SP Plus Corporation
STANDARD PARKING CORP (Form: 10-Q, Received: 11/09/2012 06:03:20)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2012

 

Commission file number: 000-50796

 


 

STANDARD PARKING CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware

 

16-1171179

(State or Other Jurisdiction of

 

(I.R.S. Employer Identification No.)

Incorporation or Organization)

 

 

 

900 N. Michigan Avenue, Suite 1600

Chicago, Illinois 60611-1542

(Address of Principal Executive Offices, Including Zip Code)

 

(312) 274-2000

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES  x   NO  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES  x  NO  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  o

 

Accelerated filer  x

 

 

 

Non-accelerated filer  o

 

Smaller reporting company  o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  o   NO  x

 

As of November 5, 2012, there were 21,829,462 shares of common stock of the registrant outstanding.

 

 

 



Table of Contents

 

STANDARD PARKING CORPORATION

 

FORM 10-Q INDEX

 

Part I. Financial Information

 

Item 1. Financial Statements:

 

Condensed Consolidated Balance Sheets as of September 30, 2012 (Unaudited) and December 31, 2011

3

Condensed Consolidated Statements of Income (Unaudited) for the three months ended September 30, 2012 and 2011 and the nine months ended September 30, 2012 and 2011

4

Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended September 30, 2012 and 2011 and the nine months ended September 30, 2012 and 2011

5

Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2012 and 2011

6

Notes to Condensed Consolidated Interim Financial Statements

7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

Item 3. Quantitative and Qualitative Disclosures about Market Risk

36

Item 4. Controls and Procedures

37

Part II. Other Information

 

Item 1. Legal Proceedings

37

Item 1A. Risk Factors

38

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

46

Item 6. Exhibits

47

Signatures

48

 

 

 

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Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

STANDARD PARKING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except for share and per share data)

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

(Unaudited)

 

(see Note)

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

10,386

 

$

13,220

 

Notes and accounts receivable, net

 

61,175

 

46,396

 

Prepaid expenses and supplies

 

2,604

 

2,419

 

Deferred taxes

 

2,745

 

2,745

 

Total current assets

 

76,910

 

64,780

 

Leasehold improvements, equipment and construction in progress, net

 

16,646

 

16,732

 

Advances and deposits

 

4,131

 

5,261

 

Long-term receivables, net

 

15,398

 

14,177

 

Intangible and other assets, net

 

10,387

 

9,420

 

Cost of contracts, net

 

13,030

 

14,286

 

Goodwill

 

132,694

 

132,417

 

Total assets

 

$

269,196

 

$

257,073

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

51,501

 

$

44,747

 

Accrued and other current liabilities

 

37,565

 

41,304

 

Current portion of long-term borrowings

 

633

 

754

 

Total current liabilities

 

89,699

 

86,805

 

Deferred taxes

 

16,488

 

12,981

 

Long-term borrowings, excluding current portion

 

72,658

 

81,259

 

Other long-term liabilities

 

30,332

 

26,386

 

Standard Parking Corporation’s stockholders’ equity:

 

 

 

 

 

Preferred stock, par value $.01 per share; 5,000,000 shares authorized and no shares issued

 

 

 

Common stock, par value $.001 per share; 50,000,000 shares authorized; 15,668,128 and 15,464,864 shares issued and outstanding as of September 30, 2012 and December 31, 2011, respectively

 

15

 

15

 

Additional paid-in capital

 

94,071

 

92,662

 

Accumulated other comprehensive loss

 

(110

)

(318

)

Accumulated deficit

 

(33,902

)

(42,632

)

Total Standard Parking Corporation stockholders’ equity

 

60,074

 

49,727

 

Noncontrolling interest

 

(55

)

(85

)

Total equity

 

60,019

 

49,642

 

Total liabilities and stockholders’ equity

 

$

269,196

 

$

257,073

 

 


Note:              The balance sheet at December 31, 2011 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

 

See Notes to Condensed Consolidated Interim Financial Statements.

 

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STANDARD PARKING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except for share and per share data, unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 2012

 

September 30, 2011

 

September 30, 2012

 

September 30, 2011

 

Parking services revenue:

 

 

 

 

 

 

 

 

 

Lease contracts

 

$

42,969

 

$

37,501

 

$

122,927

 

$

109,899

 

Management contracts

 

49,226

 

43,259

 

141,562

 

131,556

 

 

 

92,195

 

80,760

 

264,489

 

241,455

 

Reimbursed management contract revenue

 

100,958

 

106,365

 

309,055

 

307,615

 

Total revenue

 

193,153

 

187,125

 

573,544

 

549,070

 

Cost of parking services:

 

 

 

 

 

 

 

 

 

Lease contracts

 

40,108

 

34,049

 

113,495

 

101,834

 

Management contracts

 

30,409

 

22,489

 

82,919

 

73,196

 

 

 

70,517

 

56,538

 

196,414

 

175,030

 

Reimbursed management contract expense

 

100,958

 

106,365

 

309,055

 

307,615

 

Total cost of parking services

 

171,475

 

162,903

 

505,469

 

482,645

 

Gross profit:

 

 

 

 

 

 

 

 

 

Lease contracts

 

2,861

 

3,452

 

9,432

 

8,065

 

Management contracts

 

18,817

 

20,770

 

58,643

 

58,360

 

Total gross profit

 

21,678

 

24,222

 

68,075

 

66,425

 

General and administrative expenses (1)

 

13,846

 

11,814

 

43,759

 

34,593

 

Depreciation and amortization

 

1,723

 

1,683

 

5,258

 

4,893

 

Operating income

 

6,109

 

10,725

 

19,058

 

26,939

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

Interest expense

 

1,093

 

1,197

 

3,355

 

3,546

 

Interest income

 

(61

)

(297

)

(266

)

(470

)

 

 

1,032

 

900

 

3,089

 

3,076

 

Income before income taxes

 

5,077

 

9,825

 

15,969

 

23,863

 

Income tax expense

 

2,623

 

3,760

 

7,007

 

9,305

 

Net income

 

2,454

 

6,065

 

8,962

 

14,558

 

Less: Net income attributable to noncontrolling interest

 

75

 

89

 

232

 

260

 

Net income attributable to Standard Parking Corporation

 

$

2,379

 

$

5,976

 

$

8,730

 

$

14,298

 

Common stock data:

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.15

 

$

0.38

 

$

0.56

 

$

0.91

 

Diluted

 

$

0.15

 

$

0.37

 

$

0.55

 

$

0.89

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

15,668,129

 

15,704,837

 

15,632,817

 

15,776,883

 

Diluted

 

15,928,685

 

16,034,330

 

15,883,535

 

16,116,136

 

 


(1)          Non-cash stock based compensation expense of $251 and $1,114 for the three and nine months ended September 30, 2012, respectively, and $411 and $1,724 for the three and nine months ended September 30, 2011, respectively, is included in general and administrative expenses.

 

See Notes to Condensed Consolidated Interim Financial Statements.

 

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STANDARD PARKING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 2012

 

September 30, 2011

 

September 30, 2012

 

September 30, 2011

 

Net income

 

$

2,454

 

$

6,065

 

$

8,962

 

$

14,558

 

Other comprehensive (expense) income

 

202

 

(443

)

208

 

(465

)

Comprehensive income

 

2,656

 

5,622

 

9,170

 

14,093

 

Less: comprehensive income attributable to noncontrolling interest

 

75

 

89

 

232

 

260

 

Comprehensive income attributable to Standard Parking Corporation

 

$

2,581

 

$

5,533

 

$

8,938

 

$

13,833

 

 

See Notes to Condensed Consolidated Interim Financial Statements.

 

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STANDARD PARKING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, except for share and per share data, unaudited)

 

 

 

Nine Months Ended

 

 

 

Septmeber 30, 2012

 

September 30, 2011

 

Operating activities:

 

 

 

 

 

Net income

 

$

8,962

 

$

14,558

 

Adjustments to reconcile net income to net cash provided by operations:

 

 

 

 

 

Depreciation and amortization

 

5,215

 

4,935

 

Loss (gain) on sale and abandonment of assets

 

56

 

(49

)

Amortization of debt issuance costs

 

446

 

478

 

Non-cash stock-based compensation

 

1,114

 

1,724

 

Excess tax benefit related to stock option exercises

 

(221

)

(148

)

Provisions for losses on accounts receivable

 

229

 

33

 

Deferred income taxes

 

3,507

 

2,857

 

Change in operating assets and liabilities

 

(8,317

)

(11,339

)

Net cash provided by operating activities

 

10,991

 

13,049

 

Investing activities:

 

 

 

 

 

Purchase of leasehold improvements and equipment

 

(3,114

)

(2,907

)

Cost of contracts purchased

 

(572

)

(395

)

Proceeds from sale of assets

 

15

 

82

 

Capitalized interest

 

(12

)

(40

)

Contingent purchase payments

 

(93

)

(293

)

Net cash used in investing activities

 

(3,776

)

(3,553

)

Financing activities:

 

 

 

 

 

Proceeds from exercise of stock options

 

154

 

143

 

Repurchase of common stock

 

 

(5,031

)

Earn-out payments made

 

(1,525

)

 

Tax benefit related to stock option exercises

 

221

 

148

 

Payments on senior credit facility

 

(8,200

)

(3,250

)

Distribution to noncontrolling interest

 

(202

)

(255

)

Payments on long-term borrowings

 

(108

)

(102

)

Payments for debt issuance costs

 

(30

)

(30

)

Payments on capital leases

 

(414

)

(399

)

Net cash used in financing activities

 

(10,104

)

(8,776

)

Effect of exchange rate changes on cash and cash equivalents

 

55

 

(406

)

Increase (decrease) in cash and cash equivalents

 

(2,834

)

314

 

Cash and cash equivalents at beginning of period

 

13,220

 

7,305

 

Cash and cash equivalents at end of period

 

$

10,386

 

$

7,619

 

Supplemental disclosures:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

2,415

 

$

3,151

 

Income taxes

 

3,179

 

4,975

 

 

See Notes to Condensed Consolidated Interim Financial Statements.

 

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STANDARD PARKING CORPORATION

NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

(In thousands except for share and per share data, unaudited)

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of Standard Parking Corporation have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements.

 

In the opinion of management, all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for a fair presentation of the financial position and results of operations have been included. Operating results for the three and nine month periods ended September 30, 2012 are not necessarily indicative of the results that might be expected for any other interim period or the fiscal year ended December 31, 2012. The financial statements presented in this report should be read in conjunction with the consolidated financial statements and footnotes thereto included in our 2011 Annual Report on Form 10-K filed on March 15, 2012.

 

On October 2, 2012, Standard Parking completed its acquisition of KCPC Holdings, Inc., holding company for Central Parking Corporation (“Central”). For further information regarding the acquisition of Central, see Note 16 Agreement and Plan of Merger with Central Parking and Note 17 Subsequent Events .

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and variable interest entities in which the Company is the primary beneficiary. Noncontrolling interest recorded in the consolidated statement of income is the interest in consolidated variable interest entities which are not controlled by the Company. We have interests in nine joint ventures which are determined to be variable interest entities and each operate between one and thirty-five parking facilities. Of the nine variable interest entities, five are consolidated into our financial statements, and four are single purpose entities where the Company is not the primary beneficiary and therefore the Company does not control these entities as power is shared. Investments in variable interest entities where the Company is not the primary beneficiary are accounted for under the equity method and are not material to the Company’s consolidated financial statements. All significant intercompany profits, transactions and balances have been eliminated in consolidation.

 

Financial Instruments

 

The carrying values of cash and cash equivalents, notes and accounts receivable and accounts payable are reasonable estimates of their fair value due to the short-term nature of these financial instruments. Long-term debt, including capital lease obligations, has a carrying value that approximates fair value because these instruments bear interest at market rates.

 

Interest Rate Caps

 

We do not enter into derivative instruments for any purpose other than cash flow hedging purposes.

 

On February 22, 2010, we entered into interest rate cap agreements with Wells Fargo Bank N.A. (“Wells Fargo”) and Fifth Third Bank (“Fifth Third”), allowing us to limit our exposure to increases in variable interest rates on a portion of our borrowings under our senior credit facility (“Rate Cap Transactions”). Pursuant to two separate letter agreements between the Company and Wells Fargo and Fifth Third, respectively, we will receive payments from Wells Fargo and Fifth Third each quarterly period to the extent that the prevailing three month LIBOR during that period exceeds our cap rate of 3.25%. The Rate Cap Transactions became effective March 31, 2010, and settle each quarter on a date that is intended to coincide with our quarterly interest payment dates under our senior credit facility. The Rate Cap Transactions cap our LIBOR interest rate on a notional amount of $50,000 at 3.25% for a total of 39 months. These Rate Cap Transactions are classified as a cash flow hedge, and we calculate the effectiveness of the hedge on a quarterly basis. The ineffective portion of the cash flow hedge is recognized in current period earnings as an increase of interest expense and is not material for the three and nine month periods ended September 30, 2012 and 2011. The fair value of the interest rate cap at September 30, 2012 and December 31, 2011 is $0 and $8, respectively, and is included in prepaid expenses and supplies.

 

2. Stock-Based Compensation

 

We measure share-based compensation expense at the grant date, based on the fair value of the award, and the expense is recognized over the requisite employee service period (the vesting period) for awards expected to vest (considering estimated forfeitures).

 

The Company has an amended and restated Long-Term Incentive Plan that was adopted in conjunction with our initial public offering. On April 22, 2008, our shareholders approved an amendment to our Long-Term Incentive Plan that increased the maximum

 

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number of shares of common stock available for awards under the Long-Term Incentive Plan from 2,000,000 to 2,175,000 and extended the Plan’s termination date. The Plan now terminates twenty years from the date of such approval, or April 22, 2028. Forfeited and expired options under the Plan become generally available for reissuance. At September 30, 2012, 108,498 shares remained available for award under the Plan.

 

Stock Options and Grants

 

We use the Black-Scholes option pricing model to estimate the fair value of each option grant as of the date of grant. The volatilities are based on the 90-day historical volatility of our common stock as of the grant date. The risk free interest rate is based on zero-coupon U.S. government issues with a remaining term equal to the expected life of the option.

 

There were no options granted during the nine months ended September 30, 2012 and 2011. The Company recognized no stock-based compensation expense related to stock options for the nine months ended September 30, 2012 and 2011, as all options previously granted were fully vested. As of September 30, 2012, there were no unrecognized compensation costs related to unvested options.

 

On April 25, 2012, the Company authorized vested stock grants to certain directors totaling 12,995 shares. The total value of the grant, based on the fair value of the stock on the grant date, was $245 and is included in general and administrative expenses.

 

Restricted Stock Units

 

In March 2008, the Company’s Compensation Committee and the Board of Directors authorized a one-time grant of 750,000 restricted stock units that subsequently were awarded to members of our senior management team on July 1, 2008. In November 2008, an additional 5,000 restricted stock units were awarded. The restricted stock units vest primarily in one-third installments on each of the tenth, eleventh and twelfth year anniversaries of the grant date. The restricted stock unit agreements provide for accelerated vesting upon the recipient reaching their retirement age.

 

The fair value of restricted stock units is determined using the fair value of our common stock on the date of the grant, and compensation expense is recognized over the vesting period. In accordance with the guidance related to share-based payments, we estimated forfeitures at the time of the grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting forfeitures and record stock-based compensation expense only for those awards that are expected to vest.

 

During the nine months of 2012, 146,000 restricted stock units vested and no restricted stock units were forfeited.

 

The Company recognized $251 and $869 of stock-based compensation expense related to the restricted stock units for the three and nine months ended September 30, 2012, respectively, which is included in general and administrative expenses. The Company recognized $411 and $1,479 of stock-based compensation expense related to the restricted stock units for the three and nine months ended September 30, 2011, respectively, which is included in general and administrative expenses. As of September 30, 2012, there was $5,214 of unrecognized stock-based compensation costs, net of estimated forfeitures, related to the restricted stock units that are expected to be recognized over a weighted average remaining period of approximately 6.2 years.

 

3. Net Income Per Common Share

 

Companies are required to present basic and diluted earnings per share. Basic net income per share is computed by dividing net income by the weighted daily average number of shares of common stock outstanding during the period. Diluted net income per share is based upon the weighted daily average number of shares of common stock outstanding for the period plus dilutive potential common shares, including stock options and restricted stock units using the treasury-stock method.

 

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A reconciliation of the weighted average basic common shares outstanding to the weighted average diluted common shares outstanding is as follows (unaudited):

 

 

 

Three Months Ended
September 30

 

Nine Months Ended
September 30

 

 

 

2012

 

2011

 

2012

 

2011

 

Weighted average common basic shares outstanding

 

15,668,129

 

15,704,837

 

15,632,817

 

15,776,883

 

Effect of dilutive stock options and restricted stock units

 

260,556

 

329,493

 

250,718

 

339,253

 

Weighted average common diluted shares outstanding

 

15,928,685

 

16,034,330

 

15,883,535

 

16,116,136

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.15

 

$

0.38

 

$

0.56

 

$

0.91

 

Diluted

 

$

0.15

 

$

0.37

 

$

0.55

 

$

0.89

 

 

There were 9,534 anti-dilutive options excluded in the computation of diluted earnings per share for the three and nine months ended September 30, 2011 because the options’ exercise prices were greater than the average market price of the common stock. There were no anti-dilutive options or other potential common shares for the three and nine months ended September 30, 2012.

 

4. Recently Issued Accounting Pronouncements

 

In September 2011, the FASB issued updated accounting guidance related to testing goodwill for impairment. The amendments provide entities with the option of performing a qualitative assessment before performing the first step of the two-step impairment test. If entities determine, on the basis of qualitative factors, it is not more likely than not that the fair value of the reporting unit is less than or greater than the carrying amount, then performing the two-step impairment test would be unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any. The amendment also provides entities with the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to the first step of the two-step impairment test. This guidance is effective for interim and annual periods beginning after December 15, 2011. We test for impairment annually during the fourth quarter of the fiscal year. Although the Company has not yet performed the annual impairment test for fiscal year 2012, we do not believe that its adoption will have a material effect on the Company’s financial position, results of operations or cash flows.

 

On January 1, 2012, we adopted the updated accounting guidance related to the presentation of comprehensive income. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, comprehensive income must be reported in either a single continuous statement of comprehensive income, which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. The adoption of this amendment did not have a material effect on our Consolidated Financial Statements as the amendment impacts presentation only; we have elected to present the components of total comprehensive income and components of net income in two separate consecutive statements.

 

On January 1, 2012, we adopted the amended provisions of fair value measurement and disclosure requirements. The guidance amends certain accounting and disclosure requirements related to fair value measurements to ensure that fair value has the same meaning in U.S. GAAP and in IFRS and that their respective fair value measurement and disclosure requirements are the same. This amendment changes certain fair value measurement principles and enhances disclosure requirements, particularly for level 3 fair value measurements. See Note 14 of the Notes to Unaudited Condensed Consolidated Financial Statements for disclosures related to fair value measurements.

 

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5. Leasehold Improvements, Equipment and Construction in Progress, Net

 

A summary of leasehold improvements, equipment, and construction in progress and related accumulated depreciation and amortization is as follows:

 

 

 

Ranges of Estimated
useful life

 

September 30, 2012

 

December 31, 2011

 

 

 

 

 

(Unaudited)

 

 

 

Equipment

 

2-5 years

 

$

12,022

 

$

12,021

 

Software

 

3-10 years

 

13,119

 

12,643

 

Vehicles

 

4 years

 

9,361

 

9,405

 

Other

 

10 years

 

2,542

 

2,464

 

Leasehold improvements

 

Shorter of lease term or economic life up to 10 years

 

9,414

 

9,732

 

Construction in progress

 

 

 

3,495

 

2,255

 

 

 

 

 

49,953

 

48,520

 

Less accumulated depreciation and amortization

 

 

 

(33,307

)

(31,788

)

Leasehold improvements, equipment and construction in progress, net

 

 

 

$

16,646

 

$

16,732

 

 

Depreciation expense was $1,053 and $3,216 for the three and nine months ended September 30, 2012, respectively, and $1,066 and $3,013 for the three and nine months ended September 30, 2011, respectively. Depreciation includes losses on sale and abandonment of leasehold improvements and equipment of $12 and $56  for the three and nine months ended September 30, 2012, respectively, and losses on the sale and abandonment of leasehold improvements and equipment of $13 and $49 for the three and nine months ended September 30, 2011, respectively.

 

6. Cost of Contracts, Net

 

Cost of contracts represents the contractual rights associated with providing parking services at a managed or leased facility. Cost consists of either capitalized payments made to third parties or the value ascribed to contracts acquired through acquisition. Cost of contracts is amortized over the estimated life of the contracts, including anticipated renewals and terminations.

 

The balance of cost of contracts is comprised of the following:

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Cost of contracts

 

$

24,768

 

$

24,203

 

Accumulated amortization

 

(11,738

)

(9,917

)

Cost of contracts, net

 

$

13,030

 

$

14,286

 

 

Amortization expense related to cost of contracts was $609 and $1,828 for the three and nine months ended September 30, 2012, respectively, and $555 and $1,691 for the three and nine months ended September 30, 2011 respectively. The weighted average useful life is 9.7 years for 2012 and 9.5 years for 2011.

 

7. Goodwill

 

Goodwill is assigned to reporting units based upon the specific Region where the assets are acquired and associated goodwill resided.

 

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The following table reflects the changes in the carrying amounts of goodwill by reportable segment for the nine months ended September 30, 2012 (unaudited).

 

 

 

Region
One

 

Region
Two

 

Region
Three

 

Region
Four

 

Total

 

Balance as of January 1, 2012

 

$

65,965

 

$

8,600

 

$

35,275

 

$

22,577

 

$

132,417

 

Contingent payments related to acquisitions

 

46

 

 

47

 

 

93

 

Foreign currency translation

 

 

184

 

 

 

184

 

Balance as of September 30, 2012

 

$

66,011

 

$

8,784

 

$

35,322

 

$

22,577

 

$

132,694

 

 

8. Long-Term Receivables, Net

 

 

 

Amount Outstanding

 

 

 

September 30, 2012

 

December 31, 2011

 

 

 

(Unaudited)

 

 

 

Deficiency payments:

 

 

 

 

 

Balance at the beginning of the year

 

$

13,407

 

$

12,070

 

Deficiency payments made

 

1,312

 

1,716

 

Deficiency payments received

 

(91

)

(379

)

Balance at the end of the period

 

14,628

 

13,407

 

Other Bradley related, net

 

3,203

 

3,203

 

Valuation allowance

 

(2,484

)

(2,484

)

Total Bradley receivables

 

$

15,347

 

$

14,126

 

Other long-term receivables

 

51

 

51

 

Total long-term receivables

 

$

15,398

 

$

14,177

 

 

Agreement

 

We entered into a 25-year agreement with the State of Connecticut that expires on April 6, 2025, under which we operate the surface parking and 3,500 garage parking spaces at Bradley International Airport located in the Hartford, Connecticut metropolitan area. The Company manages the facility for which it is expected to receive a management fee.

 

The parking garage was financed on April 6, 2000 through the issuance of $53,800 of State of Connecticut special facility revenue bonds, representing $47,700 non-taxable Series A bonds and a separate taxable issuance of $6,100 Series B bonds. The Series B bonds were retired on July 1, 2006 according to the terms of the indenture. The Bradley agreement provides that we deposit with a trustee for the bondholders all gross revenues collected from operations of the surface and garage parking, and from these gross revenues, the trustee pays debt service on the special facility revenue bonds outstanding, operating and capital maintenance expenses of the surface and garage parking facilities excluding our management fee discussed below, and specific annual guaranteed minimum payments to the State. Principal and interest on the Bradley special facility revenue bonds increase from approximately $3,600 in lease year 2002 to approximately $4,500 in lease year 2025. Annual guaranteed minimum payments to the State will increase from approximately $8,300 in lease year 2002 to approximately $13,200 in lease year 2024. The annual minimum guaranteed payment to the State by the trustee for the nine months ended September 30, 2012 and 2011 was $7,754 and $7,595, respectively.

 

All of the cash flow from the parking facilities is pledged to the security of the special facility revenue bonds and is collected and deposited with the bond trustee. Each month the bond trustee makes certain required monthly distributions, which are characterized as “Guaranteed Payments.” To the extent the monthly gross receipts generated by the parking facilities are not sufficient for the trustee to make the required Guaranteed Payments, we are obligated to deliver the deficiency amount to the trustee. Additionally, the Guaranteed Payments are required to be paid before we are reimbursed for deficiency payments or management fees.

 

The following is the list of Guaranteed Payments:

 

·              Garage and surface operating expenses,

 

·              Principal and interest on the special facility revenue bonds,

 

·              Trustee expenses,

 

·              Major maintenance and capital improvement deposits, and

 

·              State Minimum Guarantee.

 

However, to the extent there is a cash surplus in any month during the term of the lease, we have the right to be repaid the principal amount of any and all deficiency payments previously made, together with actual interest expenses and a premium, not to exceed 10%

 

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of the initial deficiency payment. We calculate and record interest income and premium income in the period the associated deficiency payment is received from the trustee.

 

Deficiency Payments

 

To the extent that monthly gross receipts are not sufficient for the trustee to make the required payments, we are obligated pursuant to our agreement to deliver the deficiency amount to the trustee within three business days of being notified. We are responsible for these deficiency payments regardless of the amount of utilization for the Bradley parking facilities. The deficiency payments represent contingent interest bearing advances to the trustee to cover operating cash flow requirements. To the extent sufficient funds are available in the appropriate fund, the trustee is then directed by the State to reimburse us for deficiency payments up to the amount of the calculated surplus.

 

In the nine months ended September 30, 2012, we made deficiency payments (net of repayments received) of $1,221.  In addition, we received $85 of interest income on deficiency repayments and we did not record or receive any premium income related to deficiency payments from the trustee. In the nine months ended September 30, 2011, we made deficiency payments (net of repayments received) of $1,053 and received $54 in premium income and $256 of interest income related to deficiency repayments from the trustee. There was no receivable from the trustee for interest and premium income related to deficiency repayments as of September 30, 2012 and 2011.

 

The deficiency payments, if any, are recorded as a receivable by us for which we are reimbursed from time to time as provided in the trust agreement. As of September 30, 2012 and December 31, 2011, we have a receivable of $14,628 and $13,407, respectively, compromised of cumulative deficiency payments to the trustee, net of reimbursements. We believe these advances to be fully recoverable and therefore have not recorded a valuation allowance for them. We do not guarantee the payment of any principal or interest on any debt obligations of the State of Connecticut or the trustee.

 

The Construction, Financing and Operating Special Facility Lease Agreement, which governs reimbursement of Guarantor Payments, places no time restriction or limits on our right to reimbursement.

 

Compensation

 

In addition to the recovery of certain general and administrative expenses incurred, our agreement provides for an annual management fee payment that is based on three operating profit tiers calculated for each year during the term of the agreement. The management fee is further apportioned 60% to us and 40% to an un-affiliated entity. To the extent that funds are available for the trustee to make a distribution, the annual management fee is paid when sufficient cash is available after the Guaranteed Payments (as defined in our agreement) are paid, and after the repayment of all deficiency payments, including accrued interest and premium. However, our right to the management fee accrues each year during the term of the agreement and is paid when sufficient cash is available for the trustee to make a distribution.

 

The annual management fee is paid after the repayment of all deficiency payments, including accrued interest and premium. Therefore, due to the existence and length of time for repayment of the deficiency amounts to the Company, collection of annual management fees are not reasonably assured and no management fees have been recognized. Management fees will be recognized in accordance with SAB 104 when “collectability is reasonably assured.”

 

Cumulative management fees of $5,850 have not been recognized as of September 30, 2012, and no management fee income was recognized during the nine months ended September 30, 2012 and 2011.

 

9. Borrowing Arrangements

 

Long-term borrowings, in order of preference, consist of:

 

 

 

Amount Outstanding

 

 

 

Due Date

 

September 30, 2012

 

December 31, 2011

 

 

 

 

 

(Unaudited)

 

 

 

Revolving senior credit facility

 

October 2013

 

$

71,800

 

$

80,000

 

Capital lease obligations

 

Various

 

558

 

972

 

Obligations on seller notes and other

 

Various

 

933

 

1,041

 

Total

 

 

 

73,291

 

82,013

 

Less current portion

 

 

 

633

 

754

 

Long-term borrowings excluding current portion

 

 

 

$

72,658

 

$

81,259

 

 

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Table of Contents

 

Senior Credit Facility

 

On July 15, 2008, we amended and restated our credit facility. As of May 31, 2012, the Company entered into an amendment to extend the termination date from June 29, 2013 to October 1, 2013.

 

The $210,000 revolving senior credit facility includes a letter of credit sub-facility with a sublimit of $50,000 and a swing line sub-facility with a sublimit of $10,000. The $50,000 letter of credit sub-facility does not limit the maximum actual borrowings on the revolving senior credit facility.

 

This revolving senior credit facility bears interest, at our option, at either (1) LIBOR plus an applicable LIBOR margin of between 2.00% and 3.50% depending on the ratio of our total funded indebtedness to our EBITDA from time to time (“Total Debt Ratio”) or (2) the Base Rate (as defined below) plus an applicable Base Rate Margin of between 0.50% and 2.00% depending on our Total Debt Ratio. We may elect interest periods of one, two, three or six months for LIBOR based borrowings. The Base Rate is the greater of (i) the rate publicly announced from time to time by Bank of America, N.A. as its “prime rate”, or (ii) the overnight federal funds rate plus 0.50%.

 

Certain financial covenants limit the Company’s capacity to fully draw on its $210,000 revolving credit facility. Our senior credit facility includes a fixed charge ratio covenant, a total debt to EBITDA ratio covenant, a limit on our ability to incur additional indebtedness, issue preferred stock or pay dividends, and certain other restrictions on our activities. We are required to repay borrowings under our senior credit facility out of the proceeds of future issuances of debt or equity securities and asset sales, subject to certain customary exceptions. Our senior credit facility is secured by substantially all of our assets and all assets acquired in the future (including a pledge of 100% of the stock of our existing and future domestic guarantor subsidiaries and 65% of the stock of our existing and future foreign subsidiaries).

 

We are in compliance with all of our financial covenants as of September 30, 2012.

 

The weighted average interest rate on our senior credit facility at September 30, 2012 and December 31, 2011 was 3.2% and 3.1%, respectively. The rate includes all outstanding LIBOR contracts, interest rate cap effect and letters of credit. The weighted average interest rate on outstanding borrowings, not including letters of credit, was 3.2% at September 30, 2012 and December 31, 2011.

 

At September 30, 2012, we had $17,823 of letters of credit outstanding under the senior credit facility, borrowings against the senior credit facility aggregated $71,800, and we had $38,674 available under the senior credit facility.

 

10. Business Unit Segment Information

 

An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenue and incur expenses, and about which separate financial information is regularly evaluated by our chief operating decision maker, in deciding how to allocate resources. Our chief operating decision maker is the Company’s President and Chief Executive Officer.

 

Each of the operating segments is directly responsible for revenue and expenses related to their operations including direct regional administrative costs. Finance, information technology, human resources, and legal are shared functions that are not allocated back to the four operating segments. The CODM assesses the performance of each operating segment using information about its revenue and operating income (loss) before interest, taxes, and depreciation and amortization, but does not evaluate segments using discrete asset information. There are no inter-segment transactions and the Company does not allocate interest and other income, interest expense, depreciation and amortization or taxes to operating segments. The accounting policies for segment reporting are the same as for the Company as a whole.

 

Our business is managed based on regions administered by executive vice presidents. The following is a summary of revenues (excluding reimbursed management contract revenue) and gross profit by regions for the three and nine months ended September 30, 2012 and 2011.

 

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Table of Contents

 

The Company has provided this business unit segment information for all comparable prior periods. Segment information is summarized as follows (unaudited, in thousands):

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30,
2012

 

Gross
Margin

 

September 30,
2011

 

Gross
Margin

 

September 30,
2012

 

Gross
Margin

 

September 30,
2011

 

Gross
Margin

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Region One

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

$

22,028

 

 

 

$

21,118

 

 

 

$

62,603

 

 

 

$

60,709

 

 

 

Management contracts

 

13,631

 

 

 

13,989

 

 

 

40,605

 

 

 

40,702

 

 

 

Total Region One

 

35,659

 

 

 

35,107

 

 

 

103,208

 

 

 

101,411

 

 

 

Region Two

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

1,100

 

 

 

883

 

 

 

3,404

 

 

 

2,224

 

 

 

Management contracts

 

9,752

 

 

 

3,841

 

 

 

23,596

 

 

 

16,543

 

 

 

Total Region Two

 

10,852

 

 

 

4,724

 

 

 

27,000

 

 

 

18,767

 

 

 

Region Three

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

9,349

 

 

 

5,885

 

 

 

24,889

 

 

 

17,383

 

 

 

Management contracts

 

13,697

 

 

 

13,254

 

 

 

40,603

 

 

 

38,482

 

 

 

Total Region Three

 

23,046

 

 

 

19,139

 

 

 

65,492

 

 

 

55,865

 

 

 

Region Four

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

10,491

 

 

 

9,584

 

 

 

32,030

 

 

 

29,547

 

 

 

Management contracts

 

11,965

 

 

 

11,960

 

 

 

36,147

 

 

 

35,617

 

 

 

Total Region Four

 

22,456

 

 

 

21,544

 

 

 

68,177

 

 

 

65,164

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

1

 

 

 

31

 

 

 

1

 

 

 

36

 

 

 

Management contracts

 

181

 

 

 

215

 

 

 

611

 

 

 

212

 

 

 

Total Other

 

182

 

 

 

246

 

 

 

612

 

 

 

248

 

 

 

Reimbursed revenue

 

100,958

 

 

 

106,365

 

 

 

309,055

 

 

 

307,615

 

 

 

Total revenues

 

$

193,153

 

 

 

$

187,125

 

 

 

$

573,544

 

 

 

$

549,070

 

 

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Region One

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

$

1,601

 

7

%

$

1,898

 

9

%

$

3,830

 

6

%

$

4,193

 

7

%

Management contracts

 

7,375

 

54

%

7,945

 

57

%

22,033

 

54

%

22,214

 

55

%

Total Region One

 

8,976

 

 

 

9,843

 

 

 

25,863

 

 

 

26,407

 

 

 

Region Two

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

28

 

3

%

53

 

6

%

136

 

4

%

205

 

9

%

Management contracts

 

2,067

 

21

%

1,228

 

32

%

5,474

 

23

%

4,229

 

26

%

Total Region Two

 

2,095

 

 

 

1,281

 

 

 

5,610

 

 

 

4,434

 

 

 

Region Three

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

575

 

6

%

571

 

10

%

2,105

 

8

%

1,730

 

10

%

Management contracts

 

5,868

 

43

%

5,770

 

44

%

17,251

 

42

%

17,995

 

47

%

Total Region Three

 

6,443

 

 

 

6,341

 

 

 

19,356

 

 

 

19,725

 

 

 

Region Four

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

719

 

7

%

707

 

7

%

2,287

 

7

%

1,937

 

7

%

Management contracts

 

3,769

 

32

%

4,092

 

34

%

12,054

 

33

%

12,148

 

34

%

Total Region Four

 

4,488

 

 

 

4,799

 

 

 

14,341

 

 

 

14,085

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

(62

)

(6,200

)%

223

 

719

%

1,074

 

107,400

%

 

%

Management contracts

 

(262

)

(145

)%

1,735

 

807

%

1,831

 

300

%

1,774

 

837

%

Total Other

 

(324

)

 

 

1,958

 

 

 

2,905

 

 

 

1,774

 

 

 

Total gross profit

 

21,678

 

 

 

24,222

 

 

 

68,075

 

 

 

66,425

 

 

 

General and administrative expenses

 

13,846

 

 

 

11,814

 

 

 

43,759

 

 

 

34,593

 

 

 

General and administrative expense percentage of gross profit

 

64

%

 

 

49

%

 

 

64

%

 

 

52

%

 

 

Depreciation and amortization

 

1,723

 

 

 

1,683

 

 

 

5,258

 

 

 

4,893

 

 

 

Operating income

 

6,109

 

 

 

10,725

 

 

 

19,058

 

 

 

26,939

 

 

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

1,093

 

 

 

1,197

 

 

 

3,355

 

 

 

3,546

 

 

 

Interest income

 

(61

)

 

 

(297

)

 

 

(266

)

 

 

(470

)

 

 

 

 

1,032

 

 

 

900

 

 

 

3,089

 

 

 

3,076

 

 

 

Income before income taxes

 

5,077

 

 

 

9,825

 

 

 

15,969

 

 

 

23,863

 

 

 

Income tax expense

 

2,623

 

 

 

3,760

 

 

 

7,007

 

 

 

9,305

 

 

 

Net income

 

2,454

 

 

 

6,065

 

 

 

8,962

 

 

 

14,558

 

 

 

Less: Net income attributable to noncontrolling interest

 

75

 

 

 

89

 

 

 

232

 

 

 

260

 

 

 

Net income attributable to Standard Parking Corporation

 

$

2,379

 

 

 

$

5,976

 

 

 

$

8,730

 

 

 

$

14,298

 

 

 

 

14



Table of Contents

 

Region One encompasses operations in Alabama, Connecticut, Delaware, District of Columbia, Florida, Georgia, Illinois, Indiana, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, and Wisconsin.

 

Region Two encompasses our Canadian operations, event planning and transportation, and our technology-based parking and traffic management systems.

 

Region Three encompasses operations in Arizona, California, Colorado, Hawaii, Louisiana, Nevada, Texas, Utah, Washington, and Wyoming.

 

Region Four encompasses all major airport and transportation operations nationwide.

 

Other consists of ancillary revenue that is not specifically identifiable to a region and insurance reserve adjustments related to prior years.

 

The CODM does not evaluate segments using discrete asset information.

 

11. Comprehensive Income

 

Comprehensive income consists of the following components, net of tax (unaudited):

 

 

 

For the three months ended

 

For the nine months ended

 

 

 

September 30, 2012

 

September 30, 2011

 

September 30, 2012

 

September 30, 2011

 

Net income

 

$

2,454

 

$

6,065

 

$

8,962

 

$

14,558

 

Effective portion of interest rate cap

 

64

 

9

 

153

 

(59

)

Effect of foreign currency translation

 

138

 

(452

)

55

 

(406

)

Comprehensive income

 

2,656

 

5,622

 

9,170

 

14,093

 

Less: comprehensive income attributable to noncontrolling interest

 

75

 

89

 

232

 

260

 

Comprehensive income attributable to Standard Parking Corporation

 

$

2,581

 

$

5,533

 

$

8,938

 

$

13,833

 

 

12. Income Taxes

 

For the three months ended September 30, 2012, the Company recognized income tax expense of $2,623 on pre-tax earnings of $5,077 compared to $3,760 income tax expense on pre-tax earnings of $9,825 for the three months ended September 30, 2011. For the nine months ended September 30, 2012, the Company recognized income tax expense of $7,007 on pre-tax earnings of $15,969 compared to $9,305 income tax expense on pre-tax earnings of $23,863 for the nine months ended September 30, 2011. Income tax expense is based on a projected effective tax rate of approximately 43.9% for the nine months ended September 30, 2012 compared to approximately 39.0% for the nine months ended September 30, 2011. The Company’s effective tax rate increased due to certain non-deductible transaction costs associated with the Central Parking merger and the expiration of Work Opportunity Tax Credit (WOTC) Program and other similar tax credit programs on December 31, 2011.

 

As of September 30, 2012, the Company has not identified any uncertain tax positions that would have a material impact on the Company’s financial position. The Company recognizes potential interest and penalties related to uncertain tax positions, if any, in income tax expense.

 

The tax years that remain subject to examination for the Company’s major tax jurisdictions at September 30, 2012 are shown below:

 

2009 – 2011

 

United States — federal income tax

2005 – 2011

 

United States — state and local income tax

2008 – 2011

 

Canada

 

13. Legal Proceedings

 

We are subject to litigation in the normal course of our business. The outcomes of legal proceedings and claims brought against us and other loss contingencies are subject to significant uncertainty. We accrue a charge against income when our management determines that it is probable that an asset has been impaired or a liability has been incurred and the amount of loss can be reasonably estimated. In addition, we accrue for the authoritative judgments or assertions made against us by government agencies at the time of their rendering regardless of our intent to appeal. In determining the appropriate accounting for loss contingencies, we consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of

 

15



Table of Contents

 

loss. We regularly evaluate current information available to us to determine whether an accrual should be established or adjusted. Estimating the probability that a loss will occur and estimating the amount of a loss or a range of loss involves significant judgment. In addition, the Company is subject to various legal proceedings, claims and other matters which arise in the ordinary course of business. In the opinion of management, the amount of the liability, if any, with respect to these matters will not materially affect the Company’s consolidated financial statements. We maintain liability insurance coverage to assist in protecting our assets from losses arising from or related to activities associated with business operations.           

 

14. Fair Value Measurement

 

The Company applies ASC 820 for fair value measurements and disclosures for its financial assets and financial liabilities. The standard requires disclosures about assets and liabilities measured at fair value. The Company’s financial assets measured at fair value on a recurring basis at September 30, 2012 and December 31, 2011 relate to the interest rate cap of $0 and $8, respectively, and the Company’s financial liabilities measured at fair value on a recurring basis relate to contingent earn-out payments of $4,570 and $6,498, respectively.

 

The accounting guidance for fair value measurements and disclosures includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on observable or unobservable inputs to valuation techniques that are used to measure fair value. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon its own market assumptions. The fair value hierarchy consists of the following three levels:

 

·              Level 1: Inputs are quoted prices in active markets for identical assets or liabilities.

 

·              Level 2: Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable and market-corroborated inputs, which are derived principally from or corroborated by observable market data.

 

·              Level 3: Inputs that are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

 

The significant inputs used to derive the fair value of the amounts due to seller include financial forecasts of future operating results, the probability of reaching the forecast and the associated discount rate. The probability of the contingent consideration ranges from 0% to 95%, with a weighted average discount rate of 10%. The following table sets forth the Company’s financial assets and liabilities measured at fair value on a recurring basis and the basis of measurement at September 30, 2012 and December 31, 2011:

 

 

 

Total Fair Value
Measurement at
September 30, 2012

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Interest Rate Cap

 

$

 

$

 

$

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Due to seller

 

$

(4,570

)

$

 

$

 

$

(4,570

)

 

 

 

Total Fair Value
Measurement at
December 31, 2011

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Interest Rate Cap

 

$

8

 

$

 

$

8

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Due to seller

 

$

(6,498

)

$

 

$

 

$

(6,498

)

 

The following table provides a reconciliation of the beginning and ending balances for the liabilities measured at fair value using significant unobservable inputs (Level 3):

 

 

 

Due to Seller

 

Balance at December 31, 2011

 

$

(6,498

)

Contingent earn-out payments-payments made to seller

 

1,525

 

Contingent earn-out payments-change in fair value

 

403

 

Balance at September 30, 2012

 

$

(4,570

)

 

For the nine months ended September 30, 2012, the Company recorded adjustments to the original contingent consideration obligation recorded upon the acquisition of Gameday Management Group U.S. and Expert Parking. The adjustments were the result of using revised forecasts and updated fair value measurements that adjusted the Company’s potential earn-out payments related to the purchase of these businesses.

 

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For the three and nine months ended September 30, 2012, the Company recognized a benefit of $35 and $403, respectively, which is included in general and administrative expenses in the statement of income due to the change in fair value measurements using level three valuation techniques.

 

15. Stock Repurchases

 

In June 2011, our Board of Directors authorized us to repurchase shares of our common stock, on the open market, up to $20,000 in aggregate and cancelled a prior authorization from 2008.

 

2012 Stock Repurchases

 

There were no stock repurchases for the nine months ended September 30, 2012. As of September 30, 2012, $12,467 remained available for stock repurchases under the June 2011 authorization by the Board of Directors.

 

2011 Stock Repurchases

 

During the second quarter of 2011, we repurchased 27,803 shares from third-party shareholders at an average price of $15.52 per share, including average commissions of $0.03 per share, on the open market. The total value of the second quarter transactions was $431. At June 30, 2011, 27,803 shares were held as treasury stock. In July 2011 we returned the shares to authorized and unissued.

 

During the third quarter of 2011, we repurchased 286,109 shares from third-party shareholders at an average price of $16.08 per share, including average commissions of $0.03 per share, on the open market. The total value of the third quarter transactions was $4,600. At September 30, 2011, 55,370 shares were held as treasury stock. In October 2011 we returned the shares to authorized and unissued.

 

16. Agreement and Plan of Merger with Central Parking Corporation

 

Agreement and Plan of Merger

 

On February 28, 2012, the Company, KCPC Holdings, Inc., a Delaware corporation (“KCPC”) and the ultimate parent of Central Parking Corporation, a Tennessee corporation, Hermitage Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”), and Kohlberg CPC Rep, LLC, in its capacity as the Stockholders’ Representative, entered into an Agreement and Plan of Merger (the “Merger Agreement”), providing for the merger of Merger Sub with and into KCPC, with KCPC surviving as a wholly owned subsidiary of the Company (the “Merger”).

 

The Merger Agreement contains customary representations, warranties and covenants of the Company and KCPC, including, among others, covenants of each of the Company and KCPC not to engage in certain significant actions without the prior written consent of the other party ( e.g., declaring dividends and incurring additional indebtedness).

 

Pursuant to the Merger Agreement, the stockholders of KCPC (the “KCPC Stockholders”) have agreed to indemnify the Company for a number of items, including, among others, adverse consequences resulting from breaches of representations, warranties and covenants and certain identified liabilities. These indemnification obligations are in certain cases limited to claims that in the aggregate exceed a specified “deductible” amount and, in the aggregate, do not exceed a specified “cap” amount.

 

The Merger Agreement and the other transactions contemplated by the Merger Agreement have been approved by each of the board of directors of the Company (the “Company Board”), the board of directors of KCPC and the KCPC Stockholders. In addition, at a special meeting of the Company’s stockholders held on September 11, 2012 the Company’s stockholders voted on, and approved, a proposal to issue up to 6,161,334 shares of Company stock in connection with the Merger.

 

In addition to obtaining the approval of the Company Stockholders as described above, the consummation of the Merger was subject to antitrust clearances.  On September 26, 2012, the Company and KCPC entered into an Asset Preservation Stipulation and Order (the “ Stipulation and Order “) and a Proposed Final Judgment (the “Proposed Final Judgment”) with the Antitrust Division of the United States Department of Justice regarding the Company’s acquisition of KCPC in the Merger, pursuant to the Merger Agreement.  The Stipulation and Order and Proposed Final Judgment were filed in the United States District Court for the District of Columbia (the “District Court”) on September 26, 2012.  Under the terms of the Proposed Final Judgment and Stipulation and Order, the Company and KCPC will divest contracts covering slightly more than 100 off-street parking facilities.  The contracts, which include both leases and management agreements, will be sold, terminated or permitted to expire without renewal.  The District Court approved the Stipulation and Order and Proposed Final Judgment on October 1, 2012, terminating the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and permitting consummation of the Merger.

 

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The foregoing description of the Merger Agreement and the Merger does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, a copy of which is attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 28, 2012.

 

17. Subsequent Events

 

Agreement and Plan of Merger

 

On October 2, 2012 (the “Closing Date”), the Company completed the Merger.  KCPC was the surviving corporation in the Merger and, as a result, is now a wholly owned subsidiary of the Company. Pursuant to the terms outlined in the agreement above, each share of common stock and preferred stock of KCPC issued and outstanding was converted into the right to receive its pro rata portion of 6,161,334 shares of Company Stock in the aggregate.  In addition, each share of KCPC common stock was converted into the right to receive its pro rata portion of $27,000 of total cash consideration (subject to adjustment as provided in the Merger Agreement), to be paid on the third anniversary of the Closing Date, to the extent not used to satisfy the indemnification obligations of the KCPC Stockholders that may arise under the Merger Agreement.

 

Pursuant to the Merger Agreement, the size of the Company Board was increased from five to eight members on the Closing Date. The three additional directors of the Company are Paul Halpern, Jonathan Ward and Gordon H. Woodward.

 

Due to significant limitations on access to Central information prior to the acquisition date, and the limited time since the acquisition date, the initial accounting for the business combination is incomplete at this time.  As a result, the Company is unable to provide the amounts recognized as of the acquisition date for the major classes of assets acquired and liabilities assumed, pre-acquisition contingencies and goodwill.  Also, the Company is unable to provide the pro forma revenues and earnings of the combined entity.  This information will be included in Standard Parking’s 2012 Annual Report on Form 10-K.

 

Credit Agreement

 

In connection with the Merger, on the Closing Date, the Company entered into a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. (“Bank of America”), as administrative agent, Wells Fargo Bank, N.A. (“Wells Fargo Bank”) and JPMorgan Chase Bank, N.A. (“JPMorgan Chase Bank”), as co-syndication agents, U.S. Bank National Association, First Hawaiian Bank and General Electric Capital Corporation, as co-documentation agents, Merrill Lynch, Pierce, Fenner & Smith Inc., Wells Fargo Securities, LLC and J.P. Morgan Securities LLC, as joint lead arrangers and joint book managers, and the lenders party thereto (the “Lenders”).

 

Pursuant to the terms, and subject to the conditions, of the Credit Agreement, the Lenders have made available to the Company a new senior secured credit facility (the “Senior Credit Facility”) that permits aggregate borrowings of $450,000 consisting of (i) a revolving credit facility of up to $200,000 at any time outstanding, which includes a letter of credit facility that is limited to $100,000 at any time outstanding, and (ii) a term loan facility of $250,000.  The Senior Credit Facility matures on October 2, 2017.

 

The entire amount of the term loan portion of the Senior Credit Facility was drawn by the Company on the Closing Date and is subject to scheduled quarterly amortization of principal based on the following amounts:  (i) $22,500 in the first year, (ii) $22,500 in the second year, (iii) $30,000 in the third year, (iv) $30,000 in the fourth year and (v) $37,500 in the fifth year.  The Company also borrowed $72,800 under the revolving credit facility on the Closing Date.  The proceeds from these borrowings were used by the Company to repay outstanding indebtedness of the Company and KCPC, and will also be used to pay costs and expenses related to the Merger and the related financing and fund ongoing working capital and other general corporate purposes.

 

Borrowings under the Senior Credit Facility bear interest, at the Company’s option, (i) at a rate per annum based on the Company’s consolidated total debt to EBITDA ratio for the 12-month period ending as of the last day of the immediately preceding fiscal quarter, determined in accordance with the applicable pricing levels set forth in the Credit Agreement (the “Applicable Margin”) for LIBOR loans, plus the applicable LIBOR rate or (ii) the Applicable Margin for base rate loans plus the highest of (x) the federal funds rate plus 0.5%, (y) the Bank of America prime rate and (z) a daily rate equal to the applicable LIBOR rate plus 1.0%.

 

Under the terms of the Credit Agreement, the Company is required to maintain a maximum consolidated total debt to EBITDA ratio of not greater than 4.5:1.0 (with certain step-downs described in the Credit Agreement).  In addition, the Company is required to maintain a minimum consolidated fixed charge coverage ratio of not less than 1:25:1.0 (with certain step-ups described in the Credit Agreement).

 

Events of default under the Credit Agreement include failure to pay principal or interest when due, failure to comply with the financial and operational covenants, the occurrence of any cross default event, non-compliance with other loan documents, the occurrence of a change of control event, and bankruptcy and other insolvency events. If an event of default occurs and is continuing, the Lenders holding a majority of the commitments and outstanding term loan under the Credit Agreement have the right, among others, to (i) terminate the commitments under the Credit Agreement, (ii) accelerate and require the Company to repay all the outstanding amounts owed under the Credit Agreement and (iii) require the Company to cash collateralize any outstanding letters of credit.

 

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Each wholly owned domestic subsidiary of the Company (subject to certain exceptions set forth in the Credit Agreement) has guaranteed all existing and future indebtedness and liabilities of the other guarantors and the Company arising under the Credit Agreement.

 

In connection with and effective upon the execution and delivery of the Credit Agreement on October 2, 2012, the Company terminated its then-existing Amended and Restated Credit Agreement (the “Prior Credit Agreement”), dated as of July 15, 2008. Losses on the extinguishment of debt will be recorded in interest expense during the fourth quarter in the amounts of $428 and $534 related to the interest rate cap and debt issuance costs, respectively. There were no termination penalties incurred by the Company in connection with the termination of the Prior Credit Agreement.

 

Interest Rate Swap Agreements

 

October 25, 2012, the Company entered into interest rate swap transactions (collectively, the “Interest Rate Swaps”) with each of JPMorgan Chase Bank, Bank of America and PNC Bank, N.A. in an initial aggregate notional amount of $150,000 (the “Notional Amount”).  The Interest Rate Swaps have an effective date of October 31, 2012 and a termination date of September 30, 2017. The Interest Rate Swaps effectively fix the interest rate on an amount of variable interest rate borrowings under the Credit Agreement, originally equal to the Notional Amount at 0.7525% per annum plus the applicable margin rate for LIBOR loans under the Credit Agreement determined based upon Standard’s consolidated total debt to EBITDA ratio. The Notional Amount is subject to scheduled quarterly amortization that coincides with quarterly prepayments of principal under the Credit Agreement.

 

Registration Rights Agreement

 

In connection with the Merger, on the Closing Date, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with Kohlberg CPC Rep, L.L.C. (“Kohlberg”), 2929 CPC HoldCo, LLC (“Lubert-Adler”), VCM STAN-CPC Holdings, LLC (“Versa”), each of which was, immediately prior to the effective time of the Merger (the “Effective Time”), a KCPC Stockholder and, as a result of the Merger, is now a stockholder of the Company.  As described in the Company’s Current Report on Form 8-K filed with the SEC on February 29, 2012, pursuant to the terms of the Registration Rights Agreement, the Company is required to file with the SEC a shelf registration statement, registering for public sale by Kohlberg, Lubert-Adler and Versa the shares of Company Stock issued by the Company to such KCPC Stockholders in connection with the Merger, no later than six months following the Closing Date.  Under the Registration Rights Agreement, the Company is required to maintain the effectiveness of the shelf registration statement for resales of Common Stock by such KCPC Stockholders until the earliest of (i) the date upon which the registrable securities (as defined in the Registration Rights Agreement) are able to be sold without registration under the Securities Act of 1933, (ii) the date that all registrable securities have been sold and (iii) the seventh anniversary of the effective date of the shelf registration statement.  Neither Kohlberg, Lubert-Adler nor Versa is permitted to request an underwritten offering of registrable securities prior to the first anniversary of the Closing Date and, prior to the third anniversary of the Closing Date, neither Kohlberg, Lubert-Adler nor Versa may make any offers or sales of registrable securities pursuant to a shelf registration except in a firm commitment underwritten public offering.

 

The Registration Rights Agreement also provides Kohlberg, Lubert-Adler and Versa with piggyback registration rights for underwritten public offerings that the Company may effect for its own account or for the benefit of other selling stockholders.

 

The foregoing description of the Registration Rights Agreement does not purport to be complete and is qualified in its entirety by reference to the Registration Rights Agreement, a copy of which is attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 2, 2012.

 

Closing Agreements

 

As previously disclosed in Item 1.01 of the Company’s Current Report on Form 8-K filed with the SEC on February 29, 2012, on February 28, 2012, the Company entered into Closing Agreements with Lubert-Adler Real Estate Fund V, L.P., Lubert-Adler Real Estate Parallel Fund V, L.P., Kohlberg Investors V, L.P., Kohlberg TE Investors V, L.P., Kohlberg Partners V, L.P., Kohlberg Offshore Investors V, L.P., KOCO Investors V, L.P., Versa Capital Fund I, L.P. and Versa Capital Fund I Parallel, L.P.

 

In connection with the Merger, on the Closing Date, the Company entered into additional Closing Agreements (the “Additional Closing Agreements”) with the KCPC Stockholders, as well as with Sailorshell and Co., CP Klaff Equity LLC and

 

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Jumpstart Development LLC (Worldwide), each of which was, prior to the transfer of its shares in KCPC to the KCPC Stockholders, a stockholder of KCPC.

 

Pursuant to the terms of the Additional Closing Agreements, Kohlberg, Lubert-Adler and Versa have agreed that, for a period of three years following the Closing Date and for so long as such KCPC Stockholder owns in the aggregate (together with its affiliates, all other KCPC Stockholders and their respective affiliates and any other persons with which any of the foregoing form a “group”) beneficially or of record more than 10% of the issued and outstanding Company Stock, to cause the shares of Company Stock held by them to be counted as present at any meeting of the Company’s stockholders and to vote, in person or by proxy, all of such shares of Company Stock as follows:

 

For two years following the Closing Date:

 

·                   with respect to the election of directors to the Company Board, “for” any nominees recommended by the Company Board; and

 

·                   with respect to all other matters submitted for a vote of the Company’s stockholders, in accordance with the recommendation of the Company Board with respect to such matters.

 

For the period beginning on the day after the second anniversary of the Closing Date and ending on the third anniversary of the Closing Date:

 

·                   with respect to the election of directors to the Company Board, “for” any nominees recommended by the Company Board; and

 

·                   with respect to all other matters submitted for a vote of the Company’s stockholders, in proportion to the votes cast by all other Company stockholders.

 

The Additional Closing Agreements also provide that Kohlberg, Lubert-Adler and Versa will be subject to a four-year standstill period following the Closing Date, during which time, such KCPC Stockholder will not, among other things, (i) acquire or agree to acquire any additional voting securities of the Company, (ii) seek or propose a merger, acquisition, tender offer or other extraordinary transaction with or involving the Company or any of its subsidiaries or their respective securities or assets, (iii) call a meeting of the stockholders of the Company or initiate a stockholder proposal or (iv) form a “group” (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934) with any person (other than an affiliate of such KCPC Stockholder) with respect to the acquisition or voting of any voting securities of the Company.

 

The Additional Closing Agreements impose certain restrictive covenants on Kohlberg and Versa, including (i) confidentiality obligations with respect to confidential information of the Company and (ii) non-disparagement requirements.  Lubert-Adler is subject to confidentiality obligations with respect to confidential information of the Company pursuant to the terms of its Additional Closing Agreement.

 

The foregoing description of the Additional Closing Agreements does not purport to be complete and is qualified in its entirety by reference to the Additional Closing Agreements, copies of which are attached as Exhibits 10.2 through 10.8 to the Company’s Current Report on Form 8-K filed with the SEC on October 2, 2012.

 

Item 2.       Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion of our results of operations should be read in conjunction with the consolidated financial statements and the notes thereto contained in this Quarterly Report on Form 10-Q and the consolidated financial statements and the notes thereto included in our Annual Report on our Form 10-K for the year ended December 31, 2011.

 

Important Information Regarding Forward-Looking Statements

 

This Form 10-Q contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, including statements regarding our merger with the parent of Central Parking Corporation (“Central”), and the other expectations, beliefs, plans, intentions and strategies of the Company.  We have tried to identify these statements by using words such as “expect,” “anticipate,” “believe, “could,” “should,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” and “will” and similar terms and phrases, but such words, terms and phrases are not the exclusive means of identifying such statements.  These forward-looking statements are made based on management’s expectations and beliefs concerning future events and are subject to uncertainties and factors relating to operations and the business environment, all of which are difficult to predict and many of which are beyond management’s control.  Actual results, performance and achievements could differ materially from those expressed in, or implied by, these forward-looking statements due to a variety of risks, uncertainties and other factors, including, but not limited to, the following: our ability to integrate Central into the business of the Company successfully and the amount of time and expense spent and incurred in connection with the integration; the risk that the economic benefits, cost savings and other synergies that we anticipate as a result of the Central merger are not fully realized or take longer to realize than expected; our substantially increased indebtedness incurred in connection with the Central merger, which may reduce available cash flow, increase vulnerability to adverse economic conditions, and limit flexibility in planning for, or reacting to, changes in or challenges related to our business; unanticipated Central merger and integration expenses; other losses, or renewals on less favorable terms, of management contracts and leases; adverse litigation judgments or settlements; adverse impact to our operations in areas damaged by Hurricane Sandy; changes in general economic and business conditions or demographic trends; the loss of customers, clients or strategic alliances as a result of the Central merger; the effect on our strategy and operations due to changes to the Board of Directors that occurred upon the completion of the merger; the impact of the divestitures of management contracts and leases required by the agreement entered into by the Company with the Department of Justice in connection with the Central merger; the impact of public and private regulations; financial difficulties or

 

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bankruptcy of major clients; intense competition; insurance losses that are worse than expected or adverse events not covered by insurance; labor disputes; extraordinary events affecting parking at facilities that we manage, including emergency safety measures, military or terrorist attacks, cyber terrorism and natural disasters; the risk that state and municipal government clients sell or enter into long-term leases of parking-related assets to competitors or clients of our competitors; uncertainty in the credit markets; availability, terms and deployment of capital; our ability to obtain performance bonds on acceptable terms; and the impact of Federal health care reform.

 

For a detailed discussion of factors that could affect our future operating results, please see our filings with the Securities and Exchange Commission, including the disclosures under “Risk Factors” in those filings and in this Report.  Except as expressly required by the federal securities laws, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, changed circumstances, future events or for any other reason.

 

Recent Events

 

Agreement and Plan of Merger

 

On October 2, 2012 (the “Closing Date”), the Company completed the Merger. KCPC was the surviving corporation in the Merger and, as a result, is now a wholly owned subsidiary of the Company. Pursuant to the terms outlined in the agreement above, each share of common stock and preferred stock of KCPC issued and outstanding was converted into the right to receive its pro rata portion of 6,161,334 shares of Company Stock in the aggregate. In addition, each share of KCPC common stock was converted into the right to receive its pro rata portion of $27.0 million of total cash consideration (subject to adjustment as provided in the Merger Agreement), to be paid on the third anniversary of the Closing Date, to the extent not used to satisfy the indemnification obligations of the KCPC Stockholders that may arise under the Merger Agreement.

 

Pursuant to the Merger Agreement, the size of the Company Board was increased from five to eight members on the Closing Date. The three additional directors of the Company are Paul Halpern, Jonathan Ward and Gordon H. Woodward.

 

Due to significant limitations on access to Central information prior to the acquisition date, and the limited time since the acquisition date, the initial accounting for the business combination is incomplete at this time. As a result, the Company is unable to provide the amounts recognized as of the acquisition date for the major classes of assets acquired and liabilities assumed, pre- acquisition contingencies and goodwill. Also, the Company is unable to provide the pro forma revenues and earnings of the combined entity. This information will be included in Standard Parking’s 2012 Annual Report on Form 10-K.

 

Credit Agreement

 

In connection with the Merger, on the Closing Date, the Company entered into a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. (“Bank of America”), as administrative agent, Wells Fargo Bank, N.A. (“Wells Fargo Bank”) and JPMorgan Chase Bank, N.A. (“JPMorgan Chase Bank”), as co-syndication agents, U.S. Bank National Association, First Hawaiian Bank and General Electric Capital Corporation, as co-documentation agents, Merrill Lynch, Pierce, Fenner & Smith Inc., Wells Fargo Securities, LLC and J.P. Morgan Securities LLC, as joint lead arrangers and joint book managers, and the lenders party thereto (the “Lenders”).

 

Pursuant to the terms, and subject to the conditions, of the Credit Agreement, the Lenders have made available to the Company a new senior secured credit facility (the “Senior Credit Facility”) that permits aggregate borrowings of $450.0 million consisting of (i) a revolving credit facility of up to $200.0 million at any time outstanding, which includes a letter of credit facility that is limited to $100.0 million at any time outstanding, and (ii) a term loan facility of $250.0 million. The Senior Credit Facility matures on October 2, 2017.

 

The entire amount of the term loan portion of the Senior Credit Facility was drawn by the Company on the Closing Date and is subject to scheduled quarterly amortization of principal based on the following amounts: (i) $22.5 million in the first year, (ii) $22.5 million in the second year, (iii) $30.0 million in the third year, (iv) $30.0 million in the fourth year and (v) $37.5 million in the fifth year. The Company also borrowed $72.8 million under the revolving credit facility on the Closing Date. The proceeds from these borrowings were used by the Company to repay outstanding indebtedness of the Company and KCPC, and will also be used to pay costs and expenses related to the Merger and the related financing and fund ongoing working capital and other general corporate purposes.

 

Borrowings under the Senior Credit Facility bear interest, at the Company’s option, (i) at a rate per annum based on the Company’s consolidated total debt to EBITDA ratio for the 12-month period ending as of the last day of the immediately preceding fiscal quarter, determined in accordance with the applicable pricing levels set forth in the Credit Agreement (the “Applicable Margin”) for LIBOR loans, plus the applicable LIBOR rate or (ii) the Applicable Margin for base rate loans plus the highest of (x) the federal funds rate plus 0.5%, (y) the Bank of America prime rate and (z) a daily rate equal to the applicable LIBOR rate plus 1.0%.

 

Under the terms of the Credit Agreement, the Company is required to maintain a maximum consolidated total debt to EBITDA ratio of not greater than 4.5:1.0 (with certain step-downs described in the Credit Agreement). In addition, the Company is required to maintain a minimum consolidated fixed charge coverage

 

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ratio of not less than 1:25:1.0 (with certain step-ups described in the Credit Agreement).

 

Events of default under the Credit Agreement include failure to pay principal or interest when due, failure to comply with the financial and operational covenants, the occurrence of any cross default event, non-compliance with other loan documents, the occurrence of a change of control event, and bankruptcy and other insolvency events. If an event of default occurs and is continuing, the Lenders holding a majority of the commitments and outstanding term loan under the Credit Agreement have the right, among others, to (i) terminate the commitments under the Credit Agreement, (ii) accelerate and require the Company to repay all the outstanding amounts owed under the Credit Agreement and (iii) require the Company to cash collateralize any outstanding letters of credit.

 

Each wholly owned domestic subsidiary of the Company (subject to certain exceptions set forth in the Credit Agreement) has guaranteed all existing and future indebtedness and liabilities of the other guarantors and the Company arising under the Credit Agreement.

 

In connection with and effective upon the execution and delivery of the Credit Agreement on October 2, 2012, the Company terminated its then-existing Amended and Restated Credit Agreement (the “Prior Credit Agreement”), dated as of July 15, 2008. Losses on the extinguishment of debt will be recorded in interest expense during the fourth quarter in the amounts of $0.4 million and $0.5 million related to the interest rate cap and debt issuance costs, respectively. There were no termination penalties incurred by the Company in connection with the termination of the Prior Credit Agreement.

 

Interest Rate Swap Agreements

 

October 25, 2012, the Company entered into interest rate swap transactions (collectively, the “Interest Rate Swaps”) with each of JPMorgan Chase Bank, Bank of America and PNC Bank, N.A. in an initial aggregate notional amount of $150.0 million (the “Notional Amount”). The Interest Rate Swaps have an effective date of October 31, 2012 and a termination date of September 30, 2017. The Interest Rate Swaps effectively fix the interest rate on an amount of variable interest rate borrowings under the Credit Agreement, originally equal to the Notional Amount at 0.7525% per annum plus the applicable margin rate for LIBOR loans under the Credit Agreement determined based upon Standard’s consolidated total debt to EBITDA ratio. The Notional Amount is subject to scheduled quarterly amortization that coincides with quarterly prepayments of principal under the Credit Agreement.

 

Registration Rights Agreement

 

In connection with the Merger, on the Closing Date, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with Kohlberg CPC Rep, L.L.C. (“Kohlberg”), 2929 CPC HoldCo, LLC (“Lubert-Adler”), VCM STAN-CPC Holdings, LLC (“Versa”), each of which was, immediately prior to the effective time of the Merger (the “Effective Time”), a KCPC Stockholder and, as a result of the Merger, is now a stockholder of the Company. As described in the Company’s Current Report on Form 8-K filed with the SEC on February 29, 2012, pursuant to the terms of the Registration Rights Agreement, the Company is required to file with the SEC a shelf registration statement, registering for public sale by Kohlberg, Lubert-Adler and Versa the shares of Company Stock issued by the Company to such KCPC Stockholders in connection with the Merger, no later than six months following the Closing Date. Under the Registration Rights Agreement, the Company is required to maintain the effectiveness of the shelf registration statement for resales of Common Stock by such KCPC Stockholders until the earliest of (i) the date upon which the registrable securities (as defined in the Registration Rights Agreement) are able to be sold without registration under the Securities Act of 1933, (ii) the date that all registrable securities have been sold and (iii) the seventh anniversary of the effective date of the shelf registration statement. Neither Kohlberg, Lubert-Adler nor Versa is permitted to request an underwritten offering of registrable securities prior to the first anniversary of the Closing Date and, prior to the third anniversary of the Closing Date, neither Kohlberg, Lubert-Adler nor Versa may make any offers or sales of registrable securities pursuant to a shelf registration except in a firm commitment underwritten public offering.

 

The Registration Rights Agreement also provides Kohlberg, Lubert-Adler and Versa with piggyback registration rights for underwritten public offerings that the Company may effect for its own account or for the benefit of other selling stockholders.

 

The foregoing description of the Registration Rights Agreement does not purport to be complete and is

 

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qualified in its entirety by reference to the Registration Rights Agreement, a copy of which is attached as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 2, 2012.

 

Closing Agreements

 

As previously disclosed in Item 1.01 of the Company’s Current Report on Form 8-K filed with the SEC on February 29, 2012, on February 28, 2012, the Company entered into Closing Agreements with Lubert-Adler Real Estate Fund V, L.P., Lubert-Adler Real Estate Parallel Fund V, L.P., Kohlberg Investors V, L.P., Kohlberg TE Investors V, L.P., Kohlberg Partners V, L.P., Kohlberg Offshore Investors V, L.P., KOCO Investors V, L.P., Versa Capital Fund I, L.P. and Versa Capital Fund I Parallel, L.P.

 

In connection with the Merger, on the Closing Date, the Company entered into additional Closing Agreements (the “Additional Closing Agreements”) with the KCPC Stockholders, as well as with Sailorshell and Co., CP Klaff Equity LLC and Jumpstart Development LLC (Worldwide), each of which was, prior to the transfer of its shares in KCPC to the KCPC Stockholders, a stockholder of KCPC.

 

Pursuant to the terms of the Additional Closing Agreements, Kohlberg, Lubert-Adler and Versa have agreed that, for a period of three years following the Closing Date and for so long as such KCPC Stockholder owns in the aggregate (together with its affiliates, all other KCPC Stockholders and their respective affiliates and any other persons with which any of the foregoing form a “group”) beneficially or of record more than 10% of the issued and outstanding Company Stock, to cause the shares of Company Stock held by them to be counted as present at any meeting of the Company’s stockholders and to vote, in person or by proxy, all of such shares of Company Stock as follows:

 

For two years following the Closing Date:

 

·          with respect to the election of directors to the Company Board, “for” any nominees recommended by the Company Board; and

 

·            with respect to all other matters submitted for a vote of the Company’s stockholders, in accordance with the recommendation of the Company Board with respect to such matters.

 

For the period beginning on the day after the second anniversary of the Closing Date and ending on the third anniversary of the Closing Date:

 

·           with respect to the election of directors to the Company Board, “for” any nominees recommended by the Company Board; and

 

·            with respect to all other matters submitted for a vote of the Company’s stockholders, in proportion to the votes cast by all other Company stockholders.

 

The Additional Closing Agreements also provide that Kohlberg, Lubert-Adler and Versa will be subject to a four-year standstill period following the Closing Date, during which time, such KCPC Stockholder will not, among other things, (i) acquire or agree to acquire any additional voting securities of the Company, (ii) seek or propose a merger, acquisition, tender offer or other extraordinary transaction with or involving the Company or any of its subsidiaries or their respective securities or assets, (iii) call a meeting of the stockholders of the Company or initiate a stockholder proposal or (iv) form a “group” (as defined in Section 13(d)(3) of the Securities Exchange Act of 1934) with any person (other than an affiliate of such KCPC Stockholder) with respect to the acquisition or voting of any voting securities of the Company.

 

The Additional Closing Agreements impose certain restrictive covenants on Kohlberg and Versa, including (i) confidentiality obligations with respect to confidential information of the Company and (ii) non-disparagement requirements. Lubert-Adler is subject to confidentiality obligations with respect to confidential information of the Company pursuant to the terms of its Additional Closing Agreement.

 

The foregoing description of the Additional Closing Agreements does not purport to be complete and is qualified in its entirety by reference to the Additional Closing Agreements, copies of which are attached as Exhibits 10.2 through 10.8 to the Company’s Current Report on Form 8-K filed with the SEC on October 2, 2012.

 

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Hurricane Sandy

 

We have significant operations in New Jersey, New York and other areas that have been impacted by Hurricane Sandy. Although it is premature to quantify any potential reduction in revenues or net income related to Hurricane Sandy, we expect that our business and financial results will be adversely impacted. We have not been able to estimate the insured property damage that we have sustained from the hurricane. As of November 9, 2012, no amounts have been recorded related to the deductible portion of our casualty insurance program that we expect to incur in connection with the hurricane-related insurance claim that we will file.

 

Overview

 

Our Business

 

We manage parking facilities in urban markets and at airports across the United States and in four Canadian provinces. We do not own any facilities, but instead enter into contractual relationships with property owners or managers.

 

We operate our clients’ properties through two types of arrangements: management contracts and leases. Under a management contract, we typically receive a base monthly fee for managing the facility, and we may also receive an incentive fee based on the achievement of facility performance objectives. We also receive fees for ancillary services. Typically, all of the underlying revenue and expenses under a standard management contract flow through to our clients rather than to us. However, some management contracts, which are referred to as “reverse” management contracts, usually provide for larger management fees and require us to pay various costs. Under lease arrangements, we generally pay to the property owner either a fixed annual rent, a percentage of gross customer collections or a combination thereof. We collect all revenue under lease arrangements and we are responsible for most operating expenses, but we are typically not responsible for major maintenance, capital expenditures or real estate taxes. Margins for lease contracts vary significantly, not only due to operating performance, but also due to variability of parking rates in different cities and varying space utilization by parking facility type and location. As of September 30, 2012, we operated approximately 91% of our locations under management contracts and approximately 9% of our locations under leases. For the nine months ended September 30, 2012, we derived approximately 86% of our gross profit under management contracts and approximately 14% of our gross profit under leases.

 

In evaluating our financial condition and operating performance, management’s primary focus is on our gross profit, total general and administrative expenses and general and administrative expenses as a percentage of our gross profit. Although the underlying economics to us of management contracts and leases are similar, the manner in which we are required to account for them differs. Revenue from leases includes all gross customer collections derived from our leased locations (net of parking tax), whereas revenue from management contracts only includes our contractually agreed upon management fees and amounts attributable to ancillary services. Gross customer collections at facilities under management contracts, therefore, are not included in our revenue. Accordingly, while a change in the proportion of our operating agreements that are structured as leases versus management contracts may cause significant fluctuations in reported revenue and expense of parking services, that change will not artificially affect our gross profit. For example, as of September 30, 2012, we operated approximately 91% of our locations under management contracts, and for the nine months ended September 30, 2012, we derived approximately 86% of our gross profit under management contracts. Only approximately 54% of total revenue (excluding reimbursed management contract revenue), however, was from management contracts because under those contracts the revenue collected from parking customers belongs to our clients. Therefore, gross profit and total general and administrative expenses, rather than revenue, are management’s primary focus.

 

General Business Trends

 

We believe that sophisticated commercial real estate developers and property managers and owners recognize the opportunity for parking and related services to be a profit generator rather than a cost center. Often, the parking experience makes both the first and the last impressions on their properties’ tenants and visitors. By outsourcing these services, they are able to capture additional profit by leveraging the unique operational skills and controls that an experienced parking management company can offer. Our ability to consistently deliver a uniformly high level of parking and related services and maximize the profit to our clients improves our ability to win contracts and retain existing locations. Our location retention rate for the twelve-month period ended September 30, 2012 was approximately 90%, compared to approximately 92% for the twelve-month period ended September 30, 2011, which also reflects our decision not to renew, or to terminate, unprofitable contracts.

 

For the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011, average gross profit per location increased by 3.5% from $30.4 thousand to $31.5 thousand due primarily to a favorable health insurance dividend related to 2011.

 

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Summary of Operating Facilities

 

We focus our operations in core markets where a concentration of locations improves customer service levels and operating margins. The following table reflects our facilities operated at the end of the periods indicated:

 

 

 

September 30, 2012

 

December 31, 2011

 

September 30, 2011

 

Managed facilities

 

1,962

 

1,953

 

1,970

 

Leased facilities

 

199

 

201

 

212

 

Total facilities

 

2,161

 

2,154

 

2,182

 

 

Revenue

 

We recognize parking services revenue from lease and management contracts as the related services are provided. Substantially all of our revenue comes from the following two sources:

 

·              Parking services revenue—lease contracts . Parking services revenue related to lease contracts consist of all revenue received at a leased facility, including parking receipts (net of parking tax), consulting and real estate development fees, gains on sales of contracts and payments for exercising termination rights.

 

·              Parking services revenue—management contracts. Management contract revenue consists of management fees, including both fixed and performance-based fees, and amounts attributable to ancillary services such as accounting, equipment leasing, payments received for exercising termination rights, consulting, developmental fees, gains on sales of contracts, as well as insurance and other value-added services with respect to managed locations. We believe we generally purchase required insurance at lower rates than our clients can obtain on their own because we effectively self-insure for all liability and worker’s compensation claims by maintaining a large per-claim deductible. As a result, we have generated operating income on the insurance provided under our management contracts by focusing on our risk management efforts and controlling losses. Management contract revenue does not include gross customer collections at the managed locations as this revenue belongs to the property owner rather than to us. Management contracts generally provide us with a management fee regardless of the operating performance of the underlying facility.

 

Conversions between type of contracts (lease or management) are typically determined by our client and not us. Although the underlying economics to us of management contracts and leases are similar, the manner in which we account for them differs substantially.

 

Reimbursed Management Contract Revenue

 

Reimbursed management contract revenue consists of the direct reimbursement from the property owner for operating expenses incurred under a management contract, which is reflected in our revenue.

 

Cost of Parking Services

 

Our cost of parking services consists of the following:

 

·              Cost of parking services—lease contracts. The cost of parking services under a lease arrangement consists of contractual rental fees paid to the facility owner and all operating expenses incurred in connection with operating the leased facility. Contractual fees paid to the facility owner are generally based on either a fixed contractual amount or a percentage of gross revenue or a combination thereof. Generally, under a lease arrangement we are not responsible for major capital expenditures or real estate taxes.

 

·              Cost of parking services—management contracts. The cost of parking services under a management contract is generally the responsibility of the facility owner. As a result, these costs are not included in our results of operations. However, our reverse management contracts, which typically provide for larger management fees, do require us to pay for certain costs, which are included in cost of parking services.

 

Reimbursed Management Contract Expense

 

Reimbursed management contract expense consists of direct reimbursed costs incurred on behalf of property owners under a management contract, which is reflected in our cost of parking services.

 

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Gross Profit

 

Gross profit equals our revenue less the cost of generating such revenue. This is the key metric we use to examine our performance because it captures the underlying economic benefit to us of both lease contracts and management contracts.

 

General and Administrative Expenses

 

General and administrative expenses include salaries, wages, payroll taxes, insurance, travel and office related expenses for our headquarters, field offices, supervisory employees, and board of directors.

 

Depreciation and Amortization

 

Depreciation is determined using a straight-line method over the estimated useful lives of the various asset classes or in the case of leasehold improvements, over the initial term of the operating lease or its useful life, whichever is shorter. Intangible assets determined to have finite lives are amortized over their remaining useful life.

 

Results of Operations

 

Segments

 

An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenue and incur expenses, and about which separate financial information is regularly evaluated by our chief operating decision maker, in deciding how to allocate resources. Our chief operating decision maker is our president and chief executive officer.

 

Our business is managed based on regions administered by executive vice presidents. The following is a summary of revenues (excluding reimbursed management contract revenue) by region for the three and nine months ended September 30, 2012 and 2011.

 

Region One encompasses operations in Alabama, Connecticut, Delaware, District of Columbia, Florida, Georgia, Illinois, Indiana, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, and Wisconsin.

 

Region Two encompasses our Canadian operations, event planning and transportation, and our technology-based parking and traffic management systems.

 

Region Three encompasses operations in Arizona, California, Colorado, Hawaii, Louisiana, Nevada, Texas, Utah, Washington, and Wyoming.

 

Region Four encompasses all major airport and transportation operations nationwide.

 

Other consists of ancillary revenue that is not specifically identifiable to a region and insurance reserve adjustments related to prior years.

 

The following tables present the material factors that impact our financial statements on an operating segment basis.

 

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Three Months ended September 30, 2012 Compared to Three Months ended September 30, 2011

 

Segment revenue information is summarized as follows:

 

 

 

Three Months Ended September 30,

 

 

 

Region One

 

Region Two

 

Region Three

 

Region Four

 

Other

 

Total

 

Variance

 

 

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

Amount

 

%

 

 

 

(in millions)

 

Lease contract revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New location

 

$

0.8

 

$

 

$

0.4

 

$

0.2

 

$

3.7

 

$

 

$

 

$

 

$

 

$

 

$

4.9

 

$

0.2

 

$

4.7

 

2350.0

 

Contract expirations

 

0.3

 

1.2

 

 

0.1

 

 

0.5

 

 

0.1

 

 

 

0.3

 

1.9

 

(1.6

)

(84.2

)

Same location

 

20.9

 

19.5

 

0.7

 

0.6

 

5.6

 

5.4

 

10.5

 

9.5

 

 

 

37.7

 

35.0

 

2.7

 

7.7

 

Conversions

 

0.1

 

0.4

 

 

 

 

 

 

 

 

 

0.1

 

0.4

 

(0.3

)

(75.0

)

Total lease contract revenue

 

$

22.1

 

$

21.1

 

$

1.1

 

$

0.9

 

$

9.3

 

$

5.9

 

$

10.5

 

$

9.6

 

$

 

$

 

$

43.0

 

$

37.5

 

$

5.5

 

14.7

 

Management contract revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

New location

 

$

1.6

 

$

0.3

 

$

7.3

 

$

0.1

 

$

0.9

 

$

0.1

 

$

0.4

 

$

 

$

 

$

 

$

10.2

 

$

0.5

 

$

9.7

 

1940.0

 

Contract expirations

 

0.1

 

2.0

 

0.1

 

1.0

 

0.2

 

1.2

 

 

0.3

 

 

 

0.4

 

4.5

 

(4.1

)

(91.1

)

Same location

 

11.8

 

11.7

 

2.4

 

2.8

 

12.6

 

11.9

 

11.5

 

11.6

 

0.2

 

0.2

 

38.5

 

38.2

 

0.3

 

0.8

 

Conversions

 

0.1

 

0.1

 

 

 

 

 

 

 

 

 

0.1

 

0.1

 

 

 

Total management contract revenue

 

$

13.6