SP Plus Corporation
STANDARD PARKING CORP (Form: 10-Q/A, Received: 11/19/2013 06:15:03)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


 

FORM 10-Q/A

 

(Amendment No. 1)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2013

 

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)

 

 

 

200 E Randolph Street, Suite 7700

Chicago, Illinois 60601-7702

(Address of Principal Executive Offices, Including Zip Code)

 

(312) 274-2000

(Registrant’s Telephone Number, Including Area Code)

 

900 N. Michigan Avenue, Suite 1600

Chicago, Illinois 60611-1542

(Former Name, Former Address and

Former Fiscal Year, if Changed Since

Last Report)

 

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 11, 2013, there were 21,913,346 shares of common stock of the registrant outstanding.

 

 

 



Table of Contents

 

STANDARD PARKING CORPORATION

 

FORM 10-Q INDEX

 

Part I. Financial Information

4

Item 1. Financial Statements:

4

Condensed Consolidated Balance Sheets as of September 30, 2013 (Unaudited) and December 31, 2012

4

Condensed Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2013 and 2012

5

Condensed Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2013 and 2012

6

Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2013 and 2012

7

Notes to Condensed Consolidated Interim Financial Statements

8

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

21

Item 3. Quantitative and Qualitative Disclosures about Market Risk

34

Item 4. Controls and Procedures

35

Part II. Other Information

36

Item 1. Legal Proceedings

36

Item 1A. Risk Factors

36

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

36

Item 6. Exhibits

37

Signatures

38

 

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Table of Contents

 

Explanatory Notes

 

This Quarterly Report on Form 10-Q/A of Standard Parking Corporation (the “Company,” “Standard,” “we” or “us”) for the quarterly period ended September 30, 2013 has been filed solely to revise the disclosure in Part I. Item 4. Controls and Procedures, to reflect changes to the Company’s disclosure as to the effectiveness of the Company’s disclosure controls and procedures as of September 30, 2013.

 

The Company’s principal executive officer, principal financial officer and principal accounting officer have provided currently dated certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 in connection with this amended Quarterly Report on Form 10-Q/A; the certifications are filed as Exhibits 31.1, 31.2, 31.3 and 32.

 

This amended Quarterly Report on Form 10-Q/A sets forth the original Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2013 in its entirety, except as revised in Part I. Item 4. Except for disclosures in Part I. Item 4, this amended Quarterly Report on Form 10-Q/A filing does not modify or update disclosures in the Form 10-Q, including the nature and character of such disclosures.

 

This Quarterly Report on includes restated consolidated balance sheets as of December 31, 2012, and consolidated statements of income, consolidated statements of comprehensive income and consolidated statements of cash flows for the three and nine months ended September 30, 2012. We will not file an amended Quarterly Report on Form 10-Q/A for the quarterly period ended September 30, 2012. This restatement is to reflect a correction in the manner in which the Company has accounted for deficiency payments under the Company’s agreement with the State of Connecticut (the “State”) under which the Company operates the surface parking and 3,500 garage parking spaces at Bradley International Airport located in the Hartford, Connecticut metropolitan area (the “Bradley Agreement”).  Cumulative deficiency payments under the Bradley Agreement, net of reimbursements, had previously been recorded as a receivable by the Company.

 

At the time of the Company’s initial accounting for the Bradley Agreement in 2000, the Company’s revenue projections, as well as the projections included in the Bradley Agreement and in the feasibility study prepared by the State’s parking consultant showed that there would be sufficient funds available the State would be able to repay deficiency payments, if any, over the term of the Bradley Agreement.  The Company continues to believe that the State will be able to repay and expects that the State will ultimately repay the deficiency payments made by the Company under the Bradley Agreement.  However, it has now been determined that the recovery of the deficiency payments represents a contingency and, accordingly, (i) the deficiency payments made by the Company under the Bradley Agreement should have been, and should continue to be, recorded as cost of parking services in the reporting periods in which such payments were made, and (ii) the payments to the Company of the principal, interest and premium related to deficiency payments should have been, and should continue to be, recognized as a reduction of cost of parking services in the reporting periods in which such repayments were received.  This approach is different from the Company’s historical practice of reporting such deficiency payments as accounts receivable and interest and premium received as interest income.   The restatement of the Company’s historical consolidated financial statements to reflect its correction in accounting for deficiency payments under the Bradley Agreement is referred to herein as the “Restatement.”

 

For further information regarding the Restatement, see the Company’s Current Report on Form 8-K, dated November 13, 2013, as filed with the Securities and Exchange Commission (the “SEC”) (the “Restatement 8-K”).

 

This Quarterly Report should be read in conjunction with the Company’s other filings, as amended, made with the Securities and Exchange Commission subsequent to December 31, 2012, including the Restatement 8-K, the Company’s amended Annual Report on Form 10-K/A for the year ended December 31, 2012, and the Company’s amended Quarterly Reports on Form 10-Q/A for the quarterly periods ended March 31, 2013 and June 30, 2013.

 

3


 


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,
2013

 

December 31,
2012

 

 

 

(Unaudited)

 

(Restated) Note 1

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

22,275

 

$

28,450

 

Notes and accounts receivable, net

 

122,353

 

111,498

 

Prepaid expenses and supplies

 

13,873

 

27,823

 

Deferred taxes

 

15,265

 

15,265

 

Total current assets

 

173,766

 

183,036

 

Leasehold improvements, equipment, land and construction in progress, net

 

45,120

 

40,402

 

Other assets:

 

 

 

 

 

Advances and deposits

 

7,132

 

8,540

 

Intangible assets, net

 

173,869

 

197,344

 

Other assets, net

 

23,731

 

22,260

 

Cost of contracts, net

 

11,836

 

14,215

 

Goodwill

 

439,382

 

439,486

 

 

 

655,950

 

681,845

 

Total assets

 

$

874,836

 

$

905,283

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

110,560

 

$

129,034

 

Accrued and other current liabilities

 

98,200

 

109,300

 

Current portion of unfavorable lease contracts

 

13,592

 

17,467

 

Current portion of long-term debt obligations

 

21,590

 

21,837

 

Total current liabilities

 

243,942

 

277,638

 

Deferred taxes

 

15,333

 

19,079

 

Long-term borrowings, excluding current portion:

 

 

 

 

 

Obligations under senior credit facility

 

286,075

 

286,727

 

Other long-term debt obligations

 

1,872

 

1,995

 

 

 

287,947

 

288,722

 

Unfavorable lease contracts

 

66,034

 

74,758

 

Other long-term liabilities

 

63,738

 

58,086

 

Stockholders’ equity:

 

 

 

 

 

Preferred Stock, par value $0.01 per share; 5,000,000 shares authorized as of September 30, 2013 and December 31, 2012; no shares issued

 

 

 

Common stock, par value $.001 per share; 50,000,000 shares authorized as of September 30, 2013 and December 31, 2012; 21,906,254 and 21,870,770 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively

 

22

 

22

 

Additional paid-in capital

 

239,767

 

236,375

 

Accumulated other comprehensive (loss) income

 

228

 

(381

)

Accumulated deficit

 

(42,841

)

(49,768

)

Total Standard Parking Corporation stockholders’ equity

 

197,176

 

186,248

 

Noncontrolling interest

 

666

 

752

 

Total equity

 

197,842

 

187,000

 

Total liabilities and stockholders’ equity

 

$

874,836

 

$

905,283

 

 


Note:              The balance sheet at December 31, 2012 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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Table of Contents

 

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, 2013

 

September 30, 2012

 

September 30, 2013

 

September 30, 2012

 

Parking services revenue:

 

 

 

 

 

 

 

 

 

Lease contracts

 

$

122,771

 

$

42,969

 

$

367,088

 

$

122,927

 

Management contracts

 

77,681

 

49,226

 

256,435

 

141,562

 

 

 

200,452

 

92,195

 

623,523

 

264,489

 

Reimbursed management contract revenue

 

154,858

 

100,958

 

472,737

 

309,055

 

Total revenue

 

355,310

 

193,153

 

1,096,260

 

573,544

 

Cost of parking services:

 

 

 

 

 

 

 

 

 

Lease contracts

 

115,696

 

40,108

 

339,828

 

113,495

 

Management contracts

 

44,680

 

30,713

 

157,250

 

84,055

 

 

 

160,376

 

70,821

 

497,078

 

197,550

 

Reimbursed management contract expense

 

154,858

 

100,958

 

472,737

 

309,055

 

Total cost of parking services

 

315,234

 

171,779

 

969,815

 

506,605

 

Gross profit:

 

 

 

 

 

 

 

 

 

Lease contracts

 

7,075

 

2,861

 

27,260

 

9,432

 

Management contracts

 

33,001

 

18,513

 

99,185

 

57,507

 

Total gross profit

 

40,076

 

21,374

 

126,445

 

66,939

 

General and administrative expenses

 

20,494

 

13,846

 

75,310

 

43,759

 

Depreciation and amortization

 

7,959

 

1,723

 

23,704

 

5,258

 

Operating income

 

11,623

 

5,805

 

27,431

 

17,922

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

Interest expense

 

4,818

 

1,093

 

14,421

 

3,355

 

Interest income

 

(108

)

(61

)

(347

)

(181

)

 

 

4,710

 

1,032

 

14,074

 

3,174

 

Income before income taxes

 

6,913

 

4,773

 

13,357

 

14,748

 

Income tax expense

 

2,448

 

2,504

 

4,359

 

6,520

 

Net income

 

4,465

 

2,269

 

8,998

 

8,228

 

Less: Net income attributable to noncontrolling interest

 

721

 

75

 

2,070

 

232

 

Net income attributable to Standard Parking Corporation

 

$

3,744

 

$

2,194

 

$

6,928

 

$

7,996

 

Common stock data:

 

 

 

 

 

 

 

 

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.17

 

$

0.14

 

$

0.32

 

$

0.51

 

Diluted

 

$

0.17

 

$

0.14

 

$

0.31

 

$

0.50

 

Weighted average shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

21,911,574

 

15,668,129

 

21,890,861

 

15,632,817

 

Diluted

 

22,285,723

 

15,928,685

 

22,226,030

 

15,883,535

 

 

See Notes to Condensed Consolidated Interim Financial Statements.

 

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Table of Contents

 

STANDARD PARKING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

($ in thousands, unaudited)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30, 2013

 

September 30, 2012

 

September 30, 2013

 

September 30, 2012

 

Net income

 

$

4,465

 

$

2,269

 

$

8,998

 

$

8,228

 

Other comprehensive (expense) income, before tax

 

(280

)

202

 

609

 

208

 

Comprehensive income

 

4,185

 

2,471

 

9,607

 

8,436

 

Less: comprehensive income attributable to noncontrolling interest

 

721

 

75

 

2,070

 

232

 

Comprehensive income attributable to Standard Parking Corporation

 

$

3,464

 

$

2,396

 

$

7,537

 

$

8,204

 

 

See Notes to Condensed Consolidated Interim Financial Statements.

 

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Table of Contents

 

STANDARD PARKING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

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

 

 

 

Nine Months Ended

 

 

 

September 30, 2013

 

September 30, 2012

 

Operating activities:

 

 

 

 

 

Net income

 

$

8,998

 

$

8,228

 

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

 

 

 

 

 

Depreciation and amortization

 

22,335

 

5,215

 

Net accretion of acquired lease contracts

 

(2,526

)

 

Loss on sale and abandonment of assets

 

1,431

 

56

 

Amortization of debt issuance costs and original issue discount on borrowings

 

2,105

 

446

 

Non-cash stock-based compensation

 

3,472

 

1,114

 

Excess tax benefit related to stock option exercises

 

 

(221

)

Provisions for losses on accounts receivable

 

232

 

229

 

Deferred income taxes

 

(1,675

)

3,021

 

Net change in operating assets and liabilities

 

(24,181

)

(7,097

)

Net cash provided by operating activities

 

10,191

 

10,991

 

Investing activities:

 

 

 

 

 

Purchase of leasehold improvements and equipment

 

(11,529

)

(3,114

)

Cost of contracts purchased

 

(365

)

(572

)

Proceeds from sale of assets

 

143

 

15

 

Capitalized interest

 

 

(12

)

Contingent payments for businesses acquired

 

(87

)

(93

)

Net cash used in investing activities

 

(11,838

)

(3,776

)

Financing activities:

 

 

 

 

 

Proceeds from exercise of stock options

 

 

154

 

Earn-out payments made

 

(142

)

(1,525

)

Tax benefit related to stock option exercises

 

 

221

 

Payments on senior credit facility

 

(1,525

)

(8,200

)

Distribution to noncontrolling interest

 

(2,156

)

(202

)

Payments on long-term borrowings

 

(115

)

(108

)

Payments for debt issuance costs

 

 

(30

)

Payments on capital leases

 

(350

)

(414

)

Net cash used in financing activities

 

(4,288

)

(10,104

)

Effect of exchange rate changes on cash and cash equivalents

 

(240

)

55

 

Decrease in cash and cash equivalents

 

(6,175

)

(2,834

)

Cash and cash equivalents at beginning of period

 

28,450

 

13,220

 

Cash and cash equivalents at end of period

 

$

22,275

 

$

10,386

 

Supplemental disclosures:

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

Interest

 

$

12,465

 

$

2,415

 

Income taxes

 

1,128

 

3,179

 

 

See Notes to Condensed Consolidated Interim Financial Statements.

 

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Table of Contents

 

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 (the “Company”) 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, 2013 are not necessarily indicative of the results that might be expected for any other interim period or the fiscal year ended December 31, 2013, we revised our previously issued consolidated financial statements to reflect the finalization of purchase accounting related to KCPC Holdings, Inc., a correction in accounting for our contract related to Bradley Airport, as described in Note 10 (the “Bradley Agreement”) and certain other adjustments. The financial statements presented in this report should be read in conjunction with the restated consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K/A filed on November 18, 2013, our Quarterly Report on Form 10-Q/A for March 31, 2013, filed on November 18, 2013, and our Quarterly Report on Form 10-Q/A for June 30, 2013, filed on November 18, 2013.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and Variable Interest Entities (“VIE”) in which the Company is the primary beneficiary. Noncontrolling interest recorded in the consolidated statement of income is the interest in consolidated VIEs not held by the Company. The Company has ownership interests in thirty-eight partnerships, joint ventures or similar arrangements that operate parking facilities. Twenty-nine are VIEs and nine are voting interest model entities where the company’s ownership ranges from 20-50% and it does not control the entities. The Company consolidates those VIEs where it is the primary beneficiary and accounts for voting interest entities that it does not control using the equity method of accounting. The assets and liabilities of the VIEs are not material to the Company’s Consolidated Balance Sheets. 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 has a carrying value that approximates fair value because these instruments bear interest at market rates.

 

Interest Rate Swaps

 

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

 

On October 25, 2012, the Company entered into Interest Rate Swap transactions (collectively, the “Interest Rate Swaps”) with each of JPMorgan Chase Bank, N.A. (“JPMorgan Chase Bank”), Bank of America, N.A. (“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 (“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 the Company’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. These Interest Rate Swaps are classified as cash flow hedges, and we calculate the effectiveness of the hedge on a monthly basis. The ineffective portion of the cash flow hedge is recognized in earnings as an increase of interest expense. As of September 30, 2013, no ineffectiveness of the hedge has been recognized. The fair value of the Interest Rate Swaps at September 30, 2013 and December 31, 2012 was an asset of $621 and a liability of $794, respectively, and is included in prepaid expenses at September 30, 2013 and other long-term liabilities at December 31, 2012.

 

2. Acquisition

 

On October 2, 2012 (“Closing Date”), we completed our acquisition (the “Central Merger”) of 100% of the outstanding common shares of KCPC Holdings, Inc. (“KCPC”), which was the ultimate parent of Central Parking Corporation (“Central”) for 6,161,332 shares of our common stock and the assumption of $217,675 of Central’s debt net of cash acquired. Additionally, Central’s former stockholders will be entitled to receive cash consideration of $27,000, subject to adjustment, to be paid three years after closing to the extent it is not used to satisfy certain obligations that the Company has been indemnified for, by or from the former Central shareholders. The Company financed the acquisition through additional borrowings under the Senior Credit Facility (defined in Note 11).

 

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Table of Contents

 

Pursuant to the Central Merger agreement, we are entitled to indemnification from the former stockholders of KCPC if and to the extent Central’s combined net debt and the absolute value of Central’s working capital (as determined in accordance with the Merger Agreement) (the “Net Debt Working Capital”) exceeded $285,000 as of September 30, 2012. The Net Debt Working Capital was $300,546 as of September 30, 2012 and, accordingly, the Net Debt Working Capital exceeded $285,000 by $15,546. We have made a formal indemnity claim under the Merger Agreement relating to Net Debt Working Capital.

 

 

Central Net Debt Working Capital at September 30, 2012 as defined in the Merger Agreement 

 

$

(300,546

)

Threshold

 

285,000

 

Excess over the threshold

 

(15,546

)

Cash consideration payable in three years

 

27,000

 

Cash consideration to be issued

 

$

11,454

 

Present value of cash consideration at the acquisition date

 

$

8,943

 

 

Accordingly, the fair value of the final consideration to acquire all of Central’s outstanding stock at the acquisition date is as follows:

 

Stock consideration

 

$

140,726

 

Present value of cash consideration to be issued

 

8,943

 

Total consideration transferred

 

$

149,669

 

 

The Company incurred certain acquisition and integration related costs associated with the transaction that were expensed as incurred and are reflected in the Condensed Consolidated Statements of Income. The Company recognized $1,893 and $9,210 of these costs in its Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2013 in general and administrative expenses, respectively.

 

The acquisition has been accounted for using the acquisition method of accounting (in accordance with the provisions of ASC 805, Business Combinations ) which requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date.

 

The purchase price has been allocated based on the estimated fair value of net assets acquired and liabilities assumed at the date of the acquisition.  We have previously reported our preliminary purchase price allocation.  We have subsequently finalized the purchase price allocation, which resulted in revision to the previously reported preliminary amounts.  The revisions to the purchase price allocation were applied retrospectively back to the date of the acquisition as reflected in the Company’s restated consolidated financial statements included in our Form 10K-A filed on November 18, 2013.

 

The following table summarizes the fair values of the assets acquired and liabilities assumed in the acquisition as previously reported based on the preliminary allocation and as finalized:

 

 

 

Preliminary
amounts (a)

 

Amounts as
finalized

 

Net current liabilities

 

$

(28,041

)

$

(25,444

)

Leasehold improvements, equipment, land and construction in progress, net

 

24,154

 

24,781

 

Identified intangible assets:

 

 

 

 

 

Management contracts

 

81,000

 

81,000

 

Favorable lease contracts

 

51,650

 

80,235

 

Trade name / trademarks

 

14,900

 

9,100

 

Existing technology

 

34,000

 

34,000

 

Non-competition agreements

 

2,600

 

2,600

 

Other noncurrent assets

 

17,748

 

17,748

 

Net long-term deferred tax liability

 

(24,516

)

(22,528

)

Long-term debt

 

(237,223

)

(237,223

)

Unfavorable lease contracts

 

(69,316

)

(101,676

)

Other noncurrent liabilities

 

(19,523

)

(19,523

)

Net liabilities assumed

 

(152,567

)

(156,930

)

Goodwill

 

302,236

 

306,599

 

Total consideration transferred

 

$

149,669

 

$

149,669

 

 


(a)   These amounts reflect the reclassification of net long-term deferred tax liabilities of $24,434 from net current liabilities to net long term deferred tax liability

 

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The acquired management contracts are being amortized over a weighted average life of 16 years. The favorable and unfavorable lease contracts are being amortized over their contractual lives which results in a weighted average life of 10 and 7 years, respectively. The trade names and trademarks are being amortized over 4 years. The non-compete agreements are being amortized over 1 year. The existing technology is being amortized over 4.5 years. See Note 8 for further disclosure regarding the amortization of the intangible assets.

 

Goodwill is calculated as the excess of the consideration transferred over the fair value of net assets acquired. Goodwill is not amortized and is not deductible for tax purposes. Goodwill represents expected synergies with the Company’s existing operations, which include growth of new and existing customers, elimination of corporate overhead redundancies, and logistical improvements.

 

A single estimate of fair value results from a complex series of the Company’s judgments about future events and uncertainties and relies heavily on estimates and assumptions. The Company’s judgments used to determine the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as assets lives, can materially impact the Company’s results of operations.

 

3. 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 24, 2013, our shareholders approved an amendment to our Long-Term Incentive Plan that increased the maximum number of shares of common stock available for awards under the Long-Term Incentive Plan from 2,175,000 shares to 2,975,000 shares.  The Plan terminates on April 22, 2028. Forfeited and expired options under the Plan become generally available for reissuance. At September 30, 2013, 673,069 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, 2013 and 2012. The Company recognized no stock-based compensation expense related to stock options for the nine months ended September 30, 2013 and 2012, as all options previously granted were fully vested. As of September 30, 2013, there were no unrecognized compensation costs related to unvested options.

 

On April 24, 2013, the Company authorized vested stock grants to certain directors totaling 21,949 shares. The total value of the grant, based on the fair value of the stock on the grant date, was $465 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 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.

 

In October 2012, the Company’s Board of Directors authorized a grant of 191,895 restricted stock units that were awarded to our senior management team. In June 2013, an additional 4,247 restricted stock units were awarded. The restricted stock units vest in one-third installments on each of the first, second and third anniversaries of the grant date. The restricted stock unit agreements were

 

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awarded to members of the executive team who played a key role in the due diligence and subsequent planning that led to the successful closing of the Central Merger as well as retention of the team through the integration period. The restricted stock units vest over a three-year period. Additionally in October 2012, as part of employment agreements, 30,529 restricted stock units were awarded and shall become vested on the third anniversary of the grant date.

 

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 ended September 30, 2013, 27,000 restricted stock units vested. During the nine months ended September 30, 2012, 146,000 restricted stock units vested, respectively.  No restricted stock units were forfeited.

 

The Company recognized $1,003 and $3,062 of stock-based compensation expense related to the restricted stock units for the three and nine months ended September 30, 2013, respectively, which is included in general and administrative expenses.  The Company recognized $251 and $869 of stock-based compensation expenses related to restricted stock units for the three and nine months ended September 30, 2012, respectively, which is included in general and administrative expenses.  As of September 30, 2013, there was $6,157 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 4.0 years.

 

4. 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.

 

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,

 

 

 

2013

 

2012

 

2013

 

2012

 

Weighted average common basic shares outstanding

 

21,911,574

 

15,668,129

 

21,890,861

 

15,632,817

 

Effect of dilutive stock options and restricted stock units

 

374,149

 

260,556

 

335,169

 

250,718

 

Weighted average common diluted shares outstanding

 

22,285,723

 

15,928,685

 

22,226,030

 

15,883,535

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.17

 

$

0.14

 

$

0.32

 

$

0.51

 

Diluted

 

$

0.17

 

$

0.14

 

$

0.31

 

$

0.50

 

 

There are no additional securities that could dilute basic earnings per share in the future that were not included in the computation of diluted earnings per share, other than those disclosed.

 

5. Recently Issued Accounting Pronouncements

 

Accounting Standards Adopted

 

In July 2012, the FASB issued ASU 2012-2, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This update provides an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired and then determine whether it should perform a quantitative impairment test. The amendment is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 with early adoption permitted. Although the Company has not performed its annual impairment test, we adopted the guidance in 2013 and do not expect the adoption to have a material effect on the Company’s financial position, results of operations or cash flows.

 

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220), which deferred the effective date for applying ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, in respect of certain provisions relating to the presentation of separate line items on the income statement for reclassifications of items out of accumulated other comprehensive income into income, in order for the FASB to further evaluate this change in standard before implementation. The deferral is temporary and other provisions of ASU 2011-05 were effective for the Company beginning January 1, 2012. The adoption of this update impacted the presentation and disclosure of the Company’s financial statements but did not impact the Company’s results of operations, financial position, or cash flows.

 

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In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This update requires additional disclosures about offsetting and related arrangements on assets and liabilities to enable users of financial statements to understand the effect of such arrangements on an entity’s financial position as reported. This amendment is effective for fiscal 2013. We adopted the guidance in the first quarter of 2013 and it did not have a material effect on the Company’s financial position, results of operations or cash flows.

 

6. Leasehold Improvements, Equipment, Construction in Progress and Land, Net

 

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

 

 

 

 

 

September 30, 2013

 

 

 

 

 

Ranges of Estimated Useful Life

 

(Unaudited)

 

December 31, 2012

 

Equipment

 

2 - 5 Years

 

$

29,807

 

$

28,498

 

Software

 

3 - 10 Years

 

17,206

 

15,031

 

Vehicles

 

4 Years

 

7,860

 

9,353

 

Other

 

10 Years

 

515

 

367

 

Leasehold improvements

 

Shorter of lease term or economic life up to 10 years

 

21,445

 

17,920

 

Construction in progress

 

 

 

5,680

 

2,086

 

 

 

 

 

82,513

 

73,255

 

Less accumulated depreciation and amortization

 

 

 

(39,692

)

(35,152

)

 

 

 

 

42,821

 

38,103

 

Land

 

 

 

2,299

 

2,299

 

Leasehold improvements, equipment, land and construction in progress, net

 

 

 

$

45,120

 

$

40,402

 

 

Depreciation expense was $3,978 and $9,483 for the three and nine months ended September 30, 2013, respectively. Depreciation expense was $1,053 and $3,216 for the three and nine months ended September 30, 2012, respectively. Depreciation includes losses on sale and abandonment of leasehold improvements and equipment of $846 and $1,517 for the three and nine months ended September 30, 2013, 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.

 

7. 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 capitalized payments made to third parties, 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, 2013

 

December 31, 2012

 

 

 

(Unaudited)

 

 

 

 

 

 

 

 

 

Cost of contracts

 

$

26,456

 

$

26,599

 

Accumulated amortization

 

(14,620

)

(12,384

)

Cost of contracts, net

 

$

11,836

 

$

14,215

 

 

Amortization expense related to cost of contracts was $143 and $1,505 for the three and nine months ended September 30, 2013, respectively. Amortization expense related to cost of contracts was $609 and $1,828 for the three and nine months ended September 30, 2012, respectively. The weighted average useful life is 9.5 years for 2013 and 9.7 years for 2012.

 

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8. Intangible assets, net

 

The balance of intangible assets is comprised of the following:

 

 

 

September 30,
2013

 

December 31,
2012

 

 

 

(Unaudited)

 

 

 

Covenant not to compete

 

$

3,533

 

$

3,533

 

Trade names

 

9,820

 

9,820

 

Proprietary know how

 

34,650

 

34,650

 

Lease contract rights

 

80,235

 

80,235

 

Management contract rights

 

81,000

 

81,000

 

Accumulated amortization

 

(35,369

)

(11,894

)

Intangible assets, net

 

$

173,869

 

$

197,344

 

 

Amortization expense related to intangible assets included in depreciation and amortization was $3,877 and $12,853 for the three and nine months ended September 30, 2013, respectively. Amortization for lease contracts rights was $3,383 and $11,152 for the three and nine months ended September 30, 2013, respectively, and is included in cost of parking services of lease contracts. There was no amortization for lease contracts included in cost of parking services for lease contracts for the three and nine months ended September 30, 2012.

 

9. Goodwill

 

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

 

The following table reflects the changes in the carrying amounts of goodwill by reportable segment for the nine months ended September 30, 2013 (unaudited):

 

 

 

Region
One

 

Region
Two

 

Region
Three

 

Region
Four

 

Region
Five

 

Total

 

Balance as of December 31, 2012

 

$

193,758

 

$

32,245

 

$

66,181

 

$

62,621

 

$

84,681

 

$

439,486

 

Contingent payments related to acquisitions

 

93

 

 

 

 

 

 

93

 

Foreign currency translation

 

 

 

 

 

(197

)

 

 

 

 

(197

)

Balance as of September 30, 2013

 

$

193,851

 

$

32,245

 

$

65,984

 

$

62,621

 

84,681

 

$

439,382

 

 

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10. Bradley 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 (“Bradley”) located in the Hartford, Connecticut metropolitan area. The Company manages the facility for which it is expected to receive a contingent management fee.

 

The parking garage was financed on April 6, 2000 through the issuance of $53,800 of State of Connecticut (“State”) 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 contract year 2002 to approximately $4,500 in contract year 2025. Annual guaranteed minimum payments to the State will increase from approximately $8,300 in contract year 2002 to approximately $13,200 in contract year 2024. The annual minimum guaranteed payment to the State by the trustee for the nine months ended September 30, 2013 and 2012 was $7,917 and $7,754, 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. We record deficiency payments made as additional cost of parking services.

 

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 Bradley Agreement, 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% of the initial deficiency payment. We calculate and record interest income and premium income along with deficiency principal repayments as a reduction of cost of parking services 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.

 

The total deficiency payments we have made, net of reimbursements, as of September 30, 2013 and December 31, 2012:

 

 

 

September 30,
2013

 

December 31,
2012

 

 

 

(Unaudited)

 

 

 

Balance at beginning of year

 

$

14,598

 

$

13,407

 

Deficiency payments made

 

742

 

1,658

 

Deficiency repayment received

 

(760

)

(467

)

Balance at end of period

 

$

14,580

 

$

14,598

 

 

In the nine months ended September 30, 2013, we received deficiency repayments (net of deficiency payments made) of $18 along with $60 of interest from the trustee. In the nine months ended September 30, 2012, we made deficiency payments (net of repayments received) of $1,221 and received $85 for interest related to deficiency repayments from the trustee.

 

We believe these advances to be fully recoverable as the Construction, Financing and Operating Special Facility Lease Agreement, which governs reimbursement of Guarantor Payments, places no time restriction on the Company’s right to reimbursement. The payment of principal, interest and premium will be recorded when received. We do not directly guarantee the payment of any principal or interest on any debt obligations of the State of Connecticut or the trustee.

 

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Compensation

 

In addition to the recovery of certain general and administrative expenses incurred, the Bradley 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 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. Cumulative management fees of approximately $9,000 have not been recognized as of September 30, 2013, and no management fee income was recognized during the nine months ended September 30, 2013 and 2012.

 

11. Borrowing Arrangements

 

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

 

 

 

 

 

Amount Outstanding

 

 

 

Maturity Date

 

September 30,
2013

 

December 31,
2012

 

 

 

(Unaudited)

 

Senior Credit Facility, net of discount

 

October 2, 2017

 

$

307,383

 

$

307,939

 

Other obligations

 

Various

 

2,154

 

2,620

 

Total debt

 

 

 

309,537

 

310,559

 

Less current portion

 

 

 

21,590

 

21,837

 

Total long-term debt

 

 

 

$

287,947

 

$

288,722

 

 

Senior Credit Facility

 

In connection with the Central Merger, on the Closing Date, the Company entered into a Credit Agreement with Bank of America, as administrative agent, Wells Fargo Bank, N.A. (“Wells Fargo Bank”) and 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 secured Senior 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 payments of principal based on the following annualized 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 Central, and will also be used to pay costs and expenses related to the Central Merger and the related financing and fund ongoing working capital and other general corporate purposes. At September 30, 2013, the Company had $307,383 outstanding on the Senior Credit Facility, net of discount.

 

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

 

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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.

 

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 “Former Credit Agreement”), dated as of July 15, 2008. There were no termination penalties incurred by the Company in connection with the termination of the Former Credit Agreement.

 

We are in compliance with all of our covenants as of September 30, 2013.

 

The weighted average interest rate on our Senior Credit Facility at September 30, 2013 and December 31, 2012 was 3.7% and 3.7%, respectively. The rate includes all outstanding LIBOR contracts, cash flow hedge effectiveness effect and letters of credit. The weighted average interest rate on outstanding borrowings, not including letters of credit, was 3.8% and 3.9% at September 30, 2013 and December 31, 2012, respectively.

 

At September 30, 2013, we had $59,272 of letters of credit outstanding under the Senior Credit Facility, borrowings against the Senior Credit Facility aggregated $307,383 and we had $41,407 available under the Senior Credit Facility.

 

The Company acquired Subordinated Convertible Debentures (“Convertible Debentures”) that prior to the acquisition of Central, were convertible at the option of the holder thereof into shares of Central common stock. As a result of the acquisition, the subordinated debenture holders no longer have the right to convert the Convertible Debentures to common stock of the Company, but do have the right to redeem the Convertible Debentures for $19.18 cash per share upon their stated maturity (April 1, 2028) or upon acceleration or earlier repayment of the Convertible Debentures. There were no redemptions during the nine months ended September 30, 2013. Approximately 65,375 Convertible Debentures or $1,254 (redemption value) remain outstanding at September 30, 2013.

 

The remaining $900 of other obligations at September 30, 2013 relates to various financing arrangements.

 

12. Business Unit Segment Information

 

Segment information is presented in accordance with a “management approach,” which designates the internal reporting used by the Chief Operating Decision Maker (“CODM”) for making decisions and assessing performance as the source of the Company’s reportable segments. The Company’s segments are organized in a manner consistent with which separate financial information is available and evaluated regularly by our CODM in deciding how to allocate resources and in assessing performance.

 

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 CODM. Our CODM 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.

 

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Our business is managed based on regions administered by executive vice presidents. The following is summary of revenues (excluding reimbursed management contract revenue) and gross profit by regions for the three and nine months ended September 30, 2013 and 2012 with information related to prior periods recast to conform to the current regional alignment (unaudited):

 

 

 

For the three months ended

 

For the nine  months ended

 

 

 

September 30,
2013

 

Gross
Margin %

 

September 30,
2012

 

Gross
Margin %

 

September 30,
2013

 

Gross
Margin
%

 

September 30,
2012

 

Gross
Margin %

 

Revenues(a):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Region One

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

$

77,857

 

 

 

$

19,544

 

 

 

$

227,097

 

 

 

$

55,013

 

 

 

Management contracts(b)

 

22,351

 

 

 

12,537

 

 

 

79,241

 

 

 

37,320

 

 

 

Total Region One

 

100,208

 

 

 

32,081

 

 

 

306,338

 

 

 

92,333

 

 

 

Region Two

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

1,039

 

 

 

 

 

 

3,396

 

 

 

 

 

 

Management contracts

 

8,585

 

 

 

7,106

 

 

 

24,362

 

 

 

15,252

 

 

 

Total Region Two

 

9,624

 

 

 

7,106

 

 

 

27,758

 

 

 

15,252

 

 

 

Region Three

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

12,614

 

 

 

5,662

 

 

 

37,517

 

 

 

16,962

 

 

 

Management contracts

 

16,694

 

 

 

13,362

 

 

 

53,823

 

 

 

40,204

 

 

 

Total Region Three

 

29,308

 

 

 

19,024

 

 

 

91,340

 

 

 

57,166

 

 

 

Region Four

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

10,602

 

 

 

10,491

 

 

 

33,075

 

 

 

32,030

 

 

 

Management contracts

 

22,850

 

 

 

11,965

 

 

 

72,852

 

 

 

36,148

 

 

 

Total Region Four

 

33,452

 

 

 

22,456

 

 

 

105,927

 

 

 

68,178

 

 

 

Region Five

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

21,635

 

 

 

7,271

 

 

 

67,129

 

 

 

18,922

 

 

 

Management contracts

 

8,115

 

 

 

3,873

 

 

 

27,452

 

 

 

11,484

 

 

 

Total Region Five

 

29,750

 

 

 

11,144

 

 

 

94,581

 

 

 

30,406

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

(976

)

 

 

 

 

 

(1,127

)

 

 

 

 

 

Management contracts

 

(915

)

 

 

384

 

 

 

(1,294

)

 

 

1,154

 

 

 

Total Other

 

(1,891

)

 

 

384

 

 

 

(2,421

)

 

 

1,154

 

 

 

Reimbursed management contract revenue

 

154,858

 

 

 

100,958

 

 

 

472,737

 

 

 

309,055

 

 

 

Total revenues

 

$

355,310

 

 

 

$

193,153

 

 

 

$

1,096,260

 

 

 

$

573,544

 

 

 

Gross Profit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Region One

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

2,494

 

3

%

1,533

 

8

%

9,124

 

4

%

3,407

 

6

%

Management contracts

 

8,877

 

40

%

6,913

 

55

%

35,761

 

45

%

20,444

 

55

%

Total Region One

 

11,371

 

 

 

8,446

 

 

 

44,885

 

 

 

23,851

 

 

 

Region Two

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

(10

)

(1

)%

 

 

447

 

14

%

 

 

Management contracts

 

3,221

 

38

%

1,408

 

20

%

6,992

 

29

%

2,879

 

19

%

Total Region Two

 

3,211

 

 

 

1,408

 

 

 

7,439

 

 

 

2,879

 

 

 

Region Three

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

1,514

 

8

%

402

 

7

%

3,585

 

10

%

1,404

 

8

%

Management contracts

 

5,976

 

22

%

5,648

 

72

%

20,010

 

37

%

16,765

 

42

%

Total Region Three

 

7,490

 

 

 

6,050

 

 

 

23,595

 

 

 

18,169

 

 

 

Region Four

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

824

 

8

%

719

 

7

%

2,690

 

8

%

2,355

 

7

%

Management contracts

 

4,612

 

20

%

3,471

 

29

%

17,584

 

24

%

10,808

 

30

%

Total Region Four

 

5,436

 

 

 

4,190

 

 

 

20,274

 

 

 

13,163

 

 

 

Region Five

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

3,815

 

18

%

334

 

5

%

12,658

 

19

%

1,312

 

7

%

Management contracts

 

3,337

 

41

%

1,335

 

34

%

11,782

 

43

%

4,369

 

38

%

Total Region Five

 

7,152

 

 

 

1,669

 

 

 

24,440

 

 

 

5,681

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Lease contracts

 

(1,580

)

162

%

(63

)

(100

)%

(1,273

)

113

%

1,073

 

100

%

Management contracts

 

6,996

 

(765

)%

(326

)

(85

)%

7,085

 

(548

)%

2,123

 

186

%

Total Other

 

5,416

 

 

 

(389

)

 

 

5,812

 

 

 

3,196

 

 

 

Total gross profit

 

40,076

 

 

 

21,374

 

 

 

126,445

 

 

 

66,939

 

 

 

General and administrative expenses

 

20,494

 

 

 

13,846

 

 

 

75,310

 

 

 

43,759

 

 

 

General and administrative expense percentage of gross profit

 

51

%

 

 

64

%

 

 

59

%

 

 

64

%

 

 

Depreciation and Amortization

 

7,959

 

 

 

1,723

 

 

 

23,704

 

 

 

5,258

 

 

 

Operating income

 

11,623

 

 

 

5,805

 

 

 

27,431

 

 

 

17,922

 

 

 

Other expenses (income):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

4,818

 

 

 

1,093

 

 

 

14,421

 

 

 

3,355

 

 

 

Interest income

 

(108

)

 

 

(61

)

 

 

(347

)

 

 

(181

)

 

 

 

 

4,710

 

 

 

1,032

 

 

 

14,074

 

 

 

3,174

 

 

 

Income before income taxes

 

6,913

 

 

 

4,773

 

 

 

13,357

 

 

 

14,748

 

 

 

Income tax expense

 

2,448

 

 

 

2,504

 

 

 

4,359

 

 

 

6,520

 

 

 

Net income

 

4,465

 

 

 

2,269

 

 

 

8,998

 

 

 

8,228

 

 

 

Less: Net income attributable to noncontrolling interest

 

721

 

 

 

75

 

 

 

2,070

 

 

 

232

 

 

 

Net income attributable to Standard Parking Corporation

 

$

3,744

 

 

 

$

2,194

 

 

 

$

6,928

 

 

 

$

7,996

 

 

 

 


(a)    Excludes reimbursed management contract revenue.

(b)   The nine months ended September 30, 2013 includes a net gain of $2,700 related to the sale of rights associated with certain contracts.  There were no

 

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similar payments received in 2012.

 

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Region One encompasses operations in Connecticut, Delaware, District of Columbia, Illinois, Indiana, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Virginia, West Virginia and Wisconsin.

 

Region Two encompasses event planning and transportation, our acquired valet business and our technology-based parking and traffic management systems.

 

Region Three encompasses operations in Canada, Arizona, California, Colorado, Hawaii, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming.

 

Region Four encompasses all major airport and transportation operations nationwide.

 

Region Five encompasses Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Oklahoma, Puerto Rico, Tennessee, and Texas.

 

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

 

Our CODM does not evaluate segments using discrete asset information.

 

13. 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, 2013

 

September 30, 2012

 

September 30, 2013

 

September 30, 2012

 

Net income

 

$

4,465

 

$

2,269

 

$

8,998

 

$

8,228

 

Effective portion of cash flow hedge

 

(312

)

64

 

849

 

153

 

Effect of foreign currency translation

 

32

 

138

 

(240

)

55

 

Comprehensive income

 

4,185

 

2,471

 

9,607

 

8,436

 

Less: comprehensive income attributable to noncontrolling interest

 

721

 

75

 

2,070

 

232

 

Comprehensive income attributable to Standard Parking Corporation

 

$

3,464

 

$

2,396

 

$

7,537

 

$

8,204

 

 

14.  Accumulated Other Comprehensive Income

 

Changes in accumulated other comprehensive income consists of the following components, net of tax (unaudited):

 

 

 

For the nine months ended September 30, 2013

 

 

 

Cash flow hedge

 

Foreign Currency

 

Total

 

Balance at December 31, 2012

 

$

(476

)

$

95

 

$

(381

)

Other comprehensive income before reclassifications

 

849

 

(240

)

609

 

Amounts reclassified from accumulated other comprehensive income

 

 

 

 

Net current period other comprehensive income

 

849

 

(240

)

609

 

Balance at September 30, 2013

 

$

373

 

$

(145

)

$

228

 

 

15. Income Taxes

 

For the three months ended September 30, 2013, the Company recognized income tax expense of $2,448 on pre-tax earnings of $6,913 compared to $2,504 income tax expense on pre-tax earnings of $4,773 for the three months ended September 30, 2012. For the nine months ended September 30, 2013, the Company recognized income tax expense of $4,359 on pre-tax earnings of $13,357 compared to $6,520 income tax expense on pre-tax earnings of $14,748 for the nine months ended September 30, 2012. The effective tax rate was approximately 32.6% for the nine months ended September 30, 2013 compared to approximately 44.2% for the nine months ended September 30, 2012. The effective tax rate for the nine months ended September 30, 2013 was favorably impacted by the discrete benefit of approximately $376 for the retroactive extension of the Work Opportunity Tax Credit (“WOTC”) and other similar federal income tax credit programs that were enacted as part of the American Taxpayer Relief Act in January of 2013 and approximately $214 of favorable 2012 Federal provision to return true-up adjustments. Without these discrete benefits, our effective tax rate would have been 37.1% for the nine months ended September 30, 2013.

 

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As of September 30, 2013, the Company has not identified any uncertain tax positions that would have a material impact on the Company’s financial position or income tax expense in future periods. 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, 2013 are shown below:

 

2007 – 2012

 

United States—federal income tax

 

2007 – 2012

 

United States—state and local income tax

 

2010 – 2013

 

Canada

 

 

16. 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 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 that 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.

 

17. 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. As of September 30, 2013, the Company’s financial assets relate to Interest Rate Swaps of $621 and the Company’s financial liabilities relate to contingent acquisition consideration payments of $2,562.

 

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.

 

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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 10% to 95%, with a weighted average discount rate of 11%. The following tables set forth the Company’s financial assets and liabilities measured at fair value on a recurring basis and the basis of measurement at September 30, 2013 and December 31, 2012 (unaudited):

 

 

 

Total Fair Value
Measurement at

September 30, 2013

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

621

 

 

621

 

 

Liabilities:

 

 

 

 

 

 

 

Contingent acquisition consideration

 

$

(2,562

)

 

 

 

 

(2,562

)

 

 

 

Total Fair Value
Measurement at
December 31, 2012

 

Level 1

 

Level 2

 

Level 3

 

Liabilities:

 

 

 

 

 

 

 

 

 

Interest Rate Swaps

 

$

(794

)

 

(794

)

 

Contingent acquisition consideration

 

$

(3,324

)

 

 

(3,324

)

 

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, unaudited):

 

 

 

Contingent
acquisition
consideration

 

Balance at December 31, 2012

 

$

(3,324

)

Contingent earn-out payments-payments made to seller

 

392

 

Contingent earn-out payments-change in fair value

 

370

 

Balance at September 30, 2013

 

$

(2,562

)

 

For the three and nine months ended September 30, 2013 and 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.

 

The Company recognized a benefit of $62 and $370 for the three and nine months ended September 30, 2013, 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. For the three and nine months ended September 30, 2012, the Company recognized a benefit of $169 and $368, 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.

 

Nonrecurring Fair Value Measurements

 

The purchase price of business acquisitions is primarily allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition dates, with the excess recorded as goodwill. We utilize Level 3 inputs in the determination of the initial fair value. Non-financial assets such as goodwill, intangible assets, and leasehold improvements, equipment land and construction in progress are subsequently measured at fair value when there is an indicator of impairment and recorded at fair value only when an impairment is recognized. We assess the impairment of intangible assets annually or whenever events or changes in circumstances indicate that the carrying amount of an intangible asset may not be recoverable. The fair value of our goodwill and intangible assets is not estimated if there is no change in events or circumstances that indicate the carrying amount of an intangible asset may not be recoverable. We have not recorded impairment charges related to our business acquisitions.

 

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/A for the year ended December 31, 2012.

 

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Table of Contents

 

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 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: risks relating to the Restatement (including, without limitation the time, costs and expenses associated with the restatement potential inquiries from the SEC and for Nasdaq, the potential material adverse effect on the price of our common stock and possible stockholder lawsuits); 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 (defined below) 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; the economic impact to 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 Central 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 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 Part II. Item 1A (Risk Factors) of this Form 10-Q and our other filings with the Securities and Exchange Commission, including the disclosures under “Risk Factors” in those filings.  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.

 

Explanatory Note

 

The discussion and analysis below gives effect to the Restatement, which is to reflect a correction in the manner in which the Company has accounted for deficiency payments under the Bradley Agreement.  Cumulative deficiency payments under the Bradley Agreement, net of reimbursements, had previously been recorded as an accounts receivable by the Company.

 

At the time of the Company’s initial accounting for the Bradley Agreement in 2000, the Company’s revenue projections as well as there would be sufficient funds available to the projections included in the Bradley Agreement and in the feasibility study prepared by the State’s parking consultant showed that the State would be able to repay deficiency payments, if any, over the term of the Bradley Agreement.  The Company continues to believe that the State will be able to repay and expects that the State will ultimately repay the deficiency payments made by the Company under the Bradley Agreement.  However, it has now been determined that the recovery of the deficiency payments represents a contingency and, accordingly, (i) the deficiency payments made by the Company under the Bradley Agreement should have been, and should continue to be, recorded as cost of parking services in the reporting periods in which such payments were made, and (ii) the repayments to the Company of the principal, interest and premium related to deficiency payments should have been, and should continue to be, recognized as a reduction to the cost of parking services the reporting periods in which such repayments were received. This approach is different from the Company’s historical practice of reporting such deficiency payments as accounts receivable.

 

On October 2, 2012, we completed our acquisition (the “Central Merger”) of Central Parking Corporation. Central, together with its affiliates, was a leading provider of parking and related services, which operated parking facilities in 38 states, the District of Columbia and Puerto Rico and provided ancillary products and services, including parking consulting, shuttle, valet, on-street and parking meter enforcement and billing and collection services. Our consolidated results of operations for the three and nine months ended September 30, 2013 include Central’s results of operations for the period. Our consolidated results of operations for the three and nine months ended September 30, 2012 do not include any of Central’s results of operations.

 

During September 2013, the Company finalized the purchase price allocation for the Central Merger.

 

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

 

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and varying space utilization by parking facility type and location. As of September 30, 2013, we operated approximately 80% of our locations under management contracts and approximately 20% of our locations under leases. For the nine months ended September 30, 2013, we derived approximately 78% of our gross profit under management contracts and approximately 22% 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, 2013, we operated approximately 80% of our locations under management contracts, and for the nine months ended September 30, 2013 we derived approximately 78% of our gross profit under management contracts. Only approximately 41% 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, excluding Central, rate for the twelve-month period ended September 30, 2013 was approximately 88%, compared to approximately 90% for the twelve-month period ended September 30, 2012, which also reflects our decision not to renew, or to terminate, unprofitable contracts and divestitures required to be made by the Department of Justice in connection with the Central Merger.

 

Excluding Central, average gross profit per location for the nine months ended September 30, 2013 did not significantly change compared to the nine months ended September 30, 2012, average gross profit per location was $31.7 thousand in 2013 and $31.5 thousand in 2012.

 

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, 2013

 

December 31, 2012

 

September 30, 2012

 

Managed facilities

 

3,420

 

3,325

 

1,962

 

Leased facilities

 

857

 

939

 

199

 

Total facilities

 

4,277

 

4,264

 

2,161

 

 

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.

 

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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 types 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.

 

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 (“CODM”), in deciding how to allocate resources. Our CODM 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), cost of parking services and gross profit by regions for the three and nine months ended September 30, 2013 and 2012 with information related to prior periods recast to conform to the current regional alignment.

 

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As noted previously, the financial results for the three and nine months ended September 30, 2012 do not include any of Central’s results of operations for the period due to the timing of the closing of the Central Merger on October 2, 2012.  The financial results for the three and nine months ended September 30, 2013 include Central’s results of operations for the periods.  To help understand the operating results for these quarters, the term “Central Operations” refers to the results of Central on a stand-alone basis and the term “Standard Operations” refers to the results of the Company on a stand-alone basis and not inclusive of results from the acquired operations of Central for the three and nine months ended September 30, 2013.

 

Region One encompasses operations in Connecticut, Delaware, District of Columbia, Illinois, Indiana, Kansas, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Virginia, West Virginia and Wisconsin.

 

Region Two encompasses event planning and transportation, our acquired valet business and our technology-based parking and traffic management systems.

 

Region Three encompasses operations in Canada, Arizona, California, Colorado, Hawaii, Nevada, New Mexico, Oregon, Utah, Washington, and Wyoming.

 

Region Four encompasses all major airport and transportation operations nationwide.

 

Region Five encompasses Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, Oklahoma, Puerto Rico, Tennessee, and Texas.

 

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

 

Three Months ended September 30, 2013 Compared to Three Months ended September 30, 2012

 

Segment revenue information is summarized as follows (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30,

 

 

 

Region One

 

Region Two

 

Region
Three

 

Region
Four

 

Region Five

 

Other

 

Total

 

Variance

 

 

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

2013

 

2012

 

Amount

 

%

 

 

 

(In millions )

 

Lease contract revenue:

 

 

 

 

 

 

 

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