SP Plus Corp - Quarter Report: 2008 June (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2008

 

Commission file number: 000-50796

 

 

STANDARD PARKING CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

 

900 N. Michigan Avenue, Suite 1600

Chicago, Illinois 60611-1542

(Address of Principal Executive Offices, Including Zip Code)

 

(312) 274-2000

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Indicate by check mark whether the registrant 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):

 

 

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 August 1, 2008, there were 17,840,298 shares of common stock of the registrant outstanding.

 

 

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STANDARD PARKING CORPORATION
FORM 10-Q INDEX

 

Part I. Financial Information
Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007	3
	Condensed Consolidated Statements of Income (Unaudited) for the three months ended June 30, 2008 and June 30, 2007 and the six months ended June 30, 2008 and June 30, 2007	4
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2008 and June 30, 2007	5
	Notes to Condensed Consolidated Interim Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4.	Controls and Procedures	28
Part II. Other Information
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29
Item 4.	Submission of Matters to a Vote of Security Holders	29
Item 6.	Exhibits	31
Signatures		32
Index to Exhibits		33

 

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PART I. FINANCIAL INFORMATION

 

Item 1.         Financial Statements

 

STANDARD PARKING CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

		June 30, 2008			December 31, 2007
		(Unaudited)			(see Note)
ASSETS
Current assets:
Cash and cash equivalents		$	11,595		$	8,466
Notes and accounts receivable, net		44,340			42,706
Prepaid expenses and supplies		3,188			2,765
Deferred taxes		6,247			6,247
Total current assets		65,370			60,184
Leasehold improvements, equipment and construction in progress, net		16,151			15,695
Advances and deposits		1,873			1,382
Long-term receivables, net		5,747			4,854
Intangible and other assets, net		5,137			4,350
Cost of contracts, net		10,404			7,688
Goodwill		124,530			119,890
Deferred taxes		—			1,345
Total assets		$	229,212		$	215,388
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	46,587		$	42,941
Accrued and other current liabilities		31,612			33,195
Long-term borrowings		1,419			1,938
Total current liabilities		79,618			78,074
Deferred taxes		2,496			—
Long-term borrowings, excluding current portion		85,448			78,425
Other long-term liabilities		24,467			19,550
Stockholders’ equity (1):
Common stock, par value $.001 per share; 21,300,000 shares authorized; 17,873,658 and 18,371,308 shares issued and outstanding as of June 30, 2008 and December 31, 2007, respectively		18			18
Additional paid-in capital		139,144			150,520
Accumulated other comprehensive income		455			482
Treasury stock, at cost, 72,263 and 48,474 shares as of June 30, 2008 and December 31, 2007, respectively		(1,479		)	(1,172		)
Accumulated deficit		(100,955		)	(110,509		)
Total stockholders’ equity		37,183			39,339
Total liabilities and stockholders’ equity		$	229,212		$	215,388

 

Note:        The balance sheet at December 31, 2007 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.

 

(1)   Adjusted to reflect the effect of the 2-for-1 stock split in January 2008.  See Note 2. Stock Split for additional information.

 

See Notes to Condensed Consolidated Interim Financial Statements.

 

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STANDARD PARKING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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

 

		Three Months Ended						Six Months Ended
		June 30, 2008			June 30, 2007			June 30, 2008			June 30, 2007
Parking services revenue:
Lease contracts		$	40,003		$	35,988		$	77,697		$	71,186
Management contracts		36,415			28,539			72,295			56,735
		76,418			64,527			149,992			127,921
Reimbursed management contract expense		99,317			87,588			198,768			178,085
Total revenue		175,735			152,115			348,760			306,006
Cost of parking services:
Lease contracts		34,711			31,768			69,604			63,786
Management contracts		18,162			11,703			35,208			23,427
		52,873			43,471			104,812			87,213
Reimbursed management contract expense		99,317			87,588			198,768			178,085
Total cost of parking services		152,190			131,059			303,580			265,298
Gross profit:
Lease contracts		5,292			4,220			8,093			7,400
Management contracts		18,253			16,836			37,087			33,308
Total gross profit		23,545			21,056			45,180			40,708
General and administrative expenses (1)		12,029			10,844			23,440			21,658
Depreciation and amortization		1,579			1,276			2,950			2,528
Operating income		9,937			8,936			18,790			16,522
Other expenses (income):
Interest expense		1,086			1,770			2,604			3,573
Interest income		(41		)	(227		)	(83		)	(446		)
		1,045			1,543			2,521			3,127
Minority interest		3			89			125			249
Income before income taxes		8,889			7,304			16,144			13,146
Income tax expense		3,612			2,953			6,590			5,313
Net income		$	5,277		$	4,351		$	9,554		$	7,833
Common stock data (2):
Net income per share:
Basic		$	0.29		$	0.23		$	0.53		$	0.41
Diluted		$	0.29		$	0.22		$	0.52		$	0.40
Weighted average shares outstanding:
Basic		17,891,155			18,930,560			18,007,316			19,068,612
Diluted		18,265,653			19,376,018			18,400,527			19,547,670

 

(1)   Non-cash compensation expense of $412 and $465 for the three and six months ended June 30, 2008, respectively, and $244 and $372 for the three and six months ended June 30, 2007, respectively, is included in general and administrative expense.

 

(2)   Share and per share amounts have been retroactively adjusted for the effect of the 2-for-1 stock split in January 2008.  See Note 2. Stock Split for additional information.

 

See Notes to Condensed Consolidated Interim Financial Statements.

 

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STANDARD PARKING CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

 

		Six Months Ended
		June 30, 2008			June 30, 2007
Operating activities:
Net income		$	9,554		$	7,833
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization		2,775			2,499
Loss on sale of assets		175			29
Amortization of debt issuance costs		142			136
Non-cash stock-based compensation		465			465
Excess tax benefit related to stock option exercises		(491		)	(944		)
Reversal for losses on accounts receivable		(49		)	(196		)
Deferred income taxes		3,841			3,710
Change in operating assets and liabilities		606			3,029
Net cash provided by operating activities		17,018			16,561
Investing activities:
Acquisitions		(5,457		)	—
Purchase of leaseholds improvements and equipment		(2,515		)	(2,483		)
Cost of contracts purchased		(185		)	—
Contingent purchase payments		(47		)	(102		)
Net cash used in investing activities		(8,204		)	(2,585		)
Financing activities:
Repurchase of common stock		(12,926		)	(9,998		)
Proceeds from exercise of stock options		342			754
Tax benefit related to stock option exercises		491			944
Proceeds from (payments on) senior credit facility		7,450			(5,050		)
Payments on long-term borrowings		(56		)	(77		)
Payments of debt issuance costs		(35		)	(35		)
Payments on capital leases		(891		)	(1,195		)
Net cash used in financing activities		(5,625		)	(14,657		)
Effect of exchange rate changes on cash and cash equivalents		(60		)	17
Increase (decrease) in cash and cash equivalents		3,129			(664		)
Cash and cash equivalents at beginning of period		8,466			8,058
Cash and cash equivalents at end of period		$	11,595		$	7,394
Supplemental disclosures:
Cash paid during the period for:
Interest		$	2,806		$	3,372
Income taxes		1,614			719

 

See Notes to Condensed Consolidated Interim Financial Statements.

 

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STANDARD PARKING CORPORATION
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

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

 

1.                 Basis of Presentation

 

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

 

In the opinion of management, all adjustments (consisting only of adjustments of a normal and recurring nature) considered necessary for a fair presentation of the financial position and results of operations have been included. Operating results for the three-month and six-month periods ended June 30, 2008 are not necessarily indicative of the results that might be expected for any other interim period or the fiscal year ending December 31, 2008. The financial statements presented in this report should be read in conjunction with the consolidated financial statements and footnotes thereto included in our 2007 Annual Report on Form 10-K filed March 14, 2008.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries, and joint ventures in which the Company has more than 50% ownership interest. Minority interest recorded in the consolidated statement of income is the joint venture partner’s non-controlling interest in consolidated joint ventures. We have interests in twelve joint ventures, each of which operates between one and twenty-two parking facilities. Of the twelve joint ventures, nine are majority owned by us and are consolidated into our financial statements, and three are single purpose entities where we have a 50% interest or a minority interest. Investments in joint ventures where the Company has a 50% or less non-controlling ownership interest are accounted for under the equity method. All significant intercompany profits, transactions and balances have been eliminated in consolidation.

 

Variable Interest Entities

 

Equity		Commencement of Operations		Nature of Activities		% Ownership		Locations
Other investments in VIEs		Sep 93 — Jan 08		Management of parking lots, shuttle operations and parking meters		50	%	Various states

 

The existing VIEs in which we have a variable interest are not consolidated into our financial statements because we are not the primary beneficiary.

 

2. Stock Split

 

On December 4, 2007, the Board of Directors declared a 2-for-1 stock split in the form of a 100% common stock dividend to stockholders of record as of the close of business on January 8, 2008, which was distributed on January 17, 2008.  All share and per share data included in the consolidated financial statements and accompanying notes have been adjusted to reflect this stock split.

 

3. Stock-Based Compensation

 

Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R using the modified prospective method and consequently we have not retroactively adjusted prior period results. Under this method, compensation costs for the six months ended June 30, 2008 and 2007 are based on the estimated fair value of the respective options and the proportion vesting in the period. Deductions for stock-based employee compensation expense for the three and six months ended June 30, 2008 and 2007 were calculated using the Black-Scholes option pricing model. Allocation of compensation expense was made using historical option terms for option grants made to our employees and historical price volatility.

 

The Company has an amended and restated Long-Term Incentive Plan that was adopted in conjunction with the IPO.  On February 27, 2008, our Board approved an amendment to our Long-Term Incentive Plan, subject to shareholder approval, that increased the maximum number of shares of common stock available for awards under the Long-Term Incentive Plan from 2,000,000 to 2,175,000 and extended the Plan’s termination date. Our shareholders approved this Plan amendment on April 22, 2008, and the Plan now terminates twenty years from the date of such approval, or April 22, 2028.  At June 30, 2008, 875,333 shares were outstanding under the Plan.  In most cases, options granted under the Plan vest at the end of a three-year period from the date of the award. Options are granted with an exercise price equal to the closing price at the date of grant.

 

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Stock Options

 

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 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. Historically, the expected life for options was calculated using the simplified method. The simplified method was calculated as the vesting term plus the contractual term divided by two.

 

		2007
Estimated weighted-average fair value of options granted		$	7.86
		2007
Weighted average dividend yield		0		%
Weighted average volatility		34.84		%
Weighted average risk free interest rate		4.65		%
Expected life of option (years)		7

 

There were no options granted during the six months ended June 30, 2008.

 

On January 24, 2008, we issued a stock grant totaling 1,084 shares to a certain director.  The total value of the grant was $25 and is included in general and administrative expenses.

 

On April 22, 2008, we issued stock grants totaling 18,900 shares to certain directors.  The total value of the grant was $385 and is included in general and administrative expenses.

 

The Company recognized $385 and $202 of stock based compensation expense (which includes the above stock grants to certain directors), for the three months ended June 30, 2008 and 2007, respectively, which is included in general and administrative expense. The Company recognized $411 and $279 of stock based compensation expense, for the six months ended June 30, 2008 and 2007, respectively, which is also included in general and administrative expense.  As of June 30, 2008, there was no unrecognized compensation costs related to unvested options.

 

Restricted Stock

 

In December 2006, the Board of Directors adopted a performance-based incentive program under our Long-Term Incentive Plan. This new program provided participating executives with the opportunity to earn a combination of stock (50%) and cash (50%) if certain performance targets for pre-tax income and pre-tax free cash flow are achieved. On February 23, 2007, certain participating executives became entitled to performance restricted stock based on the stock price at the commencement of the first three year performance cycle (2007 – 2009) and as a result 16,404 shares were issued subject to vesting upon the achievement of the performance goals. On April 13, 2007, an additional 13,294 shares of the performance restricted stock were issued subject to vesting upon the achievement of the three year performance goals to the remaining participating executives.   On December 31, 2007, 3,849 shares were released free of restrictions in accordance with the achievement of the first year performance goals.

 

In March 2008, the Company’s Compensation Committee and the Board of Directors approved a one-time grant of 750,000 restricted stock units which were awarded to members of our senior management team on July 1, 2008 in lieu of any further incentive compensation pursuant to the restricted stock and cash award program for cycles that otherwise would have begun in 2008 and thereafter.

 

In accordance with SFAS No. 123R, recording of stock-based compensation expense for awards with performance conditions is based on the probable outcome of that performance condition.  The Company recognized $27 and $42 of stock-based compensation expense and $27 and $42 of cash compensation expense related to the performance-based incentive program, for the three months ended June 30, 2008 and 2007, respectively, which is included in general and administrative expenses.  The Company recognized $54 and $93 of stock-based compensation expense and $54 and $93 of cash compensation expense related to the performance-based incentive program, for the six months ended June 30, 2008 and 2007, respectively, which is included in general and administrative expenses.  As of June 30, 2008, there was $201 of unrecognized compensation costs related to the performance-based incentive program which is expected to be recognized over a weighted average period of 1.5 years.

 

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4.                 Net Income Per Common Share

 

In accordance with SFAS No.128, Earnings Per Share (“EPS”), 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 using the treasury-stock method.

 

A reconciliation of the weighted average basic shares outstanding to the weighted average diluted shares outstanding is as follows:

 

		Three Months Ended June 30,						Six Months Ended June 30,
		(Unaudited)						(Unaudited)
		2008			2007			2008			2007
Net income		$	5,277		$	4,351		$	9,554		$	7,833
Weighted average basic shares outstanding		17,891,155			18,930,560			18,007,316			19,068,612
Effect of dilutive stock options		374,498			445,458			393,211			479,058
Weighted average diluted shares outstanding		18,265,653			19,376,018			18,400,527			19,547,670
Net income per share
Basic		$	0.29		$	0.23		$	0.53		$	0.41
Diluted		$	0.29		$	0.22		$	0.52		$	0.40

 

For the six months ended June 30, 2008 and 2007, 25,849 and 29,698 shares, respectively, of performance based restricted stock were not included in the computation of weighted diluted common share amounts because the number of shares ultimately issued is contingent on the Company’s performance goals, which were not achieved as of that date.

 

On March 11, 2008, our Board of Directors approved an award of 750,000 restricted stock units to senior management, which was subsequently made on July 1, 2008 under the provisions of the existing Long Term Incentive Plan.

 

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

 

5.                 Recently Issued Accounting Pronouncements

 

In September 2006, the FASB issued Statement of Financial Accounting Standards, Fair Value Measurements (“Statement No. 157”). Statement No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The statement does not require new fair value measurements, but is applied to the extent that other accounting pronouncements require or permit fair value measurements. The statement emphasizes that fair value is a market-based measurement that should be determined based on the assumptions that market participants would use in pricing an asset or liability. Companies will be required to disclose the extent to which fair value is used to measure assets and liabilities, the inputs used to develop the measurements, and the effect of certain of the measurements on earnings (or changes in net assets) for the period. Certain requirements of Statement No. 157 are required for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The effective date for other requirements of Statement No. 157 has been deferred for one year by the FASB. The Company adopted the sections of Statement No. 157 which are effective for fiscal years beginning after November 15, 2007 and there was no impact on the Company’s consolidated financial statements. The Company is currently evaluating the impact of the delayed Sections of Statement No. 157 on its consolidated financial statements, but is not yet in a position to determine the impact of its adoption.

 

In December 2007, the FASB issued Statement No. 141 (Revised 2007), Business Combinations (“Statement No. 141R”), effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Statement No. 141R establishes principles and requirements on how an acquirer recognizes and measures in its financial statements identifiable assets acquired, liabilities assumed, noncontrolling interests in the acquiree, goodwill or gain from a bargain purchase and accounting for transaction costs. Additionally, Statement No. 141R determines what information must be disclosed to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The Company will adopt Statement No. 141R on January 1, 2009.

 

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In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51. (“Statement No. 160”) Statement No. 160 requires entities to report noncontrolling (minority) interests as a component of shareholders’ equity on the balance sheet; include all earnings of a consolidated subsidiary in consolidated results of operations; and treat all transactions between the parent and its noncontrolling interest holder that increase or decrease the noncontrolling interest as equity provided the parent does not lose control. Statement No. 160 is effective for fiscal years beginning

on or after December 15, 2008, must be adopted concurrently with SFAS 141R, and adoption is prospective only; however, presentation and disclosure requirements described above must be applied retrospectively. The Company is currently evaluating the impact that Statement No. 160 will have on its financial statements and disclosures.

 

6.                 Acquisitions

 

During February 2008, the Company acquired certain assets of G.O. Parking in Chicago, Illinois.  Consideration for the acquisition was approximately $5,261 with an additional $3,000 to be paid in five annual installments of $600, commencing February 2009.  In addition, the Company paid and capitalized $196 in acquisition costs.

 

During the year ended December 31, 2007, the Company completed four acquisitions and purchased certain assets of a valet operation in Seattle, Washington. Consideration for all acquisitions was approximately $6,550, ($5,928 paid in cash and $622 through the sale of certain contract rights in a non-cash transaction) with an estimated $1,525 to be paid in the future based upon financial performance compared to forecast. In addition, the Company paid and capitalized $274 in acquisition costs. A summary of the acquisitions follows:

 

·                  In September 2007, we acquired certain assets of Downtown Parking, LLC. a parking operator in Chicago, Illinois.

 

·                  In September 2007, we acquired certain assets of Alliance International Security, Inc., a regional security services firm based in Los Angeles, California.

 

·                  In July 2007, we acquired contract rights for certain locations in Los Angeles, California from a related party.

 

·                  In July 2007, we acquired certain valet parking locations in Honolulu, Hawaii.

 

The acquisitions for 2008 and 2007 were accounted for using the purchase method of accounting.  The purchase price allocations are based on preliminary estimates.  These estimates are subject to revision after the Company completes its fair value analysis.  The Company financed the acquisitions through additional term borrowings under the senior credit facility and existing cash. The results of operations of these acquisitions are included in the Company’s consolidated statement of income from the date of acquisition. None of the acquisitions, either individually or in the aggregate is considered material to the Company.

 

7.  Leasehold Improvements, Equipment and Construction in Progress, net

 

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

 

		Ranges of Estimated useful life		June 30, 2008			December 31, 2007
Equipment		2-10 years		$	31,366		$	30,234
Leasehold improvements		Shorter of lease term or economic life up to 10 years		10,160			10,082
Construction in progress				5,048			4,129
				46,574			44,445
Less accumulated depreciation and amortization				(30,423		)	(28,750		)
Leasehold improvements, equipments and construction in progress, net				$	16,151		$	15,695

 

Depreciation expense was $1,073 and $2,067 for the three and six months ended June 30, 2008, respectively, and $1,270 and $2,517 for the three and six months ended June 30, 2007, respectively. Depreciation includes losses on abandonments of leasehold improvements and equipment of $175 and $29 in 2008 and 2007, respectively.

 

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8.  Cost of Contracts, net

 

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

 

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

 

		June 30, 2008			December 31, 2007
		(Unaudited)
Cost of contracts		$	43,295		$	39,953
Accumulated amortization		(32,891		)	(32,265		)
Cost of contracts, net		$	10,404		$	7,688

 

Amortization expense related to cost of contract was $335 and $640 for the three and six months ended June 30, 2008, respectively, and $234 and $467 for the three and six months ended June 30, 2007, respectively.  The weighted average useful life is 10 years for 2008 and 7 years for 2007.

 

9.                 Goodwill and Intangible Assets

 

As of June 30, 2008 and December 31, 2007, the Company’s finite lived intangible assets amount to $324 and $193, respectively net of accumulated amortization of $182 and $36, which primarily consisted of non-compete agreements amortized over their contractual lives.

 

The change in the carrying amount of goodwill is summarized as follows:

 

Beginning balance at January 1, 2008		$	119,890
Effect of foreign currency translation		(102		)
Purchase price adjustment related to acquisitions		4,695
Contingency payments related to acquisitions		47
Ending balance at June 30, 2008		$	124,530

 

Amortization expense for intangible assets was $79 and $146 for the three and six months ended June 30, 2008, respectively, and $2 and $3 for the three and six months ended June 30, 2007, respectively.  As a result of the acquisitions which occurred during 2007, our contingent payments outstanding as of June 30, 2008 total $1,478 and will be paid over time based on performance. Such contingent payments will be accounted for as additional purchase price.

 

The Company has assigned its goodwill to its various reporting units. The following table reflects the changes in the carrying amounts of goodwill by reported segment for the six months ended June 30, 2008.

 

		Region One			Region Two			Region Three			Region Four			Total
Balance as of January 1, 2008		$	55,175		$	16,367		$	25,771		$	22,577		$	119,890
Acquired during the period		3,500			—			1,242			—			4,742
Foreign currency translation		—			(102		)	—			—			(102		)
Balance as of June 30, 2008		$	58,675		$	16,265		$	27,013		$	22,577		$	124,530

 

10.          Long-Term Receivables

 

Long-term receivables, net, consist of the following:

 

		Amount Outstanding
		June 30, 2008			December 31, 2007
		(Unaudited)
Bradley International Airport
Deficiency payments		$	4,987		$	4,135
Other Bradley related, net		3,203			3,203
Valuation allowance		(2,484		)	(2,484		)
Net amount related to Bradley other long-term receivables, net		5,706			4,854
Other long-term receivables, net		41			—
Total long-term receivables, net		$	5,747		$	4,854

 

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We entered into a 25-year agreement with the State of Connecticut that expires on April 6, 2025, under which we operate the surface parking and 3,500 garage parking spaces at Bradley International Airport located in the Hartford, Connecticut metropolitan area. The parking garage was financed on April 6, 2000 through the issuance of $53,800 of State of Connecticut special facility revenue bonds, representing $47,700 non-taxable Series A bonds and a separate taxable issuance of $6,100 Series B bonds. The Series B bonds were retired on July 1, 2006 according to the terms of the indenture. The Bradley agreement provides that we deposit with a trustee for the bondholders all gross revenues collected from operations of the surface and garage parking, and from these gross revenues, the trustee pays debt service on the special facility revenue bonds, operating and capital maintenance expenses of the surface

and garage parking facilities and specific annual guaranteed minimum payments to the State. Principal and interest on the Bradley special facility revenue bonds increase from approximately $3,600 in lease year 2002 to approximately $4,500 in lease year 2025. Our annual guaranteed minimum payments to the State increase from approximately $8,300 in lease year 2002 to approximately $13,200 in lease year 2024.

 

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. In the six months ended June 30, 2008, we made deficiency payments (net of repayments) of $851 and did not record or receive any interest and premium income related to deficiency repayments from the trustee. In the six months ended June 30, 2007, we received repayments (net of deficiency payments) of $358 and received $273 for interest and premium income on deficiency repayments from the trustee. The total receivable from the trustee for interest and premium income related to deficiency repayments as of June 30, 2008 was $52 compared to $82 as of June 30, 2007.

 

The deficiency payments represent contingent interest bearing advances to the trustee to cover operating cash flow requirements. The payments, if any, are recorded as a receivable by us for which we are reimbursed from time to time as provided in the trust agreement. As of June 30, 2008, we have advanced to the trustee $4,987, net of reimbursements. We believe these advances to be fully recoverable and therefore have not recorded a valuation allowance for them. We do not guarantee the payment of any principal or interest on any debt obligations of the State of Connecticut or the trustee. Total cumulative net management fees related to Bradley are $5,806. Prior to 2003, we recognized a total of $2,506 in fees. A full valuation allowance was recorded against these fees during the year ended December 31, 2003. Due to the existence of outstanding guarantor payments, $3,300 in management fees have not been recognized as of June 30, 2008.

 

11.          Borrowing Arrangements

 

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

 

				Amount Outstanding
		Due Date		June 30, 2008			December 31, 2007
				(Unaudited)
Senior credit facility		June 2011		$	81,600		$	74,150
Capital lease obligations		Various		3,784			4,649
Obligations on Seller notes and other		Various		1,483			1,564
				86,867			80,363
Less current portion				1,419			1,938
				$	85,448		$	78,425

 

Senior Credit Facility

 

The senior credit facility consists of $135,000 revolving credit facility that will expire on June 29, 2011. The revolving credit facility includes a letter of credit sub-facility with a sublimit of $50,000 and a swing line sub-facility with a sublimit of $10,000.

 

The revolving credit facility bears interest, at our option, at either (1) LIBOR plus the applicable LIBOR Margin ranging between 1.50% and 2.25% depending on the ratio of our total funded indebtedness to our EBITDA from time to time (“Total Debt Ratio”) or (2) the Base Rate (as defined below) plus the applicable Base Rate Margin ranging between 0.00% and 0.75% depending on our Total Debt Ratio. We may elect interest periods of one, two, three or six months for LIBOR based borrowings. The Base Rate is the greater of (i) the rate publicly announced from time to time by Bank of America, N.A. as its “prime rate”, or (ii) the overnight federal funds rate plus 0.50%.

 

The senior credit facility includes a fixed charge ratio covenant, a total debt to EBITDA ratio covenant, a limit on our ability

 

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to incur additional indebtedness, issue preferred stock or pay dividends, and certain other restrictions on our activities. We are required to repay borrowings under the senior credit facility out of the proceeds of future issuances of debt or equity securities and asset sales, subject to certain customary exceptions. The senior credit facility is secured by substantially all of our assets and all assets acquired in the future (including a pledge of 100% of the stock of our existing and future domestic guarantor subsidiaries and 65% of the stock of our existing and future foreign subsidiaries).

 

We are in compliance with all of our financial covenants as of June 30, 2008.

 

The weighted average interest rate on our senior credit facility at June 30, 2008 and December 31, 2007 was 3.8% and

5.4%, respectively. The rate includes all outstanding LIBOR contracts, interest rate cap effect and letters of credit. The weighted average interest rate on outstanding borrowings, not including letters of credit, was 4.4% and 6.5% at June 30, 2008 and December 31, 2007, respectively.

 

At June 30, 2008, we had $21,024 of letters of credit outstanding under the senior credit facility, borrowings against the senior credit facility aggregated $81,600, and we had $32,376 available under the senior credit facility.

 

We have entered into various financing agreements, which were used for the purchase of equipment.

 

On July 15, 2008, we entered into an amended and restated credit agreement.  See Note 17 Subsequent Event.

 

12.          Stock Repurchase

 

2008 Stock Repurchases

 

In December 2007, the Board of Directors authorized us to repurchase shares of our common stock, on the open market or through private purchases, up to $25,000 in aggregate.  As of December 31, 2007, $22,882 remained available for repurchase under this authorization.

 

During the first quarter of 2008 we repurchased 257,125 shares at an average price of $20.79 per share, including average commissions of $0.03 per share, on the open market.  Our majority shareholder sold to us 120,111 shares in the first quarter at an average price of $20.76 per share.  The total value of the first quarter transactions was $7,839.  214,500 shares were retired in March 2008 and the remaining 162,736 shares were retired in June 2008.

 

During the second quarter of 2008 we repurchased 120,000 shares at an average price of $20.70 per share, including average commissions of $0.03 per share, on the open market.  Our majority shareholder sold to us 125,964 shares in the second quarter at an average price of $20.67 per share.  The total value of the second quarter transactions was $5,087.  173,701 shares were retired in June 2008 and the remaining 72,263 were held as treasury stock at June 30, 2008.

 

As of June 30, 2008, $9,955 remained available for repurchase under the December 2007 authorization by the Board of Directors.

 

2007 Stock Repurchases

 

In March 2007 the Board of Directors authorized us to repurchase shares of our common stock, on the open market or through private purchases, up to $20,000 in aggregate.  This repurchase program was completed during the fourth quarter of 2007.

 

During the first quarter of 2007 we repurchased 95,278 shares at an average price of $17.57 per share, including average commissions of $0.01 per share, on the open market. Our majority shareholder sold to us 100,000 shares in the first quarter at an average price of $17.56 per share. The total value of the first quarter transactions was $3,430. All treasury shares were retired in March 2007.

 

During the second quarter of 2007 we repurchased 175,600 shares at an average price of $18.33 per share, including average commissions of $0.01 per share, on the open market.  Our majority shareholder sold to us 182,808 shares in the second quarter at an average price of $18.32 per share.  The total value of the second quarter transactions was $6,568.  All treasury shares were retired during the second quarter.

 

13.          Domestic and Foreign Operations

 

Our business activities consist of domestic and foreign operations. Foreign operations are conducted in Canada. Revenue attributable to foreign operations was less than 10% of consolidated revenues for each of the periods ended June 30, 2008 and June 30, 2007.

 

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A summary of information about our foreign and domestic operations is as follows:

 

		For the three months ended						For the six months ended
		June 30, 2008			June 30, 2007			June 30, 2008			June 30, 2007
		(Unaudited)						(Unaudited)
Total revenues, excluding reimbursement of management contract expenses:
Domestic		$	75,192		$	63,535		$	147,712		$	125,972
Foreign		1,226			992			2,280			1,949
Consolidated		$	76,418		$	64,527		$	149,992		$	127,921
Operating income:
Domestic		$	9,530		$	8,631		$	18,102		$	16,046
Foreign		407			305			688			476
Consolidated		$	9,937		$	8,936		$	18,790		$	16,522
Net income before income taxes:
Domestic		$	8,470		$	6,988		$	15,429		$	12,647
Foreign		419			316			715			499
Consolidated		$	8,889		$	7,304		$	16,144		$	13,146

 

		June 30, 2008			December 31, 2007
Identifiable assets:
Domestic		$	220,261		$	207,375
Foreign		8,951			8,013
Consolidated		$	229,212		$	215,388

 

Business Unit Segment Information

 

SFAS No. 131 “Disclosures about Segments of an Enterprise and Related Information” (SFAS 131”), establishes annual and interim reporting standards for an enterprise’s operating segments and related disclosures about its products, services, geographic areas and major customers. An operating segment is defined as a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, and about which separate financial information is regularly evaluated by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources. The CODM, as defined by SFAS 131, is the Company’s President and Chief Executive Officer (“CEO”).

 

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.

 

The Company is managed based on regions administered by executive vice presidents. Three regions are generally organized geographically with the fourth region encompassing major airports and transportation operations nationwide. The following is a summary of revenues (excluding reimbursement of management contract expenses) and operating income before depreciation and amortization by regions for the three and six months ended June 30, 2008 and 2007. Information related to prior periods has been recast to conform to the current region alignment.

 

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In accordance with SFAS 131, the Company has provided this business unit segment information for all comparable prior periods. Segment information is summarized as follows (in thousands):

 

		For the three months ended						For the six months ended
		June 30, 2008			June 30, 2007			June 30, 2008			June 30, 2007
		(Unaudited)
Revenues(a):
Region One		$	29,107		$	25,705		$	57,028		$	50,333
Region Two		10,205			6,924			18,177			13,411
Region Three		15,421			14,002			31,607			28,931
Region Four		18,899			17,181			38,125			33,953
Other		2,786			715			5,055			1,293
Total revenues		$	76,418		$	64,527		$	149,992		$	127,921
Operating income (loss):
Region One		8,522			8,035			16,050			15,667
Region Two		4,554			2,790			7,816			5,318
Region Three		5,965			5,286			11,746			10,265
Region Four		4,401			4,033			9,024			8,167
Other		(11,926		)	(9,932		)	(22,896		)	(20,367		)
Operating income before depreciation and amortization		11,516			10,212			21,740			19,050
Depreciation and amortization		1,579			1,276			2,950			2,528
Total operating income		$	9,937		$	8,936		$	18,790		$	16,522
Other expenses (income):
Interest expense		$	1,086		$	1,770		$	2,604		$	3,573
Interest income		(41		)	(227		)	(83		)	(446		)
		1,045			1,543			2,521			3,127
Minority interest		3			89			125			249
Income before income taxes		8,889			7,304			16,144			13,146
Income tax expense (benefit)		3,612			2,953			6,590			5,313
Net income		$	5,277		$	4,351		$	9,554		$	7,833

 

(a)                                  Excludes reimbursement of management contract expenses.

 

Region One encompasses operations in Delaware, District of Columbia, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Minnesota, Missouri, New Hampshire, New Jersey, New York, North Carolina, Ohio, Rhode Island, Vermont, Virginia, and Wisconsin, along with regional general and administrative expenses.

 

Region Two encompasses operations in Alabama, British Columbia, Florida, Georgia, Louisiana, Ontario, Tennessee, and Texas, along with regional general and administrative expenses.

 

Region Three encompasses operations in Arizona, California, Colorado, Hawaii, Nevada, Utah, Washington, and Wyoming, along with regional general and administrative expenses.

 

Region Four encompasses all major airport and transportation operations nationwide, along with regional general and administrative expenses.

 

Other consists of ancillary revenue that is not specifically identifiable to a region and support office general and administrative expenses.

 

The CODM does not evaluate segments using discrete asset information.

 

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14.          Comprehensive Income

 

Comprehensive income consists of the following components:

 

		For the three months ended						For the six months ended
		June 30, 2008			June 30, 2007			June 30, 2008			June 30, 2007
		(Unaudited)						(Unaudited)
Net income		$	5,277		$	4,351		$	9,554		$	7,833
Revaluation of interest rate cap		(62		)	33			33			76
Effect of foreign currency translation		(5		)	144			(60		)	17
Comprehensive income		$	5,210		$	4,528		$	9,527		$	7,926

 

15. Income Taxes

 

For the three months ended June 30, 2008, the Company recognized income tax expense of $3,612 on pre-tax earnings of $8,889 compared to $2,933 income tax expense on pretax earnings of $7,304 for the three months ended June 30, 2007. For the six months ended June 30, 2008, the Company recognized income tax expense of $6,590 on pre-tax earnings of $16,144 compared to $5,313 income tax expense on pretax earnings of $13,146 for the six months ended June 30, 2007.  The increase in income tax expense is based on an effective tax rate of approximately 40.6% in the second quarter of 2008 compared to approximately 40.2% in the second quarter of 2007.  The change in the Company’s effective tax rate resulted from an increase in the Company’s state tax rate.

 

In July 2006, FASB issued Statement of Financial Accounting Standards Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109, “Accounting for Income Taxes”. FIN 48 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company recognizes potential interest and penalties related to uncertain tax positions, if any, in income tax expense. Upon adoption, the Company completed a detailed analysis of its tax positions and determined that the implementation of FIN 48 did not have an impact on the Company’s financial position or results from operations.  As of June 30, 2008, the Company has not identified any tax positions that would have a material impact on the Company’s financial position.

 

The tax years that remain subject to examination for the Company’s major tax jurisdictions at June 30, 2008 are shown below:

 

2004 – 2007		United States — federal income tax
2003 – 2007		United States — state and local income tax
2004 – 2007		Canada

 

16. Hurricane Katrina

 

On May 2, 2008, we entered into a definitive settlement agreement with our insurance carrier to finalize all of our open claims with respect to Hurricane Katrina. The settlement agreement is for $4,225 of which $2,000 was received previously. We are required to reimburse the owners of the leased and managed locations for property damage of approximately $2,360, of which $1,763 has been paid as of June 30, 2008.  After payment of settlement fees, expenses and other amounts due under contractual arrangements, we recorded $1,995 in pre-tax income in the second quarter of 2008, of which $1,623 was recorded as revenue and $372 was recorded as a reduction of general and administrative expenses.

 

17. Subsequent Event

 

On July 15, 2008, we entered into an amended and restated credit agreement with a group of six banks:  Bank of America, N.A., as administrative agent, issuing lender and as a lender; Wells Fargo Bank N.A., as syndication agent, issuing lender and as a lender; Fifth Third Bank, as a lender; JPMorgan Chase Bank, N.A., as a lender; U.S. Bank National Association, as a lender; and First Hawaiian Bank, as a lender.  This credit agreement amended and restated our credit facility dated June 29, 2006.

 

The senior credit facility was increased from $135,000 to $210,000.  The $210,000 revolving credit facility will expire in July 2013.  The revolving credit facility includes a letter of credit sub-facility with a sublimit of $50,000 and a swing line sub-facility with a sublimit of $10,000.

 

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

 

In July 2008 the Board of Directors authorized us to repurchase shares of our common stock, on the open market or through private purchases, up to an additional $60,000 in aggregate.

 

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

 

The following discussion will assist in understanding our financial position and results of operations. The information below should be read in conjunction with the consolidated financial statements, the related notes to the consolidated financial statements and our Form 10-K for the year ended December 31, 2007.

 

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as in this Quarterly Report generally. You should carefully review the risks described in this Quarterly Report as well as the risks described in other documents filed by us and from time to time with the Securities and Exchange Commission. In addition, when used in this Quarterly Report, the words “anticipates,” “plans,” “believes,” “estimates,” and “expects” and similar expressions are generally intended to identify forward-looking statements. Such statements are subject to a number of risks and uncertainties. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by these forward-looking statements or us. We undertake no obligation to revise these forward-looking statements to reflect any future events or circumstances.

 

We continue to be subject to certain factors that could cause our results to differ materially from expected and historical results (see the “Risk Factors” set forth in our 2007 Form 10-K filed on March 14, 2008).

 

Overview

 

Our Business

 

We manage parking facilities in urban markets and at airports across the United States and in three 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 revenues 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 revenues 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 June 30, 2008, we operated 89% of our locations under management contracts and 11% under leases.

 

In evaluating our financial condition and operating performance, management’s primary focus is on our gross profit, total general and administrative expense and general and administrative expense 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 June 30, 2008, 89% of our locations were operated under management contract and 82% of our gross profit for the period ended June 30, 2008 was derived from management contracts. Only 48% of total revenue (excluding reimbursement of management contract expenses), 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 expense, rather than revenue, are management’s primary focus.

 

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General Business Trends

 

We believe that sophisticated commercial real estate developers and property managers and owners recognize the potential 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 retention rate for the twelve month period ended June 30, 2008 was 91%, compared to 89% for the year-ago period, which also reflects our decision not to renew, or terminate, unprofitable contracts.

 

Gross profit per location remained flat at $10.6 thousand for the three months ended June 30, 2008 and June 30, 2007.

 

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:

 

		June 30, 2008		December 31, 2007		June 30, 2007
Managed facilities		1,979		1,893		1,753
Leased facilities		240		238		238
Total facilities		2,219		2,131		1,991

 

Revenue

 

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

 

·                                         Parking services revenue—lease contracts. Parking services revenues 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, 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 revenues do 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.

 

Reimbursement of Management Contract Expense

 

Reimbursement of management contract expense consists of the direct reimbursement from the property owner for operating expenses incurred under a management contract.

 

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.

 

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