[GRAPHIC OMITTED]
MIDAS, INC.
1999 ANNUAL REPORT
<PAGE>
1999 MIDAS HIGHLIGHTS
February: Midas announces net income of $28.2 million for 1998, the company's
first year as an independent public company following its spin-off from Whitman
Corporation.
February: Midas' board of directors authorizes the repurchase of up to 3 million
common shares over the following 24 months.
June: Midas relocates corporate headquarters from downtown Chicago to a newly
constructed building in suburban Itasca, Illinois, and begins consolidating
Midas Canada headquarters functions into Itasca to create a North American
headquarters.
July: The company expands its alliance with Arvin Industries calling for Arvin
to supply the majority of formed pipe to Midas for distribution to Midas dealers
and for customers outside the Midas system.
October: The company closes its plant in Bedford Park, Illinois, and moves
exhaust tubing production to the muffler plant in Hartford, Wisconsin.
November: Midas forms an alliance with Visteon Automotive Systems to supply
products as Midas prepares to launch climate control services at 2,100 shops in
the United States and Canada.
[GRAPHIC OMITTED]
<PAGE>
[GRAPHIC OMITTED]
<PAGE>
[GRAPHIC OMITTED]
TO OUR SHAREHOLDERS
In January 1998, Midas, Inc., began its major transition to reposition the
company and our franchisees to meet the growing challenges in the automotive
aftermarket. Much of 1999 was a continuation of our transformation.
Midas management is encouraged by the positive results we saw in 1999, as we
directed our efforts on North America and sharpened our focus on wholesale parts
distribution. Our sales for the year were $355.5 million, down 31 percent from
1998. This decrease was strategic and was a direct result of our sale of Midas
Europe to Magneti Marelli in late 1998; the franchising of more than 150
formerly company-operated Midas shops in North America, and lower prices on
wholesale products sold to Midas franchisees.
Even with sales declining by 31 percent, net income in 1999 was $38.4 million,
an increase of 10 percent from 1998, excluding special items. Earnings per
diluted share were $2.28 in 1999, up 40 percent from the $1.63 per diluted share
a year earlier.
Unfortunately, the stock market did not recognize these improved results in
1999. We were disappointed in Wall Street's reaction to the overall automotive
aftermarket industry during the year. Midas' shares were affected, but not to
the extent of many of our competitors. Our shares closed at $21.875 on December
31, 1999, the last day of trading of our fiscal year.
<PAGE>
We are confident that the initiatives we are putting into place will improve our
wholesale revenues and earnings in 2000 and will help return our share price to
more attractive levels.
TRANSITION CONTINUED IN 1999
Midas management made considerable progress last year in implementing many of
the changes announced or started in 1998.
Shop appearance: In December 1998, we announced a major program to upgrade the
appearance of the 2,100 Midas shops in the United States and Canada. More than
60 percent of the shops completed those upgrades in 1999, by installing signs
with the new Midas logo and refurbishing the exteriors and interiors of the
shops to make them more contemporary.
The refurbishing of the shops will continue through the first quarter of 2000
and we expect to begin marketing the new logo and the new shop appearance on a
national basis beginning in the spring of 2000.
Retail sales: 1999 was an extremely challenging year for anyone in the exhaust
business. At the beginning of the year, the industry had predicted a modest
single-digit decline in aftermarket demand for exhaust products. Instead, the
exhaust aftermarket was down more than three times the anticipated levels, due
to the improved quality of the stainless steel exhaust systems on vehicles built
in the past decade. Fortunately, Midas shops were not off to the extent of many
others in the industry, but our shops still experienced a double-digit decrease
in exhaust.
Such a dramatic decline in exhaust sales underscores the importance of Midas'
efforts to move into new service offerings. The success of these efforts is
shown by the fact that even though our exhaust sales were down by double digits
last year, our overall retail sales declined by only two percent in 1999.
There were improvements in our other core services of brakes, steering and
suspension, and significant increases in other services.
New Midas: We are in the process of rolling out a New Midas in markets
throughout the United States and Canada. The New Midas is designed to enhance
our customers' service experiences by incorporating the new appearance of the
shops, expanded service offerings, enhancements in shop operations and new
standards for employees' performance and appearance.
The New Midas program was tested in late 1999 in two markets. Encouraged by the
significant improvements in retail sales and customer count in those test
markets--some by as much as 25 percent--a market-by market roll-out of the New
Midas is under way during the first half of 2000.
I do not look at the New Midas as an option; it is the key to the success of the
Midas system over the next decade. Our traditional business model is changing.
We must transform Midas from a "muffler and brake specialist" whose customers
come to our shops every three or four years, to a provider of a wide range of
automotive repairs and maintenance services, allowing us to build a loyal base
of repeat customers by seeing our customers several times a year.
Wholesale products: Just as in our retail business, Midas is making significant
changes in our lines of wholesale products. The dramatic decline in the exhaust
market has accelerated management's pursuit of ways to reduce Midas' exposure to
variations in demand for exhaust products.
In July 1999, we announced an expansion of our alliance with Arvin Industries.
We now are purchasing formed pipe from Arvin for distribution to Midas
franchisees and to customers outside the Midas system and Midas is supplying
select formed pipe and exhaust components to Arvin. We have consolidated our
exhaust manufacturing in Hartford, Wisconsin, where we added production of
straight tubing and select formed pipe to the manufacture of mufflers. On
October 1, we closed our plant in Bedford Park, Illinois, which had produced
formed pipe and straight tubing.
MIDAS, INC. 1999 ANNUAL REPORT 03
<PAGE>
Midas also is developing new partnerships with vendors to move into new product
areas, as well as to improve existing product programs. In November, we
announced that Midas had formed an alliance with Visteon Automotive Systems,
calling for Visteon to be the exclusive supplier of climate control products as
Midas begins offering those services at its 2,100 shops in North America. The
segments of the climate control business Midas is entering--air conditioning,
heating and radiator repair--are a tremendous opportunity for the Midas system.
They represent a market in excess of $4 billion--larger than exhaust and nearly
as large as brakes--with no dominant service provider.
Midas management also has enhanced the company's current programs for brake
products, shocks and struts, and has introduced an array of new products to
assist Midas dealers as they enter maintenance services.
Distribution: Midas continued the re-configuration of its parts distribution
system in 1999, closing warehouses in Woodland, California, Montreal, Quebec,
Canada, and Mt. Pocono, Pennsylvania. We expect to close additional warehouses
in 2000, leaving Midas with a total of 10 major distribution centers in North
America to service the Midas system and external customers. As warehouses close,
we are providing enhanced service shipments to Midas shops via regional
carriers.
Information systems: Midas made considerable progress in improving its
information systems in 1999. We selected software by JDA Systems and have begun
installing corporate systems for finance, distribution and merchandising. With
input from the International Midas Dealers Association, we selected IBM hardware
for in-shop point-of-sale equipment. Dealers also have begun installation of
advanced state-of-the-art point-of-sale software, which will assist them in
managing inventories and customer databases and will significantly improve the
company's ability to collect timely sales data.
CHANGING SOURCES OF SALES AND REVENUES 1999 VS 1998
[The following table was depicted as a bar chart in the printed material.]
1999 1998
Replacement parts sales 65.9% 48.5%
Company-oriented shops 3.0% 28.6%
Royalties and License Fees 19.2% 14.3%
Real estate rent revenues 11.3% 7.3%
Other 0.6% 1.3%
CORPORATE ACTIVITIES
1999 saw considerable changes in the mix of the company's sources of revenues.
The franchising of more than 150 company-operated Midas shops in North America
has virtually eliminated retail sales as a source of revenues. The sale of our
European interests to Magneti Marelli in late 1998 means that Midas, Inc., now
receives royalties and license fees instead of retail sales and operating
revenues from Midas Europe.
As a result, wholesale parts revenues grew to two-thirds of our sales and
revenues mix in 1999, from less than half the previous year. Conversely,
revenues from company operated shops were only three percent of our overall
revenue last year, down from 28 percent in 1998.
Royalties and license fees contributed 19.2 percent of 1999 revenues, up from
14.3 percent in 1998, and real estate revenues were 11.3 percent, compared to
7.3 percent in 1998.
The segment of revenues from replacement parts will continue to increase as we
move forward with our programs to expand the distribution of wholesale products
to Midas franchisees and to customers outside the Midas system.
<PAGE>
Reducing costs and debt: Midas management continued its efforts to control
selling, general and administrative expenses (SG&A), which amounted to 27
percent of sales and revenues in 1999, compared to 39.8 percent the previous
year. As a result, our operating income margin last year was 19.2 percent, up
from 13.5 percent before business transformation charges in 1998.
At the end of 1999, Midas' debt level was at $112.1 million, down slightly from
$114.6 million a year ago. Since the time of Midas' spin-off from Whitman
Corporation in January 1998, debt has been reduced a total of $123.2 million
from $235.3 million.
Midas' debt-to-capitalization ratio at the end of fiscal 1999 was 49 percent,
compared to 71 percent at the time of the spin-off and 48 percent at the end of
1998.
Share repurchase: In February 1999, Midas' Board of Directors authorized
management to repurchase up to 3.0 million of the company's common shares within
24 months. By the end of December 1999, Midas had repurchased 1.9 million
shares. In January of this year, Midas announced that its Board of Directors has
increased the authorization by an additional 2.0 million shares over the next 36
months. Management believes that, as long as the market does not recognize the
true value of our shares, repurchasing shares is in the best interests of
shareholders and demonstrates our confidence in the company's strong financial
position and long-term growth potential.
Midas headquarters: Midas relocated its corporate headquarters in June 1999,
from downtown Chicago to a new building in suburban Itasca.
We also have consolidated the former headquarters functions of Midas Canada into
Itasca, resulting in a more efficient and effective North American headquarters
operation.
Summary: I am confident that Midas' strong management team has developed and is
implementing the necessary initiatives at both the corporate and operational
levels to enable Midas to take advantage of opportunities in wholesale and
retail markets for automotive products and services. We will continue to face
challenges, but we are making significant progress.
By executing the New Midas program, enhancing our service to customers and
expanding our product offerings in both wholesale and retail channels, we will
significantly improve Midas' results and the value of your investment in us.
We appreciate your continued confidence and support.
/s/ Wendel H. Province
Wendel H. Province
Chairman and Chief Executive Officer
February 17, 2000
MIDAS, INC. 1999 ANNUAL REPORT 05
<PAGE>
[GRAPHIC OMITTED]
DAVID SCOTT LEVATON
o Midas Dealer - Los Angeles
Los Angeles dealer David Levaton admits that his three Midas shops were
looking tired.
"No one would have looked at my shops and thought 'high tech,' so I
started work on refurbishing early last year," Levaton said. "Now, the new
appearance provides a renewed spirit for my employees and curious new
customers are coming in."
Levaton's business increased in his three shops in 1999, even with the
decline in exhaust.
He builds his business by offering every customer a free safety
inspection.
"The new Midas menu board and computerized vehicle maintenance schedules
enable us to show customers that we provide all the services they need,"
Levaton said.
"Revenues from services other than exhaust and brakes accounted for nearly
30 percent of our business last year," he said. "My shops are in an
enormous potential market for maintenance services, which we must promote
to the public as their alternative to the car dealerships."
Customers today are more knowledgeable about their vehicles, according to
Levaton.
"They may have checked out their problems and symptoms on the Internet and
are coming to us for explanation or verification," he said. "It is up to
us to deliver what the customer needs."
<PAGE>
[GRAPHIC OMITTED]
Expanded services increase the frequency
that customers visit Midas shops.
[GRAPHIC OMITTED] Midas shops are open longer hours to accommodate
busy lifestyles of their customers.
THE NEW MIDAS:
In early 2000, the company began a market-by-market launch of the New Midas,
which combines a new appearance, expanded services and enhanced operational
elements.
The objective of New Midas is to differentiate Midas shops in the competitive
automotive service marketplace by providing a total commitment to the customer
and a consistent level of service throughout the Midas system.
Midas tested the New Midas program, supported by newly created television, radio
and print advertising, in two markets in late 1999. Experience from these tests
was used to implement our first three launch markets in the first quarter of
2000. The roll-out will continue in markets throughout North America in the
first half of this year.
The basic shop upgrades were under way throughout 1999. New signs displaying the
revised Midas logo were installed and exteriors were painted gray with accent
stripes to give the shops a contemporary look. Interiors also have been painted
and counters, flooring and point-of-purchase displays have been updated.
All New Midas shops offer the traditional Midas core services for exhaust,
brakes and steering and suspension, as well as the new categories of drive
train, starting and charging, climate control and maintenance services, such as
oil changes, filters, belts, wiper blades and radiator flush and fill. Climate
control is being phased in: first, as an inspection and recharge service,
followed by diagnosis and repair once technicians are appropriately certified.
In addition, the New Midas program includes standards for employee technical
certification and appearance, expanded hours of operation, standardized
telephone processes and improvements in the selling process and inventory
management.
Midas has developed a comprehensive New Midas training program for franchisees,
their employees and for Midas field personnel. The training sessions focus on
three key areas: selling processes, telephone management and teamwork.
There will be additional technical training by Midas personnel and vendors for
the new services.
The comprehensive training effort will make certain that customers' service
experiences match the bright new look of Midas.
MIDAS, INC. 1999 ANNUAL REPORT 07
<PAGE>
[GRAPHIC OMITTED]
HERB HOLLINGER + TRACY BEERS
o Midas Dealers / Partners - Philadelphia
CAROLYN SAVAGE + JOHN WERTZ
o Midas Customers - Philadelphia
"Our future opportunity is in maintenance services," says Tracy Beers, a
24-year veteran Midas dealer who owns eight Midas shops in the greater
Philadelphia area with partner Herb Hollinger.
Maintenance services contributed more than $1 million in revenues to their
eight shops in 1999, compared to just $155,000 five years ago.
"These services of oil changes, belt replacement, radiator flushes and
state vehicle inspections increased by 25 percent last year, more than
offsetting our decline in exhaust," Beers explained.
"As a female motorist, I have confidence that Midas now can provide the
routine services required to keep my car safe for my family," said
customer Carolyn Savage.
Beers and Hollinger completed the exterior and interior refurbishing of
their shops last summer. They credit the upgraded image of their shops
with bringing in new customers.
"The change in appearance of our shops tells potential customers that
there is something new going on here," Hollinger said. "We grew our
maintenance business dramatically last year without any additional
advertising."
These Pennsylvania dealers are seeing new customers and serving their
customers more often.
"Providing maintenance enables us to serve lease customers and others who
may not hold onto their vehicles long enough to need to replace their
exhaust systems," Beers said.
"The fresh, state-of-the-art look of our shops gives customers the
confidence that Midas can service their high-tech vehicles," Hollinger
explained.
<PAGE>
[GRAPHIC OMITTED] Midas has added a line of Evergard
visibility products, including wiper blades.
Midas Plus brake friction materials provide stopping [GRAPHIC OMITTED]
characteristics that are unique among aftermarket products.
WHOLESALE PRODUCT SALES:
The year 1999 brought some significant changes to Midas' wholesale products
business. Because of the declines in the sales of exhaust products in the
replacement market, company management has sought ways to reduce Midas' exposure
to fluctuations in exhaust demand.
At the same time during 1999, Midas entered into new vendor alliances for
existing product lines and for new services.
In July, the company announced plans to consolidate exhaust product
manufacturing in Hartford, Wisconsin. On October 1, Midas closed its plant in
Bedford Park, Illinois, near Chicago, which had produced formed pipe and
straight tubing. At the same time, the company expanded an existing alliance
with Arvin Industries for formed pipe.
The production of straight tubing and select formed pipe has been moved to the
Hartford plant, which also will continue to manufacture mufflers. Consolidation
of exhaust manufacturing at Hartford enables the company to achieve cost
efficiencies.
At the Automotive Service Industry Association (ASIA/MEMA) show in Las Vegas in
November, Midas and Visteon Climate Control Systems, Ltd., announced that
Visteon, a part of Ford Motor Company, will be the exclusive supplier of climate
control products to Midas. The company began phasing in climate control in
January and will roll out services for air conditioning, heating and radiators
at the 2,100 Midas shops in North America during 2000. The market for climate
control in the aftermarket exceeds $4 billion in sales annually and there is no
dominant service provider.
Midas has entered into a new partnership with Federal Mogul to provide Midas
Plus brake friction materials. These new pads and shoes are uniquely designed
for Midas. They provide original equipment quality, virtually eliminate brake
squeal and reduce stopping distances.
The company also significantly enhanced its product offerings in chassis parts;
began offering an array of winter products, such as thermostats, heater hoses,
wiper blades, antifreeze, and various replacement lamps; added visibility
products, including wiper motors and arms, windshield washer pumps and tubing;
introduced a new line of high-quality chemicals, such as cleaners, solvents and
conditioning treatments for core and maintenance services, and expanded its line
of Evergard drive belts.
Improvements in wholesale product offerings provide Midas customers with high
quality, competitively priced products designed specifically for the
professional installer.
MIDAS, INC. 1999 ANNUAL REPORT 09
<PAGE>
[GRAPHIC OMITTED]
GREG WARE
o Midas Dealer - Winnipeg
Greg Ware, a Midas dealer since 1987, bought eight former Company-operated
shops in Winnipeg, Manitoba.
"My challenge in Winnipeg has been to change the mindset of employees from
muffler and brakes to becoming a full service operation," Ware said. "My
philosophy is to drive sales by looking after the customer. That is how we
increase traffic and sales volume."
Ware says that by offering maintenance services, he is seeing customers
three and four times a year.
"And, we can sell our core exhaust and brake services to our customers who
are in the shops for oil changes and other maintenance jobs," Ware said.
Ware completed refurbishing his shops in November 1999. His overall
business was up double digits last year and his maintenance revenues
increased 400 percent.
Another benefit of the expanded menu of services is in attracting
technicians, according to Ware.
"In the past, technicians sometimes were not interested in working at
Midas because they thought of us only as a muffler and brake operation,"
Ware said. "Now that we are moving into air conditioning and other types
of services, techs are coming to me looking for jobs."
Ware said his major challenge is recruiting and retaining qualified staff.
"Launching additional services demands new technical skills," Ware said.
"Training programs are key to execution of the expanded services."
Ware said his goal is to generate lifetime customers who ask for his
technicians by name.
<PAGE>
[GRAPHIC OMITTED] A new vendor alliance has strengthened Midas'[GRAPHIC OMITTED]
market position for shocks and struts.
1999 MARKETING:
Successful national promotions featuring services at a price point were the key
to improving retail sales in 1999. Supported by the company's heaviest schedule
of national advertising ever on network and national cable television, these
promotions produced encouraging results for Midas franchisees.
National rebate promotions running three times throughout the year helped
support retail revenues from brakes. In early 1999, the company began shipping
new Midas-brand shocks and struts featuring exclusive "R2" technology.
Promotions for these new products helped Midas maintain a strong position in the
shock and strut replacement category in North America.
These promotions were supported by a series of commercials created by
Chicago-based EURO RSCG Tatham, which became Midas' national creative agency in
late 1998. The commercials featured animation and carried the theme of "Go
Midas," which will continue in new commercials in 2000.
In late 1999, Tatham produced new "Go Midas" commercials for this year, which
feature Midas technicians and the new Midas logo. Some commercials are running
nationally to support product promotions and others are introducing expanded
services during the local market launches of the New Midas program. The New
Midas commercials feature upbeat "Keep a Good Thing Going" music created
specifically for Midas. The music helps tell the story that Midas understands
the importance of vehicles in consumers' everyday lives. The New Midas
commercials will air nationally during 2000.
Midas continued its aftermarket leadership
in the brake category throughout 1999. [GRAPHIC OMITTED]
MIDAS, INC. 1999 ANNUAL REPORT 11
<PAGE>
[GRAPHIC OMITTED]
<PAGE>
SELECTED FINANCIAL DATA
In millions, except per share amounts
<TABLE>
<CAPTION>
======================================================================================================================
FISCAL YEAR 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales and revenues $ 355.5 $ 513.8 $ 591.0 $ 598.9 $ 570.7
Operating income before business transformation costs 68.2 69.6 66.8 78.0 82.5
Operating margin before business transformation costs 19.2% 13.5% 11.3% 13.0% 14.5%
Operating income (loss) $ 68.4 $ 13.9 $ (0.8) $ 78.0 $ 82.5
Income (loss) before income taxes 62.9 40.0 (27.1) 51.6 55.9
Net income (loss) 38.4 28.2 (23.5) 30.4 31.7
Earnings (loss) per share - diluted (pro forma in 1997) $ 2.28 $ 1.63 $ (1.21)
Total assets $ 305.9 $ 325.3 $ 443.1 $ 482.7 $ 451.4
Obligations under capital leases and long-term debt 112.1 114.6 19.9 14.4 17.3
Loans and advances from Whitman -- -- 55.5 77.2 70.3
Total shareholders' equity 114.6 123.4 234.1 277.1 258.5
Return on average shareholders' equity 32.1% 23.0% (8.8)% 11.4% 13.0%
======================================================================================================================
</TABLE>
Earnings per share information is presented for fiscal 1999 and 1998 only
because the Spin-off from Whitman occurred in early 1998. In accordance with
Securities and Exchange Commission regulations, pro forma earnings per share
information is presented for the year preceding the Spin-off; such information
is based on the assumption that the 17.0 million shares distributed in the
Spin-off had been outstanding throughout 1997.
14 MIDAS, INC. 1999 ANNUAL REPORT
<PAGE>
QUARTERLY FINANCIAL DATA (UNAUDITED)
In millions, except per share amounts
<TABLE>
<CAPTION>
======================================================================================================
First Second Third Fourth
Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal 1999
Sales and revenues $ 84.7 $ 98.5 $ 92.4 $ 79.9
Operating income 12.5 21.2 21.5 13.2
Operating margin 14.8% 21.5% 23.3% 16.5%
Net income $ 6.5 $ 12.3 $ 12.2 $ 7.4
Earnings per share diluted $ .37 $ .72 $ .73 $ .46
Stock price range:
High $ 35.54 $ 35.16 $ 29.32 $ 24.10
Low 29.28 24.96 21.73 17.98
Dividends declared per share $ .02 $ .02 $ .02 $ .02
Fiscal 1998
Sales and revenues $ 129.9 $ 140.4 $ 137.2 $ 106.3
Operating income (loss) 11.7 21.7 24.4 (43.9)
Operating margin 9.0% 15.5% 17.8% (41.3)%
Net income (loss) $ 4.2 $ 11.2 $ 13.1 $ (0.3)
Earnings (loss) per share diluted $ .24 $ .65 $ .76 $ (.02)
Stock price range:
High $ 21.00 $ 22.00 $ 26.00 $ 32.63
Low 15.25 18.06 19.75 22.88
Dividends declared per share $ -- $ .02 $ .02 $ .02
======================================================================================================
</TABLE>
The fourth quarter of fiscal 1999 and the first quarter of fiscal 1998 consisted
of fourteen weeks. All other quarters consisted of thirteen weeks.
MIDAS, INC. 1999 ANNUAL REPORT 15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
================================================================================
RESULTS OF OPERATIONS
The following table presents, for the fiscal periods indicated, selected
financial information as a percentage of total sales and revenues:
<TABLE>
<CAPTION>
====================================================================================================================
Percentage of Sales and Revenues
FISCAL YEAR 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Replacement parts sales 65.9% 48.5% 45.5%
Company-operated shop retail sales 3.0 28.6 35.6
Royalties 19.2 14.3 11.5
Real estate rental revenues 11.3 7.3 6.0
Other 0.6 1.3 1.4
-----------------------------------------------
Sales and revenues 100.0 100.0 100.0
-----------------------------------------------
Cost of sales and revenues 53.8 46.7 44.1
Selling, general and administrative expenses 27.0 39.8 44.6
-----------------------------------------------
Operating income before business transformation costs 19.2 13.5 11.3
Business transformation costs -- 10.8 11.4
-----------------------------------------------
Operating income (loss) 19.2 2.7 (0.1)
Other income (expense), net 0.9 7.6 (3.2)
Interest expense (2.4) (2.5) (1.3)
-----------------------------------------------
Income (loss) before income taxes 17.7 7.8 (4.6)
Income taxes (6.9) (2.3) 0.6
-----------------------------------------------
Net income (loss) 10.8% 5.5% (4.0)%
====================================================================================================================
</TABLE>
INTRODUCTION
Beginning in 1996 and carrying forward into 1997, the Company began to
experience declines in earnings and returns on assets and equity. These trends
were due to a combination of slow growth, increasing operating expenses and an
expanding asset base. The Company also began to experience declines in sales and
revenues from certain business activities including substantial declines in
exhaust sales at both the retail and wholesale level due to the automobile
manufacturers use of non-corrosive stainless steel exhaust systems. These
trends, coupled with an expected substantial increase in the Company's long-term
debt as a result of the Spin-off of Midas as an independent company by Whitman
Corporation, led management to conduct an in-depth review of current strategies
and potential alternative strategies to reverse these trends.
Forthcoming from this strategic review was a business strategy to: focus the
Company's management and financial resources on expanding the North American and
European franchise network by adding new shops, improving relationships with
franchisees, improving the efficiency of the wholesale replacement part
distribution system, reducing operating expenses and redeploying assets by
franchising company-operated shops. The strategy also called for the
introduction of new Midas products and services at the retail level to offset
the declines in the exhaust business.
In 1998, the Company reached an agreement with Magneti Marelli, S.p.A., a member
of the Fiat Group, to form a strategic alliance to accelerate the development of
the Midas system in Europe and South America. Midas management concluded that
Magneti Marelli had the financial and human resources to accelerate the
development of the Midas business in Europe and South America at a much faster
pace than the Company. Midas management also concluded that the proceeds from a
transaction with Magneti Marelli could provide the Company with additional
financial resources which would enable the Company to accelerate the execution
of its strategy to transform and grow the North American franchise network.
Accordingly, Midas sold its interests in Europe and South America to Magneti
Marelli for $100 million in October 1998, and entered into a licensing agreement
for the Midas trademarks and know-how as a part of the transaction.
16 MIDAS, INC. 1999 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
continued
================================================================================
As a result of the foregoing, the Company's business strategy was further
modified to the current strategy, which is to become a focused and efficient
operator of a North American franchise, a wholesale parts distribution network
and a licensor of Midas trademarks outside of North America.
BUSINESS TRANSFORMATION COSTS
The business transformation process resulted in costs which are summarized in
the following table (in millions):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
FISCAL YEAR 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Franchisee incentive payments $ -- $ 32.3 $ --
Disposition of company-operated shops (0.1) 2.1 35.5
Corporate office relocation -- 7.0 --
Integration of Canadian administration function -- 4.0 --
Consolidation of North American distribution system (1.2) 4.1 --
Special one-time return program -- -- 7.8
Changes to U.S. franchisee advertising program -- -- 4.4
Asset write-downs to recognize impairments -- 4.2 12.5
Severance and other costs 1.1 2.0 7.4
------------------------------------------------
Business transformation costs before taxes (0.2) 55.7 67.6
Income taxes (benefit) 0.1 (20.9) (21.4)
------------------------------------------------
Business transformation costs, net of taxes $ (0.1) $ 34.8 $ 46.2
===================================================================================================================
</TABLE>
Additional information regarding each of the business transformation costs
listed in the above summary is presented in Note 3 to the Financial Statements.
Because of changes in the Company's business strategy, the type of operational,
legal and financial control of the Midas shops changed substantially in 1998.
The method of operation of the shops in operation at the end of fiscal 1999,
1998 and 1997, is presented below.
MIDAS RETAIL SHOPS
- --------------------------------------------------------------------------------
FISCAL YEAR END 1999 1998 1997
- --------------------------------------------------------------------------------
Franchised and licensed 2,698 2,674 2,341
Company-operated 13 58 377
----------------------------------------
Total 2,711 2,732 2,718
================================================================================
Although the total number of shops in operation remained relatively constant
over the past 3 years, the number of shops operated by the Company declined by
364 shops since the end of fiscal 1997, and the number of shops operating under
a franchise or license agreement increased by 357 shops. This shift in the type
of shop operation reflects the sale of Midas Europe and the strategy to focus on
franchising.
The approximately 2,700 Midas shops currently in operation worldwide offer some
or all of the following services: exhaust, brake, suspension, air conditioning,
batteries and a number of other routine maintenance services. The Company's
business strategy is to expand these service offerings in the future.
The remaining company-operated shops as of January 1, 2000 represent the
Company's Australian operations and a training facility located in Palatine,
Illinois.
The business strategy of focusing the Company on growing the North American
franchisee network is expected to have a significant impact on the future
sources of revenue for the Company.
MIDAS, INC. 1999 ANNUAL REPORT 17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
continued
================================================================================
RESULTS OF OPERATIONS - FISCAL 1999 COMPARED TO FISCAL 1998
Sales and revenues for fiscal 1999 declined $158.3 million or 30.8% from fiscal
1998 to $355.5 million. Approximately $146.5 million or 92.5% of the decrease
was due to the sale of the Company's European operations and the elimination of
retail sales from company-operated shops which were franchised, sold or licensed
during fiscal 1999 and fiscal 1998 as part of the Company's strategy to dispose
of company-operated shops. The remainder of the decrease in fiscal 1999 sales
was attributable to a decline in retail demand for replacement exhaust products
due to automobile manufacturers use of non-corrosive stainless steel exhaust
systems, which drove a decline in exhaust sales at the wholesale level.
Cost of sales and revenues for fiscal 1999 decreased $48.7 million or 20.3%
versus fiscal 1998 due to a combination of the franchising and licensing of
company-operated shops, lower wholesale exhaust parts sales, and lower wholesale
parts costs. Costs of sales and revenues as a percent of total sales and
revenues increased 7.1 percentage points to 53.8% in fiscal 1999 due primarily
to the reduction in retail sales from company-operated shops which carried a
relatively higher gross margin to cover service and other costs at the retail
level.
Selling, general and administrative expenses for fiscal 1999 decreased $108.2
million or 53.0% from fiscal 1998 to $96.1 million. Approximately $103.8 million
of this reduction was related to the sale of the Company's European operations
and the franchising and licensing of company-operated shops, while the balance
was due to the Company's cost reduction program. As a percentage of total sales
and revenues, selling, general and administrative expenses declined from 39.8%
of sales in fiscal 1998 to 27.0% of sales in fiscal 1999. This decrease was
primarily due to the franchising of company-operated shops which carry a higher
operating expense ratio, and the fiscal 1998 cost reduction program.
The Company recorded business transformation activity in both fiscal 1999 and
fiscal 1998. Total charges of $55.7 million were recorded in fiscal 1998, while
fiscal 1999 reflects a net credit of $0.2 million. This activity is described
above under "Introduction" and in Note 3 to the Financial Statements.
Operating income was $68.4 million in fiscal 1999 versus $13.9 million in fiscal
1998. Both years were impacted by business transformation costs as previously
noted. Excluding these costs, operating income remained relatively constant at
$68.2 million in fiscal 1999 versus $69.6 million in fiscal 1998. Excluding
business transformation costs from both years, the operating income margin
improved substantially from 13.5% in fiscal 1998 to 19.2% in fiscal 1999.
Interest expense declined $4.1 million from $12.7 million in fiscal 1998 to $8.6
million in fiscal 1999. This reduction is the result of the repayment during
fiscal 1998 of approximately $120 million of the debt that was outstanding at
the time of the Spin-off from Whitman.
The Company's effective tax rate was 39.0% in fiscal 1999 versus an effective
tax rate of 29.5% in fiscal 1998. The lower rate in fiscal 1998 was the result
of the lower non-U.S. effective tax rate on the sale of the Company's European
operations.
As a result of the above items, net income increased $10.2 million from $28.2
million in fiscal 1998 to $38.4 million in fiscal 1999.
RESULTS OF OPERATIONS - FISCAL 1998 COMPARED TO FISCAL 1997
Sales and revenues for fiscal 1998 declined $77.2 million or 13.1% from fiscal
1997 to $513.8 million. Approximately 82% of the decrease was due to the
elimination of retail sales from company-operated shops in fiscal 1998 as a
result of the franchising or sale and licensing of a net 311 shops during the
year. The remainder of the decrease in fiscal 1998 was attributable to lower
replacement parts sales due to: the pass through of negotiated cost decreases to
franchisees in the form of wholesale price decreases, the elimination of
unprofitable wholesale distribution points and programs, fluctuations in foreign
currency exchange rates, and lower retail customer traffic in certain services
which resulted in lower wholesale parts sales. Partially offsetting these
decreases were increased royalty and real estate rental revenues primarily due
to the franchising of former company-operated shops.
Cost of sales and revenues for fiscal 1998 decreased $20.9 million or 8.0%
versus fiscal 1997 due to a combination of the franchising of company-operated
shops, lower wholesale parts sales and lower wholesale parts costs. Cost of
sales and revenues as a percent of total sales and revenues increased 2.6
percentage points to 46.7% in fiscal 1998, due primarily to the reduction in
retail sales from
18 MIDAS, INC. 1999 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
continued
================================================================================
company-operated shops in fiscal 1998, which carried a substantially higher
gross margin to cover service and other costs at the retail level.
Selling, general and administrative expenses for fiscal 1998 decreased $59.1
million or 22.4% from fiscal 1997 to a total of $204.3 million. Approximately
60% of the decrease in expenses was due to the franchising of company-operated
shops in fiscal 1998. The balance of the decrease was due to a combination of
cost reduction programs across the majority of expense categories and the sale
of Midas operations in Europe. Operating expenses as a percent of total sales
and revenues decreased 4.8 percentage points in fiscal 1998 to 39.8%. The
decrease was primarily due to the franchising of company-operated shops in
fiscal 1998, which carry a relatively higher operating expense ratio and cost
reduction programs across the majority of expense categories.
In the fourth quarter of fiscal 1998 and the third quarter of fiscal 1997, Midas
recorded charges related to business transformation activities of $55.7 million
and $67.6 million, respectively. These charges are described above under
"Introduction" and in Note 3 to the Financial Statements.
Operating income in fiscal 1998 was $13.9 million versus an operating loss of
$0.8 million in fiscal 1997. Both years were impacted by business transformation
costs as noted previously. Excluding these costs, operating income in fiscal
1998 increased $2.8 million or 4.2% above the prior year. Excluding business
transformation costs from both years, the operating income margin in fiscal 1998
was 13.5% or 2.2 percentage points above fiscal 1997.
Income before income taxes in 1998 was $40.0 million versus a $27.1 million loss
in fiscal 1997. The improvement in fiscal 1998 was due to the combination of the
following: a $38.0 million gain from the sale of the Midas business in Europe, a
sharp reduction in Whitman charges due to the Spin-off in early 1998, and higher
operating income. These positive factors were partially offset by increased
interest expense primarily due to the additional debt incurred by the Company in
connection with the Spin-off.
Net income in fiscal 1998 was $28.2 million versus a loss of $23.5 million in
fiscal 1997.
LIQUIDITY, FINANCIAL CONDITION AND CAPITAL RESOURCES
Following is a summary of the Company's cash flows from operating, investing and
financing activities for fiscal 1999 and 1998, respectively (in millions):
- -------------------------------------------------------------------------------
FISCAL YEAR 1999 1998
- -------------------------------------------------------------------------------
Net cash provided by operating activities $ 36.7 $ 21.3
-------------------
Net cash provided by (used in) investing activities (8.4) 106.1
-------------------
Net cash used in financing activities (52.1) (103.0)
-------------------
Net change in cash and cash equivalents $(23.8) $ 24.4
===============================================================================
Midas has historically funded its operations and capital expenditures through
cash flow from operations. At fiscal year-end 1999, the Company had cash and
cash equivalents of $13.1 million and working capital of $84.6 million. At
fiscal year-end 1998, the Company had cash and cash equivalents of $36.9 million
and working capital of $101.0 million. The $23.8 million decrease in cash and
cash equivalents and the $16.4 million decrease in working capital are the
result of the decision to repurchase 1.9 million shares of the Company's common
stock during fiscal 1999 at a cost of $56.5 million. As of the end of both
fiscal years 1999 and 1998, the Company had outstanding borrowings of $25
million under its $200 million line of credit.
MIDAS, INC. 1999 ANNUAL REPORT 19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
continued
================================================================================
Net cash provided by operating activities was $36.7 million in fiscal 1999
compared with $21.3 million in fiscal 1998. This increase of $15.4 million was
the result of higher earnings and lower business transformation cash outlays,
which was partially offset by lower depreciation due to the sale of the
Company's European operations and the franchising of company-operated shops, and
higher working capital requirements.
Net cash used in investing activities was $8.4 million in fiscal 1999 compared
with net cash provided of $106.1 million in fiscal 1998. This decrease of $114.5
was the result of lower asset sales and higher capital expenditures in fiscal
1999 compared to fiscal 1998. Fiscal 1998 included proceeds of $86.8 million
related to the sale of the Company's European operation, and $30.3 million of
proceeds related to the sale of other property and equipment (largely
attributable to the franchising of company-operated shops) compared to $10.8
million in fiscal 1999. The increase in capital expenditures in fiscal 1999 was
the result of systems improvements and the corporate office relocation.
Net cash used in financing activities was $52.1 million in fiscal 1999 compared
with $103.0 million in fiscal 1998. During fiscal 1998, the Company paid $193.1
million of dividends and loan repayments to Whitman as part of the Spin-off,
which were funded in part by a $98.8 million net increase in long-term debt. No
such payments to Whitman or borrowings were necessary in fiscal 1999, however
the Company used $56.5 million of cash to acquire treasury shares.
In February 1999, the Company's Board of Directors authorized a share repurchase
plan for up to 3.0 million of the Company's common shares. During fiscal 1999,
the Company repurchased approximately 1.6 million shares at an aggregate price
of approximately $56.5 million. In January 2000, the Board of Director's
approved an increase of 2.0 million shares, bringing the total authorization to
5.0 million shares. Purchases of the shares are expected to be made from time to
time, depending upon market conditions.
The Company believes that current cash balances, cash generated from operations,
and availability under its line of credit will be adequate to fund the growth in
working capital and capital expenditures necessary to support future growth in
sales for the foreseeable future, as well as the Company's share repurchase
plan.
YEAR 2000
In 1997, the Company instituted a Year 2000 project to evaluate and remediate
Year 2000 issues. The project was divided into three sections:
o The Company's computer hardware, hardware operating systems and
application software.
o Franchisee computer hardware and application software, including point of
sale hardware and software.
o Supplier computer systems.
As of the date of this report, the Company has not experienced any significant
business disruptions as a result of Year 2000 issues. However, Year 2000 issues
may yet arise from factors that currently are not apparent. The Company will
continue to monitor all related Year 2000 issues.
Total expenses for the Year 2000 project were $4.9 million with $1.3 million
being spent in fiscal 1999.
20 MIDAS, INC. 1999 ANNUAL REPORT
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
continued
================================================================================
FORWARD LOOKING STATEMENTS
This report contains, and certain of the Company's other public documents and
statements and oral statements 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 other 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.
MIDAS, INC. 1999 ANNUAL REPORT 21
<PAGE>
REPORT OF MANAGEMENT
================================================================================
Midas management has prepared the accompanying financial statements and related
information included herein for fiscal years 1999, 1998, and 1997. The report of
KPMG LLP, the Company's independent auditors, on those financial statements is
included herein. The primary responsibility for the integrity of the financial
information included in this annual report rests with management. Such
information was prepared in accordance with generally accepted accounting
principles appropriate in the circumstances based on our best estimates and
judgements.
Midas maintains internal accounting control systems which are adequate to
provide reasonable assurance that assets are safeguarded from loss or
unauthorized use and which produce records adequate for preparation of financial
information. The system and controls and compliance therewith are reviewed by a
program of internal audits and by our independent auditors. There are limits
inherent in all systems of internal accounting control based on the recognition
that the cost of such a system should not exceed the benefits to be derived. We
believe the Company's system provides this appropriate balance.
The Audit Committee of the Board of Directors is responsible for reviewing and
monitoring the Company's financial reports and accounting practices to ascertain
that they are within acceptable limits of sound practice in such matters. The
membership of the Committee consists of independent Directors. At periodic
meetings, the Audit Committee discusses audit and financial reporting matters
and the internal audit function with representatives of financial management and
with representatives from KPMG LLP.
/s/ R. Lee Barclay
R. Lee Barclay
Executive Vice President and Chief Financial Officer
February 17, 2000
22 MIDAS, INC. 1999 ANNUAL REPORT
<PAGE>
INDEPENDENT AUDITORS' REPORT
================================================================================
The Board of Directors and Shareholders
Midas, Inc.
We have audited the accompanying balance sheets of Midas as of fiscal year end
1999 and 1998 and the related statements of operations, cash flows, and changes
in shareholders' equity for each of the fiscal years 1999, 1998, and 1997. These
financial statements are the responsibility of Midas' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Midas as of fiscal year end
1999 and 1998, and the results of operations and cash flows for fiscal years
1999, 1998, and 1997 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Chicago, Illinois
February 17, 2000
MIDAS, INC. 1999 ANNUAL REPORT 23
<PAGE>
STATEMENTS OF OPERATIONS
In millions, except for earnings and dividends per share
<TABLE>
<CAPTION>
==============================================================================================
FISCAL YEAR 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales and revenues $ 355.5 $ 513.8 $ 591.0
Cost of sales and revenues 191.2 239.9 260.8
Selling, general, and administrative expenses 96.1 204.3 263.4
Business transformation costs (0.2) 55.7 67.6
------------------------------------
Operating income (loss) 68.4 13.9 (0.8)
------------------------------------
Gain on sale of European operations -- 38.0 --
------------------------------------
Whitman charges -- (1.1) (18.1)
------------------------------------
Interest expense:
Whitman -- (0.5) (6.8)
Other (8.6) (12.2) (2.3)
------------------------------------
Total interest expense (8.6) (12.7) (9.1)
------------------------------------
Other income, net 3.1 1.9 0.9
------------------------------------
Income (loss) before income taxes 62.9 40.0 (27.1)
Income taxes (benefit) 24.5 11.8 (3.6)
------------------------------------
Net income (loss) $ 38.4 $ 28.2 $ (23.5)
====================================
Earnings (loss) per share:
Basic $ 2.33 $ 1.67
======================
Diluted $ 2.28 $ 1.63
======================
Pro forma basic and diluted $ (1.21)
==============
Dividends per common share $ .08 $ .06
======================
Average number of shares
Common shares outstanding 16.4 16.9
Equivalent shares on outstanding stock options 0.4 0.4
Shares applicable to diluted earnings 16.8 17.3
======================
Pro forma common shares outstanding 17.0
==============
</TABLE>
See accompanying notes to financial statements.
24 MIDAS, INC. 1999 ANNUAL REPORT
<PAGE>
BALANCE SHEETS
In millions
<TABLE>
<CAPTION>
===================================================================================
FISCAL YEAR END 1999 1998
- -----------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Current assets:
Cash and cash equivalents $ 13.1 $ 36.9
Receivables, net 43.5 39.4
Inventories 63.5 63.2
Other current assets 20.7 24.8
-------------------
Total current assets 140.8 164.3
Property and equipment, net 140.5 142.8
Other assets 24.6 18.2
-------------------
Total assets $305.9 $325.3
===================
Liabilities and Equity:
Current liabilities:
Short-term debt $ 1.8 $ 1.6
Accounts and dividends payable 26.4 19.5
Income taxes payable 1.6 --
Accrued expenses 26.4 42.2
-------------------
Total current liabilities 56.2 63.3
Long-term debt 101.0 102.2
Obligations under capital leases 9.3 10.8
Deferred income taxes and other liabilities 24.8 25.6
-------------------
Total liabilities 191.3 201.9
-------------------
Shareholders' equity:
Common stock ($.001 par value, 100 million
shares authorized; 17.3 million
and 17.0 million shares issued) and
paid-in capital 26.8 27.1
Treasury stock, at cost (1.6 million shares
and .2 million shares) (44.9) (4.2)
Notes receivable from common stock sold to officers (6.1) --
Retained income 144.0 106.9
Cumulative other comprehensive income (loss) (5.2) (6.4)
-------------------
Total shareholders' equity 114.6 123.4
-------------------
Total liabilities and equity $305.9 $325.3
===================
</TABLE>
See accompanying notes to financial statements
MIDAS, INC. 1999 ANNUAL REPORT 25
<PAGE>
STATEMENTS OF CASH FLOWS
In millions
<TABLE>
<CAPTION>
=============================================================================================
FISCAL YEAR 1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 38.4 $ 28.2 $(23.5)
Adjustments reconciling net income to net cash
provided by operating activities:
Depreciation and amortization 10.4 17.0 21.3
Business transformation costs (0.2) 55.7 67.6
Cash outlays for business transformation costs (13.2) (58.4) (1.9)
Gain on sale of European operations -- (38.0) --
Deferred income taxes 5.3 (0.2) (13.8)
Changes in assets and liabilities, exclusive of
effects of dispositions:
Receivables (4.1) 4.8 6.5
Inventories (0.3) (2.0) 9.8
Accounts and dividends payable 6.9 4.2 (15.3)
Accrued expenses (8.2) 5.8 10.4
Income taxes payable 1.6 0.6 (10.8)
Other 0.1 3.6 3.8
---------------------------------
Net cash provided by operating activities 36.7 21.3 54.1
---------------------------------
Cash flows from investing activities:
Capital investments (19.2) (11.0) (29.4)
Proceeds from sale of European operations, net
of cash of $13.2 million in operations sold -- 86.8 --
Proceeds from sales of property and equipment 10.8 30.3 5.2
---------------------------------
Net cash provided by (used in) investing activities (8.4) 106.1 (24.2)
---------------------------------
Cash flows from financing activities:
Net decrease in short-term debt -- -- (2.5)
Payment of obligations under capital leases (0.6) (1.8) (0.8)
Long-term debt incurred -- 291.4 3.5
Long-term debt repayments (0.9) (192.6) --
Cash received for common stock 7.2 3.8 --
Cash paid for treasury shares (56.5) (9.8) --
Net decrease in loans and advances
from Whitman -- (55.5) (20.8)
Dividends to Whitman -- (137.6) (14.0)
Dividends to shareholders (1.3) (0.9) --
---------------------------------
Net cash used in financing activities (52.1) (103.0) (34.6)
---------------------------------
Effect of exchange rate changes on cash and
cash equivalents -- -- (1.0)
---------------------------------
Net change in cash and cash equivalents (23.8) 24.4 (5.7)
Cash and cash equivalents at beginning of period 36.9 12.5 18.2
---------------------------------
Cash and cash equivalents at end of period $ 13.1 $ 36.9 $ 12.5
=================================
</TABLE>
See accompanying notes to financial statements.
26 MIDAS, INC. 1999 ANNUAL REPORT
<PAGE>
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
In millions
<TABLE>
<CAPTION>
===================================================================================================================================
COMBINED
CAPITAL COMPREHENSIVE INCOME
ACCOUNTS OF RETAINED -------------------------
WHITMAN EARNINGS CURRENT CUMULATIVE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal year end 1996 $ 24.3 $254.8 $ (2.0)
Net income -- (23.5) $(23.5) --
Other comprehensive income - foreign currency translation adjustments -- -- (7.8) (7.8)
Capital contribution from Whitman 2.3 -- -- --
-------
Comprehensive income -- -- $(31.3) --
=======
Dividends to Whitman -- (14.0) --
--------------------- --------
Fiscal year end 1997 26.6 217.3 (9.8)
Net income -- 0.4 $ 0.4 --
Other comprehensive income - foreign currency translation adjustments -- -- (1.3) (1.3)
Capital contribution from Whitman 0.6 -- -- --
Dividends to Whitman -- (137.6) -- --
------------------------------------------------------
Balances prior to Spin-off $ 27.2 $ 80.1 $ (0.9) $(11.1)
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
====================================================================================================================================
NOTES
RECEIVABLE
COMMON STOCK AND FROM
PAID-IN CAPITAL TREASURY STOCK COMMON COMPREHENSIVE INCOME
----------------- ------------------- STOCK SOLD RETAINED ---------------------
SHARES AMOUNT SHARES AMOUNT TO OFFICERS EARNINGS CURRENT CUMULATIVE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization of Midas 17.0 $ 27.2 -- $ -- $ -- $ 80.1 $ (0.9) $(11.1)
Purchase of treasury shares -- -- (0.4) (9.8) -- -- -- --
Stock option transactions -- (0.1) 0.2 5.6 -- -- -- --
Net income -- -- -- -- -- 27.8 27.8 --
Other comprehensive income:
foreign currency
translation adjustments -- -- -- -- -- -- 4.7 4.7
-------
Comprehensive income -- -- -- -- -- -- $ 31.6 --
=======
Dividends to shareholders -- -- -- -- (1.0) --
----------------------------------------------------------------------- ---------
Fiscal year end 1998 17.0 27.1 (0.2) (4.2) 106.9 (6.4)
Common shares issued
under management stock
incentive plan 0.3 6.1 -- -- (6.1) -- -- --
Purchase of treasury shares -- -- (1.9) (56.5) -- -- -- --
Stock option transactions -- (6.4) 0.5 15.8 -- -- -- --
Net income -- -- -- -- -- 38.4 $ 38.4 --
Other comprehensive income:
foreign currency
translation adjustments -- -- -- -- -- -- 1.2 1.2
-------
Comprehensive income -- -- -- -- -- -- $ 39.6 --
=======
Dividends to shareholders -- -- -- -- -- (1.3) --
----------------------------------------------------------------------- ---------
Fiscal year end 1999 17.3 $ 26.8 (1.6) $(44.9) $ (6.1) $144.0 $ (5.2)
======================================================================================================== =========
</TABLE>
See accompanying notes to financial statements.
MIDAS, INC. 1999 ANNUAL REPORT 27
<PAGE>
NOTES TO FINANCIAL STATEMENTS
================================================================================
(1) INTRODUCTION
Basis of Presentation
Midas, Inc. became an independent, publicly held company on January 30, 1998 as
a result of its spin-off ("Spin-off") from Whitman Corporation ("Whitman").
Prior to that time, the companies that comprise Midas, Inc. were direct or
indirect wholly-owned subsidiaries of Whitman. For periods prior to the
Spin-off, the financial statements are presented on a combined basis; for
subsequent periods, they are presented on a consolidated basis. As required by
the context, "Midas" or the "Company" refers to Midas, Inc. and subsidiaries or
to the group of companies that became wholly-owned subsidiaries of Midas, Inc.
in conjunction with the Spin-off.
Common Stock and Paid-in Capital at Spin-off Date
The combined capital accounts of Whitman were recorded as common stock and
paid-in capital of Midas as of the date of the Spin-off.
Pro Forma Basic and Diluted Earnings (Loss) Per Share (Unaudited)
Pro forma basic and diluted earnings (loss) per share have been calculated on
the assumption that the 17.0 million shares of Midas Common Stock that were
distributed in the Spin-off had been outstanding since the beginning of 1997.
Pro forma adjustments have been made to give effect to increases or decreases in
costs that would have been incurred by Midas as an independent, publicly held
company, rather than a subsidiary of Whitman. The fiscal 1997 pro forma
adjustments are summarized as follows (in millions):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
<S> <C>
Incremental administrative expenses of an independent, publicly held company $ (2.8)
Elimination of Whitman charges 18.1
Elimination of interest paid to Whitman 6.8
Incremental interest expense of an independently-capitalized company (17.2)
Incremental income tax provision (1.9)
------
Pro forma reduction of net loss $ 3.0
========================================================================================
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Midas provides retail automotive services principally through franchised or
licensed shops in the U.S., Canada, Europe and other countries. Midas also
manufactures exhaust system components and purchases other automotive
aftermarket replacement parts for distribution to North American franchisees and
other automotive aftermarket customers.
Fiscal Periods
The 1999, 1998, and 1997 fiscal years ended on January 1, 2000, December 26,
1998 and December 20, 1997. The fiscal years each consisted of 53 weeks.
Foreign Currency Translation and Transactions
All assets and liabilities of non-U.S. operations are translated into U.S.
dollars using exchange rates as of the end of each fiscal period. Income and
expense items are translated at average exchange rates prevailing during each
fiscal period. The resulting translation adjustments are recorded as a component
of shareholders' equity. Gains and losses from foreign currency transactions are
included in net earnings.
28 MIDAS, INC. 1999 ANNUAL REPORT
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
Cash and Cash Equivalents
Cash and cash equivalents consist of deposits with banks and financial
institutions which are unrestricted as to withdrawal or use, and which have an
original maturity of three months or less.
Fair Value of Financial Instruments
Midas' financial instruments include cash and cash equivalents, receivables,
short-term debt, accounts payable, and long-term debt. The carrying value of the
long-term debt exceeded its fair value by approximately $2.3 million as of
fiscal year end 1999. The fair value of the long-term debt exceeded its carrying
value by approximately $3.4 million as of fiscal year end 1998. The carrying
amounts of the other assets and liabilities approximate fair values because of
the short maturities of those instruments.
Inventories
Inventories are valued at the lower of cost, determined using the first-in,
first-out method, or net realizable value.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method and includes amortization of assets held under capital
leases. When property is sold or retired, the cost and accumulated depreciation
are eliminated from the accounts and gains or losses are recorded in the
statement of operations.
Expenditures for maintenance and repairs are expensed as incurred. The
approximate ranges of annual deprecation rates are 2% to 10% for buildings and
improvements, 8% to 20% for machinery and equipment, and 20% to 33% for computer
software and hardware.
Carrying Values of Long-lived Assets
Midas evaluates the carrying values of its long-lived assets to be held and used
in the business by reviewing undiscounted cash flows by operating unit. Such
evaluations are performed whenever events and circumstances indicate that the
carrying amount of an asset may not be recoverable. If the sum of the projected
undiscounted cash flows over the remaining lives of the related assets does not
exceed the carrying values of the assets, the carrying values are adjusted for
the differences between the fair values and the carrying values.
Revenue Recognition
Product sales are recognized as revenues at the time products are shipped, at
which time provision is made for estimated product returns. Sales and revenues
of company-operated shops were recognized when customer vehicles are repaired or
serviced.
Revenues derived from initial franchise fees are recognized when the franchised
shop opens. Costs related to securing initial franchise agreements and
performing the required services under such agreements are charged to expense as
incurred. Franchise renewal fees are recognized when the renewal period
commences. Royalties are recognized in the periods that correspond to the
periods when retail sales and revenues are recognized by franchisees.
Selected products carry warranties ranging from one year to the lifetime of a
vehicle, so long as the original retail customer owns the vehicle. Midas
estimates and records the net costs related to its warranty program as required,
in the period the sales are reported, based on its historical experience.
Stock-Based Compensation
The company uses the intrinsic value method of accounting for its stock-based
compensation plans.
Advertising
Advertising costs are expensed as incurred.
MIDAS, INC. 1999 ANNUAL REPORT 29
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
Restatements
Certain reclassifications have been made to the previously reported fiscal 1998
and 1997 financial statements in order to provide consistency with the fiscal
1999 results. These reclassifications did not affect previously reported
operating income, net income or earnings per share.
Use of Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and disclosures of contingencies to prepare
the financial statements in conformity with generally accepted accounting
principles. Actual results could differ from these estimates.
(3) BUSINESS TRANSFORMATION
The Business Transformation Process
The Company is transforming itself from a worldwide operator of both franchised
and company-operated shops to a focused and efficient operator of a North
American franchise and wholesale parts distribution network and a licensor of
Midas trademarks and know-how outside of North America. Within North America the
business transformation process includes: changing consumer perceptions about
Midas and the products and services offered, improving relationships with
franchisees and redeploying assets to improve returns.
Business Transformation Costs
The costs associated with the business transformation process are summarized as
follows (in millions):
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
FISCAL YEAR 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Franchisee incentive payments $ -- $32.3 $ --
Disposition of company-operated shops (0.1) 2.1 35.5
Corporate office relocation -- 7.0 --
Integration of Canadian administration function -- 4.0 --
Consolidation of North American distribution system (1.2) 4.1 --
Special one-time return program -- -- 7.8
Changes to U.S. franchisee advertising program -- -- 4.4
Asset write-downs to recognize impairments -- 4.2 12.5
Severance and other costs 1.1 2.0 7.4
------------------------------
Business transformation costs before taxes (0.2) 55.7 67.6
Income taxes (benefit) 0.1 (20.9) (21.4)
------------------------------
Business transformation costs, net of taxes $(0.1) $34.8 $46.2
=======================================================================================
</TABLE>
Franchisee Incentive Payments
During 1998, Midas launched a new image and consumer perception program. The
program is directed at "freshening" the Midas image with consumers and changing
their perceptions about the scope of product and service offerings. To launch
the program, Midas made up-front cash incentive payments to franchisees that
have agreed to modify existing shops and enhance information systems. The
planned modifications include installing new signs and making improvements to
building exteriors and customer service areas. Franchisees that wish to expand
their product and service offerings may also need to enhance their information
systems. The incentive payments, which were disbursed in lump sum amounts based
on the number of shops operated by each participating franchisee, were recorded
as expenses as the disbursements were made. The incentive payments, together
with other costs associated with the program launch (principally costs of
special regional meetings attended by the franchisees), were recorded as
expenses in the fourth quarter of fiscal 1998.
30 MIDAS, INC. 1999 ANNUAL REPORT
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
Midas continues to monitor franchisee performance to ensure compliance with the
program and has not received any refunds of incentive payments. The incentive
payments cover approximately 99% of the franchised shops located in the U.S. and
Canada.
Disposition of Company-operated Shops
During the third quarter of fiscal 1997, management adopted a plan for the
disposition of substantially all of its 150 company-operated shops in the United
States. Under the 1997 plan, 119 shops were expected to be franchised and 16
shops closed. By the end of December 1998, substantially all aspects of the 1997
disposition program had been completed. In the fourth quarter of fiscal 1998,
management decided to franchise the remaining company-operated shops in the
United States, and all company-operated shops in Canada. These programs were
finalized in fiscal 1999, at a savings of approximately $0.1 million. The
estimated losses and costs associated with the program are summarized as follows
(in millions):
- --------------------------------------------------------------------------------
FISCAL YEAR 1999 1998 1997
- --------------------------------------------------------------------------------
Asset write-downs $ -- $ 1.3 $21.5
Non-recoverable lease costs -- -- 7.7
Severance and other costs (0.1) 0.8 6.3
- --------------------------------------------------------------------------------
$(0.1) $ 2.1 $35.5
================================================================================
Asset Write-downs. The assets of the U.S. company-operated shops to be disposed
were written down to net realizable values, based on estimated proceeds (net of
transaction costs) from sales of tangible and intangible assets of shops to be
franchised and from sales or recoveries of tangible assets of shops to be
closed.
Non-recoverable Lease Costs. Certain U.S. company-operated shops occupied leased
facilities. Management estimated that $7.7 million of costs under such leases
would not be recovered through future operations due to shop closings or because
subleases in connection with franchising transactions were not expected to
result in full recovery of the related lease payments.
Severance and Other Costs. Severance and other costs recorded in fiscal 1997
include $4.7 million of termination benefits for 202 employees and other costs
of $1.6 million. Severance and other costs recorded in fiscal 1998 included $0.5
million of termination benefits for employees. Cash expenditures relating to
employee severance costs were incurred as the shops were closed or sold and
amounted to $1.8 million during fiscal 1999, $3.1 million during fiscal 1998 and
$0.2 million in fiscal 1997.
Corporate Office Relocation
In December 1998, Midas determined that it would relocate its corporate
headquarters and entered into a lease for a new facility. Relocation costs
recorded in fiscal 1998 include: (a) estimated costs of $5.7 million related to
subleasing the former headquarters after the relocation, based on the
differential between the amounts due under the existing noncancellable lease and
estimated proceeds from subleasing; and (b) the write-down ($1.3 million) of
leasehold improvements and equipment that were not used in the new facility,
based on the estimated net realizable value of the assets at the time of
relocation.
The relocation and subleasing of the former headquarters were completed in
fiscal 1999. The existing accruals are adequate to cover the losses to be
incurred during the remaining term of the former headquarters lease. Cash
outlays during fiscal 1999 were $2.0 million. There were no cash outlays in
fiscal 1998.
Integration of Canadian Administration Function
During the fourth quarter of fiscal 1998, management adopted a plan to integrate
the administration of the Canadian franchising operations into the U.S.
worldwide headquarters. Costs included $0.5 million in asset write-downs to net
realizable values, $2.1 million of termination benefits for 61 employees, $0.5
million of lease termination costs, and other costs of $0.9 million. The
integration will be completed in the first half of 2000. There were no cash
outlays during fiscal 1998 and $1.1 million in cash outlays in fiscal 1999.
MIDAS, INC. 1999 ANNUAL REPORT 31
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
Consolidation of North American Distribution System
During the fourth quarter fiscal 1998, management adopted a plan to consolidate
the North American distribution system by reducing the number of distribution
centers. Costs include $1.2 million of termination benefits for 78 employees,
and other costs of $2.9 million. Three distribution centers were closed in
fiscal 1999, with the remaining closures scheduled for fiscal 2000. No cash
outlays were made in fiscal 1998 and approximately $0.3 million in cash outlays
were made in fiscal 1999. During fiscal 1999, the Company decided to retain one
of the distribution centers that had been scheduled for closing. As the result
of that decision, business transformation costs were reduced by $1.2 million in
1999.
Special One-time Product Return Program
Midas policies restrict the level of excess products that may be returned by
franchisees. A special one-time program was adopted in fiscal 1997, under which
franchisees were permitted to return products in excess of the amounts that
would have been permitted under those policies. The $7.8 million charge covered
the costs associated with returns of products sold to franchisees in prior
periods.
Changes in U.S. Franchisee Advertising Program
Under the terms of its franchising agreements, Midas is obligated to use
one-half of the royalty payments received from franchisees for advertising
expenditures. Advertising expenditures in fiscal 1997 under the U.S. program
exceeded the amounts received from franchisees. Although it is not obligated to
do so under the franchising agreements, Midas provided a one-time supplement to
the program amounting to $4.4 million.
Asset Write-downs to Recognize Impairments
Asset write-downs in fiscal 1997 to recognize impairments included: $5.5 million
related to company-owned real estate and improvements, which are leased to
franchisees under leases that are not expected to result in full recovery of the
investments in such assets; $5.3 million related to impaired goodwill of certain
non-U.S. operating units, based on past and projected operating results; and
$1.2 million related to computer hardware deemed obsolete due to changes in
operating procedures. Asset write-downs in fiscal 1998 of $4.2 million were
related to the Company's investment in its Australian subsidiary, which is
expected to be disposed of in fiscal 2000.
Severance and Other Costs
Severance and other costs in fiscal 1997 included $4.4 million of termination
benefits for 61 employees resulting from staff reductions and $3.0 million of
other non-recurring costs. The staff reductions occurred in early 1998.
Severance payments were $1.4 million in fiscal 1999, $1.9 million in fiscal
1998, and $1.1 million in fiscal 1997. Other costs of $0.6 million were paid in
fiscal 1997.
Severance and other costs in fiscal 1998 of $2.0 million include $0.7 million of
estimated termination benefits for employees in Midas' Australian and
Asia-Pacific operations and $0.5 million of disposition costs associated with
those operations. Total severance payments were $0.4 million in 1999 and the
remaining $0.3 million was recognized as income in fiscal 1999 as part of
severance and other costs.
During fiscal 1999, the Company continued its transformation process by closing
one of its manufacturing facilities. A charge of $2.8 million for termination
benefits for 195 employees and other closing costs was recorded. Cash outlays of
approximately $2.4 million were made in fiscal 1999 with the balance to be paid
in fiscal 2000. During fiscal 1999, the Company also recorded a $1.4 million
reduction of severance and other costs as part of a pension curtailment gain
related to the 1999 and 1998 staff reductions.
Other Information
In the aggregate, business transformation costs have resulted in asset
write-downs of $30.0 million in fiscal 1997 and $9.5 million in fiscal 1998.
Cash outlays were $1.9 million in fiscal 1997, $58.4 million in fiscal 1998 and
$13.2 million in fiscal 1999. Remaining short-term business transformation
liabilities of $5.7 million are classified in accrued expenses while the
remaining long-term liabilities of $9.7 million are classified in other
liabilities.
32 MIDAS, INC. 1999 ANNUAL REPORT
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
(4) STRATEGIC ALLIANCE
Midas, Inc. and Magneti Marelli, S.p.A., a member of the Fiat Group, formed a
strategic alliance to develop the Midas program in the business of fast auto
service repair in Europe and South America.
As part of the alliance, Midas sold its interests in its European operations to
Magneti Marelli on October 30, 1998 and entered into a long-term license
agreement for which Midas received $100 million. Midas will also receive
on-going royalties throughout the term of the license agreement, as the
automotive service shops in Europe that were sold will continue to operate using
the Midas name.
The fiscal 1998 gain on sale of the European operations was $38.0 million before
taxes or $28.1 million after taxes.
(5) DEBT AGREEMENTS
Long-term debt consisted of the following (in millions):
- --------------------------------------------------------------------------------
FISCAL YEAR END 1999 1998
- --------------------------------------------------------------------------------
Unsecured credit facility $ 25.0 $ 25.0
Unsecured debt 75.0 75.0
Notes payable, due 2000 and 2002, 9.5% interest rate 2.1 3.1
------------------
Total debt 102.1 103.1
Less amounts due within one year 1.1 0.9
------------------
Long-term debt $101.0 $102.2
================================================================================
The Company has 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. This facility expires in
January 2003. In March 1998, Midas entered into an interest rate swap agreement
that fixed the first $25 million of variable rate borrowings under the revolving
credit facility at a rate of 5.79% with an all-in cost of 6.24% over a two year
period. The counterparty to the swap transaction is a commercial bank.
The $75 million in unsecured debt is at a fixed rate of 6.89% with an investment
grade (BBB) rating. The maturity date of the debt is April 15, 2005.
The Company's debt agreements require maintenance of certain financial covenants
including minimum net worth.
(6) TRANSACTIONS WITH WHITMAN
Cash Management and Advances
Whitman managed the cash not considered necessary for current operating
requirements of certain of its subsidiaries, including the U.S. operations of
Midas. Cash not needed for current operations was advanced to Whitman at the
then-current commercial bank prime lending rate; cash was advanced by Whitman on
the same basis. Interest income and expense on such advances are included in
interest expense-Whitman in the statements of operations.
Whitman Charges
Whitman allocated portions of its corporate office general and administrative
expenses and interest expense to its subsidiaries. Midas' share of such costs
amounted to $1.1 million in fiscal 1998 and $18.1 million in fiscal 1997.
MIDAS, INC. 1999 ANNUAL REPORT 33
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
Dividends and Capital Contributions
Midas paid dividends to Whitman and received capital contributions from Whitman,
as summarized in the statements of changes in shareholders' equity. In January
1998, Midas settled its Whitman obligations of $210 million, which consisted of
a $137.6 million dividend and $72.4 million of intercompany loans and advances.
(7) SUPPLEMENTAL BALANCE SHEET AND CASH FLOW INFORMATION
Receivables
Receivables are stated net of allowance for doubtful accounts of $1.8 million at
fiscal year end 1999 and $1.5 million at fiscal year end 1998.
Inventories
Inventories consisted of the following (in millions):
- --------------------------------------------------------------------------------
FISCAL YEAR END 1999 1998
- --------------------------------------------------------------------------------
Raw materials and work in process $ 4.5 $ 3.7
Finished goods 59.0 59.5
---------------------
$ 63.5 $ 63.2
================================================================================
Other Current Assets
Other current assets consisted of the following (in millions):
- --------------------------------------------------------------------------------
FISCAL YEAR END 1999 1998
- --------------------------------------------------------------------------------
Income taxes receivable $ 2.7 $ 1.7
Deferred income taxes 9.2 13.2
Other 8.8 9.9
---------------------
$ 20.7 $ 24.8
================================================================================
Property and Equipment
Property and equipment consisted of the following (in millions):
- -------------------------------------------------------------------------------
FISCAL YEAR END 1999 1998
- -------------------------------------------------------------------------------
Land $ 47.8 $ 50.4
Buildings and improvements 113.4 115.8
Machinery and equipment 70.9 87.8
---------------------
Total property and equipment 232.1 254.0
Accumulated depreciation (91.6) (111.2)
---------------------
Property and equipment, net $ 140.5 $ 142.8
===============================================================================
34 MIDAS, INC. 1999 ANNUAL REPORT
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
Accrued Expenses
Accrued expenses consisted of the following (in millions):
- --------------------------------------------------------------------------------
FISCAL YEAR END 1999 1998
- --------------------------------------------------------------------------------
Salaries and wages $ 1.9 $ 5.3
Taxes other than income taxes 2.8 3.3
Advertising 5.2 4.4
Accrued business transformation costs 5.7 14.4
Sales return allowance 5.0 5.0
Other expenses and interest 5.8 9.8
---------------------
$ 26.4 $ 42.2
================================================================================
Supplemental Cash Flow Information
Net cash provided by operating activities includes cash payments for interest
and income taxes as follows (in millions):
- --------------------------------------------------------------------------------
FISCAL YEAR 1999 1998 1997
- --------------------------------------------------------------------------------
Interest paid - Whitman $ -- $ 0.5 $ 6.8
Interest paid - other 8.6 10.9 2.3
Income taxes paid 16.4 11.0 21.9
================================================================================
(8) ADVERTISING
Under the terms of its franchise agreements, Midas is obligated to use one-half
of the royalty payments received from franchisees for advertising expenditures.
Amounts received from franchisees are recorded as liabilities until disbursed.
Midas also administers cooperative advertising programs under which amounts
received from franchisees are recorded as liabilities until they are disbursed.
Aggregate expenditures under these programs by Midas' North American operations
amounted to $62.2 million, $58.9 million, and $61.3 million in fiscal 1999,
1998, and 1997, respectively.
Midas also incurs certain advertising costs that are included in selling,
general and administrative expenses, which amounted to $3.4 million, $13.6
million, and $21.3 million in fiscal 1999, 1998, and 1997, respectively.
MIDAS, INC. 1999 ANNUAL REPORT 35
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
(9) INCOME TAXES
The income tax expense (benefit) consisted of (in millions):
- --------------------------------------------------------------------------------
FISCAL YEAR END 1999 1998 1997
- --------------------------------------------------------------------------------
Current:
U.S. Federal $ 13.2 $ 6.5 $ 4.9
Non-U.S 1.6 4.1 4.3
U.S. state and local 4.4 1.4 1.0
--------------------------------------
Total current 19.2 12.0 10.2
--------------------------------------
Deferred:
U.S. Federal 5.7 (0.4) (11.8)
Non-U.S 1.2 (1.3) (0.3)
U.S. state and local (1.6) 1.5 (1.7)
--------------------------------------
Total deferred 5.3 (0.2) (13.8)
--------------------------------------
Income taxes (benefit) $ 24.5 $ 11.8 $ (3.6)
================================================================================
The items which gave rise to differences between the income taxes (benefit) in
the statements of operations and the income taxes (benefit) computed at the U.S.
statutory rate are summarized as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
FISCAL YEAR 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense (benefit) computed at U.S. statutory rate 35.0% 35.0% (35.0)%
U.S. state and local taxes, net of U.S. Federal income
tax benefits 2.9 4.7 (1.8)
Higher non-U.S. effective tax rates 1.9 2.5 6.6
Lower non-U.S. effective tax rates on sale of
European operations -- (12.2) --
Non-deductible write-offs of intangible assets -- -- 10.3
Non-deductible expenses 0.2 (2.0) 3.7
Other items, net (1.0) 1.5 2.9
----------------------------------
Income taxes (benefit) 39.0% 29.5% (13.3)%
======================================================================================================
</TABLE>
Pretax income from non-U.S. operations amounted to $4.5 million, $18.2 million,
and $6.3 million in fiscal 1999, 1998 and 1997, respectively. Historically,
Midas' practice has been to reinvest its earnings in its non-U.S. subsidiaries.
For the sale of its European operations, the Company repatriated the earnings
associated with those operations in 1999. The Company has not recognized U.S.
income taxes on the unremitted earnings of its Canadian operations, since
foreign tax credits for Canadian income taxes will significantly reduce or
eliminate any U.S. tax liability.
36 MIDAS, INC. 1999 ANNUAL REPORT
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
Deferred income taxes are created by "temporary differences" between amounts of
assets and liabilities for financial reporting purposes and such amounts as
reported under income tax regulations. Deferred tax assets and liabilities
consisted of (in millions):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
FISCAL YEAR END 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets attributable to:
Employee benefits and vacation accruals $ 3.7 $ 4.0
Capitalized leases 1.1 1.0
Business transformation costs 7.0 10.3
Other items 7.6 6.3
----------------------
Total deferred tax assets 19.4 21.6
----------------------
Deferred tax liabilities attributable to:
Depreciation and amortization (5.0) (2.6)
Pension plan expense (4.2) (3.0)
Undistributed non-U.S. earnings, net of non-U.S. taxes withheld -- (1.4)
Other items (5.0) (4.5)
----------------------
Total deferred tax liabilities (14.2) (11.5)
----------------------
Net deferred tax assets $ 5.2 $ 10.1
======================
Net deferred tax assets included in:
Other current assets $ 9.2 $ 13.2
Deferred income taxes and other liabilities (4.0) (3.1)
----------------------
Net deferred tax assets $ 5.2 $ 10.1
=================================================================================================
</TABLE>
Management believes it is more likely than not that all deferred tax assets will
be realized and, accordingly, no valuation allowance has been recorded.
(10) FRANCHISE AGREEMENTS
Midas' franchise agreements generally cover a 20-year period and provide for
renewals. A franchise agreement can be canceled by Midas only in the event a
franchisee fails to comply with the provisions of the agreement. Franchise
agreements provide for initial and renewal fees and continuing royalty payments
based on a percentage of sales.
Worldwide shops in operation as of fiscal year-end consisted of (unaudited):
- --------------------------------------------------------------------------------
FISCAL YEAR END 1999 1998 1997
- --------------------------------------------------------------------------------
Franchised and licensed 2,698 2,674 2,341
Company-operated 13 58 377
-----------------------------------
Total 2,711 2,732 2,718
================================================================================
MIDAS, INC. 1999 ANNUAL REPORT 37
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
(11) LEASES
Control of the real estate used by Midas shops is a fundamental strength of the
Midas program. Midas employs a number of methods to ensure continued dedication
of the real estate to the Midas program. Midas leases real estate that is
subleased to franchisees and owns real estate in North America that is leased to
franchisees. Midas has also entered into contingent operating lease agreements
that are described below. At fiscal year end 1999, approximately 80% percent of
real estate associated with North American shops was controlled by Midas, using
one of these methods.
Leased Real Estate
Gross rent expense applicable to operating leases relates to rentals of shops,
distribution facilities, corporate administration facilities and other
miscellaneous items. Gross rent expense, the sublease rental income from
franchisees that reduced gross rent expense, and the resulting net rent expense
for fiscal 1999, 1998 and 1997 are presented below (in millions):
- --------------------------------------------------------------------------------
FISCAL YEAR 1999 1998 1997
- --------------------------------------------------------------------------------
Gross rent expense $ 22.6 $ 27.2 $ 37.1
Sublease rental income 22.4 20.7 22.6
-----------------------------------
Net rent expense $ 0.2 $ 6.5 $ 14.5
================================================================================
Substantially all of Midas' operating leases provide that Midas pay taxes,
maintenance, insurance, and certain other operating expenses. The subleases with
franchisees contain provisions for Midas to recover such costs.
At January 1, 2000, annual minimum rental payments due under capital and
operating leases that have initial or remaining noncancelable terms in excess of
one year, along with sublease rental income on real estate due under
noncancelable subleases were as follows (in millions):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
CAPITAL OPERATING SUBLEASE
LEASES LEASES RENTALS TOTAL
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000 $ 1.6 $ 25.0 $ (20.8) $ 5.8
2001 1.6 23.6 (19.7) 5.5
2002 1.6 22.6 (18.8) 5.4
2003 1.6 20.6 (16.8) 5.4
2004 1.5 18.9 (15.0) 5.4
Thereafter 8.5 81.7 (62.7) 27.5
--------------------------------------------------
Total minimum lease payments 16.4 $ 192.4 $ (153.8) $ 55.0
====================================
Less imputed interest 6.4
------
Present value of minimum lease payments 10.0
Less current portion included in short-term debt 0.7
------
Obligations under capital leases-noncurrent $ 9.3
================================================================
</TABLE>
At fiscal year end 1999 and 1998, the net book value of property under capital
leases included in the balance sheets amounted to $7.2 million and $8.7 million,
respectively.
38 MIDAS, INC. 1999 ANNUAL REPORT
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
Real Estate Owned by Midas and Leased to Franchisees
Midas owns real estate located in various communities throughout the U.S. that
is leased to franchisees under operating lease agreements. Substantially all
leases are for initial terms of 20 years and provide for minimum and contingent
rentals.
Real estate leased to franchisees and included in the balance sheets consisted
of (in millions):
- --------------------------------------------------------------------------------
FISCAL YEAR END 1999 1998
- --------------------------------------------------------------------------------
Land $ 45.9 $ 44.8
Buildings and improvements 82.2 88.7
---------------------------
Total property and equipment 128.1 133.5
Accumulated depreciation (30.3) (30.5)
---------------------------
Property and equipment, net $ 97.8 $ 103.0
================================================================================
Rental income for fiscal 1999 was $17.0 million, compared to $17.4 million in
fiscal 1998 and $15.6 million in fiscal 1997. Minimum future lease payments to
be received are as follows (in millions):
- --------------------------------------------------------------------------------
2000 $ 15.5
2001 13.7
2002 12.2
2003 10.7
2004 9.5
Thereafter 65.8
- --------------------------------------------------------------------------------
$ 127.4
=======
Contingent Operating Lease Agreements
Midas has entered into contingent operating lease agreements covering real
estate that is leased by U.S. and Canadian franchisees from parties that are
directly or indirectly related to the franchisees.
At January 1, 2000, 121 shops were covered by these contingent operating lease
agreements, under which Midas could be required, under certain limited
circumstances, to begin making rental payments with respect to individual shop
locations. The average annual shop rental is $42 thousand with an average
remaining term of approximately 8 years.
Management believes that, individually and in the aggregate, any potential
difference that might arise under these contingent lease agreements between the
rental expense and the rental income from future subleases would not materially
affect the financial position or results of operations of Midas.
MIDAS, INC. 1999 ANNUAL REPORT 39
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
(12) PENSION AND POSTRETIREMENT PLANS
Defined Benefit Pension Plans and Other Postretirement Plans
Substantially all North American employees are covered under various defined
benefit pension plans sponsored and funded by Midas. Plans covering salaried
employees provide pension benefits based on years of service, and generally are
limited to a maximum of 20% of the employees' average annual compensation during
the five years preceding retirement. Plans covering hourly employees generally
provide benefits of stated amounts for each year of service. Plan assets are
invested primarily in common stocks, corporate bonds, and government securities.
In addition, Midas provides substantially all former U.S. salaried employees who
retired prior to July 1989 and selected other employees in the U.S. and Canada
with certain life and health care benefits.
Net periodic pension and postretirement cost for fiscal 1999, 1998 and 1997 are
presented in the following table (in millions):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS POSTRETIREMENT BENEFITS
FISCAL YEAR 1999 1998 1997 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost benefits $ 1.7 $ 1.8 $ 1.6 $ -- $ -- $ --
Interest cost on projected benefit obligation 2.7 2.7 2.5 0.1 0.2 0.2
Actual return on assets (4.7) (4.4) (3.9) -- -- --
Net amortization and deferral -- 0.1 0.1 (0.3) (0.3) (0.2)
------------------------------------------------------------------------------
Total net periodic cost (credit) $ (0.3) $ 0.2 $ 0.3 $ (0.2) $ (0.1) $ --
====================================================================================================================================
</TABLE>
The principal economic assumptions used in the determination of net periodic
pension and postretirement cost included the following:
- --------------------------------------------------------------------------------
FISCAL YEAR 1999 1998 1997
- --------------------------------------------------------------------------------
Discount rate 6.5% 7.0% 7.5%
Expected long-term rate of return on assets 9.5% 9.5% 9.5%
Rate of increase in compensation levels 4.0% 4.5% 5.0%
================================================================================
The changes in the projected benefit obligations for fiscal 1999 and fiscal 1998
were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS POSTRETIREMENT BENEFITS
FISCAL YEAR 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligations as of the beginning of the year $ 45.3 $ 39.8 $ 2.3 $ 2.9
Change in foreign currency exchange rates 0.4 (0.4) -- --
Service cost 1.8 1.8 -- --
Interest cost 2.7 2.7 0.1 0.1
Participants' contributions -- -- 0.1 --
Plan amendments -- 0.1 -- 0.1
Actuarial (gain) loss (5.5) 3.9 (0.3) (0.7)
Business transformation divestitures (2.4) -- -- --
Benefits paid and expenses (2.1) (2.6) (0.2) (0.1)
--------------------------------------------------------
Benefit obligations as of the end of the year $ 40.2 $ 45.3 $ 2.0 $ 2.3
====================================================================================================================================
</TABLE>
The health care cost trend rate used to measure the cost in 1999 for health care
benefits was 8.2%, which is graded down to an ultimate trend rate of 5.5% to be
achieved in the year 2006. The effect of a one percentage point change in the
assumed health care cost trend rates for future years would result in a $0.1
million increase or decrease in the accumulated postretirement benefit
obligation as of fiscal year end 1999. The effect of this change on the
aggregate of the service and interest cost components of the net periodic
postretirement benefit costs would not be material.
40 MIDAS, INC. 1999 ANNUAL REPORT
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
The changes in the fair market value of the plan assets for fiscal 1999 and
fiscal 1998 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS POSTRETIREMENT BENEFITS
FISCAL YEAR 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fair value of assets as of the beginning of the year $ 54.3 $ 55.5 $ -- $ --
Change in foreign currency exchange rates 0.4 (0.6) -- --
Actual return on plan assets 10.1 0.9 -- --
Employer contributions 0.2 1.1 0.1 0.1
Participant's contributions -- -- 0.1 --
Benefits paid and expenses (2.1) (2.6) (0.2) (0.1)
-----------------------------------------------------
Fair value of assets as of the end of the year $ 62.9 $ 54.3 $ -- $ --
====================================================================================================================================
</TABLE>
Pension costs are funded in amounts not less than minimum levels required by
regulation. The following table reconciles the pension plans and postretirement
plans funded status to the amounts recognized in other noncurrent assets
(liabilities) in Midas' balance sheets as of fiscal year end 1999 and 1998 (in
millions):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
PENSION BENEFITS POSTRETIREMENT BENEFITS
FISCAL YEAR 1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligation (measured as of September 30):
Projected benefit obligation $ (40.2) $ (45.3) $ (2.0) $ (2.3)
Plan assets at fair market value
(measured as of September 30) 62.9 54.3 -- --
--------------------------------------------------
Plan assets in excess of (less than) projected
benefit obligation 22.7 9.0 (2.0) (2.3)
Unrecognized net asset at transition (0.8) (1.1) -- --
Unrecognized prior service costs 1.5 2.8 -- --
Unrecognized net gain (12.9) (2.1) (4.6) (4.6)
--------------------------------------------------
Prepaid (accrued) recognized on balance sheets $ 10.5 $ 8.6 $ (6.6) $ (6.9)
====================================================================================================================================
</TABLE>
The principal economic assumptions used in determining the above benefit
obligations were discount rates of 7.5% in fiscal 1999 and 6.5% in fiscal 1998,
and rates of increase in future compensation levels of 5.0% in fiscal 1999 and
4.5% in fiscal 1998.
Defined Contribution Plans
Substantially all U.S. salaried employees, certain U.S. hourly employees, and
certain Australian and Canadian employees participate in voluntary, contributory
defined contribution plans to which Midas makes full or partial matching
contributions. Midas' matching contributions to these plans amounted to $1.4
million, $1.7 million, and $2.0 million in fiscal 1999, 1998 and 1997,
respectively. Midas' cost for the associated nonqualified plan was $0.2 million
in fiscal 1999, $0.1 million in fiscal 1998 and $0.7 million in fiscal 1997.
Multi-employer Pension Plan
Midas participates in a multi-employer pension plan, which provides benefits to
certain unionized employees. Amounts contributed to this plan totaled $0.2
million in fiscal 1999 and $0.3 million for both fiscal 1998 and 1997.
MIDAS, INC. 1999 ANNUAL REPORT 41
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
(13) STOCK-BASED COMPENSATION
Stock Options
In connection with the Spin-off, Midas adopted, and Whitman, as then sole
shareholder of Midas, Inc., approved the Midas 1998 Stock Incentive Plan (the
"Plan"). The Plan authorizes the issuance of up to 3,106,886 shares of Midas
common stock pursuant to the exercise of incentive stock options, non-qualified
stock options and stock appreciation rights and the grant of restricted stock
and performance awards. In addition, Midas reserved 10,000 shares for issuance
upon the grant of stock awards.
On the date of the Spin-off, outstanding stock options granted under the Whitman
stock option plan were replaced with non-qualified Midas, Inc. stock options of
equivalent value, with necessary adjustments being made to the number and
exercise price of the Midas options to preserve the economic spread of the prior
Whitman options. Options granted pursuant to the Plan are generally exercisable
over a period of three or five years commencing one year after the date of
grant. The following table summarizes information regarding the outstanding
stock options as of January 1, 2000.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE
RANGE OF REMAINING LIFE WEIGHTED-AVERAGE AVERAGE WEIGHTED- AVERAGE
EXERCISE PRICES SHARES (IN YEARS) EXERCISE PRICE EXERCISABLE SHARES EXERCISE PRICE
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$9.81 - $14.42 360,566 6.4 $ 14.02 238,365 $ 13.81
15.65 - 18.50 650,784 7.1 16.15 383,521 15.99
20.38 - 24.95 470,000 8.2 22.53 97,997 22.48
25.95 - 34.66 322,500 9.4 26.57 7,500 28.00
--------- --------
1,803,850 727,383
===================================================================================================================================
</TABLE>
The stock option activity since the Spin-off is summarized as follows:
- --------------------------------------------------------------------------------
NUMBER OF OPTION
SHARES PRICE RANGES
- --------------------------------------------------------------------------------
Outstanding at Spin-off 2,106,886 $ 7.35 to $ 16.39
Granted 784,774 15.65 to 28.00
Exercised (288,086) 7.35 to 15.83
Cancelled and forfeited (359,073) 11.41 to 15.83
---------------------------------------
Outstanding at December 26, 1998 2,244,501 7.35 to 28.00
Granted 370,000 24.95 to 34.66
Exercised (757,923) 7.35 to 20.25
Cancelled and forfeited (52,728) 14.42 to 25.95
---------------------------------------
Outstanding at January 1, 2000 1,803,850 9.81 to 34.66
================================================================================
42 MIDAS, INC. 1999 ANNUAL REPORT
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
Restricted Stock
During fiscal 1998, the Company granted options to purchase 276,565 shares of
restricted stock to certain of its officers. The options were granted at the
market price of the stock on the date of the grant, and are reflected in the
above table. During fiscal 1999, all 276,565 options were exercised at a
combined price of approximately $6.1 million. In connection with the purchase of
these shares and in accordance with the terms of the grant, the holders of the
restricted stock became indebted to Midas in the aggregate amount of $6.1
million. Such loans bear interest at 6.0% per annum, and have a four-year term
that is accelerated no later than one month after termination of employment. The
Company has agreed to waive interest that accrues while Midas employs the
borrower. The notes receivable are reflected as a reduction of shareholders'
equity in the accompanying balance sheet as of fiscal year end 1999.
Restricted shares of Whitman common stock issued to certain Midas officers were
forfeited on January 30, 1998 and replaced with restricted shares of Midas
common stock of equal value. At fiscal year end 1999, there were 4,418
restricted shares of Midas common stock outstanding. The restricted shares vest
at various times over a three-year period commencing one year from the original
date of grant.
Other
The Company accounts for its stock-based compensation plans using the intrinsic
value method of accounting. An alternative to the intrinsic value method is the
fair value method. Had the Company used the fair value method, pro forma net
income and earnings per share would have been:
- --------------------------------------------------------------------------------
FISCAL YEAR 1999 1998
- --------------------------------------------------------------------------------
Net income (in millions)
As reported $ 38.4 $ 28.2
Pro forma 37.0 27.4
Basic earnings per share
As reported $ 2.33 $ 1.67
Pro forma 2.25 1.62
Diluted earnings per share
As reported $ 2.28 $ 1.63
Pro forma 2.25 1.62
================================================================================
The weighted average estimated fair value of the options granted in fiscal 1999
and 1988 were $13.93 and $11.82, respectively, based on the Black-Scholes
valuation model using the following assumptions:
- --------------------------------------------------------------------------------
FISCAL YEAR 1999 1998
- --------------------------------------------------------------------------------
Risk-free interest rate 6.5% 6.5%
Dividend yield .00% .00%
Expected volatility 33.25% 33.25%
Expected life in years 8 8
================================================================================
MIDAS, INC. 1999 ANNUAL REPORT 43
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
(14) SHAREHOLDER RIGHTS AGREEMENT AND SERIES A JUNIOR PARTICIPATING PREFERRED
STOCK
In fiscal 1997, Midas adopted a Rights Agreement providing for the issuance of
one Preferred Stock Purchase Right (a "Right") with each share of Midas common
stock. Each Right entitles the registered holder to purchase from Midas one
one-hundredth of a share of Series A Junior Participating Preferred Stock (a
"Preferred Share") at a price of $150 per one one-hundredth of a Preferred Share
(the "Purchase Price"), subject to adjustment. The Rights will become
exercisable on the Rights Distribution Date, which is the earlier of the tenth
day following a public announcement that a person(s) has acquired beneficial
ownership of 13% or more of the Midas common stock (an "Acquired Person"), or
ten business days after the commencement of a tender offer or exchange offer
that would result in a person(s) acquiring beneficial ownership of 13% or more
of the outstanding shares of Midas common stock.
If a person becomes an Acquiring Person, each Right holder (other than the
Acquiring Person) will be entitled to receive, upon exercise of the Right, a
number of shares of Midas common stock having a market value of two times the
exercise price of the Right. If Midas is acquired in a merger or other business
combination, each Right holder (other than the Acquiring Person) will be
entitled to receive, upon exercise of a Right, a number of the acquiring
Company's common shares having a market value at that time of two times the
exercise price of the Right.
In general, Midas can redeem all the Rights for one cent per Right at any time
until 10 days following the first public announcement that a person has become
an Acquiring Person. The Midas Board of Directors, without the consent of the
holders of the Rights, is also authorized to reduce the stock ownership
thresholds to 10 percent or increase them to not more than 20 percent. The
Rights will expire on December 31, 2007. Until a Right is exercised, the holder
of a Right (merely by being a Right holder) will have no rights as a shareholder
of Midas, including voting or dividend rights.
Each Preferred Share will be entitled to a minimum preferential quarterly
dividend payment of $1.00 per share, but will be entitled to an aggregate
dividend of 100 times the dividend declared per share of Midas common stock.
Each Preferred Share will have 100 votes, voting together with the Midas common
stock. In the event of a merger or other transaction in which shares of common
stock of the Company are exchanged, each Preferred Share will be entitled to
receive 100 times the amount received per share of Midas common stock.
The Company has 20 million authorized shares of Series A Junior Participating
Preferred Stock. There are no Series A Junior Participating Preferred Stock
issued or outstanding.
(15) CONTINGENCIES
In connection with the disposition of U.S. company-operated shops, certain
franchisees entered into financing agreements with a third party lender. If the
franchisees fail to make required payments, Midas is contingently liable for a
portion of the losses that would be incurred by the lender. As of January 1,
2000, Midas' maximum loss exposure is approximately $5.5 million; no losses were
incurred by Midas in fiscal 1999 or 1998.
Midas has certain contingent liabilities arising from various pending claims and
litigation related to a number of matters. While the amount of liability that
may result from these matters cannot be determined, in the opinion of Midas'
counsel, the ultimate liability will not materially affect the financial
position or results of operations of Midas.
44 MIDAS, INC. 1999 ANNUAL REPORT
<PAGE>
NOTES TO FINANCIAL STATEMENTS
continued
================================================================================
(16) BUSINESS SEGMENT INFORMATION
Midas operates in a single business segment and provides retail automotive
services principally through franchised shops located in North America (United
States and Canada) and through franchised and licensed shops in International
markets. During fiscal 1999, the Company completed its disposition of
company-operated shops, primarily through the franchising activities in the
United States and Canada described in Note 3 and the sale of the European
operations described in Note 4. Foreign currency gains and losses were not
significant. Sales to any single customer were less than five percent of sales
and revenues in each of the years presented. Midas' U.S. operations export
products to and receive royalties from franchisees located in Central America.
Such sales and revenues amounted to less than one percent of U.S. sales and
revenues in each of the fiscal years presented.
The following tables present financial information for each of the principal
geographic areas in which the company operates. Sales and revenues are
attributed to geographic areas based on the location of customers.
- --------------------------------------------------------------------------------
Sales and Revenues
----------------------------------
FISCAL YEAR END 1999 1998 1997
- --------------------------------------------------------------------------------
North American Operations:
U.S $ 301.8 $ 354.7 $ 411.7
Canada 40.7 47.9 57.3
----------------------------------
Total North America 342.5 402.6 469.0
----------------------------------
International Operations 13.0 111.2 122.0
----------------------------------
Total $ 355.5 $ 513.8 $ 591.0
================================================================================
- --------------------------------------------------------------------------------
Identifiable Assets
----------------------------------
FISCAL YEAR END 1999 1998 1997
- --------------------------------------------------------------------------------
North American Operations:
U.S $ 277.0 $ 298.7 $ 317.4
Canada 28.3 23.6 34.3
----------------------------------
Total North America 305.3 322.3 351.7
----------------------------------
International Operations 0.6 3.0 91.4
----------------------------------
Total $ 305.9 $ 325.3 $ 443.1
================================================================================
MIDAS, INC. 1999 ANNUAL REPORT 45
<PAGE>
================================================================================
SENIOR MANAGEMENT
Wendel H. Province
Chairman & Chief Executive Officer
R. Lee Barclay
Executive Vice President
& Chief Financial Officer
Ronald J. McEvoy
Executive Vice President
& Chief Information Officer
James D. Hamrick
Senior Vice President,
Merchandising
Gerard M. Klaisle
Senior Vice President,
Human Resources
John A. Warzecha
Senior Vice President,
Franchise Operations and Sales
Robert H. Sorensen
Vice President, General
Counsel & Secretary
Carl R. Daniels, Jr.
Vice President, Logistics
D. Bruce Hutchison
Vice President, Marketing
================================================================================
ANNUAL MEETING
Thursday, May 11, 2000 11:00 a.m.
Chicago O'Hare Hilton
O'Hare Airport
Chicago, Illinois
Shareholders of record at the close of business on Thursday, March 23rd shall be
entitled to vote.
STOCK TRANSFER AGENT AND REGISTRAR
First Chicago Trust Company
c/o Equiserve
P. O. Box 2500
Jersey City, New Jersey 07303-2500
(800) 446-2617 or (201) 324-1225
http://www.equiserve.com
INVESTOR RELATIONS CONTACT
Bob Troyer
Director, Investor Relations
& Corporate Affairs
(800) 621-0144 or (630) 438-3016
================================================================================
FORM 10-K AVAILABLE
Form 10-K Report, filed annually with the Securities and Exchange Commission,
includes financial data which supplements the material included in this Annual
Report. Midas, Inc., will provide without charge a copy of Form 10-K to any
shareholder upon written request to Midas Investor Relations.
INDEPENDENT AUDITORS
KPMG LLP
Chicago, Illinois
CORPORATE OFFICES
Midas, Inc.
1300 Arlington Heights Road
Itasca, Illinois 60143
(800) 621-0144 / (630) 438-3000
INTERNET ADDRESSES
http://www.midasinc.com
(Investors site)
http://www.midas.com
(Consumers site)
46 Midas, Inc. 1999 Annual Report
<PAGE>
[PHOTO OMITTED]
BOARD OF DIRECTORS
Standing left to right
<TABLE>
<S> <C> <C> <C>
Robert R. Schoeberl Thomas L. Bindley Herbert M. Baum Jarobin Gilbert, Jr.
Executive Vice President President President and President and
(Retired) Bindley Capital Corporation Chief Operating Officer Chief Executive Officer
Montgomery Ward Member, Executive Committee Hasbro, Inc. DBSS Group, Inc.
Member, Executive Committee Member, Member, Member,
Member, Audit & Finance Committee Compensation Committee Compensation Committee
Audit & Finance Committee Chairman,
Audit & Finance Committee
</TABLE>
Sitting left to right
<TABLE>
<S> <C>
Archie R. Dykes Wendel H. Province
Chairman Chairman and
Capital City Holdings, Inc. Chief Executive Officer
Chairman, Midas, Inc.
Compensation Committee Chairman, Executive Committee
</TABLE>
<PAGE>
[GRAPHIC OMITTED]
[LOGO] MIDAS, INC.
MIDAS Corporate Offices
1300 Arlington Heights Road
Itasca, IL 60143
(630) 438-3000
www.midasinc.com
