-----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, IfB+HeUeURhw+tkIg69prBfdN/0L/esSuG8wQq4cfB5C/QloZz0n2Ugq01eYyo7z j2+LF1G2rEms4MqJMC+48g== 0000890566-98-000387.txt : 19980325 0000890566-98-000387.hdr.sgml : 19980325 ACCESSION NUMBER: 0000890566-98-000387 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980324 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: SEC FILE NUMBER: 001-12939 FILM NUMBER: 98571564 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, 1997 COMMISSION FILE NO.: 0-28056 COACH USA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS 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 New York Stock Exchange 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 16, 1998, the aggregate market value of the 19,367,394 shares of the registrant's common stock held by non-affiliates of the registrant was $843,692,101, based on the $43.5625 last sale price of the registrant's common stock on the New York Stock Exchange on that date. As of March 16, 1998, 22,055,833 shares of the registrant's common stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III 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, 1997. 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. [ ] 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 four 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, 1997 were provided through a fleet of approximately 4,600 motorcoaches and high occupancy vehicles, including 500 motorcoaches provided by various transit authorities pursuant to service contracts.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 executive sedan vehicle services include dispatching and vehicle sales, leasing and financing for more than 2,500 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 motorcoach service businesses (the "Founding Companies"). During the year ended December 31, 1996, the Company acquired eight additional motorcoach businesses and one taxicab service business. During the year ended December 31, 1997, the Company acquired 34 additional motorcoach businesses and two taxicab and executive sedan businesses. Therefore, from the Initial Public Offering through the end of fiscal 1997, excluding the Founding Companies, the Company has acquired 42 motorcoach businesses and three taxicab and executive sedan businesses. Subsequent to year-end and through March 16, 1998, the Company acquired seven additional motorcoach businesses and one additional taxicab service business. 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. 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 in excess of $20 billion in revenues in 1997. 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, as the number of foreign tourists traveling 1 to the United States continues to increase, motorcoach travel will continue to be 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. Examples of this type of business of the Company completed in fiscal 1997 include the multi-year privatization contracts for transit services with the city of Seattle for $32 million in gross revenues for the life of the contract, and with the city of Los Angeles for $44 million in gross revenues for the life of the contract. 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 and executive sedan services are 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 and high occupancy vehicle (i.e. shuttles, vans and minibuses) 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 2 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 and executive sedan service revenues are derived primarily from services provided to independent contractors that own or lease and operate vehicles 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 the vehicle 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. 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 30 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 various cities 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 service on demand 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 and executive sedan 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 various gaming states including Connecticut, New Jersey, Louisiana, Nevada and Colorado. 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. 3 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. 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 and executive sedans 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 service, the closest available vehicle 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 and executive sedan services are provided to passengers going to and coming from the airports in the municipalities in which the Company provides these 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 or executive sedan at the airport cab station. 4 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 continue 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 many of 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: COORDINATION OF SALES AND MARKETING PROGRAMS. The travel and tourism industry has experienced significant growth in recent years, and the Company expects this trend to continue. The operating subsidiaries of the Company have begun to coordinate, when appropriate, sales and marketing programs as a means to expand their recreational and excursion business. The operating subsidiaries will continue to 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, in order to expand services to larger users of their services. 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 THE CORPORATE STRUCTURE. The Company intends to continue to take advantage of its 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 5 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 has begun to consolidate certain operations and eliminate redundant facilities and redeploy equipment through coordination among the various operating subsidiaries. The Company believes that there will continue to be opportunities to eliminate redundant facilities and redeploy equipment. Additionally, the Company expects to continue to benefit from cross-marketing and increased equipment utilization that has 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 simultaneous with the Initial Public Offering, and through the remainder of fiscal 1996, the Company completed the acquisition of eight additional motorcoach service businesses and one additional taxicab service business. During the year ended December 31, 1997, the Company acquired thirty-four additional motorcoach businesses and two taxicab and executive sedan businesses. Therefore, from the Initial Public Offering through the end of fiscal 1997, excluding the Founding Companies, the Company has acquired 42 motorcoach businesses and three taxicab and executive sedan businesses. Subsequent to year-end and through March 16, 1998, the Company completed the acquisition of seven additional motorcoach businesses and one additional taxicab business. The Company has increased and expanded its presence in the markets serviced in fiscal 1996, and has entered several major new markets in the United States and Canada. The Company believes that it can continue to successfully implement its acquisition program due to: (i) its strategy for creating a national company, which should enhance an 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, enable an 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 maintained 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 believes that the visibility of these individuals within these associations will continue to increase the industry's awareness of the Company and its strategies, thereby attracting interest from local and regional operators. 6 OPERATIONS The majority of the Company's daily operations continue to be handled at the local subsidiary level and the Company will continue to maintain a decentralized management structure. However, the growth in the number of operating subsidiaries, and the growth in operations of existing subsidiaries will continue to require further coordination among management on a regional basis. Therefore, the operating subsidiaries have begun to coordinate and implement consolidation opportunities and other strategies to maximize equipment and facility utilization on a regional as well as a local basis. Most of the Company's locations have 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. 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. Computerized dispatch services are an integral part of the daily support services provided to the independent contractor drivers in the taxicab and executive sedan business. The Company continues to centralize certain administrative support activities. The Company believes that by continuing to remove the burden and attention-diverting responsibility of administrative and support functions, the local management of the operating companies will be able to focus on pursuing new business opportunities and improving equipment utilization and yields. The Company's operations (and the revenues generated from the operations) are concentrated in a similar fashion to the population centers across the United States and Canada, with particular concentrations of operations and revenue in the New York/New Jersey area and southern California. 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 7 percentage of maintenance costs incurred at outside shops and a decrease in total maintenance costs. The Company has begun to consolidate certain facilities which will enable the Company where appropriate to eliminate redundant maintenance facilities. The Company continues to replace older motorcoaches with newer equipment. In many instances this replacement reduces maintenance costs largely because late model motorcoaches are more reliable and have better engine and power train warranties. When cost effective to do so, the Company has relocated older motorcoaches to markets where they can be utilized. 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 acquired companies individually. SALES AND MARKETING The Company has a broad customer base. No single customer of the Company accounted for more than 2% of revenues in 1997. 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. Most of the motorcoach operations also have 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, yellow pages 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 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. The Company, through its operating subsidiaries, intends to continue to coordinate sales and marketing campaigns and programs for its recreation and excursion services. The focus of the marketing effort will continue to 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. 8 The Company's taxicab and executive sedan 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. The airport services provided through high occupancy vehicles are sold on a per seat basis through agents at the airports and the hotel pick up locations. 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 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 9 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, 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 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 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 and December 1996 and the exemptions were granted on November 8, 1996 and May 15, 1997, respectively. The Company filed twenty three applications for exemption or approval with the STB in connection with the acquisitions completed in fiscal 1997; seven were approved on May 15, 1997, three were approved on November 13, 1997; one was approved on December 4, 1997; three were approved on February 24, 1998; and the remaining nine are pending. 10 The Company's taxicab and executive sedan 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 and the Company has had to remediate these spills and releases. 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 with such contamination. 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, 1997, the Company had approximately 10,600 employees, of whom approximately 6,700 were motorcoach drivers and approximately 1,500 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 7,800 are full-time employees. The Company's taxicab, executive sedan and paratransit services are primarily 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 11 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 and luxury sedan drivers are subject to laws and regulations governing driving records, appearance and presentation which are monitored by local municipalities. As of December 31, 1997, several different unions, each through various local affiliations, represented approximately 3,300 employees of the Company, of whom approximately 2,900 were motorcoach drivers. The Company is a party to a number of different collective bargaining agreements which expire at various dates through 2002. In the last 10 years, the various operating companies have not experienced any significant 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. YEAR 2000 ISSUES Some of the existing operating and financial computer systems utilized by the Company at its operating subsidiaries will need to be modified or replaced by the Company or its vendors to increase the date field or make other modifications to reflect the upcoming change in the century. The Company believes that the resolution of this issue and the modifications required will not have a material impact on the business of the Company. 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 12 (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 sales and marketing campaigns, (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, (k) the statements under "Drivers and Other Personnel" regarding the Company's relationship with union representatives and employees, and (l) the statements under "Year 2000 Issues" regarding the modifications of computer systems 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. 13 ITEM 2. PROPERTIES FACILITIES At December 31, 1997, 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 twenty-eight of the facilities on which motorcoach and high occupancy vehicle operations are located, and three of the facilities on which taxicab and executive sedan 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 3,500 motorcoaches and 1,100 other high occupancy vehicles. Approximately 300 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 200 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 six years. Motorcoaches have a useful operating life in excess of 15 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 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 and executive sedan service operations provide dispatch and related services to a fleet of over 2,500 vehicles, of which approximately 1,100 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 14 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. The majority of the claims are for personal injury or property damage incurred in the transportation of its passengers. The Company is also a party to routine litigation regarding contracts and employment claims. 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. 15 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock traded on the Nasdaq National Market from May 14, 1996, the date of the Initial Public Offering, until May 7, 1997. Since May 8, 1997, the Company's Common Stock has traded on the New York Stock Exchange. The following table sets forth the high and low last sale prices for the Common Stock for the period from May 14, 1996 through March 16, 1998. 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............................. 34 1/4 27 5/8 Second quarter............................ 31 1/4 24 1/2 Third quarter............................. 31 7/16 24 7/8 Fourth quarter............................ 35 1/16 27 1998 First quarter (through March 16, 1998).... 45 1/2 28 5/8 At March 16, 1998, there were approximately 231 stockholders of record of the Company's Common Stock. On March 16, 1998, the last reported sale price of the Common Stock on the New York Stock Exchange was $43.5625 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 two fiscal years 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, Shelli LePori (an employee of Notre Capital Ventures II, LLC, the firm which founded 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 American Business Partners, LLC, formerly known as Exel Motorcoach Partners, LLC, a former consultant to the Company, and Mr. Verrochi is a member of the board of directors of the Company). 16 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 subordinated notes 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. In connection with the acquisition of businesses completed in the first quarter of fiscal 1997, the Company issued 578,033 shares of Common Stock to the stockholders of the companies in the transactions accounted for as poolings-of-interests and subordinated notes convertible into 256,410 shares of Common Stock to stockholders of the companies accounted for as purchases. In connection with the acquisition of businesses completed in the second quarter of fiscal 1997, the Company issued 1,289,956 shares of Common Stock to the stockholders of the companies in the transactions accounted for as poolings-of-interests and subordinated notes convertible into 102,128 shares of Common Stock to stockholders of the companies accounted for as purchases. In connection with the acquisition of businesses completed in the third quarter of fiscal 1997, the Company issued subordinated notes convertible into 118,603 shares of Common Stock to stockholders of the companies accounted for as purchases. In addition, on July 26, 1997, the Company issued warrants to purchase 100,000 shares of Common Stock at a strike price of $26.00 per share (which was the closing price of the Common Stock on that date) to American Business Partners, LLC, formerly known as Exel Motorcoach Partners, LLC. In connection with the acquisition of businesses completed in the fourth quarter of fiscal 1997, the Company issued subordinated notes convertible into 200,288 shares of Common Stock to stockholders of the companies accounted for as purchases. In connection with the acquisition of businesses completed subsequent to year end through March 16, 1998, the Company issued subordinated notes convertible into 122,000 shares of Common Stock to stockholders of the companies accounted for as purchases. 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. 17 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 and through 1997, the Company completed 45 acquisitions, 19 of which were accounted for as poolings-of-interests (the "Pooled Companies"), 3 of which were accounted for as immaterial poolings-of-interests (the "Immaterial Pooled Companies"), and 23 of which were accounted for as purchases (the "Purchased Companies"). The PRO FORMA STATEMENT OF INCOME DATA INCLUDING COMPENSATION DIFFERENTIAL AND OTHER ADJUSTMENTS and PRO FORMA 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, the Immaterial Pooled Companies from the beginning of the fiscal quarter in which they were acquired, and the Purchased Companies since the date of their respective acquisition. In addition, the data below gives effect to (i) certain reductions in salaries and benefits to the former owners of the Founding Companies and the Pooled Companies, which were agreed to in connection with the 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 1997; (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 and 1997 acquisitions. The PRO FORMA FOR PURCHASED COMPANIES data below gives effect to all items above and also gives effect to the acquisitions of the Purchased Companies as if those acquisitions occurred on January 1, 1996, and gives pro forma effect to (i) Compensation Differential of the Purchased Companies, (ii) the amortization of goodwill, (iii) interest expense attributable to convertible subordinated notes issued, and (iv) income tax adjustments attributable to the above adjustments.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 1993 1994 1995 1996 1997 -------- -------- -------- -------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) PRO FORMA STATEMENT OF INCOME DATA INCLUDING COMPENSATION DIFFERENTIAL AND OTHER ADJUSTMENTS: Total revenues .................................. $281,872 $282,397 $316,275 $370,781 $ 542,790 Operating expenses .............................. 226,471 221,839 241,103 281,924 398,945 Gross profit .................................... 55,401 60,558 75,172 88,857 143,845 General and administrative expenses ............. 33,193 37,253 40,527 41,365 62,029 Operating income ................................ 22,208 23,305 34,645 47,492 81,816 Income before extraordinary items ............... 7,108 7,961 13,494 20,461 35,682 Extraordinary items ............................. 1,191 -- -- 2,648 (929) Net income ...................................... 8,299 7,961 13,494 23,109 34,753 BASIC EARNINGS PER SHARE: Income before extraordinary items per share .................................... $ 1.13 $ 1.67 Net income per share ............................ 1.27 1.62 Weighted average shares (1) ..................... 18,152 21,412 DILUTED EARNINGS PER SHARE: Income before extraordinary items per share .................................... $ 1.12 $ 1.61 Net income per share ............................ 1.26 1.57 Weighted average shares (1) ..................... 18,543 22,954 PRO FORMA FOR PURCHASED COMPANIES: Total revenues .................................. $571,060 $ 615,770 Operating expenses .............................. 430,978 452,918 Gross profit .................................... 140,082 162,852 General and administrative expenses ............. 71,140 75,641 Operating income ................................ 68,942 87,211 Income before extraordinary items ............... 22,679 35,633
18
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------- PRO FORMA PRO FORMA PRO FORMA HISTORICAL HISTORICAL 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- BALANCE SHEET DATA (AT END OF PERIOD): Working capital (deficit) ................... $ (16,779) $ (18,727) $ (19,314) $ (22,036) $ (5,311) Total assets ................................ 182,561 207,085 241,538 366,040 665,870 Total debt, including current portion .................................. 101,499 121,278 138,125 153,978(2) 320,764(2) Stockholders' equity ........................ 23,234 24,517 31,204 114,270 160,555
- ------ (1) See Note 11 of the Notes to Consolidated Financial Statements for a reconciliation of weighted average shares outstanding for the year ended December 31, 1997. (2) Does not include $22.5 million and $52.3 million of outstanding convertible subordinated notes as of December 31, 1996 and 1997, respectively, issued in connection with the acquisitions of the Purchased Companies. 19 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, simultaneous with the closing of its Initial Public Offering, the six Founding Companies. During the remainder of 1996 and through 1997, the Company completed 45 acquisitions, 19 of which were accounted for as poolings-of-interests (the "Pooled Companies"), and 23 of which were accounted for as purchases (the "Purchased Companies"). Additionally, three acquisitions have been accounted for as immaterial poolings-of-interests (the "Immaterial Pooled Companies"). As a result, the pro forma financial statements, including the pro forma results discussed below, include the historical financial statements 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 the Pooled Companies; (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 acquisitions completed through 1997; and (iv) the tax impact of the Compensation Differential in each period. The Company continues to realize savings by consolidating certain general, administrative and purchasing functions and reducing insurance expenses. In addition, the Company continues 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 increase in costs related to the Company's corporate management. Neither these savings nor the costs associated therewith, for the periods prior to the Initial Public Offering or the date of the respective subsequent acquisitions, 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 and other arrangements 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 direct tour expenses. General and administrative expenses consist primarily of compensation and related benefits to the former owners and certain key employees of the Founding Companies and the subsequent acquisitions, administrative salaries and benefits, marketing, communications and professional fees. PRO FORMA RESULTS FOR 1996 COMPARED TO 1997 Total revenues increased $172.0 million, or 46.4%, to $542.8 million for the year 1997. The increase in revenues was primarily due to revenues from Purchased Companies acquired in 1997 of $106.3 million and the incremental revenues of the Purchased Companies acquired in 1996 of $26.0 million. The remaining increase was largely due to: (i) additional revenues of approximately $10.0 million related to the expansion of transit services, and (ii) continued growth in the charter, tour and taxicab operations. Operating expenses increased $117.0 million, or 41.5%, to $398.9 million for 1997. The increase in operating expenses was primarily due to the acquisition of the Purchased Companies discussed above 20 and an overall increase in operations throughout the Company, partially offset by savings in the Company's insurance and parts buying programs. General and administrative expenses in 1997, after elimination of the Compensation Differential and non-recurring pooling costs, increased $20.7 million, or 50.0%, from $41.4 million in 1996 to $62.0 million. The increase in general and administrative expenses was largely due to the acquisition of the Purchased Companies and additional costs of the corporate management group required to execute the acquisition program and to manage the consolidated group of companies. Interest expense increased $9.7 million in 1997 as compared to 1996 due to higher levels of debt resulting from cash paid, debt assumed and convertible subordinated notes issued in connection with the acquisition of certain Purchased Companies, and additional equipment purchases. Pro forma net income before extraordinary items, adjusted for the Compensation Differential, non-recurring pooling costs, and the pro forma provision for taxes, increased during 1997 as compared to 1996 primarily due to the acquisition of the Purchased Companies, continued revenue growth and the effects of increased purchasing power. The extraordinary items recorded in 1997 include extraordinary losses of $0.9 million, net of taxes, related to prepayment penalties on early retirement of certain debt. PRO FORMA RESULTS FOR 1995 COMPARED TO 1996 Total revenues increased $54.5 million, or 17.2% from $316.3 million in 1995 to $370.8 million in 1996. The increase in revenues was primarily attributable to revenues from Purchased Companies acquired in 1996 of $16.8 million. Additionally, revenues increased due to: (i) an increase in taxicab service revenues of $9.3 million, attributable to internal expansion, (ii) an increase in motorcoach charter and special destination revenues of $7.9 million, primarily attributable to increased service to Atlantic City and Louisiana casinos, and (iii) continued growth in the charter and tour operations. Operating expenses increased $40.8 million, or 16.9%, from $241.1 million in 1995 to $281.9 million in 1996. The increase in operating expenses was primarily due to the operating expenses from the Purchased Companies acquired in 1996 of $12.8 million. The remaining increase is consistent with the overall increase in operations throughout the Company. General and administrative expenses, after elimination of the Compensation Differential and non-recurring pooling costs, increased $0.8 million, or 2.1% from $40.5 million in 1995 to $41.4 million in 1996. Interest expense increased $2.6 million in 1996 as compared to 1995 due to higher levels of debt resulting from cash paid, debt assumed and convertible subordinated notes issued in connection with the acquisition of certain Purchased Companies, and additional equipment purchases. This increase was partially offset by the repayment of debt through the use of proceeds of the Initial Public Offering and a secondary offering of Coach USA Common Stock completed in November and December 1996. Pro forma net income before extraordinary items, adjusted for the Compensation Differential, non-recurring pooling costs, and the pro forma provision for taxes, increased $7.0 million, from $13.5 million in 1995 to $20.5 million in 1996, and represented 4.3% of revenues in 1995 compared to 5.5% of revenues in 1996. 21 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, partially offset by extraordinary losses related to prepayment penalties on early retirement of certain debt. Obligations due to certain former stockholders of the Pooled Companies 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 $1.6 million, net of taxes, for prepayment penalties on certain retired debt were recorded in 1996. 22 SELECTED CONSOLIDATED FINANCIAL DATA The following consolidated financial information represents the operations of the Pooled Companies for all periods presented, the Immaterial Pooled Companies from the beginning of the fiscal quarter in which they were acquired, the Founding Companies and Coach USA for the seven months ended December 31, 1996, and the Purchased Companies since their respective dates 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) certain tax adjustments related to the taxation of certain Pooled Companies as S Corporations prior to the consummation of the Mergers; (iii) the elimination of non-recurring pooling costs associated with the 1996 and 1997 acquisitions, and (iv) the tax impact of the Compensation Differential in each period.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------- 1993 1994 1995 1996 1997 --------- --------- --------- --------- --------- (IN THOUSANDS) STATEMENT OF INCOME DATA: Total revenues ......................... $ 178,800 $ 175,643 $ 202,786 $ 325,717 $ 542,790 Gross profit ........................... 37,383 41,651 52,208 80,863 143,845 Operating income ....................... 11,818 10,841 16,898 37,282 77,501 Income before extraordinary items ............................... 3,156 2,457 4,197 14,140 32,337 PRO FORMA: Operating income ....................... 14,844 14,811 21,487 44,185 81,816 Income before extraordinary items ............................... 5,425 4,393 6,686 19,402 35,682 BALANCE SHEET DATA: Working capital (deficit) .............. $ (14,814) $ (15,328) $ (15,101) $ (22,036) $ (5,311) Total assets ........................... 114,105 132,244 159,351 366,040 665,870 Total debt, including current portion ............................. 71,486 89,395 106,052 153,978(1) 320,764(1) Stockholders' equity ................... 4,267 2,876 6,489 114,270 160,555
(1) Does not include $22.5 million and $52.3 million of outstanding convertible subordinated notes outstanding as of December 31, 1996 and 1997, respectively, issued in connection with the acquisitions of the Purchased Companies. HISTORICAL RESULTS FOR 1996 COMPARED TO 1997 Total revenues increased $217.1 million, or 66.6%, to $542.8 million for the year 1997. The increase in revenues was primarily due to: (i) the acquisition of the Purchased Companies acquired in 1997 with revenues of $106.3 million, (ii) the incremental revenues of the Founding Companies of $51.8 million, as the Founding Companies were reported for only seven months in 1996 as compared to twelve months in 1997, (iii) the incremental revenues of the Purchased Companies acquired in 1996 of $26.0 million, (iv) additional revenues of approximately $10.0 million related to the expansion of transit services, and (v) continued growth in charter, tour and taxicab operations. Operating expenses increased 62.9% to $398.9 million for 1997. The increase in operating expenses was primarily due to the acquisition of the Purchased Companies, incremental costs of the Founding Companies, and an overall increase in operations throughout the Company, partially offset by savings in the Company's insurance and parts buying programs. 23 General and administrative expenses in 1997, after elimination of the Compensation Differential and non-recurring pooling costs, increased $25.4 million, or 69.1%, from $36.7 million in 1996 to $62.0 million in 1997. The increase in general and administrative expenses was largely due to the acquisition of the Purchased Companies, incremental costs of the Founding Companies, and additional costs of the corporate management group required to execute the acquisition program and to manage the consolidated group of companies. Interest expense increased $10.2 million in 1997 as compared to 1996 due to higher levels of debt resulting from cash paid, debt assumed and convertible subordinated notes issued in connection with the acquisition of certain Purchased Companies, and additional equipment purchases. Pro forma net income before extraordinary items, adjusted for the Compensation Differential, non-recurring pooling costs and the pro forma provision for taxes, increased during 1997 as compared to 1996 primarily due to the acquisition of the Purchased Companies, continued revenue growth and the effects of increased purchasing power. The extraordinary items recorded in 1997 include extraordinary losses of $0.9 million, net of taxes, related to prepayment penalties on early retirement of certain debt. HISTORICAL RESULTS FOR 1995 COMPARED TO 1996 Total revenues increased $122.9 million, or 60.6%, from $202.8 million in 1995 to $325.7 million in 1996. The increase in revenues was primarily due to: (i) the acquisition of the Founding Companies with revenues subsequent to the mergers of $72.9 million, (ii) the acquisition of the Purchased Companies with revenues of $16.8 million, (iii) an increase in taxicab service revenues of $9.3 million, attributable to internal expansion, (iv) an increase in motorcoach charter and special destination revenues of $7.9 million, largely attributable to increased service to Atlantic City and Louisiana casinos, and (v) continued growth in the charter and tour operations. Operating expenses increased $94.3 million, or 62.6%, from $150.6 million in 1995 to $244.9 million in 1996. The increase in operating expenses is primarily related to additional costs associated with the acquisition of the Founding and Purchased Companies. The remaining increase is consistent with the overall increase in operations throughout the Company. General and administrative expenses, after elimination of the Compensation Differential and non-recurring pooling costs, increased $6.0 million, or 19.4%, from $30.7 million in 1995 to $36.7 million in 1996. Interest expense increased $3.7 million in 1996 as compared to 1995 due to higher levels of debt resulting from cash paid, debt assumed and convertible subordinated notes issued in connection with the acquisition of certain Purchased Companies, and additional equipment purchases. This increase was partially offset by the repayment of debt through the use of proceeds of the Initial Public Offering and a secondary offering of Coach USA Common Stock completed in November and December 1996. Pro forma net income before extraordinary items, adjusted for the Compensation Differential, non-recurring pooling costs and pro forma provision for taxes, increased $12.7 million, from $6.7 million in 1995 to $19.4 million in 1996, and represented 3.3% of revenues in 1995 compared to 6.0% of revenues in 1996. 24 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, partially offset by extraordinary losses related to prepayment penalties on early retirement of certain debt. Obligations due to certain former stockholders of the Pooled Companies 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 $1.6 million, net of taxes, for prepayment penalties on certain retired debt were recorded in 1996. 25 LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $15.4 million, $19.9 million and $38.4 million for 1995, 1996 and 1997, respectively. Cash used in investing activities was $19.5 million, $73.9 million, and $134.1 million for 1995, 1996 and 1997, respectively. Cash used in investing activities was primarily for additions and replacements of motorcoaches and for expansion of facilities, net of proceeds from sales of property and equipment. In addition, the Company paid $16.8 million and $64.6 million in cash for the Purchased Companies, net of cash acquired, in 1996 and 1997, respectively. Cash provided by financing activities was $6.1 million, $51.4 million, and $94.6 million for 1995, 1996 and 1997, respectively. Cash provided by financing activities for 1995 was primarily attributable to the issuance of $6.8 million of long-term obligations, net of repayments, partially offset by $1.1 million in dividends paid to former owners of the Pooled Companies. Cash provided by financing activities of $51.4 million for 1996 was primarily attributable to $48.1 million in net proceeds from the Initial Public Offering and $48.5 million from a secondary offering of Common Stock, partially offset by $42.6 million of net payments on long-term obligations and $2.9 million in dividends paid to former owners of the Pooled Companies. Cash provided by financing activities of $94.6 million for 1997 was primarily attributable to increased borrowings under the credit facility and the private placement of $150.0 million in senior subordinated notes totaling approximately $212.0 million, net of debt repayments of $119.1 million. Cash and cash equivalents decreased $2.6 million and $1.1 million for 1996 and 1997, respectively. For 1995, cash and cash equivalents increased $2.1 million. Capital expenditures, net of trade-ins and proceeds from sales of property and equipment, during 1995, 1996 and 1997 were $23.3 million, $43.6 million and $69.2 million, respectively. These expenditures were primarily for motorcoaches and other vehicles and were principally financed with debt and cash flows from operations. As of December 31, 1997, the Company had entered into commitments to purchase 107 motorcoaches for approximately $32.4 million. The Company intends to finance additional vehicle purchases primarily through cash flows from operations, trade-ins of older equipment, supplemented as necessary, with borrowings under its revolving credit agreement. Between January 1, 1998 and March 16, 1998, the Company acquired seven businesses. The consideration paid for these businesses consisted of $16.3 million in cash, 242,000 shares of Common Stock and $4.9 million in subordinated notes convertible into 122,000 shares of Common Stock. In August 1997, the Company amended and restated its revolving credit agreement. The credit agreement, as amended, provides for a revolving credit facility of $300 million through a bank syndicate, and allows the Company to have additional borrowings of up to $80 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 2000. Interest on outstanding borrowings is charged, at the Company's option, at the banks' prime rate plus up to 0.25% or the London Interbank Offered Rate ("LIBOR") plus 0.50% to 1.75%, both as determined by the ratio of the Company's funded debt to cash flow (as defined). A commitment fee 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 16, 1998, the Company had a total of $217.5 million outstanding under the revolving and other outside credit facilities and had utilized $16.8 million of the facility for letters of credit securing certain insurance obligations and performance bonds, resulting in a borrowing availability of $145.7 million under the revolving and other outside credit facilities. 26 In June 1997, the Company completed the sale of $150.0 million of 9 3/8% senior subordinated notes due 2007. The net proceeds from the offering were used to repay amounts owed under the credit facility. These notes are subordinated to all existing and future senior indebtedness of the Company, including amounts outstanding under the Company's credit facility and are guaranteed by the domestic subsidiaries of the Company. The notes are redeemable at the option of the Company at prices decreasing from a premium of 104.7% on July 1, 2002, to par on July 1, 2005. Interest on the notes is paid semiannually. 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, operating income and net income during the first and fourth quarters. 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 1996 compared to 1997" regarding the increase in 1997 pro forma net income, (c) the statements in paragraph five under "Liquidity and Capital Resources" regarding capital expenditures in 1995, 1996 and 1997 and the motorcoach purchase commitment, (d) the statements in paragraph seven 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. 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS PAGE ---- Report of Independent Public Accountants.............................29 Consolidated Balance Sheets..........................................30 Consolidated Statements of Income....................................31 Consolidated Statements of Stockholders' Equity......................32 Consolidated Statements of Cash Flows................................33 Notes to Consolidated Financial Statements...........................34 28 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, 1996 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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 consolidated financial position of Coach USA, Inc. and subsidiaries as of December 31, 1996 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas March 2, 1998 29 COACH USA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, ----------------------------- 1996 1997 --------- --------- ASSETS CURRENT ASSETS: Cash and cash equivalents ............................................................ $ 4,723 $ 3,648 Accounts receivable, net of allowance of $3,476 and $3,663 ........................... 27,295 43,346 Inventories .......................................................................... 14,310 22,490 Notes receivable, current portion .................................................... 2,811 4,138 Prepaid expenses and other current assets ............................................ 12,907 24,219 --------- --------- Total current assets ............................................................ 62,046 97,841 PROPERTY AND EQUIPMENT, net ................................................................ 255,075 395,800 NOTES RECEIVABLE, net of allowance of $500 and $500 ........................................ 4,231 8,906 GOODWILL, net .............................................................................. 36,110 145,576 OTHER ASSETS, net .......................................................................... 8,578 17,747 --------- --------- Total assets .................................................................... $ 366,040 $ 665,870 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of convertible subordinated notes ................................. $ 4,000 $ -- Current maturities of long-term obligations .......................................... 20,924 12,012 Accounts payable and accrued liabilities ............................................. 59,158 91,140 --------- --------- Total current liabilities ....................................................... 84,082 103,152 LONG-TERM OBLIGATIONS, net of current maturities ........................................... 133,054 158,752 SENIOR SUBORDINATED NOTES .................................................................. -- 150,000 CONVERTIBLE SUBORDINATED NOTES, net of current maturities .................................. 18,500 52,300 DEFERRED INCOME TAXES ...................................................................... 16,134 41,111 --------- --------- Total liabilities ............................................................... 251,770 505,315 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par, 500,000 shares authorized, 0 and 1 share issued and outstanding, respectively .............................................. -- -- Common Stock, $.01 par, 100,000,000 shares authorized, 20,901,625 and 21,817,918 shares issued and outstanding, respectively ........................ 209 218 Additional paid-in capital ........................................................... 105,576 121,534 Cumulative translation adjustment .................................................... (209) (479) Retained earnings .................................................................... 8,694 39,282 --------- --------- Total stockholders' equity ...................................................... 114,270 160,555 --------- --------- Total liabilities and stockholders' equity ...................................... $ 366,040 $ 665,870 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 30 COACH USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- PRO FORMA 1995 1996 1997 1997 -------- -------- --------- --------- (UNAUDITED) REVENUES ................................................... $202,786 $325,717 $ 542,790 $ 542,790 OPERATING EXPENSES ......................................... 150,578 244,854 398,945 398,945 -------- -------- --------- --------- Gross profit .................................... 52,208 80,863 143,845 143,845 GENERAL AND ADMINISTRATIVE EXPENSES ................................................. 35,310 42,480 64,497 62,029 ACQUISITION RELATED COSTS .................................. -- 1,101 1,847 -- -------- -------- --------- --------- Operating income ................................ 16,898 37,282 77,501 81,816 INTEREST EXPENSE ........................................... 9,219 12,944 23,106 23,106 -------- -------- --------- --------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS .................................. 7,679 24,338 54,395 58,710 PROVISION FOR INCOME TAXES ................................. 3,482 10,198 22,058 23,028 -------- -------- --------- --------- INCOME BEFORE EXTRAORDINARY ITEMS .......................... 4,197 14,140 32,337 35,682 EXTRAORDINARY ITEMS, net of income taxes ................... -- 2,648 (929) (929) -------- -------- --------- --------- NET INCOME ................................................. $ 4,197 $ 16,788 $ 31,408 $ 34,753 ======== ======== ========= ========= BASIC EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE: INCOME BEFORE EXTRAORDINARY ITEMS .................... $ .60 $ .96 $ 1.51 $ 1.67 EXTRAORDINARY ITEMS .................................. -- .18 (.05) (.05) -------- -------- --------- --------- NET INCOME ................................................. $ .60 $ 1.14 $ 1.46 $ 1.62 ======== ======== ========= ========= DILUTED EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE: INCOME BEFORE EXTRAORDINARY ITEMS .................... $ .60 $ .95 $ 1.46 $ 1.61 EXTRAORDINARY ITEMS .................................. -- .17 (.04) (.04) -------- -------- --------- --------- NET INCOME ................................................. $ .60 $ 1.12 $ 1.42 $ 1.57 ======== ======== ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 31 COACH USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
COMMON STOCK ADDITIONAL CUMULATIVE RETAINED TOTAL ---------------- PAID-IN TRANSLATION EARNINGS STOCKHOLDERS' SHARES AMOUNT CAPITAL ADJUSTMENT (DEFICIT) EQUITY ------ ---- --------- ------- -------- --------- BALANCE AT DECEMBER 31, 1994 .......................... 6,987 $ 70 $ 8,165 $ (229) $ (5,130) $ 2,876 S Corporation dividends paid by certain Pooled Companies ..................... -- -- -- -- (1,149) (1,149) Net income ...................................... -- -- -- -- 4,197 4,197 Other ........................................... -- -- 536 29 -- 565 ------ ---- --------- ------- -------- --------- BALANCE AT DECEMBER 31, 1995 .......................... 6,987 $ 70 $ 8,701 $ (200) $ (2,082) $ 6,489 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 ..................... -- -- -- -- (3,356) (3,356) Adjustment to conform fiscal year ends of Pooled Companies ..................... -- -- -- -- 70 70 Net income ...................................... -- -- -- -- 16,788 16,788 Capital contributions equal to the current income taxes of S Corporations ................................. -- -- 874 -- -- 874 Other ........................................... -- -- 331 (9) -- 322 ------ ---- --------- ------- -------- --------- BALANCE AT DECEMBER 31, 1996 .......................... 20,901 $209 $ 105,576 $ (209) $ 8,694 $ 114,270 Issuance of Common Stock: Acquisition of Purchased Companies ............ 596 6 12,385 -- -- 12,391 Exercise of stock options ..................... 119 1 2,509 -- -- 2,510 Equity of acquired companies treated as Immaterial Poolings-of-interest ........... 197 2 378 -- 396 776 S Corporation dividends paid by certain Pooled Companies ..................... -- -- -- -- (1,216) (1,216) Other ........................................... 5 -- 686 (270) -- 416 Net income ...................................... -- -- -- -- 31,408 31,408 ------ ---- --------- ------- -------- --------- BALANCE AT DECEMBER 31, 1997 .......................... 21,818 $218 $ 121,534 $ (479) $ 39,282 $ 160,555 ====== ==== ========= ======= ======== =========
The accompanying notes are an integral part of these consolidated financial statements. 32 COACH USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, -------------------------------------- 1995 1996 1997 -------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ....................................................................... $ 4,197 $ 16,788 $ 31,408 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization ............................................... 12,693 19,780 35,064 Gain on sale of assets ...................................................... (470) (753) (2,226) Deferred income tax provision ............................................... 2,421 7,224 12,378 Adjustment to conform fiscal year ends of Pooled Companies .................. -- 70 -- Extraordinary gain .......................................................... -- (7,007) -- Changes in operating assets and liabilities, net of effect of Purchased Companies -- Accounts receivable, net ............................................... (3,797) (2,271) (6,989) Inventories ............................................................ (2,832) (5,866) (7,633) Prepaid expenses and other current assets .............................. (666) (5,564) (5,380) Accounts payable and accrued liabilities ............................... 4,621 (1,504) (16,455) Other .................................................................. (752) (999) (1,739) -------- --------- --------- Net cash provided by operating activities ......................... 15,415 19,898 38,428 -------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment .............................................. (23,653) (47,389) (97,458) Proceeds from sales of property and equipment .................................... 6,330 14,054 33,887 Cash consideration paid for the Founding Companies, net of cash acquired .......................................................... -- (22,112) -- Cash consideration paid for Purchased Companies, net of cash acquired .......................................................... -- (16,769) (64,624) Increase in notes receivable ..................................................... (1,828) (1,672) (5,938) Other ............................................................................ (334) -- -- -------- --------- --------- Net cash used in investing activities ............................. (19,485) (73,888) (134,133) -------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term obligations ...................................... (27,519) (140,067) (119,069) Proceeds from issuance of long-term obligations .................................. 34,295 97,421 211,995 Proceeds from issuance of Common Stock ........................................... -- 96,564 2,510 S Corporation dividends paid by certain Pooled Companies ......................... (1,079) (2,914) (1,216) Other ............................................................................ 440 414 410 -------- --------- --------- Net cash provided by financing activities ......................... 6,137 51,418 94,630 -------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................... 2,067 (2,572) (1,075) CASH AND CASH EQUIVALENTS, beginning of year ........................................... 5,228 7,295 4,723 -------- --------- --------- CASH AND CASH EQUIVALENTS, end of year ................................................. $ 7,295 $ 4,723 $ 3,648 ======== ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest ........................................................... $ 8,250 $ 12,794 $ 16,631 Cash paid for income taxes ....................................................... 686 5,167 822 Assets acquired under capital leases ............................................. 5,943 10,218 5,618 Convertible debt issued for Purchased Companies .................................. -- 22,500 33,800
The accompanying notes are an integral part of these consolidated financial statements. 33 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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, simultaneous 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." Subsequent to the Offering, Coach USA acquired forty-five additional businesses through December 31, 1997 (See Note 3). The acquisition of nineteen of these businesses has been accounted for under the poolings-of-interests method of accounting (the "Pooled Companies"), three of these businesses have been accounted for as immaterial poolings-of-interests (the "Immaterial Pooled Companies"), and twenty-three of these businesses have been accounted for under the purchase method of accounting (the "Purchased Companies"). 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 their respective dates of acquisition, and give retroactive effect to the acquisitions of the Pooled Companies. The Pooled Companies, the Founding Companies subsequent to May 31, 1996, the Immaterial Pooled Companies from the beginning of the fiscal quarter in which they were acquired, 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 for all periods presented. Certain reclassifications have been made to the Consolidated Financial Statements to conform with the presentation used in 1997. Three of the Pooled Companies previously reported on an October fiscal year end. As such, the accounts of these companies for their 1995 fiscal year have been consolidated with the accounts of the Company as of December 31, 1995. Unaudited revenues and net income for these three companies for the two-month period ended December 31, 1995, were approximately $6,904,000 and $70,000, 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. 34 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 three to five years. Depreciation and amortization expense in the accompanying consolidated financial statements includes $2,497,000, $2,995,000 and $3,420,000 of depreciation related to taxicabs held for sale in 1995, 1996 and 1997. 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. Management estimates that the fair value of the notes receivable approximates the historical value of $13.0 million at December 31, 1997. 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 of businesses accounted for as purchases over the fair market value of the net tangible assets acquired. Goodwill is amortized using the straight-line method over a period of 40 years. Goodwill on the accompanying consolidated balance sheets is presented net of accumulated amortization of $377,000 and $2,779,000 as of December 31, 1996 and 1997, respectively. 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. Also included in other assets are deferred financing costs, primarily related to the Company's senior subordinated notes. These costs are being amortized using the straight-line method over the life of the related financing. 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. 35 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 tourism-based companies, governmental units and casinos. 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 OF 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, 1995 ..... $1,785 $ -- $1,108 $ (761) $2,132 Year ended December 31, 1996 ..... 2,132 957 1,225 (838) 3,476 Year ended December 31, 1997 ..... 3,476 1,180 880 (1,873) 3,663
REVENUE RECOGNITION The Company recognizes revenue from recreation, excursion, commuter, transit and taxicab support services and sales to independent taxicab contractors 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 recorded as services and sales are performed. INCOME TAXES The Company and its U.S. subsidiaries file a consolidated return for federal income tax purposes. Acquired companies file "short-period" federal income tax returns through their respective acquisition dates and thereafter are included in the Company's consolidated return. For purposes of preparing these consolidated financial statements, federal and state income taxes have been provided for certain acquired companies which were Subchapter S corporations prior to their acquisition by the Company as if these companies had filed corporate tax returns. 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. 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 these estimates. 36 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) FOREIGN CURRENCY TRANSLATION The Company's Canadian subsidiaries maintain their books and records in Canadian dollars. Assets and liabilities of these operations are translated into U.S. dollars at the exchange rate in effect at the end of each accounting period, and income statement accounts are translated at the average exchange rate prevailing during the period. Gains and losses resulting from such translation are reported as a separate component of stockholders' equity. Gains and losses from transactions in foreign currencies are reported in other income and are not significant. 3. BUSINESS COMBINATIONS: POOLINGS During 1996, the Company acquired all of the outstanding stock of six companies in exchange for 3,284,336 shares of Common Stock. Five of these companies provide motorcoach transportation services and one provides taxicab and luxury sedan services. During 1997, the Company acquired all of the outstanding stock of sixteen companies in exchange for 3,899,982 shares of Common Stock. Thirteen of these companies provide motorcoach and other passenger ground transportation services and three provide taxicab and luxury sedan services. These acquisitions have been accounted for as poolings-of-interests and the results of operations of nineteen of these companies are included for all periods presented herein. The prior periods presented have not been restated for three of these companies, the Immaterial Pooled Companies. Restated consolidated revenues and net income of the Company are summarized in the table below (in thousands, except per share data):
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------- 1995 1996 ---------------------- --------------------- REVENUES NET INCOME REVENUES NET INCOME -------- ------ -------- ------- As previously reported ................ $ 83,925 $2,411 $185,728 $12,915 Subsequent poolings in 1997 ........... 118,861 1,786 139,989 3,873 -------- ------ -------- ------- After subsequent poolings ............. $202,786 $4,197 $325,717 $16,788 ======== ====== ======== ======= Diluted net income per share -- After subsequent poolings ....... $ .60 $ 1.12 ====== =======
In connection with the acquisition of one of the Pooled Companies, the former stockholders of the Pooled Company received shares ("Dividend Access Shares") of a wholly owned subsidiary of the Company, in lieu of receiving Common Stock. The Company has agreed to issue shares of Common Stock to the holders of the Dividend Access Shares upon their redemption to the subsidiary. These Dividend Access Shares have been treated as outstanding shares of Common Stock for purposes of these consolidated financial statements. Also in connection with the acquisition of the Pooled Company, one share of Coach Series A Voting Preferred Stock was issued by the Company which entitles each holder of the Dividend Access Shares to vote their shares as if they held an equal number of shares of Common Stock. 37 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The historical financial statements for 1995 and 1996 include the operations of the Pooled Companies prior to their acquisition by the Company. The unaudited combined revenues, income before extraordinary items and net income of the Pooled Companies for the preacquisition periods in 1997 were $87.4 million, $3.3 million and $3.2 million, respectively. PURCHASES During 1996, the Company acquired the businesses of three motorcoach companies in transactions accounted for as purchases. The aggregate consideration paid in these transactions was $16.8 million in cash, net of cash acquired, and $22.5 million in the form of subordinated notes convertible into 750,460 shares of Common Stock. The accompanying consolidated balance sheet as of December 31, 1996 includes allocations of the respective purchase prices. The allocations resulted in goodwill recognized of $36.5 million representing the excess of purchase price over the fair value of the net assets acquired. During 1996, prior to merging with the Company, two of the Pooled Companies completed acquisitions of businesses which were accounted for as purchase transactions. The aggregate consideration paid in these transactions was $4.1 million in cash, net of cash acquired. During 1997, the Company acquired the businesses of twenty companies in transactions accounted for as purchases. Nineteen of these businesses provide motorcoach transportation services and one provides taxicab services. The aggregate consideration paid in these transactions was $64.6 million in cash, net of cash acquired, 595,364 shares of the Company's Common Stock and $33.8 million in subordinated notes convertible into 905,258 shares of Common Stock. The accompanying consolidated balance sheet as of December 31, 1997 includes preliminary allocations of the respective purchase prices and is subject to final adjustment. The allocations resulted in goodwill recognized of $109.4 million representing the excess of purchase price over the fair value of the net assets acquired. In connection with the acquisitions discussed above, liabilities were assumed as follows for 1996 and 1997 (in thousands): YEAR ENDED DECEMBER 31, --------------------- 1996 1997 -------- --------- Fair value of assets acquired, net of cash acquired ... $ 64,286 $ 94,216 Goodwill .............................................. 36,487 109,398 Cash paid, net of cash acquired ....................... (16,769) (64,624) Issuance of Common Stock .............................. -- (12,391) Issuance of convertible notes ......................... (22,500) (33,800) -------- --------- Liabilities assumed ................................... $ 61,504 $ 92,799 ======== ========= The PRO FORMA STATEMENT OF INCOME DATA INCLUDING COMPENSATION DIFFERENTIAL AND OTHER ADJUSTMENTS below includes the historical financial statement data of the Founding Companies at historical cost, the Company (including the Pooled Companies) for all periods presented, the Immaterial Pooled Companies from the beginning of the fiscal quarter in which they were acquired, and the Purchased Companies since the date of their respective acquisitions. In addition, the data below gives effect to (i) certain reductions in salaries and benefits to the former owners of the Founding Companies and the Pooled Companies which were agreed to in connection with the mergers of the Founding Companies and the acquisition of the Pooled Companies, as well as a non-recurring, non-cash charge recorded by the 38 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 1997; (iii) the tax impact of the Compensation Differential in each period; (iv) for 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 and 1997 acquisitions. The PRO FORMA FOR PURCHASED COMPANIES data below gives effect to all items above and also gives effect to the acquisitions of the Purchased Companies as if those acquisitions occurred on January 1, 1996, and gives pro forma effect to (i) Compensation Differential of the Purchased Companies, (ii) the amortization of goodwill, (iii) interest expense attributable to cash expended and convertible subordinated notes issued in connection with the acquisitions of the Purchased Companies, (iv) income tax adjustments attributable to the above adjustments, and (v) an adjustment to record interest expense on the senior subordinated notes, amortization of deferred financing costs and related taxes, as if the notes had been outstanding for the periods presented (in thousands, except per share data). PRO FORMA STATEMENT OF INCOME DATA INCLUDING COMPENSATION DIFFERENTIAL AND OTHER ADJUSTMENTS: YEAR ENDED DECEMBER 31, ----------------------- 1996 1997 -------- -------- (UNAUDITED) Revenues .......................................... $370,781 $542,790 Income before extraordinary items ................. 20,461 35,682 Diluted income per share before extraordinary items 1.12 1.61 PRO FORMA FOR PURCHASED COMPANIES: YEAR ENDED DECEMBER 31, ----------------------- 1996 1997 -------- -------- (UNAUDITED) Revenues .......................................... $571,060 $615,770 Income before extraordinary items ................. 22,679 35,633 Diluted income per share before extraordinary items 1.18 1.57 The pro forma 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): 39 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, ------------------ 1996 1997 -------- ------- Prepaid insurance................................. $ 3,388 $ 5,540 Deferred income tax asset, net.................... 653 1,013 Prepaid licenses, registrations and other taxes... 4,338 6,037 Deposits and other receivables.................... 1,345 7,840 Other............................................. 3,183 3,789 -------- ------- $ 12,907 $24,219 ======== ======= 5. PROPERTY AND EQUIPMENT: Property and equipment consist of the following (in thousands): DECEMBER 31, ESTIMATED ---------------------- USEFUL LIVES 1996 1997 (YEARS) --------- --------- Transportation equipment .................. 3-15 $ 295,491 $ 419,322 Buildings and leasehold improvements....... 5-30 17,190 39,114 Other ..................................... 3-10 26,287 34,469 --------- --------- 338,968 492,905 Less-- Accumulated depreciation ........... (83,893) (97,105) --------- --------- $ 255,075 $ 395,800 ========= ========= Included in transportation equipment at December 31, 1996 and 1997, are approximately $30.0 million and $33.3 million, respectively, of assets held under capital leases. 6. OTHER ASSETS: Other assets consist of the following (in thousands): DECEMBER 31, ------------------ 1996 1997 -------- ------- Taxicab permits, net of accumulated amortization of $2,298 and $2,451 .................................. $ 4,159 $ 4,586 Deferred financing costs, net of accumulated amortization of $127 and $1,203 ................................. 748 7,012 Other, net of accumulated amortization of $1,158 and $944 3,671 6,149 -------- ------- $ 8,578 $17,747 ======== ======= Amortization expense related to other assets for the years ended December 31, 1996 and 1997 was $416,000 and $1,503,000, respectively. 40 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES: Accounts payable and accrued liabilities consist of the following (in thousands): DECEMBER 31, ----------------------- 1996 1997 ------- ------- Trade accounts payable ......................... $14,688 $16,919 Accrued insurance claims ....................... 18,799 29,846 Accrued compensation ........................... 8,636 11,352 Income taxes and other taxes ................... 3,511 9,616 Accrued interest payable ....................... 904 7,768 Deferred revenue ............................... 1,534 2,863 Other .......................................... 11,086 12,776 ------- ------- $59,158 $91,140 ======= ======= 8. LONG-TERM OBLIGATIONS: Long-term obligations consist of the following (in thousands):
DECEMBER 31, ---------------------- 1996 1997 --------- --------- Revolving credit facility with a bank syndicate, interest at LIBOR plus 1.25% (6.97% at December 31, 1997), secured by substantially all of the assets of the Company ................ $ 60,110 $ 109,723 Notes payable to finance companies, interest rates ranging from 6.70% to 14.10%, due in monthly installments of $484, maturing at various dates through 2011; secured by certain transportation equipment .............................. 38,451 22,714 Obligations under capital leases of certain transportation equipment, implicit interest rates ranging from 5.00% to 13.62%, due in monthly installments of $526, maturing at various dates through 2004 .................................... 26,998 27,495 Other ................................................................. 28,419 10,832 --------- --------- Total long-term obligations ........................................... 153,978 170,764 Less-- current maturities ............................................. (20,924) (12,012) --------- --------- $ 133,054 $ 158,752 ========= =========
41 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1997, future principal payments of long-term obligations and minimum lease payments under capital lease obligations are as follows (in thousands):
LONG-TERM CAPITAL LEASE OBLIGATIONS OBLIGATIONS -------- -------- Year ending December 31 -- 1998 ................................. $ 8,275 $ 5,640 1999 ................................. 4,560 6,135 2000 ................................. 119,720 6,743 2001 ................................. 3,719 4,731 2002 ................................. 2,799 4,920 Thereafter ........................... 4,196 6,010 -------- -------- $143,269 34,179 ======== Less-- Amounts representing interest . (6,684) -------- $ 27,495 ========
REVOLVING CREDIT AGREEMENT In August 1997, the Company amended and restated its credit agreement. The credit agreement, as amended and restated, provides for a revolving credit facility of $300 million through a bank syndicate and allows for an additional $80 million of debt outside the credit facility (in addition to fully subordinated debt). The proceeds of the facility 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 2000, 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 0.25%, or the London Interbank Offered Rate ("LIBOR") plus 0.50% to 1.75%, both as determined by the ratio of the Company's funded debt to cash flow, as defined. A commitment fee 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, 1997, the Company had a total of $170.8 million outstanding under the revolving and other outside credit facilities and had utilized $16.8 million of the facility for letters of credit securing certain insurance obligations and performance bonds, resulting in a borrowing availability of $192.4 million under the revolving and other outside credit facilities. SENIOR SUBORDINATED NOTES In June 1997, the Company completed the sale of $150.0 million of 9 3/8% senior subordinated notes due 2007. The net proceeds from the offering were used to repay amounts owed under the credit facility. These notes are subordinated to all existing and future senior indebtedness of the Company, including amounts outstanding under the Company's credit facility, and are guaranteed by the domestic subsidiaries of the Company. The notes are redeemable at the option of the Company at prices decreasing from a premium of 104.7% on July 1, 2002, to par on July 1, 2005. Interest on the notes is paid semiannually. CONVERTIBLE SUBORDINATED NOTES During 1996 and 1997, the Company issued $56.3 million of convertible subordinated notes to certain former owners of the Purchased Companies as partial consideration of the acquisition purchase price. The notes bear interest at a weighted average interest rate of 5.15% and are convertible by the 42 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) holder into shares of the Company's Common Stock at a weighted average price of $34.83 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 $30.6 million of principal payments in 1999 and $21.7 million in 2000. The Company made scheduled principal payments of $4.0 million during 1997. Interest on the notes is paid quarterly. Management estimates that the fair value of its debt obligations approximates the historical value of $373.1 million at December 31, 1997. 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, ---------------------------------- 1995 1996 1997 ------- -------- -------- Current -- Federal ............................. $ 888 $ 2,753 $ 9,034 State ............................... 173 346 646 ------- -------- -------- 1,061 3,099 9,680 ------- -------- -------- Deferred -- Federal ............................. 2,059 5,730 9,843 State ............................... 362 1,369 2,535 ------- -------- -------- 2,421 7,099 12,378 ------- -------- -------- Provision for income taxes before extraordinary items ................. 3,482 10,198 22,058 ------- -------- -------- Extraordinary Items -- Current ............................. -- 1,640 (627) Deferred ............................ -- 125 -- ------- -------- -------- -- 1,765 (627) ------- -------- -------- $ 3,482 $ 11,963 $ 21,431 ======= ======== ======== Deferred income taxes result from the effect of transactions which are recognized in different periods for financial and tax reporting purposes. 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 basis of existing assets and liabilities. 43 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of deferred income tax liabilities and assets are as follows (in thousands): DECEMBER 31, -------------------- 1996 1997 -------- -------- Deferred income tax liabilities -- Property and equipment ............................ $ 38,237 $ 59,429 Other ............................................. 902 1,618 -------- -------- Total deferred income tax liabilities ........ 39,139 61,047 -------- -------- Deferred income tax assets -- Accounts receivable/allowance for doubtful accounts (1,330) (1,466) Accrued liabilities/expenses ...................... (12,309) (11,666) Net operating losses .............................. (4,463) (4,294) Other intangibles ................................. (1,989) (1,248) Tax credits ....................................... (2,821) (2,659) Other ............................................. (1,650) (520) -------- -------- Total deferred income tax assets ............. (24,562) (21,853) Less-- Valuation allowance ............................. 904 904 -------- -------- Net deferred income tax liabilities .......... $ 15,481 $ 40,098 ======== ======== 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, --------------------------- 1995 1996 1997 ------- ------- ------- Tax at federal statutory rate ................... $ 2,684 $10,063 $18,496 Add-- State income taxes, net of federal benefit .................... 346 1,184 2,012 Nondeductible expenses ................ 316 555 360 Other ................................. 136 161 563 ------- ------- ------- $ 3,482 $11,963 $21,431 ======= ======= ======= For purposes of the consolidated federal income tax return, the Company has net operating loss carryforwards available to offset future taxable income of the Company. The net operating loss carryforwards will expire at various dates through 2011. 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 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. The effect of differences in foreign versus domestic tax rates is not material for the periods presented. 44 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES: PURCHASE COMMITMENTS As of December 31, 1997, the Company had entered into commitments to purchase 107 motorcoaches for approximately $32.4 million. The Company intends to finance these equipment purchases primarily through cash flows from operations, trade-ins of older equipment and borrowings 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, 1995, 1996 and 1997 was $6,089,000, $9,951,000, and $16,222,000, 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 through October 2030 and provide for certain escalations in the rent expense each year. Included in the 1997 rental expense above is approximately $828,000 of rent paid to these related parties. The following represents future minimum rental payments under noncancelable operating leases (in thousands): Year ending December 31 -- 1998................................................$ 11,275 1999................................................ 10,047 2000................................................ 8,355 2001................................................ 6,733 2002................................................ 2,831 Thereafter.......................................... 13,210 --------- $ 52,451 ========= 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 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 consolidated 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. As of March 16, 1998, the STB had exempted from regulatory approval requirements each of the acquisition transactions involving federally-regulated interstate motorcoach operators entered into by the Company through October 1997. There can be no assurance that the Company will be able to obtain such approval or exemption with respect to acquisitions completed after October 1997 or future acquisitions. 45 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 coverages 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, 1997. 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. The Company contributed $303,000, $301,000 and $455,000 to these plans during the years ended December 31, 1995, 1996 and 1997, 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 2002. 11. NET INCOME PER COMMON SHARE Earnings per share amounts are based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period. The weighted average number of shares used to compute basic and diluted earnings per share for 1995, 1996 and 1997 is illustrated below (in thousands): 46 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, -------------------------------------- PRO FORMA 1995 1996 1997 1997 ------ ------- ------- ------- (UNAUDITED) Net income: Net income for basic earnings per share - income available to common stockholders ................ $4,197 $16,788 $31,408 $34,753 Effect of convertible subordinated notes under the "if converted" method - interest expense addback, net of taxes .................................... -- 229 1,179 1,179 ------ ------- ------- ------- Net income for diluted earnings per share - income available to common stockholders ................ $4,197 $17,017 $32,587 $35,932 ====== ======= ======= ======= Weighted average shares: Weighted average shares outstanding for basic earnings per share .............................. 6,987 14,742 21,412 21,412 Effect of dilutive stock options and warrants ...... -- 183 402 402 Effect of convertible subordinated notes under the "if converted" method - weighted convertible shares issuable ................................. -- 255 1,140 1,140 ------ ------- ------- ------- Weighted average shares outstanding for diluted earnings per share .............................. 6,987 15,180 22,954 22,954 ====== ======= ======= =======
12. SUPPLEMENTAL GUARANTOR INFORMATION The Company's payment obligations under the Senior Subordinated Notes are jointly and severally guaranteed by all domestic subsidiaries (the "Guarantors") of the Company. The following unaudited condensed consolidating balance sheet, statement of income and statement of cash flows presents the combined financial statements of the Guarantors and non-guarantor subsidiaries. Separate financial statements and other disclosures concerning the Guarantors are not deemed material to investors. 47 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS) (UNAUDITED)
COACH GUARANTOR NONGUARANTOR USA, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents .............. $ -- $ 3,426 $ 222 $ -- $ 3,648 Accounts receivable, net of allowance .. -- 40,049 3,297 -- 43,346 Inventories ............................ -- 21,019 1,471 -- 22,490 Notes receivable, current portion ...... -- 4,138 -- -- 4,138 Prepaid expenses and other current assets .............................. -- 22,573 1,646 -- 24,219 ------------ ------------ ------------ ------------ ------------ Total current assets .............. -- 91,205 6,636 -- 97,841 PROPERTY AND EQUIPMENT, net ............ -- 380,794 15,006 -- 395,800 NOTES RECEIVABLE, net of allowance ..... -- 8,906 -- -- 8,906 GOODWILL, net .......................... -- 136,299 9,277 -- 145,576 INTERCOMPANY & INVESTMENTS IN SUBSIDIARIES ..................... 420,680 -- -- (420,680) -- OTHER ASSETS, net ...................... 7,162 10,205 380 -- 17,747 ------------ ------------ ------------ ------------ ------------ Total assets ...................... $ 427,842 $ 627,409 $ 31,299 $ (420,680) $ 665,870 ============ ============ ============ ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations ......................... $ -- $ 4,784 $ 7,228 $ -- $ 12,012 Accounts payable and accrued liabilities ......................... 7,564 77,676 5,900 -- 91,140 ------------ ------------ ------------ ------------ ------------ Total current liabilities ......... 7,564 82,460 13,128 -- 103,152 LONG-TERM OBLIGATIONS, net of current maturities ........................ 109,723 373,498 10,969 (335,438) 158,752 SENIOR SUBORDINATED NOTES .................... 150,000 -- -- -- 150,000 CONVERTIBLE SUBORDINATED NOTES ..................................... -- 52,300 -- -- 52,300 DEFERRED INCOME TAXES ........................ -- 38,236 2,875 -- 41,111 ------------ ------------ ------------ ------------ ------------ Total liabilities ................. 267,287 546,494 26,972 (335,438) 505,315 STOCKHOLDERS' EQUITY: Common Stock ........................... 218 78 4 (82) 218 Additional paid-in capital ............. 121,534 51,193 1,668 (52,861) 121,534 Cumulative translation adjustment ...... (479) -- (479) 479 (479) Retained earnings ...................... 39,282 29,644 3,134 (32,778) 39,282 ------------ ------------ ------------ ------------ ------------ Total stockholders' equity ........ 160,555 80,915 4,327 (85,242) 160,555 ------------ ------------ ------------ ------------ ------------ Total liabilities and stockholders' equity ......................... $ 427,842 $ 627,409 $ 31,299 $ (420,680) $ 665,870 ============ ============ ============ ============ ============
48 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS) (UNAUDITED)
COACH GUARANTOR NONGUARANTOR USA, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ REVENUES........................................ $ -- $ 501,867 $ 40,923 $ -- $ 542,790 OPERATING EXPENSES .............................. -- 365,769 33,176 -- 398,945 ------------ ------------ ------------ ------------ ------------ Gross profit ......................... -- 136,098 7,747 -- 143,845 GENERAL AND ADMINISTRATIVE EXPENSES ..................................... 179 60,819 3,499 -- 64,497 ACQUISITION RELATED COSTS ........................................ -- 1,738 109 -- 1,847 ------------ ------------ ------------ ------------ ------------ Operating income ..................... (179) 73,541 4,139 -- 77,501 INTEREST EXPENSE ................................ -- 21,971 1,135 -- 23,106 EQUITY IN INCOME OF SUBSIDIARIES ................................. 31,587 -- -- (31,587) -- ------------ ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS ...................... 31,408 51,570 3,004 (31,587) 54,395 PROVISION FOR INCOME TAXES ...................... -- 20,856 1,202 -- 22,058 ------------ ------------ ------------ ------------ ------------ INCOME BEFORE EXTRAORDINARY ITEMS ........................................ 31,408 30,714 1,802 (31,587) 32,337 EXTRAORDINARY ITEMS, net of income taxes ................................. -- (794) (135) -- (929) ------------ ------------ ------------ ------------ ------------ NET INCOME ...................................... $ 31,408 $ 29,920 $ 1,667 $ (31,587) $ 31,408 ============ ============ ============ ============ ============
49 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS) (UNAUDITED)
COACH GUARANTOR NONGUARANTOR USA, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------------ ------------ ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income ............................. $ 31,408 $ 29,920 $ 1,667 $ (31,587) $ 31,408 Adjustments to reconcile net income-- Depreciation and amortization ....... -- 33,403 1,661 -- 35,064 Equity in income of subsidiaries .... (31,587) -- -- 31,587 -- Gain on sale of assets .............. -- (1,468) (758) -- (2,226) Deferred income tax provision ....... -- 12,019 359 -- 12,378 Changes in operating assets and liabilities -- Accounts receivable, net ........ -- (7,667) 678 -- (6,989) Inventories ..................... -- (7,818) 185 -- (7,633) Prepaids and other current assets -- (4,700) (680) -- (5,380) Accounts payable and accrued liabilities .................. 6,985 (22,545) (895) -- (16,455) Other ........................... -- (2,581) 842 -- (1,739) ------------ ------------ ------------ ------------ ------------ Net cash provided by operating activities ..... 6,806 28,563 3,059 -- 38,428 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment .... -- (88,986) (8,472) -- (97,458) Proceeds from sales of property and equipment ........................... -- 26,366 7,521 -- 33,887 Cash consideration paid for Purchased Companies, net ...................... (62,457) -- (2,167) -- (64,624) Increase in notes receivable, net ...... -- (5,938) -- -- (5,938) ------------ ------------ ------------ ------------ ------------ Net cash used in investing activities ..... (62,457) (68,558) (3,118) -- (134,133) CASH FLOWS FROM FINANCING ACTIVITIES: Intercompany ........................... (151,592) 151,592 -- -- -- Principal payments on long-term obligations ......................... -- (109,478) (9,591) -- (119,069) Proceeds from issuance of long-term obligations ......................... 195,113 8,022 8,860 -- 211,995 Proceeds from issuance of Common Stock ............................... 2,510 -- -- -- 2,510 S Corporation dividends paid by certain Pooled Companies .................... -- (1,216) -- -- (1,216) Other .................................. -- 411 (1) -- 410 ------------ ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities . 46,031 49,331 (732) -- 94,630 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................... (9,620) 9,336 (791) -- (1,075) CASH AND CASH EQUIVALENTS, beginning of year ........................ -- 3,710 1,013 -- 4,723 ------------ ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of year ............................... $ (9,620) $ 13,046 $ 222 $ -- $ 3,648 ============ ============ ============ ============ ============
50 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. 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 plan as of December 31, 1996 and 1997 (in thousands, except per share data):
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1996 1997 ------------------------------- -------------------------------- WEIGHTED- WEIGHTED- AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE ------------- ------------- ------------- ------------- Options outstanding at beginning of year......................... -- $ -- 1,797 $ 17.83 Granted.......................................................... 1,823 17.79 1,022 28.00 Forfeited........................................................ (26) 14.79 (121) 16.92 Exercised........................................................ -- -- (119) 15.80 ------------- ------------- ------------- ------------- Options outstanding at end of year............................... 1,797 $ 17.83 2,579 $ 21.99 ============= ============= ============= ============= Options exercisable at year end.................................. -- 245 Weighted-average fair value of options granted during the year...............................................$ 14.18 $ 13.27
The following table summarizes information about stock options outstanding as of December 31, 1997 (in thousands, except per share data):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------------- ----------------------------------- WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE RANGE OF AS OF CONTRACTUAL EXERCISE AS OF EXERCISE EXERCISE PRICES DECEMBER 31, 1997 LIFE PRICE DECEMBER 31, 1997 PRICE - --------------- --------------- --------------- --------------- --------------- --------------- $14.00 - $23.75 1,426 8.47 $ 17.22 216 $ 17.49 $26.00 - $28.90 698 9.39 26.65 29 27.11 $29.00 - $30.00 455 9.43 29.81 -- -- ------ ------ -------- ----- ------- 2,579 8.89 $ 21.99 245 $ 18.64 ====== ====== ======== ===== =======
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 51 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 1997 -------- -------- Net Earnings As reported....... $ 16,788 $ 31,408 Pro forma......... $ 15,291 $ 28,271 Diluted Earnings Per Share As reported....... $ 1.12 $ 1.42 Pro forma......... $ 1.02 $ 1.28 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 for 1996 and 1997: (i) risk-free interest rates ranging from 5.73% to 6.96%, (ii) expected life of 10 years in 1996 and 6 years in 1997, (iii) average volatility of 35%, and (iv) dividend yield of 0.00%. 14. EXTRAORDINARY ITEMS During 1996, obligations due to stockholders of a Pooled Company 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 $1.6 million, net of taxes, resulting from early extinguishment of debt at certain other companies. The extraordinary items recorded in 1997 include extraordinary losses of $0.9 million, net of taxes, related to prepayment penalties from the early extinguishment of debt at certain companies. 15. QUARTERLY FINANCIAL DATA (UNAUDITED) The table below sets forth the unaudited consolidated operating results by quarter for the year ended December 31, 1997. All quarters presented have been restated for subsequent acquisitions accounted for as poolings-of-interests, except for the Immaterial Pooled Companies (in thousands, except per share data). 52 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE MONTHS ENDED, ------------------------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------- ------------- ------------- ------------- Revenues ................................. $ 96,532 $ 138,712 $ 157,109 $ 150,437 Gross profit ............................. 19,574 38,653 45,212 40,406 Net income before extraordinary items .... 1,678 9,918 12,621 8,120 Net income ............................... 1,559 9,638 12,416 7,795 Basic earnings per share: Net income before extraordinary items $ .08 $ .47 $ .59 $ .37 Net income .......................... $ .08 $ .44 $ .58 $ .36 Diluted earnings per share: Net income before extraordinary items $ .08 $ .45 $ .56 $ .36 Net income .......................... $ .07 $ .44 $ .55 $ .35
Due to rounding, the sum of the quarterly amounts reflected above for net income per share do not add to the annual net income per share reflected in the accompanying consolidated statements of income. 16. SUBSEQUENT EVENTS (UNAUDITED) Through March 16, 1998, the Company acquired seven additional businesses subsequent to December 31, 1997. These subsequent acquisitions were accounted for as purchases. The aggregate consideration paid in these transactions was $16.3 million in cash, $4.9 million of subordinated notes convertible into 122,000 shares of the Company's Common Stock, and 242,000 shares of the Company's Common Stock. Subsequent to year end, the Company entered into a swap agreement which effectively fixes the price the Company will pay for a significant portion of diesel fuel purchases, the primary fuel consumed in the Company's operations. The swap agreement utilizes NYMEX No. 2 heating oil, which has a high degree of correlation to diesel fuel. Under the swap agreement, the Company purchased a notional quantity of 3.0 million gallons per month at prices ranging from $0.4825 per gallon to $0.5215 per gallon from March 1 through December 31, 1998. This notional quantity represents an amount less than the Company's anticipated average monthly consumption. The swap agreement will be accounted for on a monthly settlement basis with the net amounts paid or received under the agreement included in the cost of the commodity. The use of such a commodity swap effectively protects the Company against an increase in the price of the commodity or prevents the Company from benefitting in the event of a decrease in the price of the commodity, to the extent of the notional quantity under contract. 53 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. 54 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 and Index to Schedules at S-1. (3)Exhibits EXHIBIT NUMBER DESCRIPTION ------ ----------- 3.1 -- Second Amended and Restated Certificate of Incorporation of Coach USA (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-4 (File No. 333-33755) 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) 4.2 -- Indenture dated as of June 24, 1997 between Coach USA, Inc., the Guarantors named therein, and the Bank of New York, as Trustee, with respect to the 93/8% Senior Subordinated Notes due 2007 (including form of 93/8% Senior Subordinated Note due 2007) (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 (File No. 333-33215) of the Company) 4.3 -- Certificate of Designation of Series A Voting Preferred Stock (par value $0.01 per share) of Coach USA, Inc. 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) 55 EXHIBIT NUMBER DESCRIPTION ------ ----------- 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) 10.11 -- Amendment Dated June 24, 1997 to Agreement Between Coach USA, Inc. and Exel Motorcoach Partners, LLC (Incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-4 (File No. 333-33215) of the Company) 10.12 -- Warrants to Purchase 100,000 Shares of Common Stock of Coach USA, Inc., held by American Business Partners, LLC, formerly known as Exel Motorcoach Partners, LLC 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 Among Coach USA, Inc., as Borrower, The Financial Institutions named in this Credit Agreement as Banks, and NationsBank Texas, N.A., as Agent for the Banks, dated August 13, 1997 (Incorporated by reference to Exhibit 10.1 to the Form 10-Q for the period ended June 30, 1997 (File No. 001-12939) of the Company) 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 23 -- Consent of Arthur Andersen LLP 27 -- Financial Data Schedule (b) Reports on Form 8-K: None 56 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 23, 1998 - ------------------------------------ Chief Executive Officer Richard H. Kristinik (Principal Executive Officer) /s/ LAWRENCE K. KING Senior Vice President, March 23, 1998 - ------------------------------------ Chief Financial Officer Lawrence K. King and Director (Principal Financial and Accounting Officer) /s/ STEVEN S. HARTER Director March 23, 1998 - ---------------------------------------- Steven S. Harter /s/ JOHN MERCADANTE, JR. President, Chief Operating March 23, 1998 - ---------------------------------------- Officer and Director John Mercadante, Jr. /s/ FRANK P. GALLAGHER Senior Vice President-- March 23, 1998 - ---------------------------------------- Corporate Development Frank P. Gallagher and Director /s/ GERALD MERCADANTE Senior Vice President-- March 23, 1998 - ---------------------------------------- Northeast Region Gerald Mercadante Operations and Director 57 SIGNATURE CAPACITY IN WHICH SIGNED DATE --------- ------------------------ ---- /s/ CHARLES D. BUSSKOHL Director March 23, 1998 - ---------------------------------------- Charles D. Busskohl /s/ WILLIAM J. LYNCH Director March 23, 1998 - ---------------------------------------- William J. Lynch - ---------------------------------------- Director March ___, 1998 Paul M. Verrochi
58 EX-4.3 2 EXHIBIT 4.3 CERTIFICATE OF DESIGNATIONS OF SERIES A VOTING PREFERRED STOCK (Par Value $0.01 Per Share) of COACH USA, INC. --------------------------------------------- Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware -------------------------------------------- The undersigned does hereby certify that the following resolutions were duly adopted by the Board of Directors of Coach USA, Inc., a Delaware corporation (the "Corporation"), in accordance with the provisions of Section 151 of the Delaware General Corporation Law, at a meeting duly convened and held on June 5, 1997, at which a quorum was present and acting throughout: RESOLVED, that pursuant to the authority conferred on the Board of Directors by the Amended and Restated Certificate of Incorporation of the Corporation, a series of the Corporation's authorized preferred stock, par value $0.01 per share (the "Preferred Stock"), be, and it hereby is, established, created and approved, and that the designation and number of shares thereof and the voting and other powers, preferences and relative, participating, optional and other rights of the shares of such series, and the qualifications, limitations and restrictions thereof, be, and they hereby are, as set forth on Exhibit A attached hereto and incorporated herein by reference for all purposes; and FURTHER RESOLVED, that the proper officers be, and each hereby is, authorized, empowered and directed, by and on behalf of the Corporation and in its name, to prepare, execute and deliver, and file with the Secretary of State of the State of Delaware, a certificate of designations of the terms, limitations, rights and preferences of the Preferred Stock (the "Certificate of Designations"), with the designations, voting and other powers, preferences, relative, participating, optional and other rights, and the qualifications, limitations and restrictions, set forth on Exhibit A; 1 IN WITNESS WHEREOF, the Corporation has caused this certificate to be signed this 11th day of June, 1997. COACH USA, INC. By:/s/ DOUGLAS M. CERNY Senior Vice President 2 Exhibit A SERIES A VOTING PREFERRED STOCK DESIGNATION OF TERMS, LIMITATIONS, RIGHTS AND PREFERENCES 1. AUTHORIZED NUMBER AND DESIGNATION. The preferred stock created and authorized hereby shall be designated as the "Series A Voting Preferred Stock" (the "Series A Voting Preferred Stock"). The number of shares of Series A Voting Preferred Stock shall be one (1). The Series A Voting Preferred Stock is issuable solely in a single whole share that shall entitle the holder thereof to exercise the voting rights and to have the benefit of all other rights of a holder of Series A Voting Preferred Stock as set forth herein and in the Certificate of Incorporation. The par value of the share of Series A Voting Preferred Stock shall be $0.01. 2. DIVIDENDS. A holder of Series A Voting Preferred Stock shall not be entitled to receive any dividends declared and paid by the Corporation. 3. VOTING RIGHTS. A holder of Series A Voting Preferred Stock shall have the same rights and privileges regarding the voting of such stock as a holder of the Corporation's Common Stock, par value $0.01 per share (the "Common Stock"), has. Except as otherwise required by law, the share of Series A Voting Preferred Stock shall be entitled to cast such number of votes as are equal to the number of votes that holders of outstanding Dividend Access Shares, par value $0.01 per share ("Dividend Access Shares") of 3376249 Canada Inc., a Canadian corporation ("Canada Inc."), would be entitled to if all such Dividend Access Shares were redeemed by the holders thereof for Common Stock of the Corporation pursuant to the terms of the Dividend Access Shares. The Series A Voting Preferred Stock and the Common Stock shall vote as one class except as otherwise provided by law or this Certificate. 4. PRIORITY OF SERIES A VOTING PREFERRED STOCK IN THE EVENT OF LIQUIDATION, DISSOLUTION OR WINDING UP. In the event of any liquidation, dissolution or winding up of the Corporation, the holder of the Series A Voting Preferred Stock shall not be entitled to any preference over holders of the Common Stock and shall be entitled to receive, pro rata with the holders of Common Stock, all of the remaining assets of the Corporation available for distribution to its stockholders. 5. OTHER PROVISIONS. (a) Pursuant to the terms of that certain Stock Purchase Agreement, dated May 22, 1997, by and among the Corporation, Canada Inc. and all of the stockholders of Trentway-Wagar (Properties) Inc., a Canadian corporation, one share of Series A Voting Preferred Stock is being issued to the trustee (the "Trustee") under the Exchange Trust Agreement, dated June 12, 1997 (the "Exchange Trust Agreement"), among the Corporation, Canada Inc. and the Trustee. (b) The holder of the Series A Voting Preferred Stock share is entitled to exercise the voting rights set forth in Section 3 hereof in such manner as such holder desires and in accordance with the terms of the Exchange Trust Agreement. (c) For purposes hereof, the number of Dividend Access Shares outstanding shall exclude Dividend Access Shares owned or held in treasury by the Corporation, Canada Inc., any of their subsidiaries or any person directly or indirectly controlled by or under common control of the Corporation. For purposes hereof, "control" (including the correlative meanings, the terms "controlled by" and "under common control of") as applied to any person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of that person through the ownership of voting securities, by contract or otherwise. (d) At such time as the share of Series A Voting Preferred Stock has no votes attached to it because there are no Dividend Access Shares of Canada Inc. outstanding and there are no shares of stock, debt, options or other agreements of Canada Inc. which could give rise to the issuance of any Dividend Access Shares of Canada Inc. to any person (other than the Corporation, Canada Inc., any of their subsidiaries or any person directly or indirectly controlled by or under common control of the Corporation), the Series A Voting Preferred Stock shall be canceled. EX-10.12 3 EXHIBIT 10.12 DATE: JULY 26, 1997 WARRANTS TO PURCHASE 100,000 SHARES OF COMMON STOCK OF COACH USA, INC. HELD BY EXEL MOTORCOACH PARTNERS LLC Pursuant to the Amendment dated June 24, 1997 to Agreement Between Coach USA, Inc. and Exel Motorcoach Partners LLC (the "Amendment Agreement"), Coach USA, Inc. ("Coach") hereby grants to Exel Motorcoach Partners LLC ("Exel") the right to purchase 100,000 shares of common stock of Coach pursuant to the terms provided for below. 1. WARRANTS. The warrants granted to Exel entitle Exel, or his permitted assigns, to purchase 100,000 shares of common stock, $.01 par value, of Coach at an exercise price of $26.00 per share (such warrants to purchase shares of Coach common stock are hereinafter referred to as the "Warrants"). 2. PERMITTED ASSIGNS. Exel (and Exel's members upon distribution of warrants by Exel to its members) shall have the right to assign any portion of the Warrants (a) to Paul Verrochi, Dominic Puopolo, Don Glazer and Don Boyles and (b) to anyone else as permitted by law (which assignment can be made by any of the persons listed in (a) above). Any person or entity that owns any Warrants is herein referred to as a "Holder." In the event of the death of any Holder, then such Warrants shall be exercisable by the heirs of such Holder pursuant to the terms hereunder. IN THE EVENT OF AN ASSIGNMENT TO ANYONE OTHER THAN AMERICAN BUSINESS PARTNERS LLC AND THOSE LISTED IN (A) ABOVE OR THEIR HEIRS, COACH SHALL HAVE THE RIGHT FOR TWENTY BUSINESS DAYS PRIOR TO SUCH ASSIGNMENT TO ACQUIRE ANY SUCH WARRANTS PROPOSED FOR ASSIGNMENT UPON THE SAME TERMS AND CONDITIONS AS PROPOSED BY ANY SUCH TRANSFEREE. 3. EXERCISE PERIOD. The right to exercise any of the Warrants shall begin on January 26, 1998 and shall expire on July 26, 1999. Coach has no obligation to remind or otherwise inform Exel or any Holder of a portion or all of the rights to exercise Warrants of the pending expiration or expiration of the Warrant exercise period. 4. EXERCISE OF WARRANTS. During the period in which any Warrants can be exercised the Holder shall deliver written notice to Coach setting forth the number of shares with respect to which the Warrant is to be exercised, together with cash, certified check, bank draft, wire transfer, or postal or express money order payable to the order of Coach for an amount equal to the exercise price of the shares being purchased. 5. ADJUSTMENT UPON CHANGES IN CAPITALIZATION. In the event that any dividend or other distribution (whether in the form of cash, common stock or other property), recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase or exchange of common stock or other securities, liquidation, dissolution, or other similar corporate transaction or event, affects the common stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of Holders, then the Board of Directors shall, in such manner as it may deem equitable, adjust any or all of the number and kind of shares that may be issued in respect of Warrants and the exercise price of Warrants (or, if deemed appropriate, the Board may make provision for a cash payment with respect to any Warrants). In addition, the Board is authorized to make adjustments in the terms and conditions of Warrants in recognition of unusual of nonrecurring events (including, without limitation, events described in the preceding sentence) affecting the Company or any subsidiary or the financial statements of the Company or any subsidiary, or in response to changes in applicable laws, regulations, or accounting principles. 6. REGISTRATION UNDER SECURITIES LAWS. Coach shall prepare and file with the United States Securities and Exchange Commission a registration statement on Form S-3 in which it registers the sale to the Holders of the shares of common stock to be issued upon exercise of Warrants. Coach shall use reasonable efforts to secure and maintain the effectiveness of such registration statement. Coach shall also list for trading the shares issuable upon exercise of any Warrants on the New York Stock Exchange or such other primary exchange on which the shares of Coach common stock are traded. Coach shall not be obligated to make any other filings with any other regulatory authorities in connection with making the shares issued upon exercise of any Warrants available for public resale. 7. ADMINISTRATION. In the event a dispute or interpretation of the provisions of the Warrants is required then the Board of Directors of Coach shall be the administrator and ultimate decision maker in connection with such interpretation. Coach USA, Inc. By: /s/ DOUGLAS M. CERNY Name: Douglas M. Cerny Date: July 26, 1997 EX-21 4 EXHIBIT 21 Coach USA, Inc. Subsidiaries as of March 16, 1998 NAME OF SUBSIDIARY: STATE OF INCORPORATION: ------------------- ----------------------- 159506 Canada, Inc. Canada d/b/a Gray Line Tours d/b/a Connaisseur 170861 Canada, Inc. Canada 2948-7238 Quebec, Inc. Canada d/b/a Gray Line of Quebec City AAA Auto Leasing, Inc. Florida ACT Travel, Inc. Tennessee ASTI, Inc. Florida d/b/a Gray Line of Orlando Aircraft Taxi Co. Florida Airlines Acquisition Company, Inc. Pennsylvania d/b/a Airlines Transportation Company Airocar, Inc. Florida d/b/a Gray Line d/b/a Gray Line of Fort Lauderdale d/b/a Gray Line of Fort Myers/Naples d/b/a Gray Line of Fort Pierce d/b/a Gray Line of Key West d/b/a Gray Line of Palm Beach Airport Limousine Service, Inc. Delaware d/b/a ALS Paratransit d/b/a Checker Cab d/b/a Embassy Coach d/b/a Pittsburgh Air Bus d/b/a Pittsburgh Paratransit Airport Rent-A-Car, Inc. Florida Air Travel Transportation, Inc. Georgia d/b/a Atlanta Airport Shuttle American Bus Lines, Inc. Florida America Charters, Ltd. North Carolina American Charters and Tours, Inc. Tennessee American Coach Lines, Inc. Florida American Limousine Service, Inc. Florida American Sightseeing, Inc. Florida American Sightseeing Tours, Inc. Florida American Tour Connection, Inc. New Jersey AmeriCoach Tours, Limited Tennessee Antelope Nevada, Inc. Nevada Antelope Valley Bus, Inc. California Arrow Leasing, Inc. Connecticut Arrow Stage Lines, Inc. Nebraska Art-Mar Corporation Florida Associates Business Credit, LLC Kansas Atlanta Airport Shuttle, Inc. Georgia Autocar Connaisseur Inc. Canada d/b/a Gray Line of Montreal Automobiles Sabrevois Ltee Canada Barclay Airport Service, Inc. New Jersey Barclay Transportation Services, Inc. New Jersey Bayou City Coaches, Inc. Texas Blackhawk, Central City Ace Express, Inc. Colorado d/b/a Ace Express Blue Bird Coach Lines, Inc. Delaware Browder Tours, Inc. Tennessee d/b/a Browder Tours Coach USA, Inc. Subsidiaries - (Continued) NAME OF SUBSIDIARY: STATE OF INCORPORATION: ------------------- ----------------------- d/b/a Browder Tours and Charters Bus Chicago, Inc. Illinois Butler Motor Transit, Inc. Pennsylvania d/b/a Butler Motor Tours CFT Investments, LLC Kansas Cab Services, Inc. Texas d/b/a Towne Car California Charters, Inc. Texas d/b/a Texas/California Charter Service Cape Transit Corp. New Jersey d/b/a Adventure Trails Carey Statewide Limousine Service, Inc. Michigan d/b/a All-Statewide Limousine d/b/a Carey of Michigan d/b/a Carey Limousine d/b/a Statewide Limousine Central Jersey Transit, Inc. New Jersey Checker Cab of Pensacola, Inc. Florida Classic Lines, Inc. Florida Coach Leasing, Inc. Illinois Coach USA Administration, Inc. Nevada Coach USA of New Orleans, Inc. Delaware Coach XXIII Acquisition, Inc. Delaware Colorado Springs Airport Transportation Service, Inc. Colorado Commercial Leasing, LLC Missouri Commlease, LLC Missouri 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 Comprehensive Communication Services, Inc. Florida Connaisseur Parts Distribution, Inc. Canada Connaisseur Vehicle Agency Inc. Canada Corporate Car U.S.A., Inc. Florida Desert Stage Lines California Douglas Braund Investments Limited Canada 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 Eagle Paratransit Services, Inc. Louisiana Eights Cab, Inc. Florida El Expreso, Inc. Texas d/b/a El Expreso Bus Company Falcon Charter Service California Fiesta Cab Company Texas Fiesta Cab Company of San Antonio Texas Friedman Transportation Co., Inc. New Jersey Gad About Tours, Inc. Ohio Garden State Leasing Co., Inc. New Jersey Golden Isles Coaches of Florida, Inc. Florida d/b/a Golden Isles Coaches of Florida d/b/a Taylor Made Tours Golden Vacations, Inc. California Gray Line Tours of Southern Nevada, Inc. Nevada d/b/a River Gambler Tours Greater Austin Transportation Company Texas d/b/a American Cab Co. Coach USA, Inc. Subsidiaries - (Continued) NAME OF SUBSIDIARY: STATE OF INCORPORATION: ------------------- ----------------------- 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 Greater Colorado Springs Transporation 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 Greater Indianapolis Transportation, Inc. Indiana Grosvenor Bus Lines, Inc. California d/b/a Gray Line of Monterey d/b/a Gray Line of San Francisco 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 d/b/a Group N. and S., Incorporated H.A.M.L. Corporation New Jersey HealthTrans, Inc. Delaware High Adventure Tours, Inc. New York Houston Cab Company Texas IPD, Inc. Missouri Indianapolis Checker Cab, Inc. Indiana Indianapolis Taxi, Inc. Indiana Indianapolis Yellow Cab, Inc. Indiana International Express Corp. Minnesota d/b/a Airport Express Jul-Al, Inc. Georgia K.C. Executive Coach, Inc. Missouri d/b/a Kansas City Executive Coach KCI Shuttle, Inc. Missouri K-T Contract Services, Inc. Texas d/b/a Jetlink Kansas City Ground Transportation, Inc. Missouri Keeshin Charter Service, Inc. Illinois Keeshin Destination Chicago, Inc. Illinois Keeshin Transportation, LP Delaware Kerrville Bus Company, Inc. Texas d/b/a Fort Worth Charters, Inc. Coach USA, Inc. Subsidiaries - (Continued) NAME OF SUBSIDIARY: STATE OF INCORPORATION: ------------------- ----------------------- d/b/a Gray Line of Albuquerque d/b/a Gray Line of Dallas/Ft. Worth d/b/a Gray Line of Lafayette d/b/a Gray Line of San Antonio d/b/a Vaught Charters, Inc. L.E.R. Transportation Company New Jersey LND, Inc. Florida Le Bus, Inc. Florida Leisure Time Tours New Jersey d/b/a Leisure Line d/b/a Leisure Time Tours of N.J. Lenzner Tours, Inc. Pennsylvania Lenzner Tours, Ltd. Pennsylvania d/b/a Lenzner Tour & Travel d/b/a Lenzner Coach Lines Lenzner Transit, Inc. Pennsylvania Lenzner Transportation Group, Inc. Nevada Locust Partners, LLC Missouri MTSI, Inc. Missouri Metro Cab, Inc. Florida Metro Cars, Inc. Michigan Metro Cars Management Corp. Michigan Metro Diversified Insurance Group, Inc. Florida Metro Jitney Incorporated Florida Metro Limo, Inc. Florida Metro Medical Transportation Services, Inc. Florida d/b/a HealthTrans of South Florida Metro Mini-Bus, Inc. Florida Metro Taxi, Inc. Colorado Metro Taxi, Inc. Florida Metro Taxicab Co., Inc. Florida Metro Transport, LLC Missouri Metro Transportation Services, Inc. Florida Midstate Coach Lines, Inc. New York Midtown Bus Terminal of New York, Inc. New York Mister Sparkle, Inc. New Jersey Nevada Corporation, Inc. Nevada New Delaware Coach, Inc. Delaware Niagara Scenic Bus Lines, Inc. New York OSP, Inc. Illinois P&S Transportation, Inc. Florida d/b/a Laser Bus Lines 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 Pawtuxet Valley Bus Lines, Inc. Rhode Island d/b/a Newport Foxwood Tours Pennsylvania Transportation Systems, Inc. Delaware Pittsburgh Transportation Charter Services, Inc. Delaware Pittsburgh Transportation Company Pennsylvania Powder River Transporation Services, Inc. Wyoming d/b/a Pixley Transportation Progressive Transportation Services, Inc. New York R&T Leasing, Inc. New Jersey Red & Tan Charter, Inc. New Jersey Red & Tan Enterprises, Inc. New Jersey Red & Tan of Boca, Inc. Florida Red & Tan Tours, Inc. New Jersey Coach USA, Inc. Subsidiaries - (Continued) NAME OF SUBSIDIARY: STATE OF INCORPORATION: ------------------- ----------------------- 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 River Market Conoco, Inc. Missouri d/b/a River Market Conoco and Food Store RJR Development Company Texas Rockland Coaches, Inc. New Jersey Rockland Transit Corporation New York S.E.M. Incorporated Florida Shuttle Services MIA, Inc. Florida Southfield Cab Company Michigan Southfield Red & White, Inc. Michigan 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 Syracuse & Oswego Coach Lines, Inc. New York TFC Investments, LLC Kansas Terminal Cab, Inc. Missouri Texas Bus Lines, Inc. Texas d/b/a Airport Express Texas Shuttle, Inc. Texas The Arrow Line, Inc. Connecticut The B.T.D. Realty Corporation Connecticut The Hudson Bus Transportation Co., Inc. New Jersey The Mapleridge Group, Inc. Michigan Total Vehicle Services, Inc. Florida TranServ, Inc. Michigan d/b/a Detroit Limousine d/b/a TranSedan d/b/a TranServ Executive Services Trans-Hudson Express, Inc. New Jersey Transportation Contractors, Inc. Florida Transportation Equipment of Pensacola, Inc. Florida Transportation Management, Inc. Florida Transportation Management Services, Inc. Pennsylvania d/b/a Gray Line of Pittsburgh d/b/a Lenzner Coach Lines d/b/a North Boroughs Cab Trentway-Wagar, Inc. Ontario, Canada Trentway-Wagar (Leasing), Inc. Ontario, Canada Trentway-Wagar (Properties), Inc. Ontario, Canada TryKap Airport Services, Inc. Florida TryKap Transportation Management, Inc. Florida d/b/a TryKap Management, Inc. d/b/a World Transportation, Inc. Tucker Taxi, Inc. Florida Tucker Transportation Company, Inc. Florida Tyburn Limited Delaware d/b/a Yellow Airport Express Utica Rome Bus Company, Inc. New York Van Nortwick Bros., Inc. New Jersey d/b/a Van Nortwick Bros. d/b/a Van Nortwick Tours Vertical Market Software, Inc. Washington West Florida Mobility, Inc. Florida Coach USA, Inc. Subsidiaries - (Continued) NAME OF SUBSIDIARY: STATE OF INCORPORATION: ------------------ ---------------------- Worthen Van Service, Inc. Wyoming Yellow Cab Company of Houston, Inc. Texas Yellow Cab Company of Pittsburgh Pennsylvania Yellow Cab of Pensacola, Inc. Florida Yellow Cab Service Corporation Delaware Zone Taxicab of Colorado Springs, Inc. Colorado EX-23 5 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Annual Report on Form 10-K, into the Company's previously filed registration statements on Form S-3 (File No. 333-27575), on Form S-3 (File No. 333-33215) on Form S-4 (File No. 333-33755), Form S-8 (File No. 333-30155) and on Form S-8 (File No. 333-30157). ARTHUR ANDERSEN LLP Houston, Texas March 23, 1998 EX-27 6
5 THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL REPORT ON FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1997 DEC-31-1997 3,648 0 47,009 3,663 22,490 97,841 492,905 97,105 665,870 103,152 373,064 0 0 218 160,337 665,870 542,790 542,790 398,945 398,945 66,344 0 23,106 54,395 22,058 32,337 0 (929) 0 31,408 1.46 1.42
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