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 27, 1999
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 36-4180556
(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 16,852,913 shares of common stock outstanding as of March 27,
1999.
PART 1. FINANCIAL INFORMATION
Item 1: Financial Statements
MIDAS, INC.
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
(In millions, except for earnings and dividends per share)
For the three months
ended March
--------------------
1999 1998
--------- --------
Sales and revenues......................................... $ 84.7 $131.2
Cost of sales and revenues................................. 44.9 62.2
Selling, general, and administrative expenses.............. 27.3 57.3
------ ------
Operating income...................................... 12.5 11.7
------ ------
Whitman charges............................................ - ( 1.1)
------ ------
Interest expense:
Whitman............................................... - ( 0.5)
Other................................................. ( 2.2) ( 3.3)
------ ------
Total interest expense................................ ( 2.2) ( 3.8)
------ ------
Other income (expense), net................................ 0.5 0.4
------ ------
Income before taxes................................... 10.8 7.2
Income taxes............................................... 4.3 3.0
------ ------
Net income................................................. $ 6.5 $ 4.2
====== ======
EARNINGS PER SHARE:
Basic.................................................... $ .39 $ .25
====== ======
Diluted.................................................. $ .37 $ .24
====== ======
Dividends per common share................................. $ .02
======
AVERAGE NUMBER OF SHARES
Common shares outstanding................................ 16.9 17.0
Equivalent shares on outstanding stock options........... .6 .2
------ ------
Shares applicable to diluted earnings.................... 17.5 17.2
====== ======
See notes to condensed financial statements.
1
MIDAS, INC.
CONDENSED BALANCE SHEETS (Unaudited)
(In millions)
March December
1999 1998
------ -------
Assets:
Current assets:
Cash and cash equivalents.......................................... $ 24.4 $ 36.9
Receivables, net................................................... 46.9 39.4
Inventories........................................................ 70.2 63.2
Other current assets............................................... 22.3 24.8
------ ------
Total current assets............................................. 163.8 164.3
Property and equipment, net............................................... 141.6 142.8
Intangible assets, net.................................................... 1.4 2.1
Other assets.............................................................. 24.1 16.1
------ ------
Total assets..................................................... $330.9 $325.3
====== ======
LIABILITIES AND EQUITY:
Current liabilities:
Short-term debt.................................................... $ 1.7 $ 1.6
Accounts and dividends payable..................................... 26.5 19.5
Accrued expenses................................................... 41.5 42.2
------ ------
Total current liabilities........................................ 69.7 63.3
Long-term debt............................................................ 101.6 102.2
Obligations under capital leases.......................................... 9.9 10.8
Deferred income taxes and other liabilities............................... 26.9 25.6
------ ------
Total liabilities................................................ 208.1 201.9
------ ------
Shareholders' equity:
Common stock ($.001 par value, 100 million shares
authorized, 17.3 million shares issued - March 1999 and
17.0 million shares issued - December 1998) and paid-in capital..... 29.1 27.1
Treasury stock (.4 million shares - March 1999 and
.2 million shares - December 1998, at cost)......................... (13.4) (4.2)
Retained income....................................................... 113.1 106.9
Accumulated other comprehensive income (loss)......................... (6.0) ( 6.4)
------ ------
Total shareholders' equity............................................ 122.8 123.4
------ ------
Total liabilities and equity..................................... $330.9 $325.3
====== ======
See notes to condensed financial statements.
2
MIDAS, INC.
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
(In millions)
For the three months
ended March
1999 1998
--------- --------
Cash flows from operating activities:
Net income......................................................... $ 6.5 $ 4.2
Adjustments reconciling net income to
net cash provided by operating activities:
Depreciation and amortization................................. 2.9 4.4
Cash outlays for business transformation costs................ (3.0) (6.1)
Changes in assets and liabilities.................................. (1.3) 5.7
------ ------
Net cash provided (used) by operating activities.................... 5.1 8.2
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital investments................................................ (4.3) (7.5)
Proceeds from sales of property and equipment...................... 1.5 8.8
------ ------
Net cash provided (used) in investing activities.................... (2.8) 1.3
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt incurred............................................ - 216.4
Long-term debt repayments.......................................... (0.4) (17.5)
Payment of obligations under capital leases........................ (0.1) (0.2)
Cash received for common stock..................................... 3.9 -
Cash paid for treasury shares...................................... (17.9) -
Net increase (decrease) in loans and
advances from Whitman......................................... - (55.5)
Dividends paid to shareholders..................................... (0.3) -
Dividends paid to Whitman.......................................... - (137.6)
------ ------
Net cash provided (used) by financing activities.................... (14.8) 5.6
------ ------
Effect of exchange rate changes on
cash and cash equivalents.......................................... - (0.2)
------ ------
Net change in cash and cash equivalents............................. (12.5) 14.9
Cash and cash equivalents at beginning of period.................... 36.9 12.5
------ ------
Cash and cash equivalents at end of period.......................... $ 24.4 $ 27.4
====== ======
See notes to condensed financial statements.
3
MIDAS, INC.
CONDENSED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
(In millions)
Number of Shares
---------------- Common Accumulated
Common Stock and Compre- Compre-
Stock Treasury Paid-in Treasury hensive Retained hensive
Issued Stock Capital Stock Income Earnings Income
------ -------- -------- -------- ------- -------- -----------
December 1998....................... 17.0 (0.2) $27.1 $ (4.2) $106.9 $(6.4)
Common shares issued under
management restricted stock
incentive plan..................... 0.3 - 6.1 - - -
Purchase of treasury shares......... - (0.5) - (17.9) - -
Stock option transactions........... - 0.3 (4.1) 8.7 - -
Net income.......................... - - - - $ 6.5 6.5 -
Other comprehensive income Foreign
currency translation adjustments... - - - - 0.4 - 0.4
-----
Comprehensive income................ - - - - $ 6.9 - -
=====
Dividends to shareholders........... - - - - (0.3) -
---- ---- ----- ------ ------ -----
March 1999.......................... 17.3 (0.4) $29.1 $(13.4) $113.1 $(6.0)
==== ==== ===== ====== ====== =====
See notes to condensed financial statements.
4
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 present the consolidated financial
information for Midas, Inc. and its wholly-owned subsidiaries ("Midas" or the
"Company"). Midas became an independent, publicly held company on January 30,
1998 as the result of a spin-off by Whitman Corporation ("Whitman"). The
unaudited condensed financial statements for the quarter ended March 27, 1999
cover a 13-week period, while the quarter ended March 28, 1998 covered a 14-week
period.
NOTE 2. Supplemental Cash Flow Activity
Net cash provided by operating activities reflect cash payments and receipts for
interest and taxes as follows (in millions):
For the three months
ended March
--------------------
1999 1998
------- ---------
Interest paid - Whitman........... $ - $ 1.0
Interest paid - other............. 0.9 2.2
Income tax (refunds).............. (0.4) (3.7)
Income taxes paid................. 3.1 2.1
NOTE 3. Inventories
Inventories, summarized by major classification, were as follows (in millions):
March December
1999 1998
---------- --------
(Unaudited)
Raw materials $ 2.8 $ 2.5
Work in process 1.2 1.2
Finished goods 66.2 59.5
----- -----
$70.2 $63.2
===== =====
5
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
LIQUIDITY AND CAPITAL RESOURCES
Introduction:
In anticipation of the January 30, 1998 spin-off from Whitman, Midas
entities entered into three new debt agreements in January 1998. Midas, Inc.
and its wholly-owned subsidiary, Midas International Corporation, entered into a
five-year, unsecured revolving credit facility with a syndicate of commercial
banks and financial institutions that enable the Company to borrow funds at
variable interest rates on a revolving credit basis up to an aggregate principal
amount of $200 million. Midas International Corporation also entered into a
seven-year $50 million unsecured term loan arrangement with an institutional
investor. Also in January 1998, Midas France S.A. entered into a 100 million
French franc, five-year amortizing term loan.
In 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 Corporation 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.
As a result of the spin-off related transactions noted above, the Company's
total debt to capitalization increased from 24.4% at December 1997 to 68.5% at
the quarter ended March 1998.
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.
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.
In October 1998, Midas, Inc. and Magneti Marelli, S.p.A., a member of the
Fiat Group, formed a strategic alliance to develop the Midas program in the
business of fast auto service repair in Europe and South America. As part of
the alliance, Midas sold its interests in Europe and South America to Magneti
Marelli for $100 million in October 1998, and entered into a long-term license
agreement. Midas will also receive on-going royalties throughout the term of
the license agreement, as the shops in Europe will continue to operate using the
Midas name.
During the last three-quarters of 1998, the Company used a portion of the
proceeds realized from the sale of Europe and the franchising of North America
company-operated shops to retire $99.0 million of short and long-term debt.
This reduction in debt lowered the Company's debt to capitalization from 68.5%
at the end of March 1998, to 48.2% at December 1998.
6
1999 Activity:
The Company generated net cash flows from operating activities of $5.1
million and $8.2 million for the three months ended March 1999 and 1998,
respectively. The year-over-year decline was due to a normal seasonal increase
in working capital in 1999 compared to a decline one year ago as a result of the
franchising of company-operated shops and closing of low return distribution
points.
Investing activities used $2.8 million in cash in the first quarter of 1999
and provided $1.3 million during the comparable quarter one year ago. During
the first quarter of 1998 the Company franchised a number of company-operated
shops in conjunction with the strategic initiative to focus on franchising
activities. This activity provided $8.8 million in proceeds from asset sales in
1998 and $1.5 million in 1999.
Net cash used by financing activities was $14.8 million in the first
quarter of 1999, which compared to cash provided by financing activities of $5.6
million one year ago. The primary factor in the variance was a net $14.0
million used in 1999 to repurchase common stock under a formal repurchase plan
approved by the Company's Board of Directors in 1999.
Midas' cash and cash equivalents totaled $24.4 million at March 1999
compared to $27.4 million at March 1998, respectively.
Midas management believes that cash flows from operations and unused
amounts available under the revolving credit facility will be sufficient to
satisfy Midas' future working capital, capital investment, share repurchase and
other financing requirements for the foreseeable future.
7
RESULTS OF OPERATIONS
1999 First Quarter Compared with 1998 First Quarter.
In order to execute the Company's business strategy, which is to become a
focused and efficient operator of a North American franchisee and wholesale
parts distribution network and a licensor of Midas trademarks and know-how
outside North America, the Company undertook a number of initiatives in 1997 and
1998 that significantly affected the Company's financial statements. The most
significant of these actions were the sale of Midas Europe and the franchising
of virtually all of the company-operated shops in North America.
The following is a summary of the Company's sales and revenues for the
three months ended March 1999 and March 1998, respectively: ($ Millions)
Percent Percent
1999 To Total 1998 To Total
----- -------- ------ --------
Replacement parts sales................... $53.6 63.3% $ 60.6 46.2%
Company-operated shop retail sales........ 4.8 5.7 43.4 33.1
Royalties and license fees................ 15.7 18.5 16.8 12.8
Real estate rental revenues............... 9.9 11.7 8.9 6.8
Other..................................... 0.7 0.8 1.5 1.1
----- ----- ------ -----
Sales and revenues........................ $84.7 100.0% $131.2 100.0%
===== ===== ====== =====
Replacement parts sales decreased $7.0 million or 11.6% in the first
quarter versus one year ago. The primary factors in this decline were; 13 weeks
of operations in 1999 versus 14 weeks in the quarter ended March 1998, a
reduction in selling prices to customers representing a pass-through of vendor
price reductions granted to the Company and, the closing of several low return
distribution points.
Retail sales from company-operated shops decreased $38.6 million or 89% in
the quarter due to a combination of; the sale of Midas Europe which operated 190
company owned shops and the franchising of 122 company-operated shops in North
America over the past twelve months.
Royalties and license fees decreased $1.1 million or 6.5% in the quarter
due to the sale of Midas Europe. In 1998 the Company realized a 5% royalty on
all franchisee sales. Under the license agreement entered into with the
purchase of Midas Europe the Company earns a 2.5% royalty on all retail sales in
Europe.
Real estate rental revenues increased $1.0 million or 11.2% in the quarter
versus one year ago due to the leasing of former company-operated shop real
estate to franchisees.
Other miscellaneous sales and revenues declined principally due to the sale
of Midas Europe.
In total, first quarter sales and revenues declined $46.5 million or 35.4%
to $84.7 million versus $131.2 million in the year ago quarter.
Cost of sales and revenues for the quarter declined $17.3 million or 27.8%
from 1998 to $44.9 million. $13.4 million, or 77% of the decrease was due to
the sale of Midas Europe in 1998 and the franchising of 122 company-operated
shops over the past twelve months. The remainder of the decrease was due to
lower replacement parts sales. Cost of sales and revenues as a percent to sales
and revenues, increased from 47.4% in the quarter ended March 1998 to 53.0% in
the current quarter. The increase in cost of sales and revenues as a percent to
sales and revenues was due almost entirely to the sharp decline in the number of
company-operated shops, which carried a much lower cost of sales component than
the remaining business.
8
Selling, general and administrative expenses for the quarter declined $30.0
million or 52.4% from 1998 to $27.3 million. $25.9 million or 86% of the
decline was due to the sale of Midas Europe and the franchising of company-
operated shops in North America. The remainder of the decrease was due to a
combination of; 13 weeks of operations in the current quarter versus 14 weeks in
the quarter one-year ago and generally lower ongoing costs as a result of cost
reduction initiatives. Selling, general and administrative expenses in the
quarter represented 32.2% of sales and revenues versus 43.7% in the year ago
quarter. This decline was due to combination of the sharp decline in the number
of company-operated shops which carried a substantially higher operating expense
component than the ongoing business and generally lower costs as a result of
cost reduction initiatives.
Operating income for the quarter increased $0.8 million or 6.8% from 1998
to $12.5 million. The operating income margin for the quarter was 14.8% as
compared to 8.9% in the first quarter one year ago. The improvement in
operating income was due to a combination of the sale of Midas Europe and the
franchising of company-operated shops in North America, as both of these
businesses reported seasonally lower results in the first and fourth quarters
and, generally lower costs as a result of cost reduction initiatives.
There were no Whitman administrative charges in the current quarter due to
the spin-off of the Company in the first quarter one year ago.
Interest expense for the quarter declined $1.6 million or 42.1% from 1998
to $2.2 million. The decline in interest expense was principally the result of
a substantial reduction in long-term debt over the past 12 months.
Year 2000 Update
In 1997, the Company instituted a Year 2000 project to evaluate and
remediate Year 2000 issues. The project is divided into three sections:
. The Company's computer hardware, hardware operating systems and
application software.
. Franchisee computer hardware and application software, including point of
sale hardware and software.
. Supplier computer systems.
The Company's State of Readiness. With respect to the Company's
application hardware, hardware operating systems and application software,
substantial progress has been made, utilizing both internal and external
resources in remediating those systems deemed not to be Year 2000 compliant.
Management expects that by September 1999 all of the Company's internal computer
systems will be Year 2000 compliant.
With respect to franchisee systems, the Company has conducted surveys and
engaged in discussions with current franchisee systems vendors and it has been
determined that a substantial number of the franchisee systems are not Year 2000
compliant. The Company is currently discussing solutions with both current and
potential new vendors to ensure compliance. Management believes that it may be
until the fourth quarter of 1999 before substantially all of the franchisee
systems are Year 2000 compliant.
With respect to the Company's suppliers, the Company initiated discussions
with major suppliers in the fourth quarter of 1998 to determine their state of
readiness and/or plans to become Year 2000 compliant.
9
The Cost to Address the Company's Year 2000 Issues. Through March 1999,
the Company has spent approximately $4.1 million in connection with the Year
2000 project. Management estimates that an additional $0.5 million will be
required to be spent to ensure all of the Company's systems are Year 2000
compliant. Management is unable to project at this time the cost to the
Company, if any, of ensuring that substantially all franchisee systems are Year
2000 compliant.
The Risks Associated with the Company's Year 2000 Issues. The failure to
correct a material Year 2000 problem could result in an interruption in, or a
failure of, normal business activities and operations. Such interruptions or
failures could materially and adversely affect the Company's results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of franchisees and third-party suppliers, the Company is
unable to determine at this time whether the consequences of Year 2000 failures
will have a material impact on the Company's results of operations, liquidity or
financial condition. The Year 2000 project is expected to significantly reduce
the Company's level of uncertainty about the Year 2000 problem. The Company
believes that the Year 2000 project should reduce the possibility of significant
interruptions of normal operations.
Contingency Plans. The Company has not developed contingency plans as of
this date. The Company has engaged a third party to assess the Company's
readiness for the Year 2000 issue. Should progress in completing the Year 2000
project fall behind schedule, a contingency plan will be developed.
FORWARD LOOKING STATEMENTS
This report contains, and certain of the Company's other public documents
and statements and oral statements contain and will contain, forward-looking
statements that reflect management's current assumptions and estimates of future
performance and economic conditions using information currently available. Such
statements are made in reliance upon the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. The Company cautions investors that
any forward-looking statements are subject to risks and uncertainties that may
cause actual results and future trends to differ materially from those
projected, stated, or implied by the forward-looking statements.
The Company's results of operations and the forward-looking statements
could be affected by, among others things: general economic conditions in the
markets in which the Company operates; economic developments that have a
particularly adverse effect on one or more of the markets served by the Company;
the ability to execute management's internal operating plans; the timing and
magnitude of capital expenditures; economic and market conditions in the U.S.
and worldwide; currency exchange rates; changes in consumer spending levels and
demand for new products and services; cost and availability of raw materials;
and overall competitive activities. The Company disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise.
10
PART 2. OTHER INFORMATION
Part 2 items were not applicable. Exhibit 27, Financial Data Schedule, was
filed only electronically with the Securities Exchange Commission.
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: May 11, 1999 By: /s/ EDWIN A. GRELL
------------------
Edwin A. Grell
Vice President and Controller
(As Chief Accounting Officer and Duly
Authorized Officer of Midas, Inc.
11