-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NZVERbQfQ0di583CizSRTTaHwyMt3NXxZtBfDIWQevRdhpDU4a9Q1IvxyPlC8Ul6 y9gD5AnyRGgfPIP7nPEWfQ== 0000890566-97-000661.txt : 19970401 0000890566-97-000661.hdr.sgml : 19970401 ACCESSION NUMBER: 0000890566-97-000661 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: COACH USA INC CENTRAL INDEX KEY: 0001011147 STANDARD INDUSTRIAL CLASSIFICATION: LOCAL & SUBURBAN TRANSIT & INTERURBAN HWY PASSENGER TRAINS [4100] IRS NUMBER: 760496471 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-28056 FILM NUMBER: 97570667 BUSINESS ADDRESS: STREET 1: ONE RIVERWAY STREET 2: STE 600 CITY: HOUSTON STATE: TX ZIP: 77056-1903 BUSINESS PHONE: 8882622487 MAIL ADDRESS: STREET 1: ONE RIVERWAY STREET 2: STE 600 CITY: HOUSTON STATE: TX ZIP: 77056-1903 10-K 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NO.: 0-28056 COACH USA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) DELAWARE 76-0496471 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) ONE RIVERWAY, SUITE 600 HOUSTON, TEXAS 77056-1903 (888) COACH-US (ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED Common Stock, $.01 par value Nasdaq National Market SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE 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 [ ] As of March 24, 1997, the aggregate market value of the 14,807,730 shares of the registrant's common stock held by non-affiliates of the registrant was $444,231,900, based on the $30.00 last sale price of the registrant's common stock on the Nasdaq National Market on that date. As of March 24, 1997, 18,078,107 shares of the registrant's common stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III (other than the required information regarding executive officers) is incorporated by reference from the registrant's definitive proxy statement, which will be filed with the Commission not later than 120 days following December 31, 1996. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] ================================================================================ PART I ITEM 1. BUSINESS Coach USA, Inc. ("Coach USA" or the "Company") is the largest provider of motorcoach charter, tour and sightseeing services and one of the five largest non-municipal providers of commuter and transit motorcoach services in the United States. The Company also provides airport ground transportation, paratransit and other related passenger ground transportation services. The Company's services at December 31, 1996 were provided through a fleet of approximately 1,650 motorcoaches, including 300 motorcoaches provided by various transit authorities pursuant to service contracts, as well as various other high occupancy vehicles. The Company's charter and tour fleet features luxury, European style motorcoaches with plush seats, televisions, VCRs and other amenities. The Company's taxicab and high occupancy vehicle services include dispatching and vehicle sales, leasing and financing for more than 1,350 vehicles, primarily owned by independent contractor drivers. Coach USA was founded in September 1995 to create a nationwide provider of motorcoach and other ground transportation services; however, it conducted no operations prior to its initial public offering in May 1996 (the "Initial Public Offering"). Coach USA acquired, simultaneously with the closing of the Initial Public Offering, six existing motorcoach service businesses (the "Founding Companies"). Through December 31, 1996, the Company acquired eight additional motorcoach businesses and one taxicab service business. Subsequent to year-end, in February 1997, the Company acquired three additional motorcoach businesses and the acquisitions of three other companies are currently pending. The Company's strategy is to continue to aggressively pursue additional acquisitions to consolidate and enhance its position in its current markets and to acquire operations in new markets. The Company believes that it can continue to successfully implement this strategy due to the synergies being created by the consolidation of various operating companies under common ownership of the Company. The acquisition strategy is further enhanced by the leadership roles that several of the principals of the Company have in both national and regional motorcoach associations. INDUSTRY OVERVIEW The motorcoach industry in the United States can be broadly divided into three types of services: (i) recreation and excursion (charter, tour and sightseeing); (ii) commuter and transit; and (iii) regularly scheduled intercity service. The motorcoach industry is highly fragmented with approximately 5,000 motorcoach operators. These companies collectively generated approximately $20 billion in revenues in 1996. The Company believes that the taxicab services industry has a similar profile but smaller market size. The Company believes that there will be increasing demand for recreation and excursion services, commuter and transit motorcoach services and airport related services for a broad range of customers based on a number of factors, including: GROWING TRAVEL AND TOURISM INDUSTRY. Travel and tourism is one of the fastest growing industries in the United States. Nationwide charter users include such large organizations as AAA, AARP and convention organizers, whose members are potential users of motorcoach services. As the population of the United States continues to age, the Company believes more people will find motorcoach touring an attractive, low cost alternative to travel by automobile. Also, the number of European and Asian tourists traveling to the United States continues to increase, and motorcoach travel is a popular way for these tourists to travel in the United States. PRIVATIZATION. The Company expects state and local governments to accelerate their efforts to privatize capital intensive operations, such as commuter and transit services, and ancillary services, such as paratransit services required under the Americans with Disabilities Act ("ADA"). The Company believes that this acceleration will result primarily from a decrease in Federal funds available to subsidize operations and the increasing capital cost of acquiring equipment. An example of this type of contract is the February 1997 privatization contract awarded for $32 million. 1 OUTSOURCING. Many hotels, casinos, rental car companies, colleges and other institutions operate large motorcoach fleets and other high occupancy vehicles. These entities are increasingly seeking to outsource these non-core activities as a means to better manage their capital and operating resources and to improve their profits. EXPANDING METROPOLITAN AREAS. Metropolitan areas are continuing to expand geographically and in population. As a result, state and local governments face increasing automobile traffic congestion, deteriorating infrastructures and a continuing migration of offices and commuters to suburban locations. These trends should increase the Company's opportunities to provide motorcoach commuter and transit services. The Company believes that the fuel and emissions efficiency, flexibility and low capital cost of motorcoaches and other high occupancy vehicles will make them increasingly viable alternatives to the high cost of widening existing roads or establishing or expanding other transit and commuter systems, such as subways and commuter trains. INCREASING AIRPORT CONGESTION. The number of passengers served by the current United States airport system is estimated to increase by 25% over the next five years. Currently, there is no coordinated effort to provide seamless transportation between planes and motorcoaches or other modes of ground transportation, and many passengers continue to use private automobiles for local or regional travel to and from airports. With no major airport expansions expected at most major airports in the next five years, the Company believes that motorcoaches, vans and other high occupancy vehicles can alleviate much of this congestion and address the shortage of convenient parking at many airports. In addition, taxicab service is an integral part of passenger ground transportation to and from most major airports. SERVICES PROVIDED The type and level of services provided by the Company vary by market served. The services offered in each of the Company's markets are determined by the management team responsible for that market location and are based on such management's estimate of the demand for a particular service in the market, competition to provide that service and the Company's ability to provide that service consistent with the quality standard that the Company seeks. The Company provides motorcoach services on both a contracted and per seat basis. For contracted services, the Company arranges a fee for the use of the equipment. In these arrangements, the customer contracts the vehicle for use and the Company is paid a rate, generally on a daily or per mile basis, that is not dependent on passenger load factors. In per seat operations, the Company is paid by each individual customer. Fares for these per seat services are usually determined by the Company and payment is received from individual passengers or through a commissioned agent. In some states, these fares are subject to regulatory approval. The Company's taxicab service revenues are derived primarily from services provided to independent contractors that own or lease and operate taxicabs under one of the Company's trade names. The independent contractor drivers pay a weekly or daily fee in advance to the Company for dispatching, use and maintenance of taxicab equipment, liability insurance coverage, use of operating rights, charge account and other services. The independent contractor collects and retains the fares from the passenger. Fares charged to passengers are subject to municipal or state regulatory approval. MOTORCOACH SERVICES The Company's motorcoaches are either owned by the Company or leased under long-term leases, pursuant to which the Company is responsible for all maintenance, insurance and upkeep. Certain transit privatization contracts provide equipment and insurance to the Company. The majority of the Company's motorcoach drivers are employees of the Company with the remainder provided pursuant to a leasing arrangement. In certain of the motorcoach operations, the drivers are independent contractors. 2 RECREATION AND EXCURSION CHARTER AND TOUR SERVICES. Charter services are provided on a fixed daily rate, based on mileage and hours of operation. The Company offers both daily and long-term charter and tour arrangements (as long as 14 days) with various levels of luxury and price. The Company has arrangements with tour agencies to provide various levels of service and equipment for agent-sponsored and organized tours. Under these arrangements, the Company contracts with tour agencies to provide the motorcoach and driver at a fixed daily rate. To increase equipment utilization, the Company also regularly offers shorter charter service to various social groups or other organizers for transportation to events or specific destinations. In some instances, the Company organizes its own tours and markets them on a per passenger basis. SIGHTSEEING. Per seat sightseeing services are provided on a scheduled basis at an advertised or published price. Typically, customers will make reservations for the tours or can simply board on an "open-door" basis at scheduled locations. Payment is made by the customer, or through the travel agent or the hotel. The Company uses a network of hotel lobby ticket counters, hotel concierges and travel agents to sell the Company's sightseeing tours. AIRPORT SERVICE. The Company picks up passengers at airports in Atlantic City, Colorado Springs, Denver, Houston, Las Vegas, Los Angeles, Miami, Newark and Philadelphia and transports them to and from their hotel, casino, cruise ship or convention site. The Company provides passenger ground transportation services into, from and between airports in certain cities in which the Company has operations using motorcoaches and other high occupancy vehicles. This service is provided on either a fixed schedule or on demand service basis. In fixed schedule services, the Company provides regular pick-up and drop-off services while fixed fee services can be arranged through computerized reservations systems or through purchase at a service desk at the airport. Taxicab service operations are an integral part of the passenger ground transportation services to and from the airports in the cities in which the Company operates. SPECIALIZED DESTINATION ROUTE. The Company provides specialized destination route services, including daily scheduled service to casinos in Connecticut, New Jersey, Louisiana and Nevada. Luxury motorcoaches pick passengers up at specified locations. Tickets are sold through agents and at specified locations. Customers are taken on an "open-door" basis or by reservation. COMMUTER AND TRANSIT SERVICES COMMUTER SERVICES. In most of its commuter services, the Company has fixed routes serviced on a daily basis. Most of these routes are owned (as a result of having received Federal or state regular route authority) by the individual operating subsidiaries. Many of the Company's motorcoaches that are dedicated to commuter service are owned by a state or municipal transit authority and provided to the Company at nominal rent or given by such authority to the Company to service a particular route. In all cases, the drivers and operations personnel are employed by the Company and the Company is responsible for maintenance of the equipment. The Company is paid through individual ticket purchases or through a fare box. Contracts with transit authorities for this service typically have one to three year terms and are periodically reviewed for rate and fare increases. Commuter service is provided daily. OUTSOURCING CONTRACTS. The Company has agreements with various corporations, institutions and government entities to provide motorcoaches, drivers and equipment for their employees and customers. The Company contracts with the customer to provide the schedule of service required by the customer, sometimes 24 hours per day. PRIVATIZATION TRANSIT CONTRACTS. In privatization transit contracts, the Company has a contract with a transit authority for fixed routes on a daily basis, with the schedule established by the transit authority. The Company operates dedicated equipment owned by the Company or by the transit authority. In each instance, the drivers and operations personnel are employees of the Company and the Company is responsible for equipment maintenance. The Company is paid a fixed amount from the municipality based on number of miles or hours operated. Contracts for this service range from three to five years and are periodically reviewed for rate increases. 3 PARATRANSIT SERVICES. The Company has contracts with agencies of various counties that are responsible for coordinating the non-emergency transportation of medical aid patients. Following delivery to the Company of patient reservation schedules, the Company provides the scheduled service, usually through use of independent contractor drivers, and invoices the county organization for services provided. These contracts are generally on a multi-year basis and require the Company to meet certain performance standards. TAXICAB SERVICES The majority of the Company's taxicabs are owned by independent contractor drivers, with the remainder being owned by the Company and leased on a daily or weekly basis to independent contractor drivers. None of the taxicab drivers are employees of the Company. In addition to the daily or weekly fee paid by the drivers to the Company for dispatching and other support services, the Company derives revenues through vehicle sales and financing services to drivers, maintenance, parts and labor provided to drivers and vehicle mini-billboard advertising. RADIO DISPATCHED SERVICES. Radio dispatched services are provided primarily on a call-in basis. When the request is made for taxicab service, the closest available taxicab is notified through the Company's computer dispatching system. An independent contractor driver of the identified vehicle accepts the trip and picks up the customer. AIRPORT SERVICES. Taxicab services are provided to passengers going to and coming from the airports in the municipalities in which the Company provides taxicab services. Most services provided to passengers coming from the airports are provided on a demand basis as passengers depart the airport and summon a taxicab at the airport cab station. PARATRANSIT SERVICES. Pursuant to contracts with local transit authorities, the Company provides on demand transportation services for disabled and other persons that are in need of transportation services. These contracts are generally on a multi-year basis and require the Company to meet certain performance standards. BUSINESS STRATEGY The Company's objective is to be the largest provider of regional and local motorcoach and passenger ground transportation services in the United States. Management plans to achieve this goal by: EXPANDING THROUGH ACQUISITIONS. The Company intends to pursue an aggressive acquisition strategy to enhance its position in its current markets and to acquire operations in new markets by: ENTERING NEW GEOGRAPHIC MARKETS. The Company intends to expand into geographic markets it does not currently serve by acquiring well-established motorcoach and other passenger ground transportation service providers that, like the Founding Companies and the subsequent acquisitions, are leaders in their regional markets. EXPANDING EXISTING MARKETS. The Company also plans to acquire additional motorcoach and other passenger ground transportation service providers in many of the markets in which it operates, including acquisitions that either broaden the range of services provided by the Company in that market or expand the geographic scope of the Company's operations in that market, as well as tuck-in acquisitions of smaller operations. The Company believes that tuck-in acquisitions will increase operating efficiencies without a proportionate increase in administrative costs and, in some instances, will broaden the Company's range of services. ACCELERATING INTERNAL GROWTH. A key component of the Company's strategy is to accelerate internal growth at each of the existing operations and each subsequently acquired business. The Company believes internal growth can be accelerated by: ESTABLISHING A NATIONAL SALES AND MARKETING PROGRAM. The travel and tourism industry has experienced significant growth in recent years, and the Company expects this trend to continue. The Company has begun to establish a national sales and marketing program as a means to expand its 4 recreational and excursion business. This program will target travel and tour companies, national and international travel agencies and convention organizers, as well as organizations such as AAA, AARP and professional and amateur athletic teams. DEVELOPING PRIVATIZATION AND OUTSOURCING. The Company believes that the trend toward privatization and outsourcing will accelerate, as more transit authorities and businesses such as hotels, casinos, rental car agencies, colleges and other institutions that operate their own fleets decide to privatize or outsource non-core operations. CAPITALIZING ON NEW CORPORATE STRUCTURE. The Company intends to continue to take advantage of its new corporate structure by: CENTRALIZING ADMINISTRATIVE FUNCTIONS. The Company believes that it will continue to have greater purchasing power, resulting in significant cost savings in such areas as equipment and parts, tires, insurance and financing, than the operating locations had independently. The Company has begun to realize cost savings through the consolidation of administrative functions such as employee benefits, safety and maintenance programs and risk management. INCREASING OPERATING EFFICIENCIES. The Company believes that there are opportunities to eliminate redundant facilities and equipment through coordination among the various operating subsidiaries of the Company. Additionally, the Company expects to continue to benefit from cross-marketing and increased equipment utilization that has already occurred among the various operating locations of the Company. ACQUISITION STRATEGY The Company believes that there are many attractive acquisition candidates in the motorcoach and passenger ground transportation services industry because of the highly fragmented nature of the industry, industry participants' need for capital and their owners' desire for liquidity. The Company will continue to pursue an aggressive acquisition program to consolidate and enhance its position in its current markets and to acquire operations in new markets. The Company acquired the six Founding Companies simultaneously with the completion of the Initial Public Offering. The Founding Companies include four companies in New Jersey, and one each in San Francisco and Phoenix. Through the remainder of fiscal 1996, the Company completed the acquisition of eight additional motorcoach service businesses and one additional taxicab service business. Subsequent to the end of the 1996 fiscal year, the Company completed the acquisition of three additional motorcoach businesses and the acquisitions of three other companies are currently pending. These acquisitions increase the Company's presence in New Jersey and the northeastern United States and expand the Company's operations into Miami, Houston, San Antonio, Las Vegas, southern California and Wyoming. The Company believes that it can successfully implement its acquisition program due to: (i) its strategy for creating a national company, which should enhance the acquired Company's ability to compete in its local and regional market through an expansion of offered services, improved equipment utilization and lower operating costs; (ii) the additional capital available for new equipment; (iii) the potential for increased profitability as a result of the Company's centralization of certain administrative functions, greater purchasing power and economies of scale; (iv) its financial strength and visibility as a public company; and (v) its decentralized management strategy, which should, in most cases, as in each of the current operating subsidiaries, enable the acquired company's management to remain involved in the operation of the company. The Company has analyzed a substantial amount of data on the motorcoach and passenger ground transportation services industry and individual businesses within the industry and believes it is well positioned to continue implementing its acquisition program. Several of the principals of the current operating subsidiaries have leadership roles in both national and regional motorcoach and taxicab service trade associations, which has allowed these principals to become personally acquainted with operators of motorcoach and passenger ground transportation services businesses across the country. The Company 5 believes that the visibility of these individuals within these associations will increase the industry's awareness of the Company and its strategies, thereby attracting interest from local and regional operators. OPERATIONS All aspects of the Company's daily motorcoach and passenger ground transportation services operations are handled on a local basis. Each location has an operations center staffed by customer service personnel, fleet managers and dispatchers. All of the Company's commuter and transit services as well as its sightseeing and specialized destination route services are operated with dedicated fleets of motorcoaches and drivers, and most fleets include back-up vehicles in case of equipment breakdown or higher passenger volume. Because commuter and transit services and specialized destination route services involve fixed routes which rarely vary, the dispatch function is limited to communicating with drivers by radio to determine that the motorcoach is in service, the number of passengers embarked and whether the motorcoach is on schedule and to deal with any problems in route. When necessary, dispatchers can communicate necessary modifications in schedules to meet customer demand and increase utilization. Computerized dispatch services are an integral part of the daily support services provided to the independent contractor drivers. Operations personnel schedule individual motorcoaches for recreation and excursion services as charter business is obtained. In many instances, the Company receives bookings for tours and charters well in advance, which enables the Company to predict periods during which equipment utilization is likely to be low. When this occurs, the Company more actively solicits charter business in an effort to maintain equipment utilization or schedules alternative uses for its equipment, particularly during the winter months when tourism declines. The Company maintains a decentralized management structure. Most operating decisions are made at the operating location level. At the same time, the Company has begun to centralize and maintain certain administrative support activities. The Company believes that by continuing to remove the burden and attention-diverting responsibility of administrative and support functions, the management of the operating companies and any other acquired businesses will be able to focus on pursuing new business opportunities and improving equipment utilization and yields. The Company has initiated and believes there will continue to be opportunities to increase equipment utilization by coordination among the various operating locations. For example, some motorcoaches that transport passengers into New York City or Atlantic City in the morning are parked until they run the reverse trip at the end of the day. The use of these motorcoaches for day charters and sightseeing could be increased. In addition, equipment stored during the "off-season" could be transported and utilized by another location that has more business during that time. MAINTENANCE Each of the Company's motorcoach operating locations has a comprehensive preventive maintenance program for its equipment to minimize equipment downtime and prolong equipment life. This program includes regular safety checks when a motorcoach returns to the terminal, regular oil and filter changes, lubrication, cooling system checks and wheel alignment on average every 6,000 to 12,000 miles, and more extensive maintenance procedures at greater intervals. Interiors of motorcoaches are cleaned and exteriors washed usually on a daily basis. Repairs and maintenance are primarily performed at various maintenance facilities operated by the Company. Most maintenance provided by outside facilities results from on-the-road breakdowns or involves major engine overhauls. To the extent economically and logistically practicable, the Company shares maintenance facilities and personnel among the operating locations. The Company expects this will result in a decrease in the percentage of maintenance costs incurred at outside shops and a decrease in total maintenance costs. It also may be possible to close some maintenance facilities in areas where there will be multiple maintenance facilities. 6 The Company expects that replacement of older motorcoaches with newer equipment will reduce maintenance costs largely because late model motorcoaches are more reliable and have better engine and power train warranties. In addition, the Company believes that it may be able to negotiate better warranty terms than the individual operating locations could because of the increased negotiating power of the Company. The Company intends to purchase most of its motorcoaches with standard component specifications, particularly engines and drive trains, thereby reducing the complexity of maintenance and spare parts management. The Company has entered into a leasing agreement for tires on terms more favorable than previously available to the operating companies individually. SALES AND MARKETING The Company has a broad customer base. No single customer of the Company accounted for more than 10% of revenues in 1996. Management at the Company's operating locations has been responsible for establishing and maintaining relationships with tour organizers, travel agencies and other regular users of charter and tour services as well as pursuing outsourcing and privatization opportunities. Each of the motorcoach operations also has a sales staff that focuses primarily on obtaining specific charter and tour business. The principal means of marketing charter and tour services has been in telephone directories and through direct mail or personal contact with customers included in each operating location's data bases, which include civic groups, schools and domestic and foreign tour organizers and travel agencies. The Company uses ticket counters in hotel lobbies and concierges to market and promote sightseeing services. The Company's specialized destination route services to casinos in New Jersey, Connecticut, Nevada and Louisiana are promoted primarily by individual casinos. These casinos will either pay the Company for the transportation or provide incentives to passengers transported by the Company to the casino. In some instances, the casinos actively advertise these promotions in various media, such as newspapers, television and billboards. Once the Company has established operations in a sufficient number of metropolitan areas, the Company intends to implement a targeted national sales and marketing campaign for its recreation and excursion services. The focus of this campaign will be on national users of motorcoach service, such as domestic and international travel and tour agencies, convention organizers and sports teams. The Company believes that it will have a marketing advantage over its competitors since it will be able to offer consistent, dependable, quality service in various metropolitan areas in the United States, thereby enabling its customers to use the Company's services in multiple locations rather than dealing with numerous regional or local motorcoach operators. Contracts with counties and municipalities to provide commuter and transit and paratransit services are generally obtained through a competitive bidding process. In some instances where the Company is the existing provider, the county or municipality may elect to renegotiate the Company's existing contract instead of putting the contract out for rebid. The Company believes that counties and municipalities consider quality of service, reliability and price to be the most important factors in awarding contracts although other factors, such as financial stability, personnel policies and practices and total cost both to the municipality and the public, are also considered. The Company's taxicab service operations utilize the yellow pages, billboards and signs on the taxicabs as the primary means of marketing services. Paratransit contracts are obtained through a competitive bidding process. COMPETITION The portions of the motorcoach and ground transportation industry in which the Company operates are highly competitive, fragmented and served by numerous operators, most of which serve only a single area or region. The Company's competitors include other operators of motorcoaches and other high occupancy and taxicab and luxury sedan vehicles, rent-a-car companies and, to a more limited extent, airlines, Amtrak and commuter rail service providers. Some of the Company's competitors, which vary depending on 7 geographic region and the nature of the service provided, have greater financial, technical and marketing resources and generate greater revenues than the Company in specific regions. The majority of the Company's motorcoach competitors consist of small regional operators with a strong presence in their respective markets. The Company believes that as it expands geographically, it may compete with additional national, regional and local transportation service providers. The Company believes that the principal competitive factors in the motorcoach industry are reliability, customer service and price, as well as equipment comfort and appearance. In addition, competition with respect to some services is limited in some locations by the difficulty in obtaining required state route authorizations. The Company believes that its ownership of route authorizations provides it with a competitive advantage in certain markets because of the relative difficulty of obtaining these authorizations. The Company competes for acquisition candidates. The Company believes that its decentralized management philosophy and operating strategies will make it an attractive acquiror to other motorcoach and ground transportation companies. However, no assurance can be given that the Company's acquisition program will continue to be successful or that the Company will be able to compete effectively in its chosen markets. REGULATION As a result of the ICC Termination Act of 1995 (the "Termination Act"), the Interstate Commerce Commission (the "ICC"), which previously regulated motorcoach operators engaged in interstate commerce, was abolished effective January 1, 1996. However, certain of the ICC's regulatory functions were transferred as of that date to the Surface Transportation Board (the "STB"), a new regulatory body established within the United States Department of Transportation (the "USDOT"), and certain other functions were transferred to the United States Secretary of Transportation (the "Secretary"). Under the Termination Act, motorcoach operators engaged in interstate commerce are generally required to be registered with the Secretary, who has delegated responsibility for registration to the Office of Motor Carriers of the Federal Highway Administration ("FHWA"), another body of the USDOT. By virtue of the Termination Act, persons who held operating authority issued by the ICC prior to December 31, 1995 were automatically deemed registered with the Secretary. Most of the Company's operating companies held authority issued by the ICC prior to December 31, 1995, and, accordingly, were deemed registered with the FHWA and are now subject to the regulatory requirements of the STB and the FHWA. The Bus Regulatory Reform Act of 1982 significantly reduced federal regulation of the motorcoach industry. The Termination Act further lessened regulatory requirements, with the result that the Secretary, the STB and the FHWA have only limited regulatory authority over interstate motorcoach operations. The level of fares is not subject to federal regulation, and motorcoach operators are not required to file tariffs. Motorcoach operators are, however, required by the Termination Act to provide transportation service on reasonable request and to provide safe and adequate service, equipment and facilities. They must also maintain minimum amounts of insurance and file evidence of such insurance with the FHWA. The Secretary and the STB are vested with enforcement authority, including authority to impose civil penalties, with respect to violations of applicable regulatory requirements. The Secretary may also suspend, amend or revoke a registration for willful failure to comply with the Termination Act, with the regulations of the Secretary, the STB or the FHWA or with any condition of the operator's registration. The Termination Act preempts states, their political subdivisions and multi-state agencies from regulating the scheduling or rates of interstate or intrastate transportation provided by motorcoach operators on interstate routes. However, states may require motorcoach operators to provide notice, not in excess of 30 days, of changes in their schedules. These preemption provisions do not apply to commuter service. The Company is subject to extensive FHWA and state regulations with respect to the qualifications of its drivers and the safety of its vehicles and their operation. See "Drivers and Other Personnel" and "Safety." In addition, the high occupancy vehicles operated by the Company are required by FHWA regulations to meet Federal noise standards established by the Environmental Protection Agency. The Company believes that it has conducted its operations in substantial compliance with FHWA regulations, 8 and the Company does not believe that ongoing compliance with such regulations will require substantial capital expenditures. Under the ADA, the Company could become obligated to provide accessible vehicles to persons who are disabled under certain circumstances defined in that statute and in USDOT regulations. If the Company were required to make its motorcoaches compatible with ADA regulations, it could result in significant capital expenditures by the Company. The Company is subject to regulation by the Occupational Safety and Health Administration with respect to worker and workplace safety. Certain states in which the Company operates, such as New Jersey, Nevada and Pennsylvania, have a comprehensive regulatory scheme in connection with the operation of high occupancy vehicles and with respect to the safety of operation and equipment. Although some of the regulatory restrictions of these states have been preempted by federal legislation, as described above, these states still maintain strong regulatory control over wholly intrastate routes. Because certain operations of the Company have been granted authority to provide commuter service and scheduled intrastate service, the Company has a competitive advantage. However, there can be no assurance that these states will maintain their current regulatory postures, and any reduction in regulation of motorcoach operators could adversely affect the Company. The Termination Act requires the STB's approval of any transaction under which a person that is not a regulated motorcoach operator, such as Coach USA, acquires control of two or more STB-regulated motorcoach operators. However, the STB is empowered to exempt persons from this requirement for approval of motorcoach acquisitions. Coach USA filed a petition with the STB seeking such exemption in order to permit the acquisition by Coach USA of those of the Founding Companies and their affiliates that are regulated by the STB, and the exemption was granted and became effective on May 3, 1996. The Company filed a similar petition with the STB seeking an exemption in connection with the acquisition of five motorcoach businesses that were part of the acquisitions completed in August 1996, and the exemption was granted and became effective on November 7, 1996. The Company has filed similar petitions with the STB seeking an exemption in connection with the acquisition of certain operations completed in December 1996 and February 1997. The Company's taxicab service operations are regulated at the state and local level. Local regulations focus on the number of vehicles that are authorized to provide taxicab services and whether new entries into the local marketplace will be granted authority to do business. These regulatory authorities also set and periodically review the maximum fares that can be charged to passengers. ENVIRONMENTAL MATTERS The Company's operations are subject to various Federal, state and local environmental laws and regulations governing vehicle emissions, underground and aboveground fuel tanks and the storage, use and disposal of hazardous materials and hazardous waste in connection with the Company's in-house maintenance operations. These laws include the Water Pollution Control Act, the Clean Air Act, as amended, the Resource Conservation and Recovery Act, as amended, the Comprehensive Environmental Response, Compensation and Liability Act and various state and local laws. There are underground storage tanks at several of the Company's facilities. The Company also conducts motorcoach washing at certain of its facilities and the resulting waste must be disposed of in accordance with regulatory requirements. In the event of a spill, the Company would be responsible for the cost of the clean-up, which could be significant. As a result of historical operations, there have been spills and releases of hazardous substances, including petroleum and petroleum products, at several of the Company's facilities. At certain locations, the Company has had to remediate these spills and releases at a significant cost to the Company. However, additional spills and releases of hazardous substances of which the Company is unaware, including spills and releases of petroleum and petroleum products, may have occurred at the Company facilities. With respect to unknown pre-existing contamination at a facility, in most instances, each of the stockholders of the applicable business acquired by the Company has agreed to indemnify the Company (up to the amount of consideration such stockholder received, after satisfaction of a threshold payable by the Company, which varies depending on the transaction) for liabilities in connection with such contamination. If and to the extent that any stockholder of such a business had actual knowledge of a spill or release and did not disclose it to the Company, such stockholder has agreed to indemnify the Company for all liabilities in connection 9 with such contamination, not subject to any limit on such indemnification obligation. Some of the operating companies have disclosed that from time to time they have spilled or released certain hazardous substances in the course of operating their businesses. The Company has begun to initiate the implementation of an environmental compliance program at all of its facilities in an effort to prevent or reduce future releases of hazardous substances. DRIVERS AND OTHER PERSONNEL As of December 31, 1996, the Company had approximately 4,100 employees, of whom approximately 2,570 were motorcoach drivers and approximately 630 were maintenance personnel. The balance includes administrative personnel, sales personnel, customer service personnel, fleet managers, dispatchers and safety and training personnel. Of these employees, approximately 2,900 are full-time employees. The Company's taxicab and paratransit services are provided through independent contractor drivers that are not employees of the Company. The Company has established motorcoach driver retention programs which seek to maintain a sufficient number of qualified drivers to handle passenger service. Each operating location historically had relatively minimal driver turnover among full-time drivers other than for sightseeing and tour services, where the need for motorcoach drivers varies seasonally. Safety and dependability of drivers are critical to the Company's operations. Motorcoach drivers are required to comply with all applicable Federal and state driver qualification and safety regulations, including hours of service and medical qualifications, and to hold a Commercial Driver's License issued in conformity with regulations of the FHWA. Drivers are also subjected to drug and alcohol testing requirements imposed by the FHWA, including random, reasonable suspicion and post-accident testing. Driver applicants are required to have significant driving experience and to pass medical examinations. Taxicab drivers are subject to laws and regulations governing driving records, appearance and presentation which are monitored by local municipalities. As of December 31, 1996, several different unions represented approximately 1,350 employees of the Company, of whom approximately 1,190 were motorcoach drivers. The Company is a party to a number of different collective bargaining agreements which expire at various dates through 2000. In the last 10 years, the various operating companies have not experienced any work stoppages and the Company believes that relationships with union representatives and union employees are satisfactory. SAFETY The Company is dedicated to safe operations. The Company vigorously adheres to the FHWA and comparable state motor carrier safety rules, including rules concerning safe motor vehicle equipment, driver qualifications and safe operation of vehicles. The Company maintains drug and alcohol testing programs for its motorcoach drivers in conformity with FHWA and comparable state requirements. The Company also addresses accidents and other incidents and takes follow-up steps intended to reduce the risk of repeat accidents and incidents. The Company employs safety specialists and maintains safety programs designed to meet the specific needs of the operating location, including field spotters and riders who assess motorcoach driver performance. In addition, the Company employs specialists to perform compliance checks and conduct safety tests throughout the operations. The Company conducts a number of safety programs designed to promote compliance with rules and regulations and to reduce accidents and injury claims. These programs include incentive programs for accident-free driving, driver safety meetings, distribution of safety bulletins to drivers and participation in national safety associations. RISK MANAGEMENT AND INSURANCE The primary risks in the Company's operations are bodily injury and property damage to third parties and workers' compensation. The Company maintains insurance against these risks in amounts which it considers sufficient and is subject to loss deductibles per incident ranging from $5,000 to $250,000. As such, any claim within the deductible per incident would be a financial obligation of the Company. 10 DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS This Report includes "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this Report, including without limitation (a) statements in paragraph three under "Business" regarding the Company's strategy of consolidation through acquisitions and the factors that will contribute toward the success of that strategy, (b) the statements in paragraphs two, three, four, six and seven under "Industry Overview" regarding the demand for transportation services and the factors impacting that demand, (c) the statements under "Business Strategy" regarding the Company's acquisition, internal growth and economies-of-scale strategies, (d) the statements in paragraph one under "Acquisition Strategy" regarding the number of acquisition candidates in the industry, (e) the statements in paragraphs three and four under "Acquisition Strategy" regarding the factors contributing to the success of the acquisition program, (f) statements in paragraphs two and three under "Operations" regarding the benefits of a decentralized management structure, (g) the statements in paragraph four under "Maintenance" regarding the impact on maintenance costs of motorcoach replacement, (h) the statements in paragraph four under "Sales and Marketing" regarding the implementation and targets for a national sales and marketing campaign, (i) the statements in paragraph five under "Sales and Marketing" regarding the considerations used by governmental agencies in awarding contracts, (j) the statements under "Competition" regarding potential competition, competitive factors in the motorcoach industry and the Company's ability to compete for acquisition candidates, and (k) the statements under "Drivers and Other Personnel" regarding the Company's relationship with union representatives and employees are forward looking statements. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed in this Report, including without limitation in conjunction with the forward looking statements included in this Report. All subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. ITEM 2. PROPERTIES FACILITIES At December 31, 1996, the Company's facilities consisted principally of offices, garages and maintenance facilities. Some of these are single facilities, and other facilities have limited operations, which may not include complete maintenance services. The Company owns eight of the facilities on which motorcoach or taxicab operations are located. The remaining facilities are leased, including some from related parties. The Company believes that its facilities are adequate for its current needs. The Company leases its executive and administrative offices in Houston, Texas. EQUIPMENT The Company operates approximately 1,650 motorcoaches and other high occupancy vehicles. Approximately 200 of these motorcoaches are provided by various transit authorities for nominal rent, with the Company assuming full responsibility for maintenance and repairs. These motorcoaches are provided under contracts to perform transit and commuter services and must be returned to the transit authorities in the event the contracts for them are not renewed. In addition, approximately 100 other motorcoaches have been provided by certain transit authorities to the Company to operate for the normal useful operating lives thereof, and these motorcoaches must only be returned to such transit authorities if the Company surrenders its routes for which such motorcoaches were provided, or at the end of the normal useful operating lives thereof. The Company's owned fleet of motorcoaches has an average age of five years. Motorcoaches have a useful operating life in excess of 10 years. The Company's replacement policy will depend on the use being made of the particular motorcoach, but the Company expects that on average it will replace motorcoaches every 10 to 12 years. A majority of the Company's current fleet of motorcoaches are from 11 one manufacturer, Motorcoach Industries Incorporated, although other manufacturers are represented in the Company's fleet. Most engines and drive trains are manufactured by Detroit Diesel and Allison Transmissions, respectively. This continuity of engine and drive train should enable the Company to implement a standardized, Company-wide maintenance program and allow it to reduce its spare parts inventory. The Company leases most of its tires from Firestone, with the lease payments based on mileage driven on the tires. The Company's taxicab service operations provide dispatch and related services to a fleet of over 1,350 vehicles, of which approximately 860 are owned and operated by independent contractor drivers and the remainder of which are owned by the Company and leased on a daily or weekly basis to independent contractor drivers. The Company offers full service maintenance and repairs on vehicles owned by the independent contractor drivers and provides maintenance on the vehicles owned by the Company. ITEM 3. LEGAL PROCEEDINGS LITIGATION One or more of the operations of the Company (or other operations acquired in the future by the Company) may become subject to litigation in connection with the competitive bidding process for a contract to provide transit, commuter or paratransit services on behalf of a transit authority. Unsuccessful bidders occasionally will challenge, through a regulatory appeals process or in court, the awarding of the contract and will often name the successful bidder as an additional defendant. The cost of defending such an action can be significant, and if the required competitive bidding procedures were not followed by the transit authority, the authority could be ordered to begin the process over or even award the contract to another bidder. From time to time, the Company is a party to routine litigation incidental to its business, primarily involving claims for personal injury or property damage incurred in the transportation of its passengers. The Company is not aware of any pending claims or threatened claims which, if adversely determined, might materially affect the Company's operating results or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 12 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock has traded on the Nasdaq National Market since May 14, 1996. The following table sets forth the high and low last sale prices for the Common Stock for the period from May 14, 1996, the date of the Initial Public Offering, through March 17, 1997. HIGH LOW ---- ---- 1996 Second quarter (from May 14).... $22 3/4 $17 5/8 Third quarter................... 27 1/2 18 Fourth quarter.................. 32 25 1997 First quarter (through March 24, 1997)........................... 34 1/4 28 At March 24, 1997, there were approximately 144 stockholders of record of the Company's Common Stock. On March 24, 1997, the last reported sale price of the Common Stock on the Nasdaq National Market was $30.00 per share. DIVIDENDS The Company intends to retain all of its earnings, if any, to finance the expansion of its business and for general corporate purposes, including future acquisitions, and does not anticipate paying any cash dividends on its Common Stock for the foreseeable future. In addition, the Company's revolving credit agreement includes, and any additional lines of credit established in the future may include, restrictions on the ability of the Company to pay dividends without the consent of the lender. SALE OF UNREGISTERED SECURITIES The following information relates to securities of the Company issued or sold by the Company during the past year which were not registered under the Securities Act: (i) In January 1996, the Company issued 30 shares of Common Stock at an effective price of $.01 per share to officers of the Company; and (ii) In March 1996, the Company issued 39.2 shares of Common Stock at an effective price of $.01 per share to officers of the Company, an employee of Notre Capital Ventures II, LLC, a firm which participated in the organization of the Company, Dominic Puopolo and M Three Trust (a trust for the benefit of the children of Paul M. Verrochi) (Messrs. Puopolo and Verrochi are principals with Exel Motorcoach Partners, LLC, a consultant to the Company, and Mr. Verrochi is a member of the board of directors of the Company). Subsequent to the issuance of the foregoing shares, and prior to the completion of the Initial Public Offering, Coach USA declared a stock dividend and issued 9,999 shares of Common Stock for each share of Common Stock then outstanding. Simultaneously with the completion of the Initial Public Offering, the Company issued 5,099,687 shares of its Common Stock in connection with the Mergers of the six Founding Companies. In connection with the acquisition of businesses completed in August 1996, the Company issued 2,558,580 shares of Common Stock to the stockholders of the companies in the transactions accounted for as poolings-of-interests and convertible debt currently convertible into 750,460 shares of Common Stock to the stockholders of the purchased companies accounted for as purchases. In connection with the acquisition of businesses completed in December 1996, the Company issued 1,150,795 shares of Common Stock to the stockholders of the companies acquired in three transactions accounted for as poolings-of-interests. Each of these transactions was effected without registration of the relevant security under the Securities Act in reliance upon the exemption provided by Section 4(2) of the Securities Act for transactions not involving a public offering. 13 ITEM 6. SELECTED FINANCIAL DATA COACH USA, INC. SELECTED PRO FORMA FINANCIAL DATA Coach USA acquired, simultaneously with the closing of the Initial Public Offering, the Founding Companies. During the remainder of 1996, the Company completed nine acquisitions, six of which were accounted for as poolings-of-interests (the "Pooled Companies") and three of which were accounted for as purchases (the "Purchased Companies"). The PRO FORMA STATEMENT OF INCOME DATA and BALANCE SHEET DATA below include historical financial statement data of the Founding Companies at historical cost, the Company (including the Pooled Companies) for all periods presented and the Purchased Companies since the date of acquisition. The PRO FORMA FOR COMPENSATION DIFFERENTIAL AND OTHER ADJUSTMENTS data below give effect to (i) certain reductions in salaries and benefits to the owners of the Founding Companies and the Pooled Companies which were agreed to in connection with the original mergers of the Founding Companies and the acquisition of the Pooled Companies, as well as a non-recurring, non-cash charge recorded by the Company (collectively, the "Compensation Differential"); (ii) certain tax adjustments related to the taxation of certain Founding Companies and Pooled Companies as S Corporations prior to the consummation of the mergers of the Founding Companies and the acquisitions completed through 1996; (iii) the tax impact of the Compensation Differential in each period; (iv) for 1995 and 1996, the conversion of debt to equity at one of the Pooled Companies; and (v) the elimination of non-recurring pooling costs associated with the 1996 acquisitions. The PRO FORMA FOR PURCHASED COMPANIES data below gives effect to all items above and the effect of the acquisitions of the Purchased Companies as if those acquisitions occurred on January 1, 1995, and gives pro forma effect to (i) Compensation Differential of the Purchased Companies, (ii) the amortization of goodwill, (iii) interest expense attributed to the convertible debt, and (iv) income tax adjustments attributed to the above adjustments.
YEAR ENDED DECEMBER 31 ----------------------------------------------------- 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA STATEMENT OF INCOME DATA: Total revenues...................... $ 159,065 $ 166,714 $ 175,175 $ 197,414 $ 230,66 Operating expenses.................. 126,828 135,283 139,114 150,725 173,551 Gross profit........................ 32,237 31,431 36,061 46,689 57,115 General and administrative expenses.......................... 22,472 22,073 24,198 27,162 30,766 Operating income.................... 9,765 9,358 11,863 19,527 26,349 Income before extraordinary items... 4,010 3,029 3,949 8,555 9,167 PRO FORMA FOR COMPENSATION DIFFERENTIAL AND OTHER ADJUSTMENTS: Total revenues...................... $ 159,065 $ 166,714 $ 175,175 $ 197,414 $ 230,666 Operating expenses.................. 126,828 135,283 139,114 150,725 173,551 Gross profit........................ 32,237 31,431 36,061 46,689 57,115 General and administrative expenses.......................... 20,114 18,665 20,152 21,363 24,226 Operating income.................... 12,123 12,766 15,909 25,326 32,889 Income before extraordinary items... 10,519 14,469 Extraordinary items................. -- 2,723 Net income.......................... 10,519 17,192 Income before extraordinary items per share......................... $ 0.82 $ 0.99 Net income per share................ 0.82 1.17 Weighted average shares(1).......... 12,794 14,677 PRO FORMA FOR PURCHASED COMPANIES: Total revenues...................... $ 233,266 $ 256,686 Operating expenses.................. 173,610 189,016 Gross profit........................ 59,656 67,670 General and administrative expenses.......................... 25,193 29,421 Operating income.................... 34,463 38,249 Income before extraordinary items... 11,910 15,376
14
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 1992 1993 1994 1995 1996 --------- --------- --------- --------- ---------- PRO FORMA HISTORICAL ------------------------------------------------------ BALANCE SHEET DATA (AT END OF PERIOD): Working capital (deficit)........... $ (8,395) $ (7,563) $ (8,448) $ (10,275) $ (4,597) Total assets........................ 120,986 123,312 139,806 165,184 276,843 Total debt, including current portion........................... 72,408 68,538 80,833 94,410 97,118(2) Stockholders' equity................ 13,320 16,519 19,122 23,763 103,971
- ------------ (1) The 1995 share data include: (i) 2,165,724 shares issued by Coach USA prior to the Initial Public Offering; (ii) 5,099,687 shares issued to the stockholders of the Founding Companies in connection with the Mergers; (iii) 1,700,714 of the 4,140,000 shares sold in the Initial Public Offering to pay the cash portion of the consideration for the Founding Companies; (iv) 118,142 of the 4,140,000 shares sold in the Initial Public Offering to pay excess S Corporation distributions; (v) 3,284,336 shares issued in connection with the acquisition of the Pooled Companies; and (vi) 425,039 shares issued in connection with the conversion of the indebtedness to equity at one of the Pooled Companies completed in 1996. The 1996 share data include those amounts included in the 1995 share data plus (i) the remaining weighted average for the 2,321,144 of the 4,140,000 shares sold in the Initial Public Offering; (ii) 2,084,307 shares sold in the Secondary Public Offering during November 1996 weighted for the period ended December 1996; and (iii) 227,743 shares attributable to dilution for outstanding options to purchase Common Stock, using the treasury stock method. (2) Does not include $22,500,000 of convertible debt issued in connection with the acquisitions of the Purchased Companies. 15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Coach USA was founded in September 1995 to create a nationwide provider of motorcoach and other ground transportation services. On May 17, 1996, Coach USA acquired, simultaneously with the closing of the Initial Public Offering, the six Founding Companies. Through the remainder of 1996, the Company acquired nine additional businesses. The acquisition of six of these businesses has been accounted for under the pooling-of-interests method of accounting and the remaining three have been accounted for under the purchase method of accounting. As a result, the pro forma financial statements, including the pro forma results discussed below, include the historical financial statements of each of the Founding Companies and the Company (including the Pooled Companies) for all periods presented at historical cost, as if these companies had always been members of the same operating group and give effect to (i) the Compensation Differential; (ii) the elimination of merger costs related to pooled acquisitions; (iii) certain tax adjustments related to the taxation of certain Founding Companies and Pooled Companies as S Corporations prior to the consummation of the mergers of the Founding Companies and the subsequent acquisitions; and (iv) the tax impact of the Compensation Differential in each period. The Company has begun to realize savings by consolidating certain general administrative and purchasing functions and reducing insurance expenses. In addition, the Company has begun to realize savings from its ability to borrow at lower interest rates than the Founding Companies and the subsequent acquisitions. These savings are being partially offset by the costs of being a public company and the incremental increase in costs related to the Company's new corporate management. Neither these savings nor the costs associated therewith for the periods prior to the Initial Public Offering have been included in the pro forma financial information discussed below. As a result, historical pro forma results may not be comparable to, or indicative of, future performance. The Company's motorcoach revenues are derived from fares charged to individual passengers and fees charged under contracts to provide motorcoach services. Taxicab operation revenues are derived from fees and other services charged to independent taxicab operators. Operating expenses consist primarily of salaries and benefits for motorcoach drivers and mechanics, depreciation, maintenance, fuel, oil, insurance and commissions to agents. General and administrative expenses consist primarily of compensation and related benefits to the owners and certain key employees of the Founding Companies and the Pooled Companies, administrative salaries and benefits, marketing, communications and professional fees. PRO FORMA RESULTS FOR 1995 COMPARED TO 1996 Total revenues increased $33.3 million, or 16.8%, to $230.7 million for the year 1996. The increase in revenues was largely due to: (i) an increase in taxicab service revenues of $7.3 million, primarily attributable to internal expansion, (ii) an increase of $7.2 million in special destination services revenues primarily to the Atlantic City and Louisiana casinos, and (iii) an increase of $4.1 million in per capita tour revenue attributable in part to the acquisition of Gray Line Los Angeles in 1995. In addition, revenues from the Purchased Companies totaled $12.7 million since their acquisition. Operating expenses increased 15.1% to $173.6 million for 1996. The increase in operating expenses was largely due to a combined increase of $2.9 million at all of the locations attributable to higher fuel costs in 1996. Approximately $1.3 million of the additional fuel cost related to higher prices and the remainder related to higher consumption consistent with the Company's increased operations. The increase in fuel expense was offset by savings in the Company's insurance program. The remaining increase was consistent with increased operations throughout the Company. General and administrative expenses in 1996, after elimination of the Compensation Differential, increased $2.8 million, or 13.4%, from $21.4 million in 1995 to $24.2 million. The increase in general and administrative expenses was largely due to an increase of $1.5 million related to the establishment of the 16 corporate management group required to execute the acquisition program and to manage the consolidated group of companies. The remaining increase was consistent with the increased operations throughout the Company. Interest expense increased $1.5 million in 1996 as compared to 1995 due to the higher level of debt related to additional equipment and debt related to the Purchased Companies, partially offset by the repayment of debt through the use of proceeds of the Initial Public Offering, a secondary offering of Coach USA Common Stock completed in November 1996 and due to lower rates from the Company's new credit facility. Pro forma net income (before giving effect to the extraordinary items), which has been adjusted for the Compensation Differential and the pro forma provision for taxes, increased during 1996 as compared to 1995 primarily due to continued revenue growth and the effects of increased purchasing power. The extraordinary items recorded in 1996 include an extraordinary gain that was recognized in connection with the mergers of the Pooled Companies with Coach USA in August 1996 and extraordinary losses related to prepayment penalties on certain debt retired. Obligations due to stockholders of $17.2 million were retired in exchange for shares of Coach USA Common Stock. The transactions resulted in an extraordinary gain on early extinguishment of debt of approximately $4.2 million, net of taxes, representing the excess of the recorded value of the obligations exchanged over the market value of the Coach USA Common Stock. In addition, extraordinary losses of $1.5 million, net of taxes, for prepayment penalties on certain retired debt were recorded in 1996. PRO FORMA RESULTS FOR 1994 COMPARED TO 1995 Total revenues increased $22.2 million, or 12.7%, from $175.2 million in 1994 to $197.4 million in 1995. The increase was largely due to an increase in motorcoach charter and special destination revenues of $9.0 million, primarily attributable to increased service to the Louisiana casinos, an increase in motorcoach transit revenues of $5.7 million, primarily attributable to additional transit contracts in Northern California and New York, an increase in taxicab service revenues of $2.9 million, primarily attributable to the purchase of additional taxicab operations in Austin, Texas in July 1995, and an increase in per capita revenue of $2.5 million primarily attributable to the acquisition of Gray Line Los Angeles in 1995. Operating expenses increased $11.6 million, or 8.3%, from $139.1 million in 1994 to $150.7 million in 1995, but declined as a percentage of revenues from 79.4% in 1994 to 76.3% in 1995. The dollar increase was largely due to an increase in operating expenses of $3.8 million, primarily attributable to increased service to the Louisiana casinos, an increase in operating expenses of $4.6 million, primarily attributable to the increase in transit services, and $2.1 million, primarily attributable to higher per capita sales. These increases were partially offset by a $2.2 million reduction in operating expenses primarily due to a decision not to renew a municipal contract in the Northeast, and lower salaries, wages and related benefits from favorable revisions of a collective bargaining agreement. General and administrative expenses, after elimination of the Compensation Differential, increased $1.2 million, or 6.0%, from $20.2 million in 1994 to $21.4 million in 1995. This increase was consistent with the increase in revenues. Interest expense increased $1.7 million, or 26.0%, from $6.6 million in 1994 to $8.3 million in 1995. The increase was largely due to higher levels of debt during 1995 as a result of equipment purchases. Net income, adjusted for the Compensation Differential and taxes, increased $4.9 million, from $5.6 million in 1994 to $10.5 million in 1995, and represented 3.2% of revenues in 1994 compared to 5.3% of revenues in 1995. 17 SELECTED CONSOLIDATED FINANCIAL DATA The following consolidated financial information represents the operations of the Pooled Companies for all periods presented and the Founding Companies and Coach USA for the seven months ended December 31, 1996 and the Purchased Companies since the date of acquisition. This financial information has been derived from the Consolidated Financial Statements of Coach USA. Pro forma net income before extraordinary items gives effect to (i) the Compensation Differential; (ii) the elimination of non-recurring pooling costs associated with the 1996 acquisitions; and (iii) the tax impact of the Compensation Differential in each period.
YEAR ENDED DECEMBER 31 ------------------------------------------------------ 1992 1993 1994 1995 1996 --------- --------- --------- --------- ---------- (IN THOUSANDS) STATEMENT OF INCOME DATA: Total revenues.................. $ 62,137 $ 63,642 $ 68,421 $ 83,925 $ 185,728 Gross profit.................... 14,887 13,413 17,154 23,725 48,963 Operating income................ 4,309 3,830 5,427 9,576 25,973 Income before extraordinary items......................... 631 681 649 2,411 10,192 PRO FORMA: Operating income................ 6,537 5,402 7,415 12,168 29,874 Income before extraordinary items......................... 2,127 2,079 1,983 3,711 12,982 BALANCE SHEET DATA: Working capital (deficit)....... $ (5,543) $ (5,598) $ (5,049) $ (6,062) $ (4,597) Total assets.................... 52,372 54,856 64,965 82,997 276,843 Total debt, including current portion....................... 39,839 38,525 48,950 62,337 97,118(1) Stockholders' equity............ (4,115) (2,448) (2,519) (951) 103,971
- ------------ (1) Does not include $22,500,000 of convertible debt issued in connection with the acquisitions of the Purchased Companies. HISTORICAL RESULTS FOR 1995 COMPARED TO 1996 Total revenues increased $101.8 million, or 121.3%, to $185.7 million for the year 1996. The increase in revenues was largely due to: (i) the acquisition of the Founding Companies with revenues of $72.9 million, (ii) the acquisition of the Purchased Companies with revenues of $12.7 million, (iii) an increase in taxicab service revenues of $7.3 million, primarily attributable to internal expansion, (iv) an increase of $3.8 million in special destination services revenues primarily to the Louisiana casinos, and (v) an increase of $4.1 million in per capita tour revenue attributable in part to the acquisition of Gray Line Los Angeles in 1995. Operating expenses increased 127.2% to $136.8 million for 1996. The increase in operating expenses was consistent with increased operations throughout the Company. The remaining increase was due to higher fuel costs in 1996, offset by savings in the Company's insurance program. General and administrative expenses in 1996, after elimination of the Compensation Differential and the elimination of non-recurring pooling costs associated with the 1996 acquisitions, increased $7.5 million, or 65.2%, from $11.6 million in 1995 to $19.1 million in 1996. The increase in general and administrative expenses was largely due to the increase in operations and an increase related to the establishment of the corporate management group required. Pro forma net income (before giving effect to the extraordinary gain), which has been adjusted for the Compensation Differential and the pro forma provision for taxes, increased during 1996 as compared to 1995 primarily due to continued revenue growth and the effects of increased purchasing power. The extraordinary items recorded in 1996 include an extraordinary gain that was recognized in connection with the mergers of the Pooled Companies with Coach USA in August 1996 and extraordinary losses related to prepayment penalties on certain debt retired. Obligations due to stockholders of $17.2 million were retired in exchange for shares of Coach USA Common Stock. The transactions resulted in an extraordinary gain on early extinguishment of debt of approximately $4.2 million, net of taxes, representing the excess of the recorded value of the obligations exchanged over the market value of the Coach USA Common Stock. In addition, extraordinary losses of $1.5 million, net of taxes, for prepayment penalties on certain retired debt were recorded in 1996. HISTORICAL RESULTS FOR 1994 COMPARED TO 1995 Total revenues increased $15.5 million, or 22.7%, from $68.4 million in 1994 to $83.9 million in 1995. The increase was largely due to an increase in motorcoach charter and special destination revenues of $6.6 million, primarily attributable to increased service to the Louisiana casinos, an increase in taxicab service revenues of $2.9 million, partially attributable to the purchase of additional taxicab operations in Austin, Texas in July 1995, and an increase in per capita revenue of $2.5 million partially attributable to the acquisition of Gray Line Los Angeles in 1995. Operating expenses increased $8.9 million, or 17.4%, from $51.3 million in 1994 to $60.2 million in 1995, but declined as a percentage of revenues from 74.9% in 1994 to 71.7% in 1995. The dollar increase was largely due to an increase in operating expenses of $3.8 million, primarily attributable to increased service to the Louisiana casinos, and $2.1 million, primarily attributable to higher per capita sales. General and administrative expenses, after elimination of the Compensation Differential, increased $1.8 million, or 18.7%, from $9.7 million in 1994 to $11.5 million in 1995. This increase was consistent with the increase in revenues. Interest expense increased $1.4 million, or 33.2%, from $4.1 million in 1994 to $5.5 million in 1995. The increase was largely due to higher levels of debt during 1995 as a result of equipment purchases. Net income, adjusted for the Compensation Differential and taxes, increased $1.7 million, from $2.0 million in 1994 to $3.7 million in 1995, and represented 2.9% of revenues in 1994 compared to 4.4% of revenues in 1995. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $5.1 million, $4.2 million and $7.4 million for 1994, 1995 and 1996, respectively. Cash used in investing activities was $14.3 million, $12.5 million, and $53.7 million for 1994, 1995 and 1996, respectively. Cash used in investing activities was primarily for additions and replacements of motorcoaches and for expansion of facilities, net of sales of property and equipment. In addition, in 1996 the Company paid $34.5 million in cash for the Founding and Purchased Companies, net of cash acquired. Cash provided by financing activities was $8.1 million, $9.9 million and $44.4 million for 1994, 1995 and 1996, respectively. Cash provided by financing activities for 1995 was primarily attributable to the issuance of $10.8 million of long-term obligations, net of repayments, partially offset by $1.1 million in S Corporation distributions paid to the former owners of the Pooled Companies. Cash provided by financing activities of $44.4 million for 1996 was primarily attributable to $48.1 million from the Initial Public Offering and $48.5 million from the Second Public Offering partially offset by $50.5 million of net payments on long-term obligations and $1.8 million in S Corporation distributions paid to the former owners of the Pooled Companies. Cash and cash equivalents decreased $1.1 million and $1.9 million for 1994 and 1996, respectively. For 1995, cash and cash equivalents increased $1.6 million. 19 Capital expenditures during 1994, 1995 and 1996 were $14.3 million, $12.5 million and $20.6 million, respectively. These expenditures were primarily for motorcoaches and other vehicles, net of trade-ins and proceeds from sales of property and equipment, and were principally financed with debt and cash flows from operations. As of December 31, 1996, the Company had entered into commitments to purchase 108 motorcoaches as of December 31, 1996 for approximately $32.6 million. The Company expects to finance additional vehicle purchases primarily from cash flows from operations, trade-ins on older equipment supplemented, as necessary, with borrowings under its revolving credit agreement. On May 17, 1996, the Company completed the Initial Public Offering of 4,140,000 shares of Common Stock, resulting in net proceeds of approximately $48.1 million. The net proceeds were used to pay the cash portion of the purchase price for the Founding Companies and to repay indebtedness assumed by the Company. In November and December 1996, the Company sold 2,084,307 shares of Common Stock in the Second Public Offering, resulting in net proceeds of approximately $48.5 million. The net proceeds were used to repay outstanding debt freeing the existing credit facility for additional working capital and general corporate purposes, including acquisitions. Between January 1, 1997 and March 17, 1997, the Company acquired three businesses (see "Business -- Acquisitions"). The consideration paid for these businesses consisted of $34.3 million in cash, 578,033 shares of Common Stock and $18.3 million in convertible subordinated notes convertible into 484,239 shares of Common Stock. In February 1997, the Company amended and restated its revolving credit agreement. The credit agreement, as amended, provides for a revolving credit facility of $181 million through a syndicate of eight banks, and allows the Company to have borrowings of up to $40 million (in addition to fully subordinated debt) outside the credit facility. The facility is secured by substantially all of the assets of the Company and matures in August 1999. Interest on outstanding borrowings is charged, at the Company's option, at the banks' prime rate plus up to 1.0% or the London Interbank Offered Rate ("LIBOR") plus 1.0% to 2.25%, both as determined by the ratio of the Company's funded debt to cash flow (as defined). A commitment fee ranging from 0.25% to 0.50% is payable on the unused portion of the facility. Under the terms of the credit agreement, the Company must maintain certain minimum financial ratios. The credit agreement prohibits the payment of cash dividends. As of March 17, 1997, the Company had a total of $155.9 million outstanding under the revolving and other outside credit facilities and had utilized $5.0 million of the facility for letters of credit securing certain insurance obligations and performance bonds, resulting in a borrowing availability of $60.1 million under the revolving and other outside credit facilities. In September 1996, the Company entered into an interest rate cap agreement with a bank. The agreement has a term of one year and a notional amount of $50 million. The agreement provides that if the 90 day LIBOR rate exceeds 6.5% for certain measurement periods, the bank will pay to the Company the difference between such rate and 6.5%. As of March 17, 1997, the 90-day LIBOR rate was 5.62%. The cost of the agreement is being amortized over its term. Management believes that the Company's revolving credit facility and its cash flows from operations will provide sufficient liquidity to execute the Company's acquisition and internal growth plans for the next 12 months. Should the Company accelerate its acquisition program, the Company may need to seek additional financing through the public or private sale of equity or debt securities. There can be no assurance that the Company could secure such financing if and when it is needed or on terms the Company deems acceptable. SEASONALITY The timing of certain holidays, weather conditions and seasonal vacation patterns may cause the Company's quarterly results of operations to fluctuate significantly. The Company expects to realize higher revenues, operating income and net income during the second and third quarters and lower revenues and net income during the first and fourth quarters. 20 INFLATION Inflation has not had a material impact on the Company's results of operations for the last three years. DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS This"Management's Discussion and Analysis of Financial Condition and Results of Operations" includes "forward looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this section, including without limitation (a) statements in paragraph two under "Introduction" regarding the Company's incremental savings and additional cost related to formation and the exclusion of these items from the historical pro forma results, (b) the statements in paragraph five under "Historical results for 1995 compared to 1996" regarding the increase in 1996 pro forma net income, (c) the statements in paragraph five under "Liquidity and Capital Resources" regarding capital expenditures in 1994, 1995 and 1996 and the motorcoach purchase commitment, (d) the statements in paragraph eleven under "Liquidity and Capital Resources" regarding the revolving credit facility and its impact on cash flow, and (e) the statements under "Seasonality" regarding the factors affecting quarterly results are all forward looking statements. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Company's expectations ("Cautionary Statements") are disclosed in this section and elsewhere in this Report, including without limitation in conjunction with the forward looking statements included in this section. All subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the Cautionary Statements. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS PAGE ---- COACH USA, INC. AND SUBSIDIARIES: Report of Independent Public Accountants....................... 24 Consolidated Balance Sheets........ 25 Consolidated Statements of Income............................ 26 Consolidated Statements of Stockholders' Equity.............. 27 Consolidated Statements of Cash Flows............................. 28 Notes to Consolidated Financial Statements........................ 29 FOUNDING COMPANIES: SUBURBAN TRANSIT CORP. AND RELATED COMPANIES Report of Independent Public Accountants....................... 42 Combined Balance Sheets............ 43 Combined Statements of Income...... 44 Combined Statements of Stockholders' Equity.............. 45 Combined Statements of Cash Flows............................. 46 Notes to Combined Financial Statements........................ 47 GROSVENOR BUS LINES, INC. AND SUBSIDIARIES (OPERATING AS GRAY LINE OF SAN FRANCISCO) Report of Independent Public Accountants....................... 54 Consolidated Balance Sheets........ 55 Consolidated Statements of Income............................ 56 Consolidated Statements of Stockholders' Equity.............. 57 Consolidated Statements of Cash Flows............................. 58 Notes to Consolidated Financial Statements........................ 59 LEISURE TIME TOURS Report of Independent Public Accountants....................... 66 Balance Sheets..................... 67 Statements of Income............... 68 Statements of Stockholders' Equity............................ 69 Statements of Cash Flows........... 70 Notes to Financial Statements...... 71 COMMUNITY BUS LINES, INC. AND RELATED COMPANIES Report of Independent Public Accountants....................... 77 Combined Balance Sheets............ 78 Combined Statements of Income...... 79 Combined Statements of Stockholders' Equity.............. 80 Combined Statements of Cash Flows............................. 81 Notes to Combined Financial Statements........................ 82 22 PAGE ---- CAPE TRANSIT CORP. (OPERATING AS ADVENTURE TRAILS) Report of Independent Public Accountants....................... 88 Balance Sheets..................... 89 Statements of Income............... 90 Statements of Stockholders' Equity............................ 91 Statements of Cash Flows........... 92 Notes to Financial Statements...... 93 ARROW STAGE LINES, INC. Report of Independent Public Accountants....................... 99 Balance Sheets..................... 100 Statements of Income............... 101 Statements of Stockholders' Equity............................ 102 Statements of Cash Flows........... 103 Notes to Financial Statements...... 104 COACH USA, INC. Report of Independent Public Accountants....................... 109 Balance Sheets..................... 110 Statements of Income............... 111 Statements of Stockholders' Equity............................ 112 Statements of Cash Flows........... 113 Notes to Financial Statements...... 114 23 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Coach USA, Inc.: We have audited the accompanying consolidated balance sheets of Coach USA, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1995 and 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Coach USA, Inc. and subsidiaries as of December 31, 1995 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas March 4, 1997 24 COACH USA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31, --------------------- 1995 1996 --------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents........................ $ 3,411 $ 1,466 Accounts receivable, less allowance of $950 and $2,046.......................................... 7,458 16,980 Inventories...................................... 3,385 8,500 Notes receivable, current portion................ 3,045 2,811 Prepaid expenses and other current assets........ 3,481 10,779 --------- ---------- Total current assets........................ 20,780 40,536 PROPERTY AND EQUIPMENT, net........................... 48,908 191,937 NOTES RECEIVABLE, less allowance of $500 and $500..... 1,978 4,231 GOODWILL, net......................................... 11 30,102 OTHER ASSETS, net..................................... 11,320 10,037 --------- ---------- Total assets................................ $ 82,997 $ 276,843 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of convertible subordinated notes........................................... $ -- $ 4,000 Current maturities of long-term obligations...... 9,313 6,037 Accounts payable and accrued liabilities......... 17,529 35,096 --------- ---------- Total current liabilities................... 26,842 45,133 LONG-TERM OBLIGATIONS, net of current maturities...... 36,557 91,081 CONVERTIBLE SUBORDINATED NOTES, net of current maturities.......................................... -- 18,500 LONG-TERM OBLIGATIONS DUE TO STOCKHOLDERS, net of current maturities.................................. 16,467 -- DEFERRED INCOME TAXES................................. 4,082 18,158 --------- ---------- Total liabilities........................... 83,948 172,872 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common Stock, $.01 par, 30,000,000 shares authorized, 3,284,336 and 17,199,093 shares issued and outstanding, respectively............ 33 172 Additional paid-in capital....................... 4,519 100,684 Retained earnings (deficit)...................... (5,503) 3,115 --------- ---------- Total stockholders' equity.................. (951) 103,971 --------- ---------- Total liabilities and stockholders' equity................................... $ 82,997 $ 276,843 ========= ========== The accompanying notes are an integral part of these consolidated financial statements. 25
COACH USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED DECEMBER 31, PRO FORMA -------------------------------- COMBINED 1994 1995 1996 1996 --------- --------- ---------- ----------- (UNAUDITED) REVENUES............................. $ 68,421 $ 83,925 $ 185,728 $ 230,666 OPERATING EXPENSES................... 51,267 60,200 136,765 174,292 --------- --------- ---------- ----------- Gross profit.................... 17,154 23,725 48,963 56,374 GENERAL AND ADMINISTRATIVE EXPENSES........................... 11,727 14,149 21,889 23,485 ACQUISITION RELATED COSTS............ -- -- 1,101 -- --------- --------- ---------- ----------- Operating income................ 5,427 9,576 25,973 32,889 INTEREST EXPENSE..................... 4,111 5,475 8,514 8,981 --------- --------- ---------- ----------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS................ 1,316 4,101 17,459 23,908 PROVISION FOR INCOME TAXES........... 667 1,690 7,267 9,439 --------- --------- ---------- ----------- INCOME BEFORE EXTRAORDINARY ITEMS.... 649 2,411 10,192 14,469 EXTRAORDINARY ITEMS, net of income taxes.............................. -- -- 2,723 2,723 --------- --------- ---------- ----------- NET INCOME........................... $ 649 $ 2,411 $ 12,915 $ 17,192 ========= ========= ========== =========== EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE: INCOME BEFORE EXTRAORDINARY ITEMS......................... $ .20 $ .73 $ .90 $ .99 EXTRAORDINARY ITEMS............. -- -- .24 .18 --------- --------- ---------- ----------- NET INCOME........................... $ .20 $ .73 $ 1.14 $ 1.17 ========= ========= ========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 26 COACH USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
COMMON STOCK ADDITIONAL RETAINED TOTAL ------------------ PAID-IN EARNINGS STOCKHOLDERS' SHARES AMOUNT CAPITAL (DEFICIT) EQUITY ------- ------- ----------- --------- ------------- BALANCE AT DECEMBER 31, 1993......... 3,285 $ 33 $ 4,313 $ (6,794) $ (2,448) S Corporation dividends paid by certain Pooled Companies...... -- -- -- (690) (690) Net income...................... -- -- -- 649 649 Other........................... -- -- (30) -- (30) ------- ------- ----------- --------- ------------- BALANCE AT DECEMBER 31, 1994......... 3,285 33 4,283 (6,835) (2,519) S Corporation dividends paid by certain Pooled Companies...... -- -- -- (1,079) (1,079) Net income...................... -- -- -- 2,411 2,411 Other........................... -- -- 236 -- 236 ------- ------- ----------- --------- ------------- BALANCE AT DECEMBER 31, 1995......... 3,285 33 4,519 (5,503) (951) Issuance of Common Stock: Proceeds of stock offerings... 6,224 62 96,502 -- 96,564 Merger with Predecessor....... 2,166 22 2,055 (2,053) 24 Acquisition of Founding Companies..................... 5,099 51 6,323 9,155 15,529 Cash Distribution to Founding Companies' Shareholders....... -- -- (23,810) -- (23,810) Reorganization.................. -- -- 4,402 (4,402) -- Conversion from S Corporation to C Corporation for Founding Companies..................... -- -- -- (5,426) (5,426) Conversion of debt to equity.... 425 4 10,198 -- 10,202 S Corporation dividends paid by certain Pooled Companies...... -- -- -- (1,838) (1,838) Adjustment to conform fiscal year ends of Pooled Companies..................... -- -- -- 267 267 Net income...................... -- -- -- 12,915 12,915 Capital contributions equal to the current income taxes of S Corporations.................. -- -- 341 -- 341 Other........................... -- -- 154 -- 154 ------- ------- ----------- --------- ------------- BALANCE AT DECEMBER 31, 1996......... 17,199 $ 172 $ 100,684 $ 3,115 $ 103,971 ======= ======= =========== ========= =============
The accompanying notes are an integral part of these consolidated financial statements. 27 COACH USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ---------------------------------- 1994 1995 1996 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income...................... $ 649 $ 2,411 $ 12,915 Adjustments to reconcile net income to net cash provided by operating activities -- Adjustment to conform fiscal year ends of Pooled Companies..................... -- -- 267 Extraordinary gain.............. -- -- (7,007) Depreciation and amortization... 4,720 6,238 12,343 Gain on sale of assets.......... (44) (572) (354) Deferred income tax provision... 757 1,294 6,672 Changes in operating assets and liabilities, net of effect of Purchased Companies -- Accounts receivable, net... 428 (1,833) (779) Inventories................ (1,107) (2,579) (4,505) Notes receivable........... 175 (1,828) (1,672) Prepaid expenses and other current assets............. (211) (611) (3,705) Accounts payable and accrued liabilities........ (1,318) 1,838 (6,340) Other...................... 1,034 (139) (474) ---------- ---------- ---------- Net cash provided by operating activities......... 5,083 4,219 7,361 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment....................... (15,449) (14,324) (24,704) Proceeds from sales of property and equipment................. 1,182 1,813 4,057 Cash consideration paid for the Founding Companies, net of cash acquired -- -- (22,112) Cash consideration paid for Purchased Companies, net of cash acquired................. -- -- (12,343) Proceeds from sales of investments................... -- -- 1,419 ---------- ---------- ---------- Net cash used in investing activities (14,267) (12,511) (53,683) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term obligations................... (10,273) (13,319) (122,257) Proceeds from issuance of long-term obligations......... 18,767 24,116 71,754 Sales of Common Stock........... -- -- 96,564 S Corporation Dividends paid by certain Pooled Companies...... (690) (1,079) (1,838) Other........................... 286 181 154 ---------- ---------- ---------- Net cash provided by financing activities 8,090 9,899 44,377 ---------- ---------- ---------- ---------- ---------- ---------- NET INCREASE (DECREASE) IN CASH...... (1,094) 1,607 (1,945) CASH AND CASH EQUIVALENTS, beginning of year.............................. 2,898 1,804 3,411 ========== ========== ========== CASH AND CASH EQUIVALENTS, end of year................................. $ 1,804 $ 3,411 $ 1,466 ========== ========== ========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest.......... $ 2,737 $ 4,099 $ 8,376 Cash paid for income taxes...... 25 125 4,632 Assets acquired under capital leases.......................... 1,931 2,404 7,597 Convertible debt issued for Purchased Companies........... -- -- 22,500
The accompanying notes are an integral part of these consolidated financial statements. 28 COACH USA, INC. AND SUBSIDIARIES: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION In September 1995, Coach USA, Inc. (Coach USA), was founded to create a national company providing motorcoach transportation services, including charter and tour services, and related passenger ground transportation services. In May 1996, Coach USA acquired, simultaneously with the closing of its initial public offering (the Offering), six established businesses. Consideration for these businesses consisted of a combination of cash and common stock of Coach USA (the Common Stock). These six businesses are referred to herein as the "Founding Companies." Coach USA acquired nine additional businesses in 1996. Of these nine additional businesses acquired, six were accounted for as poolings-of-interests and are referred to herein as the "Pooled Companies." The remaining three businesses were accounted for as purchases and are referred to herein as the "Purchased Companies" (see Note 3). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of Coach USA and the Founding Companies from June 1, 1996, the effective date used to account for the acquisitions of the Founding Companies, the Purchased Companies since date of acquisition, and give retroactive effect to the acquisitions of the Pooled Companies. The Pooled Companies, the Founding Companies subsequent to May 31, 1996, and the Purchased Companies since date of acquisition, are collectively referred to herein as the "Company." All significant intercompany transactions and balances have been eliminated in consolidation. The unaudited pro forma combined statement of income for the year ended December 31, 1996 includes the accounts of Coach USA and the Founding Companies from January 1, 1996, the Purchased Companies since date of acquisition, and gives retroactive effect to the acquisitions of the Pooled Companies. Certain pro forma adjustments further discussed in Note 3 have been made to the unaudited pro forma combined statement of income. Two of the Pooled Companies have previously reported on an October fiscal year end. As such, the accounts of these companies for their 1994 and 1995 fiscal years have been consolidated with the accounts of the Company as of December 31, 1994 and 1995, respectively. Unaudited revenues and net income for these two companies for the two-month period ended December 31, 1995, were approximately $6,292,000 and $267,000, respectively. Accordingly, an adjustment is included in the consolidated statement of stockholders' equity for the net income attributed to this two-month period. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents. INVENTORIES Inventories consist of motorcoach and taxicab replacement parts and taxicabs held for sale. Inventory cost for replacement parts is accounted for on the first-in, first-out basis and inventory cost for taxicabs held for sale or on short-term leases are accounted for on the specific identification basis, and both are reported at the lower of cost or market. Taxicabs held for sale are depreciated over their estimated useful lives of 4.5 years. Depreciation and amortization expense in the accompanying consolidated financial statements includes $1,053,000, $1,457,000 and $1,940,000 of depreciation related to taxicabs held for sale in 1994, 1995 and 1996. 29 COACH USA, INC. AND SUBSIDIARIES: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTES RECEIVABLE Notes receivable result from the sale of taxicabs to independent contractors. The notes bear interest and are due in weekly installments over periods ranging up to 42 months. NOTES RECEIVABLE FROM STOCKHOLDERS The Company had notes receivable from former stockholders of certain of the Pooled Companies totaling $439,000 at December 31, 1995. These notes receivable were unsecured, noninterest-bearing and payable on demand and were repaid in full in connection with the respective mergers with Coach USA. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Expenditures for maintenance and repairs, including replacement of engines and certain other significant costs, are expensed as costs are incurred. Depreciation on transportation equipment and other assets for financial reporting purposes is computed on the straight-line basis over the estimated useful lives of the assets, net of their estimated residual values. Gains or losses on the sale of equipment are included in operating expenses. GOODWILL Goodwill represents the excess of the aggregate price paid by the Company in acquisitions accounted for as purchases over the fair market value of the net tangible assets acquired. Goodwill is amortized on a straight-line basis generally over 40 years. OTHER ASSETS Taxicab permits are carried at cost, less accumulated amortization. The permit costs are amortized using the straight-line method over a period of 40 years. Annual renewal fees are charged to expense as incurred. The Company applies Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". Management continually evaluates whether events or circumstances have occurred that indicate that the remaining estimated useful lives of property and equipment, other identifiable intangible assets and goodwill may warrant revision or that the remaining balances may not be recoverable. CONCENTRATIONS OF CREDIT RISK The Company provides services to a broad range of geographical regions. The Company's credit risk primarily consists of receivables from a variety of customers, including casinos and various other tourism-based companies and governmental units. In addition, the Company's accounts and notes receivable include amounts due from independent taxicab contractors. Management performs ongoing credit evaluations of its customers and independent taxicab contractors and provides allowances as deemed necessary. The activity in the allowance for doubtful accounts is as follows (in thousands):
BEGINNING BALANCE AT BALANCE AT FOUNDING AND CHARGED TO BALANCE AT BEGINNING PURCHASED COSTS AND END OF OF PERIOD COMPANIES EXPENSES WRITE-OFFS PERIOD ---------- ------------ ---------- ---------- ---------- Year ended December 31, 1994............ $1,049 $ -- $ 806 $ (1,038) $ 817 Year ended December 31, 1995............ 817 -- 746 (613) 950 Year ended December 31, 1996............ 950 955 927 (786) 2,046
30 COACH USA, INC. AND SUBSIDIARIES: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REVENUE RECOGNITION The Company recognizes revenue from recreation, excursion, commuter, transit and taxicab support services and sales to independent taxicab operators when such services and sales are performed. The Company recognizes financing income on notes receivable using the effective interest method over the term of the notes. Costs associated with the revenues are incurred and recorded as services and sales are performed. The Company has a 50 percent interest in a joint venture which provides various paratransit services to a governmental agency in South Florida. Income from this joint venture was $1.0 million, $0.6 million and $0.7 million in 1994, 1995 and 1996, respectively, and is included in revenues in the accompanying consolidated financial statements. INCOME TAXES The Company will file a consolidated return for federal income tax purposes. Income taxes are provided under the liability method considering the tax effects of transactions reported in the financial statements which are different from the tax return. The deferred income tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the underlying assets or liabilities are recovered or settled. Certain of the Pooled Companies were S Corporations for income tax purposes and, accordingly, any income tax liabilities for the periods prior to the acquisition date are the responsibility of the respective stockholders. For purposes of these consolidated financial statements, federal and state income taxes have been provided as if these companies had filed C Corporation tax returns for the pre-acquisition periods. The current income tax expense of these S Corporations is reflected in the consolidated financial statements in the provision for income taxes and as an increase to additional paid-in capital. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE The computation of net income per common and common equivalent share for the years ended December 31, 1994 and 1995 includes 3,284,336 shares issued in connection with the acquisitions of the Pooled Companies. The computation of net income per common and common equivalent share for the year ended December 31, 1996 is based upon 11,345,031 weighted average shares outstanding which includes (a) the 3,284,336 shares discussed above, (b) the weighted average portion of the 2,165,724 shares issued prior to the Initial Public Offering, (c) the weighted average portion of the 5,099,687 shares issued to the stockholders of the Founding Companies, (d) the weighted average portion of the 4,140,000 shares sold in the Initial Public Offering, (e) the weighted average portion of the 425,039 shares issued in connection with the conversion of indebtedness to equity at one of the Pooled Companies, (f) the weighted average portion of the 2,084,307 shares sold in a secondary stock offering, and (g) 305,605 shares representing the weighted average portion of shares for the dilution attributable to outstanding options to purchase common stock, using the treasury stock method. The computation of net income per common and common equivalent share for the unaudited pro forma combined year ended December 31, 1996 is based upon 14,676,773 weighted average shares outstanding 31 COACH USA, INC. AND SUBSIDIARIES: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) which includes (a) the 3,284,336 shares discussed above, (b) the 2,165,724 shares issued prior to the Initial Public Offering, (c) 5,099,687 shares issued to the stockholders of the Founding Companies, (d) 1,700,714 of the 4,140,000 shares sold in the Initial Public Offering to pay the cash portion of the consideration for the Founding Companies; (e) 118,142 of the 4,140,000 shares sold in the Initial Public Offering to pay excess S Corporation distributions, (f) the weighted average of the remaining 2,321,144 shares issued in the Initial Public Offering, (g) the weighted average portion of 425,039 shares issued in connection with the conversion of indebtedness to equity at one of the Pooled Companies, (h) the weighted average portion of the 2,084,307 shares sold in the secondary stock offering, and (i) 227,743 shares representing the weighted average portion of shares for the dilution attributable to outstanding options to purchase common stock, using the treasury stock method. In March 1996, the Company authorized 500,000 shares of $.01 par value preferred stock, none of which has been issued. 3. BUSINESS COMBINATIONS: The Founding Companies were merged with Coach USA effective June 1, 1996, for financial reporting purposes. The unaudited data presented below consists of the income statement data as presented in these consolidated financial statements combined with the Founding Companies, including certain pro forma adjustments further discussed below, as if the Founding Companies were combined with the Pooled Companies and Coach USA as of January 1, 1995 (in thousands): YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ (UNAUDITED) Revenues................................ $197,414 $230,666 Income before extraordinary items....... 10,519 14,469 Income per share before extraordinary items................................. .82 .99 POOLINGS During 1996, the Company acquired all of the outstanding stock of the Pooled Companies in exchange for 3,284,336 shares of Common Stock. Five of these companies provide motorcoach transportation services and one provides primarily taxicab services. These acquisitions have been accounted for as poolings-of-interests and the results of operations of these six companies are included for all periods presented herein. The historical financial statements for 1994 and 1995 represent the operations of the Pooled Companies prior to their acquisition by the Company. The combined revenues, income before extraordinary items, and net income of the Pooled Companies for the preacquisition period in 1996 were $87.6 million, $4.3 million and $4.2 million, respectively. 32 COACH USA, INC. AND SUBSIDIARIES: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PURCHASES On August 29, 1996, the Purchased Companies were acquired which were accounted for as purchases. The aggregate consideration paid in these transactions was $14.5 million in cash and $22.5 million in the form of subordinated notes convertible into 750,460 shares of Common Stock. The accompanying balance sheet as of December 31, 1996 includes allocations of the respective purchase prices and is subject to final adjustment. The allocations resulted in goodwill recognized of $30.3 million representing the excess of purchase price over fair value of the net assets acquired. In conjunction with the acquisitions, liabilities were assumed as follows (in thousands): Fair value of assets acquired, net of cash acquired......................... $ 63,963 Goodwill................................ 30,341 Cash paid, net of cash acquired......... (12,343) Issuance of convertible notes........... (22,500) ---------- Liabilities assumed..................... $ 59,461 ========== The following table sets forth further adjustments to the unaudited pro forma income statement data above to present the effect of the acquisitions of the Purchased Companies on the Company's results of operations for the years ended December 31, 1995 and 1996. The following unaudited pro forma income statement data includes the Founding Companies and the Pooled Companies, plus all Purchased Companies as if the acquisitions were effective on the first day of the year being reported (in thousands): YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ (UNAUDITED) Revenues................................ $233,266 $256,686 Income before extraordinary items....... 11,910 15,376 Income per share before extraordinary items................................. .93 1.05 Pro forma adjustments included in the preceding tables regarding the Founding Companies and the Purchased Companies primarily relate to (a) owners' compensation differential, (b) adjustments to depreciation and amortization due to the purchase price allocations, (c) adjustments of historical interest expense related to certain subordinated debt and cash payments related to the Purchased Companies, (d) elimination of interest on debt converted to equity of one of the Pooled Companies, (e) elimination of merger costs in connection with the acquisition of the Pooled Companies, and (f) adjustments to the federal and state income tax provisions based on the combined operations. The pro forma combined results presented above are not necessarily indicative of actual results which might have occurred had the operations and management teams of the Company, the Founding Companies, and the Purchased Companies been combined at the beginning of the periods presented. 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS: Prepaid expenses and other current assets consist of the following (in thousands): DECEMBER 31 -------------------- 1995 1996 --------- --------- Prepaid insurance....................... $ 1,243 $ 2,601 Deferred income tax asset, current...... 1,283 2,780 Prepaid licenses, registrations and other taxes........................... 552 3,297 Other................................... 403 2,101 --------- --------- $ 3,481 $ 10,779 ========= ========= 33 COACH USA, INC. AND SUBSIDIARIES: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. PROPERTY AND EQUIPMENT: Property and equipment consist of the following (in thousands):
DECEMBER 31 ESTIMATED ---------------------- USEFUL LIVES 1995 1996 ------------ ---------- ---------- (YEARS) Transportation equipment................ 3-15 $ 57,637 $ 219,544 Building and leasehold improvements..... 5-31.5 5,081 8,744 Computer equipment...................... 5-7 7,754 8,802 Other................................... 3-10 1,827 9,985 ---------- ---------- 72,299 247,075 Less -- Accumulated depreciation........ (23,391) (55,138) ---------- ---------- $ 48,908 $ 191,937 ========== ==========
Included in transportation equipment at December 31, 1995 and 1996, are approximately $10.9 million and $20.7 million, respectively, of assets held under capital leases. 6. OTHER ASSETS: Other assets consist of the following (in thousands): DECEMBER 31 -------------------- 1995 1996 --------- --------- Taxicab permits, net of accumulated amortization of $2,194 and $2,298............................ $ 4,263 $ 4,159 Noncurrent deferred income tax asset.... 6,089 3,782 Other, net of accumulated amortization of $672 and $838...................... 968 2,096 --------- --------- $ 11,320 $ 10,037 ========= ========= Amortization expense related to other assets for the years ended December 31, 1995 and 1996 was $201,000 and $270,000, respectively. 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: Accounts payable and accrued liabilities consist of the following (in thousands): DECEMBER 31 -------------------- 1995 1996 --------- --------- Trade accounts payable................................ $ 3,595 $ 8,352 Accrued insurance claims.............................. 6,074 13,285 Accrued compensation.................................. 2,608 4,017 Due to affiliates..................................... 642 -- Property and other taxes.............................. 973 1,298 Accrued interest payable.............................. 829 781 Deferred revenue...................................... 598 1,287 Other................................................. 2,210 6,076 --------- --------- $ 17,529 $ 35,096 ========= ========= 34 COACH USA, INC. AND SUBSIDIARIES: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 8. LONG-TERM OBLIGATIONS: Long-term obligations consist of the following: DECEMBER 31 -------------------- 1995 1996 --------- --------- (IN THOUSANDS) Revolving credit facility with a bank syndicate, interest at LIBOR plus 1.50% (7.03% at December 31, 1996), secured by substantially all of the assets of the Company......................................... $ -- $ 60,110 Notes payable to finance companies, interest rates ranging from 7.70% to 15.00%, due in monthly installments of $468,830, maturing at various dates through 2004; secured by certain transportation equipment........................................... 35,138 16,162 Obligations under capital leases of certain transportation equipment, implicit interest rates ranging from 5.00% to 11.00%, due in monthly installments of $320,682, maturing at various dates through 2003........................................ 5,547 16,825 Various notes payable to stockholders, including $600 of accrued interest payable in 1996................. 18,108 -- Other................................................. 4,144 4,021 --------- --------- Total Long-term Obligations........................... 62,937 97,118 Less -- Current maturities............................ (9,313) (6,037) Less -- Accrued Interest.............................. (600) -- --------- --------- $ 53,024 $ 91,081 ========= ========= At December 31, 1996, future principal payments of long-term debt and minimum lease payments under capital lease obligations are as follows (in thousands): LONG-TERM CAPITAL LEASE DEBT OBLIGATIONS ------------ ------------- Year ending December 31 -- 1997............................... $ 3,659 $ 3,915 1998............................... 3,132 3,055 1999............................... 63,870 2,935 2000............................... 3,602 3,558 2001............................... 3,039 2,815 Thereafter......................... 2,991 6,259 ------------ ------------- $ 80,293 22,537 ============ Less -- Amounts representing interest......................... (5,712) ------------- $16,825 ============= REVOLVING CREDIT AGREEMENT In May 1996, the Company entered into a $30 million revolving credit agreement with one bank. This credit facility was primarily utilized to refinance certain indebtedness of the Founding Companies not repaid with proceeds of the Offering. In August 1996, the Company amended and restated the $30 million credit agreement. The credit agreement, as amended, provides for a revolving credit facility of $115 million through a syndicate of eight banks and allows for an additional $15 million of debt outside the credit facility. The proceeds of the facility 35 COACH USA, INC. AND SUBSIDIARIES: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) are to be used for working capital, capital expenditures and acquisitions, including refinancing of indebtedness related to acquisitions. The facility is secured by substantially all of the assets of the Company and matures in August 1999, at which time all amounts then outstanding become due. Interest on outstanding borrowings is charged, at the Company's option, at the bank's prime rate plus up to 1.0% or the London Interbank Offered Rate ("LIBOR") plus 1.0% to 2.25%, both as determined by the ratio of the Company's funded debt to cash flow, as defined. A commitment fee ranging from 0.25% to 0.50% is payable on the unused portion of the facility. Under the terms of the credit agreement, the Company must maintain certain minimum financial ratios. The credit agreement prohibits the payment of cash dividends. As of December 31, 1996, the Company had a total of $97.1 million outstanding under the revolving and other outside credit facilities and had utilized $4.9 million of the facility for letters of credit securing certain insurance obligations and performance bonds, resulting in a borrowing availability of $28.0 million under the revolving and other outside credit facilities. In September 1996, the Company entered into an interest rate cap agreement with a bank. The agreement has a term of one year and a notional principal amount of $50 million. The agreement provides that if the 90-day LIBOR rate exceeds 6.5% for certain measurement periods, the bank will pay to the Company the difference between such rate and 6.5%. The cost of the agreement is being amortized over its term. In February 1997, the Company amended and restated its credit agreement. The credit agreement, as further amended, now provides for a revolving credit facility of $181 million and allows the Company to have borrowings of up to $40 million (in addition to the fully subordinated notes) outside the credit facility. Other provisions of the credit agreement were unchanged. CONVERTIBLE SUBORDINATED NOTES In August 1996, the Company issued $22.5 million of convertible subordinated notes (the Notes) to former owners of the Purchased Companies as partial consideration of the acquisition purchase price. The Notes bear interest, payable quarterly, at a weighted average interest rate of 5.0 percent and are convertible by the holder into shares of the Company's Common Stock at a weighted average price of $29.98 per share. The Notes are redeemable for cash or the Company's Common Stock at the option of the Company at any time after one year of issuance. The terms of the Notes require $4.0 million of principal payments in 1997 and $18.5 million in 1999. Management estimates that the fair value of its debt obligations is $100,753,000, compared to the historical value of $102,793,000 at December 31, 1996. The estimated fair value was determined by applying an estimated discount rate to the scheduled cash payments under the obligations. 36 COACH USA, INC. AND SUBSIDIARIES: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 9. INCOME TAXES: The Company has implemented SFAS No. 109, "Accounting for Income Taxes," which provides for a liability approach to accounting for income taxes. The provision for income taxes consists of the following (in thousands): YEAR ENDED DECEMBER 31 ------------------------------- 1994 1995 1996 --------- --------- --------- Current -- Federal............................ $ (133) $ 308 $ 597 State.............................. 43 88 123 --------- --------- --------- (90) 396 720 --------- --------- --------- Deferred -- Federal............................ 741 1,197 5,337 State.............................. 16 97 1,210 --------- --------- --------- 757 1,294 6,547 --------- --------- --------- Provision for income taxes before extraordinary items................... 667 1,690 7,267 --------- --------- --------- Extraordinary Items -- Current............................ -- -- 1,690 Deferred........................... -- -- 125 --------- --------- --------- -- -- 1,815 --------- --------- --------- $ 667 $ 1,690 $ 9,082 ========= ========= ========= Deferred income taxes result from the effect of transactions which are recognized in different periods for financial and tax reporting purposes and relate primarily to depreciation, accrued insurance claims payable and net operating loss carryforwards. Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates to differences between the financial reporting and the tax bases of existing assets and liabilities. The components of deferred income tax liabilities and assets are as follows (in thousands): DECEMBER 31 ---------------------- 1995 1996 ---------- ---------- Deferred income tax liabilities -- Property and equipment........................... $ 6,126 $ 26,862 Other............................................ 481 580 ---------- ---------- Total deferred income tax liabilities....... 6,607 27,442 ---------- ---------- Deferred income tax assets -- Accounts receivable/allowance for doubtful accounts....................................... (128) (832) Accrued liabilities/expenses..................... (4,689) (7,984) Net operating losses............................. (3,001) (1,965) Other assets..................................... (2,074) (2,394) Tax credits...................................... (4) (2,511) Other............................................ (174) (764) ---------- ---------- Total deferred income tax assets............ (10,070) (16,450) Less -- Valuation allowance........................... 5 904 ---------- ---------- Net deferred income tax (assets) liabilities.............................. $ (3,458) $ 11,896 ========== ========== 37 COACH USA, INC. AND SUBSIDIARIES: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The differences in income taxes provided and the amounts determined by applying the federal statutory tax rate to income before income taxes result from the following (in thousands): YEAR ENDED DECEMBER 31 ------------------------------- 1994 1995 1996 --------- --------- --------- Tax at federal statutory rate........... $ 461 $ 1,435 $ 7,699 Add (deduct) -- State income taxes, net of federal benefit............ 64 119 933 Nondeductible expenses........ 124 155 383 Tax-exempt income............. (9) (3) -- Other......................... 27 (16) 67 --------- --------- --------- $ 667 $ 1,690 $ 9,082 ========= ========= ========= For purposes of the consolidated federal tax return, the Company has net operating loss carryforwards available to offset taxable income of the Company in the future. The net operating loss carryforwards will expire at various dates from 1997 to 2010. The Company also has tax credit carryforwards which have been partially offset by a valuation allowance. Certain tax credit carryforwards will expire at various periods from 1996 through 2002. In connection with the acquisition of the Pooled Companies, ownership changes occurred resulting in various limitations on certain tax attributes of the Pooled Companies. However, the Company expects full utilization of these tax attributes prior to their expiration. 10. COMMITMENTS AND CONTINGENCIES: PURCHASE COMMITMENTS As of December 31, 1996, the Company has entered into commitments to purchase 108 motorcoaches for approximately $32,636,000. The Company intends to sell or trade-in a number of older motorcoaches and finance the balance of the new motorcoaches under the revolving and other outside credit facilities. LEASES The Company leases certain facilities and equipment under noncancelable operating leases. Rental expense for the years ended December 31, 1994, 1995 and 1996 was $1,416,000, $1,437,000, and $3,094,000, respectively. Concurrent with the acquisitions of certain Founding and Purchased Companies, the Company entered into various agreements with previous owners to lease land and buildings used in the Company's operations. The terms of these leases range from May 1996 through October 2030 and provide for certain escalations in the rent expense each year. Included in the 1996 rent expenses above is approximately $467,000 of rent paid to these related parties. The following represents future minimum rental payments under noncancelable operating leases (in thousands): Year ending December 31 -- 1997............................... $ 2,677 1998............................... 1,976 1999............................... 1,765 2000............................... 1,650 2001............................... 1,319 Thereafter......................... 15,972 --------- $ 25,359 ========= 38 COACH USA, INC. AND SUBSIDIARIES: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CLAIMS AND LAWSUITS The Company is subject to certain claims and lawsuits arising in the normal course of business, most of which involve claims for personal injury and property damage incurred in connection with its operations. The Company maintains various insurance coverages in order to minimize financial risk associated with the claims. The Company has provided accruals for certain of these actions in the accompanying consolidated financial statements. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not have a material effect on the Company's financial position or results of operations. REGULATORY MATTERS The Surface Transportation Board ("STB") must approve or exempt any consolidation or merger of two or more regulated interstate motorcoach operators or the acquisition of one such operator by another. On November 7, 1996, the STB granted the Company's petition for exemption in connection with the Pooled Companies acquired in August 1996 and the Purchased Companies. There can be no assurance that the Company will be able to obtain such approval or exemption with respect to the December acquisitions or future acquisitions. ESTIMATED INSURANCE CLAIMS PAYABLE The primary risks in the Company's operations are bodily injury and property damage to third parties and workers' compensation. The Company has commercial liability insurance policies that provide coverage by the insurance company, subject to deductibles ranging from $5,000 to $250,000. The Company is consolidating its insurance program under a program which provides for deductibles ranging from $100,000 to $250,000. As such, any claim within the deductible per incident would be the financial obligation of the Company. The accrued insurance claims payable represents management's estimate of the Company's potential claims costs in satisfying the deductible provisions of the insurance policies for claims occurring through December 31, 1996. The accrual is based on known facts and historical trends. Management believes such accrual to be adequate. EMPLOYEE BENEFIT PLANS The Company maintains certain 401(k) plans which allow eligible employees to defer a portion of their income through contributions to the plans. No contributions were required or made to these plans during 1994. The Company contributed $21,000 and $182,000 to its plans during the year ended December 31, 1995 and 1996, respectively. COLLECTIVE BARGAINING AGREEMENTS The Company is a party to various collective bargaining agreements with certain of its employees. The agreements require the Company to pay specified wages and provide certain benefits to its union employees. These agreements will expire at various times through 2000. COMMITMENTS The Company has entered into agreements with Exel Motorcoach Partnership ("Exel") whereby Exel will provide introductions to other motorcoach businesses and provide other consulting services for a term of three years. The consideration to be paid to Exel will be approximately $100,000 per year. In addition, Exel will be paid a commission on any acquisition completed by the Company with motorcoach businesses introduced to it by Exel, based on a formula ranging from 5% of the first $1,000,000 of consideration paid for the acquired business, and decreasing to a level of 1% of the consideration in excess of $4,000,000 paid 39 COACH USA, INC. AND SUBSIDIARIES: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) for such business. A director of the Company is a principal of Exel. In connection with several acquisitions, the Company paid Exel commissions of $503,600 in 1996, based on the formula outlined above. 11. EMPLOYEE STOCK OPTION PLAN The Company's 1996 Long-Term Incentive Plan provides for the granting of options to key employees to purchase an aggregate of not more than the greater of 1,500,000 shares or 15% of the total number of shares of the Company's Common Stock outstanding at the time of grant at fair market value on the date of grant. One-fifth of granted options generally become exercisable after one year, and continue to become exercisable in one-fifth increments each year thereafter. The options expire after ten years from the date of grant if unexercised. Outstanding options may be canceled and reissued under terms specified in the plan. The following table summarizes activity under the Company's stock option plans: 1996 ----------- Options outstanding, beginning of year.................................. -- Granted (exercise price per share) 1996 ($14.00 to $27.25).......... 1,807,017 Forfeited (exercise price per share) 1996 ($14.00 to $23.75)... (15,500) ----------- Options outstanding, end of year........ 1,791,517 =========== The Company accounts for its stock-based compensation under Accounting Principles Board Statement No. 25 "Accounting for Stock Issued to Employees." Under this accounting method, no compensation expense is recognized in the consolidated statements of income if no intrinsic value of the option exists at the date of grant. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock Based Compensation." SFAS No. 123 encourages companies to account for stock based compensation awards based on the fair value of the awards at the date they are granted. The resulting compensation cost would be shown as an expense in the statement of income. Adoption of the standard is required for fiscal years beginning after December 15, 1995. Companies can choose not to apply the new accounting method and continue to apply current accounting requirements; however, disclosure is required as to what net income and earnings per share would have been had the new accounting method been followed. While the Company did not adopt SFAS No. 123 for accounting purposes, it has implemented the disclosure requirements below which include annual pro forma disclosures of its effects on options granted since the initial grant in May 1996. Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts (in thousands except per share data): 1996 --------- Net Earnings As reported............................. $ 12,915 Pro forma............................... $ 11,398 Earnings Per Share As reported............................. $ 1.14 Pro forma............................... $ 1.03 The effects of applying SFAS No. 123 in the pro forma disclosure may not be indicative of future amounts as additional awards in future years are anticipated. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: Expected dividend yield....................................0.00% Expected stock price volatility..................34.59% - 34.78% Risk free interest rate............................6.43% - 6.96% Expected life of options................................10 years 40 COACH USA, INC. AND SUBSIDIARIES: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Options outstanding at December 31, 1996, had exercise prices ranging from $14.00 to $27.25, a weighted average remaining contractual life of 9.5 years, a weighted average fair value of $14.29 per option and a weighted average exercise price of $17.71 per option. 12. EXTRAORDINARY ITEMS In connection with the merger of a Pooled Company with Coach USA in August 1996, obligations due to stockholders of $17.2 million were retired in exchange for shares of Coach USA Common Stock. The transactions resulted in an extraordinary gain on early extinguishment of debt of approximately $4.2 million, net of taxes, representing the excess of the recorded value of the obligations exchanged over the market value of the Coach USA Common Stock. This gain was partially offset by extraordinary losses of approximately $1.5 million, net of taxes, resulting from early extinguishment of debt at certain other companies. 13. SUBSEQUENT EVENTS: On February 28, 1997, the Company acquired three additional businesses. The acquisition of one of these businesses was accounted for as a pooling-of-interests, for which the Company issued 578,033 shares of its Common Stock. The following table summarizes the consolidated revenues and net income of the Company after giving effect to this transaction (in thousands, except per share data).
FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 1994 1995 1996 ------------------ ------------------ ------------------- NET NET NET REVENUES INCOME REVENUES INCOME REVENUES INCOME -------- ------ -------- ------ -------- ------- As presently reported $ 68,421 $ 649 $ 83,925 $2,411 $185,728 $12,915 Subsequent Pooling................... 19,639 694 19,478 541 20,110 625 -------- ------ -------- ------ -------- ------- After Subsequent Pooling............. $ 88,060 $1,343 $103,403 $2,952 $205,838 $13,540 ======== ====== ======== ====== ======== ======= Net income per share -- After Subsequent Pooling........... $ .35 $ .76 $ 1.14 ====== ====== =======
The remaining two companies were accounted for as purchases. The aggregate consideration to be paid in these transactions was $34.3 million in cash and $18.3 million of convertible subordinated notes convertible into 484,239 shares of the Company's Common Stock. In addition, subsequent to year end, the Company has entered into agreements to acquire three additional businesses which are subject to approval of various governmental regulatory bodies. Total consideration to be paid is estimated at $3.3 million (unaudited) in cash and approximately 392,000 shares (unaudited) of the Company's Common Stock. 41 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Suburban Transit Corp. We have audited the accompanying combined balance sheets of Suburban Transit Corp. (a New Jersey corporation) and related companies as of December 31, 1994 and 1995, and May 31, 1996, and the related combined statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995, and for the five months ended May 31, 1996. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Suburban Transit Corp. and related companies as of December 31, 1994 and 1995, and May 31, 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, and for the five months ended May 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas August 2, 1996 42 SUBURBAN TRANSIT CORP. AND RELATED COMPANIES COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents....... $ 2,226 $ 1,861 $ 286 Accounts receivable, less allowance of $50............. 1,372 952 1,298 Notes receivable from stockholders................. 655 652 -- Inventories..................... 720 796 639 Investments -- restricted....... 362 365 110 Prepaid expenses and other current assets............... 919 577 442 --------- --------- --------- Total current assets...... 6,254 5,203 2,775 PROPERTY AND EQUIPMENT, net.......... 8,759 10,826 12,550 OTHER ASSETS......................... 83 62 53 --------- --------- --------- Total assets.............. $ 15,096 $ 16,091 $ 15,378 ========= ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations.................. $ 914 $ 1,217 $ -- Accounts payable and accrued liabilities.................. 4,354 4,067 3,547 --------- --------- --------- Total current liabilities............... 5,268 5,284 3,547 LONG-TERM OBLIGATIONS, net of current maturities......................... 2,944 3,850 -- DUE TO PARENT........................ -- -- 5,365 DEFERRED INCOME TAXES................ 2,084 2,055 2,046 --------- --------- --------- Total liabilities......... 10,296 11,189 10,958 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, no par, 13,250 shares authorized, 549 shares issued............ 73 73 73 Retained earnings............... 4,727 4,829 4,347 --------- --------- --------- Total stockholders' equity.................. 4,800 4,902 4,420 --------- --------- --------- Total liabilities and stockholders' equity.... $ 15,096 $ 16,091 $ 15,378 ========= ========= ========= The accompanying notes are an integral part of these combined financial statements. 43 SUBURBAN TRANSIT CORP. AND RELATED COMPANIES COMBINED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS)
SIX MONTHS FIVE MONTHS YEAR ENDED DECEMBER 31 ENDED ENDED ------------------------------- JUNE 30 MAY 31 1993 1994 1995 1995 1996 --------- --------- --------- ----------- ----------- (UNAUDITED) REVENUES............................. $ 32,274 $ 30,427 $ 29,752 $13,742 $11,520 OPERATING EXPENSES................... 28,903 27,526 25,322 12,038 10,648 --------- --------- --------- ----------- ----------- Gross profit.............. 3,371 2,901 4,430 1,704 872 GENERAL AND ADMINISTRATIVE EXPENSES........................... 2,417 2,283 2,563 1,333 1,052 --------- --------- --------- ----------- ----------- Operating income (loss)... 954 618 1,867 371 (180) OTHER (INCOME) EXPENSE: Interest expense................ 227 282 432 205 197 Interest income................. (33) (39) (114) (57) (39) Other, net...................... (19) (96) (105) -- -- --------- --------- --------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES.... 779 471 1,654 223 (338) PROVISION FOR INCOME TAXES........... 259 128 423 47 -- --------- --------- --------- ----------- ----------- NET INCOME (LOSS).................... $ 520 $ 343 $ 1,231 $ 176 $ (338) ========= ========= ========= =========== =========== PRO FORMA DATA (Unaudited): Historical net income (loss).... $ 520 $ 343 $ 1,231 $ 176 (338) Pro forma compensation differential.. 569 597 902 336 140 Less: Pro forma provision for income taxes................. 294 282 621 182 (83) --------- --------- --------- ----------- ----------- PRO FORMA NET INCOME (LOSS).......... $ 795 $ 658 $ 1,512 $ 330 $ (115) ========= ========= ========= =========== ===========
The accompanying notes are an integral part of these combined financial statements. 44 SUBURBAN TRANSIT CORP. AND RELATED COMPANIES COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK TOTAL ---------------- RETAINED STOCKHOLDERS' SHARES AMOUNT EARNINGS EQUITY ------ ------ -------- ------------- BALANCE AT DECEMBER 31, 1992......... 549 $ 73 $ 4,624 $ 4,697 Dividends paid.................. -- -- (455) (455) Net income...................... -- -- 520 520 ------ ------ -------- ------------- BALANCE AT DECEMBER 31, 1993......... 549 73 4,689 4,762 Dividends paid.................. -- -- (305) (305) Net income...................... -- -- 343 343 ------ ------ -------- ------------- BALANCE AT DECEMBER 31, 1994......... 549 73 4,727 4,800 Dividends paid.................. -- -- (1,129) (1,129) Net income...................... -- -- 1,231 1,231 ------ ------ -------- ------------- BALANCE AT DECEMBER 31, 1995......... 549 73 4,829 4,902 Dividends paid.................. -- -- (81) (81) Distribution to Stockholders.... -- -- (63) (63) Net loss........................ -- -- (338) (338) ------ ------ -------- ------------- BALANCE AT MAY 31, 1996.............. 549 $ 73 $ 4,347 $ 4,420 ====== ====== ======== =============
The accompanying notes are an integral part of these combined financial statements. 45 SUBURBAN TRANSIT CORP. AND RELATED COMPANIES COMBINED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
SIX MONTHS FIVE MONTHS YEAR ENDED DECEMBER 31 ENDED ENDED ------------------------------- JUNE 30 MAY 31 1993 1994 1995 1995 1996 --------- --------- --------- ------------ ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............... $ 520 $ 343 $ 1,231 $ 176 $ (338) Adjustments to reconcile net income (loss) to net cash provided by operating activities -- Depreciation.............. 848 893 878 395 396 Gain on sale of assets.... -- (96) (105) -- -- Deferred tax provision.... 157 -- 303 81 -- Changes in operating assets and liabilities -- Accounts receivable, net..................... (13) (387) 420 312 (346) Inventories............. (75) (77) (76) (60) 157 Prepaid expenses and other current assets............... (410) 301 36 150 135 Accounts payable and accrued liabilities.......... 354 349 (291) 840 (520) Other................... 21 20 2 17 652 --------- --------- --------- ------------ ----------- Net cash provided by operating activities..... 1,402 1,346 2,398 1,911 136 --------- --------- --------- ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment.................... (1,074) (1,748) (3,199) (2,646) (2,183) Proceeds from sales of property and equipment................ -- 875 359 (1) -- Sales (Purchases) of investments -- restricted.... -- (252) (3) -- 255 --------- --------- --------- ------------ ----------- Net cash used in investing activities..... (1,074) (1,125) (2,843) (2,647) (1,928) --------- --------- --------- ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term obligations.................. (1,196) (1,819) (3,037) (2,897) (6,719) Proceeds from issuance of long-term obligations........ 1,390 1,670 4,246 3,858 1,652 Advances from Parent............ -- -- -- -- 5,365 Dividends paid.................. (455) (305) (1,129) -- (81) --------- --------- --------- ------------ ----------- Net cash provided by (used in) financing activities..... (261) (454) 80 961 217 --------- --------- --------- ------------ ----------- NET INCREASE (DECREASE) IN CASH...... 67 (233) (365) 225 (1,575) CASH AND CASH EQUIVALENTS, beginning of year.................. 2,392 2,459 2,226 2,226 1,861 --------- --------- --------- ------------ ----------- CASH AND CASH EQUIVALENTS, end of year............................... $ 2,459 $ 2,226 $ 1,861 $ 2,451 $ 286 ========= ========= ========= ============ =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.......... $ 201 $ 307 $ 232 $ 131 $ 154 Cash paid for income taxes...... 58 160 114 27 153
The accompanying notes are an integral part of these combined financial statements. 46 SUBURBAN TRANSIT CORP. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: Suburban Transit Corp. and its six affiliated companies (collectively, the Company) operate city transit services, provide local commuter service and provide motorcoach transportation services in the New York/New Jersey metropolitan area. The Company also provides charter and group tour services. The Company merged with a subsidiary of Coach USA, Inc. (Coach USA) (the Merger) in May, 1996. All outstanding shares of the Company's common stock were exchanged for cash and shares of Coach USA's common stock concurrent with the consummation of the initial public offering (the Offering) of the common stock of Coach USA. In connection with the Merger, the Company dividended certain assets to the stockholders consisting of land and buildings, with a total carrying value of approximately $63,000 (unaudited). The Company's financial position and results of operations are consolidated with Coach USA effective June 1, 1996 for financial reporting purposes. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION The combined financial statements include the accounts and results of operations of Suburban Transit Corp. and affiliated companies which are under common control and management of three related stockholders. All significant intercompany transactions and balances have been eliminated. INTERIM FINANCIAL INFORMATION The interim financial statements for the six months ended June 30, 1995 are unaudited, and certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the results of operations and cash flows with respect to the consolidated interim financial statements, have been included. The results of operations for the interim periods ended June 30, 1995 and May 31, 1996, are not necessarily indicative of the results for the entire fiscal year. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less as cash equivalents. INVENTORIES Inventories primarily consist of motorcoach replacement parts. Inventory cost is accounted for on the first-in, first-out basis and reported at the lower of cost or market. INVESTMENTS Included in investments at December 31, 1994 and 1995, are certificates of deposit of $250,000 which are used as collateral for loans, and cash deposits as of December 31, 1994 and 1995, and May 31, 1996, of $112,000, $115,000 and $110,000, respectively, which are restricted as to withdrawal related to the Company's accrued insurance claims payable. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Expenditures for maintenance and repairs, including replacement of engines and certain other significant costs, are expensed as costs are incurred. Depreciation on transportation equipment and other assets for financial reporting purposes is computed on the straight-line basis over the estimated useful lives of the assets net of their estimated residual values. 47 SUBURBAN TRANSIT CORP. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) CONCENTRATION OF CREDIT RISK The Company's credit risks primarily consist of accounts receivable from the state of New Jersey and other governmental entities. Management performs ongoing credit evaluations of its customers and provides allowances as deemed necessary. REVENUE RECOGNITION The Company recognizes revenue from recreation, excursion, commuter and transit services when such services are rendered. Costs associated with the revenues are incurred and recorded as services are rendered. INCOME TAXES Two of the affiliated companies are S Corporations and the remaining companies are C Corporations for federal income tax purposes. Federal income taxes for the C Corporations are provided under the liability method considering the tax effects of transactions reported in the financial statements which are different from the tax return. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the underlying assets or liabilities are recovered or settled. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. PROPERTY AND EQUIPMENT: Property and equipment consist of the following:
ESTIMATED DECEMBER 31 USEFUL LIVES -------------------- MAY 31 (YEARS) 1994 1995 1996 -------------- --------- --------- --------- (IN THOUSANDS) Transportation equipment............. 5-12 $ 15,683 $ 17,354 $ 19,470 Other................................ 5-10 1,007 1,061 926 --------- --------- --------- 16,690 18,415 20,396 Less -- Accumulated depreciation..... (7,931) (7,589) (7,846) --------- --------- --------- $ 8,759 $ 10,826 $ 12,550 ========= ========= =========
4. LONG-TERM OBLIGATIONS: Long-term obligations consist of the following: DECEMBER 31 -------------------- MAY 31 1994 1995 1995 --------- --------- --------- (IN THOUSANDS) Notes payable to a bank.............. $ 3,858 $ 5,067 $ -- --------- --------- --------- 3,858 5,067 -- Less -- Current maturities........... (914) (1,217) -- --------- --------- --------- $ 2,944 $ 3,850 $ -- ========= ========= ========= 48 SUBURBAN TRANSIT CORP. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) DUE TO PARENT During May 1996, the Company borrowed $5,365,000 from Coach USA at an annual interest rate of 10 percent in order to repay long-term obligations and for other financing activities. These borrowings are considered long-term as Coach USA does not intend to call the outstanding balance owed by the Company during the next twelve months. 5. INCOME TAXES: The Company has implemented Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which provides for a liability approach to accounting for income taxes. The S Corporations in the affiliated group are not subject to taxation for federal purposes. Under S Corporation status, the stockholders report their share of the Company's taxable earnings or losses on their personal income tax returns. These companies' S Corporation status will terminate with the effective date of the Merger. These companies are subject to taxation in certain states based upon the jurisdiction in which revenues are earned. The provision for taxes on income consists of the following:
YEAR ENDED DECEMBER 31 FIVE MONTHS ------------------------------- ENDED MAY 31, 1993 1994 1995 1996 --------- --------- --------- ------------- (IN THOUSANDS) Current -- Federal......................... $ 84 $ 118 $ 103 $ -- State........................... 18 10 17 -- --------- --------- --------- ------------- 102 128 120 -- --------- --------- --------- ------------- Deferred -- Federal......................... 25 (33) 172 -- State........................... 132 33 131 -- --------- --------- --------- ------------- 157 -- 303 -- --------- --------- --------- ------------- $ 259 $ 128 $ 423 $ -- ========= ========= ========= =============
Deferred taxes result from the effect of transactions which are recognized in different periods for financial and tax reporting purposes and relate primarily to depreciation and accrued insurance claims payable. Deferred income taxes are recognized for tax consequences of temporary differences by applying enacted statutory tax rates to differences between the financial reporting and the tax bases of existing assets and liabilities. 49 SUBURBAN TRANSIT CORP. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The components of deferred income tax liabilities and assets are as follows: DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- --------- (IN THOUSANDS) Deferred income tax liabilities -- Property and equipment.......... $ 2,084 $ 2,055 $ 2,065 Other........................... 95 124 56 --------- --------- --------- Total deferred income tax liabilities............. 2,179 2,179 2,121 --------- --------- --------- Deferred income tax assets -- Accrued expenses................ (605) (318) (153) General business credits........ (859) (859) (859) Other........................... (54) (38) (145) --------- --------- --------- Gross deferred income tax assets.................. (1,518) (1,215) (1,157) Less valuation allowance............... 859 859 859 --------- --------- --------- Net deferred income tax assets.................. (659) (356) (298) --------- --------- --------- $ 1,520 $ 1,823 $ 1,823 ========= ========= ========= The differences in income taxes provided and the amounts determined by applying the federal statutory tax rate to income before income taxes result from the following: YEAR ENDED DECEMBER 31 ------------------------------- MAY 31 1993 1994 1995 1996 --------- --------- --------- ------- (IN THOUSANDS) Tax at statutory rate.............. $ 273 $ 165 $ 579 $(118) Add (deduct) -- State income taxes...... 98 28 96 1 Effect of S Corporation income................ (108) (39) (252) (82) Other, net.............. (4) (26) -- 199 --------- --------- --------- ------- $ 259 $ 128 $ 423 $-- ========= ========= ========= ======= For financial reporting purposes, the Company has general business credit carryforwards which have been fully offset by a valuation allowance. The general business credit carryforwards will expire at various periods from 1996 through 2000. 6. COMMITMENTS AND CONTINGENCIES: SERVICE CONTRACTS The Company provides shuttle and charter operations for a university. The contract is renewable by mutual agreement of the parties every three years. The contract was renewed effective July 1, 1996. Revenues from the shuttle and charter operations totaled approximately $3,000,000, $3,400,000, $3,500,000, and $1,757,000 and for the years ended December 31, 1993, 1994 and 1995, and for the five months ended May 31, 1996, respectively. 50 SUBURBAN TRANSIT CORP. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) LEASES The Company leases certain facilities and equipment under noncancelable leases. Rental expense for the years ended December 31, 1993, 1994 and 1995 and five months ended May 31, 1996, was $830,000, $1,076,000, $856,000 and $376,000, respectively. Included in these amounts are rent expenses for the five months ended May 31, 1996 of $142,500 for operating facilities owned by a stockholder. The term of the leases is through 2030 and provides for a 10% escalation in rent expense every five years. The Company is responsible for all real estate taxes, insurance and maintenance. The following represents future minimum rental payments under noncancelable operating leases (in thousands): Year ending December 31 -- 1996............................ $ 221 1997............................ 363 1998............................ 352 1999............................ 376 2000............................ 376 Thereafter...................... 15,142 --------- $ 16,830 ========= CLAIMS AND LAWSUITS The Company is subject to certain claims and lawsuits arising in the normal course of business, most of which involve claims for personal injury and property damage incurred in connection with its operations. The Company maintains various insurance coverages in order to minimize financial risk associated with the claims. The Company has provided for certain of these actions in the accompanying combined financial statements. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not be material to the Company's financial position or results of operations. The Company is the plaintiff in a lawsuit against a bus company, Academy Express, Inc., formerly known as Inner Circle Qonexions, Inc. ("Inner Circle") and the Township of East Brunswick, New Jersey. The Company has challenged the award to Inner Circle of a contract for access to certain bus terminals in that Township and the Township's right to restrict access to those terminals. The Company has had access to the terminals under a contract with the Township and has retained its access to the terminals and continues to carry passengers between the terminals and New York City while this litigation is pending. In its complaint, the Company has alleged that it will lose significant revenues if denied access to the terminals, although the Company acknowledges that access to the terminals should be open to all motorcoach operators with the proper authority. The suit was filed in United States District Court for the District of New Jersey in 1994 and proceedings in the case are continuing. Although the court initially ruled against the Company on its request for injunctive relief, the court ordered an evidentiary hearing to explore certain factual issues. The evidentiary hearing took place in late May and early June 1996. The Court is currently deciding whether to vacate its prior denial of injunctive relief. Based upon consultation with legal counsel, management is unable to form an opinion as to the ultimate outcome of this matter. If the Company does not prevail, management is uncertain whether it will be able to recoup a significant portion of its lost revenues. ESTIMATED INSURANCE CLAIMS PAYABLE The Company has a commercial motorcoach liability insurance policy that provides coverage by the insurance company, subject to a $100,000 deductible. As such, any claim within the first $100,000 per incident would be the financial obligation of the Company. The Company is contingently liable for a letter of credit of $110,000 issued in connection with the Company's insurance policies. 51 SUBURBAN TRANSIT CORP. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The accrued insurance claims payable represents management's estimate of the Company's potential claims costs in satisfying the deductible provisions of the insurance policy for claims occurring through May 31, 1996. The accrual is based on known facts and historical trends, and management believes such accrual to be adequate. EMPLOYEE BENEFIT PLANS The Company maintains various 401(k) plans which allow eligible employees to defer a portion of their income through contributions to the plans. Company contributions to the plans were $134,000, $126,000, $120,000 and $50,000 in 1993, 1994, 1995 and in the five months ended May 31, 1996, respectively. COLLECTIVE BARGAINING AGREEMENTS The Company is a party to collective bargaining agreements with certain of its employees. These agreements require the Company to pay specified wages and provide certain benefits to its union employees. These agreements expire in 1998. 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS: Prepaid expenses and other current assets consist of the following: DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- ------ (IN THOUSANDS) Prepaid insurance......... $ 239 $ 139 $-- Deferred tax asset -- current.......... 610 304 304 Other..................... 70 134 138 --------- --------- ------ $ 919 $ 577 $442 ========= ========= ====== NOTES RECEIVABLE FROM STOCKHOLDERS The Company had receivables from certain stockholders totaling $655,000 and $652,000 at December 31, 1994 and 1995, respectively. The loans are unsecured, noninterest-bearing and payable on demand. These loans were repaid during 1996. 8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: Accounts payable and accrued liabilities consist of the following: DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- ------ (IN THOUSANDS) Trade accounts payable.... $ 1,203 $ 922 $ 725 Accrued compensation and benefits.................. 940 587 645 Accrued insurance claims payable................... 1,069 1,314 1,153 Other..................... 1,142 1,244 1,024 --------- --------- ------ $ 4,354 $ 4,067 $3,547 ========= ========= ====== 52 SUBURBAN TRANSIT CORP. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 9. PRO FORMA NET INCOME (UNAUDITED): Pursuant to the Merger, the pro forma information has been presented for the purpose of reflecting net income as if the Merger had occurred on January 1, 1993. General and administrative expenses for the periods presented reflect compensation and related benefits that owners received during the periods. One owner agreed to reductions in salary and benefits in connection with the Merger and has entered into a five-year employment agreement which provides for a set base salary, participation in future incentive bonus plans, certain other benefits and a two-year covenant not to compete following termination of such person's employment. The unaudited pro forma data presents compensation at the level the stockholder of the Company has agreed to receive from the Company subsequent to the Merger. In addition, the pro forma data present the incremental provision for income taxes as if the Company had been subject to federal income taxes and for the income tax impact of the compensation differential discussed above. 53 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Grosvenor Bus Lines, Inc.: We have audited the accompanying consolidated balance sheets of Grosvenor Bus Lines, Inc. (a California corporation), and subsidiaries as of October 31, 1994 and 1995, and May 31, 1996, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended October 31, 1995, and for the seven months ended May 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Grosvenor Bus Lines, Inc., and subsidiaries as of October 31, 1994 and 1995, and May 31, 1996, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1995, and for the seven months ended May 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas August 2, 1996 54 GROSVENOR BUS LINES, INC. AND SUBSIDIARIES (OPERATING AS GRAY LINE OF SAN FRANCISCO) CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) OCTOBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- ------- ASSETS CURRENT ASSETS: Cash and cash equivalents....... $ 261 $ 401 $ 706 Accounts receivable, less allowance of $150............ 2,055 2,367 1,654 Notes receivable from stockholder.................. 225 229 347 Inventories..................... 422 474 458 Investments -- restricted....... 506 759 765 Prepaid expenses and other current assets............... 1,187 1,001 1,038 --------- --------- ------- Total current assets...... 4,656 5,231 4,968 PROPERTY AND EQUIPMENT, net.......... 8,282 7,668 7,531 OTHER ASSETS......................... 557 365 255 --------- --------- ------- Total assets.............. $ 13,495 $ 13,264 $12,754 ========= ========= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations.................. $ 1,140 $ 1,358 $ 983 Accounts payable and accrued liabilities.................. 2,355 2,260 1,913 Note payable to stockholder..... 256 -- -- --------- --------- ------- Total current liabilities............... 3,751 3,618 2,896 LONG-TERM OBLIGATIONS, net of current maturities......................... 4,504 3,281 1,297 DUE TO PARENT........................ -- -- 2,709 DEFERRED INCOME TAXES................ 1,132 1,183 1,187 --------- --------- ------- Total liabilities......... 9,387 8,082 8,089 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, no par, 6,000,000 shares authorized, 4,358,879 shares issued................ 6,529 6,529 6,529 Retained deficit................ (2,421) (1,347) (1,864) --------- --------- ------- Total stockholders' equity.................. 4,108 5,182 4,665 --------- --------- ------- Total liabilities and stockholders' equity.... $ 13,495 $ 13,264 $12,754 ========= ========= ======= The accompanying notes are an integral part of these consolidated financial statements. 55 GROSVENOR BUS LINES, INC. AND SUBSIDIARIES (OPERATING AS GRAY LINE OF SAN FRANCISCO) CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS)
SEVEN MONTHS SIX MONTHS FIVE MONTHS YEAR ENDED OCTOBER 31 ENDED ENDED ENDED ------------------------------- MAY 31, JUNE 30, MAY 31, 1993 1994 1995 1996 1995 1996 --------- --------- --------- ------------ ----------- ----------- (UNAUDITED) (UNAUDITED) REVENUES............................. $ 22,122 $ 24,487 $ 29,235 $ 14,658 $12,811 $10,881 OPERATING EXPENSES................... 16,590 18,990 22,627 12,530 10,225 9,021 --------- --------- --------- ------------ ----------- ----------- Gross profit.............. 5,532 5,497 6,608 2,128 2,586 1,860 GENERAL AND ADMINISTRATIVE EXPENSES........................... 4,129 3,794 4,722 2,764 2,307 1,861 --------- --------- --------- ------------ ----------- ----------- Operating income (loss)... 1,403 1,703 1,886 (636) 279 (1) OTHER (INCOME) EXPENSE: Interest expense................ 404 441 583 276 311 227 Interest income................. (43) (39) (24) (22) (9) (17) Other, net...................... (133) (79) (129) (79) -- -- --------- --------- --------- ------------ ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES.... 1,175 1,380 1,456 (811) (23) (211) PROVISION (BENEFIT) FOR INCOME TAXES....................... 503 456 382 (294) (26) (55) --------- --------- --------- ------------ ----------- ----------- NET INCOME (LOSS).................... $ 672 $ 924 $ 1,074 $ (517) $ 3 $ (156) ========= ========= ========= ============ =========== =========== PRO FORMA DATA (Unaudited): Historical net income (loss).... $ 672 $ 924 $ 1,074 $ (517) $ 3 $ (156) Pro forma compensation differential................. 107 119 373 277 178 176 Less: Pro forma provision (benefit) for income taxes... 44 176 362 (25) 87 40 --------- --------- --------- ------------ ----------- ----------- PRO FORMA NET INCOME (LOSS).......... $ 735 $ 867 $ 1,085 $ (215) $ 94 $ (20) ========= ========= ========= ============ =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 56 GROSVENOR BUS LINES, INC. AND SUBSIDIARIES (OPERATING AS GRAY LINE OF SAN FRANCISCO) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK TOTAL -------------------- RETAINED STOCKHOLDERS' SHARES AMOUNT EARNINGS EQUITY ----------- ------ --------- ------------- BALANCE AT OCTOBER 31, 1992.......... 4,358,879 $6,529 $ (4,017) $ 2,512 Net income...................... -- -- 672 672 ----------- ------ --------- ------------- BALANCE AT OCTOBER 31, 1993.......... 4,358,879 6,529 (3,345) 3,184 Net income...................... -- -- 924 924 ----------- ------ --------- ------------- BALANCE AT OCTOBER 31, 1994.......... 4,358,879 6,529 (2,421) 4,108 Net income...................... -- -- 1,074 1,074 ----------- ------ --------- ------------- BALANCE AT OCTOBER 31, 1995.......... 4,358,879 6,529 (1,347) 5,182 Net loss........................ -- -- (517) (517) ----------- ------ --------- ------------- BALANCE AT MAY 31, 1996.............. 4,358,879 $6,529 $ 1,864 $ 4,665 =========== ====== ========= =============
The accompanying notes are an integral part of these consolidated financial statements. 57 GROSVENOR BUS LINES, INC. AND SUBSIDIARIES (OPERATING AS GRAY LINE OF SAN FRANCISCO) CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
SEVEN MONTHS SIX MONTHS FIVE MONTHS YEAR ENDED OCTOBER 31 ENDED ENDED ENDED ------------------------------- MAY 31 JUNE 30 MAY 31 1993 1994 1995 1996 1995 1996 --------- --------- --------- ------------ ------------ ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............... $ 672 $ 924 $ 1,074 $ (517) $ 3 $ (156) Adjustments to reconcile net income (loss) to net cash provided by operating activities -- Depreciation............... 833 806 878 525 434 373 Gain on sale of assets..... (3) (65) (80) -- -- -- Deferred tax provision (benefit)................ 362 346 295 (247) (8) 230 Changes in operating assets and liabilities -- Accounts receivable, net................... (401) (486) (312) 595 (1,003) 7 Inventories.............. (28) 123 (52) 16 (68) 7 Prepaid expenses and other current assets................ 90 (421) 225 (43) 565 (159) Accounts payable and accrued liabilities... (151) 480 (351) (53) 682 (39) Other.................... 64 19 (95) 67 (38) (239) --------- --------- --------- ------------ ------------ ----------- Net cash provided by operating activities....... 1,438 1,726 1,582 343 567 24 --------- --------- --------- ------------ ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment..................... (377) (1,617) (355) (388) (198) (363) Proceeds from sales of property and equipment................. -- 87 171 -- -- -- Purchases of investments -- restricted..... -- -- (253) -- (254) Proceeds from sales of investments -- restricted..... -- 69 -- -- -- -- --------- --------- --------- ------------ ------------ ----------- Net cash used in investing activities....... (377) (1,461) (437) (388) (452) (363) --------- --------- --------- ------------ ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term obligations................... (1,310) (1,131) (3,812) (3,059) (2,978) (2,487) Proceeds from issuance of long-term obligations................... 137 862 2,807 700 2,807 700 Advances from parent............ -- -- -- 2,709 -- 2,709 --------- --------- --------- ------------ ------------ ----------- Net cash provided by (used in) financing activities....... (1,173) (269) (1,005) 350 (171) 922 --------- --------- --------- ------------ ------------ ----------- NET INCREASE (DECREASE) IN CASH...... (112) (4) 140 305 (56) 583 CASH AND CASH EQUIVALENTS, beginning of year............................ 377 265 261 401 115 123 --------- --------- --------- ------------ ------------ ----------- CASH AND CASH EQUIVALENTS, end of year............................... $ 265 $ 261 $ 401 $ 706 $ 59 $ 706 ========= ========= ========= ============ ============ =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.......... $ 379 $ 413 $ 524 $ 296 $ 296 $ 283 Cash paid for income taxes...... 142 124 71 51 25 51
The accompanying notes are an integral part of these consolidated financial statements. 58 GROSVENOR BUS LINES, INC. AND SUBSIDIARIES (OPERATING AS GRAY LINE OF SAN FRANCISCO) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: Grosvenor Bus Lines, Inc., and subsidiaries (the Company), operating as Gray Line of San Francisco, provides motorcoach sight-seeing services in the San Francisco, California, Bay Area. The Company also provides charter and public transit services. The Company merged with a subsidiary of Coach USA, Inc. (Coach USA) (the Merger) in May, 1996. All outstanding shares of the Company's common stock were exchanged for cash and shares of Coach USA's common stock concurrent with the consummation of the initial public offering (the Offering) of the common stock of Coach USA. The Company's financial position and results of operations are consolidated with Coach USA effective June 1, 1996 for financial reporting purposes. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION The consolidated financial statements include the accounts and results of operations of Grosvenor Bus Lines, Inc., all its subsidiaries, and certain transportation equipment owned by a stockholder and utilized in the operations of the business. All significant intercompany transactions and balances have been eliminated in consolidation. INTERIM FINANCIAL INFORMATION The interim financial statements for the six months ended June 30, 1995 and the five months ended May 31, 1996 are unaudited, and certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the results of operations and cash flows with respect to the consolidated interim financial statements, have been included. The results of operations for the interim periods ended June 30, 1995 and May 31, 1996 are not necessarily indicative of the results for the entire fiscal year. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less as cash equivalents. INVENTORIES Inventories primarily consist of motorcoach replacement parts. Inventory cost is accounted for on the first-in, first-out basis and reported at the lower of cost or market. INVESTMENTS Included in investments at December 31, 1994 and 1995, and at May 31, 1996, are certificates of deposit of $506,000 and $759,000, and $756,000 which are used as collateral for letters of credit. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Expenditures for maintenance and repairs, including replacement of engines and certain other significant costs, are expensed as costs are incurred. Depreciation on transportation equipment and other assets for financial reporting purposes is computed on the straight-line basis over the estimated useful lives of the assets net of their estimated residual values. CONCENTRATION OF CREDIT RISK The Company's credit risks primarily consist of accounts receivable from various tour operators in the travel service industry and governmental entities. Management performs ongoing credit evaluations of its customers and provides allowances as deemed necessary. 59 GROSVENOR BUS LINES, INC. AND SUBSIDIARIES (OPERATING AS GRAY LINE OF SAN FRANCISCO) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) REVENUE RECOGNITION The Company recognizes revenue from recreation, excursion, commuter and transit services when such services are rendered. Costs associated with the revenues are incurred and recorded as services are rendered. INCOME TAXES The Company files a consolidated return for federal income tax purposes. Income taxes are provided under the liability method considering the tax effects of transactions reported in the financial statements which are different from the tax return. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the underlying assets or liabilities are recovered or settled. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. PROPERTY AND EQUIPMENT: Property and equipment consist of the following:
ESTIMATED DECEMBER 31 USEFUL LIVES -------------------- MAY 31 (YEARS) 1994 1995 1996 ------------ --------- --------- ------- (IN THOUSANDS) Transportation equipment..................... 5-12 $ 10,003 $ 9,940 $ 9,975 Other........................................ 5-10 3,094 3,193 3,179 --------- --------- ------- 13,097 13,133 13,154 Less -- Accumulated depreciation............. (4,815) (5,465) (5,623) --------- --------- ------- $ 8,282 $ 7,668 $ 7,531 ========= ========= =======
Included in transportation equipment at October 31, 1994 and 1995, and May 31, 1996 are approximately $1,151,000, $1,180,000, and $1,032,000, respectively, of assets held under capital leases. 60 GROSVENOR BUS LINES, INC. AND SUBSIDIARIES (OPERATING AS GRAY LINE OF SAN FRANCISCO) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. LONG-TERM OBLIGATIONS: Long-term obligations consist of the following: OCTOBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- ------ (IN THOUSANDS) Obligations under capital leases of certain transportation equipment, and computer equipment, implicit interest rates ranging from 6% to 10%, due in monthly installments of $61,372, maturing at various dates through 1998....................... $ 1,058 $ 790 $1,375 Note payable to a bank, interest at prime plus 1.8%, maturing April 1996; secured by transportation equipment and personal guarantees of the stockholders................ -- 300 -- Notes payable to an affiliate, interest at prime plus 1%, interest payable monthly, principal due October 2000....................... 1,552 300 300 Other................................ 3,034 3,249 605 --------- --------- ------ 5,644 4,639 2,280 Less -- Current maturities........... (1,140) (1,358) (983) --------- --------- ------ $ 4,504 $ 3,281 $1,297 ========= ========= ====== At May 31, 1996, future principal payments of long-term obligations and minimum lease payments under capital lease obligations are as follows: LONG-TERM CAPITAL LEASE DEBT OBLIGATIONS --------- ------------- (IN THOUSANDS) Year ending October 31 -- 1996......................... $ 300 $ 452 1997......................... -- 720 1998......................... -- 330 1999......................... 605 88 2000......................... -- 50 Thereafter................... -- 25 --------- ------------- $ 905 1,665 ========= Less -- Amounts representing interest........................ (290) ------------- $ 1,375 ============= Management estimates that the fair value of its debt obligations approximates the historical value of $905,000 at May 31, 1996. DUE TO PARENT During May 1996, the Company borrowed $2,709,000 from Coach USA in order to repay long-term obligations and for other financing activities. These borrowings are considered long-term as Coach USA does not intend to call the outstanding balance owed by the Company during the next twelve months. NOTE PAYABLE TO STOCKHOLDER The Company had borrowings from a stockholder totaling $256,000 at October 31, 1994. The borrowings were unsecured, noninterest-bearing and payable upon demand. 61 GROSVENOR BUS LINES, INC. AND SUBSIDIARIES (OPERATING AS GRAY LINE OF SAN FRANCISCO) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. INCOME TAXES: The Company has implemented Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which provides for a liability approach to accounting for income taxes. The provision for taxes on income consists of the following:
YEAR ENDED OCTOBER 31 SEVEN MONTHS ------------------------------- ENDED 1993 1994 1995 MAY 31, 1996 --------- --------- --------- ------------ (IN THOUSANDS) Current -- Federal......................... $ 20 $ 13 $ 15 $-- State........................... 121 97 72 -- --------- --------- --------- ------------ 141 110 87 -- --------- --------- --------- ------------ Deferred -- Federal......................... 368 338 291 (247) State........................... (6) 8 4 (47) --------- --------- --------- ------------ 362 346 295 (294) --------- --------- --------- ------------ $ 503 $ 456 $ 382 $ (294) ========= ========= ========= ============
Deferred taxes result from the effect of transactions which are recognized in different periods for financial and tax reporting purposes and relate primarily to depreciation and accrued insurance claims payable. Deferred income taxes are recognized for tax consequences of temporary differences by applying enacted statutory tax rates to differences between the financial reporting and the tax bases of existing assets and liabilities. The components of deferred income tax liabilities and assets are as follows: OCTOBER 31 -------------------- MAY 31, 1994 1995 1996 --------- --------- ------- (IN THOUSANDS) Deferred income tax liabilities -- Property and equipment.......... $ 1,132 $ 1,183 $1,187 --------- --------- ------- Total deferred income tax liabilities............. 1,132 1,183 1,187 --------- --------- ------- Deferred income tax assets -- Accrued expenses................ (74) (179) (197) General business credits........ (51) (45) (45) Net operating losses............ (672) (338) (620) Other........................... (109) (94) (92) --------- --------- ------- Gross deferred income tax assets.................. (906) (656) (954) Less valuation allowance............... 51 45 45 --------- --------- ------- Net deferred income tax assets.................. (855) (611) 909 --------- --------- ------- $ 277 $ 572 $ 278 ========= ========= ======= 62 GROSVENOR BUS LINES, INC. AND SUBSIDIARIES (OPERATING AS GRAY LINE OF SAN FRANCISCO) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The differences in income taxes provided and the amounts determined by applying the federal statutory tax rate to income before income taxes result from the following:
YEAR ENDED OCTOBER 31 SEVEN MONTHS ------------------------------- ENDED MAY 31, 1993 1994 1995 1996 --------- --------- --------- ------------- (IN THOUSANDS) Tax at statutory rate................ $ 411 $ 483 $ 510 $(284) Add (deduct) -- State income taxes........ 74 69 58 (47) Nondeductible expenses.... 18 13 13 10 Effect of nontaxable income from personal assets (transportation equipment) of stockholder............. -- (109) (199) 27 --------- --------- --------- ------------- $ 503 $ 456 $ 382 $(294) ========= ========= ========= =============
For purposes of the consolidated federal tax return, the Company has net operating loss carryforwards available to offset taxable income of the Company in the future. The net operating loss carryforwards will expire in 2004. The Company also has general business credit carryforwards which have been fully offset by a valuation allowance. The general business credit carryforwards will expire at various periods from 1996 through 2002. 6. COMMITMENTS AND CONTINGENCIES: SERVICE CONTRACTS The Company has entered into three long-term service contracts with governmental entities to provide transit and commuter service throughout northern California. The contracts expire at various dates through June 1998. Under the terms of the contracts, the Company recognized revenues of $8,735,000, $10,085,000, $12,325,000 and $7,320,880 for the years ended October 31, 1993, 1994 and 1995, and for seven months ended May 31, 1996, respectively. LETTERS OF CREDIT The Company is contingently liable for letters of credit totaling $1,150,000 issued in connection with the Company's long-term service contracts and insurance policies. These letters of credit require commitment fees ranging from one to two percent paid on an annual basis and are secured by certificates of deposit and a guarantee by a stockholder. LEASES The Company leases certain facilities and equipment under noncancelable leases. Rental expense for the years ended October 31, 1993, 1994 and 1995 and for the seven months ended May 31, 1996, was 63 GROSVENOR BUS LINES, INC. AND SUBSIDIARIES (OPERATING AS GRAY LINE OF SAN FRANCISCO) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) $862,000, $868,000, $1,019,000 and $566,000, respectively. The following represents future minimum rental payments under noncancelable operating leases (in thousands): Year ending October 31 -- 1996............................ $ 337 1997............................ 686 1998............................ 616 1999............................ 565 2000............................ 531 Thereafter...................... 989 --------- $ 3,724 ========= CLAIMS AND LAWSUITS The Company is subject to certain claims and lawsuits arising in the normal course of business, most of which involve claims for personal injury and property damage incurred in connection with its operations. The Company maintains various insurance coverages in order to minimize financial risk associated with the claims. The Company has provided for certain of these actions in the accompanying consolidated financial statements. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not be material to the Company's financial position or results of operations. ESTIMATED INSURANCE CLAIMS PAYABLE The Company had a commercial motorcoach liability insurance policy that provided coverage by the insurance company, subject to a $100,000 deductible. As such, any claim within the first $100,000 per incident would be the financial obligation of the Company. The accrued insurance claims payable represents management's estimate of the Company's potential claims costs in satisfying the deductible provisions of the insurance policy for claims occurring through May 31, 1996. The accrual is based on known facts and historical trends, and management believes such accrual to be adequate. EMPLOYEE BENEFIT PLANS The Company maintains a 401(k) plan which allows eligible employees to defer a portion of their income through contributions to the plan. Under the provisions of the plan, employees may contribute up to a maximum of four percent of employee compensation, and the Company matches 50 percent of amounts contributed by employees. Company contributions to the plan were $23,000, $26,000 and $27,000 and $18,000 in 1993, 1994, and 1995, and for the seven months ended May 31, 1996, respectively. COLLECTIVE BARGAINING AGREEMENTS The Company is a party to collective bargaining agreements with certain of its employees. The agreements require the Company to pay specified wages and provide certain benefits to its union employees. These agreements expire in 1998. 64 GROSVENOR BUS LINES, INC. AND SUBSIDIARIES (OPERATING AS GRAY LINE OF SAN FRANCISCO) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS: Prepaid expenses and other current assets consist of the following: OCTOBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- --------- (IN THOUSANDS) Prepaid insurance.................... $ 196 $ 216 $ -- Deferred tax asset -- current........ 476 515 668 Other................................ 515 270 370 --------- --------- --------- $ 1,187 $ 1,001 $ 1,038 ========= ========= ========= NOTES RECEIVABLE FROM STOCKHOLDER The Company had receivables from certain stockholders totaling $225,000 and $229,000 and $290,000 at December 31, 1994 and 1995, and May 31, 1996, respectively. The loans are unsecured, noninterest-bearing and payable on demand. 8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: Accounts payable and accrued liabilities consist of the following: OCTOBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- --------- (IN THOUSANDS) Trade accounts payable............... $ 1,175 $ 828 $ 705 Accrued compensation and benefits.... 680 769 518 Accrued insurance claims payable..... 136 170 170 Other................................ 364 493 520 --------- --------- --------- $ 2,355 $ 2,260 $ 1,913 ========= ========= ========= 9. PRO FORMA NET INCOME (UNAUDITED): Pursuant to the Merger, the pro forma information has been presented for the purpose of reflecting net income as if the Merger had occurred on November 1, 1992. General and administrative expenses for the periods presented reflect compensation and related benefits that owners received during the periods. One owner agreed to reductions in salary and benefits in connection with the Merger and entered into a five-year employment agreement which provides for a set base salary, participation in future incentive bonus plans, certain other benefits and a two-year covenant not to compete following termination of such person's employment. The unaudited pro forma data present compensation at the level the stockholder of the Company has agreed to receive from the Company subsequent to the Merger. In addition, the pro forma data present the incremental provision for income taxes as if the Company had been subject to federal income taxes and for the income tax impact of the compensation differential discussed above. 65 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Leisure Time Tours: We have audited the accompanying balance sheets of Leisure Time Tours (a New Jersey corporation) as of December 31, 1994 and 1995 and May 31, 1996, and the related statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995 and for the five months ended May 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Leisure Time Tours as of December 31, 1994 and 1995 and May 31, 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 and for the five months ended May 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas August 2, 1996 66 LEISURE TIME TOURS BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents....... $ 2,222 $ 1,315 $ 368 Accounts receivable, less allowance of $62, $37 and $37.......................... 462 579 652 Inventories..................... 237 234 234 Investments, including restricted of $300 and $300......................... 606 885 544 Prepaid expenses and other current assets............... 973 1,055 877 --------- --------- ----------- Total current assets...... 4,500 4,068 2,675 PROPERTY AND EQUIPMENT, net.......... 11,182 13,479 14,451 OTHER ASSETS......................... 42 90 54 --------- --------- ----------- Total assets.............. $ 15,724 $ 17,637 $17,180 ========= ========= =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations.................. $ 1,009 $ 1,334 $ 40 Accounts payable and accrued liabilities.................. 5,095 5,271 6,103 --------- --------- ----------- Total current liabilities............... 6,104 6,605 6,143 LONG-TERM OBLIGATIONS, net of current maturities......................... 2,289 2,999 42 DUE TO PARENT........................ -- -- 8,637 DEFERRED INCOME TAXES................ 554 558 570 --------- --------- ----------- Total liabilities......... 8,947 10,162 15,392 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $100 par, 100 shares authorized, 16 2/3 shares issued................ 2 2 2 Retained earnings............... 6,775 7,473 1,786 --------- --------- ----------- Total stockholders' equity.................. 6,777 7,475 1,788 --------- --------- ----------- Total liabilities and stockholders' equity.... $ 15,724 $ 17,637 $17,180 ========= ========= =========== The accompanying notes are an integral part of these financial statements. 67 LEISURE TIME TOURS STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS)
SIX MONTHS FIVE MONTHS YEAR ENDED DECEMBER 31 ENDED ENDED ------------------------------- JUNE 30 MAY 31 1993 1994 1995 1995 1996 --------- --------- --------- ----------- ----------- (UNAUDITED) REVENUES............................. $ 17,534 $ 17,694 $ 18,992 $ 8,949 $ 8,220 OPERATING EXPENSES................... 15,497 14,139 14,577 7,191 6,419 --------- --------- --------- ----------- ----------- Gross profit.............. 2,037 3,555 4,415 1,758 1,801 GENERAL AND ADMINISTRATIVE EXPENSES........................... 2,128 1,934 1,895 893 828 --------- --------- --------- ----------- ----------- Operating income (loss)... (91) 1,621 2,520 865 973 OTHER (INCOME) EXPENSE: Interest expense................ 380 317 339 154 208 Interest income................. (41) (71) (104) (40) (26) Other, net...................... (26) (62) (103) -- -- --------- --------- --------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES.... (404) 1,437 2,388 751 791 PROVISION (BENEFIT) FOR INCOME TAXES.............................. (32) 139 225 71 66 --------- --------- --------- ----------- ----------- NET INCOME (LOSS).................... $ (372) $ 1,298 $ 2,163 $ 680 $ 725 ========= ========= ========= =========== =========== PRO FORMA DATA (Unaudited): Historical net income (loss).... $ (372) $ 1,298 $ 2,163 $ 680 $ 725 Pro forma compensation differential................. 203 211 309 100 60 Less: Pro forma provision (benefit) for income taxes... (42) 546 895 295 291 --------- --------- --------- ----------- ----------- PRO FORMA NET INCOME (LOSS).......... $ (127) $ 963 $ 1,577 $ 485 $ 494 ========= ========= ========= =========== ===========
The accompanying notes are an integral part of these financial statements. 68
LEISURE TIME TOURS STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) COMMON STOCK TOTAL ---------------- RETAINED STOCKHOLDERS' SHARES AMOUNT EARNINGS EQUITY ------ ------ --------- ------------- BALANCE AT DECEMBER 31, 1992......... 16 2/3 $ 2 $ 6,270 $ 6,272 Dividends paid.................. -- -- (246) (246) Net loss........................ -- -- (372) (372) ------ ------ --------- ------------- BALANCE AT DECEMBER 31, 1993......... 16 2/3 2 5,652 5,654 Dividends paid.................. -- -- (175) (175) Net income...................... -- -- 1,298 1,298 ------ ------ --------- ------------- BALANCE AT DECEMBER 31, 1994......... 16 2/3 2 6,775 6,777 Dividends paid.................. -- -- (1,465) (1,465) Net income...................... -- -- 2,163 2,163 ------ ------ --------- ------------- BALANCE AT DECEMBER 31, 1995......... 16 2/3 2 7,473 7,475 ------ ------ --------- ------------- Dividends paid.................. -- -- (4,391) (4,391) Distribution to stockholders.... -- -- (2,021) (2,021) Net income...................... -- -- 725 725 ------ ------ --------- ------------- BALANCE AT MAY 31, 1996.............. 16 2/3 $ 2 $ 1,786 $ 1,788 ====== ====== ========= =============
The accompanying notes are an integral part of these financial statements. 69 LEISURE TIME TOURS STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
SIX MONTHS FIVE MONTHS YEAR ENDED DECEMBER 31 ENDED ENDED ------------------------------- JUNE 30 MAY 31 1993 1994 1995 1995 1996 --------- --------- --------- ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............... $ (372) $ 1,298 $ 2,163 $ 680 $ 725 Adjustments to reconcile net income (loss) to net cash provided by operating activities -- Depreciation.............. 1,451 1,164 1,053 492 377 (Gain) loss on sale of assets.................. 60 (62) 44 46 -- Net gain on sale of investments............. (33) (17) (153) (54) (61) Deferred tax provision (benefit)............... (49) (56) 60 (17) (67) Changes in operating assets and liabilities -- Accounts receivable, net.................. 186 (171) (117) (38) (73) Inventories............. 61 99 3 9 -- Investments............. (124) (132) (126) (234) -- Prepaid expenses and other current assets............... (35) (146) (156) (111) 178 Accounts payable and accrued liabilities.......... 376 643 194 147 832 Other................... (12) 74 (48) (14) 15 --------- --------- --------- ----------- ----------- Net cash provided by operating activities....... 1,509 2,694 2,917 906 1,926 --------- --------- --------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment.................... (911) (94) (5,625) (2,264) (1,810) Proceeds from sales of property and equipment................ 170 99 2,231 1,033 492 --------- --------- --------- ----------- ----------- Net cash provided by (used in) investing activities..... (741) 5 (3,394) (1,231) (1,318) --------- --------- --------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term obligations.................. (1,759) (990) (1,065) (275) (9,378) Proceeds from issuance of long-term obligations........ 422 500 2,100 744 3,371 Advances from parent............ -- -- -- -- 8,843 Dividends paid.................. (246) (175) (1,465) (1,240) (4,391) --------- --------- --------- ----------- ----------- Net cash provided by (used in) financing activities..... (1,583) (665) (430) (771) (1,555) --------- --------- --------- ----------- ----------- NET INCREASE (DECREASE) IN CASH...... (815) 2,034 (907) (1,096) (947) CASH AND CASH EQUIVALENTS, beginning of year............................ 1,003 188 2,222 2,222 1,315 --------- --------- --------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of year............................... $ 188 $ 2,222 $ 1,315 $ 1,126 $ 368 ========= ========= ========= =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.......... $ 372 $ 310 $ 318 $ 136 $ 192 Cash paid for income taxes...... 100 1 364 193 89
The accompanying notes are an integral part of these financial statements. 70 LEISURE TIME TOURS NOTES TO FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: Leisure Time Tours (the Company) provides motorcoach transportation services through regularly scheduled excursion, charter and group tour services primarily in the states of New Jersey, New York and Pennsylvania. The Company merged with a subsidiary of Coach USA, Inc. (Coach USA) (the Merger) in May, 1996. All outstanding shares of the Company's common stock were exchanged for cash and shares of Coach USA's common stock concurrent with the consummation of the initial public offering (the Offering) of the common stock of Coach USA. The Company's financial position and results of operations are consolidated with Coach USA effective June 1, 1996 for financial reporting purposes. In connection with the Merger, the Company dividended certain assets to the stockholders consisting of land, buildings and automobiles with a total carrying value of approximately $2,021,000. In addition, the Company made a cash distribution of $3,218,000 prior to the Merger which represents the Company's estimated S Corporation accumulated adjustment account. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: INTERIM FINANCIAL INFORMATION The interim financial statements for the six months ended June 30, 1995 are unaudited, and certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the results of operations and cash flows with respect to the consolidated interim financial statements, have been included. The results of operations for the interim period ended May 31, 1996 are not necessarily indicative of the results for the entire fiscal year. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less as cash equivalents. INVENTORIES Inventories primarily consist of motorcoach replacement parts. Inventory cost is accounted for on the first-in, first-out basis and reported at the lower of cost or market. INVESTMENTS The Company has adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires that investments in debt securities and marketable equity securities be designated as trading, held-to-maturity or available-for-sale. At December 31, 1994 and 1995, and May 31, 1996, investments have been categorized as trading securities, are stated at fair value, and are classified in the balance sheets as current assets. Investments at December 31, 1994 and 1995 and May 31, 1996 consist of marketable equity securities and certificates of deposit. The realized gains and losses on the sale of investments classified as trading securities are determined using the specific identification method. Unrealized losses on trading securities totaling $30,000, $600, $78,000 and $58,000 are included in net income for the years ended December 31, 1993, 1994 and 1995 and the five months ended May 31, 1996, respectively. Included in investments at December 31, 1994 and 1995 and May 31, 1996, are cash deposits of $300,000 which are restricted as to withdrawal related to the Company's accrued insurance claims payable. 71 LEISURE TIME TOURS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Expenditures for maintenance and repairs, including replacement of engines and certain other significant costs, are expensed as costs are incurred. Depreciation on transportation equipment and other assets for financial reporting purposes is computed on the straight-line basis over the estimated useful lives of the assets net of their estimated residual values. CONCENTRATION OF CREDIT RISK The Company's credit risks primarily consist of accounts receivable from various tour operators in the travel service industry. Management performs ongoing credit evaluations of its customers and provides allowances as deemed necessary. REVENUE RECOGNITION The Company recognizes revenue from recreation, excursion, commuter and transit services when such services are rendered. Costs associated with the revenues are incurred and recorded as services are rendered. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. PROPERTY AND EQUIPMENT: Property and equipment consist of the following:
ESTIMATED DECEMBER 31 USEFUL LIVES -------------------- MAY 31 (YEARS) 1994 1995 1996 -------------- --------- --------- --------- (IN THOUSANDS) Transportation equipment............. 12 $ 18,672 $ 19,107 $ 21,389 Other................................ 3-25 3,214 3,221 411 --------- --------- --------- 21,886 22,328 21,800 Less -- Accumulated depreciation..... (10,704) (8,849) (7,349) --------- --------- --------- $ 11,182 $ 13,479 $ 14,451 ========= ========= =========
4. LONG-TERM OBLIGATIONS: Long-term obligations consist of the following: DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- ------- (IN THOUSANDS) Notes payable to a bank.............. $ 3,178 $ 4,251 $-- Other................................ 120 82 82 --------- --------- ------- 3,298 4,333 82 Less -- Current maturities........... (1,009) (1,334) (40) --------- --------- ------- $ 2,289 $ 2,999 $ 42 ========= ========= ======= 72 LEISURE TIME TOURS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) At May 31, 1996, future principal payments of long-term obligations are as follows (in thousands): Year ending December 31 -- 1996......................... $ 40 1997......................... 42 Thereafter................... -- --------- $ 82 ========= Management estimates that the fair value of its debt obligations approximates the historical value of $82,000 at May 31, 1996. DUE TO PARENT During May 1996, the Company borrowed $8,843,000 from Coach USA at an annual interest rate of 10 percent in order to repay long-term obligations and for other financing activities. These borrowings are considered long-term as Coach USA does not intend to call the outstanding balance owed by the Company during the next twelve months. 5. INCOME TAXES: The Company has elected S Corporation status, as defined by the Internal Revenue Code, whereby the Company is not subject to taxation for federal purposes. Under S Corporation status, the stockholders report their share of the Company's taxable earnings or losses on their personal income tax returns. The Company's S Corporation status terminated with the effective date of the Merger. The Company is subject to taxation in certain states based upon the jurisdiction in which revenues are earned. The provision for taxes on income consists of the following:
FIVE MONTHS YEAR ENDED DECEMBER 31 ENDED ------------------------------- MAY 31 1993 1994 1995 1996 --------- --------- --------- ----------- (IN THOUSANDS) State -- Current......................... $ 17 $ 195 $ 165 $ 133 Deferred........................ (49) (56) 60 (67) --------- --------- --------- ----------- $ (32) $ 139 $ 225 $ 66 ========= ========= ========= ===========
Deferred taxes result from the effect of transactions which are recognized in different periods for financial and tax reporting purposes and relate primarily to depreciation and accrued insurance claims payable. Deferred income taxes are recognized for tax consequences of temporary differences by applying enacted statutory tax rates to differences between the financial reporting and the tax bases of existing assets and liabilities. 73 LEISURE TIME TOURS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The components of deferred income tax liabilities and assets are as follows: DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- ------- (IN THOUSANDS) Deferred income tax liabilities -- Property and equipment.......... $ 554 $ 558 $ 570 Other........................... 24 6 65 --------- --------- ------- Total deferred income tax liabilities............. 578 564 635 --------- --------- ------- Deferred income tax assets -- Accrued expenses................ (331) (257) (398) Other........................... (6) (6) (3) --------- --------- ------- Total deferred income tax assets.................. (337) (263) (401) --------- --------- ------- $ 241 $ 301 $ 234 ========= ========= ======= 6. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases facilities and equipment under cancelable and noncancelable lease agreements. Rental expense for the years ended December 31, 1993, 1994 and 1995 and for the five months ended May 31, 1996 was $71,000, $79,000, $60,000 and $13,000, respectively. Concurrent with the Merger, the Company entered into agreements with the stockholders to lease land and buildings used in the Company's operations for a negotiated amount and term. The term of the leases is May 1996 through May 2001 and provides for a 5 percent escalation in rent expense each year. The following represents future minimum rental payments under noncancelable operating leases (in thousands): Year ending December 31 -- 1996............................ $ 55 1997............................ 91 1998............................ 92 1999............................ 89 2000............................ 93 Thereafter...................... 32 --------- $ 452 ========= CLAIMS AND LAWSUITS The Company is subject to certain claims and lawsuits arising in the normal course of business, most of which involve claims for personal injury and property damage incurred in connection with its operations. The Company maintains various insurance coverages in order to minimize financial risk associated with the claims. The Company has provided for certain of these actions in the accompanying financial statements. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not be material to the Company's financial position or results of operations. ESTIMATED INSURANCE CLAIMS PAYABLE The Company has a commercial motorcoach liability insurance policy that provides coverage by the insurance company subject to a $50,000 deductible (prior to April 1, 1995, the deductible was $100,000). As such, any claim within the first $50,000 per incident would be the financial obligation of the Company. 74 LEISURE TIME TOURS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company is contingently liable for a letter of credit of $300,000 issued in connection with the Company's insurance policies. The accrued insurance claims payable represents management's estimate of the Company's potential claims costs in satisfying the deductible provisions of the insurance policy for claims occurring through May 31, 1996. The accrual is based on known facts and historical trends, and management believes such accrual to be adequate. EMPLOYEE BENEFIT PLANS The Company maintains a 401(k) plan which allows eligible employees to defer a portion of their income through contributions to the plan. Under the provisions of the plan, employees may contribute up to a maximum of four percent of employee compensation, and the Company matches 50 percent of amounts contributed by employees. Company contributions to the plan were $13,000, $14,000 and $20,000 and $7,000 in 1993, 1994 and 1995, and five months ended May 31, 1996, respectively. COLLECTIVE BARGAINING AGREEMENT The Company is a party to a collective bargaining agreement with certain of its employees. The agreement requires the Company to pay specified wages and provide certain benefits to its union employees. This agreement will expire in 1999. RELATED-PARTY TRANSACTIONS The Company had net amounts due to affiliated companies of $27,000, $30,000 and $7,000, at December 31, 1994 and 1995, and May 31, 1996, respectively, attributed primarily to services for purchased transportation and motorcoach maintenance. These amounts are included in trade accounts payable. ENVIRONMENTAL CONCERNS Certain groundwater contamination has occurred at the Company's facility in Mahwah, New Jersey as a result of leakage from an underground storage tank. As a result of discussions with the State of New Jersey Department of Environmental Protection (the Department), in December 1989, the Company submitted a Ground Water Quality Assessment Program (GWQAP) work plan to the Department which outlined a two-phase approach for the site assessment. Phase I and Phase II reports were submitted to the Department in August 1990 and November 1990, respectively. In August 1991, a Phase III report was submitted to the Department, which detailed the Company's final stage of the assessment program. In July 1992, the Company entered into a memorandum of agreement with the Department as an alternative to the GWQAP under which the Company will sample and monitor the groundwater contamination under the Department's oversight. A sampling and monitoring schedule was submitted to the Department in September 1992 and was approved by the state of New Jersey in November 1994. The Company has undertaken several remedial measures to improve groundwater quality at its facility. The most recent groundwater sampling reports indicate that sampling has been performed in accordance with the Department's Field Sampling Manual and that the remedial measures taken by the Company have made an improvement in groundwater quality at the site. The Company believes that the ultimate resolution of this matter will not have a material adverse effect on the financial position or results of operations of the Company. In addition, at the Company's facility in Mahwah, the Company has discharged bus wash and toilet waste into the groundwater. The Department has indicated that if the Company continues to discharge this bus wash and toilet waste into the groundwater, the Department would require the Company to connect to the public sanitary sewer system. The Company has ceased discharging bus wash and bus toilet waste into the groundwater. Currently, the Company periodically hauls this waste off-site for disposal. After consulting with an environmental engineer, the Company accrued approximately $220,000 which is included in accounts payable and accrued liabilities at December 31, 1994 and 1995 for the anticipated cost of connecting to the sewer system. 75 LEISURE TIME TOURS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS: Prepaid expenses and other current assets consist of the following: DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- ------- (IN THOUSANDS) Prepaid insurance.................... $ 444 $ 703 $ 454 Deferred tax asset -- current........ 337 263 263 Other................................ 192 89 160 --------- --------- ------- $ 973 $ 1,055 $ 877 ========= ========= ======= 8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: Accounts payable and accrued liabilities consist of the following: DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- ------- (IN THOUSANDS) Trade accounts payable............... $ 997 $ 887 $ 1,595 Accrued compensation and benefits.... 273 268 260 Accrued insurance claims payable..... 3,159 3,624 3,773 Other................................ 666 492 475 --------- --------- ------- $ 5,095 $ 5,271 $ 6,103 ========= ========= ======= 9. PRO FORMA NET INCOME (UNAUDITED): Pursuant to the Merger, the pro forma information has been presented for the purpose of reflecting net income as if the Merger had occurred on January 1, 1993. General and administrative expenses for the periods presented reflect compensation and related benefits that owners received during the periods. One owner agreed to reductions in salary and benefits in connection with the Merger and entered into a five-year employment agreement which provides for a set base salary, participation in future incentive bonus plans, certain other benefits and a two-year covenant not to compete following termination of such person's employment. The unaudited pro forma data present compensation at the level the stockholder of the Company has agreed to receive from the Company subsequent to the Merger. In addition, the pro forma data present the incremental provision for income taxes as if the Company had been subject to federal income taxes and for the income tax impact of the compensation differential discussed above. 76 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Community Bus Lines, Inc.: We have audited the accompanying combined balance sheets of Community Bus Lines, Inc. (a New Jersey corporation), and related companies as of December 31, 1994 and 1995, and May 31, 1996, and the related combined statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995, and for the five months ended May 31, 1996. These combined financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Community Bus Lines, Inc., and related companies, as of December 31, 1994 and 1995, and May 31, 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, and for the five months ended May 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas August 2, 1996 77 COMMUNITY BUS LINES, INC. AND RELATED COMPANIES COMBINED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents....... $ 269 $ 209 $ 278 Accounts receivable, less allowance of $10............. 183 183 208 Inventories..................... 257 307 289 Investments, including restricted of $528, $580 and $0....................... 1,059 1,046 -- Prepaid expenses and other current assets............... 766 1,022 443 --------- --------- ----------- Total current assets...... 2,534 2,767 1,218 PROPERTY AND EQUIPMENT, net.......... 2,590 3,241 3,488 OTHER ASSETS......................... 182 137 160 --------- --------- ----------- Total assets.............. $ 5,306 $ 6,145 $ 4,866 ========= ========= =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations.................. $ 315 $ 497 $-- Accounts payable and accrued liabilities.................. 2,485 2,953 2,524 Notes payable to stockholder.... 132 171 -- --------- --------- ----------- Total current liabilities............... 2,932 3,621 2,524 LONG-TERM OBLIGATIONS, net of current maturities...................... 784 1,191 -- DUE TO PARENT........................ -- -- 2,014 --------- --------- ----------- Total liabilities......... 3,716 4,812 4,538 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, no par, 7,500 shares authorized, 3,600 shares issued.......... 75 75 75 Additional paid-in capital...... 102 102 102 Retained earnings............... 1,837 1,580 575 Treasury stock, at cost......... (424) (424) (424) --------- --------- ----------- Total stockholders' equity.................. 1,590 1,333 328 --------- --------- ----------- Total liabilities and stockholders' equity.... $ 5,306 $ 6,145 $ 4,866 ========= ========= =========== The accompanying notes are an integral part of these combined financial statements. 78 COMMUNITY BUS LINES, INC. AND RELATED COMPANIES COMBINED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS)
SIX MONTHS FIVE MONTHS YEAR ENDED DECEMBER 31 ENDED ENDED ------------------------------- JUNE 30, MAY 31, 1993 1994 1995 1995 1996 --------- --------- --------- ---------- ----------- (UNAUDITED) REVENUES............................. $ 13,179 $ 14,106 $ 13,807 $6,598 $ 5,466 OPERATING EXPENSES................... 11,057 12,228 11,680 5,644 4,687 --------- --------- --------- ---------- ----------- Gross profit.............. 2,122 1,878 2,127 954 779 GENERAL AND ADMINISTRATIVE EXPENSES........................... 1,760 1,999 2,193 1,063 668 --------- --------- --------- ---------- ----------- Operating income (loss)... 362 (121) (66) (109) 111 OTHER (INCOME) EXPENSE: Interest expense................ 264 228 262 143 83 Interest income................. (34) (38) (49) (12) (13) Other, net...................... 28 49 (40) -- -- --------- --------- --------- ---------- ----------- INCOME (LOSS) BEFORE INCOME TAXES.... 104 (360) (239) (240) 41 PROVISION (BENEFIT) FOR INCOME TAXES.............................. 1 (98) (177) (89) 17 --------- --------- --------- ---------- ----------- NET INCOME (LOSS).................... $ 103 $ (262) $ (62) $ (151) $ 24 ========= ========= ========= ========== =========== PRO FORMA DATA (Unaudited): Historical net income (loss).... $ 103 $ (262) $ (62) $ (151) $ 24 Pro forma compensation differential................. 818 1,015 1,449 585 143 Less: Pro forma provision for income taxes................. 383 338 669 225 60 --------- --------- --------- ---------- ----------- PRO FORMA NET INCOME................. $ 538 $ 415 $ 718 $ 209 $ 107 ========= ========= ========= ========== ===========
The accompanying notes are an integral part of these combined financial statements. 79 COMMUNITY BUS LINES, INC. AND RELATED COMPANIES COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK ADDITIONAL TOTAL --------------- PAID-IN TREASURY RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL STOCK EARNINGS EQUITY ------ ------ ---------- -------- -------- ------------- BALANCE AT DECEMBER 31, 1992......... 3,600 $ 75 $102 $ (424) $2,101 $ 1,854 Net income...................... -- -- -- -- 103 103 ------ ------ ---------- -------- -------- ------------- BALANCE AT DECEMBER 31, 1993......... 3,600 75 102 (424) 2,204 1,957 Dividends paid.................. -- -- -- -- (105) (105) Net loss........................ -- -- -- -- (262) (262) ------ ------ ---------- -------- -------- ------------- BALANCE AT DECEMBER 31, 1994......... 3,600 75 102 (424) 1,837 1,590 Dividends paid.................. -- -- -- -- (195) (195) Net loss........................ -- -- -- -- (62) (62) ------ ------ ---------- -------- -------- ------------- BALANCE AT DECEMBER 31, 1995......... 3,600 75 102 (424) 1,580 1,333 ------ ------ ---------- -------- -------- ------------- Dividends paid.................. -- -- -- -- (655) (655) Distributions to stockholders... -- -- -- -- (374) (374) Net income...................... -- -- -- -- 24 24 ------ ------ ---------- -------- -------- ------------- BALANCE AT MAY 31, 1996.............. 3,600 $ 75 $102 $ (424) $ 575 $ 328 ====== ====== ========== ======== ======== =============
The accompanying notes are an integral part of these combined financial statements. 80 COMMUNITY BUS LINES, INC. AND RELATED COMPANIES COMBINED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
SIX MONTHS FIVE MONTHS YEAR ENDED DECEMBER 31 ENDED ENDED ------------------------------- JUNE 30 MAY 31 1993 1994 1995 1995 1996 --------- --------- --------- ------------ ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss).................................... $ 103 $ (262) $ (62) $ (151) $ 24 Adjustments to reconcile net income (loss) to net cash provided by operating activities -- Depreciation.................................... 365 349 350 171 143 (Gain) loss on sale of assets................... -- 15 (4) (4) (65) Deferred tax provision (benefit)................ (3) (114) (204) (92) 9 Changes in operating assets and liabilities -- Accounts receivable, net...................... (36) (25) -- (137) (25) Inventories................................... (41) (48) (50) (16) 18 Investments................................... -- 132 65 -- 466 Prepaid expenses and other current assets..................................... (693) 404 (48) 361 236 Accounts payable and accrued liabilities...... 68 410 507 60 (429) Other......................................... 158 74 41 8 (265) --------- --------- --------- ------------ ----------- Net cash provided by (used in) operating activities............................ (79) 935 595 200 112 --------- --------- --------- ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment.................. -- (436) (1,001) (994) (571) Proceeds from sales of property and equipment........ -- 10 4 4 277 Purchases of investments -- restricted............... -- (19) (52) (46) 580 --------- --------- --------- ------------ ----------- Net cash provided by (used in) investing activities............................ -- (445) (1,049) (1,036) 286 --------- --------- --------- ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term obligations.......... (910) (804) (459) (93) (2,424) Proceeds from issuance of long-term obligations........................................ 700 558 1,048 1,048 736 Advances from Parent................................. -- -- -- -- 2,014 Dividends paid....................................... -- (105) (195) (195) (655) --------- --------- --------- ------------ ----------- Net cash provided by (used in) financing activities............................ (210) (351) 394 760 (329) --------- --------- --------- ------------ ----------- NET INCREASE (DECREASE) IN CASH........................... (289) 139 (60) (76) 69 CASH AND CASH EQUIVALENTS, beginning of year.............. 419 130 269 269 209 --------- --------- --------- ------------ ----------- CASH AND CASH EQUIVALENTS, end of year.................................................... $ 130 $ 269 $ 209 $ 193 $ 278 ========= ========= ========= ============ =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest............................... $ 248 $ 212 $ 294 $ 152 $ 81 Cash paid for income taxes........................... 30 31 14 14 --
The accompanying notes are an integral part of these combined financial statements. 81 COMMUNITY BUS LINES, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: Community Bus Lines, Inc., and its six affiliated companies (collectively, the Company) operate city transit services, provide local commuter service and provide motorcoach charter and group tour services. The Company operates primarily in the New York/New Jersey metropolitan area. The Company merged with a subsidiary of Coach USA, Inc. (Coach USA) (the Merger) in May, 1996. All outstanding shares of the Company's common stock were exchanged for cash and shares of Coach USA's common stock concurrent with the consummation of the initial public offering (the Offering) of the common stock of Coach USA. The Company's financial position and results of operations are consolidated with Coach USA effective June 1, 1996 for financial reporting purposes. In connection with the Merger, the Company dividended certain assets to the stockholders consisting of cash surrender value of life insurance policies and automobiles with a total carrying value of $374,000, and also distributed approximately $655,000 of investments. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION The combined financial statements include the accounts and results of operations of Community Bus Lines, Inc., and certain affiliated companies which are under common control and management of six related stockholders. All significant intercompany transactions and balances have been eliminated. INTERIM FINANCIAL INFORMATION The interim financial statements for the six months ended June 30, 1995 are unaudited, and certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the results of operations and cash flows with respect to the consolidated interim financial statements, have been included. The results of operations for the interim periods ended June 30, 1995 and May 31, 1996, are not necessarily indicative of the results for the entire fiscal year. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less as cash equivalents. INVENTORIES Inventories primarily consist of motorcoach replacement parts. Inventory cost is accounted for on the first-in, first-out basis and reported at the lower of cost or market. INVESTMENTS The Company has adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires that investments in debt securities and marketable equity securities be designated as trading, held-to-maturity or available-for-sale. At December 31, 1994 and 1995, and May 31, 1996, investments have been categorized as trading securities, are stated at fair value, and are classified in the balance sheets as current assets. Investments at December 31, 1994 and 1995 consist of debt securities, marketable equity securities and certificates of deposit. The realized gains and losses on the sale of investments classified as trading securities are determined using the specific identification method. Unrealized gains/(losses) on trading securities totaling $(11,000), $(18,000) and $25,000 are included in net income for the years ended December 31, 1993, 1994 and 1995, 82 COMMUNITY BUS LINES, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) respectively. The realized gain associated with liquidation of the investment account during the five months ended May 31, 1996, is $5,000. Included in investments at December 31, 1994 and 1995, are money market funds and certificates of deposit of $528,000 and $580,000, respectively, which are restricted as to withdrawal related to the Company's accrued insurance claims payable. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Expenditures for maintenance and repairs, including replacement of engines and certain other significant costs, are expensed as costs are incurred. Depreciation on transportation equipment and other assets for financial reporting purposes is computed on the straight-line basis over the estimated useful lives of the assets net of their estimated residual values. TREASURY STOCK Treasury stock represents shares of the Company's common stock acquired from a related party and are carried at cost. CONCENTRATION OF CREDIT RISK The Company's credit risks primarily consist of accounts receivable from governmental entities and various tour operators in the travel service industry. Management performs ongoing credit evaluations of its customers and provides allowances as deemed necessary. REVENUE RECOGNITION The Company recognizes revenue from recreation, excursion, commuter and transit services when such services are rendered. Costs associated with the revenues are incurred and recorded as services are rendered. INCOME TAXES One of the affiliated companies is a C Corporation and the remaining companies are S Corporations for federal income tax purposes. Federal income taxes for the C Corporation are provided under the liability method considering the tax effects of transactions reported in the financial statements which are different from the tax return. The deferred tax assets and liabilities represent the future tax consequences of those differences, which will either be taxable or deductible when the underlying assets or liabilities are recovered or settled. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 83 COMMUNITY BUS LINES, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 3. PROPERTY AND EQUIPMENT: Property and equipment consist of the following:
ESTIMATED DECEMBER 31 USEFUL LIVES -------------------- MAY 31 (YEARS) 1994 1995 1996 ------------- --------- --------- --------- (IN THOUSANDS) Transportation equipment............. 12 $ 4,300 $ 4,926 $ 5,198 Other................................ 3-10 1,471 1,509 1,472 --------- --------- --------- 5,771 6,435 6,670 Less -- Accumulated depreciation..... (3,181) (3,194) (3,182) --------- --------- --------- $ 2,590 $ 3,241 $ 3,488 ========= ========= =========
4. LONG-TERM OBLIGATIONS: Long-term obligations consist of the following: DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- --------- (IN THOUSANDS) Notes payable to banks............... $ 1,001 $ 1,580 $ -- Other................................ 98 108 -- --------- --------- --------- 1,099 1,688 -- Less -- Current maturities........... (315) (497) -- --------- --------- --------- $ 784 $ 1,191 $ -- ========= ========= ========= DUE TO PARENT During May 1996, the Company borrowed $2,014,000 from Coach USA at an annual interest rate of 10 percent in order to repay long-term obligations and for other financing activities. These borrowings are considered long-term as Coach USA does not intend to call the outstanding balance owed by the Company during the next twelve months. NOTES PAYABLE TO STOCKHOLDER The Company had borrowings from a stockholder totaling $132,000 and $171,000 at December 31, 1994 and 1995, respectively. The borrowings were paid off during the five months ended May 31, 1996. 84 COMMUNITY BUS LINES, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 5. INCOME TAXES: The Company has implemented Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which provides for a liability approach to accounting for income taxes. The S Corporations in the affiliated group are not subject to taxation for federal purposes. Under S Corporation status, the stockholders report their share of the Company's taxable earnings or losses on their personal income tax returns. These companies' S Corporation status terminated with the effective date of the Merger. These companies are subject to taxation in certain states based upon the jurisdiction in which revenues are earned. The provision for taxes on income consists of the following:
YEAR ENDED DECEMBER 31 FIVE MONTHS ------------------------------- ENDED 1993 1994 1995 MAY 31, 1996 --------- --------- --------- ------------ (IN THOUSANDS) Current -- Federal......................... $ -- $ 5 $ 1 $ 7 State........................... 4 11 26 1 --------- --------- --------- ------------ 4 16 27 8 --------- --------- --------- ------------ Deferred -- Federal......................... (8) (51) (172) (27) State........................... 5 (63) (32) 36 --------- --------- --------- ------------ (3) (114) (204) 9 --------- --------- --------- ------------ $ 1 $ (98) $ (177) $ 17 ========= ========= ========= ============
Deferred taxes result from the effect of transactions which are recognized in different periods for financial and tax reporting purposes and relate primarily to depreciation and accrued insurance claims payable. Deferred income taxes are recognized for tax consequences of temporary differences by applying enacted statutory tax rates to differences between the financial reporting and the tax bases of existing assets and liabilities. The components of deferred income tax liabilities and assets are as follows: DECEMBER 31 -------------------- MAY 31, 1994 1995 1996 --------- --------- ------- (IN THOUSANDS) Deferred income tax liabilities -- Property and equipment.......... $ 101 $ 130 $ 45 Other........................... 25 33 -- --------- --------- ------- Total deferred income tax liabilities............. 126 163 45 --------- --------- ------- Deferred income tax assets -- Accrued expenses................ (305) (546) (394) Other........................... (3) (3) -- --------- --------- ------- Total deferred income tax assets.................. (308) (549) (394) --------- --------- ------- $ (182) $ (386) $(349) ========= ========= ======= 85 COMMUNITY BUS LINES, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The differences in income taxes provided and the amounts determined by applying the federal statutory tax rate to income before income taxes result from the following:
YEAR ENDED DECEMBER 31 FIVE MONTHS ------------------------------- ENDED 1993 1994 1995 MAY 31, 1996 --------- --------- --------- ------------ (IN THOUSANDS) Tax at statutory rate................ $ 36 $ (126) $ (84) $ 14 Add (deduct) -- State income taxes........ 6 (34) (3) 5 Effect of S Corporation income.................. (46) 59 (146) (22) Other, net................ 5 3 56 20 --------- --------- --------- ------------ $ 1 $ (98) $ (177) $ 17 ========= ========= ========= ============
6. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases certain facilities and equipment under noncancelable leases. Rental expense for the years ended December 31, 1993, 1994 and 1995, and for the five months ended May 31, 1996 was approximately $190,000, $297,000, $357,000, and $109,000, respectively. Included in these amounts are rent expenses paid to affiliated companies of $97,000, $233,000, $300,000 and $99,000 for the years ended December 31, 1993, 1994 and 1995, and for the five months ended May 31, 1996 respectively. Concurrent with the Merger, the Company entered into agreements with the stockholders to lease land and buildings used in the Company's operations for a negotiated amount and term. The terms of the leases are May 1996 through May 2001 and May 1996 through May 2009 and provide for a 5 percent escalation in rent expense each year. The following represents future minimum rental payments under noncancelable operating leases (in thousands): Year ending December 31 -- 1996............................ $ 136 1997............................ 240 1998............................ 241 1999............................ 253 2000............................ 266 Thereafter...................... 443 --------- $ 1,579 ========= CLAIMS AND LAWSUITS The Company is subject to certain claims and lawsuits arising in the normal course of business, most of which involve claims for personal injury and property damage incurred in connection with its operations. The Company maintains various insurance coverages in order to minimize financial risk associated with the claims. The Company has provided for certain of these actions in the accompanying combined financial statements. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not be material to the Company's financial position or results of operations. ESTIMATED INSURANCE CLAIMS PAYABLE The Company has a commercial motorcoach liability insurance policy that provides coverage by the insurance company, subject to a $100,000 deductible. As such, any claim within the first $100,000 per incident would be the financial obligation of the Company. 86 COMMUNITY BUS LINES, INC. AND RELATED COMPANIES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The accrued insurance claims payable represents management's estimate of the Company's potential claims costs in satisfying the deductible provisions of the insurance policy for claims occurring through May 31, 1996. The accrual is based on known facts and historical trends, and management believes such accrual to be adequate. COLLECTIVE BARGAINING AGREEMENTS The Company is a party to collective bargaining agreements with certain of its employees. The agreements require the Company to pay specified wages and provide certain benefits to its union employees. These agreements expire in 1998. 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS: Prepaid expenses and other current assets consist of the following: DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- ------ (IN THOUSANDS) Prepaid insurance.................... $ 191 $ 226 $ 110 Deferred tax asset -- current........ 89 297 297 Cash surrender value of life insurance............................ 462 479 -- Other................................ 24 20 36 --------- --------- ------ $ 766 $ 1,022 $ 443 ========= ========= ====== 8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: Accounts payable and accrued liabilities consist of the following: DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- ------ (IN THOUSANDS) Trade accounts payable............... $ 306 $ 263 $ 162 Accrued compensation and benefits.... 143 634 117 Accrued insurance claims payable..... 1,755 1,810 1,634 Other................................ 281 246 611 --------- --------- ------ $ 2,485 $ 2,953 $2,524 ========= ========= ====== 9. PRO FORMA NET INCOME (UNAUDITED): Pursuant to the Merger, the pro forma information has been presented for the purpose of reflecting net income as if the Merger had occurred on January 1, 1993. General and administrative expenses for the periods presented reflect compensation and related benefits that owners received during the periods. One owner agreed to reductions in salary and benefits in connection with the Merger and entered into five-year employment agreements which provide for a set base salary, participation in future incentive bonus plans, certain other benefits and a two-year covenant not to compete following termination of such person's employment. The unaudited pro forma data present compensation at the level the stockholder of the Company has agreed to receive from the Company subsequent to the Merger. In addition, the pro forma data present the incremental provision for income taxes as if all of the affiliated companies had been subject to federal income taxes and for the income tax impact of the compensation differential discussed above. 87 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Cape Transit Corp.: We have audited the accompanying balance sheets of Cape Transit Corp. (a New Jersey corporation) as of December 31, 1994 and 1995, and May 31, 1996, and the related statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995, and for the five months ended May 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cape Transit Corp. as of December 31, 1994 and 1995, and May 31, 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1995 and for the five months ended May 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas August 2, 1996 88 CAPE TRANSIT CORP. (OPERATING AS ADVENTURE TRAILS) BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- ------- ASSETS CURRENT ASSETS: Cash and cash equivalents....... $ 129 $ 20 $ 56 Accounts receivable, less allowance of $14, $16 and $16.......................... 77 141 228 Inventories..................... 367 326 326 Prepaid expenses and other current assets............... 97 27 27 --------- --------- ------- Total current assets...... 670 514 637 PROPERTY AND EQUIPMENT, net.......... 8,521 8,294 11,101 OTHER ASSETS......................... 46 36 14 --------- --------- ------- Total assets.............. $ 9,237 $ 8,844 $11,752 ========= ========= ======= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations.................. $ 1,648 $ 1,708 $ 431 Accounts payable and accrued liabilities.................. 1,397 1,223 1,363 Notes payable to stockholders... 315 315 -- --------- --------- ------- Total current liabilities............. 3,360 3,246 1,794 LONG-TERM OBLIGATIONS, net of current maturities......................... 5,653 4,675 892 DUE TO PARENT........................ -- -- 8,174 DEFERRED INCOME TAXES................ 120 142 145 --------- --------- ------- Total liabilities......... 9,133 8,063 11,005 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, no par, 2,500 shares authorized, 300 shares issued....................... 16 16 16 Retained earnings............... 88 765 731 --------- --------- ------- Total stockholders' equity.................. 104 781 747 --------- --------- ------- Total liabilities and stockholders' equity.... $ 9,237 $ 8,844 $11,752 ========= ========= ======= The accompanying notes are an integral part of these financial statements. 89 CAPE TRANSIT CORP. (OPERATING AS ADVENTURE TRAILS) STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS)
SIX MONTHS FIVE MONTHS YEAR ENDED DECEMBER 31 ENDED ENDED ------------------------------- JUNE 30 MAY 31 1993 1994 1995 1995 1996 --------- --------- --------- ------------ ----------- (UNAUDITED) REVENUES............................. $ 8,494 $ 10,001 $ 11,053 $5,239 $ 4,392 OPERATING EXPENSES................... 6,665 8,457 8,241 4,126 3,592 --------- --------- --------- ------------ ----------- Gross profit.............. 1,829 1,544 2,812 1,113 800 GENERAL AND ADMINISTRATIVE EXPENSES........................... 840 968 1,089 517 516 --------- --------- --------- ------------ ----------- Operating income.......... 989 576 1,723 596 284 OTHER (INCOME) EXPENSE: Interest expense................ 640 683 787 385 309 Other, net...................... (14) (42) 141 (3) -- --------- --------- --------- ------------ ----------- INCOME (LOSS) BEFORE INCOME TAXES.... 363 (65) 795 214 (25) PROVISION (BENEFIT) FOR INCOME TAXES.............................. 35 (7) 76 20 (2) --------- --------- --------- ------------ ----------- NET INCOME (LOSS).................... $ 328 $ (58) $ 719 $ 194 $ (23) ========= ========= ========= ============ =========== PRO FORMA DATA (Unaudited): Historical net income (loss).... $ 328 $ (58) $ 719 $ 194 $ (23) Pro forma compensation differential................. 79 86 142 71 17 Less: Pro forma provision (benefit) for income taxes... 152 16 324 103 (1) --------- --------- --------- ------------ ----------- PRO FORMA NET INCOME (LOSS).......... $ 255 $ 12 $ 537 $ 162 $ (5) ========= ========= ========= ============ ===========
The accompanying notes are an integral part of these financial statements. 90 CAPE TRANSIT CORP. (OPERATING AS ADVENTURE TRAILS) STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK TOTAL ---------------- RETAINED STOCKHOLDERS' SHARES AMOUNT EARNINGS EQUITY ------ ------ --------- ------------- BALANCE AT DECEMBER 31, 1992......... 300 $ 16 $ (99) $ (83) Dividends paid.................. -- -- (42) (42) Net income...................... -- -- 328 328 ------ ------ --------- ------------- BALANCE AT DECEMBER 31, 1993......... 300 16 187 203 Dividends paid.................. -- -- (41) (41) Net loss........................ -- -- (58) (58) ------ ------ --------- ------------- BALANCE AT DECEMBER 31, 1994......... 300 16 88 104 Dividends paid.................. -- -- (42) (42) Net income...................... -- -- 719 719 ------ ------ --------- ------------- BALANCE AT DECEMBER 31, 1995......... 300 16 765 781 Dividends paid.................. -- -- (11) (11) Net loss........................ -- -- (23) (23) ------ ------ --------- ------------- BALANCE AT MAY 31, 1996.............. 300 $ 16 $ 731 $ 747 ====== ====== ========= =============
The accompanying notes are an integral part of these financial statements. 91 CAPE TRANSIT CORP. (OPERATING AS ADVENTURE TRAILS) STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
SIX MONTHS FIVE MONTHS YEAR ENDED DECEMBER 31 ENDED ENDED ------------------------------- JUNE 30 MAY 31 1993 1994 1995 1995 1996 --------- --------- --------- ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............... $ 328 $ (58) $ 719 $ 194 $ (23) Adjustments to reconcile net income (loss) to net cash provided by operating activities -- Depreciation............... 377 634 593 283 287 (Gain) loss on sale of assets................... -- (42) 60 -- -- Deferred tax provision (benefit)................ 35 (7) 58 21 (16) Changes in operating assets and liabilities -- Accounts receivable, net................... 52 (8) (64) (77) (87) Inventories.............. (209) (50) 41 41 -- Prepaid expenses and other current assets................ (61) 9 60 65 -- Accounts payable and accrued liabilities 447 277 (174) 102 140 Other.................... (31) 21 (16) -- 41 --------- --------- --------- ----------- ----------- Net cash provided by operating activities....... 938 776 1,277 629 342 --------- --------- --------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment..................... (954) (2,163) (711) (14) (3,094) Proceeds from sales of property and equipment................. -- 1,172 285 -- -- --------- --------- --------- ----------- ----------- Net cash used in investing activities....... (954) (991) (426) (14) (3,094) --------- --------- --------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term obligations................... (1,012) (2,954) (1,545) (703) (6,073) Proceeds from issuance of long-term obligations......... 1,085 3,294 627 85 698 Advances from parent............ -- -- -- -- 8,174 Dividends paid.................. (42) (41) (42) (21) (11) --------- --------- --------- ----------- ----------- Net cash provided by (used in) financing activities....... 31 299 (960) (639) 2,788 --------- --------- --------- ----------- ----------- NET INCREASE (DECREASE) IN CASH...... 15 84 (109) (24) 36 CASH AND CASH EQUIVALENTS, beginning of year 30 45 129 129 20 --------- --------- --------- ----------- ----------- CASH AND CASH EQUIVALENTS, end of year............................... $ 45 $ 129 $ 20 $ 105 $ 56 ========= ========= ========= =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.......... $ 649 $ 799 $ 680 $ 350 $ 304
The accompanying notes are an integral part of these financial statements. 92 CAPE TRANSIT CORP. (OPERATING AS ADVENTURE TRAILS) NOTES TO FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: Cape Transit Corp., operating as Adventure Trails (the Company), provides motorcoach services to the Atlantic City, New Jersey, casinos (the casinos), including shuttles from the airport, scheduled service from Philadelphia, Pennsylvania, and contract service for employee shuttles. The Company also provides charter and group tour services. The Company merged with a subsidiary of Coach USA, Inc. (Coach USA) (the Merger) in May, 1996. All outstanding shares of the Company's common stock were exchanged for cash and shares of Coach USA's common stock concurrent with the consummation of the initial public offering (the Offering) of the common stock of Coach USA. The Company's financial position and results of operations are consolidated with Coach USA effective June 1, 1996 for financial reporting purposes. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less as cash equivalents. INTERIM FINANCIAL INFORMATION The interim financial statements for the six months ended June 30, 1995 are unaudited, and certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the results of operations and cash flows with respect to the consolidated interim financial statements, have been included. The results of operations for the interim periods ended June 30, 1995 and May 31, 1996, are not necessarily indicative of the results for the entire fiscal year. INVENTORIES Inventories primarily consist of motorcoach replacement parts. Inventory cost is accounted for on the first-in, first-out basis and reported at the lower of cost or market. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Expenditures for maintenance and repairs, including replacement of engines and certain other significant costs, are expensed as costs are incurred. Depreciation on transportation equipment and other assets for financial reporting purposes is computed on the straight-line basis over the estimated useful lives of the assets net of their estimated residual values. CONCENTRATION OF CREDIT RISK The Company's credit risks primarily consist of accounts receivable from the casinos or their affiliates, or businesses dependent upon the casinos. Management performs ongoing credit evaluations of its customers and provides allowances as deemed necessary. REVENUE RECOGNITION The Company recognizes revenue from recreation, excursion and commuter services when such services are rendered. Costs associated with the revenues are incurred and recorded as services are rendered. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and 93 CAPE TRANSIT CORP. (OPERATING AS ADVENTURE TRAILS) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. PROPERTY AND EQUIPMENT: Property and equipment consist of the following:
ESTIMATED DECEMBER 31 USEFUL LIVES -------------------- MAY 31 (YEARS) 1994 1995 1996 ------------- --------- --------- --------- (IN THOUSANDS) Transportation equipment............. 12 $ 9,411 $ 9,639 $ 12,733 Other................................ 5-10 304 347 347 --------- --------- --------- 9,715 9,986 13,080 Less --Accumulated depreciation...... (1,194) (1,692) (1,979) --------- --------- --------- $ 8,521 $ 8,294 $ 11,101 ========= ========= =========
Included in transportation equipment at December 31, 1994 and 1995, and May 31, 1996, is approximately $5,097,000 and $5,325,000, $1,974,940 respectively, of assets held under capital leases. 4. LONG-TERM OBLIGATIONS: Long-term obligations consist of the following: DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- --------- (IN THOUSANDS) Notes payable to financial institutions, interest ranging from prime (8.5% at December 31, 1995) plus 1.5%, to 11.5%, due in monthly installments of $47,600, maturing at various dates through November 2004; secured by certain transportation equipment and the personal guarantees of the stockholders....................... $ 3,257 $ 2,758 $ 229 Obligations under capital leases of certain transportation equipment, implicit interest rates ranging from 4.8% to 13.5%, due in monthly installments of $31,540, maturing at various dates through 2002...... 2,986 2,708 1,094 Notes payable to a bank.............. 1,058 917 -- --------- --------- --------- 7,301 6,383 1,323 Less -- Current maturities........... (1,648) (1,708) (431) --------- --------- --------- $ 5,653 $ 4,675 $ 892 ========= ========= ========= 94 CAPE TRANSIT CORP. (OPERATING AS ADVENTURE TRAILS) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) At May 31, 1996, future principal payments of long-term obligations and minimum lease payments under capital lease obligations are as follows: LONG-TERM CAPITAL LEASE OBLIGATIONS OBLIGATIONS ------------ ------------- (IN THOUSANDS) Year ending December 31 -- 1996...................... $ 84 $ 221 1997...................... 91 349 1998...................... 38 261 1999...................... 16 190 2000...................... -- 98 Thereafter................ -- 102 ------------ ------------- $229 1,221 ============ Less -- Amounts representing interest..................... (127) ------------- $ 1,094 ============= Management estimates that the fair value of its debt obligations approximates the historical value of $229,000 at May 31, 1996. DUE TO PARENT (UNAUDITED) During May 1996, the Company borrowed $8,174,000 from Coach USA at an annual interest rate of 10 percent in order to repay long-term obligations and for other financing activities. These borrowings are considered long-term as Coach USA does not intend to call the outstanding balance owed by the Company during the next twelve months. NOTES PAYABLE TO STOCKHOLDERS The Company had borrowings from stockholders totaling $315,000 at December 31, 1994 and 1995. The borrowings are unsecured, noninterest-bearing and payable upon demand. During 1996, these borrowings were repaid by Coach USA in connection with the Merger. 5. INCOME TAXES: The Company has elected S Corporation status, as defined by the Internal Revenue Code, whereby the Company is not subject to taxation for federal purposes. Under S Corporation status, the stockholders report their share of the Company's taxable earnings or losses on their personal income tax returns. The Company's S Corporation status terminated with the effective date of the Merger. The Company is subject to taxation in certain states based upon the jurisdiction in which revenues are earned. The provision for taxes on income consists of the following:
YEAR ENDED DECEMBER 31 FIVE MONTHS ------------------------------- ENDED 1993 1994 1995 MAY 31, 1996 --------- --------- --------- ------------ (IN THOUSANDS) State -- Current................... $ -- $ -- $ 18 $ 14 Deferred.................. 35 (7) 58 (16) --------- --------- --------- ------------ $ 35 $ (7) $ 76 $ (2) ========= ========= ========= ============
95 CAPE TRANSIT CORP. (OPERATING AS ADVENTURE TRAILS) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Deferred taxes result from the effect of transactions which are recognized in different periods for financial and tax reporting purposes and relate primarily to depreciation and accrued insurance claims payable. Deferred income taxes are recognized for tax consequences of temporary differences by applying enacted statutory tax rates to differences between the financial reporting and the tax bases of existing assets and liabilities. The components of deferred income tax liabilities and assets are as follows: DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- ------- (IN THOUSANDS) Deferred income tax liabilities -- Property and equipment.......... $ 120 $ 142 $ 145 --------- --------- ------- Total deferred income tax liabilities............. 120 142 145 --------- --------- ------- Deferred income tax assets -- Accrued expenses................ (39) (34) (53) Other........................... (34) (3) (3) --------- --------- ------- Total deferred income tax assets.................. (73) (37) (56) --------- --------- ------- $ 47 $ 105 $ 89 ========= ========= ======= 6. COMMITMENTS AND CONTINGENCIES: LEASES The Company leases certain facilities and equipment under noncancelable leases. Rental expense for the years ended December 31, 1993, 1994 and 1995, and for the five months ended May 31, 1996, was $53,000, $56,000, $67,000 and $36,000, respectively. The following represents future minimum rental payments under noncancelable operating leases (in thousands): Year ending December 31 -- 1996............................ $ 29 1997............................ 46 1998............................ 42 1999............................ 42 2000............................ 39 --------- $ 198 ========= CLAIMS AND LAWSUITS The Company is subject to certain claims and lawsuits arising in the normal course of business, most of which involve claims for personal injury and property damage incurred in connection with its operations. The Company maintains various insurance coverages in order to minimize financial risk associated with the claims. The Company has provided for certain of these actions in the accompanying financial statements. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not be material to the Company's financial position or results of operations. 96 CAPE TRANSIT CORP. (OPERATING AS ADVENTURE TRAILS) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) ESTIMATED INSURANCE CLAIMS PAYABLE The Company has a commercial motorcoach liability insurance policy that provides coverage by the insurance company, subject to a $10,000 deductible. As such, any claim within the first $10,000 per incident would be the financial obligation of the Company. The accrued insurance claims payable represents management's estimate of the Company's potential claims costs in satisfying the deductible provisions of the insurance policy for claims occurring through May 31, 1996. The accrual is based on known facts and historical trends, and management believes such accrual to be adequate. COLLECTIVE BARGAINING AGREEMENT The Company is a party to collective bargaining agreements, effective as of July 1, 1996, with certain of its employees. These agreements require the Company to pay specified wages and provide certain benefits to its union employees. These agreements expire June 30, 1999. 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS: Prepaid expenses and other current assets consist of the following: DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- --------- (IN THOUSANDS) Prepaid insurance.................... $ 60 $ -- $ -- Deferred tax asset -- current........ 37 27 27 --------- --------- --------- $ 97 $ 27 $ 27 ========= ========= ========= 8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: Accounts payable and accrued liabilities consist of the following: DECEMBER 31 -------------------- MAY 31 1994 1995 1996 --------- --------- --------- (IN THOUSANDS) Trade accounts payable............... $ 735 $ 371 $ 501 Accrued compensation and benefits.... 203 197 159 Accrued insurance claims payable..... 44 99 99 Other................................ 415 556 604 --------- --------- --------- $ 1,397 $ 1,223 $ 1,363 ========= ========= ========= 97 CAPE TRANSIT CORP. (OPERATING AS ADVENTURE TRAILS) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 9. PRO FORMA NET INCOME (UNAUDITED): Pursuant to the Merger, the pro forma information has been presented for the purpose of reflecting net income as if the Merger had occurred on January 1, 1993. General and administrative expenses for the periods presented reflect compensation and related benefits that owners received during the periods. One owner agreed to reductions in salary and benefits in connection with the Merger and entered into a five-year employment agreement which provides for a set base salary, participation in future incentive bonus plans, certain other benefits and a two-year covenant not to compete following termination of such person's employment. The unaudited pro forma data present compensation at the level the respective stockholder of the Company has agreed to receive from the Company subsequent to the Merger. In addition, the pro forma data present the incremental provision for income taxes as if the Company had been subject to federal income taxes and for the income tax impact of the compensation differential discussed above. 98 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Arrow Stage Lines, Inc.: We have audited the accompanying balance sheets of Arrow Stage Lines, Inc. (a Nebraska corporation), as of September 30, 1994 and 1995, and May 31, 1996, and the related statements of income, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1995, and for the eight months ended May 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Arrow Stage Lines, Inc., as of September 30, 1994 and 1995, and May 31, 1996, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 1995, and for the eight months ended May 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas August 2, 1996 99 ARROW STAGE LINES, INC. BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA) SEPTEMBER 30 -------------------- MAY 31 1994 1995 1996 --------- --------- ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents....... $ 147 $ 286 $ 3 Accounts receivable, less allowance of $34, $38 and $38...................... 1,067 1,021 929 Inventories..................... 285 297 369 Investments..................... 278 543 -- Prepaid expenses and other current assets............... 322 458 184 --------- --------- ---------- Total current assets...... 2,099 2,605 1,485 PROPERTY AND EQUIPMENT, net.......... 13,559 14,581 16,761 OTHER ASSETS......................... 325 196 -- --------- --------- ---------- Total assets.............. $ 15,983 $ 17,382 $ 18,246 ========= ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations.................. $ 1,659 $ 1,887 $ 351 Accounts payable and accrued liabilities.................. 1,038 1,338 1,014 --------- --------- ---------- Total current liabilities............. 2,697 3,225 1,365 LONG-TERM OBLIGATIONS, net of current maturities......................... 9,024 9,117 1,004 DUE TO PARENT........................ -- -- 12,296 --------- --------- ---------- Total liabilities......... 11,721 12,342 14,665 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $100 par, 990 shares authorized, 10 shares issued............. 1 1 1 Retained earnings............... 4,261 5,039 3,580 --------- --------- ---------- Total stockholders' equity.................. 4,262 5,040 3,581 --------- --------- ---------- Total liabilities and stockholders' equity.... $ 15,983 $ 17,382 $ 18,246 ========= ========= ========== The accompanying notes are an integral part of these financial statements. 100 ARROW STAGE LINES, INC. STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS)
EIGHT MONTHS SIX MONTHS FIVE MONTHS YEAR ENDED SEPTEMBER 30 ENDED ENDED ENDED ------------------------------- MAY 31 JUNE 30 MAY 31 1993 1994 1995 1996 1995 1996 --------- --------- --------- ------------ ------------ ----------- (UNAUDITED) (UNAUDITED) REVENUES............................. $ 9,469 $ 10,039 $ 10,650 $6,670 $5,317 $ 4,459 OPERATING EXPENSES................... 6,655 6,957 7,222 4,860 3,540 2,558 --------- --------- --------- ------------ ------------ ----------- Gross profit.............. 2,814 3,082 3,428 1,810 1,777 1,901 GENERAL AND ADMINISTRATIVE EXPENSES........................... 1,216 1,493 1,751 1,012 889 675 --------- --------- --------- ------------ ------------ ----------- Operating income.......... 1,598 1,589 1,677 798 888 1,226 OTHER (INCOME) EXPENSE: Interest expense................ 726 773 807 664 419 437 Interest income................. (76) (19) (41) (29) (30) (7) Other, net...................... (149) (220) (108) (401) -- -- --------- --------- --------- ------------ ------------ ----------- INCOME BEFORE INCOME TAXES........... 1,097 1,055 1,019 564 499 796 PROVISION FOR INCOME TAXES........... -- -- -- -- -- -- --------- --------- --------- ------------ ------------ ----------- NET INCOME........................... $ 1,097 $ 1,055 $ 1,019 $ 564 $ 499 $ 796 ========= ========= ========= ============ ============ =========== PRO FORMA DATA (Unaudited): Historical net income........... $ 1,097 $ 1,055 $ 1,019 $ 564 $ 499 $ 796 Pro forma compensation differential................. 60 30 32 35 17 27 Less: Pro forma provision (benefit) for income taxes... 480 432 431 246 211 346 --------- --------- --------- ------------ ------------ ----------- PRO FORMA NET INCOME................. $ 677 $ 653 $ 620 $ 353 $ 305 $ 477 ========= ========= ========= ============ ============ ===========
The accompanying notes are an integral part of these financial statements. 101 ARROW STAGE LINES, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
COMMON STOCK TOTAL ---------------- RETAINED STOCKHOLDERS' SHARES AMOUNT EARNINGS EQUITY ------ ------ -------- ------------- BALANCE AT SEPTEMBER 30, 1992........ 10 $1 $2,182 $ 2,183 Dividends paid.................. -- -- (73) (73) Net income...................... -- -- 1,097 1,097 ------ ------ -------- ------------- BALANCE AT SEPTEMBER 30, 1993........ 10 1 3,206 3,207 Net income...................... -- -- 1,055 1,055 ------ ------ -------- ------------- BALANCE AT SEPTEMBER 30, 1994........ 10 1 4,261 4,262 Dividends paid.................. -- -- (241) (241) Net income...................... -- -- 1,019 1,019 ------ ------ -------- ------------- BALANCE AT SEPTEMBER 30, 1995........ 10 1 5,039 5,040 ------ ------ -------- ------------- Dividends paid.................. -- -- (963) (963) Distribution to stockholders.... -- -- (1,060) (1,060) Net income...................... -- -- 564 564 ------ ------ -------- ------------- BALANCE AT MAY 31, 1996.............. 10 $1 $3,580 $ 3,581 ====== ====== ======== =============
The accompanying notes are an integral part of these financial statements. 102 ARROW STAGE LINES, INC. STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
EIGHT MONTHS SIX MONTHS FIVE MONTHS YEAR ENDED SEPTEMBER 30 ENDED ENDED ENDED ------------------------------- MAY 31 JUNE 30 MAY 31 1993 1994 1995 1996 1995 1996 --------- --------- --------- ------------ ------------ ----------- (UNAUDITED) (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income...................... $ 1,097 $ 1,055 $ 1,019 $ 564 $ 499 $ 796 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation.................... 766 926 1,240 706 626 356 Gain on sale of assets.......... (146) (180) (49) (470) (38) (220) Changes in operating assets and liabilities -- Accounts receivable, net........ (211) (193) 46 92 72 (595) Inventories..................... (62) (70) (12) (72) 10 (98) Investments..................... -- (16) (265) 543 -- -- Prepaid expenses and other current assets................ (179) (120) (136) 336 (83) 101 Accounts payable and accrued liabilities................... 167 222 300 (240) 347 111 Other........................... (9) (154) 129 (83) 100 270 --------- --------- --------- ------------ ------------ ----------- Net cash provided by operating activities....... 1,423 1,470 2,272 1,376 1,533 721 --------- --------- --------- ------------ ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment..................... (103) (759) (2,513) (5,783) (2,682) (5,311) Proceeds from sales of property and equipment..................... 183 -- 300 1,935 -- 1,935 --------- --------- --------- ------------ ------------ ----------- Net cash provided by (used in) investing activities....... 80 (759) (2,213) (3,848) (2,682) (3,376) --------- --------- --------- ------------ ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term obligations................... (2,115) (1,382) (2,128) (13,511) (652) (13,243) Proceeds from issuance of long-term obligations......... 753 572 2,449 4,367 2,172 3,932 Advances from Parent............ -- -- -- 12,296 -- 12,296 Dividends paid.................. (73) -- (241) (963) (136) (422) --------- --------- --------- ------------ ------------ ----------- Net cash provided by (used in) financing activities....... (1,435) (810) 80 2,189 1,384 2,563 --------- --------- --------- ------------ ------------ ----------- NET INCREASE (DECREASE) IN CASH...... 68 (99) 139 (283) 235 (92) CASH AND CASH EQUIVALENTS, beginning of year............................ 178 246 147 286 2 95 --------- --------- --------- ------------ ------------ ----------- CASH AND CASH EQUIVALENTS, end of year................................. $ 246 $ 147 $ 286 $ 3 $ 237 $ 3 ========= ========= ========= ============ ============ =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.......... $ 697 $ 774 $ 807 $ 632 $ 415 $ 407
The accompanying notes are an integral part of these financial statements. 103 ARROW STAGE LINES, INC. NOTES TO FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: Arrow Stage Lines, Inc. (the Company), provides motorcoach charter services principally in the southwestern United States. The Company merged with a subsidiary of Coach USA, Inc. (Coach USA) (the Merger) in May, 1996. All outstanding shares of the Company's common stock were exchanged for cash and shares of Coach USA's common stock concurrent with the consummation of the initial public offering (the Offering) of the common stock of Coach USA. The Company's financial position and results of operations are consolidated with Coach USA effective June 1, 1996 for financial reporting purposes. In connection with the Merger, the Company dividended certain assets to the stockholders consisting of land, buildings, cash surrender value of life insurance and automobiles, with a total carrying value of $1,060,000. In addition, the Company made a cash distribution of approximately $729,000 prior to the Merger which represents the Company's estimated S Corporation accumulated adjustment account. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: INTERIM FINANCIAL INFORMATION The interim financial statements for the six months ended June 30, 1995 and the five months ended May 31, 1996, are unaudited, and certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been omitted. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the results of operations and cash flows with respect to the consolidated interim financial statements, have been included. The results of operations for the interim periods ended June 30, 1995 and May 31, 1996 are not necessarily indicative of the results for the entire fiscal year. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less as cash equivalents. INVENTORIES Inventories primarily consist of motorcoach replacement parts. Inventory cost is accounted for on the first-in, first-out basis and reported at the lower of cost or market. INVESTMENTS The Company has adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires that investments in debt securities and marketable equity securities be designated as trading, held-to-maturity or available-for-sale. At September 30, 1994 and 1995, investments have been categorized as trading securities, are stated at fair value, and are classified in the balance sheets as current assets. Investments at September 30, 1994 and 1995, consist of money market and mutual funds. As of May 31, 1996, all investments were liquidated as part of the Merger. The realized gains and losses on the sale of investments classified as trading securities are determined using the specific identification method. Unrealized gains, (losses) on trading securities totaling $2,000, $(3,000) and $52,000 and $18,000 are included in net income for the years ended September 30, 1993, 1994 and 1995, and for the eight months ended May 31, 1996, respectively. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Expenditures for maintenance and repairs, including replacement of engines and certain other significant costs, are expensed as costs are incurred. 104 ARROW STAGE LINES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Depreciation on transportation equipment and other assets for financial reporting purposes is computed on the straight-line basis over the estimated useful lives of the assets net of their estimated residual values. CONCENTRATION OF CREDIT RISK The Company's credit risks primarily consist of accounts receivable from various tour operators in the travel service industry. One of the Company's customers individually represents 20%, 18%, 20% and 12% of total revenues for the years ended September 30, 1993, 1994 and 1995, and for the eight months ended May 31, 1996, respectively. Management performs ongoing credit evaluations of its customers and provides allowances as deemed necessary. REVENUE RECOGNITION The Company recognizes revenue from recreation and excursion services when such services are rendered. Costs associated with the revenues are incurred and recorded as services are rendered. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. PROPERTY AND EQUIPMENT: Property and equipment consist of the following:
ESTIMATED SEPTEMBER 30 USEFUL LIVES -------------------- MAY 31 (YEARS) 1994 1995 1996 ------------ --------- --------- --------- (IN THOUSANDS) Transportation equipment............. 12 $ 14,288 $ 15,720 $ 18,927 Other................................ 3-31 1,989 2,075 455 --------- --------- --------- 16,277 17,795 19,382 Less -- Accumulated depreciation..... (2,718) (3,214) (2,621) --------- --------- --------- $ 13,559 $ 14,581 $ 16,761 ========= ========= =========
Included in transportation equipment at September 30, 1994 and 1995, and May 31, 1996, is approximately $8,110,000, $7,726,000, and $2,191,000, respectively, of assets held under capital leases. 105 ARROW STAGE LINES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. LONG-TERM OBLIGATIONS: Long-term obligations consist of the following: SEPTEMBER 30 -------------------- MAY 31 1994 1995 1996 --------- --------- --------- (IN THOUSANDS) Obligations under capital leases of certain transportation equipment and other assets, implicit interest rates ranging from 6.0% to 9.1%, due in monthly installments of $30,827, maturing at various dates through 2001... $ -- $ -- $ 1,355 Obligations under capital leases of certain transportation equipment, implicit interest rates ranging from 6.1% to 9.7%, due in monthly installments of $93,809, maturing at various dates through 2002................. 6,379 5,157 -- Notes payable to bank........... 4,304 5,847 -- --------- --------- --------- 10,683 11,004 1,355 Less -- Current maturities...... (1,659) (1,887) (351) --------- --------- --------- $ 9,024 $ 9,117 $ 1,004 ========= ========= ========= At May 31, 1996, future principal payments of long-term obligations and minimum lease payments under capital lease obligations are as follows: CAPITAL LEASE OBLIGATIONS -------------- (IN THOUSANDS) Year ending September 30 -- 1996............................ $ 123 1997............................ 407 1998............................ 331 1999............................ 207 2000............................ 202 Thereafter...................... 305 -------------- 1,575 ============== Less -- Amounts representing interest........................... (220) -------------- $1,355 ============== DUE TO PARENT (UNAUDITED) During May 1996, the Company borrowed $12,296,000 from Coach USA at an annual interest rate of 10 percent in order to repay long-term obligations and for other financing activities. These borrowings are considered long-term as Coach USA does not intend to call the outstanding balance owed by the Company during the next twelve months. 5. INCOME TAXES: The Company has elected S Corporation status, as defined by the Internal Revenue Code, whereby the Company is not subject to taxation for federal and state purposes. Under S Corporation status, the 106 ARROW STAGE LINES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) stockholders report their share of the Company's taxable earnings or losses on their personal income tax returns. The Company's S Corporation status terminated with the effective date of the Merger. 6. COMMITMENTS AND CONTINGENCIES: PURCHASE COMMITMENTS The Company has entered into commitments to purchase 15 motorcoaches as of May 31, 1996, for approximately $4,600,000. The Company intends to trade in a similar number of motorcoaches and finance the balance with bank debt which is presently being negotiated. LEASES The Company leases certain equipment under noncancelable leases. Rental expense for the years ended September 30, 1993, 1994 and 1995 for the eight months ended May 31, 1996, was $1,000, $5,000, $5,000 and $3,000, respectively. Concurrent with the Merger, the Company entered into agreements with the stockholders to lease land and buildings used in the Company's operations for a negotiated amount and term. The following represents future minimum rental payments under noncancelable operating leases (in thousands): Period ending September 30 -- 1996............................ $ 30 1997............................ 91 1998............................ 91 1999............................ 91 2000............................ 91 Thereafter...................... 57 --------- $ 451 ========= CLAIMS AND LAWSUITS The Company is subject to certain claims and lawsuits arising in the normal course of business, most of which involve claims for personal injury and property damage incurred in connection with its operations. The Company maintains various insurance coverages in order to minimize financial risk associated with the claims. The Company has provided for certain of these actions in the accompanying financial statements. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters will not be material to the Company's financial position or results of operations. ESTIMATED INSURANCE CLAIMS PAYABLE The Company has a commercial motorcoach liability insurance policy that provides coverage by the insurance company, subject to a $25,000 deductible. As such, any claim within the first $25,000 per incident would be the financial obligation of the Company. The accrued insurance claims payable represents management's estimate of the Company's potential claims costs in satisfying the deductible provisions of the insurance policy for claims occurring through May 31, 1996. The accrual is based on known facts and historical trends, and management believes such accrual to be adequate. 107 ARROW STAGE LINES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. PREPAID EXPENSES AND OTHER CURRENT ASSETS: Prepaid expenses and other current assets consist of the following: SEPTEMBER 30 -------------------- MAY 31 1994 1995 1996 --------- --------- ------- (IN THOUSANDS) Prepaid insurance.................... $ 54 $ 35 $ 86 Cash surrender value of life insurance.......................... 71 133 -- Other................................ 197 290 98 --------- --------- ------- $ 322 $ 458 $ 184 ========= ========= ======= 8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: Accounts payable and accrued liabilities consist of the following: SEPTEMBER 30 -------------------- MAY 31 1994 1995 1996 --------- --------- ------- (IN THOUSANDS) Trade accounts payable............... $ 421 $ 426 $ 186 Accrued compensation and benefits.... 179 292 223 Deferred revenue..................... 133 195 129 Accrued insurance claims payable..... 61 67 67 Other................................ 244 358 409 --------- --------- ------- $ 1,038 $ 1,338 $ 1,014 ========= ========= ======= 9. PRO FORMA NET INCOME (UNAUDITED): Pursuant to the Merger, the pro forma information has been presented for the purpose of reflecting net income as if the Merger had occurred on October 1, 1992. General and administrative expenses for the periods presented reflect compensation and related benefits that owners received during the periods. These owners agreed to reductions in salaries and benefits in connection with the Merger and entered into five-year employment agreements which provide for a set base salary, participation in future incentive bonus plans, certain other benefits and a two-year covenant not to compete following termination of such person's employment. The unaudited pro forma data present compensation at the level the respective stockholders of the Company have agreed to receive from the Company subsequent to the Merger. In addition, the pro forma data present the incremental provision for income taxes as if the Company had been subject to federal and state income taxes and for the income tax impact of the compensation differential discussed above. 108 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Coach USA, Inc. We have audited the accompanying balance sheets of Coach USA, Inc. (a Delaware corporation) as of December 31, 1995 and May 31, 1996, and the related statements of income, stockholders' equity and cash flows for the period from inception (September, 1995) to December 31, 1995 and for the five months ended May 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Coach USA, Inc. as of December 31, 1995 and May 31, 1996, and the results of its operations and its cash flows for the period from inception (September, 1995) to December 31, 1995 and for the five months ended May 31, 1996, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas, August 2, 1996 109 COACH USA, INC. BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE DATA) DECEMBER 31 MAY 31 1995 1996 ----------- --------- ASSETS CASH AND CASH EQUIVALENTS............ $ 1 $ 8 DEFERRED OFFERING COSTS.............. 188 5,173 PROPERTY AND EQUIPMENT, net.......... 9 49 OTHER ASSETS......................... -- 54 ----------- --------- Total assets.............. $ 198 $ 5,284 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY ACCRUED LIABILITIES AND AMOUNTS DUE TO A STOCKHOLDER................... $ 197 $ 5,260 ----------- --------- Total liabilities......... 197 5,260 ----------- --------- STOCKHOLDERS' EQUITY: Common stock, $.01 par, 30,000,000 shares authorized, 1,473,724 and 2,165,724 shares issued........................ 15 22 Additional paid-in capital...... (14) 2,055 Retained earnings (deficit)..... -- (2,053) ----------- --------- Total stockholders' equity.................. 1 24 ----------- --------- Total liabilities and stockholders' equity.... $ 198 $ 5,284 =========== ========= The accompanying notes are an integral part of these financial statements. 110 COACH USA, INC. STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS) INCEPTION FIVE MONTHS THROUGH ENDED DECEMBER 31, MAY 31, 1995 1996 ------------ ------------ GENERAL AND ADMINISTRATIVE EXPENSES........................... -- $ 2,176 ------------ ------------ Operating loss.................. -- (2,176) OTHER INCOME......................... -- 139 ------------ ------------ LOSS BEFORE INCOME TAXES............. -- (2,037) PROVISION FOR INCOME TAXES........... 16 ------------ ------------ NET LOSS............................. $ -- $ (2,053) ============ ============ NET LOSS BEFORE INCOME TAX........... PRO FORMA DATA (Unaudited): Historical net loss............. $ -- $ (2,053) Pro forma non-recurring charge........................ -- 2,076 ------------ ------------ PRO FORMA NET INCOME................. $ -- $ 23 ============ ============ The accompanying notes are an integral part of these financial statements. 111 COACH USA, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL ------------------ PAID IN RETAINED STOCKHOLDERS' SHARES AMOUNT CAPITAL EARNINGS EQUITY ------- ------- ----------- --------- ------------- Balance at September, 1995 (inception)........................ -- $ -- $-- $ -- $-- Issuance of Common Stock............. 1,474 15 (14) -- 1 ------- ------- ----------- --------- ------------- Balance at December 31, 1995......... 1,474 15 (14) -- 1 Issuance of Common Stock............. 692 7 2,069 -- 2,076 Net (Loss)........................... -- -- -- (2,053) (2,053) ------- ------- ----------- --------- ------------- Balance at May 31, 1996.............. 2,166 $ 22 $ 2,055 $ (2,053) $ 24 ======= ======= =========== ========= =============
The accompanying notes are an integral part of these financial statements. 112 COACH USA, INC. STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS) INCEPTION FIVE MONTHS THROUGH ENDED DECEMBER 31, MAY 31, 1995 1996 ------------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)............... -$- $(2,053) Adjustments to reconcile net income (loss) to net cash provided by operating activities -- Non-recurring, non-cash charge.................. -- 2,076 Depreciation.............. -- 1 Changes in operating assets and liabilities -- Prepaid expenses and other current assets........... -- (4,985) Accounts payable and accrued liabilities...... 9 5,056 Other................ -- (54) ------------- ----------- Net cash provided by operating activities... 9 41 ------------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment..................... (9) (41) ------------- ----------- Net cash used in investing activities... (9) (41) ------------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock........ 1 7 Net cash provided by financing activities.................... ------------- ----------- NET INCREASE (DECREASE) IN CASH...... 1 7 CASH AND EQUIVALENTS, beginning of period............................. -- 1 ------------- ----------- CASH AND CASH EQUIVALENTS, end of period............................. $ 1 $ 8 ============= =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest.......... -$- $-- The accompanying notes are an integral part of these financial statements. 113 COACH USA, INC. NOTES TO FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: Coach USA, Inc. (Coach USA or the Company) was founded in September 1995, to create a nationwide motorcoach service provider. Coach USA acquired local and regional motorcoach companies, completed an initial public offering (IPO) of its common stock and, subsequent to the IPO, intends to continue to acquire, through merger or purchase, similar passenger ground transportation companies to expand their national and regional operations. Coach USA's primary assets at December 31, 1995 and May 31, 1996, are cash and deferred offering costs. Coach USA has not conducted any operations and all activities to date have related to the acquisitions and the IPO. Cash of $1,000 was generated from the initial capitalization of the Company in 1995 and another $7,000 in 1996. Other expenditures to date have been funded by a stockholder on behalf of the Company. 2. BASIS OF PRESENTATION: The Company incurred costs, including professional fees and travel, associated with the acquisition of the Founding Companies and the IPO. Accordingly, accrued liabilities and amounts due to a stockholder were approximately $5.3 million as of May 31, 1996. For accounting purposes and for purposes of the presentation of the financial statements herein, May 31, 1996, has been used as the effective date of the Merger. The results of the Company for the month ended June 30, 1996 are included in the Coach USA, Inc. and subsidiaries supplemental consolidated financial statements. The IPO and Merger transactions are excluded from these predecessor company financial statements. INTERIM FINANCIAL INFORMATION The results of operations for the interim period ended May 31 are not necessarily indicative of the results for the entire fiscal year. STOCKHOLDERS' EQUITY In March 1996, Coach USA declared a stock dividend of 9,999 shares of common stock for each share of common stock then outstanding. In addition, Coach USA increased the number of authorized shares of common stock to 30,000,000 shares and authorized 500,000 shares of $.01 par value preferred stock. The effects of the common stock dividend and the increase in the number of common shares authorized have been retroactively reflected on the balance sheet and in the accompanying notes. In addition, subsequent to December 31, 1995, the Company issued 692,000 shares of common stock (which reflects the common stock dividend) to various members of management at par. The sale of such shares resulted in a non-recurring non-cash charge of $2,076,000, representing the difference between the amounts paid for the shares and the estimated fair value of the shares on the date of sale as if the Founding Companies were combined. Coach USA and separate wholly-owned subsidiaries signed definitive agreements to acquire by merger six companies (Founding Companies) effective with the IPO. The companies acquired were Suburban Transit Corp. and related companies, Grosvenor Bus Lines, Inc. and subsidiaries, (operating as Gray Line of San Francisco), Leisure Time Tours, Community Bus Lines, Inc. and related companies, Cape Transit Corp. (operating as Adventure Trails), and Arrow Stage Lines, Inc. The aggregate consideration paid by Coach USA to acquire the Founding Companies was approximately $95.2 million (based upon an offering price of $14 per share consisting of a combination of cash and common stock. 114 COACH USA, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. COMMITMENTS AND CONTINGENCIES The Company has entered into agreements with Exel Motorcoach Partnership ("Exel") whereby Exel will provide introductions to other motorcoach businesses and other consulting services for a term of three years. The consideration to be paid to Exel will be approximately $100,000 per year. In addition, Exel will be paid a commission on any acquisition completed by the Company with motorcoach businesses introduced to it by Exel, based on a formula ranging from 5% of the first $1,000,000 of consideration paid for the acquired business to 1% of the consideration in excess of $4,000,000 paid for such business. Mr. Paul Verrochi, who became a director of the Company upon consummation of the Offering, is a principal of Exel. 115 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEMS 10 TO 13 INCLUSIVE. These items have been omitted in accordance with the instructions to Form 10-K. The Registrant will file with the Commission in April 1997 a definitive proxy statement including the information required to be disclosed under these items. Such information is incorporated into this Annual Report by this reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this report. (1) and (2) Financial Statements and Financial Statement Schedules -- See Index to Consolidated Financial Statements at Item 8 of this report. (3) Exhibits
EXHIBIT NUMBER DESCRIPTION - ------------------------ ------------------------------------------------------------------------------------------ 2.1 -- Agreement and Plan of Organization, dated as of March 21, 1996, by and among Coach USA, Inc., Suburban Transit Corp. and affiliated entities, Suburban Trails Acquisition Corp. and affiliated entities and the Stockholders named therein (Incorporated by reference to Exhibit 2.1 to Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-2704) of the Company) 2.2 -- Agreement and Plan of Organization, dated as of March 21, 1996, by and among Coach USA, Inc., Grosvenor Bus Lines, Inc., Grayline Acquisition Corp. and the Stockholders named therein (Incorporated by reference to Exhibit 2.2 to Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-2704) of the Company) 2.3 -- Agreement and Plan of Organization, dated as of March 21, 1996, by and among Coach USA, Inc., Leisure Time Tours, Leisure Line Acquisition Corp. and the Stockholders named therein (Incorporated by reference to Exhibit 2.3 to Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-2704) of the Company) 2.4 -- Agreement and Plan of Organization, dated as of March 21, 1996, by and among Coach USA, Inc., Community Coach, Inc. and affiliated entities, Community Coach Acquisition Corp. and affiliated entities and the Stockholders named therein (Incorporated by reference to Exhibit 2.4 to Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-2704) of the Company) 2.5 -- Agreement and Plan of Organization, dated as of March 21, 1996, by and among Coach USA, Inc., Arrow Stage Lines, Inc., Arrow Stage Acquisition Corp. and the Stockholders named therein (Incorporated by reference to Exhibit 2.5 to Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-2704) of the Company) 2.6 -- Agreement and Plan of Organization, dated as of March 21, 1996, by and among Coach USA, Inc., Cape Transit Corp., Adventure Trails Acquisition Corp. and the Stockholders named therein (Incorporated by reference to Exhibit 2.6 to Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-2704) of the Company)
116
EXHIBIT NUMBER DESCRIPTION - ------------------------ ------------------------------------------------------------------------------------------ 2.7 -- Agreement and Plan of Reorganization, dated as of August 29, 1996, by and among Coach USA, Inc., Coach V Acquisition, Inc., Yellow Cab Service Corporation, George D. Kamins, Joseph M. Chernow and Equus II Incorporated (Incorporated by reference to Exhibit 2.3 to the Company's Current Report on Form 8-K dated September 13, 1996) 2.8 -- Stock Purchase Agreement dated as of August 29, 1996 by and among Coach USA, Inc., Texas Bus Lines, Inc. and Scott Keller (Incorporated by reference to Exhibit 2.5 to the Company's Current Report on Form 8-K dated September 13, 1996) 2.9 -- Stock Purchase Agreement dated as of August 29, 1996 by and among Coach USA, Inc., K-T Contract Services, Inc., Kerrville Bus Company, Inc. and Fred Kaiser (Incorporated by reference to Exhibit 2.6 to the Company's Current Report on Form 8-K dated September 13, 1996) 3.1 -- Amended and Restated Certificate of Incorporation of Coach USA (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-1 (File No. 333-2704) of the Company) 3.2 -- By-Laws of Coach USA (Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-1 (File No. 333-2704) of the Company) 4.1 -- Form of certificate evidencing ownership of Common Stock of Coach USA (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-1 (File No. 333-2704) of the Company) 10.1 -- Coach USA 1996 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 to Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-2704) of the Company) 10.2 -- Coach USA 1996 Non-Employee Directors' Stock Option Plan (Incorporated by reference to Exhibit 10.2 to Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-2704) of the Company) 10.3 -- Employment Agreement between Coach USA and Richard H. Kristinik (Incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-1 (File No. 333-6525) of the Company) 10.4 -- Employment Agreement between Coach USA and Lawrence K. King (Incorporated by reference to Exhibit 10.4 to the Registration Statement on Form S-1 (File No. 333-6525) of the Company) 10.5 -- Employment Agreement between Coach USA and Douglas M. Cerny (Incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1 (File No. 333-6525) of the Company) 10.6 -- Employment Agreement between Coach USA, Cape Transit Corp. and John Mercadante, Jr. (Incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 (File No. 333-6525) of the Company) 10.7 -- Employment Agreement among Coach USA, Community Coach, Inc. and affiliated entities and Frank P. Gallagher (Incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1 (File No. 333-6525) of the Company) 10.8 -- Employment Agreement among Coach USA, Leisure Time Tours and Gerald Mercadante (Incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-1 (File No. 333-6525) of the Company) 10.9 -- Employment Agreement between Grosvenor Bus Lines, Inc. and Robert K. Werbe (Incorporated by reference to Exhibit 10.10 to the Registration Statement on Form S-1 (File No. 333-6525) of the Company) 10.10 -- Employment Agreement between Arrow Stage Lines, Inc. and Charles D. Busskohl (Incorporated by reference to Exhibit 10.11 to the Registration Statement on Form S-1 (File No. 333-6525) of the Company)
117
EXHIBIT NUMBER DESCRIPTION - ------------------------ ------------------------------------------------------------------------------------------ 10.11 -- Consulting Agreement between Coach USA and Exel Motorcoach Partnership (Incorporated by reference to Exhibit 10.12 to the Registration Statement on Form S-1 (File No. 333-13483) of the Company) 10.12 -- Agreement between Coach USA and Exel Motorcoach Partnership with respect to acquisitions (Incorporated by reference to Exhibit 10.13 to the Registration Statement on Form S-1 (File No. 333-13483) of the Company) 10.13 -- Agreement from Coach USA and certain of its stockholders to the stockholders of the Founding Companies with respect to restrictions on transfers of Common Stock, registration rights and related matters (Incorporated by reference to Exhibit 10.14 to the Registration Statement on Form S-1 (File No. 333-6525) of the Company) 10.14 -- Leases by and between Gerdaneu, Inc. and Leisure Time Tours related to property located in Mahwah and Pleasantville, New Jersey and Philadelphia, Pennsylvania (Incorporated by reference to Exhibit 10.15 to the Registration Statement on Form S-1 (File No. 333-6525) of the Company) 10.15 -- Lease by and between Liberty Street Corporation and Community Coach, Inc. and its affiliated entities related to property located in Passaic, New Jersey (Incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-1 (File No. 333-6525) of the Company) 10.16 -- Lease and Sublease by and between Tri-County Bus Lines, Inc. and Community Coach, Inc. and its affiliated entities related to property located in Passaic, New Jersey (Incorporated by reference to Exhibit 10.17 to the Registration Statement on Form S-1 (File No. 333-6525) of the Company) 10.17 -- Lease by and between a stockholder of Arrow Stage Lines, Inc. and Arrow Stage Lines, Inc. related to property located in Phoenix, Arizona (Incorporated by reference to Exhibit 10.19 to the Registration Statement on Form S-1 (File No. 333-6525) of the Company) 10.18 -- Credit Agreement dated as of August 14, 1996 among Coach USA, Inc. as Borrower and The Financial Institutions named therein, as Banks, and NationsBank of Texas, N.A., as Agent for the Banks providing for a $115,000,000 revolving credit facility (Incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated September 13, 1996). 10.19 -- Amendment No. 2 and Waiver dated as of February 19, 1997 among Coach USA, Inc., financial institutions that are parties to the credit agreement attached to Exhibit 10.18, and NationsBank of Texas, N.A., as agent for the financial institutions, increasing the Company's revolving credit facility to $181,000,000 11 -- Statement regarding Computation of Net Income Per Share -- See Note 2 of the Notes to Consolidated Financial Statements of Coach USA, Inc. and Subsidiaries contained in Item 8. of this Annual Report on Form 10-K. 21 -- List of subsidiaries of Coach USA
- ------------ (b) Reports on Form 8-K: None 118 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE COMPANY HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. COACH USA, INC. By: /s/ RICHARD H. KRISTINIK RICHARD H. KRISTINIK CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED. SIGNATURE CAPACITY IN WHICH SIGNED DATE - ------------------------------------------------------------ --------------- /s/RICHARD H. KRISTINIK Chairman of the Board and March 26, 1997 RICHARD H. KRISTINIK Chief Executive Officer (Principal Executive Officer) /s/LAWRENCE K. KING Senior Vice President, Chief March 26, 1997 LAWRENCE K. KING Financial Officer and Director (Principal Financial and Accounting Officer) /s/STEVEN S. HARTER Director March 26, 1997 STEVEN S. HARTER /s/JOHN MERCADANTE JR. President, Chief Operating March 26, 1997 JOHN MERCADANTE, JR. Officer and Director /s/FRANK P. GALLAGHER Senior Vice President -- March 26, 1997 FRANK P. GALLAGHER Corporate Development and Director /s/GERALD MERCADANTE Senior Vice President -- March 26, 1997 GERALD MERCADANTE Northeast Region Operations and Director Director March , 1997 CHARLES D. BUSSKOHL Director March , 1997 WILLIAM J. LYNCH Director March , 1997 PAUL M. VERROCHI Director March , 1997 THOMAS A. WERBE 119 EX-10.19 2 EXHIBIT 10.19 AMENDMENT NO. 2 AND WAIVER This Amendment No. 2 and Waiver dated as of February 19, 1997 (this "Agreement"), is among Coach USA, Inc., a Delaware corporation (the "Borrower"), the undersigned financial institutions that are parties to the Credit Agreement referred to below (the "Banks"), and NationsBank of Texas, N.A., as agent (the "Agent") for the financial institutions that are parties to the Credit Agreement. INTRODUCTION Reference is made to the Credit Agreement dated as of August 14, 1996 (as amended, the "Credit Agreement"), among the Borrower, the Banks, and the Agent, the defined terms of which are used herein unless otherwise defined herein. The Borrower, the Banks, and the Agent have agreed to increase the amount of the Revolving Loan Commitments under the Credit Agreement to $181,000,000 and make other amendments and waivers to the Credit Agreement as set forth herein in connection therewith. THEREFORE, in connection with the foregoing and for other good and valuable consideration, the Borrower, the Banks, and the Agent hereby agree as follows: Section 1. AMENDMENT. a. Each Bank party to the Credit Agreement prior to the execution of this Agreement is retaining its existing Revolving Loan Commitments and, to the extent necessary, assuming additional Revolving Loan Commitments under the terms of the Credit Agreement such that upon the effectiveness of this Agreement the Revolving Loan Commitments of such Bank shall be those set forth for such Bank on the signature pages of this Agreement. The effective date for this increase shall be the date of this Agreement, and following the effectiveness of this Agreement and as of such date, (a) the Agent shall record the new Revolving Loan Commitments in the Register and (b) the Agent shall reallocate all outstanding Revolving Loan Advances and all participation interests in Letters of Credit so that the Banks hold such Revolving Loan Advances and participation interests in Letters of Credit ratably in accordance with their Revolving Loan Commitments. b. A new definition of "Amendment No. 2 and Waiver" is added to Section 1.1 of the Credit Agreement in the appropriate alphabetical order and the definition of "Revolving Loan Commitment" in Section 1.1 of the Credit Agreement is amended by replacing such definition in its entirety, both as set forth below: "AMENDMENT NO. 2 AND WAIVER" means the Amendment No. 2 and Waiver dated as of February 19, 1997, among the Borrower, the Agent, and the Banks amending and waiving the terms of this Agreement. "REVOLVING LOAN COMMITMENT" means, for any Bank, the amount set forth below such Bank's name on the signature pages of the Amendment No.2 and Waiver as its Revolving Loan Commitment, or if such Bank has entered into any Assignment and Acceptance since the date of the Amendment No. 2 and Waiver, as set forth for such Bank as its Revolving Loan Commitment in the Register maintained by the Agent pursuant to Section 8.5(c), in each case as such amount may be terminated pursuant to Section 6.2. c. The definitions of "Guaranty," "Guarantors", and "Security Agreement" in Section 1.1 of the Credit Agreement are amended by deleting from each such definition each reference to "August 14, 1996," and replacing each such reference in its entirety with a reference to "February 19, 1997." d. The definitions of "Permitted Debt" and "Permitted Liens" in Section 1.1 of the Credit Agreement are amended by replacing such definitions in their entirety with the following: "PERMITTED DEBT" means all of the following Debt: (a) Debt in the form of the Credit Obligations; (b) Debt (i) existing on February 19, 1997, and listed in Schedule II and (ii) Debt incurred after such date provided that the aggregate outstanding amount of Debt under clauses (i) and (ii) hereof does not exceed $40,000,000; (c) Debt in the form of intercompany Debt among the Borrower and its Subsidiaries provided that in each case the Debt is subordinated upon terms satisfactory to the Agent to the obligations of the Borrower and its Subsidiaries with respect to the Credit Obligations; (d) Debt in the form of Subordinated Debt; (e) Debt in the form of obligations to insurance providers for the Borrower and its Subsidiaries for financing insurance premiums in an aggregate outstanding amount not to exceed $1,000,000; and (f) Debt in the form of indebtedness for borrowed money and letters of credit owed by any Subsidiary of the Borrower prior to the acquisition of such Subsidiary by the Borrower in an Acquisition transaction, or owed by any Person that is the subject of any Acquisition assumed by the Borrower or any Subsidiary of the Borrower in connection with such Acquisition, provided that (i) with respect to any such indebtedness for borrowed money, arrangements satisfactory to the Agent for the repayment of such indebtedness within 60 days following the closing of the Acquisition are made prior to the closing of the Acquisition and such arrangements are executed, (ii) with respect to such Debt in the form of letters of credit, arrangements satisfactory to the Agent for the repayment of such indebtedness within 60 days following the closing of the Acquisition are made prior to the closing of the Acquisition and such arrangements are executed, and (iii) with respect to all such Debt, the Borrower could obtain Advances or Letters of Credit, respectively, under this Agreement in the aggregate outstanding amount of such corresponding Debt. "PERMITTED LIENS" means all of the following Liens: (a) Liens securing the Credit Obligations; (b) Liens securing purchase money debt or Capital Leases permitted under clause (b) of the definition of Permitted Debt provided that no such Lien is spread to cover any property not purchased or leased in connection with the incurrence of such Debt; (c) Liens on assets acquired in Acquisitions securing Debt described under clause (f) of the definition of Permitted Debt provided that all such Liens and the notations, filings, and recordings reflecting such Liens are released within 90 days following the closing of the Acquisition; and (d) Liens arising in the ordinary course of business which are not incurred in connection with the borrowing of money or the obtaining of advances or credit and which do not materially detract from the value of any Restricted Entity's assets or materially interfere with any Restricted Entity's business, including such (i) Liens for taxes, assessments, or other governmental charges or levies; (ii) Liens in connection with worker's compensation, unemployment insurance, or other social security, old age pension, or public liability obligations; (iii) Liens in the form of legal or equitable encumbrances deemed to exist by reason of negative pledge covenants and other covenants or undertakings of like nature; (iv) Liens in the form of vendors', carriers', warehousemen's, repairmen's, mechanics', workmen's, materialmen's, construction, or other like Liens arising by operation of law in the ordinary course of business or incident to the construction or improvement of any property; (v) Liens in the form of zoning restrictions, easements, licenses, and other restrictions on the use of real property or minor irregularities in title thereto which do not materially impair the use of such property in the operation of the business of the applicable Restricted Entity or the value of such property; and (vi) Liens in the form of precautionary financing statements that have been filed to reflect operating leases of tires (to the extent such filings could be considered Liens hereunder). e. Schedule II to the Credit Agreement is replaced with Schedule II to this Agreement. 2 f. Section 5.14 of the Credit Agreement is amended by replacing such Section in its entirety with the following: 5.14 LINES OF BUSINESS The Borrower shall not permit the Restricted Entities to change the character of their business as conducted on the date of this Agreement, or engage in any type of business not reasonably related to such business as presently and normally conducted; provided that nothing contained in the foregoing shall prohibit any Restricted Entity from (a) expanding its business into any of the other types of businesses of any of the other Restricted Entities as of the date of this Agreement or (b) entering into and expanding into business in the taxicab industry. g. Section 5.19 of the Credit Agreement is amended by replacing such Section in its entirety with the following: 5.19 SUBSIDIARIES. (a) Upon the formation or acquisition of any new Subsidiary, or when required under paragraph (b) below with respect to any Subsidiary, the Borrower shall and shall cause such Subsidiary to promptly execute and deliver to the Agent such guaranties, security agreements, amendment agreements, and other documents and agreements as the Agent requests so that such Subsidiary guarantees and secures the Credit Obligations on the same terms as the existing Subsidiaries of the Borrower (including the execution and delivery of a Joinder Agreement in substantially the form of Exhibit G for the purpose of joining such Subsidiary as a party to the Guaranty and the Security Agreement or the execution of such new guaranties and security agreements as the Agent determines are necessary to have the same effect in different jurisdictions). In connection therewith, the Borrower shall provide corporate documentation and opinion letters reasonably satisfactory to the Agent reflecting the corporate status of such new Subsidiary of the Borrower and the enforceability of such agreements. (b) The Borrower may exempt from the requirements of paragraph (a) above any Subsidiaries of the Borrower that are business entities formed and existing under the laws of Canada provided that such exempt Subsidiaries of the Borrower (the "Exempt Canadian Subsidiaries") meet the following requirements: (i) the Exempt Canadian Subsidiaries own and operate only assets domiciled in Canada, (ii) the aggregate outstanding amount of cash investments and loans made by the Borrower and its Subsidiaries that are not Exempt Canadian Subsidiaries to the Exempt Canadian Subsidiaries does not exceed $3,500,000, (iii) the consolidated assets of the Exempt Canadian Subsidiaries do not exceed 10% of the consolidated assets of the Borrower, and (iv) the consolidated revenues of the Exempt Canadian Subsidiaries for any fiscal quarter of the Borrower do not exceed 10% of the consolidated revenues of the Borrower for such fiscal quarter. At any time any of the foregoing requirements set forth in clauses (i), (ii), (iii), or (iv) above are no longer satisfied, then the Borrower shall cause some or all of the Exempt Canadian Subsidiaries to promptly comply with the requirements of paragraph (a) to the extent necessary to maintain the requirements for exemption for the remaining Exempt Canadian Subsidiaries. Section 2. WAIVER. The Banks hereby waive any Default or Event of Default existing prior to the effectiveness of this Agreement for failure to comply with Section 5.6 of the Credit Agreement that was caused by the existence of an excess of Debt described in clause (b) of the definition of Permitted Debt prior to the amendment of such definition under this Agreement. This waiver does not extend to any violation of Section 5.6 of the Credit Agreement that exists under the terms of Section 5.6 after the effectiveness of this Agreement. This waiver is limited to the extent described herein and shall not be construed to be a waiver of any other terms of the Credit Agreement or of the Credit Documents. 3 Section 3. EFFECTIVENESS. The effectiveness of the amendments in Section 1 of this Agreement are subject to the satisfaction of the following conditions precedent: a. PAYMENT OF INCREASE FEES. The Borrower shall have paid to the Agent for the benefit of each Bank a commitment increase fee for such Bank equal to the product of the increase in the Commitment of such Bank in connection with this Agreement multiplied by the commitment increase fee percentage set forth below for the applicable level of total Commitment of such Bank: TOTAL COMMITMENT LEVEL COMMITMENT INCREASE FEE - ---------------------------------------- ----------------------- $25,000,000 0.30% ,$25,000,000 but $20,000,000 0.20% ,$20,000,000 but $15,000,000 0.15% ,$15,000,000 0.10% b. CLOSING DOCUMENTS. Borrower shall have delivered or shall have caused to be delivered the documents and other items listed below, each in form and with substance satisfactory to the Agent and where applicable executed by the appropriate parties thereto: i. this Agreement; ii. Notes for each of the Banks in the amounts of their new Revolving Loan Commitments; iii. a supplement to the Agents Fee Letter; iv. a restated Guaranty covering all of the Subsidiaries of the Borrower in existence at the time of this Agreement; v. a restated Security Agreement covering all of the Subsidiaries of the Borrower in existence at the time of this Agreement with additional provisions regarding the license interests and leases of Yellow Cab Company and its Subsidiaries; vi. an updated Vehicle Listing for each Credit Party including net book value for each Vehicle, together with original Certificates of Title for each vehicle owned without lien to the extent not earlier provided; vii. UCC-1 Financing Statements required for the restated Security Agreement for perfecting the Agent's security interests to the extent required thereunder; viii. UCC lien searches on the name of each Credit Party in each jurisdiction where filing is necessary to perfect security interests against such Credit Party, together with any other Lien Searches requested by the Agent; ix. Property and Liability Insurance policies and certificates showing compliance with the insurance requirements under the Credit Documents, including having the Agent named as an additional named insured and loss payee as required thereunder, together with copies of the underlying insurance policies; x. Opinion of Liddell Sapp regarding the existence and good standing of the Borrower, the authorization of the Credit Documents by the Borrower, the enforceability of the Credit Documents, the absence of conflicting agreements, the absence of litigation, and certain other matters as described therein; xi. Opinion of General Counsel for the Credit Parties regarding the existence and good standing of the Subsidiaries, the authorization of the Credit Documents by the Subsidiaries, and certain other matters as described therein; xii. Certificate of Assistant Secretary of the Borrower certifying the Borrower's existence and good standing in its state of incorporation, articles, bylaws and resolutions, and the Borrower's qualification and good standing in all states in which it conducts material business transactions; and 4 xiii. Certificate of Assistant Secretary of each of the Subsidiaries of the Borrower certifying each such corporation's existence and good standing in its state of incorporation, articles, bylaws and resolutions, and each corporation's qualification and good standing in all states in which it conducts material business transactions; c. NO DEFAULT. No Default shall have occurred and be continuing; and d. REPRESENTATIONS AND WARRANTIES. The representations and warranties contained in each Credit Document shall be true and correct in all material respects as of the date hereof. Section 4. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants that (a) the execution, delivery, and performance of this Agreement are within the corporate power and authority of the Borrower and have been duly authorized by appropriate proceedings, (b) this Agreement constitutes legal, valid, and binding obligations of the Borrower enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the rights of creditors generally and general principles of equity, and (c) upon the effectiveness of this Agreement and the amendment of the Credit Agreement as provided for herein, no Event of Default shall exist under the Credit Documents and there shall have occurred no event which with notice or lapse of time would become an Event of Default under the Credit Documents, as amended. Section 5. EFFECT ON CREDIT DOCUMENTS. As amended herein, the Credit Documents remain in full force and effect. Nothing herein shall act as a waiver of any of the Agent's or the Banks' rights under the Credit Documents as amended, including the waiver of any default or event of default, however denominated. The Borrower must continue to comply with the terms of the Credit Documents, as amended. This Agreement is a Credit Document for the purposes of the provisions of the other Credit Documents. Without limiting the foregoing, any breach of representations, warranties, and covenants under this Agreement may be a default or event of default under other Credit Documents. Section 6. MISCELLANEOUS. The miscellaneous provisions of the Credit Agreement apply to this Agreement. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Texas. This Agreement may be signed in any number of counterparts, each of which shall be an original. [the remainder of this page is intentionally blank] 5 THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES. EXECUTED as of the date first above written. BORROWER: COACH USA, INC. By: _____/s/_ RAYMOND K. TURNER______ Raymond K. Turner Treasurer AGENT: NATIONSBANK OF TEXAS, N.A., as Agent By: _____/s/_ JAMES D. RECER_________ James D. Recer Vice President BANKS: NATIONSBANK OF TEXAS, N.A. By: _____/s/_ JAMES D. RECER_________ James D. Recer Vice President Revolving Loan Commitment: $40,000,000 BANK ONE, TEXAS, N.A. By: _____/s/__H. GALE SMITH, JR.______ Name: H. Gale Smith, Jr. Title: Vice President Revolving Loan Commitment: $30,000,000 FIRST UNION NATIONAL BANK OF NORTH CAROLINA By: _____/s/__JANE W. WORKMAN_________ Name: Jane W. Workman Title: Senior Vice President Revolving Loan Commitment: $30,000,000 6 WELLS FARGO BANK, NATIONAL ASSOCIATION By: _____/s/__THEODORE R. LANE________ Name: Theodore R. Lane Title: Area Vice President Revolving Loan Commitment: $22,000,000 FLEET BANK, N.A. By: _____/s/__ERIC H. WASER__________ Name: Eric H. Waser Title: Senior Vice President Revolving Loan Commitment: $20,000,000 SUMMIT BANK By: _____/s/__STEVE DELUISE___________ Name: Steve Deluise Title: Vice President Revolving Loan Commitment: $20,000,000 THE SUMITOMO BANK, LIMITED By: _____/s/__JOHN J. O'NEILL_________ Name: John J. O'Neill Title: Vice President and Manager By: _____/s/__BRUCE PORTILLO__________ Name: Bruce Portillo Title: Vice President Revolving Loan Commitment: $9,000,000 7 BANQUE PARIBAS By: _____/s/__SCOTT CLINGAN___________ Name: Scott Clingan Title: Vice President By: _____/s/__LARRY ROBINSON__________ Name: Larry Robinson Title: Vice President Revolving Loan Commitment: $10,000,000 8 EX-11 3 EXHIBIT TO COME EX-21 4 EXHIBIT 21 COACH USA, INC. SUBSIDIARIES AS OF MARCH 20, 1997 STATE OF NAME OF SUBSIDIARY: INCORPORATION: - ------------------------------------------------------------ -------------- ASTI, Inc................................................... Florida Aiglon Car Rentals, Inc..................................... Texas American Bus Lines, Inc..................................... Florida American Coach Lines, Inc................................... Florida American Limousine Service, Inc............................. Florida American Sightseeing, Inc................................... Florida American Sightseeing Tours, Inc............................. Florida Antelope Nevada............................................. Nevada Antelope Valley Bus, Inc.................................... California Arrow Stage Lines, Inc...................................... Nebraska Barclay Airport Service, Inc................................ New Jersey Bayou City Coaches, Inc..................................... Texas Cab Services, Inc........................................... Texas d/b/a Towne Car California Charters, Inc.................................... Texas Cape Transit Corp........................................... New Jersey Central Jersey Transit, Inc................................. New Jersey Coach USA Administration, Inc............................... Nevada Colorado Springs Airport Transportation Service, Inc........ Colorado Community Bus Lines, Inc.................................... New Jersey Community Coach, Inc........................................ New Jersey Community Tours, Inc........................................ New Jersey Community Transit Lines, Inc................................ New Jersey Community Transportation, Inc............................... New Jersey Desert Stage Lines.......................................... California Eagle Executive Transportation Services, Inc................ Texas d/b/a Concorde-Access Transportation d/b/a Concorde-Access Limousines d/b/a Greater Houston Charters and Sightseeing Service d/b/a Houston Medical Limousine and Charter Service Falcon Charter Service...................................... California Fiesta Cab Company.......................................... Texas Fiesta Cab Company of San Antonio........................... Texas Fiesta Transportation Company............................... Texas d/b/a Fiesta Elegante Garden State Leasing Co., Inc............................... New Jersey Golden Vacations, Inc....................................... California Greater Austin Transportation Company....................... Texas d/b/a American Cab Co. d/b/a American Yellow Checker Cab Company d/b/a Towne Car Limousine Service d/b/a Yellow Cab Company d/b/a Yellow Check Cab Company d/b/a Yellow Checker Cab Company Greater Boulder Transportation Company...................... Colorado d/b/a American Cab Company of Denver STATE OF NAME OF SUBSIDIARY: INCORPORATION: - ------------------------------------------------------------ -------------- Greater Colorado Springs Transportation Company............. Colorado d/b/a Airport Taxicab of Colorado Springs, Inc. d/b/a Checker Taxicab, Inc. d/b/a Colorado Springs Airport Ground Transportation Authority d/b/a Colorado Springs Taxicab, Inc. d/b/a El Paso County Taxicab, Inc. d/b/a Metro Limousine d/b/a Metro Taxicab of Colorado Springs, Inc. d/b/a Towne Car, Inc. d/b/a Towne Car of Colorado Springs, Inc. d/b/a Towne Car of Denver, Inc. d/b/a Yellow Cab Company of Colorado Springs, Inc. d/b/a Yellow Cab Package XPress Greater Denver Transportation Company....................... Colorado d/b/a Towne Car of Denver, Inc. Greater Houston Transportation Company...................... Texas d/b/a City Taxi d/b/a Package XPress d/b/a Yellow Cab d/b/a Yellow Cab Company d/b/a Yellow Cab Company of Katy d/b/a Yellow Cab Package XPress Grosvenor Bus Lines, Inc.................................... California Grosvenor Limousine Service, Inc............................ California Gulf Coast Transportation Company........................... Texas d/b/a Gray Line of Houston d/b/a Gray Line Tours of Houston H.A.M.L. Corporation........................................ New Jersey Houston Cab Company......................................... Texas K-T Contract Services, Inc.................................. Texas d/b/a Jetlink Kerrville Bus Company, Inc.................................. Texas d/b/a Gray Line of Albuquerque d/b/a Gray Line of San Antonio L.E.R. Transportation Company............................... New Jersey LND, Inc.................................................... Florida Leisure Time Tours.......................................... New Jersey d/b/a Leisure Line Metro Taxi, Inc............................................. Colorado Midtown Bus Terminal of New York, Inc....................... New York Mister Sparkle, Inc......................................... New Jersey New Delaware Coach, Inc..................................... Delaware PCSTC, Inc.................................................. California d/b/a Gray Line of Anaheim d/b/a Gray Line of Los Angeles d/b/a Pacific Coast Sightseeing Tours & Charters Parker Tours, Inc........................................... New York Powder River Transportation Services, Inc................... Wyoming Progressive Transportation Services, Inc.................... New York R&T Leasing, Inc............................................ New Jersey Red & Tan Charter, Inc...................................... New Jersey Red & Tan Enterprises....................................... New Jersey Red & Tan of Boca, Inc...................................... Florida 2 STATE OF NAME OF SUBSIDIARY: INCORPORATION: - ------------------------------------------------------------ -------------- Red & Tan Tours, Inc........................................ New Jersey Red & Tan Tours of Florida, Inc............................. Florida Red & Tan Transportation Systems, Inc....................... New Jersey Red & Tan Unlimited, Inc.................................... New Jersey Red Top Sedan Service, Inc.................................. Florida Red Top Transportation, Inc................................. Florida Rockland Coaches, Inc....................................... New Jersey Rockland Transit Corporation................................ New York Shuttle Services MIA, Inc................................... Florida Suburban Management Corp.................................... New Jersey d/b/a Central Jersey Transit d/b/a Suburban Management Corporation d/b/a Suburban Tours Suburban Trails, Inc........................................ New Jersey Suburban Transit Corp....................................... New Jersey Texas Bus Lines, Inc........................................ Texas d/b/a Airport Express Texas Shuttle, Inc.......................................... Texas The Hudson Bus Transportation Co., Inc...................... New Jersey Transportation Contractors, Inc............................. Florida Worthen Van Service, Inc.................................... Wyoming Yellow Cab Company of Houston, Inc.......................... Texas Yellow Cab Service Corporation.............................. Delaware Zone Taxicab of Colorado Springs, Inc....................... Colorado 3 EX-27 5
5 YEAR DEC-31-1996 DEC-31-1996 1,466 0 19,026 2,046 8,500 40,536 247,075 55,138 276,843 45,133 0 0 0 172 103,799 276,843 185,728 185,728 136,765 159,755 0 0 8,514 17,459 7,267 10,192 0 2,723 0 12,915 1.14 1.14
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