Midas 10-Q 2007 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGEACT OF 1934

For the quarterly period ended June 30, 2007

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to            

Commission File Number: 01-13409

MIDAS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware	36-4180556
(State or Other Jurisdiction of Incorporation or Organization )	(I.R.S. Employer Identification No.)
1300 Arlington Heights Road, Itasca, Illinois	60143
(Address of Principal Executive Offices)	(Zip Code)

(630) 438-3000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer, as defined in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  ¨    Accelerated Filer  x    Non-Accelerated Filer  ¨

Indicate by check mark whether the Registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act)    YES  ¨    NO  x

The number of shares of the Registrant’s Common Stock, $.001 par value per share, outstanding as of July 30, 2007 was 14,641,065.

PART I. FINANCIAL INFORMATION

Item 1: Condensed Financial Statements

MIDAS, INC.

CONDENSED STATEMENTS OF OPERATIONS (Unaudited)

(In millions, except for earnings per share)

	For the quarter ended fiscal June						For the six months ended fiscal June
	2007			2006			2007			2006
	(13 weeks)			(13 weeks)			(26 weeks)			(26 weeks)
Sales and revenues:
Franchise royalties and license fees	$	15.9		$	16.9		$	30.6		$	32.1
Real estate revenues		8.9			9.1			17.9			18.2
Company-operated shop retail sales		10.5			10.5			20.0			20.0
Replacement part sales and product royalties		8.9			7.7			16.3			15.5
Other		1.1			0.9			2.2			1.9
Total sales and revenues		45.3			45.1			87.0			87.7
Cost of sales and revenues:
Real estate cost of revenues		5.4			5.7			10.9			11.3
Company-operated shop cost of sales		2.5			2.5			4.8			4.7
Replacement part cost of sales		7.3			6.1			13.2			12.4
Warranty expense		1.3			1.6			2.4			2.9
Other cost of sales		0.3			0.3			0.6			0.5
Total cost of sales and revenues		16.8			16.2			31.9			31.8
Gross profit		28.5			28.9			55.1			55.9
Selling, general, and administrative expenses		20.3			22.2			40.6			44.4
Gain on sale of assets		—			—			—			(3.4	)
Business transformation charges		1.0			0.4			1.5			0.5
Operating income		7.2			6.3			13.0			14.4
Interest expense		(2.3	)		(2.3	)		(4.5	)		(4.5	)
Other income, net		0.2			0.2			0.3			0.5
Income before income taxes		5.1			4.2			8.8			10.4
Income tax expense		2.1			1.6			3.6			4.0
Net income	$	3.0		$	2.6		$	5.2		$	6.4
Earnings per share:
Basic	$	0.22		$	0.17		$	0.37		$	0.42
Diluted	$	0.21		$	0.17		$	0.35		$	0.41
Average number of shares:
Common shares outstanding		14.1			15.2			14.2			15.2
Common stock warrants		0.1			0.1			0.1			0.1
Shares applicable to basic earnings		14.2			15.3			14.3			15.3
Equivalent shares on outstanding stock awards		0.6			0.4			0.5			0.4
Shares applicable to diluted earnings		14.8			15.7			14.8			15.7

See notes to condensed financial statements.

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MIDAS, INC.

CONDENSED BALANCE SHEETS

(In millions, except per share data)

	Fiscal June 2007			Fiscal December 2006
	(Unaudited)
Assets:
Current assets:
Cash and cash equivalents	$	1.9		$	2.4
Receivables, net		30.0			28.7
Inventories		2.4			3.1
Deferred income taxes		6.7			7.6
Prepaid assets		4.3			3.3
Other current assets		3.1			4.3
Total current assets		48.4			49.4
Property and equipment, net		95.7			99.4
Goodwill and other intangible assets, net		9.8			1.5
Deferred income taxes		53.9			57.2
Other assets		8.7			8.9
Total assets	$	216.5		$	216.4
Liabilities and equity:
Current liabilities:
Current portion of long-term obligations	$	1.9		$	2.0
Accounts payable		14.7			15.9
Current portion of accrued warranty		4.6			4.6
Accrued expenses		18.7			21.5
Total current liabilities		39.9			44.0
Long-term debt		72.5			61.1
Obligations under capital leases		2.5			3.0
Finance lease obligation		33.4			33.9
Accrued warranty		29.0			28.8
Other liabilities		5.0			8.3
Total liabilities		182.3			179.1
Temporary equity:
Non-vested restricted stock subject to redemption		3.4			2.3
Shareholders’ equity:
Common stock ($.001 par value, 100 million shares authorized, 17.7 million shares issued) and paid-in capital		8.2			10.3
Treasury stock, at cost (3.1 million shares and 2.7 million shares)		(66.5	)		(57.8	)
Retained income		94.3			89.1
Accumulated other comprehensive loss		(5.2	)		(6.6	)
Total shareholders’ equity		30.8			35.0
Total liabilities and shareholders’ equity	$	216.5		$	216.4

See notes to condensed financial statements.

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MIDAS, INC.

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)

(In millions)

	For the six months ended fiscal June
	2007			2006
Cash flows from operating activities:
Net income	$	5.2		$	6.4
Adjustments reconciling net income to net cash provided by operating activities:
Depreciation and amortization		4.6			4.5
Stock based compensation		2.4			1.7
Amortization of financing fees and change in interest rate swap valuation		0.2			0.1
Business transformation charges		1.5			0.5
Gain on sale of assets		—			(3.4	)
Deferred income taxes		3.0			3.2
Cash outlays for business transformation costs		(1.8	)		(3.5	)
Changes in assets and liabilities, exclusive of effects of business transformation charges, acquisitions and dispositions		(5.1	)		2.3
Net cash provided by operating activities		10.0			11.8
Cash flows from investing activities:
Capital investments		(1.1	)		(1.5	)
Cash paid for acquired businesses		(6.7	)		(0.1	)
Proceeds from sales of assets		1.2			1.1
Net cash used in investing activities		(6.6	)		(0.5	)
Cash flows from financing activities:
Net borrowings (repayments) under revolving lines of credit		11.4			(4.3	)
Payment of principal obligations under capital leases		(0.5	)		(0.5	)
Payment of principal obligations under finance lease		(0.5	)		(0.5	)
Decrease in outstanding checks		(2.5	)		(0.2	)
Cash received for common stock		1.9			1.7
Cash paid for treasury shares		(13.7	)		(7.6	)
Net cash used in financing activities		(3.9	)		(11.4	)
Net change in cash and cash equivalents		(0.5	)		(0.1	)
Cash and cash equivalents at beginning of period		2.4			1.4
Cash and cash equivalents at end of period	$	1.9		$	1.3

See notes to condensed financial statements.

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MIDAS, INC.

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)

(In millions)

	Common Stock And Paid In Capital				Treasury Stock					Retained Income		Comprehensive Income		Accumulated Other Comprehensive Loss
	Shares	Amount			Shares		Amount
Fiscal year end 2006	17.7	$	10.3		(2.7	)	$	(57.8	)	$	89.1			$	(6.6	)
Purchase of treasury shares	—		—		(0.6	)		(13.7	)		—				—
Stock option transactions	—		(0.9	)	0.1			2.5			—				—
Stock option expense	—		1.1		—			—			—				—
Restricted stock awards	—		(2.5	)	0.1			2.5			—				—
Restricted stock vesting	—		0.2		—			—			—				—
Net income	—		—		—			—			5.2	$	5.2		—
Other comprehensive income
— foreign currency translation	—		—		—			—			—		1.1		1.1
— gain on derivative financial instruments, net of tax	—		—		—			—			—		0.3		0.3
Comprehensive income	—		—		—			—			—	$	6.6		—
Fiscal second quarter end 2007	17.7	$	8.2		(3.1	)	$	(66.5	)	$	94.3			$	(5.2	)

See notes to condensed financial statements.

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MIDAS, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited)

1. Financial Statement Presentation

The condensed interim period financial statements presented herein do not include all of the information and disclosures customarily provided in annual financial statements and they have not been audited, as permitted by the rules and regulations of the Securities and Exchange Commission. The condensed interim period financial statements should be read in conjunction with the annual financial statements included in the annual report on Form 10-K for the fiscal year ended December 30, 2006. In the opinion of management, these financial statements have been prepared in conformity with accounting principles generally accepted in the United States and reflect all adjustments necessary for a fair statement of the results of operations and cash flows for the interim periods ended June 30, 2007 (“second quarter fiscal 2007”) and July 1, 2006 (“second quarter fiscal 2006”) and of its financial position as of June 30, 2007. All such adjustments are of a normal recurring nature. The results of operations for the second quarter of fiscal 2007 and 2006 are not necessarily indicative of the results of operations for the full year.

The unaudited condensed financial statements present the consolidated financial information for Midas, Inc. and its wholly-owned subsidiaries (“Midas” or the “Company”). The unaudited condensed financial statements for the quarters ended June 30, 2007 and July 1, 2006 both cover a 13-week period. All significant inter-company balances and transactions have been eliminated in consolidation.

Certain reclassifications have been made to the previously reported fiscal 2006 financial statements in order to provide consistency with the fiscal 2007 results. These reclassifications did not affect previously reported operating income, income before income taxes, net income or earnings per share.

Basic and diluted earnings per share were calculated based on the following share counts (in millions):

	For the quarter ended fiscal June		For the six months ended fiscal June
	2007	2006	2007	2006
Weighted-average common shares outstanding	14.1	15.2	14.2	15.2
Common stock warrants	0.1	0.1	0.1	0.1
Shares applicable to basic earnings	14.2	15.3	14.3	15.3
Effect of dilutive stock awards	0.6	0.4	0.5	0.4
Shares applicable to diluted earnings	14.8	15.7	14.8	15.7
Potential common share equivalents:
Stock options	1.3	1.4	1.3	1.4

Franchise royalties are recognized in the periods that correspond to the periods when retail sales and revenues are recognized by franchisees. Product royalties are recognized as earned based on the volume of franchisee purchases of products from certain vendors. Real estate revenues are recognized as earned on a monthly basis in accordance with underlying property lease terms. Replacement part sales are recognized 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. Taxes collected on behalf of taxing authorities are not recognized as revenue but rather are recorded as a liability and remitted to the proper taxing authority.

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2. Supplemental Cash Flow Activity

Net cash flows from operating activities reflect cash payments and receipts for interest and taxes as follows (in millions):

	For the six months ended fiscal June
	2007		2006
Interest paid	$	4.1	$	4.2
Income tax refunds		—		(0.3	)
Income taxes paid		0.7		0.5

The acquisition of certain company-operated shops resulted in non-cash reductions of accounts receivable of approximately $2.3 million and $1.8 million during the first six months of fiscal 2007 and 2006, respectively.

3. Inventories

Inventories were composed of finished goods in both the quarter ended June 30, 2007 and the year ended December 30, 2006.

4. Business Transformation Activities

In fiscal 2006, the Company launched a major update to its retail shop image. The new image program incorporates changes to internal shop appearance and merchandising, as well as a significant redesign of the Midas shop façade. Midas management believes the new image will better showcase the Company’s expansion into new services, enhance efforts to educate customers and significantly increase the visibility and curb appeal of the typical Midas shop. The Company expects a majority of Midas shops throughout North America to adopt the new shop image. In order to encourage Midas dealers to adopt this new image, the Company has agreed to fund certain planning, development, material and installation costs expected to average approximately $2,600 per shop. The Company also expects to pay the full cost of the image upgrade for its company-operated shops as well as certain shops being transitioned between owners.

As a result, the Company recorded charges of $1.6 million during fiscal 2006 related to this program, and Midas management expects that it will result in additional business transformation costs during fiscal 2007 including $0.7 million recorded in the first six months of 2007. Midas believes the total charges for franchised shops will be approximately $4 million over the life of the program.

In addition, the Company recorded business transformation charges during the first six months of fiscal 2007 of approximately $1.0 million related to the early termination of the Company’s supply agreement with AutoZone, and $0.2 million for other charges. These charges were partially offset by credits totaling $0.4 million to adjust the reserve for non-recoverable lease costs pertaining to the closure of six company-operated shops in 2006.

5. Debt Agreements

On October 27, 2005, the Company entered into a five-year, unsecured $110 million revolving credit facility. On September 15, 2006, the Company amended this revolving credit facility. The amended facility is expandable to $165 million at the Company’s discretion with lender approval. The interest rate floats based on the underlying rate of LIBOR and the Company’s leverage. This facility requires maintenance of certain financial covenants including maximum allowable leverage and minimum net worth. Currently, the interest rate on the Company’s revolving loan borrowings is priced at LIBOR plus 1.25%.

As of June 30, 2007, a total of $72.5 million was outstanding under the revolving credit facility. As of December 30, 2006, a total of $61.1 million was outstanding under the revolving credit facility.

In November 2005, $20 million in senior bank debt was converted from floating rate to fixed rate by locking-in LIBOR at 4.89% for a five year period. In addition, in March 2007, the Company entered into an interest rate swap arrangement to convert $25 million in senior bank debt from floating rate to a fixed rate by locking-in LIBOR at 4.91% for the remaining

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term of the Company’s bank agreement (October 2010). This swap effectively replaced a declining balance swap that expired in March 2007 under which LIBOR was locked-in at 2.76% for a three-year term. As a consequence, currently $45 million of the Company’s $72.5 million in senior bank debt is at fixed rates.

Both the November 2005 and March 2007 swap arrangements have been designated as cash flow hedges and have been evaluated to be highly effective. As a result, the change in the fair value of these swaps is recorded in accumulated other comprehensive income as a gain or loss on derivative financial instruments. As of June 30, 2007, the fair value of these instruments was a pre-tax gain of approximately $0.6 million.

6. Pension Plans

Certain Midas employees are covered under various defined benefit pension plans sponsored and funded by Midas. Plans covering salaried and hourly corporate 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. Plan assets are invested primarily in common stocks, corporate bonds, and government securities. The Company does not expect to make material contributions to the various plans in fiscal 2007.

The components of net periodic pension cost recognized for the interim periods are presented in the following table (in millions):

	For the quarter ended fiscal June						For the six months ended��fiscal June
	2007			2006			2007			2006
Service cost – benefits	$	0.3		$	0.3		$	0.6		$	0.6
Interest cost on projected benefit obligation		0.7			0.7			1.4			1.4
Expected return on assets		(1.1	)		(1.1	)		(2.2	)		(2.2	)
Net amortization and deferral		0.1			0.2			0.2			0.4
Total net periodic pension cost	$	—		$	0.1		$	—		$	0.2

7. Stock-Based Compensation and Other Equity Instruments

On January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standard (SFAS) No. 123R (SFAS 123R) and now records an expense for outstanding unvested stock option awards based on the grant-date fair value of those awards. The fair value of stock option awards has been determined using the Black-Scholes option pricing model and the Modified Prospective Application method of adoption as allowed under SFAS 123R.

The Company did not record an excess tax benefit in the first six months of fiscal 2007 or fiscal 2006 related to stock based compensation plans or other equity instruments. As a result, there was no impact on cash flows from operating activities or cash flows from financing activities in the Statement of Cash Flows.

Stock Options

The Midas Stock Incentive Plan, the Midas Treasury Stock Plan and the Midas Directors’ Deferred Compensation Plan (the “Plans”) authorize the issuance of up to 4,806,886 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. Options granted pursuant to the Plans generally vest over a period of three to five years commencing one year after the date of grant. It is the Company’s policy to issue shares out of treasury when options are exercised. The following table summarizes information regarding the outstanding stock options as of June 30, 2007:

	Number of Shares		Option Price Ranges		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in millions)
Outstanding at fiscal year end 2006	1,617,367		$	6.77– $34.66	$	13.51
Granted	168,600			21.53– 21.53		21.53
Exercised	(118,344	)		8.09– 22.00		13.89
Outstanding at June 30, 2007	1,667,623			6.77– 34.66		14.29	6.1	$	11.9
Exercisable at June 30, 2007	989,343			6.77– 34.66		12.17	5.1	$	6.5

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The company granted 168,600 and 98,000 options in the first six months of fiscal 2007 and 2006, respectively. Additional information pertaining to option activity during the first six months of fiscal 2007 and 2006 was as follows (in millions):

	For the quarter ended fiscal June				For the six months ended fiscal June
	2007		2006		2007		2006
Weighted average grant-date fair value of:
Stock options granted	$	1.4	$	0.9	$	1.4	$	0.9
Stock options exercised		0.5		0.2		0.8		0.8
Stock options vested		0.9		0.9		1.2		1.3

The weighted average estimated fair value of the options granted in the six months ended June 2007 and 2006 was $8.45 and $9.04 respectively, based on the Black-Scholes valuation model using the following assumptions:

Fiscal Year	2007		2006
Risk-free interest rate	4.61	%	5.02	%
Dividend yield	0.0	%	0.0	%
Expected volatility	28.01	%	29.78	%
Expected life in years	6.50		6.50

Volatility is derived based on historical trends. Expected life is calculated utilizing the simplified method as prescribed by Staff Accounting Bulletin No. 107.

As of June 30, 2007, there was $4.9 million in stock option compensation expense related to unvested awards not yet recognized, which is expected to be recognized over a weighted-average period of 3.1 years.

Restricted Stock

From time to time the Company grants shares of restricted stock to certain of its officers and directors. Certain restricted stock vests at the five or seven year anniversary, with provisions for accelerated vesting upon the occurrence of certain pre-determined events (“cliff-vesting shares”), while other restricted stock vests equally over a 5-year period or only upon the occurrence of certain pre-determined events (the latter being referred to as “performance shares”). The fair value of all but the performance share grants is equal to the stock price on the date of the grant. Activity for restricted shares for the first six months of fiscal 2007, including the non-vested restricted shares outstanding and the weighted average grant-date fair value of those restricted shares is shown in the table below:

	Number of Restricted Shares		Weighted Average Grant-Date Fair Value
Non-vested balance as of December 30, 2006	495,328		$	19.72
Granted	116,800			20.98
Vested	(10,000	)		(8.83	)
Non-vested balance as of June 30, 2007	602,128		$	20.14

The performance shares granted in 2007 vest only if the total return on the Company’s stock exceeds the total return on the S&P 500 stock index as of certain measurement dates. These conditionally vested grants were valued based on the probability of meeting the performance requirement. The derived service period for the conditionally vested grants was calculated using a Monte Carlo simulation model which utilizes multiple input variables that determine the probability of satisfying each market condition stipulated in the award grant.

For cliff-vesting shares granted in 2006, the derived service period was calculated using a Monte Carlo simulation model. The Monte Carlo simulation model utilizes multiple input variables that determine the probability of satisfying each market condition stipulated in the award grant. Forfeiture assumptions were applied to all shares granted in 2007 and 2006.

As of June 30, 2007, there was $6.1 million of unamortized restricted stock compensation of which $9.5 million was included as a reduction to paid-in capital and $3.4 million was included in non-vested restricted stock subject to redemption. The $6.1 million of unamortized restricted stock compensation is expected to be recognized over a weighted average period of 3.2 years.

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Restricted stock grants include a “change in control” provision, which provides for cash redemption of unvested restricted stock in certain circumstances. Securities and Exchange Commission Accounting Series Release No. 268 (ASR 268), “Presentation in Financial Statements of Redeemable Preferred Stocks,” requires securities with contingent cash settlement provisions which are not solely in the control of the issuer, without regard to probability of occurrence, to be classified outside of shareholders’ equity. While the Company believes the possibility of occurrence of any such change of control event is remote, the contingent cash settlement of the restricted stock as a result of such event would not be solely in the control of the Company. As such, the Company presents the $3.4 million value of unvested restricted stock as temporary equity on the consolidated balance sheet. Upon the vesting of the restricted stock the Company reclassifies the value of the restricted stock to permanent equity.

Common Stock Warrants

On March 27, 2003, the Company issued 1.0 million warrants valued at $5.0 million in connection with its 2003 debt restructuring. On January 5, 2004, 500,000 of these warrants were automatically cancelled because the Company met certain financial objectives contained in the warrant agreements. As of June 30, 2007 a total of 52,593 warrants remained outstanding. The exercise price of the warrants is $0.01, and the warrants are exercisable at any time up to March 27, 2013. Any warrants that remain unexercised at March 27, 2013 are automatically exercised as of that date.

8. Warranty

Customers are provided a written warranty from Midas on certain products purchased from Midas shops in North America, namely brake friction, mufflers, shocks and struts. The warranty will be honored at any Midas shop in North America and is valid for the lifetime of the vehicle, but is voided if the vehicle is sold. The Company maintains a warranty accrual to cover the estimated future liability associated with outstanding warranties. The Company determines the estimated value of outstanding warranty claims based on: 1) an estimate of the percentage of all warranted products sold and registered in prior periods at retail that are likely to be redeemed; and 2) an estimate of the cost of redemption of each future warranty claim on a current cost basis. These estimates are computed using actual historical registration and redemption data as well as actual cost information on current redemptions.

Year-to-date warranty activity through the first six months of fiscal 2007 is summarized as follows (in millions):

Accrued warranty at beginning of period	$	33.4
Warranty expense		2.4
Changes in foreign currency exchange rate		0.5
Warranty credit issued to franchisees (warranty claims paid)		(2.7	)
Accrued warranty at end of period		33.6
Less current portion		(4.6	)
Accrued warranty – non-current	$	29.0

9. Acquisitions and Divestitures

During the first six months of fiscal 2007, the Company acquired 21 shops from Midas dealers and re-franchised 11 shops to Midas dealers. Of the 21 shops acquired, 11 were in California and 6 were in Vancouver, BC, while 10 of the 11 re-franchised shops were in Florida. The purchase price of the acquired shops was approximately $9.0 million, which consisted of $6.7 million paid in cash and $2.3 million used to settle accounts receivable from selling dealers. These acquisitions resulted in $8.5 million of incremental goodwill and other intangibles. The re-franchising of 11 company-operated shops generated $1.2 million in cash proceeds and the retirement of $0.1 million of goodwill and other intangibles.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

RESULTS OF OPERATIONS

During fiscal 2003, Midas developed and began to implement a plan to dramatically restructure the Company’s operations and re-direct the Company’s strategic focus towards the Midas retail system. This plan was intended to transform the Company by improving profitability, enhancing the competitive position of the Midas retail system, strengthening the Company’s balance sheet and reducing future capital requirements. A major component of this strategy was the elimination of unprofitable manufacturing and distribution operations. Midas concluded these activities when it closed its last automotive exhaust distribution facility in Chicago in the first quarter of 2006.

During the first quarter of fiscal 2006, all remaining exhaust inventory and equipment were sold and liquidated and the Chicago exhaust distribution warehouse was closed. The Company’s vacant Hartford, WI factory is the one asset that remains from the former exhaust manufacturing and distribution operation. Midas is currently seeking buyers for this facility and expects to ultimately record a gain upon the sale of this facility.

Also in fiscal 2006, the Company launched a major update to its retail shop image. The new image program incorporates changes to internal shop appearance and merchandising, as well as a significant redesign of the Midas shop façade. Midas management believes the new image will better showcase the Company’s expansion into new services, enhance efforts to educate customers and significantly increase the visibility and curb appeal of the typical Midas shop. The Company expects a majority of Midas shops throughout North America to adopt the new shop image. In order to encourage Midas dealers to adopt this new image, the Company has agreed to fund certain planning, development, material and installation costs expected to average approximately $2,600 per shop. The Company also expects to pay the full cost of the image upgrade for its company-operated shops as well as certain shops being transitioned between owners. The Company recorded charges of $1.6 million during fiscal 2006 related to this program, and Midas management expects that it will result in additional business transformation costs during fiscal 2007 including $0.7 million recorded in the first six months of 2007. Midas believes the total charges for franchised shops will be approximately $4 million over the life of the program.

With the Company’s business transformation essentially complete, Midas management is focused on building shareholder value through the profitable growth of the Company. The first priority is building shareholder value through the profitable growth of the Midas retail system in North America. This includes both comparable shop sales growth at existing Midas locations and growth in overall shop count. In addition, Midas management believes that the Company’s brand name and system management expertise can be leveraged to generate incremental royalty revenue through growth of the Midas system around the world. This includes possible expansion into China, which management believes is positioned to become the world’s largest automotive market. Because the Company’s franchising business model generates substantial operating cash flow with relatively low ongoing capital investment requirements, the future growth of the Midas retail system does not necessarily depend upon the Company making significant capital investments or adding significant additional corporate overhead. Midas management also believes that it can create shareholder value by efficiently allocating capital towards complementary franchising business acquisitions and repurchasing the Company’s stock.

Second Quarter Fiscal 2007 Compared with Second Quarter Fiscal 2006

The following is a summary of the Company’s sales and revenues for the second quarter of fiscal 2007 and 2006: ($ in millions)

	2007		Percent to Total		2006		Percent to Total
Franchise royalties and license fees	$	15.9	35.1	%	$	16.9	37.4	%
Real estate revenues		8.9	19.6			9.1	20.2
Company-operated shop retail sales		10.5	23.2			10.5	23.3
Replacement part sales and product royalties		8.9	19.7			7.7	17.1
Other		1.1	2.4			0.9	2.0
Total sales and revenues	$	45.3	100.0	%	$	45.1	100.0	%

Total sales and revenues for the second quarter of fiscal 2007 increased $0.2 million, or 0.4%, from the second quarter of fiscal 2006 to $45.3 million. Within the retail auto service business, royalty revenues and license fees decreased $1.0 million, or 5.9%, from fiscal 2006. This decrease was primarily driven by a decrease in U.S. comparable shop retail sales, a decline in the number of North American shops compared to the same period in the prior fiscal year and a scheduled

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reduction in international royalties paid by Norauto. Comparable shop sales in North America declined approximately 1.6% as weak U.S. retail revenues were only partially offset by an increase in Canada comparable shop sales. Revenues from real estate leases declined slightly to $8.9 million as higher revenues from scheduled rent increases were offset by the net reduction in the number of shops subject to real estate rental agreements and lower revenue from sales-based rental agreements.

Sales from company-operated shops were $10.5 million in both fiscal 2007 and 2006 as a comparable shop sales increase of 2.2% was offset by changes in the composition of the company-operated shop portfolio. Midas ended the second fiscal quarter with 76 company-operated shops, compared to 74 shops one year ago. However, in the past year, Midas acquired 22 shops, re-franchised 14 shops and closed six shops. Of those shops acquired in the past year, 19 were acquired late in the second quarter, partially offset by the re-franchising of four shops during the quarter. Midas expects that acquisition and divestiture activity within the company-operated shop business will continue.

Replacement part sales and product royalties increased from $7.7 million to $8.9 million in the second quarter of fiscal 2007. During the second quarter of fiscal 2007, the Company recorded revenue of $1.8 million in connection with the sale of certain products that the Company purchased from AutoZone and subsequently sold to NAPA, at cost, to facilitate the Company’s transition from AutoZone to NAPA as the key stocking product supplier to Midas dealers in the U.S. Excluding these one-time sales to NAPA, replacement part sales and product royalties decreased $0.6 million in the second quarter of 2007. This decline in replacement part sales and product royalties was due to lower product royalties as a result of lower U.S. dealer purchases from AutoZone and decreased sales of tires and shop equipment to Midas dealers. Other revenue increased $0.2 million in the second quarter of fiscal 2007 reflecting continued growth in the Company’s RO Writer software revenue.

The Company’s gross profit margin decreased to 62.9% of sales in the second quarter of fiscal 2007 from 64.1% in fiscal 2006. Excluding the above described one-time revenue from the re-sale of certain product, at cost, to NAPA, the Company’s gross margin was 65.5%, an increase over the prior year. This year-over-year improvement in gross margin primarily reflects a decline in warranty expense of $0.3 million to $1.3 million, or 2.9% of total sales for fiscal 2007, compared to $1.6 million, or 3.6% of total sales in fiscal 2006. The decline in warranty expense is the result of reductions in the warranty redemption and reimbursement rates for exhaust, as well as lower retail sales of brakes and exhaust.

Selling, general and administrative expenses for the second quarter of fiscal 2007 decreased $1.9 million, or 8.6%, from the second quarter of fiscal 2006 to $20.3 million. The decrease in operating expenses reflects a $1.5 million reduction in operating expenses related to the annual dealer convention because the Company held its 50th anniversary convention in the second quarter of fiscal 2006 and a reduction in legal expense related to the expected recovery of legal fees from the Company’s insurers.

During the second quarter of fiscal 2007, the Company recorded business transformation charges of $1.0 million in selling, general and administrative expense. The charges reflect $0.8 million related to the early termination of the Company’s supply agreement with AutoZone, $0.3 million in connection with the Company’s partial funding of the rollout of a new shop image for Midas dealers, and $0.2 million for other charges. Offsetting these charges was a credit of $0.3 million to reflect an adjustment to the reserve for non-recoverable lease costs pertaining to the closure of six company-operated shops in 2006. During the second quarter of fiscal 2006, the Company recorded business transformation charges of $0.4 million in connection with the Company’s partial funding of the rollout of the new shop image for Midas dealers.

As a result of the above changes, operating income increased $0.9 million to $7.2 million in the second quarter of fiscal 2007 from $6.3 million in the second quarter of fiscal 2006. Excluding the impact of the above described business transformation charges, operating income for the second quarter of fiscal 2007 was $8.2 million compared to $6.7 million for the second quarter of fiscal 2006. Excluding the impact of business transformation charges, operating income margin increased to 18.1% in the second quarter of fiscal 2007 from 14.9% in the second quarter of fiscal 2006. The improvement in operating margin primarily reflects savings on administrative overhead expense and the improved profitability of company-operated shops, which offset the negative impact of lower franchise royalties.

Interest expense was $2.3 million in the second quarter of both fiscal 2007 and 2006. Interest expense remained unchanged despite an $11.8 million year-over-year increase in bank debt primarily due to the reduction in interest rates that resulted from changes in the Company’s debt agreement in 2006.

Other income was $0.2 million in the second quarter of both fiscal 2007 and 2006. Other income consists primarily of interest income on overdue customer accounts and foreign currency exchange gains or losses.

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The Company’s effective tax rate was 40.9% in the second quarter of fiscal 2007 compared to 38.5% in the second quarter of fiscal 2006 and compared to the 2007 statutory tax rate of 39.0%. The fiscal 2007 variance from the statutory rate is due to the impact of non-deductible compensation paid to the Company’s Chairman and Chief Executive Officer.

As a result of the above items, net income increased $0.4 million from net income of $2.6 million in the second quarter of fiscal 2006 to net income of $3.0 million in the second quarter of fiscal 2007.

First Six Months Fiscal 2007 Compared with the First Six Months Fiscal 2006

The following is a summary of the Company’s sales and revenues for the first six months of fiscal 2007 and 2006: ($ in millions)

	2007		Percent to Total		2006		Percent to Total
Franchise royalties and license fees	$	30.6	35.2	%	$	32.1	36.5	%
Real estate revenues		17.9	20.6			18.2	20.8
Company-operated shop retail sales		20.0	23.0			20.0	22.8
Replacement part sales and product royalties		16.3	18.7			15.5	17.7
Other		2.2	2.5			1.9	2.2
Total sales and revenues	$	87.0	100.0	%	$	87.7	100.0	%

Total sales and revenues for the first six months of fiscal 2007 decreased $0.7 million, or 0.8%, from the first six months of fiscal 2006 to $87.0 million. Within the retail auto service business, royalty revenues and license fees decreased $1.5 million, or 4.7%, from fiscal 2006. This decrease was primarily driven by a decrease in U.S. comparable shop retail sales, a decline in the number of North American shops compared to the same period in the prior fiscal year and a scheduled reduction in international royalties paid by Norauto. For the first six months of fiscal 2007, comparable shop sales in North America declined approximately 0.7%. Revenues from real estate leases declined slightly to $17.9 million as higher revenues from scheduled rent increases were offset by the net reduction in the number of shops subject to real estate rental agreements and lower revenue from sales-based rental agreements. Sales from company-operated shops were $20.0 million in both fiscal 2007 and 2006 as a comparable shop sales increase of 2.4% was offset by changes in the composition of the company-operated shop portfolio over the past 12 months.

Replacement part sales and product royalties increased from $15.5 million to $16.3 million in the first six months of fiscal 2007. During the first six months of fiscal 2007, the Company recorded revenue of $1.8 million in connection with the sale of certain products that the Company purchased from AutoZone and subsequently sold to NAPA, at cost, to facilitate the Company’s transition from AutoZone to NAPA as the key stocking product supplier to Midas dealers in the U.S. In the first six months of fiscal 2006, the Company recorded the final $1.4 million of sales from its exhaust distribution business. Excluding the transition sales to NAPA and the final exhaust sales, replacement part sales and product royalties increased $0.4 million in the first six months of fiscal 2007. This increase in replacement part sales and product royalties was due to increased sales of tires and batteries to Midas dealers partially offset by lower product royalties driven by lower U.S. dealer purchases from AutoZone. Other revenue increased $0.3 million reflecting continued growth in the Company’s RO Writer software revenue.

The Company’s gross profit margin decreased to 63.3% of sales in the first six months of fiscal 2007 from 63.7% in fiscal 2006. The year-over-year decline in gross margin primarily reflects the impact of the sale of $1.8 million in product, at cost, to NAPA. This was partially offset by a decline in warranty expense of $0.5 million to $2.4 million, or 2.8% of total sales for the first six months of fiscal 2007, compared to $2.9 million, or 3.3% of total sales in fiscal 2006. Excluding the impact of the $1.8 million in NAPA revenue, the Company’s gross margin in the first six months of fiscal 2007 would have increased to 64.7%.

Selling, general and administrative expenses for the first six months of fiscal 2007 decreased $3.8 million, or 8.6%, from the first six months of fiscal 2006 to $40.6 million. The decrease in operating expenses primarily reflects a $1.2 million reduction in operating expenses related to the annual dealer convention, a reduction in legal expense related to the expected recovery of legal fees from the Company’s insurers, a savings of $1.2 million on exhaust distribution expense due to the final exit from that business in the first quarter of fiscal 2006 and lower operating expenses for company-operated shops as a result of improved cost management and a change in the average number of shops in operation compared to the same period one year ago.

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During the first six months of fiscal 2007, the Company recorded business transformation charges of $1.5 million in selling, general and administrative expense. The charges reflect $1.0 million related to the early termination of the Company’s supply agreement with AutoZone, $0.7 million in connection with the Company’s partial funding of the rollout of a new shop image for Midas dealers, and $0.2 million for other charges. Offsetting these charges were credits of $0.4 million to reflect adjustments to the Company’s reserve for non-recoverable lease costs pertaining to the closure of six company-operated shops in 2006. During the first six months of fiscal 2006, the Company recorded business transformation charges of $0.5 million primarily in connection with the Company’s partial funding of the rollout of the new shop image for Midas dealers.

No significant gains or losses on sale of assets were recorded in the first six months of fiscal 2007. However, during the first six months of fiscal 2006, the Company recorded a $3.4 million gain on sale of assets. This included the final recognition of the remaining $1.8 million deferred gain from the March 2005 sale of the Company’s Chicago warehouse, and a $1.6 million gain on the sale of equipment liquidated in connection with the Company’s exit from exhaust manufacturing and distribution.

As a result of the above changes, operating income declined $1.4 million to $13.0 million in the first six months of fiscal 2007 from $14.4 million in the first six months of fiscal 2006. Excluding the impact of the above described business transformation charges and gains on sale, operating income for the first six months of fiscal 2007 was $14.5 million compared to $11.5 million for the first six months of fiscal 2006. Excluding the impact of business transformation charges and gains on sale, operating income margin increased to 16.7% in the first six months of fiscal 2007 from 13.1% in the first six months of fiscal 2006. The improvement in operating margin primarily reflects savings on administrative overhead expense, the elimination of operating losses in the Company’s exhaust distribution operation and improved profitability of company-operated shops, all of which offset the negative impact of lower franchise royalties.

Interest expense was $4.5 million in the first six months of both fiscal 2007 and 2006. Interest expense remained unchanged despite higher average bank debt compared to the year ago period primarily due to the reduction in interest rates that resulted from changes in the Company’s debt agreement in 2006.

Other income declined from $0.5 million in the first six months of fiscal 2006 to $0.3 million in the first six months of fiscal 2007 due to currency exchange losses. Other income consists primarily of interest income on overdue customer accounts and foreign currency exchange gains or losses.

The Company’s effective tax rate was 41.0% in the first six months of fiscal 2007 compared to 38.5% in the first six months of fiscal 2006 and compared to the 2007 statutory tax rate of 39.0%. The fiscal 2007 variance from the statutory rate is due to the impact of non-deductible compensation paid to the Company’s Chairman and Chief Executive Officer.

As a result of the above items, net income decreased $1.2 million from net income of $6.4 million in the first six months of fiscal 2006 to net income of $5.2 million in the first six months of fiscal 2007.

LIQUIDITY AND CAPITAL RESOURCES

Following is a summary of the Company’s cash flows from operating, investing and financing activities for the first six months of fiscal 2007 and 2006, respectively (in millions):

	2007			2006
Cash provided by operating activities before cash outlays for business transformation costs and net changes in assets and liabilities	$	16.9		$	13.0
Cash outlays for business transformation costs		(1.8	)		(3.5	)
Net changes in assets and liabilities		(5.1	)		2.3
Net cash provided by operating activities		10.0			11.8
Net cash used in investing activities		(6.6	)		(0.5	)
Net cash used in financing activities		(3.9	)		(11.4	)
Net change in cash and cash equivalents	$	(0.5	)	$	(0.1	)

The Company’s cash management system permits the Company to make daily borrowings and repayments on its revolving line of credit. This allows Midas to minimize interest expense and to maintain a low cash balance. Midas’ cash and cash equivalents decreased $0.5 million in the first six months of fiscal 2007.

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The Company’s operating activities provided net cash of $10.0 million during the first six months of fiscal 2007 compared to $11.8 million in the first six months of fiscal 2006. Excluding cash outlays for business transformation costs and changes in assets and liabilities, cash from operating activities increased from $13.0 million in the first six months of fiscal 2006 to $16.9 million in the first six months of fiscal 2007, as the decrease in net income was offset by the year over year impact of the $3.4 million gain on sale of assets in 2006, higher business transformation charges, and higher stock based compensation. Cash outlays for business transformation costs declined from $3.5 million in the first six months of fiscal 2006 to $1.8 million in the first six months of fiscal 2007. Cash outlays for business transformation costs in the first six months of fiscal 2007 were related to the Company’s update of its retail shop image and the early termination of the supply agreement with AutoZone, while cash outlays in the first six months of fiscal 2006 were primarily related to the exit from exhaust manufacturing and distribution.

Changes in assets and liabilities swung from a $2.3 million source of cash in the first six months of fiscal 2006 to a $5.1 million use of cash in the first six months of fiscal 2007. The $2.3 million source of cash in 2006 was primarily due to a decline in inventories as a result of the final liquidation of exhaust inventory, while the $5.1 million use of cash in 2007 was primarily due to increased accounts receivable attributable to the NAPA conversion and the timing of payments. Midas expects the change in assets and liabilities to become more favorable in terms of operating cash flow in the second half of 2007.

Investing activities used $6.6 million of cash in the first six months of fiscal 2007 compared to using $0.5 million of cash in the first six months of fiscal 2006. Fiscal 2007 investing activities primarily consisted of $6.7 million paid in conjunction with the acquisition of 21 shops and other assets from certain Midas dealers, $1.1 million in systems development projects, company-operated shop equipment additions and other capital expenditures and $1.2 million in cash generated as the result of the sale of 11 company-operated shops. Fiscal 2006 investing activities primarily consisted of $1.5 million in systems development projects and other capital expenditures, $0.1 million paid to acquire a Midas shop and other shop assets from a Midas dealer and $1.1 million in cash generated as the result of the sale of the remaining exhaust manufacturing assets.

Net cash used in financing activities was $3.9 million in the first six months of fiscal 2007, compared to net cash used of $11.4 million in the first six months of fiscal 2006. During fiscal 2007, the Company increased total debt by $10.4 million, decreased outstanding checks by $2.5 million, paid $13.7 million to repurchase shares of the Company’s common stock and received $1.9 million in cash from the exercise of outstanding stock options. In fiscal 2006, the Company reduced total debt by $5.3 million, reduced outstanding checks by $0.2 million, paid $7.6 million to repurchase shares of the Company’s common stock and received $1.7 million in cash from the exercise of outstanding stock options.

On October 27, 2005, the Company entered into a five-year, unsecured $110 million revolving credit facility. On September 15, 2006, the Company amended this revolving credit facility. The amended facility is expandable to $165 million at the Company’s discretion with lender approval. The interest rate floats based on the underlying rate of LIBOR and the Company’s leverage. This facility requires maintenance of certain financial covenants including maximum allowable leverage and minimum tangible net worth. Currently, the interest rate on the Company’s revolving loan borrowings is priced at LIBOR plus 1.25%.

As of June 30, 2007, a total of $72.5 million was outstanding under the revolving credit facility. As of December 30, 2006, a total of $61.1 million was outstanding under the revolving credit facility.

In November 2005, $20 million in senior bank debt was converted from floating rate to fixed rate by locking-in LIBOR at 4.89% for a five year period. In addition, in March 2007, the Company entered into an interest rate swap arrangement to convert $25 million in senior bank debt from floating rate to a fixed rate by locking-in LIBOR at 4.91% for the remaining term of the Company’s bank agreement (October 2010). This swap effectively replaced a declining balance swap that expired in March 2007 under which LIBOR was locked-in at 2.76% for a three-year term. As a consequence, currently $45 million of the Company’s $72.5 million in senior bank debt is at fixed rates.

Both the November 2005 and March 2007 swap arrangements have been designated as cash flow hedges and have been evaluated to be highly effective. As a result, the change in the fair value of these swaps is recorded in accumulated other comprehensive income as a gain or loss on derivative financial instruments.

On November 9, 2004, the Midas Board of Directors authorized a share repurchase program to begin in fiscal 2005 for up to $25 million of the Company’s outstanding common stock. On May 9, 2006, the Midas Board of Directors authorized a $25 million increase in the share repurchase program and on May 8, 2007 the Board authorized an additional $50 million increase. The Company intends to repurchase shares from time to time in the open market and in privately negotiated transactions, depending upon market and business conditions. The Company has paid approximately $50 million for shares acquired under this program since the buyback program was first initiated.

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The Company believes that cash generated from operations and availability under the current debt agreement provides sufficient liquidity to finance operations and execute strategic initiatives for at least the next 12 months.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management must make a variety of decisions which impact the reported amounts and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied, the assumptions on which to base accounting estimates, and the consistent application of those accounting principles. Due to the type of industry in which the Company operates, the nature of its business, and the Company’s existing business transformation process, the following accounting policies are those that management believes are most important to the portrayal of the Company’s financial condition and results and that require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Valuation of Warranty Liabilities

Customers are provided a written warranty from Midas on certain products purchased from Midas shops in North America, namely brake friction, mufflers, shocks and struts. The warranty will be honored at any Midas shop in North America and is valid for the lifetime of the vehicle, but is voided if the vehicle is sold. The Company maintains a warranty accrual to cover the estimated future liability associated with outstanding warranties. The Company determines the estimated value of outstanding warranty claims based on: 1) an estimate of the percentage of all warranted products sold and registered in prior periods at retail that are likely to be redeemed; and 2) an estimate of the cost of redemption of each future warranty claim on a current cost basis. These estimates are computed using actual historical registration and redemption data as well as actual cost information on current redemptions. An increase of one percentage point in the estimated percentage of warranted products likely to be redeemed in the U.S. would have the effect of changing Midas’ December 30, 2006 outstanding U.S. warranty liability by $4.5 million. A change in the estimated current cost of warranty redemptions of one dollar would have the effect of changing Midas’ outstanding U.S. warranty liability by $1.7 million.

Valuation of Receivables

The Company records receivables due from its franchisees and other customers at the time the sale is recorded in accordance with its revenue recognition policies. These receivables consist of amounts due from the sale of products, royalties due from franchisees and suppliers, rents and other amounts. The future collectibility of these amounts can be impacted by the Company’s collection efforts, the financial stability of its customers, and the general economic climate in which it operates. The Company applies a consistent practice of establishing an allowance for accounts that it feels may become uncollectible through reviewing the historical aging of its receivables and by monitoring the financial strength of its franchisees and other customers. Where the Company becomes aware of a customer’s inability to meet its financial obligations (e.g. where it is in financial distress or has filed for bankruptcy), the Company specifically reserves for the potential bad debt to reduce the net recognized receivable to the amount it reasonably believes will be collected. The valuation of receivables is performed on a quarterly basis.

Pensions

The Company has non-contributory defined benefit pension plans covering certain of its employees. The Company’s funding policy for the U.S. plan is to contribute amounts sufficient to meet the minimum funding requirement of the Employee Retirement Income Act of 1974, plus any additional amounts the Company may deem to be appropriate. The Company accounts for its defined benefit pension plans in accordance with Statement of Financial Accounting Standards (SFAS) No. 87, “Employers’ Accounting for Pensions,” and SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R),” which require that amounts recognized in the financial statements be determined on an actuarial basis. Under SFAS No. 158 the amount recorded as pension assets or liabilities is determined by comparing the projected benefit obligation (PBO) to the fair value of the plan assets. Amounts recognized in accumulated other comprehensive loss consist of unrecognized actuarial gains, losses, and prior service costs, net of tax.

To account for its defined benefit pension plans in accordance with SFAS No. 87, the Company must make three main determinations at the end of each fiscal year: First, it must determine the actuarial assumption for the discount rate used to reflect the time value of money in the calculation of the projected benefit obligation for the end of the current fiscal year and to determine the net periodic pension cost for the subsequent year. For guidance in determining this rate, the Company looks at rates of return on high-quality fixed-income investments and periodic published rate ranges.

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Second, the Company must determine the actuarial assumption for rates of increase in compensation levels used in the calculation of the accumulated and projected benefit obligations for the end of the current fiscal year and to determine the net periodic pension cost for the subsequent year. In determining this rate the Company looks at its historical and expected rates of annual salary increases.

Third, the Company must determine the expected long-term rate of return on assets assumption that is used to determine the expected return on plan assets component of the net periodic pension cost for the subsequent year. The difference between the actual return on plan assets and the expected return is deferred under SFAS No. 87 and is recognized to net periodic pension cost over a five-year period.

Carrying Values of Goodwill and Long-Lived Assets

In accordance with SFAS No. 142, the Company conducts tests for impairment of goodwill annually in the fiscal fourth quarter or more frequently if circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that an asset’s carrying amount exceeds its fair value.

Midas evaluates the carrying values of its long-lived assets to be held and used in the business by reviewing undiscounted cash flows by asset group. 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 are adjusted for the differences between the fair values and the carrying values. Additionally, in the case of fixed assets related to locations that will be closed or sold, the Company writes down fixed assets to their estimated recovery value.

Deferred Income Taxes

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences at June 30, 2007. In the event that management determines the Company would not be able to realize all or part of the net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.

IMPACT OF NEW ACCOUNTING STANDARDS

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation (FIN) No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109.” Midas adopted the provisions of FIN 48 effective December 31, 2006.

Through December 30, 2006, in accordance with prior standards, we assessed the ultimate resolution of uncertain tax matters as they arose and established reserves for tax contingencies when we believed an unfavorable outcome was probable and the liability could be reasonably estimated. As of December 30, 2006, Midas had tax reserves of $1.2 million. The reserves were recorded as a non-current liability.

FIN 48 differs from the prior standards in that it requires companies to determine that it is “more likely than not” that a tax position will be sustained by the appropriate taxing authorities before any benefit can be recorded in the financial statements. As of December 30, 2006, our unrecognized tax benefits totaled $2.0 million. The adoption of FIN 48 resulted in no change to the reserve for unrecognized tax benefits that existed as of December 30, 2006. As such, there was no change recorded to retained earnings as a result of the adoption.

Midas’s policy continues to be to recognize accrued interest related to uncertain tax positions and penalties as components of other income (expense), net. As of June 30, 2007, the Company had a $1.2 million liability for uncertain tax positions, all of which represented tax positions that, if recognized, would impact the effective tax rate. The statute of limitations remains open for U.S. Federal tax returns for 2003 and subsequent years. The statute of limitations remains open for Canadian tax returns for 2003 and subsequent years. During the periods open to examination, the Company has net

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operating losses and tax credit carry forwards that have attributes from closed periods. Since these net operating losses and tax credit carry forwards may be utilized in future periods, they remain subject to examination. As of June 30, 2007, the Company has not recorded any provisions for accrued interest or penalties related to uncertain tax positions.

During the six months ended June 30, 2007, there have been no material changes in the liability for uncertain tax positions.

In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157, “Fair Value Measurements,” (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements. SFAS 157 becomes effective for Midas on January 1, 2008. Upon adoption, the provisions of SFAS 157 are to be applied prospectively with limited exceptions. The adoption of SFAS 157 is not expected to have a material impact on Midas’ consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106 and 132(R),” (SFAS 158). SFAS 158 requires an employer to recognize the funded status of each of its defined pension and postretirement benefit plans as a net asset or liability in its statement of financial position with an offsetting amount in accumulated other comprehensive income, and to recognize changes in that funded status in the year in which changes occur through comprehensive income. This requirement became effective for Midas for its December 30, 2006 year-end. The provisions of SFAS 158 are to be applied on a prospective basis; therefore, prior periods presented will not be restated. The Company adopted SFAS 158 on December 30, 2006, which resulted in a $7.0 million reduction in other assets, a $2.8 million increase in deferred tax assets, a $0.2 million increase in other liabilities and a $4.4 million increase in accumulated other comprehensive loss. The adoption had no impact on the Company’s results of operations or cash flows.

Additionally, SFAS 158 requires an employer to measure the funded status of its plan as of the date of its year-end statement of financial position. This provision becomes effective for Midas no later than December 28, 2008 fiscal year-end. The funded status of the majority of Midas’ pension plans is currently measured annually as of the 30th of September.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (SAB 108), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements.” SAB 108 was issued to provide interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The Company adopted SAB 108 on December 30, 2006, which resulted in a cumulative effect adjustment to its opening fiscal 2006 balance sheet. The adjustment included a $4.0 million increase in other liabilities, a $1.5 million increase in deferred income tax assets and a $2.5 million reduction in retained earnings. Those amounts represent the cumulative difference between recording rent expense on a straight-line basis versus the previous Midas policy of recording rent in accordance with the underlying lease terms. The adoption of SAB 108 also resulted in lowering the 2006 real estate cost of revenues by $0.6 million and selling, general and administrative expense by $0.2 million. Prior to the adoption of SAB 108, the Company determined that the potential impact of these items using the “rollover” method was immaterial to the prior years’ statements of operations and cash flow.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (SFAS 159). SFAS 159 permits a company to choose to measure certain financial assets and liabilities at fair value that are not currently required to be measured at fair value (i.e. the Fair Value Option). Election of the Fair Value Option is made on an instrument-by-instrument basis and is irrevocable. At the adoption date, unrealized gains and losses on financial assets and liabilities for which the Fair Value Option has been elected would be reported as a cumulative adjustment to beginning retained earnings. If Midas elects the Fair Value Option for certain financial assets and liabilities, it will report unrealized gains and losses due to changes in their fair value in earnings at each subsequent reporting date. SFAS No. 159 is effective as of January 1, 2008. Midas is currently evaluating the potential impact of adopting SFAS No. 159 on its consolidated financial statements.

FORWARD LOOKING STATEMENTS

This report contains (and oral communications made by Midas may contain) forward-looking statements that may be identified by their use of words like “plans,” “expects,” “anticipates,” “intends,” “estimates,” “forecasts,” “will,” “outlook” or other words of similar meaning. All statements that address Midas’ expectations or projections about the future, including statements about Midas’ strategy for growth, cost reduction goals, expenditures and financial results, are forward-

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looking statements. Forward-looking statements are based on Midas’ estimates, assumptions and expectations of future events and are subject to a number of risks and uncertainties. All such statements are made in reliance upon the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Midas cannot guarantee that these estimates, assumptions and expectations are accurate or will be realized. Midas disclaims any intention or obligation (other than as required by law) to update or revise any forward-looking statements.

The Company’s results of operations and the forward-looking statements could be affected by, among others things: general economic conditions in the markets in which the Company operates; economic developments that have a particularly adverse effect on one or more of the markets served by the Company; the ability to execute management’s internal operating plans; the timing and magnitude of capital expenditures; the Company’s ability to access debt and equity markets; 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; and overall competitive activities. Certain of these risks are more fully described in Item 1 of Part I of the Company’s annual report on Form 10-K. The Company disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company is subject to certain market risks, including foreign currency and interest rates. The Company uses a variety of practices to manage these market risks, including, when considered appropriate, derivative financial instruments. The Company uses derivative financial instruments only for risk management and does not use them for trading or speculative purposes. Interest rate risk is managed through a combination of fixed rate debt and variable rate borrowings. The Company is exposed to potential gains or losses from foreign currency fluctuations affecting net investments and earnings denominated in foreign currencies. The Company’s primary exposure is to changes in exchange rates for the U.S. dollar versus the Canadian dollar.

The Company is exposed to credit risk on certain assets, primarily accounts receivable. The Company provides credit to customers in the ordinary course of business and performs ongoing credit evaluations. Concentrations of credit risk with respect to trade receivables are limited due to the large number of customers comprising the Company’s customer base. The Company believes its allowance for doubtful accounts is sufficient to cover customer credit risk.

In November 2005, $20 million in senior bank debt was converted from floating rate to fixed rate by locking-in LIBOR at 4.89% for a five year period. In addition, in March 2007, the Company entered into an interest rate swap arrangement to convert $25 million in senior bank debt from floating rate to a fixed rate by locking-in LIBOR at 4.91% for the remaining term of the Company’s bank agreement (October 2010). This swap effectively replaced a declining balance swap that expired in March 2007 under which LIBOR was locked-in at 2.76% for a three-year term. As a consequence, currently $45 million of the Company’s $72.5 million in senior bank debt is at fixed rates.

Both the November 2005 and March 2007 swap arrangements have been designated as cash flow hedges and have been evaluated to be highly effective. As a result, the change in the fair value of these swaps is recorded in accumulated other comprehensive income as a gain or loss on derivative financial instruments. As of June 30, 2007, the fair value of these instruments was a gain of approximately $0.6 million.

Item 4. Controls and Procedures.

(a) Evaluation of disclosure controls and procedures.

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act.

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that its disclosure controls and procedures and its internal controls over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.

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(b) Changes in internal controls over financial reporting.

There were no significant changes in internal controls during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

On June 29, 2007, two Canadian franchisees (Landsbridge Auto Corp. and 405341 Ontario Limited) filed a lawsuit in the Ontario Superior Court of Justice against Midas Canada, Inc. and Midas International Corporation claiming, among other things, that the Company breached its franchise agreement with them and Canadian franchise statutes when it closed its manufacturing and distribution operations and entered into third party supply arrangements for the supply of automotive parts to franchisees. The filing seeks class certification, monetary damages of approximately $168 million and a declaratory order requiring Midas to pay to Canadian dealers all rebates and allowances received from suppliers and abatement of royalties.

Midas believes that the case is without merit and intends to vigorously defend these claims. Midas does not believe that this matter, or the associated legal fees of defending these claims, will have a material adverse impact upon the Company’s financial position or results of operations.

Item 1A. Risk Factors.

There have been no material changes from the risk factors previously disclosed in the Company’s most recent annual report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table includes all issuer repurchases, including those made pursuant to publicly announced plans or programs and those not made pursuant to publicly announced plans or programs.

Period	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (2)
April 2007:
(April 1, 2007 through April 28, 2007)	133,625	$	21.61	133,625	$	3,756,854
May 2007:
(April 29, 2007 through May 26, 2007)	2,211	$	21.53	—	$	53,756,854
June 2007:
(May 27, 2007 through June 30, 2007)	163,737	$	23.13	163,000	$	49,986,353
Total	299,573	$	22.44	296,625

(1) Includes shares surrendered to cover withholding taxes upon the vesting of restricted stock. In the second quarter of fiscal 2007, a total of 2,948 shares were surrendered in lieu of taxes.

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(2) On November 9, 2004, the Company announced that the Board of Directors had authorized a share repurchase of up to $25 million in Midas stock. On May 9, 2006, the Midas Board of Directors authorized a $25 million increase in the share repurchase program, and on May 8, 2007, the Board authorized an additional $50 million increase. As of June 30, 2007, a total of approximately 2,369,900 shares had been repurchased under this plan since its inception. The average price of shares repurchased under the plan was approximately $21.10.

Item 3. Defaults Upon Senior Securities.

None

Item 4. Submission of Matters to a Vote of Security Holders.

(a) The Annual Meeting of Shareholders was held on May 8, 2007.

(b) Not Applicable

(c) At the Annual Meeting of Shareholders, the shareholders voted on the following matters: (1) the election of directors to serve until the 2010 Annual Meeting of Shareholders and (2) the approval of independent auditors. The voting results were as follows:

(1) Each nominee for director was elected by a vote of the shareholders as follows:

Director	For	Withheld
Archie R. Dykes	12,379,577	1,389,174
Alan D. Feldman	13,078,859	449,892

Additional directors, whose terms of office as directors continued after the meeting, are as follows:

Term Expiring in 2008	Term Expiring in 2009
Thomas L. Bindley	Jarobin Gilbert, Jr.
Robert R. Schoeberl	Diane L. Routson

(2) The proposal to ratify the appointment of KPMG LLP as the independent auditors of Midas, Inc. for the fiscal year ending December 29, 2007 was approved by shareholders as follows:

For	Against	Abstain
12,935,717	233,806	359,231

(d) Not Applicable

Item 5. Other Information.

None

Item 6. Exhibits.

31.1	Rule 13a – 14(a) / 15d – 14(a) Certification of Chief Executive Officer.
31.2	Rule 13a – 14(a) / 15d – 14(a) Certification of Chief Financial Officer.
32.1	Section 1350 Certifications.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 9, 2007	/s/ Alan D. Feldman
	Alan D. Feldman
	Chairman, President and Chief Executive Officer
	/s/ William M. Guzik
	William M. Guzik
	Executive Vice President and Chief Financial Officer
	/s/ James M. Haeger, Jr.
	James M. Haeger, Jr.
	Vice President and Controller

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