RESULTS OF OPERATIONS

MDS management is focused on building shareholder value through the profitable growth of the Company. The two main drivers of profit growth for MDS are increases in comparable shop sales and increases in shop count through the sale of additional franchised units. These two drivers are closely integrated, as the sale of franchises is much easier in an environment where franchised shop sales and profits are growing.

Growing Comparable Shop Sales

MDS management believes the key to growing sales in the Midas system in North America is to focus on those services that are most critical to the regular maintenance of vehicles: brake replacement, fluid replacement and tire replacement. These services are required of all vehicles at periodic intervals and management believes future success in automotive service requires that a service provider possess expertise, credibility and top-of-mind awareness in all three categories. These periodic services will serve as the gateway to forming broader, long-term relationships with customers, including factory scheduled maintenance and major repairs.

Brakes: The Midas system has long been a leader in the brake category throughout North America. The Company's strength in brake services dates back nearly 30 years and is backed by the well-known Midas lifetime guarantee. While brakes remain the largest and most profitable service category for the Midas system, brake sales at retail have declined over the past several years, producing a significant drag on overall system sales performance. The Company's efforts to drive retail brake sales starts with ensuring brake product quality across the Midas system. During 2008, the Company introduced new mandatory minimum performance standards for Midas brake friction to be used by franchisees. In connection with the improved product quality standards, the Company launched its SecureStop branded brake service, which helps Midas differentiate the service provided by Midas shops amongst numerous competitors who rely almost exclusively on price. In 2009, the Company is changing its promotional brake strategy from national single-price-point television advertising to a more locally-focused advertising approach. Brake service is very competitive on a local level and management believes the move to local advertising will provide Midas franchisees with greater flexibility in addressing local market conditions. Furthermore, it should allow for a more consistent share of voice in brake promotions.

Tires: In the last five years, Midas successfully launched a major retail initiative to significantly expand Midas shop sales of tires and related tire services. In support of this objective, the Company formed an alliance with Bridgestone-Firestone to distribute tires directly to Midas system shops throughout North America. As a result, comparable shop sales of tires and related tire services in North America increased significantly in each of the past four years. Despite this multi-year success in driving tire sales, tires remain a relatively small component of the Midas system overall sales mix: less than 6% in the U.S. and 9% in Canada for 2008. Management believes that achieving a 20% sales mix in tires is both attainable and important to the future growth of the Midas system in North America.

The Company continues to test a significantly expanded tire program in certain company-operated and franchised Midas shops. If this program succeeds, it will serve as a model for shops throughout the Midas system. Going forward, the Company believes that sales of tires and related tire services will be a significant component of future revenue growth for the Midas system.

Fluid Exchanges: In fiscal 2005, the Company began the roll out of a series of initiatives designed to build sales in maintenance services as a means to increase repeat customer business. The program most importantly included the standardization of the Midas oil change service and vehicle inspection process, providing all customers with suggested factory maintenance schedules and increasing the Midas shop's focus and capabilities in fluid exchange services, which are an increasingly important component of factory scheduled maintenance.

In response to the Company's efforts to build maintenance revenues and increase shop visit frequency, comparable shop sales of oil changes in North America have increased in the past two years. However, revenues from this category still represent less than 7% of Midas system sales, and the typical Midas shop performs less than six oil changes per day. While oil change revenue and car count have been growing over the past several years, management believes the Midas system has the capacity to significantly increase that number by leveraging the operating knowledge of the SpeeDee system and enhanced local marketing efforts. Growth in car count is important to driving sales growth in the Midas system.

Growing Shop Count

Since fiscal 1998, annual Midas shop closings have exceeded annual new shop openings. The annual shop closing rate during this period of approximately 2.8% is consistent with other mature retail companies, however the opening rate has lagged. This reduced opening rate is due to a variety of factors including the increased complexity of the Midas shop operating model, a lack of focus on new shop development by the MDS management team during many of those years, an over-supply of automotive repair centers in general, and a re-deployment of capital by MDS away from real estate investments.

The benefits of transitioning Midas shops to new franchisees can be seen in the performance of these shops. Sales at shops within the first year after transition have historically far outperformed the sales performance of the broader Midas system. In some cases, the improvement is dramatic with sales rising as much as 100%. In the next several years the Company hopes to accelerate the number of transitions each year and thereby increase the capacity of the Midas system as a whole to adapt and thrive in this new business environment.

In addition to transitions, the Company believes that the roll-out of the Midas-SpeeDee Co-Brand concept and the acquisition/conversion of competing automotive repair centers both provide a significant opportunity to grow the North American franchise system. A successful test of the new Midas-SpeeDee Co-Brand concept has the potential to create a new growth platform for the Company by substantially enhancing the economics and return-on-investment of a franchised automotive service shop. Because the automotive service market is both fragmented and saturated, the Company believes that unit growth is best achieved through acquisitions and conversions of independents rather than de novo opening of newly constructed sites. These two opportunities are explained in greater detail below.

The Midas-SpeeDee Co-Brand Opportunity: In March 2008, MDS acquired the SpeeDee auto service franchise system. The SpeeDee business model focuses on fluid exchanges and maintenance, providing a high quality auto service experience in a quick-service format. SpeeDee leverages the quick-service customer relationship as a gateway to a broader general repair relationship with its customers.

The Company believes the acquisition of SpeeDee provides both the Midas and SpeeDee franchise systems with a unique opportunity for growth in the future. By combining into one location Midas' expertise in general repairs and strong brand awareness with SpeeDee's strength in executing quick-lube and fluid exchanges, the Company believes it can create a powerful new format focused on satisfying the needs of time-pressed consumers seeking value, excellence and a long-term auto service relationship. The Company expects that a Midas-SpeeDee Co-Brand format shop will see customers much earlier in the lifecycle of their vehicle (relative to the typical Midas shop) and will be more able to convert these vehicles into general repair customers (relative to the typical SpeeDee shop) as the vehicles age. The resulting higher unit sales volume may produce a higher return on investment for the franchisee by better leveraging shop overhead expenses.

The Company launched its first test of the Midas-SpeeDee Co-Brand concept with three shops during the third quarter of fiscal 2008. All three were existing SpeeDee locations in California that added the Midas brand to their shop. A fourth Co-Branded unit, also in California, opened on a de novobasis in October 2008. The initial results have been very encouraging. The three SpeeDee shops that converted to Co-Brand units achieved comparable shop sales increases of 7.8% in the third quarter (after they were co-branded) and 12.7% in the fourth quarter of fiscal 2008. In the first quarter of fiscal 2009, the comparable shop sales increases accelerated further to 15%. The Company expects to test Co-Branding at additional SpeeDee locations during 2009.

During December of 2008, the Company began a test of the Co-Brand concept within existing Midas shops. Three Midas company-operated shops in suburban Chicago were remodeled to accommodate the operating requirements of the SpeeDee concept, which generate much higher vehicle throughput than the typical Midas shop. These three test locations officially launched during the first quarter of fiscal 2009. In their first quarter of operation, these Midas shops converted to the Co-Brand model delivered a comparable shop sales increase of nearly 18% compared to sales decreases for other Midas shops in the greater Chicago market. A fourth company-operated Midas shop was converted and opened as a Co-Brand in April. The Company plans to roll out additional Midas conversions to the Co-Brand concept in Southern California during 2009.

Acquisitions and Conversions: The U.S. automotive repair industry is highly fragmented. This is demonstrated by the fact that Midas, as one of the largest automotive maintenance and repair providers in the U.S., has less than 1% of the automotive repair shops in the U.S. Despite the increase in the number of vehicles on the road in the U.S. over the last 15 years, the number of automotive service outlets in the U.S. has been in decline. Vehicle complexity and the resulting need for highly skilled technicians, training programs and technologically advanced diagnostic equipment, along with the increased cost of real estate, has caused a net decrease of almost 7% of all automotive repair outlets in the past 10 years. More recently, automobile dealerships have been closing in record numbers, causing consumers to seek out alternatives.

The Company believes that the acquisition of existing automotive repair shops, as well as the conversion of independent repair facilities to the Midas and SpeeDee brands, is the most efficient way to grow the MDS system. Furthermore, the Company believes that the current economic environment will result in an increase in acquisition and conversion opportunities, as competitors struggle to remain viable during this economic downturn.

First Quarter Fiscal 2009 Compared with First Quarter Fiscal 2008

The following is a summary of the Company's sales and revenues for the first
quarter of fiscal 2009 and 2008: ($ in millions)



                                                          Percent               Percent
                                                  2009    to Total      2008    to Total
  Franchise royalties and license fees           $ 13.0       29.4 %   $ 13.3       29.7 %
  Real estate revenues from franchised shops        8.3       18.7        8.7       19.4
  Company-operated shop retail sales               15.6       35.2       14.9       33.2
  Replacement part sales and product royalties      6.1       13.8        6.7       15.0
  Software sales and maintenance revenue            1.3        2.9        1.2        2.7

  Total sales and revenues                       $ 44.3      100.0 %   $ 44.8      100.0 %

Total sales and revenues for the first quarter of fiscal 2009 declined $0.5 million, or 1.1%, from the first quarter of fiscal 2008 to $44.3 million. Within the retail auto service business, royalty revenues and license fees decreased $0.3 million, or 2.3%, from fiscal 2008. This decrease primarily reflects weakness in Midas retail sales as total North American comparable shop sales declined 3.5%, a reduction in the number of Midas shops in operation, a stronger U.S. dollar reducing the value of Canadian and European royalties and lower franchise fees. These impacts were partially offset by a $1.0 million increase in royalties due to the March 2008 acquisition of the SpeeDee business.

While royalty revenue in the Midas system was down in the first quarter of fiscal 2009, U.S. car count rose by 6% and U.S. oil change revenues increased by 23% on a comparable shop basis. MDS management believes its move to a more locally focused, higher frequency advertising program is generating increased customer visits; however, this increased traffic has not yet translated into increased comparable shop sales as cautious consumers delay more expensive repairs. The Company believes the increased traffic is creating the foundation for future revenue growth as automobiles continue to age and consumers inevitably return to more normal spending patterns.

Revenues from real estate leases declined $0.4 million to $8.3 million driven by a net reduction in the number of shops paying rent to Midas due to shop closures, lower revenue from sales-based rental agreements and a weaker Canadian dollar.

Sales from company-operated shops were $15.6 million in the first quarter of fiscal 2009 compared to $14.9 million in the first quarter of fiscal 2008. The increased revenues reflect a higher company-operated shop count due to shop acquisitions in the past 12 months. Comparable shop sales for the Midas company-operated shops were down 1.6% during the first quarter of fiscal 2009.

Replacement part sales and product royalties decreased 9.0% from $6.7 million to $6.1 million in the first quarter of fiscal 2009. The Company recorded lower sales of tires to Midas franchisees despite the fact that tire revenues grew nearly 5% at retail as a result of the increased purchasing of tires from sources outside of the Bridgestone-Firestone network, as well as a weaker Canadian dollar (which offset growth in tire unit sales in Canada). Software sales and maintenance revenue increased $0.1 million to $1.3 million reflecting continued growth in the Company's RO Writer point-of-sale software business.

Replacement part cost of sales decreased to 86.9% of replacement part sales and product royalties from 91.0% in the first quarter of fiscal 2008. The decreased cost of replacement part sales relative to revenue was due to improved margins on the products sold to franchisees. Warranty expense in the first quarter of fiscal 2009 was $0.1 million, which was approximately flat to the prior year.

Selling, general and administrative expenses in the first quarter of fiscal 2009 declined $0.1 million, or 0.8%, from the first quarter of fiscal 2008 to $13.2 million. The decrease was achieved despite an incremental $0.5 million in operating expenses related to the SpeeDee business, incremental legal costs for two class action lawsuits and higher pension expense. In this difficult revenue environment, the Company remains very focused on cost control. For example, in early 2009 the Company eliminated salary increases for all employees in the current year and reduced the company match portion of its 401(k) program.

During the first quarter of fiscal 2009, business transformation charges were not material. During the first quarter of fiscal 2008, the Company recorded business transformation charges of $0.2 million in connection with the Company's partial funding of the rollout of a new shop image. The Company's new image program will wind down during fiscal 2009 with an additional $0.5 million in business transformation charges expected during the remainder of fiscal 2009.

During the first quarter of fiscal 2009, the Company recorded a loss on sale of $0.1 million in connection with the sale of certain shop assets. During the first quarter of fiscal 2008, the Company recorded a loss on sale of $0.3 million in connection with the sale of certain shop assets.

As a result of the above changes, operating income decreased $0.3 million to $3.7 million in the first quarter of fiscal 2009 from $4.0 million in first quarter of fiscal 2008 and operating income margin decreased to 8.4% of sales from 8.9% of sales.

Interest expense was $2.0 million in the first quarter of fiscal 2009 compared to $2.2 million in the first quarter of fiscal 2008. Interest expense declined in the current year despite higher average bank debt compared to the prior year (due to the SpeeDee acquisition in March 2008) primarily due to a reduction in the Company's borrowing rate.

Other income was $0.1 million in the first quarter of fiscal 2009 compared to $0.2 million in the first quarter of fiscal 2008. Other income consists primarily of interest income on overdue customer accounts and foreign currency exchange gains or losses.

The Company's effective tax rate was 44.2% in the first quarter of fiscal 2009 compared to 40.0% in the first quarter of fiscal 2008 and compared to the 2009 statutory tax rate of 39.2%. The fiscal 2009 variance from the statutory rate was primarily due to the write down of a Canadian deferred tax asset due to a reduction in British Columbia's corporate income tax rate.

As a result of the above items, net income decreased $0.2 million from net income of $1.2 million in the first quarter of fiscal 2008 to net income of $1.0 million in the first quarter of fiscal 2009.

LIQUIDITY AND CAPITAL RESOURCES

Following is a summary of the Company's cash flows from operating, investing and
financing activities for the first three months of fiscal 2009 and 2008,
respectively (in millions):



                                                                     2009          2008
Cash provided by operating activities before cash outlays for
business transformation costs and net changes in assets and
liabilities                                                         $  4.5        $  6.4
Cash outlays for business transformation costs                        (0.1 )        (0.2 )
Net changes in assets and liabilities, exclusive of the
effects of business transformation charges, acquisitions and
dispositions                                                          (6.1 )         0.7

Net cash provided by (used in) operating activities                   (1.7 )         6.9
Net cash used in investing activities                                 (1.2 )        (2.5 )
Net cash provided by (used in) financing activities                    3.4          (3.5 )

Net change in cash and cash equivalents                             $  0.5        $  0.9

The Company's cash management system permits the Company to make daily borrowings and repayments on its revolving line of credit, allowing MDS to minimize interest expense and to maintain a low cash balance. The Company's cash and cash equivalents increased $0.5 million in the first three months of fiscal 2009.

The Company's operating activities used net cash of $1.7 million during the first three months of fiscal 2009 compared to $6.9 million of cash provided by operations in the first three months of fiscal 2008. Excluding cash outlays for business transformation costs and changes in assets and liabilities, cash from operating activities decreased from $6.4 million in the first three months of fiscal 2008 to $4.5 million in the first three months of fiscal 2009, due to the decrease in net income, lower utilization of deferred tax assets, lower stock-based compensation, reduced business transformation charges, a decrease in the gain on sale of assets and lower depreciation and amortization. Cash outlays for business transformation costs declined from $0.2 million in the first three months of fiscal 2008 to $0.1 million in the first three months of fiscal 2009. Cash outlays for business transformation costs in the first three months of fiscal 2009 and the first three months of fiscal 2008 were related to the Company's update of its retail shop image.

Changes in assets and liabilities declined from a $0.7 million source of cash in the first three months of fiscal 2008 to a $6.1 million use of cash in the first three months of fiscal 2009. The $6.1 million use of cash in the first three months of fiscal 2009 was primarily driven by a reduction in accounts payable as seasonally high tire purchases in the fourth quarter of fiscal 2008 were paid, as well as the timing of advertising payments. The $0.7 million source of cash in the first three months of fiscal 2008 was primarily due to a decline in receivables due to the collection of a non-operating receivable.

Investing activities used $1.2 million of cash in the first three months of fiscal 2009 compared to $2.5 million of cash used in first three months of fiscal 2008. Fiscal 2009 investing activities consisted of $1.1 million in capital expenditures and $0.1 million paid in conjunction with the acquisition of a shop and other assets from a Midas franchisee. The $1.1 million in capital expenditures included $0.5 million in Co-Branding spending on Midas company-operated shops, $0.2 million for systems development projects, $0.4 million for company-operated shop equipment additions and other capital expenditures. Fiscal 2008 investing activities primarily consisted of $1.9 million in capital expenditures, $0.7 million paid in conjunction with the acquisition of nine shops and other assets from certain Midas dealers, and $0.1 million in cash generated as the result of the sale of five shops to Midas franchisees. The $1.9 million in capital expenditures included $0.4 million in office renovation costs, $0.8 million for real estate purchases, $0.2 million for systems development projects and $0.5 million for company-operated shop equipment additions and other capital expenditures.

Net cash provided by financing activities was $3.4 million in first three months of fiscal 2009, compared to net cash used of $3.5 million in first three months of fiscal 2008. During fiscal 2009, MDS increased total debt by $4.0 million, partially offset by a decrease in outstanding checks of $0.6 million. During fiscal 2008, the Company decreased total debt by $4.1 million, increased outstanding checks by $0.5 million and received $0.1 million in cash from the exercise of outstanding stock options.

As of April 4, 2009, a total of $88.0 million was outstanding under the revolving credit facility. As of January 3, 2009, a total of $83.6 million was outstanding under the revolving credit facility.

In November 2005, $20 million in senior bank debt was converted from floating rate to fixed rate by locking-in LIBOR at 4.89% for a five year period. In addition, in March 2007, MDS entered into an interest rate swap arrangement to convert an additional $25 million in senior bank debt from floating rate to a fixed rate by locking-in LIBOR at 4.91% for the remaining term of the Company's bank agreement (October 2010). This swap effectively replaced a declining balance swap that expired in March 2007 under which LIBOR was locked-in at 2.76% for a three-year term. As a consequence, currently $45 million of the Company's $88.0 million in senior bank debt is at fixed rates.

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

The fair values of the Company's interest rate swaps are estimated using Level 2 inputs, which are based on model-derived valuations in which all significant . . .