SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 28, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 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 38-4180556
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
225 North Michigan Avenue Chicago, Illinois 60601
(Address of principal executive offices) (Zip Code)
(312) 565-7500
(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 of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
The registrant had 16,959,924 shares of common stock outstanding as of March 28,
1998.
PART 1. FINANCIAL INFORMATION
Item 1: Financial Statements
MIDAS, INC.
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In millions, except for earnings per share)
For the three months
ended March
------------
1998 1997
---- -----
Sales and revenues................................................................. $131.2 $142.0
Cost of goods sold................................................................. 62.2 66.6
Selling, general, and administrative expenses...................................... 57.3 63.4
------ ------
Operating income................................................................. 11.7 12.0
------ ------
Whitman charges.................................................................... (1.1) (4.5)
------ ------
Interest expense:
Whitman.......................................................................... (0.5) (2.1)
Other............................................................................ (3.3) (0.5)
------ ------
Total interest expense........................................................... (3.8) (2.6)
------ ------
Other income (expense), net........................................................ 0.4 0.3
------ ------
Income before taxes.............................................................. 7.2 5.2
Income tax provisions.............................................................. 3.0 2.1
------ ------
Net income......................................................................... $ 4.2 $ 3.1
====== ======
EARNINGS PER SHARE:
Basic............................................................................. $ .25
======
Diluted........................................................................... $ .24
======
Pro forma basic and diluted....................................................... $ .23
======
AVERAGE NUMBER OF SHARES:
Common shares outstanding......................................................... 17.0
Shares applicable to diluted earnings (includes effect of stock options).......... 17.2
Pro forma common shares outstanding............................................... 17.0
See notes to condensed financial statements.
1
MIDAS, INC.
CONDENSED BALANCE SHEETS
(In millions)
March December
1998 1997
---- ----
ASSETS: (Unaudited)
Current assets:
Cash and cash equivalents..................................... $ 27.4 $ 12.5
Receivables, net.............................................. 65.7 65.7
Inventories................................................... 76.4 79.8
Other current assets.......................................... 25.6 30.8
------ ------
Total current assets...................................... 195.1 188.8
Property and equipment, net...................................... 196.0 198.2
Intangible assets, net........................................... 26.2 29.3
Other assets..................................................... 26.1 26.8
------ ------
Total assets.............................................. $443.4 $443.1
====== ======
LIABILITIES AND EQUITY:
Current liabilities:
Short-term debt............................................... $ 5.8 $ 1.8
Accounts and dividends payable................................ 42.7 40.3
Other current liabilities..................................... 63.2 64.9
------ ------
Total current liabilities.................................. 111.7 107.0
Loans and advances from Whitman.................................. - 55.5
Long-term debt................................................... 197.0 3.5
Obligations under capital leases................................. 14.6 14.6
Deferred income taxes and other liabilities...................... 19.9 28.4
------ ------
Total liabilities........................................ 343.2 209.0
------ ------
Shareholder equity:
Common stock and capital in excess of par value
($.001 par value, 100 million shares authorized,
17.2 million shares outstanding March 1998)............... 27.4 -
Combined capital accounts.................................... - 26.6
Retained income.............................................. 83.6 217.3
Accumulated other comprehensive income (loss)................ (10.8) (9.8)
------ ------
100.2 234.1
------ ------
Total liabilities and equity.............................. $443.4 $443.1
====== ======
See notes to condensed financial statements.
2
MIDAS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
For the three
months
Ended March
-----------
1998 1997
---- ----
Cash flows from operating activities:
Net income........................................................ $ 4.2 $ 3.1
Adjustments reconciling net income to
net cash provided by operating activities:
Depreciation and amortization..................................... 4.4 5.7
Cash expenditures for non-recurring charges....................... (6.1) -
Changes in assets and liabilities................................. 5.7 (23.4)
------- ------
Net cash provided by (used in) operating activities................. 8.2 (14.6)
------- ------
Cash flows from investing activities:
Capital investments............................................... (7.5) (5.6)
Receipts associated with disposition of former
U.S. Company-operated stores.................................... 6.8 -
Proceeds from sales of property and equipment..................... 2.0 0.6
------- ------
Net cash provided by (used in) investing activities................. 1.3 (5.0)
------- ------
Cash flows from financing activities:
Long-term debt incurred........................................... 216.4 -
Long-term debt repayments......................................... (17.5) -
Payment of obligations under capital leases....................... (0.2) (1.8)
Net increase (decrease) in loans and advances from Whitman........ (55.5) 18.4
Dividends to Whitman.............................................. (137.6) -
------- ------
Net cash provided by financing activities........................... 5.6 16.6
------- ------
Effect of exchange rate changes on cash and cash equivalents........ (0.2) (0.4)
------- ------
Net change in cash and cash equivalents............................. 14.9 (3.4)
Cash and cash equivalents at beginning of period.................... 12.5 16.9
------- ------
Cash and cash equivalents at end of period.......................... $ 27.4 $ 13.5
======= ======
See notes to condensed financial statements.
3
MIDAS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 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. The results of
operations for interim periods are not necessarily indicative of the results
that may be achieved on an annual basis.
The unaudited condensed financial statements for the quarter ended March 28,
1998 cover a 14-week period and present the consolidated financial statements of
Midas and its wholly-owned consolidated subsidiaries.
The quarter ended March 22, 1997 was also a 14-week period. The statement of
operations and cash flow statement for this period and the balance sheet as of
December 20, 1997 present combined financial information for Midas, which was
then comprised of wholly-owned subsidiaries of Whitman Corporation ("Whitman"),
including Midas International Corporation ("Midas International") and its
wholly-owned subsidiaries and other Midas companies owned by Whitman but
directly managed by Midas International. In January 1998, these companies became
wholly-owned subsidiaries of Midas. (As required by the context, the terms
"Midas" or the "Company" refers to Midas, Inc. or to the group of companies that
became wholly-owned subsidiaries of Midas, Inc. in January 1998.) On January 30,
1998, as a result of the spin-off by Whitman, Midas became an independent,
publicly held company.
Certain amounts for 1997 have been reclassified to conform with current period
classifications.
NOTE 2. Pro Forma Information
Pro forma basic and diluted earnings (loss) per share for the first quarter of
fiscal 1997 have been calculated on the assumption that the 17.0 million shares
of common stock that were distributed on January 30, 1998 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 for the first quarter of fiscal 1997 are summarized as follows
(in millions):
Incremental administrative expenses
of an independent, publicly held company.................................... $(0.7)
Elimination of Whitman charges................................................. 4.5
Elimination of interest paid to Whitman ....................................... 2.1
Incremental interest expense of an independently-capitalized
Company..................................................................... (4.7)
Incremental income tax provision............................................... (0.4)
-----
Increase in pro forma net income............................................... $ 0.8
=====
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MIDAS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS - CONTINUED
NOTE 3. Supplemental Cash Flow Activity
Net cash provided by operating activities reflect cash payments and receipts for
interest and taxes as follows (in millions):
For the three months
ended March
1998 1997
---- ----
Interest paid - Whitman............................................. $ 1.0 $1.7
Interest paid - other............................................... 2.2 0.5
Income tax (refunds)................................................ (3.7) -
Income taxes paid................................................... 2.1 7.7
NOTE 4. New Accounting Standard
In January 1998, Midas adopted Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income." Midas comprehensive income consists of
(a) net income as reported in the statement of operations and (b) other
comprehensive income (loss), which is comprised solely of foreign currency
translation adjustments. Midas has not recorded income tax benefits on its
foreign currency translation adjustments. For the first three months of 1998,
comprehensive income was $3.2 million, as compared to a comprehensive loss of
$1.5 million in the first three months of 1997. The accumulated amount of other
comprehensive income (loss) through the date of each balance sheet is presented
as a component of shareholder equity. Comprehensive income will be reported in a
separate financial statement in each of the Company's future annual reports.
NOTE 5. Inventories
Inventories, summarized by major classification, were as follows (in millions):
March December
1998 1997
---- ----
(Unaudited)
Raw materials $ 3.1 $ 2.7
Work in process 1.0 1.1
Finished goods 72.3 76.0
----- -----
$76.4 $79.8
===== =====
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Item 2. Management's Discussions and Analysis of Financial Condition and
Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
In anticipation of the January 30, 1998 spin-off from Whitman, Midas
entities entered into three new debt agreements in January 1998. Midas 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 enables Midas and Midas International to borrow
funds at variable interest rates 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. Midas France
S.A. entered into a loan agreement with a syndicate of financial institutions
providing for a 100 million French franc, five-year amortizing term loan.
In January 1998, in order to settle its Whitman obligations of $210 million
($137.6 million dividend and $72.4 million of intercompany loans and advances),
and to provide for working capital on and after the spin-off, Midas
International borrowed $150 million under the revolving credit facility and $50
million under the term loan, while Midas France S.A. borrowed 100 million French
francs ($16.4 million) under the French term loan.
On April 15, 1998, Midas arranged a private placement of $75 million in
unsecured debt at a fixed rate of 6.89% with an investment grade (BBB) rating
from Duff & Phelps Credit Co. 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.
At March 1998, Midas had cash and cash equivalents of $27.4 million,
compared to $12.5 million at December 1997. Cash from operating activities
amounted to $8.2 million in the first three months of 1998, compared to a cash
outflow of $14.6 million in the first three months of 1997. The year-to-year
change principally resulted from a decrease in working capital in the first
three months of 1998 compared to a working capital increase in the same period
in 1997.
Cash provided by investing activities during the first three months of 1998
amounted to $1.3 million compared to cash used of $5.0 million during the first
three months of 1997. The variance between quarters was principally due to
proceeds from asset sales associated with the franchising of 25 former U.S.
Company-operated stores in connection with the plan for disposal adopted by
Midas in the third quarter of 1997.
RESULTS OF OPERATIONS
1998 First Quarter Compared with 1997 First Quarter.
At the end of the first quarter of 1998, there were 2,722 Midas stores in
operation system-wide versus 2,692 one year ago. Stores in operation by
business segment were as follows:
System-wide Stores in Operation
-------------------------------
March 1998 March 1997 Change
---------- ---------- -------
U.S. Operations:
Franchised 1,779 1,747 2%
Company-operated 108 149 (28)
----- -----
Total U.S. 1,887 1,896 (1)
----- -----
Non-U.S. Operations:
Europe 424 389 9
Canada 246 244 8
Other 165 163 1
----- -----
Total Non-U.S. 835 796 5
----- -----
Total 2,722 2,692 1%
===== =====
6
The increase over the past year in the number of U.S. franchised stores in
operation, and the corresponding decrease in the number of U.S. Company-operated
stores were principally due to the franchising, over the past six months, of
stores that had been operated by the Company. In the third quarter of 1997, the
Company adopted a program to franchise virtually all of its U.S. Company-
operated stores in order to more clearly focus on growing the franchised stores
portion of the U.S. business.
The year-over-year growth in non-U.S. stores in operation was due to store
growth in Europe, or more specifically, store additions in France and Spain.
Midas System-wide Retail Sales. Midas system-wide retail sales in the first
quarter (including both franchised and Company-operated stores) decreased $21.8
million, or 6% to $350.2 million. Retail sales as measured in U.S. dollars would
have been approximately $9 million higher if currency exchange rates had
remained the same in 1998 as in 1997. Following is a summary of Midas system-
wide retail sales for the quarters ended March 1998 and 1997, by business
segment (in millions):
System-Wide Retail Sales
1998 1997 Change
---- ---- ------
U.S. Operations:
Franchised stores $241.9 $256.5 (6)%
Company-operated stores 17.7 20.8 (15)
------ ------
Total U.S. 259.6 277.3 (6)
------ ------
Non-U.S. Operations:
Europe 52.1 52.0 -
Canada 25.8 28.3 (9)
Other 12.7 14.4 (12)
------ ------
Total Non-U.S. 90.6 94.7 (4)
------ ------
Total $350.2 $372.0 (6)%
====== ======
Midas system-wide retail sales in the U.S. declined 6% or $17.7 million to
a total of $259.6 million. The decrease was the result of lower retail customer
traffic due in part to a major national retail promotion during the first
quarter in 1997 and the absence of a similar promotion in the current quarter.
The decrease in retail sales from Company-operated stores in the quarter was
primarily due to a net decrease of 41 stores in operation as compared to the
year ago quarter with 13 stores permanently closed and 28 stores franchised,
under the program adopted in the third quarter of 1997. The number of Company-
operated stores in the U.S. is expected to continue to decline during 1998.
Midas system-wide retail sales in Europe were virtually even with the year
ago quarter as reported in U.S. dollars. Had currency exchange rates remained
the same in 1998 as in 1997, retail sales in Europe would have been
approximately $6 million or 12% above the year ago quarter, primarily due to an
increase in the number of stores in operation.
Midas system-wide retail sales in Canada were $25.8 million for the
quarter, which was down $2.5 million or 9% below the 1997 first quarter. Sixty
percent of the decrease was the result of fluctuations in currency exchange
rates, with the balance due to lower retail customer traffic.
Retail sales from other non-U.S. operations were down 12% or $1.7 million
to $12.7 million for the quarter. Had currency exchange rates remained at 1997
levels, retail sales from these operations would have been up marginally over
the year ago quarter.
7
Midas Sales and Revenues. Sales and revenues decreased by $10.8 million or
7% to a total of $131.2 million. Sales and revenues as measured in U.S. dollars
would have been approximately $3.8 million higher if currency exchange rates had
remained the same in 1998 as in 1997. Following is a summary of sales and
revenues for the quarters ended March 1998 and 1997, by business segment (in
millions):
Sales and Revenues
Quarter ended March
-------------------
1998 1997 Change
---- ---- -------
U.S. Operations:
Franchise activities $ 74.6 $ 80.1 (7)%
Company-operated stores 17.7 20.8 (15)
------ ------
Total U.S. 92.3 100.9 (9)
------ ------
Non-U.S. Operations:
Europe 25.2 25.8 (2)
Canada 11.8 12.5 (6)
Other 1.9 2.8 (32)
------ ------
Total Non-U.S. 38.9 41.1 (5)
------ ------
Total $131.2 $142.0 (8)%
====== ======
Sales and revenues from U.S. Operations decreased by $8.6 million or 9% to
a total of $92.3 million. Sales and revenues from U.S. franchise activities
declined $5.5 million or 7% to a total of $74.6 million. This decline in royalty
revenues and wholesale replacement parts sales was the result of lower retail
customer traffic in part due to a major retail promotion in the first quarter of
1997 and the absence of a similar event in the current quarter. As noted in the
discussion of first quarter retail sales, sales and revenues from Company-
operated stores in the U.S. declined almost 15% in large part due to the closing
or franchising of 41 stores as previously described.
European sales and revenues decreased $0.6 million or 2% to a total of
$25.2 million for the quarter. Had currency exchange rates remained at 1997
levels, sales and revenues from European operations would have been up
approximately $2.3 million or 9% primarily due to an increase in the number of
stores in operation.
Canadian sales and revenues decreased $0.7 million or 6% to a total of
$11.8 million for the quarter. Had currency exchange rates remained at 1997
levels, first quarter sales and revenues from Canadian operations would have
been within one percent of the year ago quarter.
Sales and revenues from other non-U.S. Operations declined due to a
combination of currency exchange rate fluctuations and the franchising of former
Company-operated stores in Australia.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased $6.1 million or 10% to a total of $57.3
million for the quarter. Approximately 60% of the decrease in operating expenses
were due to the decline in the number of U.S. Company-operated stores. The
remainder of the decrease was spread across all of the Company's business
segments. Operating expenses in relation to sales and revenues decreased almost
a full percentage point to 43.7%.
8
Operating Income. Operating income in the quarter decreased $0.3
million or 3% to a total of $11.7 million. The following is a summary of
operating income for the quarters ended March 1998 and 1997, by business segment
(in millions):
Operating Income
Quarter
--------
ended March
-----------
1998 1997 Change
---- ---- ------
U.S. Operations:
Franchise activities $15.1 $16.2 (7)%
Company-operated stores (0.9) (1.3) 31
----- -----
Total U.S. 14.2 14.9 (5)
----- -----
Non-U.S. Operations:
Europe (0.6) (0.9) *
Canada (0.1) (0.3) *
Other - (0.3) *
----- -----
Total Non-U.S. (0.7) (1.5) *
----- -----
13.5 13.4 *
Corporate administrative expenses (1.8) (1.4) (29)
----- -----
Total $11.7 $12.0 (3)%
===== =====
*Not meaningful.
Operating income from U.S. operations decreased $0.7 million or 5% to
a total of $14.2 million in the first quarter. Operating income from U.S.
Franchise activities decreased 7% to $15.1 million due to a combination of lower
royalty revenues and shipments of wholesale replacement parts partially offset
by lower operating expenses. Results from U.S. Company-operated stores improved
in the first quarter due to a combination of lower operating expenses in
existing stores and the closing of 13 poor performing locations.
Whitman Charges. Whitman charges for the first quarter were $1.1
million versus $4.5 million one year ago or a decrease of $3.4 million. The
reduction in charges in the current year reflects one month of charges in 1998
(due to the January 30, 1998 spin-off) compared to three months of charges in
the first quarter of 1997.
Interest Expense. Interest expense for the first quarter increased
$1.2 million, or 46% to a total of $3.8 million. The increase in interest
expense was due to a substantial increase in the Company's long-term debt to
enable the Company to repay $72.4 million of loans and advances from Whitman
Corporation and a special dividend to Whitman of $137.6 million in connection
with the spin-off. Partially offsetting the effect of higher debt levels were
lower interest rates on the new debt.
9
MIDAS, INC.
PART 2. OTHER INFORMATION
Part 2 items were not applicable. Exhibit 27, Financial Data Schedule, was filed
only electronically with the Securities Exchange Commission.
10
MIDAS, INC.
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.
MIDAS, INC.
Date: May 12, 1998 By: /s/EDWIN A. GRELL
---------------------------
Edwin A. Grell
Vice President and Controller
(As Chief Accounting Officer and Duly
Authorized Officer of Midas, Inc.
11