3. Acquisition

On October 2, 2012 (“Closing Date”), the Company completed its acquisition (the “Central Merger” or “Merger”) of 100% of the outstanding common shares of KCPC Holdings, Inc., which was the ultimate parent of Central Parking Corporation (collectively, “Central”), for 6,161,332 shares of Company common stock and the assumption of approximately $217,675 of Central’s debt, net of cash acquired. Additionally, Central’s former stockholders will be entitled to receive cash consideration (the “Cash Consideration”) in an amount equal to the sum of $27,000 plus, if and to the extent the Net Debt Working Capital (as defined below) was less than $275,000 (the “Lower Threshold”) as of September 30, 2012, the amount by which the Net Debt Working Capital was below such amount (such sum, the “Cash Consideration Amount”) to be paid three years after closing, to the extent the $27,000 is not used to satisfy seller indemnity obligations pursuant to the Agreement and Plan of Merger dated February 28, 2012 (the “Merger Agreement”).

Pursuant to the Merger Agreement, the Company is entitled to indemnification from Central’s former stockholders (i) if and to the extent Central’s combined net debt and the absolute value of Central’s negative working capital (as determined in accordance with the Merger Agreement) (the “Net Debt Working Capital”) exceeded $285,000 (the “Upper Threshold”) as of September 30, 2012 and (ii) for certain defined adverse consequences as set forth in the Merger Agreement (including with respect to Structural and Repair Costs). Pursuant to the Merger Agreement, Central’s former stockholders are required to satisfy certain indemnity obligations, which are capped at the Cash Consideration Amount (the “Capped Items”) only through a reduction of the Cash Consideration. For certain other indemnity obligations set forth in the Merger Agreement, which are not capped at the Cash Consideration Amount (the “Uncapped Items”), including the Net Debt Working Capital indemnity obligations described above, Central’s former stockholders may satisfy any amount payable pursuant to such indemnity obligations as follows (provided that the Company reserves the right to reject the cash and stock alternatives and choose to reduce the Cash Consideration):

● Central’s former stockholders can elect to pay such amount with cash;

● Central’s former stockholders can elect to pay such amount with the Company’s common stock (valued at $23.64 per share, the market value as of the closing date of the Merger Agreement); or

● Central’s former stockholders can elect to reduce the $27,000 cash consideration by such amount, subject to the condition that the cash consideration remains at least $17,000 to cover Capped Items.

The Company has determined and concluded that the Net Debt Working Capital was $296,334 as of September 30, 2012 and that, accordingly, the Net Debt Working Capital exceeded the threshold by $11,334. In addition, the Company has determined that it currently has indemnity claims of $21,708 for certain defined adverse consequences (including indemnity claims with respect to Structural and Repair Costs incurred through September 30, 2015) and as set forth in an October 1, 2015 notification letter to Central’s former stockholders’ that $1,800 of additional indemnification claims for Structural and Repair Costs (representing 80% of $2,300 of Structural and Repair Costs) met the requirements of the indemnification provisions established in the Merger Agreement. The Company has periodically given Central’s former stockholders notice regarding indemnification matters since the closing date of the Merger and has made adjustments for known matters, although Central’s former stockholders have not agreed to the aggregate of such adjustments made by the Company nor have they provided any elections with respect to using cash or stock as the payment of any Uncapped Items. Furthermore, following the Company’s notices of indemnification matters, the representative of Central’s former stockholders has indicated that they may make additional inquiries and raise issues with respect to the Company’s indemnification claims (including, specifically, as to Structural and Repair Costs) and that they may assert various claims of their own relating to the Merger Agreement.

On April 30, 2015, with respect to the Company’s Net Debt Working Capital calculation, the representative of Central’s former stockholders submitted specific objections to the Company’s calculation, asserting that the Net Debt Working Capital as of September 30, 2012 was $270,757 ($4,242 below the Lower Threshold) and on September 21, 2015 submitted a revised calculation, asserting that the Net Debt Working Capital as of September 30, 2012 was $277,989 ($2,989 above the Lower Threshold) and therefore no amounts are due to the Company given calculated Net Debt Working Capital is between the Lower Threshold and the Upper Threshold. The Company continues to review and evaluate Central’s former stockholders’ specific objections to the Company’s calculation of Net Debt Working Capital, but currently believes that these indemnification claims should sustain challenge from the former Central stockholders and that recoverability of these indemnification claims by the Company is reasonably assured. On October 1, 2015, the Company provided notification to Central’s former stockholders that the aggregate amount of the Company’s (i) Net Debt Working Capital claim of $11,334 as of September 30, 2012 and (ii) indemnity claims for certain defined adverse consequences as set forth in the Merger Agreement (including with respect to Structural and Repair Costs), exceeded the $27,000 Cash Consideration and therefore the Company would not be making any Cash Consideration payment pursuant to Section 3.7 of the Merger Agreement. On October 20, 2015, Central’s former stockholders provided notification that they deemed the Company’s refusal to pay the $27,000 Cash Consideration to be a violation of the terms of the Merger Agreement.

Under the Merger Agreement, all post-closing claims and disputes, including as to indemnification matters, are ultimately subject to resolution through binding arbitration or, in the case of a dispute as to the calculation of Net Debt Working Capital, resolution by an independent public accounting firm. The Company and the representative of Central’s former stockholders are currently engaged in the dispute resolution process for Net Debt Working Capital, as discussed above, although the Company’s pursuit of this process and the process available for other post-closing claims and disputes, including as to indemnification matters, may be delayed by actions taken by representatives of Central’s former stockholders. Should the dispute resolution process result in determinations unfavorable to the Company (either as to the Net Debt Working Capital calculation and/or other indemnification matters), the resulting resolution may have a material impact on the Company’s consolidated financial statements.

In determining the indemnity claims for certain defined adverse consequences of $23,508 (representing the aggregate of $21,708 for certain defined adverse consequences, including indemnity claims with respect to Structural and Repair Costs incurred through September 30, 2015 and $1,800 of additional indemnification claims for Structural and Repair Costs as set forth the October 1, 2015 notification letter), the Company has evaluated the nature of the costs and related indemnity claims and has concluded that it is probable that such indemnified claims will sustain any challenge from Central’s former stockholders and recoverability of these indemnified claims is reasonably assured. As previously discussed in Note 2. Commitments and Contingencies, certain lease contracts acquired in the Central Merger include provisions allocating to the Company responsibility for all or a defined portion of the costs of certain structural and other repair costs required on the property, including improvement and repair costs arising as a result of ordinary wear and tear.

The Company has reduced the cash consideration payable in three years from the acquisition date by $11,334, representing the amount Net Debt Working Capital exceeded the Upper Threshold, and $21,708, representing the amount of indemnified claims for certain adverse consequences (including, but not limited to Structural and Repair Costs) incurred through September 30, 2015, but only to the extent these indemnified claims do not exceed the $27,000 Cash Consideration payable three years from the acquisition date. While the Company believes the indemnification claims in excess of the $27,000 cash consideration date payable in three years from the acquisition date should sustain any challenge from Selling Stockholders, the Company has not recognized the recovery of $6,158 as a receivable and corresponding gain or reduction of costs incurred by the Company, as these additional indemnified claims are contingent in nature.

The following sets forth the adjustments to the cash consideration payable by the Company to the former stockholders of Central, based upon the foregoing determinations:

Cash consideration payable in three years from the acquisition date, pursuant to the Merger Agreement and prior to Central Net Debt Working Capital and indemnification of certain defined adverse consequences, net				$	27,000

Net Debt Working Capital at September 30, 2012 as defined in the Merger Agreement	$	(296,334	)
Threshold of Net Debt Working Capital, pursuant to the Merger Agreement	$	285,000

Excess over the threshold of Net Debt Working Capital				(11,334		)

Indemnification of certain defined adverse consequences incurred through September 30, 2015, net				(21,708		)


Indemnification claims for Net Debt Working Capital and certain adverse consequences in excess of the $27,000 cash consideration payable in three years from the acquisition date				(6,042		)

Indemnification claims for Net Debt Working Capital and certain adverse consequences not recognized due to the contingent nature of these claims				6,042

Cash consideration payable three years from the acquisition date (October 2, 2015)				$	—

The Central Merger has been accounted for using the acquisition method of accounting (in accordance with the provisions of Accounting Standards Codification (“ASC”) 805, Business Combinations), which requires, among other things, that most assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The purchase price has been allocated based on the estimated fair value of net assets acquired and liabilities assumed at the date of the acquisition. The Company finalized the purchase price allocation during the third quarter of 2013.

The Company incurred certain acquisition and integration costs associated with the transaction that were expensed as incurred and are reflected in the Condensed Consolidated Statements of Income. The Company recognized $1,613 and $2,989 of these costs in its Condensed Consolidated Statements of Income for the three months ended September 30, 2015 and 2014, respectively, in General and administrative expenses. The Company recognized $3,484 and $5,031 of these costs in its Condensed Consolidated Statements of Income for the nine months ended September 30, 2015 and 2014, respectively, in General and administrative expenses.