Commitments and Contingencies | 6 Months Ended |
Jun. 30, 2014 |
Commitments And Contingencies Disclosure [Abstract] | ' |
Commitments and Contingencies | ' |
7. Commitments and Contingencies |
Hotel Development Related Commitments |
In order to obtain long-term management, franchise and license contracts, the Company has committed to contribute capital in various forms on hotel development projects. These include equity investments, key money, debt financing and cash flow guarantees to hotel owners. The cash flow guarantees generally have a stated maximum amount of funding and a defined term. The terms of the cash flow guarantees to hotel owners generally require the Company to fund if the hotels do not attain specified levels of operating profit. Oftentimes, cash flow guarantees to hotel owners may be recoverable as loans repayable to the Company out of future hotel cash flows and/or proceeds from the sale of hotels. |
The following table details, as of June 30, 2014 and December 31, 2013, the Company’s key money, equity investment and debt financing commitments for hotels under development as well as potential funding obligations under cash flow guarantees at operating hotels and hotels under development at the maximum amount under the applicable contracts, but excluding contracts where the maximum amount cannot be determined (in thousands): |
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| | As of | | | As of | | | |
June 30, | December 31, | | |
2014 (1) | 2013 (1) | | |
Key money, equity investment and debt financing commitments (2) | | $ | 23,706 | | | $ | 22,499 | | | |
Key money commitments related to terminated project (3) | | | — | | | | 10,000 | | | |
Cash flow guarantees | | | 13,000 | | | | 13,000 | | | |
Cash flow guarantees in dispute (4) | | | 8,000 | | | | 8,000 | | | |
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Total maximum future funding commitments | | $ | 44,706 | | | $ | 53,499 | | | |
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Amounts due within one year (5) | | $ | 16,706 | | | $ | 25,499 | | | |
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-1 | The currency translation is based on an exchange rate of the applicable local currency to U.S. dollar using the exchange rate as of the end of the applicable reporting period. | | | | | | | | | |
-2 | As of June 30, 2014 and December 31, 2013, these commitments consist of key money commitments. The Company had no equity or debt financing commitments at June 30, 2014 and December 31, 2013. | | | | | | | | | |
-3 | As of December 31, 2013, amount reflects the funding of $10.0 million in key money for Mondrian at Baha Mar, which the Company is not obligated to fund due to the termination of the related management agreement in June 2014, discussed further below. | | | | | | | | | |
-4 | Reflects an $8.0 million performance cash flow guarantee related to Delano Marrakech, which the Company believes it is not obligated to fund due to the owner’s defaults under the management agreement terms. The Company has terminated its management agreement effective November 12, 2013, discussed further below. | | | | | | | | | |
-5 | As of June 30, 2014, amount represents £9.4 million (or approximately $16.0 million) in key money for Mondrian London, which is expected to open on September 30, 2014. As of December 31, 2013, amount represents £9.4 million (or approximately $15.4 million) in key money for Mondrian London and funding of $10.0 million in key money for Mondrian at Baha Mar. The Company is not obligated to fund the key money for Mondrian Baha Mar due to the termination of the related management agreement in June 2014, discussed further below. | | | | | | | | | |
In June 2014, the Mondrian at Baha Mar management agreement was terminated due to the failure of hotel owner to obtain a non-disturbance agreement from its lender as required by the management agreement, among other things. |
In September 2012, the Company opened Delano Marrakech, a 71 room hotel in Marrakech, Morocco. The management agreement included certain cash flow guarantees by the Company which stipulate certain minimum levels of operating performance and could result in potential future funding obligations related to Delano Marrakech, which are in dispute and disclosed in the hotel commitments and guarantees table above. As discussed further below, the Company and the hotel owner are in litigation surrounding the termination of the hotel management agreement, performance-based cash flow guarantee and related matters. Both parties are seeking arbitration of the dispute, which is expected to occur in March 2015. |
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In January 2014, the Company signed a franchise agreement for 10 Karakoy, a Morgans Original branded hotel in Istanbul, Turkey. The hotel, which is currently under development, is being converted from office and retail space, is expected to have 71 rooms and open in late 2014. The Company has a $0.7 million key money obligation that will be funded upon the hotel opening, which is included in the table above. |
The Company has signed management, license or franchise agreements for new hotels which are in the development stage. As of June 30, 2014, these include the following: |
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| | Expected Room | | | Anticipated | | | Initial |
Count | Opening | Term |
Hotels Currently Under Construction or Renovation: | | | | | | | | | | |
Mondrian London | | | 360 | | | | 2014 | | | 25 years |
Delano Las Vegas (1) | | | 1,114 | | | | 2014 | | | 10 years |
10 Karakoy, a Morgans Original, Istanbul (1) | | | 71 | | | | 2014 | | | 15 years |
Mondrian Doha | | | 270 | | | | 2015 | | | 30 years |
Delano Moscow | | | 160 | | | | | | | 20 years |
Other Signed Agreements: | | | | | | | | | | |
Mondrian Istanbul | | | 122 | | | | | | | 20 years |
Delano Aegean Sea | | | 150 | | | | | | | 20 years |
Delano Cartagena | | | 211 | | | | | | | 20 years |
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-1 | Hotel is subject to a license or franchise agreement. | | | | | | | | | |
There can be no assurances that any or all of the Company’s projects listed above will be developed as planned. If adequate project financing is not obtained, these projects may need to be limited in scope, deferred or cancelled altogether, and to the extent the Company has previously funded key money, an equity investment or debt financing on a cancelled project, the Company may be unable to recover the amounts funded. |
For example, due to the Company’s joint venture partner’s failure to achieve certain agreed milestones in the development of the Mondrian Istanbul hotel, in early 2014, the Company exercised its put option under the joint venture agreement that requires the Company’s joint venture partner to buy back the Company’s equity interests in the Mondrian Istanbul joint venture. The Company’s rights under that joint venture agreement are secured by, among other things, a mortgage on the property. In February 2014, the Company issued a notice of default to its joint venture partner, as they failed to buy back the Company’s equity interests by the contractual deadline, and further notified its joint venture partner that the Company plans to begin foreclosure proceedings as a result of the event of default. The Company initiated foreclosure proceedings on March 11, 2014. The Company’s joint venture partner, and through such joint venture partner, the joint venture itself, have objected to the foreclosure proceeding, as a result of which, the foreclosure proceeding is currently stayed. Additionally, in June 2014, the joint venture purported to notify the Company that it had terminated the hotel management agreement. The Company has objected to such purported notices and intends to vigorously defend against any lawsuit that may result. |
Other Guarantees to Hotel Owners |
As discussed above, the Company has provided certain cash flow guarantees to hotel owners in order to secure management contracts. |
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The Company’s hotel management agreements for Royalton and Morgans contain cash flow guarantee performance tests that stipulate certain minimum levels of operating performance. These performance test provisions give the Company the option to fund a shortfall in operating performance limited to the Company’s earned base fees. If the Company chooses not to fund the shortfall, the hotel owner has the option to terminate the management agreement. As of June 30, 2014, approximately $0.5 million was accrued as a reduction to management fees related to these performance test provisions. The Company’s maximum potential amount of future fundings related to the Royalton and Morgans performance guarantee cannot be determined as of June 30, 2014, but under the hotel management agreements is limited to the Company’s base fees earned. |
Operating Joint Venture Hotels Commitments and Guarantees |
The following details obligations the Company has or may have related to its operating joint venture hotels as of June 30, 2014. |
Mondrian South Beach Mortgage and Mezzanine Agreements. Morgans Group and affiliates of its joint venture partner have agreed to provide standard nonrecourse carve-out guaranties and provide certain limited indemnifications for the Mondrian South Beach mortgage and mezzanine loans. In the event of a default, the lenders’ recourse is generally limited to the mortgaged property or related equity interests, subject to standard nonrecourse carve-out guaranties for “bad boy” type acts. Morgans Group and affiliates of its joint venture partner also agreed to guarantee the joint venture’s obligation to reimburse certain expenses incurred by the lenders and indemnify the lenders in the event such lenders incur liability in connection with certain third-party actions. Morgans Group and affiliates of its joint venture partner have also guaranteed the joint venture’s liability for the unpaid principal amount of any seller financing note provided for condominium sales if such financing or related mortgage lien is found unenforceable, provided they shall not have any liability if the seller financed unit becomes subject to the lien of the lender’s mortgage or title to the seller financed unit is otherwise transferred to the lender or if such seller financing note is repurchased by Morgans Group and/or affiliates of its joint venture at the full amount of unpaid principal balance of such seller financing note. In addition, although construction is complete and Mondrian South Beach opened on December 1, 2008, Morgans Group and affiliates of its joint venture partner may have continuing obligations under construction completion guaranties until all outstanding payables due to construction vendors are paid. As of June 30, 2014, there are remaining payables outstanding to vendors of approximately $0.3 million. Pursuant to a letter agreement with the lenders for the Mondrian South Beach loan, the joint venture agreed that these payables, many of which are currently contested or under dispute, will not be paid from operating funds but only from tax abatements and settlements of certain lawsuits. In the event funds from tax abatements and settlements of lawsuits are insufficient to repay these amounts in a timely manner, the Company and its joint venture partner are required to fund the shortfall amounts. |
The Company and affiliates of its joint venture partner also have each agreed to purchase approximately $14 million of condominium units under certain conditions, including an event of default. In the event of a default under the lender’s mortgage or mezzanine loan, the joint venture partners are each obligated to purchase selected condominium units, at agreed-upon sales prices, having aggregate sales prices equal to 1/2 of the lesser of $28.0 million, which is the face amount outstanding on the lender’s mezzanine loan, or the then outstanding principal balance of the lender’s mezzanine loan. The joint venture is not currently in an event of default under the mortgage or mezzanine loan. As of June 30, 2014, there has been no triggering event that would require the Company to recognize a liability related to the construction completion or the condominium purchase guarantees. |
Mondrian SoHo. Certain affiliates of the Company’s joint venture partner have agreed to provide a standard nonrecourse carve-out guaranty for “bad boy” type acts and a completion guaranty to the lenders for the Mondrian SoHo loan, for which Morgans Group has agreed to indemnify the joint venture partner and its affiliates up to 20% of such entities’ guaranty obligations, provided that each party is fully responsible for any losses incurred as a result of its own gross negligence or willful misconduct. As of June 30, 2014, there has been no triggering event that would require the Company to recognize a liability related to this indemnity. |
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Ames. On April 26, 2013, the joint venture closed on a new loan agreement with the mortgage lenders that provided for a reduction of the mortgage debt and an extension of maturity in return for a cash paydown. The Company did not contribute to the cash paydown and instead entered into an agreement with its joint venture partner pursuant to which, among other things, (1) the Company assigned its equity interests in the joint venture to its joint venture partner, (2) the Company agreed to give its joint venture partner the right to terminate its management agreement upon 60 days prior notice in return for an aggregate payment of $1.8 million, and (3) a creditworthy affiliate of the Company’s joint venture partner has assumed all or a portion of the Company’s potential liability with respect to historic tax credit guaranties, with the Company’s liability for any tax credit guaranties capped, in any event, at $3.0 million in the aggregate. The potential liability for historic tax credit guaranties relates to approximately $16.9 million of federal and state historic rehabilitation tax credits that Ames qualified for at the time of its development. As of June 30, 2014, there has been no triggering event that would require the Company to accrue any potential liability related to the historic tax credit guarantee. In May 2013, the hotel owner exercised its right to terminate the Company’s management agreement and it was terminated on July 17, 2013. The termination fee was recorded by the Company in the second and third quarters of 2013. |
Guaranteed Loans and Commitments |
The Company has made guarantees to lenders and lessors of its owned and leased hotels, namely related to the Hudson/Delano 2014 Mortgage Loan and Clift lease payments, as discussed further in note 6. |
Litigations Regarding Mondrian SoHo |
On January 16, 2013, German American Capital Corporation, the lender for the mortgage loans on Mondrian SoHo (“GACC” or the “lender”), filed a complaint in the Supreme Court of the State of New York, County of New York against Sochin Downtown Realty, LLC, the joint venture that owns Mondrian SoHo (“Sochin JV”), Morgans Management, the manager for the hotel, Morgans Group, Happy Bar LLC and MGMT LLC, seeking foreclosure including, among other things, the sale of the mortgaged property free and clear of the management agreement, entered into on June 27, 2007, as amended on July 30, 2010, between Sochin JV and Morgans Management. According to the complaint, Sochin JV defaulted by failing to repay the approximately $217 million outstanding on the loans when they became due on November 15, 2012. Cape Advisors Inc. indirectly owns 80% of the equity interest in Sochin JV and Morgans Group indirectly owns the remaining 20% equity interest. |
On March 11, 2013, the Company moved to dismiss the lender’s complaint on the grounds that, among other things, the Company’s management agreement is not subject to foreclosure. On April 2, 2013, the lender opposed the Company’s motion to dismiss and cross-moved for summary judgment. On August 12, 2013, the court heard oral argument on both motions, as well as a third motion brought by the Company to strike an affirmation submitted by lender’s attorney. On January 27, 2014, the court granted Morgans Management’s motion to dismiss on the ground that the Company’s subsidiary that manages the hotel is not a proper party to the foreclosure action and that a management contract does not constitute an interest subject to foreclosure, and denied lender’s motion for summary judgment as moot. On March 20, 2014, the lender moved for summary judgment against the remaining four defendants who are seeking foreclosure on four mortgages secured by Mondrian SoHo. By order dated May 27, 2014, the trial court granted the motion for summary judgment to a limited extent, ordering the appointment of a referee to compute the amount but stating that a motion for summary judgment of foreclosure and sale is premature. On July 28, 2014, the trial court appointed a referee. |
On February 25, 2013, Sochin JV filed a complaint in the Delaware Chancery Court against Morgans Hotel Group Management LLC and Morgans Group, seeking, among other things, a declaration that plaintiff terminated the management agreement for the hotel, injunctive relief, and an award of damages in an amount to be determined, but alleged to exceed $10 million, plus interest. In addition, the Company, through its equity affiliate, filed a separate action against the owner and its parent in the Delaware Chancery Court for, among other things, breaching fiduciary duties and their joint venture agreement for failing to obtain consent prior to the termination. That action was subsequently consolidated with the termination action. On September 17, 2013, the Delaware Chancery Court heard oral argument on various motions to dismiss and for partial summary judgment in the consolidated actions, following which the court entered orders, on September 20, 2013, ruling that Sochin JV properly terminated the hotel management agreement on agency principles, that Morgans must vacate the hotel forthwith or on whatever other timetable the hotel owner chooses, and that certain claims by the Company’s equity affiliate are dismissed but not its breach of fiduciary duty claim. On September 30, 2013, the Company filed a motion for reconsideration and/or to certify the judgment for appeal. That motion is still pending, and no final order has as yet been issued. By joint stipulation of the parties, granted on March 18, 2014, Sochin JV was required to file its opposition to the motion for reconsideration and to stay by May 9, 2014, following which the court will issue its ruling. The parties also stipulated to move, answer or otherwise respond to the operative complaints, by May 9, 2014. However, on May 9, 2014, by agreement, both of the above-referenced actions in Delaware were dismissed with prejudice. |
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On April 30, 2013, the Company filed a lawsuit against the majority member of Sochin JV’s parent and its affiliate in New York Supreme Court for damages based on the attempted wrongful termination of the management agreement, defamation, and breach of fiduciary and other obligations under the parties’ joint venture agreement. On August 23, 2013, the owner moved to dismiss that complaint. That motion was fully briefed, and oral argument had been set for June 5, 2014. However, on May 9, 2014, by agreement, the case was dismissed with prejudice. |
Litigation Regarding Delano Marrakech |
In June 2013, the Company served the owner of Delano Marrakech with a notice of default for, among other things, failure to pay fees and reimbursable expenses and to operate the hotel in accordance with the standards under the management agreement. In September 2013, the Company served notice of termination of its management agreement for Delano Marrakech following the failure by the owner of Delano Marrakech to remedy numerous breaches of the agreement. As a result, the Company discontinued all affiliation with the hotel, including removal of the Delano name, and terminated management of the property, effective November 12, 2013. Pursuant to the management agreement, in the event of an owner default, the Company has no further obligations under the performance-based cash flow guarantee. In addition, as a result of the breaches by the hotel owner, the Company has asserted a claim for losses and damages against the owner that is currently estimated at in excess of $30.0 million, including interest. The owner of the hotel is disputing the circumstances surrounding termination and therefore its liability for this amount. On April 17, 2014, the owner submitted a counterclaim against the Company under both the performance-based cash flow guarantee and for loss of profits. The total counterclaim made by the owner is in excess of $119.0 million, excluding interest. The Company considers the counterclaim made by the owner to be entirely without merit and intends to vigorously defend itself. Both parties are seeking arbitration of the dispute, which is expected to occur in March 2015. |
Litigation Regarding TLG Promissory Notes |
On August 5, 2013, Messrs. Andrew Sasson and Andy Masi filed a lawsuit in the Supreme Court of the State of New York against TLG Acquisition LLC and Morgans Group LLC relating to the $18 million TLG Promissory Notes. See note 1 and note 6 regarding the background of the TLG Promissory Notes. The complaint alleges, among other things, a breach of contract and an event of default under the TLG Promissory Notes as a result of the Company’s failure to repay the TLG Promissory Notes following an alleged “Change of Control” that purportedly occurred upon the election of the Company’s current Board of Directors on June 14, 2013. The complaint sought payment of Mr. Sasson’s $16 million TLG Promissory Note and Mr. Masi’s $2 million TLG Promissory Note, plus interest compounded to principal, as well as default interest, and reasonable costs and expenses incurred in the lawsuit. On September 26, 2013, the Company filed a motion to dismiss the complaint in its entirety. On February 6, 2014, the Court granted the Company’s motion to dismiss. On March 7, 2014, Messrs. Sasson and Masi filed a Notice of Appeal from this decision with the Appellate Division, First Department, and on July 8, 2014, they filed their initial brief in support of that appeal. Briefing of that appeal is ongoing, and the Company’s opposition brief is due August 29, 2014. No date for oral argument of the appeal has been set. |
Litigation Regarding 2013 Deleveraging Transaction, Proxy Litigation Between Mr. Burkle and OTK and Certain of the Company’s Current Directors, and Litigation Regarding Yucaipa Board Observer Rights |
On May 5, 2014, the Company and affiliates of Yucaipa, among other litigants, executed and submitted to the Delaware Court of Chancery a Stipulation of Settlement (the “Settlement Stipulation”) which contemplates the partial settlement and dismissal of the Delaware Shareholder Derivative Action and the complete settlement and dismissal of the New York Securities Action, the Proxy Action and the Board Observer Action, all defined below. On July 23, 2014, the Delaware Court of Chancery approved the Settlement Stipulation. Pursuant to its terms, the Settlement Stipulation will not become effective until such approval is no longer subject to further court review (the “Effective Date”). |
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The Settlement Stipulation provides for the partial settlement and dismissal with prejudice of the action entitled OTK Associates, LLC v. Friedman, et al., C.A. No. 8447-VCL (Del. Ch.) (the “Delaware Shareholder Derivative Action”) and the complete settlement and dismissal with prejudice of the actions entitled Yucaipa American Alliance Fund II L.P., et al. v. Morgans Hotel Group Co., et al., Index No. 652294/2013 (NY Sup.) (the “New York Securities Action”); Burkle v. OTK Associates, LLC, et al., Case No. 13-CIV-4557 (S.D.N.Y.) (the “Proxy Action”); and Yucaipa American Alliance Fund II L.P., et al. v. Morgans Hotel Group Co., Index No. 653455/2013 (NY Sup.) (the “Board Observer Action”) (the foregoing four actions are collectively referred to as the “Actions”). |
The Settlement Stipulation provides, among other things, for the following: |
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| • | | The Company will pay to the Yucaipa parties in the New York Securities Action an amount equal to $3 million less the aggregate amount of any reasonable and necessary attorneys’ fees and expenses incurred by Mr. Burkle in his defense of the Delaware Shareholder Derivative Action that are paid to him by the Company’s insurers prior to the Effective Date (the “Securities Action Payment”). | | | | | | | |
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| • | | Mr. Burkle will pay to the Company the amount of all insurance proceeds he recovers from the Company’s insurers after the Effective Date for the reasonable and necessary attorneys’ fees and expenses that he incurred in defense of the Delaware Shareholder Derivative Action and assign to the Company any claims he may have against the Company’s insurers relating to any such reasonable and necessary attorneys’ fees and expenses that the Company’s insurers may fail to pay Mr. Burkle. | | | | | | | |
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| • | | To the extent not paid by the Company’s insurers, the Company will pay the amount of any reasonable and necessary attorneys’ fees and expenses incurred by Messrs. Friedman, Gault and Sasson (collectively, the “Settling Former Directors”) in defending the Delaware Shareholder Derivative Action, subject to the Settling Former Directors’ assignment to the Company of any claims they have against the Company’s insurers relating to any such unpaid amounts. | | | | | | | |
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| • | | The Settling Former Directors will pay to the Company a portion of the Securities Action Payment (which cannot presently be quantified because the amount depends on the resolution of pending claims submitted to the Company’s insurers) unless the Company’s insurers pay such amounts to the Company or the Settling Former Directors assign to the Company any claims they have against the Company’s insurers relating to any such amounts that the Company’s insurers fail to pay. | | | | | | | |
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| • | | OTK and current director Jason T. Kalisman will apply to the Delaware Court of Chancery for an award of payment from the Company of the reasonable and necessary fees and expenses incurred by their counsel in connection with the Delaware Shareholder Derivative Action, excluding those fees and expenses encompassed in the court’s October 31, 2013 order in the Delaware Shareholder Derivative Action. In its July 23, 2014 order approving the Settlement Stipulation, the Delaware Court of Chancery awarded an aggregate amount of approximately $6.5 million (to be reduced by the prior interim award of approximately $2.7 million) to OTK and current director Jason T. Kalisman for their counsel fees and expenses incurred in connection with the Delaware Shareholder Derivative Action which will be paid by the Company. The prior interim award of approximately $2.7 million was paid by the Company’s insurers and the Company expects its insurers to cover the remaining amount of approximately $3.8 million due per the Settlement Stipulation. | | | | | | | |
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| • | | Plaintiffs and defendants in each of the Actions, apart from the Non-Settling Former Directors who chose not to participate in Settlement Stipulation and against whom the Delaware Shareholder Derivative Action continues, will exchange customary releases which release the parties and certain of their affiliates from claims arising from the subject matters of each of the Actions. | | | | | | | |
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| • | | Each of the Actions will be dismissed with prejudice and on the merits with each party bearing its own costs, except as to the Non-Settling Former Directors against whom the Delaware Shareholder Derivative Action continues or as specified in the Settlement Stipulation. | | | | | | | |
The Company cannot currently predict the amount of all the funds it might be required to pay under the Settlement Stipulation. Nor can the Company predict whether its insurers will pay some or all of the amounts that the Company would otherwise be obligated to pay under the Settlement Stipulation; whether the Company would be successful in asserting against its insurers any claims that will or may be assigned to the Company under the terms of the Settlement Stipulation or that the Company has asserted on its own behalf; or what the amount of any such recovery might be. Furthermore, the Company cannot predict whether the Delaware Court of Chancery’s order approving the Settlement Stipulation will be challenged on appeal and, if so challenged, affirmed. Notwithstanding the foregoing, the Company does not expect that the net amount of all payments the Company might ultimately be required to make under the terms of the Settlement Stipulation and after recovery of all insurance proceeds, will be material to financial position of the Company, and as of June 30, 2014, the Company believes its accruals are adequate to cover its contingencies relating to these matters. See Part II, “Item 1. Legal Proceedings” for further discussion of the Actions and Settlement Stipulation. |
Other Litigation |
From time to time, the Company is involved in various litigation matters arising in the ordinary course of its business. The Company is not currently a party to any legal or administrative proceedings, other than as noted above, the adverse outcome of which, individually or in the aggregate, the Company believes would have a material impact on the Company’s financial condition, results of operations or cash flow. |