Key Items to Watch out for in the MICHELIN RETREAD TECHNOLOGIES, INC. 2019 FDD
Please consider the following RISK FACTORS before you buy this franchise: 1. THE FRANCHISE AGREEMENT REQUIRES YOU TO RESOLVE DISPUTES WITH US BY LITIGATION OR ARBITRATION ONLY IN SOUTH CAROLINA. OUT-OF-STATE LITIGATION OR ARBITRATION MAY FORCE YOU TO ACCEPT A LESS FAVORABLE SETTLEMENT FOR DISPUTES. IT MAY ALSO COST YOU MORE TO LITIGATE OR ARBITRATE WITH US IN SOUTH CAROLINA THAN IN YOUR OWN STATE. 2. THE FRANCHISE AGREEMENT REQUIRES THAT SOUTH CAROLINA LAW GOVERNS THE AGREEMENT, AND THIS LAW MAY NOT PROVIDE THE SAME PROTECTIONS AND BENEFITS AS LOCAL LAW. YOU MAY WANT TO COMPARE THESE LAWS. 3. ALL OF YOUR FRANCHISE OWNERS MUST SIGN A PERSONAL GUARANTY MAKING THEM LIABLE FOR ALL OF THE OBLIGATIONS OF THE FRANCHISE. 4. THERE MAY BE OTHER RISKS CONCERNING THIS FRANCHISE.
Item 5: Initial Fees
Upon signing the Franchise Agreement, you must pay to us an initial franchise fee equal to $2,500 (“Franchise Fee”), regardless of the number of Retread Shops you will operate. The Franchise Fee is non refundable and helps to cover our expenses in furnishing pre-opening and planning assistance and services, and for other costs incurred by us including, but not limited to, general sales and marketing expenses, training, legal, accountant and other professional fees. If you operate a Pre-Mold(TM)Shop, you must purchase the MRTI Equipment from us, the cost of which will range from $950,000 to $3,050,000 (including installation).
If you operate a Custom Mold(TM)Shop, you must purchase the MRTI Equipment from us, the cost of which will range from $2,250,000 to $4,650,000 (including installation). If you operate a Hybrid Shop (which can offer both Pre-Mold(TM)and Custom Mold(TM)) you must purchase the MRTI Equipment from us, the purchase cost of which will range from $2,750,000 to $5,150,000 (including installation). In any Retread Shop, you must obtain proprietary software, pursuant to a license, from us. The current cost of licensing the analytical software for MRTI Equipment ranges from $360/month to $535/month per Shop, and the current cost of licensing the Bib Tread NEXT(TM)software is: (i) a one-time license fee of $15,000 per Shop, (ii) $475/month per Shop maintenance fee (multiple Shop franchisees pay a maintenance fee of $375/month per Shop), and (iii) $500/month per Shop hosting fee (multiple shop franchisees will pay a total of $900/month for all Shops owned by the franchisee) which may be changed at any time. None of the fees described in this Item are refundable.
Item 8: Restrictions on Sources of Products and Services
To ensure that high and uniform standards of quality and service are maintained, you must operate the Shop in strict conformity with our methods, standards and specifications. You must purchase goods, services, supplies, fixtures, equipment and inventory only from us or from suppliers we have accepted. MRTI Rubber Products we sell you are manufactured by us or our affiliates, or by others on our behalf, and the reputation and goodwill of the Shops is based upon, and can be maintained only by, the use of the MRTI Rubber Products in tires retreaded at the Shops. Consequently, you must purchase all MRTI Rubber Products only from us. You must also use our Marks only as set forth in the Franchise Agreement and any Marks usage guidelines.
You may purchase or lease accepted types or brands of miscellaneous non-rubber products, equipment (other than the MRTI Equipment that we specify for use in the MRTI Process), signs and supplies that meet our standards and specifications only from accepted suppliers. For certain non-rubber products and supplies, we have designated a single accepted supplier and you may purchase these required products only from this supplier. We may periodically formulate and modify, in our sole discretion, the specifications and standards we impose on you and suppliers. Specifications and standards are issued to you through the Manual and to suppliers generally by written agreement. We may negotiate purchase arrangements (including price terms) with suppliers for your benefit. We do not provide material benefits (e.g., renewal or additional franchises) to you based on use of designated or accepted suppliers. There are currently no franchisee purchasing or distribution cooperatives.
Items from Which We Derive Revenue We will derive revenue from your purchases of MRTI Rubber Products and MRTI Equipment. We anticipate that your purchases of MRTI Rubber Products will constitute about 5% of your total purchases and leases in establishing the Shop, and 40% to 60% of your total purchases and leases during the ongoing operation of your Shop. If you purchase both MRTI Rubber Products and MRTI Equipment from us, we anticipate that these purchases will constitute 30% to 75% of your total purchases and leases in establishing the Shop. Your purchase of MRTI Equipment would not, however, affect your purchases and leases during the ongoing operation of your Shop. For the fiscal year ended December 31, 2018, our revenues from franchisees’ required purchases or leases of equipment was $199,555,267 or 99% of our total revenues of $201,695,717. We estimate that substantially all of your expenditures for leases and purchases in establishing your Shop and on an ongoing basis will be for goods and services which are subject to sourcing restrictions (that is, for which suppliers must be approved by us, or which must meet our standards or specifications). Presently, we do not receive payments from third party suppliers based on your purchases from such third party suppliers.
Purchase or Lease of Equipment, Fixtures and Signs Other than the MRTI Equipment and the MRTI Rubber Products, you may purchase or lease other types, brands and models of equipment, fixtures, signs and supplies that we accept for Shops as meeting our specifications and standards. You may purchase or lease accepted types, brands, or models of fixtures, equipment, signs (and related items such as awnings or umbrellas) and supplies only from accepted suppliers. We may modify our list of accepted types, brands and models of supplies, signs, non-MRTI Equipment and/or suppliers periodically, and you may not, after receiving written notice of the modification, reorder any type, brand or model or from any supplier that we no longer accept. If you want to purchase or lease any non-MRTI Equipment, signs or supplies of a type, brand or model that we have not accepted, you must notify us in writing and submit to us the information we request. If necessary we will provide you with written specifications for such non-proprietary products. We generally will notify you of our acceptance/non-acceptance within 30 days of the date we receive your written notice. We may impose reasonable inspection and supervision fees on accepted suppliers to cover our costs. Nonetheless, you must have a written approval from us to use any non-MRTI Equipment or items. We may withdraw our consent at any time by providing written notice to you of such withdrawal.
Insurance You must maintain in force and furnish us written evidence of the insurance coverage that we require, all of which are described in Section 6.09 of the Franchise Agreement (which is attached as Exhibit A). The cost of coverage will vary depending on the insurance carrier’s charges, the state where your Retread Shop is located, terms of payment and your history. All insurance policies except worker’s compensation and employer’s lability, as determined by us, must name us and our affiliates as additional insureds.
Computer System We require you to use a computer system and install Bib Tread NEXT(TM) software to record all sales, expenses, production and adjustment data at your Shop. Although we do not require you to use any particular brand or type of computer system, and anticipate that most franchisees will already have a computer system, the system must be capable of running Bib Tread NEXT(TM)software. In addition, your Shop must have an accessible computer post, with internet access, for the purpose of connecting to our internet-based operator training module, which provides training to your production and management personnel as well as thin/client router(s) supporting your network.
Item 10: Financing
We or our affiliates may, in our (or their) sole discretion, provide financing to qualified franchisees for purchases of MRTI Rubber Products or related products and equipment. The amount, terms and conditions of each loan will depend on the needs and creditworthiness of the franchisee. We anticipate that annual interest rates will range from the prime rate to 4 percentage points above the prime rate and that the period of repayment will not be greater than five years. Generally, we take a purchase money security interest, along with a security interest, in additional collateral to secure the loan and all other obligations. We may also require guarantees or letters of credit from third parties for loans to both individual and corporate franchisees. We may also require that franchisees maintain certain financial ratios during the term of the loan. You may prepay the debt without penalty. If you default under the terms of any financing arrangements, we may require you to pay the entire amount due and all costs of collection, including court costs and attorney’s fees, or terminate the Franchise Agreement after providing you notice and an opportunity to cure the default (Promissory Note; Section 13.02(i), Franchise Agreement). Copies of our standard form Promissory Note and Loan and Security Agreement are attached as Exhibit F. We may modify the versions of the Promissory Note and Loan and Security Agreement depending upon the particular circumstances. The Promissory Note requires you and any guarantor (and every person at any time liable for the payment of the debt) to waive presentment, demand, notice of protest and notice of non-payment.
Under the Loan and Security Agreement, you will waive, to the extent the same may be waived under applicable law: (a) notice of acceptance; (b) all of your claims, causes of action and rights against us on account of actions taken or not taken by us in the exercise of our rights or remedies; (c) all of your for our failure to comply with any requirement of applicable law relating to enforcement of our rights or remedies; (d) all rights of redemption; (e) any bonds or demands for possession; (f) presentment, demand for payment, protest and notice of non-payment and all exemptions; (g) any and all other notices or demands; (h) settlement, compromise or release of the obligations of any person primarily or secondarily liable; (i) all of your rights to demand that we release account debtors; and (j) substitution, impairment, exchange or release of any collateral.
We may extend open account credit for purchase of MRTI Rubber Products to eligible franchisees upon terms as we may determine from time to time in our sole discretion. Current standard terms are 2 nd 15 th Prox. Interest accrues on past due balances at the maximum rate permitted by law or 24% per annum, whichever is lower.
Under the Franchise Agreement, you grant us a first priority purchase money security interest in all MRTI Rubber Products that we sell to you, together with any and all related proceeds (the “PMSI Collateral”) as security for the payment in full of all your obligations to us arising out of the purchase of the PMSI Collateral. In addition, we may require that you provide us additional collateral, including, without limitation, we may require that you grant us a security interest in any and all furniture, fixtures, equipment, leasehold improvements, inventories (including raw materials, works-in-progress and finished goods, but not including the MRTI Rubber Products), accounts receivable, records and all other assets used in connection with the Shop that you own when you sign the Franchise Agreement or that you acquire later that are located at the Premises and any proceeds from them (collectively, the “MRTI Collateral”) to secure the performance and payment of all of your liabilities, obligations and indebtedness to us. Neither we nor any of our affiliates have current plans to sell or assign to third parties any financing arrangements with franchisees, but each reserves the right to do so in the future. Neither we nor any of our affiliates will receive any payments from third party lenders for loans made to franchisees. Neither we nor any of our affiliates will guarantee franchisees’ notes, leases or other obligations.
Item 12: Territory
The Franchise Agreement grants you the right to operate a Shop at a specific location accepted by MRTI, which is set forth in the Franchise Agreement. Unless you and we otherwise mutually agree by signing an Exclusive Area Rider to the Franchise Agreement (the “Rider”), you will not receive an exclusive area. We will generally consider granting an exclusive manufacturing area (“Exclusive Manufacturing Area” or “Exclusive Area”) only if you will be operating a Custom Mold(TM)Shop or Hybrid Shop, but not a Pre-Mold(TM)Shop. Any Exclusive Area will generally be delineated by counties. The premises of your Shop must, if applicable, be located within the Exclusive Area and is subject to our agreement. We may grant an Exclusive Area for a term that is shorter than the term of the Franchise Agreement.
If we grant an Exclusive Area, and subject to the exceptions described below, as long as you are in compliance with the Franchise Agreement and all other agreements with us and our affiliates, we will not during the term of the Franchise Agreement operate, or grant to another person the right to operate, any Michelin Retread Shop within an Exclusive Area that offers either Custom Mold(TM)or combined Pre-Mold(TM) and Custom-Mold(TM)(i.e., Hybrid) retreading services. We may, however, operate and grant others the right to operate Michelin Retread Shops that offer Pre-Mold(TM)retreading services only at any location, including within an Exclusive Area. We also may operate, and grant others the right to operate, within an Exclusive Area and elsewhere: (i) Shops located at truck stops, or other similar locations, that are part of a national or regional chain; (ii) Shops located at the premises of truck fleet owners that are operated principally to service their own truck fleets; and (iii) tire retreading shops that we purchase (or as to which we purchase the rights as franchisor) that are part of another franchise system or chain, regardless of whether we convert the shops to operate using any of the Marks and/or any of the MRTI System or whether the shops operate under other trademarks and service marks and/or use other technology and operating systems. If we grant these rights within your Exclusive Area, we will not pay you any compensation. Therefore, you may face competition from other franchisees, from outlets that we own, or from other channels of distribution or competitive brands that we control.
Except for your rights, if any, described above, we and our affiliates retain all rights relating to the Marks, the MRTI Process, the MRTI Equipment, the MRTI System and Shops anywhere in the world, including the right to: (a) operate, and grant others the right to operate, Shops at those locations and on those terms and conditions we deem appropriate; (b) offer and sell to such customers as we deem appropriate, products and services identified by the Marks or other trademarks and service marks at any location anywhere in the world, as we deem appropriate, including new tires, repaired tires, retreaded tires, used tire casings and tire repair services; (c) amend, modify and discontinue any programs or policies offered in connection with the Franchise Agreement; (d) test market new concepts or products at one or more Retread Shops or elsewhere without having to grant Franchisee any right to use such concepts or products; and (e) operate, and grant others the right to operate, tire retreading facilities (which may compete with you) identified by trademarks or service marks, other than the Marks, on terms and conditions we deem appropriate.
If we grant you an Exclusive Area, you must during each Agreement Year: (a) purchase from us at least the amounts of Michelin Rubber that you and we mutually agree to and designate in the Rider (“Minimum Purchase Requirements”); and (b) sell to customers at least the number of truck tires retreaded using the MRTI Process that you and we mutually agree to and designate in the Rider (“Minimum Sale Requirements”). We may periodically increase the Minimum Purchase Requirements and/or the Minimum Sale Requirements: (a) if, in our good faith judgment, the business potential for retreaded tires in the Exclusive Area warrants an increase, provided that we will not increase either requirement for the first Agreement Year and will limit any increase in each requirement for any subsequent Agreement Year to no more than 50% on a cumulative annual basis; or (b) if the rated capacity of the Shop increases due to expansion of its production capacity. If you do not meet the Minimum Purchase Requirement and/or the Minimum Sale Requirement in any Agreement Year, we may, in addition to any other rights under the Franchise Agreement or under applicable law: (a) unilaterally reduce the size of the Exclusive Area; or (b) unilaterally terminate your exclusive rights in the Exclusive Area. We do not grant you any options, rights of first refusal or similar rights to acquire additional franchises within the territory or contiguous territories.
On October 5, 2007, MNA acquired Oliver Rubber Company (“Oliver”). Oliver licenses retread manufacturing technology and sells tire retread-related products to commercial customers in the United States and licensees that operate retread shops. All Oliver tire retreading shops are independently owned and operated by licensees. Oliver licensees utilize its Tuff-Cure process to manufacture retreads and utilize rubber products purchased from Oliver. Oliver uses the following trade names and trademarks in connection with the Tuff-Cure retreading process, Oliver rubber and related products, Oliver equipment and apparatus, and Oliver tread products: Oliver, Orco, Orco PD, Tuff-Scan, Tuff Cure, Flexmix, Tuff-Tred, Power Tred, Tuff-Bond, Tuff-Tac, Long Mile, Megamile, Intertread, Serra-Sipe, Orcohesion, Orbibond, Tuff Seal, Power Trac, MCL-DU, MCL, ARTIC DRIVE and VDIPLUS. Oliver licensees may compete with our franchisees for customers and each may solicit customers in the other’s territory. Oliver licensees presently operate approximately 81 retread shops in the following states: Alabama, Alaska, Arizona, Arkansas, California, Connecticut, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, Washington, West Virginia, Wisconsin, and Wyoming. Oliver headquarters are located in Greenville, South Carolina. Oliver does not share a headquarters office with MRTI. The Oliver business operates as its own legal entity, each under its respective brands and distinctive retread processes. We do not anticipate conflicts between our franchisees and Oliver’s licensees and other business.
Item 15: Obligation to Participate in the Actual Operation of the Franchise Business
If you are an individual, we strongly encourage you to participate in the operation of the Shop personally. Your manager need not have an equity interest in the business. If you are a partnership, corporation, limited liability company or other legal entity, we may require that each of your owners signs a personal guarantee (attached hereto as Exhibit B-1) or a financing guaranty (attached hereto as Exhibit G), agreeing to be personally bound, jointly and severally, by your financial and other obligations under the Franchise Agreement. In addition if requested by MRTI, each of your officers, directors, managers and others who attend our training programs must sign nondisclosure agreements (attached hereto as Exhibit A-1) prohibiting their unauthorized use or disclosure of the Confidential Information.
Item 16: RESTRICTIONS ON WHAT THE FRANCHISEE MAY SELL
You may only sell the goods and services we have approved for the Shop and the services we specify. We may in our sole discretion periodically modify the MRTI System, including the authorized goods and services you may sell at the Shop, and there are no limits on our right to make changes. You must perform warranty service on tires retreaded and/or repaired at other Shops. We may conduct market research to determine customer trends and salability of new products and services. You must cooperate by participating in our market research programs, by test marketing new products and services in the Shop and providing us timely reports and other relevant information regarding the market research; however, we have no obligation to grant you the right to use such concepts or products. In addition, we may, from time to time and in our sole discretion, implement pilot programs in test markets in an effort to fully analyze the forecasted effects of such new programs.
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