| MIDAS INC Item 1A Risk Factors In addition to the factors discussed elsewhere in this annual report, the following are some of the important factors that could cause Midas’ actual results to differ materially from those projected in any forward-looking statements: Midas relies on franchising for a substantial portion of its operating revenues |
| The failure of Midas franchisees to successfully operate stores consistent with Midas’ standards would have a material adverse effect on Midas’ profitability |
| Midas relies on franchising for a substantial portion of its operating revenues |
| Therefore, Midas’ business is dependent on the ability of its franchisees to deliver high quality services |
| Midas franchisees are independent contractors and are not Midas employees |
| The Company provides training and support to its franchisees, but the quality of franchised store operations may be diminished by any number of factors beyond Midas’ control |
| Midas has been modifying its business model, which requires Midas franchisees to perform more technologically complex repairs and maintenance than historically has been the case, and which requires greater investment in personnel and equipment |
| Consequently, not all Midas franchisees may successfully operate stores in a manner consistent with Midas’ standards and requirements or hire and train qualified managers, technicians and other store personnel |
| If they do not, Midas’ image and reputation may suffer, and system-wide sales and profitability could decline |
| The failure to comply with applicable franchise laws could have a material adverse effect on Midas’ financial condition and results of operations |
| Midas is subject to federal and state laws and regulations, including the regulations of the Federal Trade Commission as well as similar authorities in individual states, in connection with the offer, sale and termination of franchises and the regulation of the franchisor—franchisee relationship |
| The Company’s failure to comply with these laws could subject it to liability to franchisees and to fines or other penalties imposed by governmental authorities |
| In addition, Midas may become subject to litigation with, or other claims filed with state or federal authorities by, franchisees based on alleged unfair trade practices, implied covenants of good faith and fair dealing, payment of royalties, location of shops, advertising expenditures, franchise renewal criteria or express 15 ______________________________________________________________________ [43]Table of Contents violations of agreements |
| There can be no assurance that compliance problems will not be encountered from time to time, or that material disputes will not arise with one or more franchisees |
| Accordingly, the Company’s failure to comply with applicable franchise laws and regulations could have a material adverse effect on its financial condition and results of operations |
| Midas is a leveraged company that utilizes debt to fund its business |
| The Company currently has substantial debt on its balance sheet |
| The financing provided to the Company is subject to covenants that require Midas to maintain a certain net worth and maintain compliance with certain leverage ratios |
| If Midas does not perform in accordance with these covenants, the institutions providing the funds have the option to withdraw their funding support |
| There can be no assurances that Midas will remain in compliance with its debt covenants in the future |
| In addition, Midas’ current financing agreement expires on October 27, 2010 |
| There can be no assurances that the Company will be able to refinance its existing credit facility when it expires in fiscal 2010 |
| Virtually all of Midas’ revenues outside of North America are derived from license fees from one customer and the loss or reduction of these fees would have a material adverse effect on Midas’ net income |
| Virtually all of Midas’ revenues outside of North America are derived from Midas’ master licensee in Europe and South America (previously Fiat Group Sp |
| A and now Norauto Group SA of France) |
| As part of the licensing agreement, Midas receives a fixed, US dollar denominated license fee through 2007, after which the fee will be variable based upon a percentage of retail sales |
| Midas realized dlra9dtta3 million in international license fees under this agreement in fiscal 2005, representing approximately 4dtta8prca of consolidated revenue and 95prca of operating income |
| Under the variable fee arrangement, that amount would have been reduced to approximately dlra4 million |
| The loss of these licensing fees due to an adverse change in Midas’ relationship with Norauto or in Norauto’s business would have a material adverse effect on Midas’ net income |
| Failure to successfully implement Midas’ new business model will have a material adverse effect on Midas’ financial condition and results of operations |
| Midas is in the process of repositioning from a business model focused on the servicing and replacement of mufflers, brakes, shock absorbers and struts to a model that encompasses a complete line of services, including climate control, electrical, chassis and maintenance services |
| While Midas has made substantial progress in broadening its services, it has not yet been widely successful in developing ongoing relationships with its customers |
| As a result of the change in business model, company-operated and franchised shops have had to make, and will have to continue to make, investments in training, new personnel and equipment |
| As a result of the inability of certain franchisees to adapt to the changing environment and successfully adopt the new business model, the Company has in some cases reacquired franchises to prevent the closing of these shops |
| While the Company believes that the selective acquisition of certain franchises is consistent with the implementation of its business model, the long term success of the Company depends upon the ability of the Company’s franchisees to profitably implement the new business model |
| While comparable shop sales have been maintained or improved at shops that have made the transition to the new business model, there can be no assurance that the change in the long run will be successfully marketed, that consumers will accept the new model or that the remaining shops will be willing to or can successfully make the transition to the new format |
| Midas depends on supply chain alliances to distribute products to its franchisees and on the royalty payments from these suppliers |
| Failure of these companies to reliably distribute automotive parts to Midas shops would have a material adverse effect on Midas’ profitability |
| During fiscal 2003, Midas entered into long-term supply arrangements with AutoZone and Uni-Select to distribute Midas brand products and other replacement auto parts to its franchisees throughout North America |
| In 16 ______________________________________________________________________ [44]Table of Contents addition, the Company has significant supply chain alliances with NAPA, CarQuest and Bridgestone-Firestone |
| Midas depends on these companies to reliably distribute automotive parts to Midas shops on a timely basis |
| Failure on the part of these companies, particularly AutoZone, to execute their distribution obligations to the satisfaction of Midas dealers could lead to a disruption in Midas franchisees’ operations, which would have a material adverse effect on the Company’s franchise revenues |
| A reduction in purchases by Midas dealers of the products distributed by these companies would also result in lower product royalty revenue for the Company, which the Company depends on to offset the costs of its Midas’ lifetime guarantee |
| Midas operates in a highly competitive market and the failure of Midas franchisees to effectively compete would have a material adverse effect on Midas’ financial condition and results of operations |
| The automotive services industry is highly fragmented and highly competitive |
| Numerous direct competitors exist for Midas’ retail auto service shops |
| Midas shops compete with national, regional and local specialty chains, both franchised and company-owned, car dealerships, independent repair shops and service bays of mass merchandisers |
| The Company believes the principal competitive factors in the markets served by Midas shops are, in no particular order, customer service and reputation, shop location, name awareness and price |
| Midas also competes with businesses of the types noted above and with other parties in the sale of franchises |
| Competitive factors include startup costs, royalty rates, franchisee support and the financial performance of existing franchises |
| Many of the Company’s competitors are large and have a substantially longer operating history than Midas |
| Many competitors have greater financial resources than the Company |
| The failure of Midas or individual Midas shops to compete effectively would have a material adverse effect on Midas’ financial condition and results of operations |
| Advances in automotive technology could adversely affect demand for Midas’ services |
| The demand for the services offered by Midas shops could be adversely affected by continuing developments in automotive technology |
| Automotive manufacturers are producing cars that last longer and require service and maintenance at less frequent intervals |
| For example, some manufacturers now recommend that consumers change oil at 10cmam000 mile intervals and replace spark plugs and other engine components at 100cmam000 miles, a significant increase from the mileage intervals recommended for earlier models and those currently recommended by most manufacturers |
| In addition, the improvement in original equipment manufacturers’ parts quality has in the past reduced, and may in the future reduce, demand for Midas products and services, adversely affecting Midas sales |
| Improvement in the quality of parts manufactured may extend the useful lives and warranties of those parts and may reduce demand for Midas products and services by decreasing the frequency of replacement or refurbishment of those parts |
| In turn, longer and more comprehensive warranty programs offered by automobile manufacturers and other third parties also could adversely affect the demand for Midas services |
| The Company believes that a majority of new automobile owners have their cars serviced by a dealer during the period the car is under warranty |
| In addition, advances in automotive technology continue to require Midas to incur additional costs to update its technical training program and upgrade the diagnostic capabilities of Midas shops |
| A downturn in the economy may delay or reduce consumer purchases of Midas products and services, which would adversely affect the Company’s revenues |
| Many factors affect the level of consumer spending on automotive services, including, among others, general business conditions, interest rates, gasoline prices, the availability of consumer credit and consumer confidence in future economic conditions |
| Consumer purchases of regular service interval maintenance generally are reduced during recessionary periods when disposable income is lower |
| A decline in the usage of automobiles would adversely affect demand for Midas’ products and services |
| While the number of automobiles registered in the US has steadily increased, a reduction in the number of miles driven by automobile owners would adversely affect the demand for Midas products and services |
| For example, when the retail cost of gasoline increases, the number of miles driven by automobile owners typically decreases, which historically has resulted in less frequent service intervals and fewer repairs |
| 17 ______________________________________________________________________ [45]Table of Contents The failure to comply with consumer protection regulations would have a material adverse effect on Midas’ financial condition and results of operations |
| National automotive repair chains have been the subject of investigations and reports by consumer protection agencies and the Attorneys General of various states |
| Publicity in connection with such investigations can have an adverse effect on the financial condition and results of operations of a company |
| In addition to such investigations, state and local governments have enacted numerous consumer protection laws and the failure to comply with these laws would have a material adverse effect on Midas’ financial condition and results of operations |
| Midas is subject to seasonality in its results of operations |
| The Company has historically experienced lower revenues during the first and fourth quarters |
| In particular, severe weather in winter months may make it difficult for consumers in affected parts of the country to travel to Midas shops to obtain services |
| Midas must commit resources to maintain and develop its brand |
| The failure to maintain the Midas brand would have a material adverse effect on Midas’ financial condition and results of operations |
| If Midas fails to continue maintaining and developing the Midas brand name, future revenues would be adversely affected |
| The Company believes that maintaining and developing the Midas brand name is critical to its success and that the importance of brand recognition may increase as competitors offer products and services similar to Midas’ products and services |
| Midas incurs substantial marketing expenditures to create and maintain brand loyalty as well as increase awareness of its brand |
| If Midas’ brand-building strategy is unsuccessful, these expenses may never be recovered, and Midas may be unable to increase its future revenues or implement its business strategy |
| Failure to protect Midas’ intellectual property would reduce its competitiveness |
| Midas relies on trademark, trade secret, patent and copyright law to protect its intellectual property, including the Midas brand name |
| Midas cannot be sure that these intellectual property rights can be successfully asserted or will not be invalidated, circumvented or challenged in the future |
| In addition, the laws of some of the foreign countries in which Midas’ products and services are or may be sold do not protect the Company’s intellectual property rights to the same extent as the laws of the United States |
| Midas’ failure to protect its proprietary information, and any successful intellectual property challenges or infringement proceedings against Midas, could make Midas less competitive and could have a material adverse effect on its business, financial condition and results of operations |
| Inability to respond to consumer demands would adversely affect Midas’ results of operations |
| An inability to respond to changes in consumer demands in a timely manner would adversely affect the Company’s revenues, and a failure to make continuous and successful new product and service introductions would result in declines in financial performance |
| Midas’ success in general, and at Midas shops in particular, depends on its ability to identify, originate and define automotive product and service trends as well as to anticipate, gauge and react to changing consumer demands in a timely manner |
| Midas’ automotive products and services must appeal to a broad range of consumers whose preferences cannot be predicted with certainty and are subject to rapid change |
| Midas may not be able to continue to develop appealing automotive products and services or meet changing consumer demands in the future |
| If Midas or its franchisees misjudge the market for automotive products and services, the Company or its franchisees may be faced with excess inventories and sunk training and equipment costs for certain automotive products and services and missed opportunities for other products and services |
| 18 ______________________________________________________________________ [46]Table of Contents The failure to comply with extensive environmental regulation applicable to Midas would have a material adverse effect on its financial condition and results of operations |
| Environmental compliance costs and liabilities could have a material adverse effect on the Company’s financial condition |
| Midas operations and properties are subject to increasingly stringent laws and regulations relating to environmental protection, including laws and regulations governing air emissions, water discharges and waste management |
| Such laws and regulations can impose fines and criminal sanctions for violations and require the installation of costly pollution control equipment or operational changes to limit pollution emissions and decrease the likelihood of accidental hazardous substance releases |
| Some of the Company’s current and former properties have been used as gas stations and dry cleaners |
| Accordingly, Midas could become subject to potentially material liabilities relating to the investigation and cleanup of contaminated properties, and to claims alleging personal injury or property damage as the result of exposures to, or releases of, hazardous substances |
| In addition, stricter interpretation of existing laws and regulations, new laws and regulations, the discovery of previously unknown contamination or the imposition of new or increased requirements could require Midas to incur costs or become the basis of new or increased liabilities that could reduce earnings and cash available for operations |
| The failure to attract and maintain an adequate supply of skilled labor would have a material adverse effect on Midas’ financial performance |
| The provision of high quality services by Midas shops requires an adequate supply of skilled labor |
| In addition, the operating costs and operating revenues of such shops may be adversely affected by high turnover in skilled technicians |
| Trained and experienced automotive technicians are in high demand |
| In addition, the expansion of the Midas business model from muffler and brake service to more complicated automotive repairs has required many franchised and company-operated shops to hire highly skilled full-service automobile technicians |
| Accordingly, a shop’s ability to increase productivity and revenues could be affected by its inability to attract and maintain the employment of skilled technicians necessary to provide the shop’s services |
| If Midas or its franchisees are unable to attract and maintain the adequate skilled labor force necessary to operate these shops efficiently, or if labor expenses increase as a result of a shortage in the supply of skilled technicians, Midas’ financial performance would be adversely affected |
| Midas’ performance may be affected by acts of war or terrorism War or terrorist activities or the threat of them may increase the cost of doing business or otherwise impact Midas’ financial performance |