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STAN > SEC Filings for STAN > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for STANDARD PARKING CORP

Form 10-Q for STANDARD PARKING CORP


9-Nov-2012

Quarterly Report


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

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

Important Information Regarding Forward-Looking Statements

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


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

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

Recent Events

Agreement and Plan of Merger

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

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

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

Credit Agreement

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

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

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

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

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


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

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

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

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

Interest Rate Swap Agreements

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

Registration Rights Agreement

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

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

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


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

Closing Agreements

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

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

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

For two years following the Closing Date:

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

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

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

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

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

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

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

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


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Hurricane Sandy

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

Overview

Our Business

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

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

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

General Business Trends

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

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


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Summary of Operating Facilities



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



                     September 30, 2012   December 31, 2011   September 30, 2011
Managed facilities                1,962               1,953                1,970
Leased facilities                   199                 201                  212
Total facilities                  2,161               2,154                2,182

Revenue

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

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

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

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

Reimbursed Management Contract Revenue

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

Cost of Parking Services

Our cost of parking services consists of the following:

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

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

Reimbursed Management Contract Expense

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

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