8.7 million and $12.0
million, respectively.
Real Estate Owned by Midas and Leased to Franchisees
Midas owns real estate located in various communities throughout the U.S.
that is leased to franchisees under operating lease agreements.
Substantially all leases are for initial terms of 20 years and provide for
minimum and contingent rentals. The increase in the real estate leased to
franchisees in 1998 was due to the franchising during the year of
company-operated shops.
Real estate leased to franchisees and included in the balance sheets
consisted of (in millions):
December
--------
1998 1997
---- ----
Land $ 44.8 $ 38.4
Buildings and improvements............ 88.7 70.1
------- -------
Total property and equipment.......... 133.5 108.5
Accumulated depreciation.............. (30.5) (26.5)
------- -------
Property and equipment, net........... $ 103.0 $ 82.0
======= =======
Rental income for 1998 was $17.4 million, compared to $15.6 million for both
1997 and 1996. Minimum future lease payments to be received are as follows
(in millions):
1999 $ 14.8
2000 14.0
2001 12.4
2002 10.9
2003 9.4
Thereafter.................. 62.8
-------
$ 124.3
=======
Contingent Operating Lease Agreements
Midas has entered into contingent operating lease agreements covering real
estate that is leased by U.S. and Canadian franchisees from parties that are
directly or indirectly related to the franchisees.
At December 1998, approximately 122 shops were covered by these contingent
operating lease agreements, under which Midas could be required, under
certain limited circumstances, to begin making rental payments with respect
to individual shop locations. The average annual shop rental is $51 thousand
with an average remaining term of approximately 6 years.
Management believes that, individually and in the aggregate, any potential
difference that might arise under these contingent lease agreements between
the rental expense and the rental income from future subleases would not
materially affect the financial position or results of operations of Midas.
F-21
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(12) Pension and Postretirement Plans
Defined Benefit Pension Plans and Other Postretirement Plans
Substantially all U.S. employees are covered under various defined benefit
pension plans sponsored and funded by Midas. Plans covering salaried
employees provide pension benefits based on years of service, and generally
are limited to a maximum of 20% of the employees' average annual
compensation during the five years preceding retirement. Plans covering
hourly employees generally provide benefits of stated amounts for each year
of service. Plan assets are invested primarily in common stocks, corporate
bonds, and government securities.
In addition, Midas provides substantially all former U.S. salaried employees
who retired prior to July 1989 and selected other employees in the U.S. and
Canada with certain life and health care benefits.
Net periodic pension and postretirement cost for 1998, 1997 and 1996 are
included the following table (in millions):
Pension Benefits Postretirement Benefits
---------------- -----------------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
Service cost benefits................................ $ 1.8 $ 1.6 $ 1.5 $ - $ - $ -
Interest cost on projected benefit obligation........ 2.7 2.5 2.4 0.2 0.2 0.1
Actual return on assets.............................. (4.4) (3.9) (3.7) - - -
Net amortization and deferral........................ 0.1 0.1 0.2 (0.3) (0.2) (0.3)
----- ----- ----- ----- ----- -----
Total net periodic pension cost...................... $ 0.2 $ 0.3 $ 0.4 $(0.1) $ - $(0.2)
===== ===== ===== ===== ===== =====
The principal economic assumptions used in the determination of net periodic
pension and postretirement cost included the following:
1998 1997 1996
---- ---- ----
Discount rate................................... 7.0% 7.5% 7.5%
Expected long-term rate of return on assets..... 9.5% 9.5% 9.5%
Rate of increase in compensation levels......... 4.5% 5.0% 5.0%
F-22
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(12) Pension and Other Postretirement Plans (Continued)
The changes in the projected benefit obligations for 1998 and 1997 were as
follows:
Pension Benefits Postretirement Benefits
---------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
Benefit obligations as of the beginning of the year..... $ 39.8 $ 33.8 $ 2.9 $ 3.5
Change in foreign currency exchange rates............... (0.4) (0.2) - -
Service cost............................................ 1.8 1.6 - -
Interest cost........................................... 2.7 2.5 0.1 0.2
Plan amendments......................................... 0.1 - 0.1 0.1
Actuarial (gain) loss................................... 3.9 3.5 (0.7) (0.6)
Benefits paid and expenses.............................. (2.6) (1.4) (0.1) (0.3)
------ ------ ----- -----
Benefit obligations as of the end of the year........... $ 45.3 $ 39.8 $ 2.3 $ 2.9
====== ====== ===== =====
The health care cost trend rate used to measure the cost in 1998 for health
care benefits was 8.7%, which is graded down to an ultimate trend rate of
4.5% to be achieved in the year 2006. The effect of a one-percentage point
change in the assumed health care cost trend rates for future years would
result in a $0.5 million increase or decrease in the accumulated post
retirement benefit obligation as of December 1998. The effect of this change
on the aggregate of the service and interest cost components of the net
periodic postretirement benefit costs would be immaterial.
The changes in the fair market value of the plan assets for 1998 and 1997
were as follows:
Pension Benefits Postretirement Benefits
---------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
Fair value of assets as of the beginning of the year... $ 55.5 $ 45.9 $ - $ -
Change in foreign currency exchange rates.............. (0.6) (0.3) - -
Actual return on plan assets........................... 0.9 11.3 - -
Employer contributions................................. 1.1 0.1 0.1 0.2
Participants' contributions............................ - - - 0.1
Benefits paid and expenses............................. (2.6) (1.5) (0.1) (0.3)
------ ------ ----- -----
Fair value of assets as of the end of the year......... $ 54.3 $ 55.5 $ - $ -
====== ====== ===== =====
Pension costs are funded in amounts not less than minimum levels required by
regulation. The following table reconciles the pension plans and
postretirement funded status to the amounts recognized in other noncurrent
assets (liabilities) and in Midas' balance sheets as of December 1998 and
1997 (in millions):
Pension Benefits Postretirement Benefits
---------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
Actuarial present value of benefit
obligation (measured as of
September 30):
Projected benefit obligation........... $ (45.3) $ (39.8) $ (2.3) $ (2.9)
Plan assets at fair market value
(measured as of September 30).......... 54.3 55.5 - -
------ ------- ------- -------
Plan assets in excess of
(less than) projected
benefit obligation.................... 9.0 15.7 (2.3) (2.9)
Unrecognized net asset at
transition............................. (1.1) (1.4) - -
Unrecognized prior service costs......... 2.8 3.1 - -
Unrecognized net gain.................... (2.1) (9.6) (4.6) (4.2)
------- ------- ------- -------
Prepaid (accrued) recognized on
balance sheets......................... $ 8.6 $ 7.8 $ (6.9) $ (7.1)
======= ======= ======= =======
F-23
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(12) Pension and Other Postretirement Plans (Continued)
The principal economic assumptions used in determining the above benefit
obligations were discount rates of 6.5% in 1998 and 7.5% in 1997, and rates
of increase in future compensation levels of 4.5% in 1998 and 5.0% in 1997.
Defined Contribution Plans
Substantially all U.S. salaried employees, certain U.S. hourly employees,
and certain Australian and Canadian employees participate in voluntary,
contributory defined contribution plans to which Midas makes full or partial
matching contributions. Midas' matching contributions to these plans
amounted to $1.7 million, $2.0 million, and $1.9 million in 1998, 1997 and
1996, respectively. Midas' cost for the associated nonqualified plan was
$0.1 million in 1998, $0.7 million in 1997 and $0.3 million in 1996.
Multi-employer Pension Plans
Midas participates in a number of multi-employer pension plans, which
provide benefits to certain unionized employee groups. Amounts contributed
to these plans totaled $0.3 million per year for 1998, 1997, and 1996.
(13) Stock options
In connection with the Spin-off, Midas adopted, and Whitman, as then sole
shareholder of Midas, Inc., approved the Midas 1998 Stock Incentive Plan
(the "Plan"). The Plan authorizes the issuance of up to 3,106,886 shares of
Midas common stock pursuant to the exercise of incentive stock options,
non-qualified stock options and stock appreciation rights and the grant of
restricted stock and performance awards. In addition, Midas reserved 10,000
shares for issuance upon the grant of stock awards.
On January 30, 1998, outstanding stock options granted under the Whitman
stock option plan were replaced with non-qualified Midas, Inc. stock options
of equivalent value, with necessary adjustments being made to the number and
exercise price of the Midas options to preserve the economic spread of the
prior Whitman options. Options granted pursuant to the Plan are generally
exercisable over a period of three years commencing one year after the date
of grant. The following table summarizes information regarding the
outstanding stock options as of December 1998.
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average
Remaining Weighted-Average Weighted-Average
Range of Life Exercise Exercisable Exercise
Exercise Prices Shares (in years) Price Shares Price
--------------- ------ ---------- ---------------- ----------- ----------------
$ 7.35 - $ 9.81 57,518 4.3 $ 8.78 57,518 $ 8.78
$ 11.41 - $ 17.50 1,452,209 8.1 $ 15.25 545,057 $ 14.79
$ 20.25 - $ 28.00 734,774 7.9 $ 22.55 - $ -
---------- ---------
2,244,501 602,575
========== =========
The stock option activity since the Spin-off is summarized as follows:
Number of
Shares Option Price Ranges
---------- -------------------
Outstanding at Spin-off............ 2,106,886 $ 7.35 to $ 16.39
Granted............................ 784,774 $15.65 to $ 28.00
Exercised.......................... (288,086) $ 7.35 to $ 15.83
Cancelled and forfeited............ (359,073) $11.41 to $ 15.83
----------
Outstanding at December 1998....... 2,244,501 $7.35 to $ 28.00
==========
F-24
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(13) Stock options (Continued)
In addition, restricted shares of Whitman common stock issued to certain
Midas officers were forfeited on January 30, 1998 and replaced with
restricted shares of Midas common stock of equal value. At December 1998,
there were 17,745 restricted shares of Midas common stock outstanding. The
restricted shares vest at various times over a three-year period commencing
one year from the original date of grant.
(14) Shareholder Rights Agreement and Series A Junior Participating Preferred
Stock
In 1997, Midas adopted a Rights Agreement providing for the issuance of one
Preferred Stock Purchase Right (a "Right") with each share of Midas common
stock. Each Right entitles the registered holder to purchase from Midas one
one-hundredth of a share of Series A Junior Participating Preferred Stock (a
"Preferred Share") at a price of $150 per one one-hundredth of a Preferred
Share (the "Purchase Price"), subject to adjustment. The Rights will become
exercisable on the Rights Distribution Date, which is the earlier of the
tenth day following a public announcement that a person(s) has acquired
beneficial ownership of 15% or more of the Midas common stock (an "Acquired
Person"), or ten business days after the commencement of a tender offer or
exchange offer that would result in a person(s) acquiring beneficial
ownership of 15% or more of the outstanding shares of Midas common stock.
If a person becomes an Acquiring Person, each Right holder (other than the
Acquiring Person) will be entitled to receive, upon exercise of the Right, a
number of shares of Midas common stock having a market value of two times
the exercise price of the Right. If Midas is acquired in a merger or other
business combination, each Right holder (other than the Acquiring Person)
will be entitled to receive, upon exercise of a Right, a number of the
acquiring Company's common shares having a market value at that time of two
times the exercise price of the Right.
In general, Midas can redeem all the Rights for one cent per Right at any
time until 10 days following the first public announcement that a person has
become an Acquiring Person. The Midas Board of Directors, without the
consent of the holders of the Rights, is also authorized to reduce the stock
ownership thresholds to 10 percent or increase them to not more than 20
percent. The Rights will expire on December 31, 2007. Until a Right is
exercised, the holder of a Right (merely by being a Right holder) will have
no rights as a shareholder of Midas, including voting or dividend rights.
Each Preferred Share will be entitled to a minimum preferential quarterly
dividend payment of $1.00 per share, but will be entitled to an aggregate
dividend of 100 times the dividend declared per share of Midas common stock.
Each Preferred Share will have 100 votes, voting together with the Midas
common stock. In the event of a merger or other transaction in which shares
of common stock of the Company are exchanged, each Preferred Share will be
entitled to receive 100 times the amount received per share of Midas common
stock.
The Company has 20 million authorized shares of Series A Junior
Participating Preferred Stock. There are no Series A Junior Participating
Preferred Stock issued or outstanding.
(15) Contingencies
In connection with the disposition of U.S. company-operated shops, certain
franchises entered into 78 leases with a third party lessor. If the
franchisees fail to make required payments, Midas is contingently liable for
a portion of the losses that would be incurred by the lessor. As of December
1998, Midas' maximum loss exposure is approximately $4.5 million; no losses
were incurred by Midas in 1998.
Midas has certain contingent liabilities arising from various pending claims
and litigation related to a number of matters. While the amount of liability
that may result from these matters cannot be determined, in the opinion of
Midas counsel, the ultimate liability will not materially affect the
financial position or results of operations of Midas.
F-25
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(16) Business Segment Information
Midas operates in a single business segment and provides retail automotive
services principally through franchised shops located in North America
(United States and Canada) and through franchised and licensed shops in
International markets. During 1998, the Company reduced the number of shops
it operates by more than 80%, primarily through the franchising activities
in the United States and Canada described in Note 2 and the sale of the
European operations described in Note 4. The remaining company-operated
shops are expected to be franchised in 1999. Sales between business segments
and geographic areas were not significant. Foreign currency gains and losses
were not significant. Sales to any single customer were less than five
percent of sales and revenues in each of the years presented. Midas' U.S.
operations export products to and receive royalties from franchisees located
in Central America. Such sales and revenues amounted to less than one
percent of U.S. sales and revenues in each of the years presented.
The following tables present financial information for each of Midas'
business segments as of and for the years ended December 1998, 1997 and 1996
(in millions):
Sales and revenues Operating income
------------------ ----------------
1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ----
North American Operations:
United States
Franchise activities.......................... $ 313.8 $ 327.0 $ 341.9 $ 31.8 $ 40.9 $ 77.3
Company-operated shops........................ 46.2 90.2 81.4 (2.7) (36.0) (0.8)
------- ------- ------- ------- ------- -------
Total United States........................... 360.0 417.2 423.3 29.1 4.9 76.5
------- ------- ------- ------- ------- -------
Canada
Franchise activities.......................... 38.3 41.3 40.1 (8.1) 2.4 1.8
Company-operated shops........................ 9.6 16.0 14.9 (0.3) 0.6 0.9
------- ------- ------- ------- ------- -------
Total Canada.................................. 47.9 57.3 55.0 (8.4) 3.0 2.7
------- ------- ------- ------- ------- -------
Total North America Operations................ 407.9 474.5 488.3 20.7 7.9 79.2
------- ------- ------- ------- ------- -------
International Operations:
Europe.......................................... 104.2 111.9 113.2 5.8 (0.4) 4.7
Other........................................... 7.0 10.1 12.7 (6.0) (2.5) (1.1)
------- ------- ------- ------- ------- -------
Total International Operations................ 111.2 122.0 125.9 (0.2) (2.9) 3.6
------- ------- ------- ------- ------- -------
Total before corporate and other expenses......... $ 519.1 $ 596.4 $ 604.2 20.5 5.0 82.8
------- ------- ------- ------- ------- -------
Midas, Inc. Corporate administrative expenses..... (6.6) (5.8) (4.8)
------- ------- -------
Total operating income (loss)..................... 13.9 (0.8) 78.0
Gain on sale of European operations............... 38.0 - -
------- ------- -------
Whitman charges................................... (1.1) (18.1) (17.2)
------- ------- -------
Interest expense.................................. (12.7) (9.1) (10.0)
------- ------- -------
Other income (expense), net....................... 1.9 0.9 0.8
------- ------- -------
Income (loss) before taxes........................ $ 40.0 $ (27.1) $ 51.6
======= ======= =======
F-26
MIDAS
NOTES TO FINANCIAL STATEMENTS (Continued)
(16) Business Segment Information (Continued)
Depreciation
Identifiable assets and amortization Capital investments
------------------- ---------------- -------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
North American Operations:
United States
Franchise activities................. $ 289.9 $ 268.9 $ 250.9 $ 10.4 $ 9.1 $ 7.9 $ 7.7 $ 12.9 $ 10.1
Company-operated shops............... 8.8 48.5 84.7 1.0 5.3 5.7 1.0 9.0 8.4
------- ------- ------- ------ ------ ------ ------ ------ ------
Total United States................ 298.7 317.4 335.6 11.4 14.4 13.6 8.7 21.9 18.5
Canada............................... 23.6 34.3 35.1 0.9 1.1 1.2 0.4 1.5 1.5
------- ------- ------- ------ ------ ------ ------ ------ ------
Total North America Operations........... 322.3 351.7 370.7 12.3 15.5 14.8 9.1 23.4 20.0
------- ------- ------- ------ ------ ------ ------ ------ ------
International Operations:
Europe................................. - 85.3 102.5 4.3 5.1 4.9 1.6 8.1 10.2
Other.................................. 3.0 6.1 9.5 0.4 0.7 0.6 0.3 0.6 0.5
------- ------- ------- ------ ------ ------ ------ ------ ------
Total International Operations........... 3.0 91.4 112.0 4.7 5.8 5.5 1.9 8.7 10.7
------- ------- ------- ------ ------ ------ ------ ------ ------
Total.................................... $ 325.3 $ 443.1 $ 482.7 $ 17.0 $ 21.3 $ 20.3 $ 11.0 $ 29.4 $ 30.7
======= ======= ======= ====== ====== ====== ====== ====== ======
(17) Selected Quarterly Financial Data (Unaudited)
The following table presents Midas' sales and revenues, and net income on a
quarterly basis (in millions):
First Second Third Fourth Full
quarter quarter quarter quarter year
------- ------- ------- ------- ----
1998
Sales and revenues........................ $ 131.2 $ 141.8 $ 138.6 $ 107.5 $ 519.1
Net income................................ 4.2 11.2 13.1 (0.3) 28.2
Earnings per share
Diluted................................. $ .24 $ .65 $ .76 $ (.02) $ 1.63
1997
Sales and revenues........................ $ 142.0 $ 160.3 $ 161.7 $ 132.4 $ 596.4
Net income................................ 3.1 8.6 (36.4) 1.2 (23.5)
Pro Forma
Net income.............................. 3.8 9.4 (35.6) 1.9 (20.5)
Earnings per share
Basic and diluted..................... $ .23 $ .55 $ (2.10) $ .11 $ (1.21)
1996
Sales and revenues........................ $ 130.6 $ 161.7 $ 168.7 $ 143.2 $ 604.2
Net income................................ 2.6 11.3 12.4 4.1 30.4
F-27
EXHIBIT INDEX
Exhibit
Number Document Description
- -------- --------------------
3(i).1 Certificate of Incorporation (incorporated by reference to
Exhibit 3(i).1 to the Midas, Inc. Registration Statement on
Form 10/A No.3 (Post-Effective Amendment No.
1) (Commission File No. 1-13409) (the "Form 10")).
3(i).2 Certificate of Amendment of the Certificate of
Incorporation, dated December 30, 1997 (incorporated by
reference to Exhibit 3(i).2 to the Form 10).
3(ii) By-Laws (as amended December 31, 1997) (incorporated by
reference to Exhibit 4.4 to the Midas, Inc. Registration
Statement on Form S-8 relating to its Retirement Savings
Plans (Registration No. 333-44625) (the "RSP Form S-8")).
4.1 Certificate of Designation of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 4.3
to the RSP Form S-8).
4.2 Rights Agreement, dated as of December 31, 1997, between
Midas, Inc. and First Chicago Trust Company of New York
(incorporated by reference to Exhibit 4.5 to the RSP Form
S-8).
4.3* Midas' Canadian operations revolving credit agreement,
dated June 29, 1998 with the ABN-AMRO Bank.
10.1 Distribution and Indemnity Agreement dated as of December
31, 1997 among Midas, Inc., Midas International Corporation
and Whitman Corporation (incorporated by reference to
Exhibit 2.1 to the Midas, Inc. Current Report on Form 8-K
dated January 30, 1998 (the "Form 8-K")).
10.2 Tax Sharing Agreement dated as of December 31, 1997 among
Midas, Inc., Midas International Corporation and Whitman
Corporation (incorporated by reference to Exhibit 2.2 to
the Form 8-K).
10.3 **Stock Incentive Plan (incorporated by reference to
Exhibit 4.4 to the Midas, Inc. Registration Statement on
Form S-8 relating to its Stock Incentive Plan (Registration
No. 333-44797)).
10.4* Form of Option Agreement.
10.5 **Form of Restricted Stock Award (incorporated by reference
to Exhibit 10.5 to the Midas, Inc. Annual Report on Form
10-K for the year ended December 20, 1997 (File No.
01-13409)).
10.6 **Form of Change in Control Agreement (incorporated by
reference to Exhibit 10.5 to the Midas, Inc.'s Registration
Statement on Form 10/A No.1 (Commission File No. 01-13409))
10.7 **Agreement with former Chief Executive Officer
(incorporated by reference to Exhibit 10.7 to the Midas,
Inc. Annual Report on Form 10-K for the year ended December
20, 1997 (File No. 01-13409)).
10.8* **Form of Restricted Stock Agreement and promissory note.
21* Subsidiaries of Midas, Inc.
23* Consent of KPMG LLP.
27* Financial Data Schedule.
* Filed herewith
** Management Compensatory Plan or Contract
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