March 27, 2006
Petro Stopping Centers appreciates the opportunity to submit comments to the Securities and Exchange Commission concerning the implementation of the internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (SOX). We fully support the recommendations of the SEC Advisory Committee regarding limitations on SOX Section 404 to small and micro cap public companies. However, we encourage the Committee to consider other unique circumstances in determining which companies qualify for relief.
Petro Stopping Centers, L.P. was classified as an issuer under Section 15(d) of the Securities Exchange Act of 1934 (Exchange Act) following our filing of a registration statement which required us, under the Exchange Act, to file periodic information and reports during the fiscal year in which the registration statement was declared effective. We were classified as a "debt only issuer" until the Section 15(d) statutory suspension of reporting obligations came into effect, January 1, 2005. Thereafter, we have been considered a voluntary filer because our indenture requires us to comply with the reporting requirements of the Exchange Act. As a voluntary filer, we are required to adhere to most of the requirements of SOX, including section 404. Our securities are not listed on a national exchange and are offered only to qualified institutional buyers.
We agree with the Committee that small and micro cap public companies represent a significantly smaller risk to the capital markets than large public companies. Our company is a limited partnership with $250 million in public debt which is fully secured. Although we are a "debt only issuer", the revenue filter that the Committee recommends for determining a companys SOX 404 compliance requirement creates the unintended consequence of forcing companies like ours to bear the burden of compliance even though there is little or no risk to public investors.
We also agree with the Committee that the compliance burden has had a negative effect on the competitiveness of smaller public companies. We feel that the substantial cost and burden of complying with section 404 outweigh the intended benefits. In anticipation of the new requirements of SOX, we have hired consultants to assist us with our compliance project. The need for consultants was due to limited internal resources and the substantial amount of work anticipated in complying with section 404. This initial consultant engagement is estimated to cost approximately $1,500,000, which excludes additional costs for our external auditors assessment and opinion on the effectiveness of our internal controls, related internal costs, and on-going costs for the future maintenance related to compliance with section 404.
We believe that companies like ours have been unintentionally excluded from relief and request the Committee consider other determining factors for qualification. We recommend that the Committee consider the number of shareholders in determining qualification for relief. Extensive documentation of internal controls is less relevant when a company is closely held by a limited number of investors and the cost of compliance deteriorates their investment. Given that investor protection is one of the main objectives of SOX, companies with a limited number of investors should qualify for SOX compliance relief.
As a diesel fuel retailer, our revenues have increased significantly due to rising fuel prices. However, our net profit remains constant because our cost of fuel increases proportionally. Additionally, although revenue levels may be high, net margins on diesel fuel sales are very thin ($0.07 per gallon selling for $2.50). We anticipate our first year compliance costs could exceed 3% of fuel margin.
At a minimum, we strongly recommend that the Committee exclude revenue filters and use only market capitalization for determining a companys SOX 404 compliance requirements. We believe the objectives of SOX are achieved by placing the emphasis on the amount of capital invested in a public company rather than the amount of revenues. Since the amount of annual revenues does not necessarily correlate with capital at risk, revenue filters should be excluded when determining a companys SOX 404 compliance requirement.
In conclusion, Petro Stopping Centers, L.P. fully supports the Committee's efforts to scale compliance requirements for small and micro cap companies. We further recommend relief for "debt only issuers" and companies with a limited number of investors. Additionally, we urge the Committee to exclude the use of revenue filters and use only market capitalization for determining SOX 404 compliance requirements.
Thank you for your consideration and allowing us this opportunity to provide input on the Committees recommendations.