Debt was $75.8 million at the end of the third quarter, compared to $65.1 million at the end of the third quarter last year. The increase came from a $22.4 million settlement in European arbitration.
Midas (NYSE: MDS) said today that its European licensee, MESA S.p.A., has filed suit in the Court of Appeal in Milan, Italy, claiming that Midas is in breach of the 1998 license agreement under which MESA operates the Midas automotive service business in Europe. The complaint alleges that Midas failed to cooperate with MESA to improve the Midas System. Mesa wants €5,782,000 – $7.4 million – in damages.
The unwelcome development for Midas shareholders comes as the Midas board of directors is exploring the possible sale of the company during an ongoing strategic review. Share prices have ranged from a 52-week high of $9.50 to a 52-week low of $5.08. Currently Midas is trading at $8.46. Midas during the first nine months of 2011 had net earnings of $4.4 million ($0.32 per diluted share), an increase from $2.3 million or $0.17 per diluted share in 2010. Midas pays no dividend.
The damages for the alleged breach at €5,782,000, represent a portion of the royalties MESA paid to Midas for the period from June 2009 through October 2011. MESA also seeks a declaratory judgment suspending MESA’s obligation to pay 80% of its future royalty payments owed to Midas under the license agreement.
In a statement, Midas said MESA’s claims are without merit and Midas intends to vigorously defend against them. Midas also said it has not yet determined what effect the complaint filed by MESA will have on the strategic review, declining for comment until its board approves a specific plan.
MESA had previously filed a request for arbitration in June 2009, alleging that Midas had breached its obligations under the agreement for strategic alliance or ASA. A March 2011 ruling denied MESA’s claim for the return of past royalties paid to Midas under the license agreement.
However, damages were awarded to MESA for Midas’ alleged failure under the ASA to cooperate in the improvement of IT systems for the European operations. Following the conclusion of the arbitration, the license agreement and the ASA between the parties remained in full force and effect.
“We are extremely disappointed that MESA filed this lawsuit despite the company’s repeated efforts since the arbitration ruling to discuss ways in which our two companies can cooperate under the ASA,” said Alan D. Feldman, Midas’ chairman and chief executive officer.
Midas sells aftermarket maintenance and exhaust repair services though 2,300 franchised, licensed and company-owned Midas shops in 14 countries, including more than 1,500 in the United States and Canada. Midas also owns the SpeeDee Oil Change business, with 163 auto service centers in the United States and Mexico.
