-----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, HAgQz7tibDC+mBV51vZYiy5zqNyCpTaW8/dDbio1EkRHndQqemQdBADOARYNsbdq w6qPrN1dnF6C4zTUtYhV/Q== 0000890566-99-000327.txt : 19990322 0000890566-99-000327.hdr.sgml : 19990322 ACCESSION NUMBER: 0000890566-99-000327 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 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: 99568411 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, 1998 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 500 HOUSTON, TEXAS 77056-1921 (713) 888-0104 (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 17, 1999, the aggregate market value of the 23,685,765 shares of the registrant's common stock held by non-affiliates of the registrant was $615,829,890 based on the $26.00 last sale price of the registrant's common stock on the New York Stock Exchange on that date. As of March 17, 1999, 25,426,940 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, 1998. 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. [ ] ================================================================================ TABLE OF CONTENTS Item 1. Business............................................................1 Industry Overview.........................................................1 Services Provided.........................................................2 Motorcoach Services....................................................2 Taxicab Services.......................................................4 Business Strategy.........................................................4 Acquisitions..............................................................5 Operations................................................................6 Maintenance...............................................................7 Sales and Marketing.......................................................7 Competition...............................................................9 Regulation................................................................9 Environmental Matters....................................................11 Trademarks...............................................................11 Drivers and Other Personnel..............................................11 Risk Management..........................................................12 Item 2. Properties.........................................................13 Item 3. Legal Proceedings..................................................14 Item 4. Submission of Matters to a Vote of Security Holders................14 Item 5. Market for Our Common Equity and Related Stockholder Matters.......15 Item 6. Selected Financial Data............................................16 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................18 Item 7A. Quantitative and Qualitative Disclosure About Market Risk.........28 Item 8. Financial Statements and Supplementary Data........................29 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........................................59 Items 10 to 13 inclusive....................................................59 Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.........................................................60 i PART I ITEM 1. BUSINESS GENERAL Coach USA, Inc. is the largest provider of motorcoach charter, tour and sightseeing services and one of the largest non-municipal providers of commuter and transit motorcoach services in the United States. We also provide airport ground transportation, paratransit, taxicab and other related passenger ground transportation services. We conduct operations throughout the United States and Canada with operating locations in over 120 cities. We operate approximately 9,500 motorcoaches, taxicabs and other high occupancy vehicles which transported passengers across more than 250 million miles in 1998. We believe that we have one of the most modern motorcoach fleets in the industry, with 50% of our fleet being less than five years old. Our taxicab services include dispatching and related services to a fleet of approximately 3,300 vehicles, which are either owned by or leased to independent contractor drivers. The Company was founded in September 1995 to create a nationwide provider of motorcoach and other ground transportation services. From the initial public offering in May 1996 through the end of 1997, we acquired over 45 motorcoach and taxicab businesses. During 1998, we acquired over 25 motorcoach and taxicab businesses. Our strategy is to continue to (1) enhance our position in our current markets with new or expanded services, (2) develop new operations in new markets, (3) pursue additional strategic acquisitions, (4) capitalize on synergies and economies of scale available to us, and (5) add additional initiatives to support further internal growth. As used in this Form 10-K, the terms "Coach," "Company," "we" and "our" refer to Coach USA, Inc. and its subsidiaries unless the context indicates otherwise. This Form 10-K may contain forward-looking statements. With respect to such statements, you should refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Disclosure Regarding Forward-Looking Statements" which identifies important factors that could cause actual results to differ materially from those in forward-looking statements. INDUSTRY OVERVIEW The motorcoach industry is highly fragmented with approximately 5,000 motorcoach operators. Management believes that these companies collectively generated in excess of $20 billion in revenues in 1998. Management also believes that the airport ground transportation, taxicab and paratransit services industries are similarly fragmented and collectively generated more than $5 billion in revenues in 1998. The motorcoach industry in the United States can be broadly divided into three types of services: (1) recreation and excursion (charter, tour and sightseeing); (2) commuter and transit (including outsourcing and privatization contracts); and (3) regularly scheduled intercity service. We operate extensively in the first two categories, and to a lesser degree in the third category. We believe that there will be increasing demand for our services for a broad range of customers based on a number of factors, including: o GROWTH IN THE TRAVEL AND TOURISM INDUSTRY. Travel and tourism is one of the faster growing industries in the United States as resident travel within the United States continues to increase. Nationwide charter users include large organizations such as AAA and AARP, and convention organizers. As the 1 population of the United States continues to age, we believe more people will find motorcoach touring an attractive, low cost alternative to travel by automobile. In addition, motorcoach travel continues to be a popular way for foreign tourists to travel in the United States. o CONTINUED PRIVATIZATION. We believe state and local governments will continue 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. We believe that the movement toward privatization will result primarily from decreases in federal funds available to subsidize operations and increases in the capital cost of acquiring equipment. o CONTINUED OUTSOURCING. Many hotels, casinos, rental car companies, colleges and other institutions operate large motorcoach fleets and other high occupancy vehicles to service their employees, clients, guests, students and other customers. We believe these entities will continue to look for opportunities to outsource these non-core activities as a means to better manage their capital and operating resources and to improve their profits. o INCREASING TRAFFIC CONGESTION IN METROPOLITAN AREAS. Traffic congestion is increasing in cities across the country. This trend should increase our opportunities to provide motorcoach commuter and transit services. We believe that the fuel efficiency, the flexibility and the 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. o INCREASING TRAFFIC CONGESTION AT AIRPORTS. Increased traffic congestion and a shortage of convenient parking are problems at many airports around the country. The congestion is due in part to an absence of a coordinated effort to provide seamless transportation between planes and motorcoaches or other modes of ground transportation, causing many passengers to continue to use private automobiles for local or regional travel to and from airports. We believe that motorcoaches, vans and other high occupancy vehicles as well as taxicabs can alleviate a portion of this congestion and address the shortage of convenient parking at many airports. o CONTINUED USE OF TAXICABS. Travelers continue to rely on taxicabs as a means of transportation upon arrival at airports and in moving about at their final destinations. By using taxis, travelers can avoid incurring the additional costs of renting and parking a car. Additionally, local commuters continue to use taxicabs as a means of transportation because they do not own a car or they wish to avoid driving in congested areas. SERVICES PROVIDED MOTORCOACH SERVICES RECREATION AND EXCURSION o CHARTER AND TOUR SERVICES. Charter services are provided on a fixed daily rate, based on mileage and hours of operation. We offer both daily and long-term charter and tour arrangements (as long as 30 days) with various levels of luxury and price. We have arrangements with tour agencies to provide various levels of service and equipment for agent-sponsored and organized tours. Under these arrangements, we contract with tour agencies to provide the motorcoach and driver at a fixed daily rate. To increase equipment utilization, we also regularly offer shorter charter service to various social groups or other 2 organizers for transportation to events or specific destinations. In some instances, we organize our own tours and market them on a per passenger basis. o SIGHTSEEING. We provide per seat sightseeing services on a scheduled basis at an advertised or published price. Customers can make reservations for the tours or simply board on an "open-door" basis at scheduled locations. Payment is made by the customer, or through a travel agent or a hotel on a per seat basis. We use a network of hotel lobby ticket counters, hotel concierges and travel agents to sell our sightseeing tours. o AIRPORT SERVICE. We pick up passengers at airports in various cities and transport them to and from their hotel, casino, cruise ship or convention site. We use motorcoaches and other high occupancy vehicles to provide passenger ground transportation services to, from and between airports in certain cities in which we have operations. These services are provided on either a fixed schedule or on a demand basis. Customers can arrange for services through computerized reservations systems or through ticket purchases at a service desk at the airport. o SPECIALIZED DESTINATION ROUTE SERVICES. We provide specialized destination route services, including daily scheduled service to casinos in various gaming states including Connecticut, New Jersey, Louisiana, Nevada, Colorado and Mississippi. Luxury motorcoaches pick passengers up at specified locations. Customers are taken on an "open-door" basis or by reservation. Tickets are sold on a per seat basis through agents and at specified locations. COMMUTER AND TRANSIT SERVICES o COMMUTER SERVICES. In most of our commuter services, we service fixed routes on a daily basis. Most of these routes are owned (as a result of federal or state regular route authority) by one of our individual operating subsidiaries. Many of our motorcoaches that are dedicated to commuter service are owned by a state or municipal transit authority and provided to us at nominal rent or given by such authority to us to service a particular route. In all cases, we employ the drivers and operations personnel and we are responsible for maintenance of the equipment. We are paid through individual ticket purchases or through a fare box. Contracts with transit authorities for commuter service typically have one to three year terms and are periodically reviewed for rate and fare increases. Commuter service is provided daily. o OUTSOURCING CONTRACTS. We have agreements with various corporations, institutions and government entities to provide motorcoaches, drivers and equipment for their employees and customers. We believe that these entities look for opportunities to outsource non-core activities as a means to better manage their capital and operating revenues and improve their profits. o PRIVATIZATION TRANSIT CONTRACTS. In privatization transit contracts, we contract with a transit authority to service fixed routes on a daily basis. The route schedules are established by the transit authority. We operate dedicated equipment owned by us or by the transit authority. In each instance, we employ the drivers and operations personnel, and we are responsible for equipment maintenance. We are paid a fixed amount from the municipality based on number of miles or hours operated. Contracts for this service range in length from three to five years and are periodically reviewed for rate increases. o REGIONAL LINE RUNS. We perform motorcoach transportation services in certain limited regional areas of the country on a daily basis. The route schedules are established in advance to provide seamless ground transportation services to customers. We are generally paid for these services through individual tickets which are either presold or are purchased on the date we render service. 3 o PARATRANSIT SERVICES. We contract with agencies of various counties that are responsible for coordinating the non-emergency transportation of medical aid patients. Following receipt of patient reservation schedules, we provide the scheduled services, usually through the use of independent contractor drivers, and invoice the county organization for the services provided. These contracts are generally on a multi-year basis and require that we meet certain performance standards. TAXICAB SERVICES Our taxicab revenues are derived primarily from services provided to independent contractors that own or lease and operate vehicles under one of our trade names. The independent contractor drivers pay to us a weekly or daily fee for dispatching and use of the vehicle equipment, use of operating rights, charge account, contractual liability indemnity 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. In addition to the daily or weekly fee paid to us by the drivers for dispatching and other support services, we derive revenues through vehicle sales and financing services to drivers, maintenance, parts and labor provided to drivers and vehicle mini-billboard advertising. o RADIO DISPATCHED SERVICES. Radio dispatched services are provided primarily on a call-in basis. When a customer makes a request for service, the closest available vehicle is notified through our computer dispatching system. The driver of the identified vehicle accepts the trip and picks up the customer. o AIRPORT SERVICES. We provide taxicab services to passengers going to and coming from airports in certain municipalities. Most services are provided on a demand basis as passengers exit the airport and summon a taxicab at the airport cab station. Services for passengers traveling to the airport are provided through advance reservations. BUSINESS STRATEGY Our objectives are to expand and enhance our position as the leading provider of motorcoach, airport ground transportation and taxicab services in the United States. We plan to achieve these goals by: o ACCELERATING INTERNAL GROWTH. We believe internal growth can be accelerated by: - COORDINATING SALES AND MARKETING PROGRAMS. We have begun to establish a focused effort to coordinate, when appropriate, sales and marketing programs among our subsidiaries as a means to expand our recreational and excursion business. In order to expand services to larger users of their services, our 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. We are building a coordinated national and regional marketing structure to support and complement local marketing activities. - DEVELOPING PRIVATIZATION AND OUTSOURCING. We believe that the trend toward privatization and outsourcing will continue, as more transit authorities, colleges and other institutions, and businesses such as hotels, casinos, and rental car agencies that operate their own fleets decide to privatize or outsource non-core operations. During 1998, we added several new long-term contracts as municipalities privatized transit activities and corporations and other organizations outsourced non-core transportation operations. Examples of some of the new contracts in 1998 include employee shuttles for mining operations in Elko, Nevada, an employee shuttle at Newark airport, a transportation contract with the New York State Department of Corrections, and airport customer shuttles for three rental car companies in Providence, Rhode Island. In late 1998, we executed a 4 contract to manage express bus service to residents of San Juan, Puerto Rico. In addition, several contracts already in place were expanded, such as the Los Angeles Department of Transportation contract to perform transit work in Los Angeles. In many cases, we are able to leverage off of existing facilities to service contracts, increasing our ability to be both competitive and profitable. - OFFERING A FULL RANGE OF SERVICES IN EACH MARKET. We intend to accelerate growth in each of the markets by adding complementary services, as appropriate, including motorcoach charter, tour and sightseeing, commuter and transit, airport ground transportation, paratransit and taxicab services. Many of the companies we acquire do not offer all of such services, and we believe they will benefit from the expertise of affiliated operations. - PURSUING ADVERTISING OPPORTUNITIES. In 1998, we entered into an agreement with Transportation Display Incorporated, or TDI, a subsidiary of Infinity Broadcasting, under which TDI obtains advertising clients, creates advertising materials and installs advertisements on our vehicles, and we receive a percentage of net advertising revenues. We intend to continue to pursue this and other advertising opportunities in the future. o EXPANDING THROUGH ACQUISITIONS. We intend to continue to pursue strategic acquisitions by: - ENTERING NEW GEOGRAPHIC MARKETS. We intend to expand into geographic markets we do not currently serve by acquiring well-established motorcoach and other passenger ground transportation service providers that are leaders in their regional markets. - EXPANDING EXISTING MARKETS. We plan to acquire additional motorcoach and other passenger ground transportation service providers in many of the markets in which we already operate, including acquisitions that either broaden the range of services we provide in that market or that expand the geographic scope of our operations in that market. We also plan to complete tuck-in acquisitions of smaller operations, which we believe will increase operating efficiencies without a proportionate increase in administrative costs and, in some instances, will broaden our range of services. o CAPITALIZING ON ECONOMIES OF SCALE. We intend to continue to capitalize on economies of scale by: - CENTRALIZING ADMINISTRATIVE FUNCTIONS. We believe that we will continue to have greater purchasing power, resulting in cost savings in areas such as equipment and parts, tires, insurance and financing. We have begun to realize cost savings through the consolidation of administrative functions such as accounting, safety and maintenance programs and risk management. - INCREASING OPERATING EFFICIENCIES. We have begun coordinating among the various operating subsidiaries to consolidate certain operations, eliminate redundant facilities and redeploy equipment. Examples of the operations we have consolidated include Houston, Philadelphia, Orlando and Las Vegas. We believe that there will continue to be opportunities to eliminate redundant facilities and redeploy equipment. Additionally, we expect to continue to benefit from increased equipment utilization among the various operating locations. ACQUISITIONS Between the initial public offering in May 1996 and the end of 1997, we acquired over 45 motorcoach and taxicab businesses. During 1998, we acquired over 25 motorcoach and taxicab businesses. The major acquisitions in 1998 included the Short Line group of companies (including Gray Line New 5 York Tours), Wisconsin Coach Lines, Inc., Olympia Trails Bus Company, Inc., Orange, Newark, Elizabeth Bus, Inc., and Blue Bird Coach Lines, Inc. We believe 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, the industry participants' need for capital and their owners' desire for liquidity. We will continue a strategic acquisition program to consolidate and enhance our position in our current markets and to acquire operations in new markets. We believe that we can continue to successfully implement our acquisition program due to: o our 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; o the additional capital available for new equipment; o the potential for increased profitability as a result of our centralization of certain administrative functions, greater purchasing power and economies of scale; o our financial strength and visibility as a public company; and o our decentralized management strategy, which can in many cases enable an acquired company's management to remain involved in the operation of the company. OPERATIONS The majority of our daily operations continue to be handled at the local subsidiary level. We will continue to maintain a decentralized operating structure with many support services delivered on a centralized basis. 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 and national basis. At the direction of management, the operating subsidiaries coordinate and implement consolidation opportunities and other strategies to maximize equipment and facility utilization. Most of our locations have an operations center staffed by customer service personnel, fleet managers and dispatchers. All of our commuter and transit services and our sightseeing and specialized destination route services are operated with dedicated fleets of motorcoaches and drivers. Most fleets include back-up vehicles in case of equipment breakdown or higher passenger volume. When necessary, dispatchers can communicate necessary modifications in schedules to meet customer demand and increase utilization. Computerized dispatch services are an integral part of the daily support services provided to the independent contractor drivers in the taxicab business. Operations personnel schedule individual motorcoaches for recreation and excursion services as charter business is obtained. In many instances, we receive bookings for tours and charters well in advance which enables us to predict periods during which equipment utilization is likely to be low. When this occurs, we more actively solicit charter business in an effort to maintain equipment utilization or schedule alternative uses for our equipment, particularly during the winter months when tourism declines. We centralize certain administrative support activities, including information systems, employee benefits, risk management, insurance, finance and legal. We believe that by removing 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. 6 Our operations are concentrated around the population centers across the United States and Canada, with particular concentrations of operations in the New York City and New Jersey metropolitan area. We initiated and deployed several improvements in technology in 1998 including a wide area computer network to link all operating subsidiaries. The computer network incorporates an intranet e-mail and other communication functions. We believe the speed and efficiency with which employees can coordinate activities will aid productivity. In addition, in 1998 we deployed a Company-wide financial management application to better serve management with timely financial information. MAINTENANCE Each of our motorcoach operating locations has a comprehensive preventive maintenance program for its equipment to minimize equipment downtime and prolong equipment life. This program includes (1) regular safety checks when a motorcoach returns to the terminal, (2) regular oil and filter changes, (3) lubrication, cooling system checks and wheel alignment on average every 6,000 to 12,000 miles, and (4) more extensive maintenance procedures at greater intervals. Generally, interiors of motorcoaches are cleaned and exteriors are washed on a daily basis. Repairs and maintenance are primarily performed at our various maintenance facilities. Most maintenance provided by outside facilities results from on-the-road breakdowns or involves major engine overhauls. To the extent economically and logistically practicable, we spread maintenance responsibilities and personnel among the operating locations. We expect this to decrease the percentage of maintenance costs incurred at outside shops and decrease total maintenance costs. We have begun to consolidate certain facilities which will enable us to eliminate redundant maintenance facilities where appropriate. We continue to replace older motorcoaches with newer equipment. In many instances replacement reduces maintenance costs because late model motorcoaches are more reliable and have better engine and power train warranties. When cost effective to do so, we relocate older motorcoaches to markets where they can be utilized. We intend to purchase most of our motorcoaches with standard component specifications, particularly engines and drive-trains, to reduce the complexity of maintenance and spare parts management. We have entered into leasing agreements for tires and other national contracts for supplies and materials on terms more favorable and consistent than previously available to the acquired companies individually. In late 1998, we acquired a maintenance and inventory purchasing system designed to add efficiency and decrease parts and supplies inventory. We plan to begin implementation of the system at all operating locations in 1999. SALES AND MARKETING REACHING CUSTOMERS We have a broad customer base. No single customer accounted for more than 2% of our revenues in 1998. Management at our 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 operating locations also have a sales staff that focuses primarily on obtaining specific charter and tour business. We believe opportunities exist to complement the existing local sales and marketing efforts with national programs. A vice president of marketing and sales was hired at the end of 1998 to build a 7 coordinated national and regional marketing organization structure, support the local marketing activities, develop national programs, and develop brands for the various services we offer. We are focusing more attention on our many customer groups. We are conducting market research to better understand current and future needs of both passengers and intermediaries. Customer satisfaction programs are in pilot testing to measure the strength of our services and identify areas for improvement. We are building a national customer database to leverage our existing relationships in one geographic market to extend to other markets. We believe that we will be able to offer consistent, dependable, quality service in various metropolitan areas in the United States, and our customers will prefer to use Coach services throughout the country rather than dealing with numerous small motorcoach operators. MARKETING OUR SERVICES The principal means of marketing charter and tour services has been in travel directories, yellow pages and through direct mail or personal contact with customers included in each operating location's databases. We use ticket counters in hotel lobbies and concierges to market and promote sightseeing services. Typical customers include civic groups, schools, domestic and foreign tour organizers, destination management companies, meeting planners and travel agencies. Our specialized destination route services to casinos are promoted primarily by individual casinos. These casinos either pay us for the transportation or provide incentives to passengers we transport to the casino. In some instances, the casinos actively advertise these promotions in various media, such as newspapers, television and billboards. We provide motorcoach services in many of the top casino markets such as Connecticut, New Jersey, Louisiana, Nevada, Colorado and Mississippi. Our taxicab service operations utilize the yellow pages, billboards and signs on the taxicabs as the primary means of marketing services. The airport ground transportation services provided through high occupancy vehicles are sold on a per seat basis through agents at the airports and hotel pick up locations. We intend to develop a strong brand identity for our airport services in multiple locations and cross promote with the other transportation services we offer both locally and nationally. 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 we are the existing provider, the county or municipality may elect to renegotiate our existing contract instead of putting the contract out for rebid. We believe 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 company image, financial stability, personnel policies and practices and total cost to the municipality and the public are also considered. THIRD-PARTY ADVERTISING We also make our vehicles available for advertising efforts by third parties. Acting like moving billboards, the wrapping of a large motorcoach makes an impressive ad for products of all kinds. We have taken a leadership role by becoming the first national charter company to offer vehicle advertising across the country. Several national companies have advertised on our motorcoaches. Our other vehicles, including taxis and shuttle vans, are good candidates for advertising. 8 INTERNET ADVERTISING We will continue to develop our corporate internet website and to build on the websites established by many of our acquired businesses. Early results indicate many customers want to do business with us over the internet, and we are improving our technical capabilities to facilitate more customer interactions. COMPETITION The portions of the motorcoach and ground transportation industry in which we operate are highly competitive, fragmented and served by numerous operators, most of which serve only a single area or region. Our competitors include (1) other operators of motorcoaches and other high occupancy and taxicab vehicles, (2) rental car companies and, (3) to a more limited extent, airlines, Amtrak and commuter rail service providers, and companies involved in intercity runs including Greyhound. Some of our 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 we do in specific regions. The majority of our motorcoach competitors consist of small regional operators which have strong presences in their respective markets. We believe that as we continue to expand geographically, we may compete with additional national, regional and local transportation service providers. We believe 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. We believe that our ownership of certain route authorizations provides us with a competitive advantage in certain markets because of the relative difficulty of obtaining these authorizations. We compete for acquisition candidates. We believe that our decentralized management philosophy and operating strategies make us an attractive acquiror to other motorcoach and ground transportation companies. However, we cannot guarantee that our acquisition program will continue to be successful or that we will be able to compete effectively in our chosen markets. REGULATION The United States Secretary of Transportation and three agencies within the United States Department of Transportation (the Surface Transportation Board, the Federal Highway Administration, and the Federal Transit Administration) regulate, to a limited extent, our interstate motorcoach operations. The Federal Highway Administration, or FHWA, requires our interstate motorcoach operators to register with that agency, to maintain minimum amounts of insurance and to operate in conformity with safety regulations. One or more of the regulatory bodies listed above requires our interstate motorcoach operators to adhere to driver qualification guidelines, to provide transportation service on reasonable request and to provide safe and adequate service and vehicles; however, none of the regulatory bodies regulates our interstate motorcoach fares, nor do they require our interstate motorcoach operators to file tariffs. The Surface Transportation Board, or STB, and the FHWA can impose civil penalties upon us for violations of applicable regulatory requirements; the FHWA may suspend, amend or revoke our motorcoach operator's registration for our operator's substantial failure to comply with applicable regulations; and the Federal Transit Administration, or FTA, can discontinue funding for some of our services if funding conditions are not met. We believe that we have conducted our operations in substantial compliance with applicable regulations, and we do not believe that ongoing compliance with such regulations will require us to make substantial capital expenditures. 9 Federal regulatory authority preempts state and local governments from regulating the scheduling or rates of interstate or intrastate transportation provided by motorcoach operators on interstate routes. State and local regulation of interstate and intrastate charter bus transportation is also preempted. Federal preemption does not apply to commuter service or to the regulation by states of motorcoach safety, insurance, or highway route controls on vehicle size or weight. Certain states in which we operate, to the extent not preempted by federal law, still maintain strong regulatory control over safety, equipment and wholly intrastate routes. We derive a benefit where our operations have been granted authority (sometimes exclusive authority) to provide commuter service and scheduled intrastate service. Any benefit we currently derive from owning these authorities could be lost if there is any reduction in the regulatory controls of these states. Our motorcoach operating subsidiaries are currently subject to the United States Department of Transportation 1991 interim rules implementing the Americans with Disabilities Act. These rules apply to motorcoach operators providing services in so-called "over-the-road" buses, the type operated by our motorcoach operators providing scheduled and charter services. These rules generally require motorcoach operators to assist individuals with disabilities in boarding and disembarking and to train their personnel to provide this assistance. On September 28, 1998, the Department of Transportation issued more extensive rules for implementing the Americans with Disabilities Act by motorcoach operators operating "over-the-road" buses. The new rules will impose a variety of service obligations on motorcoach operators, including an obligation that becomes effective on October 30, 2001, to provide lift-equipped buses that meet all prescribed accessibility requirements for charter services on 48 hours advance request by a disabled passenger. The new rules will require in part that all "over-the-road" buses delivered on or after October 30, 2000, that are used for scheduled fixed route services be equipped with lifts and meet other design requirements so that they are more readily accessible to persons with disabilities. By October 29, 2012, all buses used by a motorcoach operator to provide scheduled fixed route services will need to meet these accessibility requirements. We have accessible buses and lift equipment in our current fleet of vehicles. To the extent accessible bus purchases are required for compliance with the new rules, we may incur increased capital expenditures for our operating subsidiaries that have extensive scheduled operations. However, presently we do not operate extensive scheduled fixed route services and the additional cost of an accessible equipped motorcoach is small compared to the overall purchase price of a motorcoach. The STB must approve or exempt any transaction in which a person that is not a regulated motorcoach operator, such as Coach, acquires control of two or more federally regulated interstate motorcoach operators. Since 1996, we have filed twenty-two requests with the STB seeking exemption or approval of transactions in which we would acquire control of federally-regulated motorcoach operators. The STB has exempted or approved each petition we have filed through August 1998 to control federally-regulated motorcoach operators. We currently have one acquisition awaiting the STB's final approval; however, we can not be assured we will obtain the STB's approval or exemption for control of this or any other acquisition of a federally-regulated motorcoach operator. The STB's actions serve to preempt the need to obtain the approval of any state for these control transactions. The approval or exemption received from the STB also exempts those motorcoach control transactions that might otherwise require prior federal antitrust review from requirements under the Hart-Scott-Rodino Antitrust Improvements Act. Our taxicab service operations are regulated at the state and/or 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 or stipulated fares that can be charged to passengers. These regulations 10 may limit our ability to expand the size of our taxicab fleet or prevent fares from increasing in response to rising operating costs. ENVIRONMENTAL MATTERS Maintenance facilities comprise some portion of the properties our operating companies lease and/or own. Operations in these maintenance facilities are subject to various federal, state and local environmental laws, including but not limited to the Water Pollution Control Act, the Clean Air Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, the Emergency Planning and Community Right-to-Know Act, and various state and local laws. Our operating facilities must comply with environmental reporting requirements and with environmental compliance requirements. The laws and the reporting and compliance requirements govern our vehicle emissions, our underground and aboveground fuel tanks and our storage, use and disposal of hazardous materials, including petroleum products, caused by our in-house maintenance and bus washing operations. Our operating companies may, at times, spill or accidentally release hazardous materials into the environment. We make expenditures to clean up environmental contamination, including releases and spills of petroleum products. In many instances, the former stockholders of companies we acquired are responsible for environmental contamination caused prior to our purchase of their companies. We have made and intend to make necessary expenditures to comply with applicable environmental reporting and compliance requirements as well as to comply generally with environmental laws. Such laws from time to time may require us to incur expenditures for pollution control devices, or to upgrade, remove or retrofit equipment used in our operations. We have also begun to implement an environmental compliance program at our facilities in an effort to prevent or reduce releases of hazardous materials. TRADEMARKS We own several trademarks. The rights in the COACH USA trademark with the "flying C" logo have been continuously in effect since at least as early as May 14, 1996. This trademark is also registered in the U.S. Patent and Trademark Office and is pending registration in the Canadian Trademark Office. The rights in the EXPRESS SHUTTLE USA trademark and logo have been continuously in effect since at least as early as December 22, 1997. An application to register this mark is pending in the U.S. Patent and Trademark Office. Our trademarks are important to our developing national brand name recognition for COACH USA and EXPRESS SHUTTLE USA. DRIVERS AND OTHER PERSONNEL As of December 31, 1998, we had approximately 12,450 employees. Of this total, approximately 8,000 were motorcoach drivers and approximately 1,550 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 8,450 are full-time employees. A majority of our motorcoach drivers are our employees, with the remainder provided pursuant to leasing arrangements. Our taxicab and paratransit services are primarily provided through independent contractor drivers that are not our employees. We have 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 our 11 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 Federal Highway Administration. Drivers are also subjected to drug and alcohol testing requirements imposed by the Federal Highway Administration, including random, reasonable suspicion and post-accident testing. Driver applicants are required to have significant driving experience and to pass medical examinations. Taxicab drivers are subject to laws and regulations governing driving records, appearance and presentation, which are monitored by local municipalities. As of December 31, 1998, several different unions, each through various local affiliations, represented approximately 3,600 of our employees, approximately 3,200 of whom were motorcoach drivers. We are 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 we believe that relationships with union representatives and union employees are satisfactory. RISK MANAGEMENT SAFETY We are dedicated to safe operations. We vigorously adhere to the FHWA and comparable state motor carrier safety rules, including rules concerning safe motor vehicle equipment, driver qualifications and safe operation of vehicles. We also maintain drug and alcohol testing programs for our motorcoach drivers in conformance with the FHWA and comparable state reporting requirements. We internally employ safety specialists at the corporate, regional and operating company levels to carry out our comprehensive safety programs throughout the organization. The internal safety specialists continually perform compliance inspections and conduct safety audits throughout our operations. We also employ external safety consultants to assist in the development of our safety policies and programs. We conduct a number of proactive accident prevention programs designed to promote compliance with the United States Department of Transportation and the FHWA rules and regulations and to reduce accidents and injuries. These programs include comprehensive driver training programs, incentive programs for accident-free driving, driver safety meetings, distribution of safety bulletins to drivers, placement of field spotters and riders on motorcoaches to assess driver performance and participation in national safety associations. We also employ professional investigative services to thoroughly investigate accidents and incidents and take appropriate steps to reduce the risk of repeat accidents and incidents. INSURANCE The primary risks in our operations are bodily injury and property damage to third parties and workers' compensation. We maintain a broad range of insurance coverage against these and other risks including general liability, automobile liability, automobile physical damage, comprehensive property damage, workers' compensation, employer's liability, directors and officers liability and other coverage customary in the industry. We maintain primary liability limits in excess of the United States Department of Transportation requirements. We are subject to per incident deductibles ranging from $5,000 to $250,000, with a majority of our claims being made against our motorcoach operations, where our per incident deductible is $100,000. Any claim within the per incident deductibles would be our financial obligation. We also maintain excess insurance limits in amounts which we consider sufficient to protect us against claims beyond the federally required limits. 12 ITEM 2. PROPERTIES FACILITIES As of December 31, 1998, we operated out of more than 150 facilities located throughout the United States and Canada. Some of these facilities have full operations which include administrative, dispatch, sales, maintenance and/or driver support services. Many facilities have limited operations which do not include complete maintenance services. We own 33 of the facilities on which motorcoach and high occupancy vehicle operations are located, and four of the facilities on which taxicab operations are located. The remaining facilities are leased, including some from related parties. We believe that our facilities are adequate for our current needs. We shall continue to assess utilization of the facilities and, when appropriate, shall combine functions and operations and/or relocate to more desirable locations. Our corporate headquarters are in Houston, Texas, where we employ approximately 50 people. We lease the offices that comprise our corporate headquarters in Houston, Texas. EQUIPMENT We operate approximately 4,500 motorcoaches and 1,700 other high occupancy vehicles. We either own our motorcoaches or lease them under long term leases pursuant to which we are responsible for all maintenance, insurance and upkeep. Out of the total motorcoaches we operate, approximately 375 motorcoaches are provided by various transit authorities for nominal rent, and we assume full responsibility for maintenance and repairs. The transit authorities provide these motorcoaches under contracts to perform transit and commuter services and we must return these motorcoaches to the transit authorities in the event the contracts for them are not renewed. Out of the total motorcoaches we operate, approximately 475 motorcoaches are provided by certain transit authorities to operate for the normal useful operating lives thereof. These motorcoaches must only be returned to such transit authorities if we surrender our routes for which such motorcoaches were provided, or at the end of the normal useful operating lives thereof. Our owned fleet of motorcoaches has an average age of six years. Most motorcoaches have a useful operating life in excess of 20 years. Although our replacement policy will depend on the use being made of the particular motorcoach, on average we expect to replace motorcoaches every 10 to 12 years. A majority of our current fleet of motorcoaches are from one manufacturer, Motorcoach Industries Incorporated, although other manufacturers are represented in our fleet. Most engines are manufactured by Detroit Diesel and most drive trains are manufactured by Allison Transmissions. This continuity of engine and drive train should enable us to implement a standardized, company-wide maintenance program and allow us to reduce our spare parts inventory. We lease most of our tires from Firestone, with the lease payments based on mileage driven on the tires. Our taxicab service operations provide dispatch and related services to a fleet of approximately 3,300 vehicles, which are either owned or leased by independent contractor drivers. We offer full service maintenance and repairs on the vehicles. 13 ITEM 3. LEGAL PROCEEDINGS LITIGATION One or more of our operations (or other operations acquired by us in the future) may become subject to litigation in connection with the competitive bidding process for a contract to provide transit, commuter or paratransit services on behalf of a transit authority. Unsuccessful bidders occasionally will challenge, through a regulatory appeals process or in court, the awarding of the contract and will often name the successful bidder as an additional defendant. The cost of defending such an action can be significant, and if the required competitive bidding procedures were not followed by the transit authority, the authority could be ordered to begin the process over or even award the contract to another bidder. From time to time, we are a party to routine litigation incidental to our business. The majority of the claims are for personal injury or property damage incurred in the transportation of our passengers. We are also a party to routine litigation regarding contracts and employment claims. We are not aware of any pending claims or threatened claims which, if adversely determined, might materially affect our operating results or financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 14 PART II ITEM 5. MARKET FOR OUR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock traded on the Nasdaq National Market System from May 14, 1996, the date of our initial public offering, until May 7, 1997. Since May 8, 1997, our common stock has traded on the New York Stock Exchange. The following table sets forth the high and low last sale prices for our common stock for the period from January 1, 1997 through March 17, 1999. HIGH LOW ------ ------- 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............................. 46 7/8 28 15/16 Second quarter............................ 48 3/16 42 3/8 Third quarter............................. 51 1/2 21 7/16 Fourth quarter............................ 34 7/8 15 1/16 1999 First quarter (through March 17, 1999).... 34 1/2 23 1/2 At March 17, 1999, we had approximately 214 stockholders of record. On March 17, 1999, the last reported sale price of our common stock on the New York Stock Exchange was $26.00 per share. DIVIDENDS We intend to retain all of our earnings, if any, to finance the expansion of our business and for general corporate purposes, including future acquisitions. We do not anticipate paying any cash dividends on our common stock for the foreseeable future. In addition, our credit facilities include, and any additional lines of credit established in the future may include, restrictions on our ability to pay dividends without our lenders' consent. SALES OF UNREGISTERED SECURITIES The following information relates to our securities issued or sold by us during the 1998 fiscal year which were not registered under the Securities Act of 1933, as amended: In connection with the acquisition of businesses completed in fiscal 1998, we issued approximately 331,000 shares of our common stock and delivered subordinated notes convertible into approximately 971,000 shares of our common stock to stockholders of the companies in transactions accounted for as purchases. Each transaction was effected without registration of the relevant securities 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. 15 ITEM 6. SELECTED FINANCIAL DATA COACH USA, INC. SELECTED FINANCIAL DATA We acquired, simultaneously with the closing of our initial public offering in May 1996, six founding companies. Through the end of 1998, we have completed in excess of 70 acquisitions, several of which were accounted for as poolings-of-interests (the "Pooled Companies") and the remainder of which were accounted for as purchases (the "Purchased Companies"). The HISTORICAL STATEMENT OF INCOME DATA below includes historical financial statement data for the six founding companies from May 31, 1996 at historical cost, the Company (including the Pooled Companies) for all periods presented, and the Purchased Companies since the dates of their respective acquisition. The PRO FORMA STATEMENT OF INCOME DATA INCLUDING COMPENSATION DIFFERENTIAL AND OTHER ADJUSTMENTS includes the historical data above and includes the six founding companies for all periods presented at historical cost. In addition, the pro forma data below gives effect to (1) certain reductions in salaries and benefits to the former owners of the six founding companies and the Pooled Companies which were agreed to in connection with the mergers of the six 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"); (2) certain tax adjustments related to the taxation of certain of the founding companies and Pooled Companies as S Corporations prior to the consummation of the mergers of the six founding companies and the acquisitions completed through 1997; (3) the tax impact of the Compensation Differential in each period; (4) for 1995 and 1996, the conversion of debt to equity at one of the Pooled Companies; and (5) 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, 1997, 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 and other subordinated notes issued, (iv) an adjustment in 1997 to record interest expense on the senior subordinated notes and amortization of deferred financing costs as if the notes had been outstanding for the entire year, (v) an adjustment to record the pro forma interest savings resulting from the secondary offering of Common Stock and the conversion of approximately $21.2 million of convertible subordinated notes in May 1998, as if those transactions had occurred on January 1, 1997, and (vi) income tax adjustments attributable to the above adjustments.
YEAR ENDED DECEMBER 31, ---------------------------------------------------------- 1994 1995 1996 1997 1998 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) HISTORICAL STATEMENT OF INCOME DATA: Total revenues .................... $ 175,643 $ 202,786 $ 325,717 $ 542,790 $ 803,563 Operating expenses ................ 133,992 150,578 244,854 398,945 582,917 Gross profit ...................... 41,651 52,208 80,863 143,845 220,646 General and administrative expenses (1) ................... 30,810 35,310 43,581 66,344 94,577 Operating income .................. 10,841 16,898 37,282 77,501 126,069 Income before extraordinary items . 2,457 4,197 14,140 32,337 54,389 Extraordinary items ............... -- -- 2,648 (929) (631) Net income ........................ 2,457 4,197 16,788 31,408 53,758 PRO FORMA STATEMENT OF INCOME DATA INCLUDING COMPENSATION DIFFERENTIAL AND OTHER ADJUSTMENTS: Total revenues .................... $ 282,397 $ 316,275 $ 370,781 $ 542,790 $ 803,563 Operating expenses ................ 221,839 241,103 281,924 398,945 582,917 Gross profit ...................... 60,558 75,172 88,857 143,845 220,646 General and administrative expenses (1) ................... 37,253 40,527 41,365 62,029 94,577 Operating income .................. 23,305 34,645 47,492 81,816 126,069 Income before extraordinary items . 7,961 13,494 20,461 35,682 54,389 BASIC EARNINGS PER SHARE: Income before extraordinary items per share ...................... $ 1.67 $ 2.25 Net income per share .............. 1.62 2.23 Weighted average shares (2) ....... 21,412 24,137
16
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 1994 1995 1996 1997 1998 -------- --------- -------- ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) DILUTED EARNINGS PER SHARE: Income before extraordinary items per share ...................... $ 1.61 $ 2.14 Net income per share .............. 1.57 2.12 Weighted average shares (2) ....... 22,954 26,250 PRO FORMA FOR PURCHASED COMPANIES: Total revenues .................... $ 843,207 $ 907,070 Operating expenses ................ 616,457 657,456 Gross profit ...................... 226,750 249,614 General and administrative expenses (1) ................... 112,386 111,755 Operating income .................. 114,364 137,859 Income before extraordinary items . 42,988 58,312 BALANCE SHEET DATA (AT END OF PERIOD): HISTORICAL: Working capital (deficit) ......... $ (15,328) $ (15,101) $(22,036) $ (5,311) $ (25,428) Total assets ...................... 132,244 159,351 366,040 665,870 1,179,243 Total debt, including current portion (3) .................... 89,395 106,052 176,478 373,064 624,308 Stockholders' equity .............. 2,876 6,489 114,270 160,555 351,042
- ------ (1) General and administrative expenses include amortization expense and merger related costs. (2) See Note 11 of the Notes to Consolidated Financial Statements for a reconciliation of weighted average shares outstanding for the years ended December 31, 1997 and 1998. (3) Includes $22.5 million, $52.3 million and $78.8 million of outstanding convertible subordinated notes as of December 31, 1996, 1997 and 1998, respectively, issued in connection with the acquisitions of the Purchased Companies. 17 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 The Company was founded in September 1995 to create a nationwide provider of motorcoach and other ground transportation services. Today, we are the leading provider of motorcoach, airport ground transportation and taxicab services in North America with operations in over 120 cities in over 30 states and Canada. From our initial public offering in May 1996 through the end of 1998, we completed over 70 acquisitions. Several of these acquisitions were accounted for as poolings-of-interests while the remainder were accounted for as purchases. As a result, the consolidated financial statements, including the historical results discussed below, include our historical financial statements (including the Pooled Companies) for all periods presented at historical cost, as if the Pooled Companies had always been members of the same operating group and include the historical financial statements of the Purchased Companies since their respective dates of acquisition. We continue to realize savings by consolidating certain general, administrative and purchasing functions and reducing insurance expenses. In addition, we continue to realize savings from our ability to borrow at lower interest rates than the acquired companies. These savings are partially offset by the costs of being a public company and the incremental costs related to our 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 financial information discussed below. As a result, historical results may not be comparable to, or indicative of, future performance. Our 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 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 administrative salaries and benefits, marketing, communications and professional fees. 18 RESULTS OF OPERATIONS The following table sets forth certain selected financial data and that data as a percentage of our revenues for all periods indicated (dollars in thousands):
YEAR ENDED DECEMBER 31, -------------------------------------------------------------------------- 1996 1997 1998 -------------------- -------------------- ---------------------- Revenues .......................... $325,717 100.0% $542,790 100.0% $803,563 100.0% Operating expenses ................ 244,854 75.2 398,945 73.5 582,917 72.5 -------- -------- -------- -------- -------- -------- Gross profit ................... 80,863 24.8 143,845 26.5 220,646 27.5 General and administrative expenses 42,910 13.2 62,785 11.6 86,531 10.8 Amortization expense .............. 671 .2 3,559 .7 8,046 1.0 -------- -------- -------- -------- -------- -------- Operating income ............... 37,282 11.5 77,501 14.3 126,069 15.7 Interest expense .................. 12,944 4.0 23,106 4.3 36,906 4.6 -------- -------- -------- -------- -------- -------- Income before income taxes and extraordinary items ..... 24,338 7.5 54,395 10.0 89,163 11.1 Provision for income taxes ........ 10,198 3.1 22,058 4.1 34,774 4.3 -------- -------- -------- -------- -------- -------- Income before extraordinary items ....................... $ 14,140 4.3% $ 32,337 6.0% $ 54,389 6.8% ======== ======== ======== ======== ======== ========
HISTORICAL RESULTS FOR 1997 COMPARED TO 1998 Total revenues increased $260.8 million, or 48.0%, to $803.6 million in 1998. The increase in revenues was primarily due to: (i) the acquisition of the Purchased Companies acquired in 1998 with revenues of $131.5 million, (ii) the incremental revenues of the Purchased Companies acquired in 1997 of $72.1 million, (iii) additional revenues of approximately $29.0 million related to the expansion of privatization and outsourcing services, and (iv) continued growth in charter, tour and taxicab operations. Operating expenses increased 46.1% to $582.9 million for 1998 from $398.9 million in 1997. The increase in operating expenses was primarily due to the acquisition of the Purchased Companies. However, operating expenses as a percentage of revenues decreased from 73.5% in 1997 to 72.5% in 1998. This improvement was primarily due to lower maintenance costs as a result of new equipment purchases and savings from the implementation of a national parts buying program, better fleet utilization, and a 16.7% decrease in fuel and oil costs as a result of lower fuel prices. General and administrative expenses in 1998 increased $23.7 million, or 37.8%, from $62.8 million in 1997 to $86.5 million in 1998. 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 corporate strategy and to manage the consolidated group of companies. General and administrative expenses as a percentage of revenues decreased from 11.6% in 1997 to 10.8% in 1998. This improvement was primarily attributable to: (i) $1.8 million of non-recurring merger costs included in 1997 related to the acquisition of certain Pooled Companies, and (ii) the reduction of certain salaries and benefits of certain former owners of the Pooled Companies subsequent to their respective acquisitions. Interest expense increased $13.8 million in 1998 as compared to 1997 due to higher levels of debt resulting from cash paid, debt assumed and convertible and other subordinated notes issued in connection with the acquisition of certain Purchased Companies and additional equipment purchases, partially offset by the pay down of debt from the proceeds of the secondary public offering of common stock in May 1998. In addition, interest expense increased due to the incremental effect of the higher interest rate on our senior subordinated notes issued in June 1997, partially offset by improved pricing under the Company's revolving credit facilities. 19 Net income before extraordinary items increased during 1998 as compared to 1997 primarily due to the acquisition of the Purchased Companies, continued revenue growth and the effects of increased purchasing power. The extraordinary items recorded in 1998 include extraordinary losses of $0.6 million, net of taxes, related to prepayment penalties on early retirement of certain debt. HISTORICAL RESULTS FOR 1996 COMPARED TO 1997 Total revenues increased $217.1 million, or 66.6%, to $542.8 million in 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 six founding companies of $51.8 million, as the results of operations for the six 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 privatization and outsourcing 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 six founding companies, and an overall increase in our operations, partially offset by savings in our insurance and parts buying programs. General and administrative expenses in 1997 increased $19.9 million, or 46.3%, from $42.9 million in 1996 to $62.8 million in 1997. The increase in general and administrative expenses was largely due to the acquisition of the Purchased Companies, incremental costs of the six founding companies, and additional costs of the corporate management group required to execute corporate strategy 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, additional equipment purchases, and the incremental effect of the higher interest rate on our senior subordinated notes issued in June 1997. Net income before extraordinary items 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. LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities was $19.9 million, $42.2 million and $50.0 million for 1996, 1997 and 1998, respectively. Cash used in investing activities was $73.9 million, $137.9 million, and $295.3 million for 1996, 1997 and 1998, respectively. Cash used in investing activities was primarily for additions and replacements of motorcoaches and expansion of facilities and information systems, net of proceeds from sales of property and equipment. In addition, we paid $16.8 million, $64.6 million and $186.7 million in cash for the 20 Purchased Companies, net of cash acquired, in 1996, 1997 and 1998, respectively. Cash paid for the Founding Companies in 1996 was $22.1 million. Cash provided by financing activities was $51.4 million, $94.9 million, and $250.2 million for 1996, 1997 and 1998, respectively. Cash provided by financing activities of $51.4 million for 1996 was primarily attributable to $48.1 million in net proceeds from our initial public offering and $48.5 million from a secondary offering of our common stock in December 1996, 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 $94.9 million for 1997 was primarily attributable to increased borrowings under our credit facility and the sale of $150.0 million in senior subordinated notes totaling approximately $212.0 million, net of debt repayments of $119.1 million. Cash provided by financing activities of $250.2 million in 1998 is primarily attributable to a secondary offering of our common stock in May 1998 of $98.4 million, and increased borrowings under the credit facilities of $222.4 million, partially offset by $78.4 million of debt repayments. Cash and cash equivalents decreased $2.6 million and $1.1 million for 1996 and 1997, respectively. Cash and cash equivalents increased $4.6 million in 1998. Capital expenditures, net of proceeds from sales of property and equipment, during 1996, 1997 and 1998 were $43.6 million, $69.2 million and $88.3 million, respectively. These expenditures were primarily for motorcoaches and other vehicles and were principally financed with cash flows from operations and debt. As of December 31, 1998, we had entered into commitments to purchase 221 motorcoaches for approximately $79.0 million. We intend to finance these vehicle purchases through cash flows from operations and sales of older equipment, supplemented as necessary with borrowings under our revolving credit facilities. In August 1998, we amended and restated our revolving credit agreement. The credit agreement provides for revolving credit facilities totaling $425 million through a bank syndicate and allows for an additional $80 million of debt outside the credit facilities, in addition to fully subordinated debt. The revolving credit facilities consist of two tranches. Tranche "A" is a $300 million credit facility that matures in August 2001, at which time all amounts then outstanding become due. Tranche "B" is a $125 million credit facility that provides for a 364 day term which may be renewed or converted to a two-year term loan. The proceeds of the facilities are to be used for working capital, capital expenditures and acquisitions, including refinancing of indebtedness related to acquisitions. The facilities are secured by substantially all of our assets. Interest on outstanding borrowings is charged, at our option, at the bank's prime rate, or the London Interbank Offered Rate plus 0.50% to 1.25%, as determined by the ratio of our funded debt to cash flow, as defined. A commitment fee is payable on the unused portion of the facilities. Under the terms of the credit agreement, we must maintain certain minimum financial ratios. The credit agreement prohibits the payment of cash dividends. As of March 1, 1999, we had a total of $430.3 million outstanding under the revolving credit and other outside debt facilities and had utilized $21.8 million of the facilities for letters of credit securing certain insurance obligations and performance bonds, resulting in a borrowing availability of $52.9 million under the revolving and other outside credit facilities. During the second quarter of 1998, we completed the sale of 2,300,000 shares of our common stock in a secondary public offering. The net proceeds from the offering of $98.4 million were used to repay amounts owed under the credit facility. In addition, certain noteholders converted approximately $21.2 million of convertible subordinated notes previously issued in connection with certain acquisitions, resulting in the issuance of approximately 612,000 additional shares of our common stock. 21 In June 1997, we 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 of our existing and future senior indebtedness, including amounts outstanding under our credit facility, and are guaranteed by our domestic subsidiaries. The notes are redeemable at our option 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. We believe that our revolving credit facilities and our cash flows from operations will provide sufficient liquidity to execute our acquisition and internal growth plans for the next 12 months. Should we accelerate our acquisition program, we may need to seek additional financing through the public or private sale of equity or debt securities. We cannot guarantee that we will be able to secure such financing if and when it is needed or on terms we deem acceptable. YEAR 2000 ISSUES We have assessed our Year 2000 issues and have developed a plan to address both the information technology ("IT") and non-IT systems issues. The plan involves the replacement or modification of some of the existing operating and financial computer systems utilized by our operating subsidiaries. We have not developed any computer systems we use in our business; consequently, we believe our Year 2000 issues relate to systems that different vendors have developed and sold to us. We have contacted the vendors that provide our phone systems, computer systems, fueling systems and motorcoaches. We have received confirmation from our major vendors of motorcoaches, motorcoach parts and equipment, telephone systems, computer systems and fueling systems that their products are Year 2000 compliant. Further, we have replaced many computer systems that are not Year 2000 compliant in the normal course of updating various systems used at the operating subsidiaries. At this time, the replacement of the systems which are not Year 2000 compliant is over fifty percent complete and the amount expended to date is approximately $400,000. We believe that the cost to replace the remaining non-compliant systems or the cost to update the systems in 1999 should not exceed $400,000, which costs will be paid for with cash flows from operations. In the worst case scenario, if the replacements and modifications are not completed, the operating subsidiaries may experience temporary problems with certain computer systems that contain date critical functions. We believe that any temporary disruptions would not be material to our overall business or results of operations. As a contingency plan, immediately prior to January 1, 2000, we intend to print all reservations booked in our systems, we intend to fill our vehicles' fuel tanks, and we intend to take other reasonably necessary steps so that we can operate "manually" until such time as any temporary Year 2000 problems related to our operations are cured. As we acquire companies, we attempt to assess Year 2000 issues relating to their operating systems and vehicles. Since our acquisition program is ongoing, our assessment of potential Year 2000 issues is not complete. As such, there can be no assurance that the systems of newly acquired companies, or the systems of vendors and other third party relationships on which we may rely, will be made Year 2000 compliant in a timely manner or that any such failure to be Year 2000 compliant by another company would not have a material adverse effect on our business or results of operations. SEASONALITY The timing of certain holidays, weather conditions and seasonal vacation patterns may cause our quarterly results of operations to fluctuate significantly. We expect to realize higher revenues, operating 22 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 our results of operations for the last three years. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS OUR DISCLOSURE AND ANALYSIS IN THIS REPORT CONTAINS SOME FORWARD-LOOKING STATEMENTS. FORWARD- LOOKING STATEMENTS GIVE OUR CURRENT EXPECTATIONS OR FORECASTS OF FUTURE EVENTS. YOU CAN IDENTIFY THESE STATEMENTS BY THE FACT THAT THEY DO NOT RELATE STRICTLY TO HISTORICAL OR CURRENT FACTS. THEY USE WORDS SUCH AS "EXPECT," "INTEND," "PLAN," "BELIEVE," AND OTHER WORDS AND TERMS OF SIMILAR MEANING IN CONNECTION WITH ANY DISCUSSION OF OUR FUTURE OPERATING OR FINANCIAL PERFORMANCE. IN PARTICULAR, THESE INCLUDE STATEMENTS RELATING TO FUTURE ACTIONS, FUTURE TRENDS, FUTURE PERFORMANCE OR RESULTS OF CURRENT AND ANTICIPATED OPERATIONS, SALES EFFORTS, EXPENSES, THE OUTCOME OF CONTINGENCIES SUCH AS LEGAL PROCEEDINGS, AND FINANCIAL RESULTS. FROM TIME TO TIME, WE ALSO MAY PROVIDE ORAL OR WRITTEN FORWARD-LOOKING STATEMENTS IN OTHER MATERIALS WE RELEASE TO THE PUBLIC. ANY OR ALL OF OUR FORWARD-LOOKING STATEMENTS IN THIS REPORT AND IN ANY OTHER PUBLIC STATEMENTS WE MAKE MAY TURN OUT TO BE WRONG. THEY CAN BE AFFECTED BY INACCURATE ASSUMPTIONS WE MIGHT MAKE OR BY KNOWN OR UNKNOWN RISKS AND UNCERTAINTIES. CONSEQUENTLY, NO FORWARD-LOOKING STATEMENT CAN BE GUARANTEED. ACTUAL FUTURE RESULTS MAY VARY MATERIALLY. WE UNDERTAKE NO OBLIGATION TO PUBLICLY UPDATE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE. YOU SHOULD, HOWEVER, READ ANY FURTHER DISCLOSURES WE MAKE ON RELATED SUBJECTS IN OUR 10-Q, 8-K AND 10-K REPORTS TO THE SEC. ALSO YOU SHOULD READ THE FOLLOWING CAUTIONARY DISCUSSION OF RISKS, UNCERTAINTIES AND POSSIBLY INACCURATE ASSUMPTIONS RELEVANT TO OUR BUSINESS. THESE ARE FACTORS THAT WE THINK COULD CAUSE OUR ACTUAL RESULTS TO DIFFER MATERIALLY FROM EXPECTED AND HISTORICAL RESULTS. OTHER FACTORS BESIDES THOSE LISTED COULD ALSO ADVERSELY AFFECT THE COMPANY. THIS DISCUSSION IS PROVIDED AS PERMITTED BY THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. RISK FACTORS You should carefully consider the following factors and other information included in this report. LIMITED COMBINED OPERATING HISTORY While the Company was founded in September 1995, we conducted no operations and generated no revenues prior to May 14, 1996, the date of our initial public offering. The companies we acquired operated as separate independent entities prior to acquisition by us, and we cannot guarantee that we will be able to continue to successfully integrate the operations of the acquired companies or institute the necessary company-wide systems and procedures to successfully manage the combined enterprise on a profitable basis. Our management team has worked together less than three years, and we cannot guarantee that the management group will be able to effectively manage acquired operations or effectively implement our internal growth strategy and acquisition program in the future. Our historical financial results, the historical financial results of the original companies we acquired and the subsequent acquisitions cover periods when the original acquired companies and the subsequent acquisitions were not under our common control or management and, therefore, may not be indicative of our future financial or operating results. 23 RISKS RELATED TO OUR ACQUISITION STRATEGY We intend to continue to grow through the acquisition of additional motorcoach and other passenger ground transportation businesses. Increased competition for acquisition candidates may result in fewer acquisition opportunities as well as higher acquisition prices. We cannot assure that we will be able to continue to identify, acquire, profitably manage, or successfully integrate additional businesses, if any, into our existing operations without substantial costs, delays or other operational or financial problems. Further, acquisitions involve a number of special risks, including: o possible adverse effects on our operating results; o diversion of management's attention; o our potential inability to retain key acquired personnel; and o risks associated with unanticipated liabilities. Some or all of these special risks could have a material adverse effect on our business, financial condition and operating results. In addition, we cannot assure that businesses acquired in the future will achieve anticipated revenues and earnings. CAPITAL AVAILABILITY; RISKS RELATED TO ACQUISITION FINANCING We cannot assure you that adequate financing will be available in the future on terms acceptable to us to enable us to continue to execute our acquisition strategy. We expect to finance future acquisitions primarily through borrowings under our credit facilities or other debt instruments and, to a lesser extent, by issuing shares of our common stock for all or a portion of the consideration to be paid. Our credit facilities provide for an aggregate credit capacity of $425 million and contains various restrictive covenants which could limit our ability to borrow. In addition, in the event that our common stock does not maintain a sufficient market value, or potential acquisition candidates are otherwise unwilling to accept our common stock as part of the consideration for the sale of their businesses, our ability to issue our common stock as acquisition consideration may be limited. EFFECTS OF LEVERAGE We use leverage as part of our business strategy. We cannot guarantee that we will generate sufficient cash flow from operations, that anticipated revenue growth and operating improvements will be realized or that future borrowings will be available under our credit facilities in amounts sufficient to enable us to service our indebtedness, to make anticipated capital expenditures or to fund future acquisitions. Our ability to make scheduled payments of principal of, or to pay the interest on, or to refinance, our indebtedness or to fund planned capital expenditures or future acquisitions will depend on our future performance. Our future performance is, to a certain extent, subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, we cannot guarantee that we will be able to effect any refinancing on commercially reasonable terms or at all. SUBSTANTIAL SEASONALITY OF THE MOTORCOACH BUSINESS The motorcoach business is subject to seasonal variations in operations. During the winter months, operating costs are higher due to the cold weather, and demand for motorcoach services is lower due primarily to a decline in tourism. As a result, our revenues and operating results are lower in the first and fourth quarters than in the second and third quarters of each year. 24 FUEL PRICES AND TAXES Fuel is a significant operating expense for us. Fuel prices are subject to sudden increases as a result of variations in supply and demand levels. Although we attempt to hedge against such fluctuations, any sustained increase in fuel prices could adversely affect our operating results unless we are able to increase our prices. From time to time, there are efforts at the federal or state level to increase fuel or highway use taxes which, if enacted, could also adversely affect our operating results. INSURANCE COSTS; CLAIMS Our cost of maintaining personal injury, property damage and workers' compensation insurance is significant. We could experience higher insurance premiums as a result of adverse claims experience or general increases in premiums by insurance carriers for reasons unrelated to our own claims experience. As an operator of motorcoaches and other vehicles, we are exposed to claims for personal injury, death and property damage as a result of accidents. We are self-insured for the first $100,000 of losses per incident involving a motorcoach and are self-insured for the first $250,000 of losses per incident involving a taxicab. If we were to experience a significant increase in the number of claims for which we are self-insured or claims in excess of our insurance limits, our operating results and financial condition would be adversely affected. CAPITAL REQUIREMENTS We cannot guarantee that adequate financing will be available in the future on terms favorable to us to enable us to efficiently maintain operations and implement any expansion of service through a larger fleet. Our operations require significant capital in order to maintain a modern fleet of motorcoaches and to achieve internal growth. We have historically financed the acquisition of new motorcoaches, which cost more than $300,000 each, with debt financing. In addition, as motorcoaches age, they require increasing amounts of maintenance and, therefore, are more expensive to operate. Our inability to obtain, or a material delay in obtaining, the financing necessary to acquire replacement motorcoaches as needed would have an adverse effect on our results of operations due to higher operating costs associated with operating an aging fleet. SUBSTANTIAL COMPETITION IN THE MOTORCOACH AND GROUND TRANSPORTATION INDUSTRY The motorcoach and ground transportation industry is highly competitive, fragmented and subject to rapid change, particularly with regard to recreational and excursion services and commuter and transit services. There are other companies that provide these services, a number of which are as large or larger than we are on a regional basis. In addition, many other smaller companies focus on local or regional markets. Many of our larger competitors operate in several of our existing or target markets, and others may choose to enter those markets in the future. As a result of these factors, we may lose customers or have difficulty in acquiring new customers. In addition, most commuter and transit contracts are awarded in a competitive bid process, and there can be no assurance that we will be awarded any additional contracts or that any of our existing contracts will be renewed. LABOR RELATIONS Our inability to negotiate acceptable contracts with our existing union employees when existing agreements expire could result in strikes by the affected workers and increased operating costs as a result of our having to pay higher wages or benefits to union members. If a significant number of non-unionized employees were to seek to become unionized, we could experience a significant disruption in our 25 operations and higher ongoing labor costs, which could have a material adverse effect on our business and our operating results. As of December 31, 1998, we had approximately 12,450 employees, of whom approximately 8,000 were motorcoach drivers and approximately 1,550 were maintenance personnel. Approximately 3,500 of our motorcoach drivers and maintenance personnel are members of various labor unions. GOVERNMENT FUNDED CONTRACTS Payments to us under a number of our commuter and transit contracts are funded through federal or state subsidy programs. Without these subsidies, the state or local transit authorities may be unwilling to continue these contracts, which would result in lost revenues to us. In addition, many of the motorcoaches provided to us at nominal rent under these contracts are purchased by the state and local transit authorities with funds provided by federal programs. If funding for these federal programs were curtailed, we would be required to operate existing motorcoaches longer than economically practicable or be forced to acquire replacement equipment. SIGNIFICANT REGULATION Interstate motorcoach operations are subject to regulatory requirements administered by the FHWA and the STB, both units of the United States Department of Transportation. Additionally, the FTA regulates some of our operations. Our motorcoach operators which are subject to FHWA regulation are required to be registered with the FHWA, to maintain minimum amounts of insurance and to comply with extensive FHWA safety rules. The FHWA and the state regulatory agencies have broad powers to suspend, amend or revoke our motorcoach operators' authorizations for failure to comply with statutory requirements including safety and insurance requirements. Additionally, the FTA can discontinue funding for some of our services for failure to comply with the conditions on that funding. The STB must exempt or approve any consolidation or merger of two or more regulated interstate motorcoach operators or the acquisition of one such operator by another operator or by a non-operator, such as Coach, that already controls one or more operators, and has the authority to consider the antitrust implications of any proposed acquisition. The STB exempted from regulatory approval requirements each of the acquisition transactions involving federally-regulated interstate motorcoach operators entered into by us through September 1997 under the previously used exemption process. In November 1997, at the suggestion of the STB, we shifted from the exemption process to an approval process. We have received approval for all acquisition transactions through August 1998. We currently have one acquisition awaiting final approval by the STB, and all future acquisitions of other regulated interstate motorcoach operators must be approved or exempted by the STB. We cannot guarantee that we will be able to obtain any such approvals or exemptions, or that the STB will not materially delay any proposed acquisition. Motorcoach operators are also subject to extensive safety requirements and requirements imposed by environmental laws, workplace safety and anti-discrimination laws, including the Americans with Disabilities Act. Safety, environmental and vehicle accessibility requirements for motorcoach operators have increased in recent years, and this trend could continue. On September 28, 1998, the Department of Transportation issued more extensive rules for implementing the Americans with Disabilities Act by motorcoach operators operating "over-the-road" buses. The new rules will impose a variety of service obligations on motorcoach operators, including an obligation that becomes effective on October 30, 2001 to provide lift-equipped buses for charter services on 48 hours advance request by a disabled passenger. The new rules will require in part that all "over-the-road" buses delivered on or after October 30, 2000 that are used for scheduled fixed route services be equipped with lifts and meet other design requirements so that they are more readily accessible to persons with disabilities. By October 29, 2012, all buses used by 26 a motorcoach operator to provide scheduled fixed route services will need to meet these accessibility requirements. Accessible buses are more expensive than non-accessible buses and therefore compliance with the rules may result in increased capital expenditures, particularly on the part of our operating subsidiaries that have extensive scheduled operations. Some states, such as New Jersey, require motorcoach operators to obtain authority to operate over certain specified intrastate routes. In some instances, such authority cannot be obtained if another operator already has obtained authority to operate on that route. As a result, there may be regulatory constraints on expansion of our operations in these states. We currently gain some competitive advantage from these regulations because we have rights to operate over some of these regulated intrastate routes. However, if New Jersey or another highly regulated state in which we have operations were to reduce the level of regulation, any competitive advantage we currently gain from such regulation and such operating authorities could be lost. Our taxicab service operations are regulated primarily at the local municipality level. Local taxicab service regulations focus on the entry of new operators into the marketplace and the aggregate number of vehicles granted authority to operate, as well as the fares that can be charged for providing transportation services via taxicabs. These regulations may limit our ability to expand the size of our taxicab fleet or prevent fares from increasing in response to rising operating costs. POTENTIAL EXPOSURE TO ENVIRONMENTAL LIABILITIES Our operations are subject to various environmental laws and regulations, including those dealing with air emissions, water discharges and the storage, handling and disposal of petroleum and hazardous substances. The motorcoach and ground transportation services industry may become subject to stricter regulations in the future. Such regulations from time to time may require us to incur expenditures for pollution control devices, or to upgrade, remove or retrofit equipment used in our operations. Such expenditures, on an aggregate basis, may be significant. There have been spills and releases of hazardous substances, including petroleum and petroleum related products, at several of our operating facilities in the past. As a result of past and future operations at these facilities, we may be required to incur remediation costs and may be subject to penalties. In addition, although we intend to conduct appropriate environmental due diligence in connection with future acquisitions, there can be no assurance that we will be able to identify or be indemnified for all potential environmental liabilities relating to any acquired business. 27 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK We are exposed to market risk primarily from interest rates and certain commodity prices. We are actively involved in monitoring exposure to market risks and continue to develop and utilize appropriate risk management techniques. As such, we may enter into certain derivative financial instruments such as interest rate caps or swaps and commodity forward contracts. We do not use derivative financial instruments for trading or to speculate on changes in interest rates or commodity prices. The sensitivity analyses below, which hypothetically illustrates our potential market risk exposure, estimates the effects of hypothetical sudden and sustained changes in the applicable market conditions on 1999 earnings. The sensitivity analyses presented do not consider any additional actions we may take to mitigate our exposure to such changes. The market changes, assumed to occur as of December 31, 1998, include a 100 basis point change in market interest rates and a 10% increase in the spot market price for diesel fuel. The hypothetical changes and assumptions may be different from what actually occurs in the future. o INTEREST RATES. As of December 31, 1998, we had no derivative financial instrument to manage interest rate risk. As such, we are exposed to earnings and fair value risk due to changes in interest rates with respect to our long-term obligations. As of December 31, 1998, approximately 51.4% of our long-term obligations were floating rate obligations. The detrimental effect on our earnings of the hypothetical 100 basis point increase in interest rates described above would be approximately $3.2 million before income taxes. This effect is primarily due to the floating rate borrowings under our revolving credit facilities. As of December 31, 1998, the fair value of our fixed-rate debt is approximately $300.0 million based upon discounted future cash flows using incremental borrowing rates and current market prices. Market risk, estimated as the potential increase in the fair value of our fixed-rate debt resulting from a hypothetical 100 basis point decrease in interest rates, was approximately $0.8 million as of December 31, 1998. o COMMODITY PRICES. Our results of operations are impacted by changes in the price of diesel fuel. During 1998, diesel fuel accounted for approximately 4.5% of our operating expenses. Based on our 1999 projected fuel consumption, a $0.05 change in the average price per gallon of diesel fuel would impact our annual fuel expense by approximately $0.6 million, after the effect of hedging instruments currently in place. In order to offset our exposure to a potential change in price for diesel fuel, we have entered into certain commodity forward contracts for NYMEX #2 heating oil. NYMEX #2 heating oil has a high degree of correlation to diesel fuel. This fuel hedging strategy could result in us not benefitting from certain fuel price declines. As of December 31, 1998, we had hedged approximately 80% of our projected 1999 fuel consumption. The potential change in the fair value of these commodity forward contracts, assuming a 10% change in the underlying commodity price, would be approximately $1.4 million as of December 31, 1998. This amount excludes the offsetting impact of the price risk inherent in the physical purchase of the underlying commodity. 28 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS PAGE ---- Report of Independent Public Accountants............................. 30 Consolidated Balance Sheets.......................................... 31 Consolidated Statements of Income.................................... 32 Consolidated Statements of Stockholders' Equity...................... 33 Consolidated Statements of Cash Flows................................ 34 Notes to Consolidated Financial Statements........................... 35 29 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, 1997 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1997 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas March 1, 1999 30 COACH USA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, -------------------------- 1997 1998 ----------- ----------- ASSETS CURRENT ASSETS: Cash and cash equivalents ............................ $ 3,648 $ 8,267 Accounts receivable, net of allowance of $3,663 and $5,330 ............................... 43,346 76,748 Inventories .......................................... 22,490 35,196 Notes receivable, current portion .................... 4,138 4,856 Prepaid expenses and other current assets ............ 24,219 23,749 ----------- ----------- Total current assets .............................. 97,841 148,816 PROPERTY AND EQUIPMENT, net ............................. 395,800 574,313 NOTES RECEIVABLE, net of allowance of $500 and $500 ..... 8,906 23,658 GOODWILL, net ........................................... 145,576 404,992 OTHER ASSETS, net ....................................... 17,747 27,464 ----------- ----------- Total assets ...................................... $ 665,870 $ 1,179,243 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of convertible subordinated notes . $ -- $ 12,415 Current maturities of long-term obligations .......... 12,012 23,072 Accounts payable and accrued liabilities ............. 91,140 138,757 ----------- ----------- Total current liabilities ......................... 103,152 174,244 LONG-TERM OBLIGATIONS, net of current maturities ........ 158,752 372,482 SENIOR SUBORDINATED NOTES ............................... 150,000 150,000 CONVERTIBLE SUBORDINATED NOTES, net of current maturities 52,300 66,339 DEFERRED INCOME TAXES ................................... 41,111 65,136 ----------- ----------- Total liabilities ................................. 505,315 828,201 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par, 500,000 shares authorized, 1 and 1 share issued and outstanding, respectively ......................... -- -- Common Stock, $.01 par, 100,000,000 shares authorized, 21,817,918 and 25,412,130 shares issued and outstanding, respectively ....... 218 254 Additional paid-in capital ........................... 121,534 258,709 Cumulative other comprehensive income ................ (479) (961) Retained earnings .................................... 39,282 93,040 ----------- ----------- Total stockholders' equity ........................ 160,555 351,042 ----------- ----------- Total liabilities and stockholders' equity ........ $ 665,870 $ 1,179,243 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 31 COACH USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------------- 1996 1997 1998 --------- --------- --------- REVENUES ................................... $ 325,717 $ 542,790 $ 803,563 OPERATING EXPENSES ......................... 244,854 398,945 582,917 --------- --------- --------- Gross profit ......................... 80,863 143,845 220,646 GENERAL AND ADMINISTRATIVE EXPENSES ........ 41,809 60,938 86,531 AMORTIZATION EXPENSE ....................... 671 3,559 8,046 MERGER RELATED COSTS ....................... 1,101 1,847 -- --------- --------- --------- Operating income ..................... 37,282 77,501 126,069 INTEREST EXPENSE ........................... 12,944 23,106 36,906 --------- --------- --------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEMS ................................... 24,338 54,395 89,163 PROVISION FOR INCOME TAXES ................. 10,198 22,058 34,774 --------- --------- --------- INCOME BEFORE EXTRAORDINARY ITEMS .......... 14,140 32,337 54,389 EXTRAORDINARY ITEMS, net of income taxes ... 2,648 (929) (631) --------- --------- --------- NET INCOME ................................. $ 16,788 $ 31,408 $ 53,758 ========= ========= ========= BASIC EARNINGS PER COMMON SHARE: INCOME BEFORE EXTRAORDINARY ITEMS ....... $ .96 $ 1.51 $ 2.25 EXTRAORDINARY ITEMS ..................... .18 (.05) (.02) --------- --------- --------- NET INCOME ................................. $ 1.14 $ 1.46 $ 2.23 ========= ========= ========= DILUTED EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE: INCOME BEFORE EXTRAORDINARY ITEMS ....... $ .95 $ 1.46 $ 2.14 EXTRAORDINARY ITEMS ..................... .17 (.04) (.02) --------- --------- --------- NET INCOME ................................. $ 1.12 $ 1.42 $ 2.12 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 32 COACH USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (AMOUNTS IN THOUSANDS)
CUMULATIVE COMMON STOCK ADDITIONAL OTHER RETAINED TOTAL COMPREHENSIVE -------------------- PAID-IN COMPREHENSIVE EARNINGS STOCKHOLDERS' INCOME SHARES AMOUNT CAPITAL INCOME (DEFICIT) EQUITY ------------- -------- ---------- ---------- ------------- ---------- ------------- BALANCE AT DECEMBER 31, 1995 ............. $ -- 6,987 $ 70 $ 8,701 $ (200) $(2,082) $ 6,489 Issuance of Common Stock: Proceeds from sale of Common Stock .............................. -- 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) Capital contributions equal to the current income taxes of S Corporations ..................... -- -- -- 874 -- -- 874 Other ................................. -- -- -- 331 -- 70 401 Comprehensive income: Other comprehensive income: Foreign currency translation adjustments ..................... (9) -- -- -- (9) -- (9) Net income .......................... 16,788 -- -- -- -- 16,788 16,788 --------- Comprehensive income ............... $ 16,779 -- -- -- -- -- -- ========= --------- --------- --------- --------- --------- --------- 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 S Corporation dividends paid by certain Pooled Companies ........... -- -- -- -- -- (1,216) (1,216) Other ................................. -- 202 2 1,064 -- 396 1,462 Comprehensive income: Other comprehensive income: Foreign currency translation adjustments ..................... (270) -- -- -- (270) -- (270) Net income .......................... 31,408 -- -- -- -- 31,408 31,408 --------- Comprehensive income ............... $ 31,138 -- -- -- -- -- -- ========= --------- --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1997 ............. 21,818 $ 218 $ 121,534 $ (479) $ 39,282 $ 160,555 --------- --------- --------- --------- --------- --------- Issuance of Common Stock: Acquisition of Purchased Companies .. -- 331 3 7,906 -- -- 7,909 Exercise of stock options and warrants ........................ -- 280 3 7,688 -- -- 7,691 Conversion of convertible subordinated notes .............. -- 683 7 23,158 -- -- 23,165 Proceeds from sale of Common Stock .. -- 2,300 23 98,423 -- -- 98,446 Comprehensive income: Other comprehensive income: Foreign currency translation adjustments ..................... (223) -- -- -- (223) -- (223) Minimum pension liability .......... (259) -- -- -- (259) -- (259) Net income .......................... 53,758 -- -- -- -- 53,758 53,758 --------- Comprehensive income ............... $ 53,276 -- -- -- -- -- -- ========= --------- --------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 1998 ............. 25,412 $ 254 $ 258,709 $ (961) $ 93,040 $ 351,042 ========= ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 33 COACH USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (AMOUNTS IN THOUSANDS)
YEAR ENDED DECEMBER 31, ----------------------------------- 1996 1997 1998 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income ....................................... $ 16,788 $ 31,408 $ 53,758 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization ................. 19,780 35,064 54,714 Gain on sale of assets ........................ (753) (2,226) (1,832) Deferred income tax provision ................. 7,224 12,378 20,927 Extraordinary gain ............................ (7,007) -- -- Changes in operating assets and liabilities, net of effect of Purchased Companies -- Accounts receivable, net ................... (2,271) (6,989) (22,886) Inventories ................................ (5,866) (7,633) (14,779) Prepaid expenses and other current assets .. (5,564) (5,380) 4,963 Accounts payable and accrued liabilities ... (1,504) (16,455) (38,717) Other ...................................... (929) 2,072 (6,191) --------- --------- --------- Net cash provided by operating activities 19,898 42,239 49,957 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment .............. (47,389) (97,458) (114,734) Proceeds from sales of property and equipment .... 14,054 33,887 26,455 Cash consideration paid for Founding and Purchased Companies, net of cash acquired ..... (38,881) (64,624) (186,702) Increase in notes receivable and other non-current assets ............................ (1,672) (9,749) (20,299) --------- --------- --------- Net cash used in investing activities ... (73,888) (137,944) (295,280) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term obligations ...... (140,067) (119,069) (78,359) Proceeds from issuance of long-term obligations .. 97,421 211,995 222,387 Proceeds from issuance of Common Stock ........... 96,564 2,510 106,137 S Corporation dividends paid by certain Pooled Companies ............................... (2,914) (1,216) -- Other ............................................ 423 680 -- --------- --------- --------- Net cash provided by financing activities 51,427 94,900 250,165 --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ..................... (9) (270) (223) --------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,572) (1,075) 4,619 CASH AND CASH EQUIVALENTS, beginning of year ........ 7,295 4,723 3,648 --------- --------- --------- CASH AND CASH EQUIVALENTS, end of year .............. $ 4,723 $ 3,648 $ 8,267 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest ........................... $ 12,794 $ 16,631 $ 35,560 Cash paid for income taxes ....................... 5,167 822 22,234 Assets acquired under capital leases ............. 10,218 5,618 -- Convertible debt and other notes issued for Purchased Companies ........................ 22,500 33,800 68,068
The accompanying notes are an integral part of these consolidated financial statements. 34 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, 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 May 1996, Coach USA has acquired over 70 additional businesses (See Note 3). The acquisition of several of these businesses has been accounted for under the poolings-of-interests method of accounting (the "Pooled Companies"), and the remainder 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 and the Purchased Companies since date of acquisition, are collectively referred to 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 1998. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of three months or less as cash equivalents. INVENTORIES Inventories consist of motorcoach and taxicab replacement parts and taxicabs held for sale. Inventory cost for replacement parts is accounted for on the first-in, first-out basis and inventory cost for taxicabs held for sale is accounted for on the specific identification basis. 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 $3.0 million, $3.4 million and $4.5 million of depreciation related to taxicabs held for sale in 1996, 1997 and 1998. 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. Also included in notes receivable are amounts resulting from the sale of used motorcoaches. Management estimates that the fair value of the notes receivable approximates the historical value of $28.5 million at December 31, 1998. 35 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Expenditures for maintenance and repairs, including normal 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 $2.8 million and $9.1 million as of December 31, 1997 and 1998, 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. CONCENTRATIONS OF CREDIT RISK The Company provides services to a broad range of geographical regions; however, approximately 26% of the Company's 1998 revenues were generated in the New York City and New Jersey metropolitan area. 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. 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. 36 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. 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 component of comprehensive income. Gains and losses from transactions in foreign currencies are reported in other income and are not significant for any period presented. NEW ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No. 130 requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income from operations. The Company has adopted SFAS No. 130 effective January 1, 1998, and has modified the Consolidated Statement of Stockholders' Equity to conform to the appropriate presentation. The Company has adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS No. 131 superceded the business segment disclosure requirements previously in effect under SFAS No. 14. SFAS No. 131, among other things, establishes standards regarding the information a company is required to disclose about its operating segments and provides guidance regarding what constitutes a reportable operating segment. The Company has adopted the disclosure requirements of SFAS No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits". SFAS No. 132 revises disclosure requirements for such pension and postretirement benefit plans to, among other things, standardize certain disclosures and 37 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) eliminate certain other disclosures no longer deemed useful. SFAS No. 132 does not change the measurement or recognition criteria for such plans. SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued in June 1998 and requires companies to recognize all derivative instruments as assets or liabilities in the balance sheet and to measure those instruments at fair value. SFAS No. 133 must be adopted by the Company no later than January 1, 2000, although earlier application is permitted. The Company is currently evaluating the potential impact of implementing SFAS No. 133. In March 1998, the American Institute of Certified Public Accountants (AICPA) of Position (SOP) 98-1 providing guidance on accounting for the costs of computer software developed or obtained for internal use. The effective date of this pronouncement is for fiscal years beginning after December 15, 1998. The Company is in the process of reviewing its current policies for accounting for costs associated with internal software development projects and how they may be affected by SOP 98-1. The Company believes its current policies are materially consistent with the SOP and the impact on the Company's future results of operations will not be material. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities". The effective date of this pronouncement is for fiscal years beginning after December 15, 1998. At adoption, SOP 98-5 requires the Company to write off any unamortized start-up costs as a cumulative change in accounting principle and expense all future start-up costs as they are incurred. The Company intends to adopt SOP 98-5 in the first quarter of 1999 and believes that adoption will result in a non-recurring, non- cash, after-tax charge of approximately $5.2 million. 3. BUSINESS COMBINATIONS POOLINGS-OF-INTERESTS During 1996 and 1997, the Company acquired all of the outstanding stock of several companies in exchange for approximately 7,184,000 shares of Common Stock. These companies provide motorcoach and other passenger ground transportation services and taxicab services. These acquisitions have been accounted for as poolings-of-interests and the results of operations 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. Annual revenues in 1996 and 1997 for the Immaterial Pooled Companies were approximately $7.8 million and $9.2 million, respectively. There were no companies acquired during 1998 that were accounted for as poolings-of-interest. 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. The historical financial statements for 1996 include the operations of the 1997 Pooled Companies prior to their acquisition by the Company. The unaudited combined revenues, income before extraordinary 38 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 approximately 750,000 shares of Common Stock. The allocations of the respective purchase prices resulted in goodwill recognized of $32.4 million, representing the excess of purchase price over the fair value of 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 over 20 businesses in transactions accounted for as purchases. The aggregate consideration paid in these transactions was $64.6 million in cash, net of cash acquired, approximately 596,000 shares of the Company's Common Stock and $33.8 million in subordinated notes convertible into approximately 905,000 shares of Common Stock. The accompanying consolidated balance sheet as of December 31, 1997 includes allocations of the respective purchase prices. The allocations resulted in goodwill recognized of $123.3 million, representing the excess of purchase price over the fair value of the net assets acquired. During 1998, the Company acquired over 25 businesses in transactions accounted for as purchases. The aggregate consideration paid in these transactions consisted of $186.7 million in cash, net of cash acquired, approximately 331,000 shares of the Company's Common Stock, $49.7 million of subordinated notes convertible into approximately 971,000 shares of Common Stock, and $18.4 million of other subordinated notes payable. The accompanying consolidated balance sheet as of December 31, 1998 includes preliminary allocations of the respective purchase prices and is subject to final adjustment. The allocations resulted in goodwill recognized of $258.6 million, representing the excess of purchase price over the fair value of the net assets acquired. An officer and member of the Board of Directors of the Company had minority beneficial ownership in one of the businesses acquired in 1998. The total consideration paid in this transaction to this individual was approximately $6.5 million. In connection with the acquisitions discussed above, liabilities were assumed as follows for 1996, 1997 and 1998 (in thousands): YEAR ENDED DECEMBER 31, ------------------------------------ 1996 1997 1998 ---------- ---------- ---------- Fair value of assets acquired, net of cash acquired ............... $ 64,286 $ 94,216 $ 166,492 Goodwill ......................... 32,370 123,280 258,620 Cash paid, net of cash acquired .. (16,769) (64,624) (186,702) Issuance of Common Stock ......... -- (12,391) (7,909) Issuance of convertible and other subordinated notes ............. (22,500) (33,800) (68,068) --------- --------- --------- Liabilities assumed .............. $ 57,387 $ 106,681 $ 162,433 ========= ========= ========= 39 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The PRO FORMA STATEMENT OF INCOME DATA INCLUDING COMPENSATION DIFFERENTIAL AND OTHER ADJUSTMENTS below includes the historical financial statement data of the Company (including the Pooled Companies) for all periods presented and the Purchased Companies since the date of their respective acquisitions. In addition, the data below gives effect to (1) certain reductions in salaries and benefits to the former owners of the Pooled Companies which were agreed to in connection with the acquisitions of the Pooled Companies (collectively, the "Compensation Differential"); (2) certain tax adjustments related to the taxation of certain Pooled Companies as S Corporations prior to the consummation of the acquisitions completed through 1997; (3) the tax impact of the Compensation Differential in each period; and (4) the elimination of non-recurring pooling costs associated with the 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, 1997, and gives pro forma effect to (i) Compensation Differential of the Purchased Companies, (ii) the amortization of goodwill, (iii) interest expense attributable to cash paid and convertible and other subordinated notes issued, (iv) an adjustment to record interest expense on the senior subordinated notes and amortization of deferred financing costs, as if the notes had been outstanding for the periods presented, (v) an adjustment to record the pro forma interest savings resulting from the secondary offering of Common Stock and the conversion of approximately $21.2 million of convertible subordinated notes in May 1998, as if these transactions had occurred on January 1, 1997, and (vi) income tax adjustments attributable to the above adjustments (in thousands, except per share data). PRO FORMA STATEMENT OF INCOME DATA INCLUDING COMPENSATION DIFFERENTIAL AND OTHER ADJUSTMENTS: YEAR ENDED DECEMBER 31, ----------------------- 1997 1998 ---------- ---------- (UNAUDITED) Revenues........................................ $542,790 $803,563 Income before extraordinary items............... 35,682 54,389 Diluted earnings pre share before extraordinary items......................................... 1.61 2.14 PRO FORMA FOR PURCHASED COMPANIES: YEAR ENDED DECEMBER 31, ----------------------- 1997 1998 ---------- ---------- (UNAUDITED) Revenues........................................ $843,207 $907,070 Income before extraordinary items............... 42,988 58,312 Diluted earnings per share before extraordinary items......................................... 1.64 2.18 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 and the Purchased Companies been combined at the beginning of the periods presented. 40 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets consist of the following (in thousands): DECEMBER 31, ------------------ 1997 1998 -------- ------- Prepaid insurance................................. $ 5,540 $ 2,906 Deferred income tax asset, net.................... 1,013 -- Prepaid licenses, registrations and other taxes... 6,037 3,381 Deposits and other receivables.................... 7,840 10,422 Other............................................. 3,789 7,040 -------- ------- $ 24,219 $23,749 ======== ======= 5. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands): DECEMBER 31, ESTIMATED ------------------- USEFUL LIVES 1997 1998 ------------ -------- --------- (YEARS) Transportation equipment......... 3-15 $419,322 $592,407 Land, buildings and leasehold improvements.................. 5-30 39,114 49,796 Other............................ 3-10 34,469 53,380 -------- -------- 492,905 695,583 Less-- Accumulated depreciation.. (97,105) (121,270) -------- -------- $395,800 $574,313 ======== ======== Included in transportation equipment at December 31, 1997 and 1998, are approximately $33.3 million and $28.9 million, respectively, of assets held under capital leases. 6. OTHER ASSETS Other assets consist of the following (in thousands): DECEMBER 31, ----------------- 1997 1998 ------- ------- Taxicab permits, net of accumulated amortization of $3,608 and $3,998 ....... $ 4,586 $ 4,871 Deferred financing costs, net of accumulated amortization of $1,203 and $1,882 ....... 7,012 6,275 Start-up costs, net of accumulated amortization of $278 and $659 ........... 3,811 8,587 Other, net of accumulated amortization of $666 and $575 ........................ 2,338 7,731 ------- ------- $17,747 $27,464 ======= ======= 41 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Amortization expense related to other assets for the years ended December 31, 1997 and 1998 was $1.5 million and $1.8 million, respectively. 7. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consist of the following (in thousands): DECEMBER 31, ------------------- 1997 1998 -------- -------- Trade accounts payable............................ $ 16,919 $ 32,040 Accrued insurance claims.......................... 29,846 42,399 Accrued compensation.............................. 11,352 20,990 Income taxes and other taxes...................... 9,616 4,309 Accrued interest payable.......................... 7,768 9,114 Accrued acquisition consideration................. -- 9,713 Deferred revenue.................................. 2,863 3,208 Other............................................. 12,776 16,984 -------- -------- $ 91,140 $138,757 ======== ======== 8. LONG-TERM OBLIGATIONS Long-term obligations consist of the following (in thousands): DECEMBER 31, ---------------------- 1997 1998 --------- --------- Revolving credit facilities with a bank syndicate, interest at LIBOR plus 1.00% (6.06% at December 31, 1998), secured by substantially all of the assets of the Company ....................... $ 109,723 $ 320,895 Notes payable to other banks, interest rates ranging from 6.00% to 9.45%, due in monthly installments of $521, maturing at various dates through 2006 ...... 10,748 25,042 Notes payable to finance companies, interest rates ranging from 6.50% to 12.17%, due in monthly installments of $169, maturing at various dates through 2004; secured by certain transportation equipment ......... 22,714 4,974 Obligations under capital leases of certain transportation equipment, implicit interest rates ranging from 6.07% to 11.20%, due in monthly installments of $512, maturing at various dates through 2006 ...... 27,495 25,429 Other .......................................... 84 19,214 --------- --------- Total long-term obligations .................... 170,764 395,554 Less-- current maturities ...................... (12,012) (23,072) --------- --------- $ 158,752 $ 372,482 ========= ========= 42 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At December 31, 1998, 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 -- 1999...................................... $ 18,112 $ 6,805 2000...................................... 10,520 6,467 2001...................................... 328,992 5,179 2002...................................... 3,690 4,427 2003...................................... 2,712 6,699 Thereafter................................ 6,099 1,474 -------- -------- $370,125 $ 31,051 ======== Less-- Amounts representing interest...... (5,622) -------- $ 25,429 ======== REVOLVING CREDIT AGREEMENT In August 1998, the Company amended and restated its revolving credit agreement. The credit agreement provides for revolving credit facilities totaling $425 million through a bank syndicate and allows for an additional $80 million of debt outside the credit facilities, in addition to fully subordinated debt. The revolving credit facilities consist of two tranches. Tranche "A" is a $300 million credit facility that matures in August 2001, at which time all amounts then outstanding become due. Tranche "B" is a $125 million credit facility that provides for a 364 day term which may be renewed or converted to a two-year term loan. The proceeds of the facilities are to be used for working capital, capital expenditures and acquisitions, including refinancing of indebtedness related to acquisitions. The facilities are secured by substantially all of the assets of the Company. Interest on outstanding borrowings is charged, at the Company's option, at the bank's prime rate, or the London Interbank Offered Rate ("LIBOR") plus 0.50% to 1.25%, 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 facilities. 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, 1998, the Company had a total of $395.6 million outstanding under the revolving credit and other outside debt facilities and had utilized $21.1 million of the facilities for letters of credit securing certain insurance obligations and performance bonds, resulting in a borrowing availability of $88.3 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 revolving credit facilities. These notes are subordinated to all existing and future senior indebtedness of the Company, including amounts outstanding under the Company's revolving credit facilities, 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. 43 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONVERTIBLE SUBORDINATED NOTES As of December 31, 1998, the Company has outstanding $78.8 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 4.62% and are convertible by the holder into shares of Common Stock, at any time after one year of issuance, at a weighted average price of $45.97 per share. The notes are redeemable by the Company at any time after one year of issuance. During 1998, a noteholder converted $2.0 million of convertible subordinated notes into approximately 71,000 shares of Common Stock. In conjunction with an offering of the Company's Common Stock in May 1998, certain noteholders converted approximately $21.2 million of convertible subordinated notes into approximately 612,000 shares of Common Stock. The terms of the outstanding notes require $12.4 million, $16.7 million, $49.1 million and $0.6 million of principal payments in 1999, 2000, 2001 and 2003, respectively. Interest on the notes is paid quarterly. Management estimates that the fair value of its debt obligations of $624.3 million is approximately $620.9 million at December 31, 1998. 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, ----------------------------- 1996 1997 1998 -------- ------- -------- Current -- Federal......................... $ 2,753 $ 9,034 $ 11,066 State........................... 346 646 2,715 -------- ------- -------- 3,099 9,680 13,781 -------- ------- -------- Deferred -- Federal......................... 5,730 9,843 18,163 State........................... 1,369 2,535 2,830 -------- ------- -------- 7,099 12,378 20,993 -------- ------- -------- Provision for income taxes before extraordinary items............. 10,198 22,058 34,774 -------- ------- -------- Extraordinary Items -- Current......................... 1,640 (627) (11) Deferred........................ 125 -- (66) -------- ------- -------- 1,765 (627) (77) -------- ------- -------- $ 11,963 $21,431 $ 34,697 ======== ======= ======== 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 44 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of temporary differences by applying enacted statutory tax rates to differences between the financial reporting and the tax bases of existing assets and liabilities. The components of deferred income tax liabilities and assets are as follows (in thousands): DECEMBER 31, ---------------------- 1997 1998 -------- -------- Deferred income tax liabilities -- Property and equipment .......................... $ 59,429 $ 97,001 Other ........................................... 1,618 -- -------- -------- Total deferred income tax liabilities ........ 61,047 97,001 -------- -------- Deferred income tax assets -- Tax credits ..................................... (2,659) (15,195) Accrued liabilities/expenses .................... (11,666) (14,156) Net operating losses ............................ (4,294) (4,377) Accounts receivable/allowance for doubtful accounts ............................. (1,466) (2,042) Other intangibles ............................... (1,248) 3,021 Other ........................................... (520) -- -------- -------- Total deferred income tax assets ............. (21,853) (32,749) Less-- Valuation allowance ......................... 904 884 -------- -------- Net deferred income tax liabilities .......... $ 40,098 $ 65,136 ======== ======== 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, ----------------------------- 1996 1997 1998 --------- ------- -------- Tax at federal statutory rate........... $ 10,063 $ 18,496 $ 31,207 Add-- State income taxes, net of federal benefit................. 1,184 2,012 2,898 Nondeductible expenses............ 555 360 669 Other............................. 161 563 (77) -------- -------- -------- $ 11,963 $ 21,431 $ 34,697 ======== ======== ======== 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 2012. 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. 45 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. COMMITMENTS AND CONTINGENCIES PURCHASE COMMITMENTS As of December 31, 1998, the Company had entered into commitments to purchase 221 motorcoaches for approximately $79.0 million. The Company intends to finance these equipment purchases primarily through cash flows from operations, sales 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, 1996, 1997 and 1998 was $10.0 million, $16.2 million and $22.0 million, respectively. Concurrent with certain acquisitions, 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 1998 rental expense above is approximately $2.2 million of rent paid to these related parties. The following represents future minimum rental payments under noncancelable operating leases (in thousands): Year ending December 31 -- 1999................................................ $ 20,437 2000................................................ 17,636 2001................................................ 14,276 2002................................................ 8,788 2003................................................ 9,450 Thereafter.......................................... 28,595 --------- $ 99,182 ========= 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 1, 1999, 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 August 1998. There can be no assurance that the Company will be able to obtain such approval or exemption with respect to acquisitions completed after August 1998 or future acquisitions. 46 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) INSURANCE CLAIMS 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, with a majority of claims being made against the motorcoach operations, where the per incident deductible is $100,000. As such, any claim within the deductible per incident would be the financial obligation of the Company. The accrued insurance claims represent 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, 1998. 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 earnings through contributions to the plans. The Company contributed $0.3 million, $0.5 million and $1.1 million to these plans during the years ended December 31, 1996, 1997 and 1998, 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 EARNINGS 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 1996, 1997 and 1998 is illustrated below (in thousands): 47 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, --------------------------- 1996 1997 1998 ------- ------- ------- Net income: Net income for basic earnings per share - income available to common stockholders ................ $16,788 $31,408 $53,758 Effect of convertible subordinated notes under the "if converted" method - interest expense addback, net of taxes .................................... 229 1,179 1,846 ------- ------- ------- Net income for diluted earnings per share - income available to common stockholders ................ $17,017 $32,587 $55,604 ======= ======= ======= Weighted average shares: Weighted average shares outstanding for basic earnings per share .............................. 14,742 21,412 24,137 Effect of dilutive stock options and warrants ...... 183 402 526 Effect of convertible subordinated notes under the "if converted" method - weighted convertible shares issuable ................................. 255 1,140 1,587 ------- ------- ------- Weighted average shares outstanding for diluted earnings per share .............................. 15,180 22,954 26,250 ======= ======= =======
12. INDUSTRY AND GEOGRAPHIC AREA SEGMENT INFORMATION The Company's operations consist of providing motorcoach transportation services and taxicab services. The motorcoach service segment has operations in the United States and Canada. The taxicab service segment has operations in the United States only. The motorcoach transportation segment consists of several similar services including charter and tour, sightseeing, airport service, special destination, commuter services, outsourcing and privatization contracts, and paratransit operations. The tables below reflect certain information relating to the Company's operations by segment and then by geographic concentration. Substantially all revenues represent sales from unaffiliated customers. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. For purposes of this presentation, general corporate expenses have been allocated between operating segments on a pro rata basis based on revenue. In addition, general corporate assets have been included in the calculation of identifiable assets and are classified under motorcoach transportation (in thousands). 48 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) YEAR ENDED DECEMBER 31, -------------------------------- 1996 1997 1998 --------- --------- --------- BY SEGMENT: Revenues Motorcoach Transportation............ $ 259,134 $ 458,722 $ 699,572 Taxicab Services..................... 66,583 84,068 103,991 --------- --------- ----------- Total............................. $ 325,717 $ 542,790 $ 803,563 ========= ========= =========== Operating Profit Motorcoach Transportation............ $ 30,629 $ 67,338 $ 108,708 Taxicab Services..................... 6,653 10,163 17,361 --------- --------- ----------- Total............................. $ 37,282 $ 77,501 $ 126,069 ========= ========= =========== Depreciation and Amortization Motorcoach Transportation............ $ 14,450 $ 27,742 $ 45,214 Taxicab Services..................... 5,330 7,322 9,500 --------- --------- ----------- Total............................. $ 19,780 $ 35,064 $ 54,714 ========= ========= =========== Identifiable Assets Motorcoach Transportation............ $ 313,592 $ 593,379 $ 1,054,427 Taxicab Services..................... 52,448 72,491 124,816 --------- --------- ----------- Total............................. $ 366,040 $ 665,870 $ 1,179,243 ========= ========= =========== Capital Expenditures Motorcoach Transportation............ $ 37,428 $ 90,983 $ 103,808 Taxicab Services..................... 9,961 6,475 10,926 --------- --------- ----------- Total............................. $ 47,389 $ 97,458 $ 114,734 ========= ========= =========== BY GEOGRAPHICAL AREA: Revenues United States........................ $ 298,250 $ 501,867 $ 762,587 Canada............................... 27,467 40,923 40,976 --------- --------- ----------- Total............................. $ 325,717 $ 542,790 $ 803,563 ========= ========= =========== Long-lived Assets United States........................ $ 292,249 $ 543,366 $ 1,002,760 Canada............................... 11,745 24,663 27,667 --------- --------- ----------- Total............................. $ 303,994 $ 568,029 $ 1,030,427 ========= ========= =========== 13. 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 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. Information as of December 31, 1998 and for the twelve months then ended has been omitted as the total assets and pre-tax income of the non-guarantor subsidiaries is less than 3% of the consolidated total. 49 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) CONDENSED CONSOLIDATING BALANCE SHEET FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
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 other comprehensive income ............................. (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 ========= ========= ========= ========= =========
50 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)
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 MERGER 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 ========= ========= ========= ========= =========
51 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)
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 ............................ -- 1,230 842 2,072 --------- --------- --------- --------- --------- Net cash provided by operating activities ........ 6,806 32,374 3,059 -- 42,239 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 ..... -- (9,749) -- (9,749) --------- --------- --------- --------- --------- Net cash used in investing activities ........ (62,457) (72,369) (3,118) -- (137,944) 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 (269) 680 --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities ........ 46,031 49,331 (462) -- 94,900 --------- --------- --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES .......... -- -- (270) -- (270) --------- --------- --------- --------- --------- 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 ========= ========= ========= ========= =========
52 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. STOCK OPTION PLANS In June 1998, the 1996 Long-Term Incentive Plan was amended and restated. The Company's 1998 Long-Term Incentive Plan provides for the granting of options to key employees to purchase an aggregate of not more than the greater of 4,000,000 shares or 18% 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. Options granted generally become exercisable in equal annual installments over a five year period. The options expire ten years from the date of grant if unexercised. Outstanding options may be canceled and reissued under terms specified in the plan. The Company's 1996 Non-Employee Directors' Stock Plan provides for the granting of options to non-employee directors of the Company to purchase an aggregate of not more than 250,000 shares of the Company's Common Stock at fair market value on the date of grant. The granted options become exercisable immediately upon grant. The options expire at the earlier of (i) 10 years from the date of grant or (ii) one year after the non-employee director ceases to serve as a director of the Company. The following table summarizes activity under all the Company's stock option plans as of December 31, 1996, 1997 and 1998 (in thousands, except per share data):
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------------------------------------------- 1996 1997 1998 ----------------------------- --------------------------- ------------------------ WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- ------------- ------------ -------------- ---------- ----------- Options outstanding at beginning of year ....................... -- $ -- 1,828 $ 17.77 2,797 $ 22.36 Granted .......................... 1,853 17.73 1,209 28.11 1,097 30.93 Forfeited ........................ (25) 14.79 (121) 16.92 (219) 24.27 Exercised ........................ -- -- (119) 15.80 (220) 19.71 ------- ------- ------- ------- ------- ------- Options outstanding at end of year 1,828 $ 17.77 2,797 $ 22.36 3,455 $ 25.13 ======= ======= ======= ======= ======= ======= Options exercisable at year end .. 30 290 643 Weighted-average fair value of options granted during the year $ 14.16 $ 13.30 $ 14.07
53 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes information about stock options outstanding as of December 31, 1998:
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, 1998 LIFE PRICE DECEMBER 31, 1998 PRICE - ----------------- ------------------ -------------- ------------- ------------------ -------------- (000'S) (000'S) $14.00 - $23.75 1,441 7.88 $ 18.06 379 $ 16.98 $25.00 - $34.07 1,663 8.70 28.66 239 27.98 $34.69 - $45.38 351 9.54 37.38 25 44.44 --------- --------- --------- ----------- ---------- 3,455 8.44 $ 25.13 643 $ 22.14 ========= ========= ========= =========== ==========
The Company accounts for its stock-based compensation under Accounting Principles Board Statement No. 25 "Accounting for Stock Issued to Employees." Under this accounting method, no compensation expense is recognized in the consolidated statements of income if no intrinsic value of the option exists at the date of grant. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock Based Compensation." SFAS No. 123 encourages companies to account for stock based compensation awards based on the fair value of the awards at the date they are granted. The resulting compensation cost would be shown as an expense in the statement of income. 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 1998 -------- -------- -------- Net Earnings As reported............. $ 16,788 $ 31,408 $ 53,758 Pro forma............... $ 15,386 $ 28,117 $ 48,702 Diluted Earnings Per Share As reported............. $ 1.12 $ 1.42 $ 2.12 Pro forma............... $ 1.03 $ 1.28 $ 1.93
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, 1997 and 1998: 54 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1996 1997 1998 --------------- -------------- ---------------- Range of risk-free interest rates... 6.43% - 6.96% 5.73% - 6.81% 4.38% - 5.74% Expected life....................... 10 years 6 years 6 years Average volatility.................. 35.0% 35.0% 43.0% Dividend yield...................... 0.0% 0.0% 0.0%
15. PENSION AND OTHER BENEFIT PLANS During 1998, the Company acquired certain subsidiaries which had defined benefit plans and a defined benefit post-retirement medical plan. The following table illustrates the change in benefit obligations, change in plan assets and funded status of these benefit plans for 1998 (in thousands).
DEFINED OTHER BENEFIT RETIREMENT PLANS PLANS ----------- ----------- CHANGE IN BENEFIT OBLIGATIONS: Obligations at beginning of year............ $ 21,814 $ 2,767 Service cost................................ 414 77 Interest cost............................... 1,444 194 Plan participant's contributions............ 101 105 Amendments.................................. 1,171 -- Actuarial loss.............................. 151 (90) Benefits paid............................... (1,233) (105) ----------- ---------- Benefit obligations at end of year.......... $ 23,862 $ 2,948 =========== ========== CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year................................... $ 18,661 $ -- Actual return on plan assets................ 2,778 -- Employer contributions...................... 600 -- Plan participants contributions............. 101 -- Benefits paid............................... (1,376) -- ----------- ---------- Fair value of plan assets at end of year.... $ 20,764 $ -- =========== ========== Funded status............................... $ (3,098) $ (2,948) Unrecognized actuarial gain................. (1,167) -- Unrecognized prior service cost............. -- -- Unrecognized transition obligation.......... 990 1 ----------- ---------- Net amount recognized....................... $ (3,275) $ (2,947) =========== ==========
55 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEFINED OTHER BENEFIT RETIREMENT PLANS PLANS ------------ ------------ AMOUNTS RECOGNIZED IN THE CONSOLIDATED BALANCE SHEET CONSISTS OF: Accrued benefit cost, net...................... $ (3,275) $ (2,947) Accrued additional benefit liability........... (327) -- Intangible asset............................... 68 -- Accumulated other comprehensive income......... 259 -- ----------- ---------- Net amount recognized.......................... $ (3,275) $ (2,947) =========== ========== WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31, 1998: Discount rate.................................. 6.94% 6.95% Expected return on assets...................... 8.36% 9.00% Rate of compensation increase.................. 4.15% -- For measurement purposes under the post-retirement medical plan, a 7.0% annual rate of increase in the per capita cost of covered health care benefits was assumed. COMPONENTS OF NET PERIODIC BENEFIT COST: Service cost................................... $ 414 $ 77 Interest cost.................................. 1,444 194 Expected return on plan assets................. (2,661) -- Amortization of prior service cost............. 160 -- Recognized actuarial loss...................... 1,263 75 ----------- ---------- Net periodic benefit cost...................... $ 620 $ 346 =========== ==========
The aggregate projected benefit obligations, accumulated benefit obligations and fair value of plan assets for the benefit plans with accumulated benefit obligations in excess of plan assets was approximately $6.4 million as of December 31, 1998. Assumed health care cost trend rates have a significant effect on amounts reported for the post-retirement medical plan. A one-percentage point change in assumed health care cost trend rates would have the following effects (in thousands):
1.0% INCREASE 1.0% DECREASE -------------- ------------- Effect on total service and interest cost components...... $ 32 $ (28) Effect on post-retirement benefit obligation ............. 302 (264)
56 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 16. EXTRAORDINARY ITEMS The extraordinary items recorded in 1997 and 1998 include extraordinary losses of $0.9 million and $0.6 million, net of taxes, respectively, related to prepayment penalties from the early extinguishment of certain debt. 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. 17. QUARTERLY FINANCIAL DATA (UNAUDITED) The table below sets forth the unaudited consolidated operating results by quarter for the years ended December 31, 1997 and 1998. All periods presented have been restated for acquisitions accounted for as poolings-of-interests (in thousands, except per share data). 57 COACH USA, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE THREE MONTHS ENDED, ------------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ----------- ----------- ------------ ------------ 1998 Revenues ............................................... $ 149,983 $ 196,653 $ 232,916 $ 224,011 Gross profit ........................................... 32,003 57,022 71,139 60,482 Net income before extraordinary items .................. 2,443 15,422 21,788 14,736 Net income ............................................. 2,355 15,083 21,677 14,642 Basic earnings per common share: Net income before extraordinary items ............... $ .11 $ .65 $ .86 $ .58 Net income .......................................... $ .11 $ .64 $ .86 $ .58 Diluted earnings per common and common equivalent share: Net income before extraordinary items ............... $ .11 $ .61 $ .81 $ .56 Net income .......................................... $ .10 $ .60 $ .81 $ .55 1997 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 common share: Net income before extraordinary items ............... $ .08 $ .47 $ .59 $ .37 Net income .......................................... $ .08 $ .44 $ .58 $ .36 Diluted earnings per common and common equivalent 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 earnings per share do not add to the annual net income per share reflected in the accompanying consolidated statements of income. 18. SUBSEQUENT EVENTS (UNAUDITED) Through March 1, 1999, the Company acquired two additional businesses subsequent to December 31, 1998. These subsequent acquisitions were accounted for as purchases. The aggregate consideration paid in these transactions was $1.3 million in cash. 58 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. We will file with the Commission in April 1999 a definitive proxy statement including the information required to be disclosed under these items. Such information is incorporated into this Annual Report on Form 10-K by this reference. 59 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) Financial Statements - See Index to Consolidated Financial Statements at Item 8 of this report. (2) Financial Schedules: A. Report of Independent Public Accountants B. Schedule II - Valuation and Qualifying Accounts (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 our Registration Statement on Form S-4 (File No. 333-33755)) 3.2 -- By-Laws of Coach USA (Incorporated by reference to Exhibit 3.2 to our Registration Statement on Form S-1 (File No. 333-2704)) 4.1 -- Form of certificate evidencing ownership of Common Stock of Coach USA (Incorporated by reference to Exhibit 4.1 to our Registration Statement on Form S-1 (File No. 333-2704)) 4.2 -- Indenture dated as of June 24, 1997 between Coach USA, 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 our Registration Statement on Form S-4 (File No. 333-33215)) 4.3 -- Certificate of Designation of Series A Voting Preferred Stock (par value $0.01 per share) of Coach USA (Incorporated by reference to Exhibit 4.3 to our Annual Report on Form 10-K for the period ended December 31, 1997 (File No. 0-28056)) 10.1 -- Coach USA 1996 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.1 to Amendment No. 2 to our Registration Statement on Form S-1 (File No. 333- 2704)) 10.2 -- Coach USA 1998 Long-Term Incentive Plan (Incorporated by reference to Exhibit 10.2 to Annex I to our Proxy Statement on Form DEF 14A filed April 30, 1998) 10.3 -- Coach USA 1996 Non-Employee Directors' Stock Option Plan (Incorporated by reference from Exhibit 10.2 to Amendment No. 2 to our Registration Statement on Form S-1 (File No. 333-2704)) 10.4 -- Employment Agreement between Coach USA and Lawrence K. King (Incorporated by reference to Exhibit 10.4 to our Registration Statement on Form S-1 (File No. 333-6525)) 10.5 -- Employment Agreement between Coach USA and Douglas M. Cerny (Incorporated by reference to Exhibit 10.5 to our Registration Statement on Form S-1 (File No. 333-6525)) 10.6 -- Employment Agreement between Coach USA, Cape Transit Corp. and John Mercadante, Jr. (Incorporated by reference to Exhibit 10.6 to our Registration Statement on Form S-1 (File No. 333-6525)) 60 EXHIBIT NUMBER DESCRIPTION --------- ------------- 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 our Registration Statement on Form S-1 (File No. 333-6525)) 10.8 -- Employment Agreement among Coach USA, Leisure Time Tours and Gerald Mercadante (Incorporated by reference to Exhibit 10.9 to our Registration Statement on Form S-1 (File No. 333-6525)) 10.9 -- Employment Agreement by and between Coach USA and Barnett Rukin dated July 31, 1998 10.10 -- Amendment Dated June 24, 1997 to Agreement Between Coach USA and Exel Motorcoach Partners, LLC (Incorporated by reference to Exhibit 10.1 to our Registration Statement on Form S-4 (File No. 333-33215)) 10.11 -- Warrants to Purchase 100,000 Shares of Common Stock of Coach USA, held by American Business Partners, LLC, formerly known as Exel Motorcoach Partners, LLC (Incorporated by reference to Exhibit 10.12 to our Annual Report on Form 10- K for the period ended December 31, 1997 (File No. 001-12939)) 10.12 -- Credit Agreement Among Coach USA, as Borrower, The Financial Institutions named in the Credit Agreement as Banks, and NationsBank Texas, N.A., as Agent for the Banks, dated August 13, 1997 (Incorporated by reference to Exhibit 10.18 to our Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 001-12939)) 10.13 -- Amended and Restated Credit Agreement Among Coach USA, as Borrower, The Financial Institutions named in the Credit Agreement as Banks, and NationsBank Texas, N.A., as Agent for Banks, dated August 14, 1998 (Incorporated by reference to our Quarterly Report on Form 10-Q for the period ended September 30, 1998 (File No. 000-28056)) 11 -- Statement regarding Computation of Net Income Per Share -- See Note 11 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 61 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/ LAWRENCE K. KING Lawrence K. King 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/ LAWRENCE K. KING Chairman of the Board and March 18, 1999 - --------------------------------- Chief Executive Officer Lawrence K. King (Principal Executive Officer and Principal Financial Officer) /S/ RAYMOND K. TURNER Vice President of Finance and March 18, 1999 - --------------------------------- Corporate Controller Raymond K. Turner (Principal Accounting Officer) /S/ JOHN MERCADANTE, JR. President and Director March 18, 1999 - --------------------------------- John Mercadante, Jr. /S/ FRANK P. GALLAGHER Executive Vice President, March 18, 1999 - --------------------------------- Chief Operating Officer Frank P. Gallagher and Director /S/ GERALD MERCADANTE Director March 18, 1999 - --------------------------------- Gerald Mercadante /S/ BARNETT RUKIN Director March 18, 1999 - --------------------------------- Barnett Rukin /S/ RICHARD H. KRISTINIK Director March 18, 1999 - --------------------------------- Richard H. Kristinik /S/ STEVEN S. HARTER Director March 18, 1999 - --------------------------------- Steven S. Harter /S/ WILLIAM J. LYNCH Director March 18, 1999 - --------------------------------- William J. Lynch /S/ PAUL M. VERROCHI Director March 18, 1999 - --------------------------------- Paul M. Verrochi /S/ FRANK V. ATLEE III Director March 18, 1999 - --------------------------------- Frank V. AtLee III
62 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Coach USA, Inc. and subsidiaries included in this Annual Report on Form 10-K and have issued our report thereon dated March 1, 1999. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The financial data included in Schedule II is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Houston, Texas March 1, 1999 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS The activity in the allowance for doubtful accounts is as follows (in thousands):
BEGINNING BALANCE AT BALANCE OF BALANCE AT BEGINNING PURCHASED CHARGED TO END OF OF PERIOD COMPANIES EXPENSE WRITE-OFFS PERIOD ----------- ------------ ----------- ------------- ------------ 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 Year ended December 31, 1998........... 3,663 2,218 956 (1,507) 5,330
EX-10.9 2 EXHIBIT 10.9 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") by and between Coach USA, Inc., a Delaware corporation ("the Company"), and Barnett Rukin ("Employee") is hereby entered into and effective as of the 31st day of July, 1998. This Agreement hereby supersedes any other employment agreements or understandings, written or oral, between the Company and Employee. R E C I T A L S The following statements are true and correct: As of the date of this Agreement, the Company is engaged primarily in the business of providing passenger ground transportation services. Employee is employed hereunder by the Company in a confidential relationship wherein Employee, in the course of Employee's employment with the Company, has and will continue to become familiar with and aware of information as to the Company's customers, specific manner of doing business, including the processes, techniques and trade secrets utilized by the Company, and future plans with respect thereto, all of which has been and will be established and maintained at great expense to the Company; this information is a trade secret and constitutes the valuable good will of the Company. Therefore, in consideration of the mutual promises, terms, covenants and conditions set forth herein and the performance of each, it is hereby agreed as follows: A G R E E M E N T S 1. EMPLOYMENT AND DUTIES. (a) The Company hereby employs Employee as its Senior Regional Vice President for the Northeast Region or such other position of equal or higher rank as designated by the Board of Directors. As such, Employee shall have responsibilities, duties and authority reasonably accorded to and expected of such position and will report directly to the Chief Operating Officer of the Company. Employee hereby accepts this employment upon the terms and conditions herein contained and, subject to paragraph 1(c), agrees to devote Employee's time, attention and efforts to promote and further the business of the Company. (b) Employee shall faithfully adhere to, execute and fulfill all policies established by the Company. (c) Employee shall not, during the term of Employee's employment hereunder, be engaged in any other business activity pursued for gain, profit or other pecuniary advantage if such activity interferes with Employee's duties and responsibilities hereunder. The foregoing limitations shall not be construed as prohibiting Employee from making or managing personal investments in such form or manner as will not violate the terms of paragraph 3 hereof. (d) During the first three years after the date hereof, the Company shall nominate the Employee to the Company's Board of Directors at each election of directors, subject to the vote of the stockholders of the Company. 2. COMPENSATION. For all services rendered by Employee, the Company shall compensate Employee as follows: (a) BASE SALARY. The base salary payable to Employee shall be $260,000 per year, payable on a regular basis in accordance with the Company's standard payroll procedures. On each anniversary date of this Agreement during the term, Employee's base salary shall increase by not less than the average percentage increase in the salaries of the senior management of the Company. (b) INCENTIVE BONUS PLAN. For 1998 and subsequent years of the term, the Employee shall be eligible to participate in the Company's Incentive Bonus Plan, which sets forth the criteria under which key employees, as designated by the Chief Operating Officer may be eligible to receive year-end bonus awards. (c) EXECUTIVE PERQUISITES, BENEFITS AND OTHER COMPENSATION. Employee shall be entitled to receive additional benefits and compensation from the Company in such form and to such extent as specified below: (i) Admittance for participation for Employee and Employee's dependent family members under health, hospitalization, disability, dental, life and other insurance plans that the Company may have in effect from time to time, with benefits provided to Employee under this clause (i) to be at least equal to such benefits provided to Company executives. (ii) Reimbursement for all business travel and other out-of-pocket expenses reasonably incurred by Employee in the performance of Employee's services pursuant to this Agreement. All reimbursable expenses shall be appropriately documented in reasonable detail by Employee upon submission of any request for reimbursement, and in a format and manner consistent with the Company's expense reporting policy. (iii) The Company shall provide Employee with other executive perquisites as may be available to or deemed appropriate for Employee by the Board and participation in all other Company-wide employee benefits as available from time to time. 2 3. NON-COMPETITION AGREEMENT. (a) Employee will not, during the period of Employee's employment by or with the Company, and for a period of two (2) years immediately following the termination of Employee's employment under this Agreement, for any reason whatsoever, directly or indirectly, for Employee or on behalf of or in conjunction with any other person, persons, company, partnership, corporation or business of whatever nature: (i) engage, as an officer, director, shareholder, owner, partner, joint venturer, or in a managerial or advisory capacity, whether as an employee, independent contractor, consultant or advisor, or as a sales representative, in any business offering any services or products in direct competition with the Company or any of its subsidiaries within 100 miles of where the Company or any of its subsidiaries conducts business, including any territory serviced by the Company or any of its subsidiaries (the "Territory"); (ii) call upon any person who is, at that time, within the Territory, an employee of the Company (including the subsidiaries thereof) in a managerial capacity for the purpose or with the intent of enticing such employee away from or out of the employ of the Company (including the subsidiaries thereof); (iii) call upon any person or entity which is, at that time, or which has been, within one (1) year prior to that time, a customer of the Company (including the subsidiaries thereof) within the Territory for the purpose of soliciting or selling products or services in direct competition with the Company within the Territory; or (iv) call upon any prospective acquisition candidate, on Employee's own behalf or on behalf of any competitor, which candidate was, to Employee's actual knowledge after due inquiry, either called upon by the Company (including the subsidiaries thereof) or for which the Company made an acquisition analysis, for the purpose of acquiring such entity. Notwithstanding the above, the foregoing covenant shall not be deemed to prohibit Employee from acquiring as an investment not more than four and nine-tenths percent (4.9%) of the capital stock of a competing business, whose stock is traded on a national securities exchange or over-the-counter. (b) Because of the difficulty of measuring economic losses to the Company as a result of a breach of the foregoing covenant, and because of the immediate and irreparable damage that could be caused to the Company for which they would have no other adequate remedy, Employee agrees that the foregoing covenant may be enforced by the Company in the event of breach by Employee, by injunctions and restraining orders. (c) It is agreed by the parties that the foregoing covenants in this paragraph 3 impose a reasonable restraint on Employee in light of the activities and business of the Company (including 3 the Company's subsidiaries) on the date of the execution of this Agreement and the current plans of the Company (including the Company's subsidiaries); but it is also the intent of the Company and Employee that such covenants be construed and enforced in accordance with the changing activities, business and locations of the Company (including the Company's subsidiaries) throughout the term of this covenant, whether before or after the date of termination of the employment of Employee. For example, if, during the term of this Agreement, the Company (including the Company's subsidiaries) engages in new and different activities, enters a new business or establishes new locations for its current activities or business in addition to or other than the activities or business enumerated under the Recitals above or the locations currently established therefor, then Employee will be precluded from soliciting the customers or employees of such new activities or business or from such new location and from directly competing with such new business within 100 miles of its then-established operating location(s) through the term of this covenant. It is further agreed by the parties hereto that, in the event that Employee shall cease to be employed hereunder, and shall enter into a business or pursue other activities not in competition with the Company (including the Company's subsidiaries), or similar activities or business in locations the operation of which, under such circumstances, does not violate clause (i) of this paragraph 3, and in any event such new business, activities or location are not in violation of this paragraph 3 or of Employee's obligations under this paragraph 3, if any, Employee shall not be chargeable with a violation of this paragraph 3 if the Company (including the Company's subsidiaries) shall thereafter enter the same, similar or a competitive (i) business, (ii) course of activities or (iii) location, as applicable. (d) The covenants in this paragraph 3 are severable and separate, and the unenforceability of any specific covenant shall not affect the provisions of any other covenant. Moreover, in the event any court of competent jurisdiction shall determine that the scope, time or territorial restrictions set forth are unreasonable, then it is the intention of the parties that such restrictions be enforced to the fullest extent which the court deems reasonable, and the Agreement shall thereby be reformed. (e) All of the covenants in this paragraph 3 shall be construed as an agreement independent of any other provision in this Agreement, and the existence of any claim or cause of action of Employee against the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of such covenants. It is specifically agreed that the period of two (2) years following termination of employment stated at the beginning of this paragraph 3, during which the agreements and covenants of Employee made in this paragraph 3 shall be effective, shall be computed by excluding from such computation any time during which Employee is in violation of any provision of this paragraph 3. (f) Employee agrees that the covenants and agreements of Employee in this paragraph 3, and in paragraphs 5, 6 and 7 below, are in addition to, independent of, and made for consideration that is not the same as the consideration received by Employee for any similar covenants and agreements of Employee contained in any other agreement of any nature between Employee and the 4 Company including but not limited to any covenants and agreements of Employee in any other agreement of any nature whatsoever between Employee and the Company. 4. PLACE OF PERFORMANCE. (a) Employee understands that Employee may be requested by the Board to relocate from Employee's present residence to another geographic location in order to more efficiently carry out Employee's duties and responsibilities under this Agreement or as part of a promotion or other increase in duties and responsibilities. In such event, if Employee agrees to relocate, the Company will pay all relocation costs to move Employee, Employee's immediate family and their personal property and effects. Such costs may include, by way of example, but are not limited to, pre-move visits to search for a new residence, investigate schools or for other purposes; temporary lodging and living costs prior to moving into a new permanent residence; duplicate home carrying costs; all closing costs on the sale of Employee's present residence and on the purchase of a comparable residence in the new location; and added income taxes that Employee may incur if any relocation costs are not deductible for tax purposes. The general intent of the foregoing is that Employee shall not personally bear any out-of-pocket cost as a result of the relocation, with an understanding that Employee will use Employee's best efforts to incur only those costs which are reasonable and necessary to effect a smooth, efficient and orderly relocation with minimal disruption to the business affairs of the Company and the personal life of Employee and Employee's family. (b) Notwithstanding the above, if Employee is requested by the Board to relocate and Employee refuses, such refusal shall not constitute "cause" for termination of this Agreement under the terms of paragraph 5(c). 5. TERM; TERMINATION; RIGHTS ON TERMINATION. The term of this Agreement shall begin on the date hereof and continue for three (3) years (the "Term"), unless terminated sooner as herein provided. This Agreement and Employee's employment may be terminated in any one of the followings ways: (a) DEATH. The death of Employee shall immediately terminate this Agreement with no severance compensation due to Employee's estate. (b) DISABILITY. If, as a result of incapacity due to physical or mental illness or injury, Employee shall have been absent from full-time duties hereunder for four (4) consecutive months, then thirty (30) days after receiving written notice (which notice may occur before or after the end of such four (4) month period, but which shall not be effective earlier than the last day of such four (4) month period), the Company may terminate Employee's employment hereunder provided Employee is unable to resume full-time duties at the conclusion of such notice period. Also, Employee may terminate Employee's employment hereunder if Employee's health should become impaired to an extent that makes the continued performance of Employee's duties hereunder hazardous to Employee's physical or mental health or life, provided that Employee shall have furnished the Company with a written statement from a qualified doctor to such effect and provided, 5 further, that, at the Company's request made within thirty (30) days of the date of such written statement, Employee shall submit to an examination by a doctor selected by the Company who is reasonably acceptable to Employee or Employee's doctor and such doctor shall have concurred in the conclusion of Employee's doctor. In the event this Agreement is terminated as a result of Employee's disability, Employee shall receive from the Company, in a lump-sum payment due within ten (10) days of the effective date of termination, the compensation specified in paragraph 2 above for one (1) year. (c) GOOD CAUSE. The Company may terminate the Agreement ten (10) days after written notice to Employee for good cause, which shall be: (1) Employee's gross negligence in the performance or intentional nonperformance (continuing for ten (10) days after receipt of written notice of need to cure) of any of Employee's material duties and responsibilities hereunder; or (2) Employee's conviction of a felony crime. In the event of a termination for good cause, as enumerated above, Employee shall have no right to any severance compensation. (d) WITHOUT CAUSE. At any time after the commencement of employment, the Company or Employee may, without cause, terminate this Agreement and Employee's employment, effective thirty (30) days after written notice is provided to or from the Company. Should Employee be terminated by the Company without cause during the Term or should Employee resign by reason of Employer's material violation of this Agreement, Employee shall receive from the Company, in a lump-sum payment due within ten (10) days of the effective date of termination, an amount equal to the Employee's compensation specified in paragraph 2 above for the remainder of the Term. Further, any termination without cause by the Company shall operate to shorten the period set forth in paragraph 3(a) and during which the terms of paragraph 3 apply to one (1) year from the date of termination of employment. If Employee resigns or otherwise terminates Employee's employment pursuant to this paragraph 5(d) for any reason other than Employer's material violation of this Agreement, Employee shall receive no severance compensation. Upon termination of this Agreement for any reason provided above, Employee shall be entitled to receive all compensation earned and all benefits and reimbursements due through the effective date of termination. Additional compensation subsequent to termination, if any, will be due and payable to Employee only to the extent and in the manner expressly provided above. All other rights and obligations of the Company and Employee under this Agreement shall cease as of the effective date of termination, except that the Company's obligations under paragraph 9 herein and Employee's obligations under paragraphs 3, 6, 7, 8 and 10 herein shall survive such termination in accordance with their terms. If termination of Employee's employment arises out of the Company's failure to pay Employee on a timely basis the amounts to which Employee is entitled under this Agreement or as a result of any other breach of this Agreement by the Company, as determined by a court of competent jurisdiction or pursuant to the provisions of paragraph 15 below, the Company shall pay all amounts and damages to which Employee may be entitled as a result of such breach, including interest thereon and all reasonable legal fees and expenses and other costs incurred by Employee to 6 enforce Employee's rights hereunder. Further, none of the provisions of paragraph 3 shall apply in the event this Agreement is terminated as a result of a breach by the Company. 6. RETURN OF COMPANY PROPERTY. All records, designs, patents, business plans, financial statements, manuals, memoranda, lists and other property delivered to or compiled by Employee by or on behalf of the Company or its representatives, vendors or customers which pertain to the business of the Company shall be and remain the property of the Company and be subject at all times to their discretion and control. Likewise, all correspondence, reports, records, charts, advertising materials and other similar data pertaining to the business, activities or future plans of the Company which is collected by Employee shall be delivered promptly to the Company without request by it upon termination of Employee's employment. 7. INVENTIONS. Employee shall disclose promptly to the Company any and all significant conceptions and ideas for inventions, improvements and valuable discoveries, whether patentable or not, which are conceived or made by Employee, solely or jointly with another, during the period of employment, and which are directly related to the business or activities of the Company and which Employee conceives as a result of Employee's employment by the Company. Employee hereby assigns and agrees to assign all Employee's interests therein to the Company or its nominee. Whenever requested to do so by the Company, Employee shall execute any and all applications, assignments or other instruments that the Company shall deem necessary to apply for and obtain Letters Patent of the United States or any foreign country or to otherwise protect the Company's interest therein. 8. TRADE SECRETS. Employee agrees that Employee will not, during or after the Term of this Agreement with the Company, disclose the specific terms of the Company's relationships or agreements with their respective significant vendors or customers or any other significant and material trade secret of the Company whether in existence or proposed, to any person, firm, partnership, corporation or business for any reason or purpose whatsoever. 9. INDEMNIFICATION. In the event Employee is made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by the Company against Employee), by reason of the fact that Employee is or was performing services under this Agreement, then the Company shall indemnify Employee against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement, as actually and reasonably incurred by Employee in connection therewith. In the event that both Employee and the Company are made a party to the same third-party action, complaint, suit or proceeding, the Company agrees to engage competent legal representation, and Employee agrees to use the same representation, provided that if counsel selected by the Company shall have a conflict of interest that prevents such counsel from representing Employee, Employee may engage separate counsel and the Company shall pay all attorneys' fees of such separate counsel. Further, while Employee is expected at all times to use Employee's best efforts to faithfully discharge Employee's duties under this Agreement, Employee cannot be held liable to the Company for errors or omissions made in good 7 faith where Employee has not exhibited gross, willful and wanton negligence and misconduct or performed criminal and fraudulent acts which materially damage the business of the Company. 10. NO PRIOR AGREEMENTS. Employee hereby represents and warrants to the Company that the execution of this Agreement by Employee and Employee's employment by the Company and the performance of Employee's duties hereunder will not violate or be a breach of any agreement with a former employer, client or any other person or entity. Further, Employee agrees to indemnify the Company for any claim, including, but not limited to, attorneys' fees and expenses of investigation, by any such third party that such third party may now have or may hereafter come to have against the Company based upon or arising out of any non-competition agreement, invention or secrecy agreement between Employee and such third party which was in existence as of the date of this Agreement. 11. ASSIGNMENT; BINDING EFFECT. Employee understands that Employee has been selected for employment by the Company on the basis of Employee's personal qualifications, experience and skills. Employee agrees, therefore, that Employee cannot assign all or any portion of Employee's performance under this Agreement. Subject to the preceding two (2) sentences, this Agreement shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective heirs, legal representatives, successors and assigns. 12. COMPLETE AGREEMENT. This Agreement is not a promise of future employment. Employee has no oral representations, understandings or agreements with the Company or any of its officers, directors or representatives covering the same subject matter as this Agreement. This written Agreement is the final, complete and exclusive statement and expression of the agreement between the Company and Employee and of all the terms of this Agreement, and it cannot be varied, contradicted or supplemented by evidence of any prior or contemporaneous oral or written agreements. This written Agreement may not be later modified except by a further writing signed by a duly authorized officer of the Company and Employee, and no term of this Agreement may be waived except by writing signed by the party waiving the benefit of such term. 13. NOTICE. Whenever any notice is required hereunder, it shall be given in writing addressed as follows: To the Company: Coach USA, Inc. One Riverway, Suite 500 Houston, Texas 77056-1903 Attn: Chief Operating Officer with a copy to: Law Department Coach USA, Inc. One Riverway, Suite 500 Houston, Texas 77056-1903 8 To Employee: Barnett Rukin 17 Franklin Turnpike Mahwah, New Jersey 07430 with a copy to: Keith E. Osber, Esq. Hinman, Howard & Kattell, LLP 700 Security Mutual Building 80 Exchange Street P.O. Box 5250 Binghamton, New York 13902-5250 Notice shall be deemed given and effective three (3) days after the deposit in the U.S. mail of a writing addressed as above and sent first class mail, certified, return receipt requested, or when actually received. Either party may change the address for notice by notifying the other party of such change in accordance with this paragraph 13. 14. SEVERABILITY; HEADINGS. If any portion of this Agreement is held invalid or inoperative, the other portions of this Agreement shall be deemed valid and operative and, so far as is reasonable and possible, effect shall be given to the intent manifested by the portion held invalid or inoperative. The paragraph headings herein are for reference purposes only and are not intended in any way to describe, interpret, define or limit the extent or intent of the Agreement or of any part hereof. 15. ARBITRATION. Any unresolved dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three (3) arbitrators in New York, New York in accordance with the rules of the American Arbitration Association then in effect. The arbitrators shall not have the authority to add to, detract from, or modify any provision hereof nor to award punitive damages to any injured party. The arbitrators shall have the authority to order back-pay, severance compensation, vesting of options (or cash compensation in lieu of vesting of options), reimbursement of costs, including those incurred to enforce this Agreement, and interest thereon in the event the arbitrators determine that Employee was terminated without disability or good cause, as defined in paragraphs 5(b) and 5(c), respectively, or that the Company has otherwise materially breached this Agreement. A decision by a majority of the arbitration panel shall be final and binding. Judgment may be entered on the arbitrators' award in any court having jurisdiction. The direct expense of any arbitration proceeding shall be borne by the Company. 16. GOVERNING LAW. This Agreement shall in all respects be construed according to the laws of the State of New York. 9 17. COUNTERPARTS. This Agreement may be executed simultaneously in two (2) or more counterparts, each of which shall be deemed an original and all of which together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. COACH USA, INC. By: /s/ DOUGLAS M. CERNY Name: Douglas M. Cerny Title: Sr. Vice President EMPLOYEE: /S/ BARNETT RUKIN Barnett Rukin EX-21 3 EXHIBIT 21 Coach USA, Inc. Subsidiaries as of March 18, 1999 NAME OF SUBSIDIARY: STATE OF INCORPORATION: 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 Five Star Tours, Ltd. 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 d/b/a Medi-Transportation of South Florida, Inc. d/b/a Orlando Transportation, Ltd. Airport Limousine Service, Inc. Delaware d/b/a ALS Paratransit d/b/a Checker Cab d/b/a Embassy Coach d/b/a Pittsburgh Airbus d/b/a Pittsburgh Paratransit Airport Rent-A-Car, Inc. Florida Air Travel Transportation, Inc. Georgia d/b/a Atlanta Airport Shuttle Alamo City Transportation Company Texas d/b/a Towne Car American Bus Lines, Inc. Florida America Charters, Ltd. North Carolina d/b/a Northwestern Coach Company, Inc. d/b/a Piedmont Coach Lines, Inc. American Charters and Tours, Inc. Tennessee American Coach Lines, Inc. Florida American Limousine Service, Inc. Florida American New York Tours Corp. New York d/b/a Parker Tours d/b/a ShortLine d/b/a Short Line Travel Tours American Sightseeing, Inc. Florida American Sightseeing Tours, Inc. Florida d/b/a ASTI d/b/a Dreamer Charters and Limousines d/b/a Golden Isles Coaches of Florida d/b/a Royal Tours of America American Tour Connection, Inc. New Jersey AmeriCoach Tours, Inc. Tennessee Antelope Nevada, Inc. Nevada Antelope Valley Bus, Inc. California d/b/a Gray Line Los Angeles Arrow Leasing, Inc. Connecticut Arrow Stage Lines, Inc. Nebraska Art-Mar Corporation Florida Associates Business Credit, LLC Kansas Atlanta Airport Shuttle, Inc. Georgia Coach USA, Inc. Subsidiaries - (Continued) NAME OF SUBSIDIARY: STATE OF INCORPORATION: 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 Bay Area Yellow Cab, LLC Florida 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 d/b/a Browder Tours and Charters Brunswick Transportation Company, Inc. Maine d/b/a The Maine Line d/b/a The Maine Line - Charter d/b/a Maine Line Tours Bus Chicago, Inc. Illinois Butler Motor Transit, Inc. Pennsylvania d/b/a Butler Motor Tours d/b/a Earth Tours d/b/a Grove City Bus Line C&E Transportation of Biloxi, Inc. Mississippi CFT Investments, LLC Kansas Cab Services, Inc. Texas d/b/a Towne Car California Charters, Inc. Texas d/b/a Texas/California Charter Service Cam-Jo, Inc. Florida d/b/a Bay Area Yellow Cab d/b/a Clearwater Yellow Cab d/b/a Pasco County Yellow Cab d/b/a Pinellas Yellow Cab d/b/a St. Petersburg Yellow Cab Cambas Investments, Inc. Florida 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 Cab Company Pennsylvania d/b/a Country Road Tours d/b/a Park Tours Central Charters & Tours, Inc. Pennsylvania Central Jersey Transit, Inc. New Jersey Checker Cab of Pensacola, Inc. Florida Chenango Valley Bus Lines, Inc. New York d/b/a ShortLine Classic Lines, Inc. Florida Clinton Avenue Bus Company New Jersey Coach Leasing, Inc. Illinois d/b/a USA Coach Leasing Coach USA Administration, Inc. Nevada Coach USA Management Business Trust Delaware Coach USA of New Orleans, Inc. Delaware Coach XXIII Acquisition, Inc. Delaware Colonial Coach Corp. New Jersey d/b/a Gray Line d/b/a ShortLine Coach USA, Inc. Subsidiaries - (Continued) NAME OF SUBSIDIARY: STATE OF INCORPORATION: Colorado Springs Airport Transportation Service, Inc. Colorado Commercial Leasing, LLC Missouri Commlease, LLC Missouri Commodore Tours, Inc. New Jersey 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 Corporate Car U.S.A., Inc. Florida Dairyland Buses, Inc. Wisconsin Dairyland-Hamilton, Inc. Wisconsin 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 Central De Autobuses d/b/a El Expreso Bus Co. d/b/a Mexico Travel Centre d/b/a Mexico Travel Services d/b/a Noreste Bus Co. d/b/a The Express Bus Co. Erie Coach Lines Company Nova Scotia, Canada d/b/a Erie Coach d/b/a Erie Coach Lines Falcon Charter Service California Fiesta Cab Company Colorado d/b/a Taxis Fiesta Fiesta Cab Company Texas d/b/a Taxis Fiesta Fiesta Cab Company, Inc. Georgia d/b/a Taxis Fiesta Fiesta Cab Company, Inc. Indiana d/b/a Taxis Fiesta Fiesta Cab Company of San Antonio Texas d/b/a Taxis Fiesta Fiesta Transportation Company Texas d/b/a Fiesta Elegante Friedman Transportation Co., Inc. New Jersey GL Bus Lines, Inc. New York d/b/a Gray Line d/b/a ShortLine 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 Air Shuttle, Inc. New York d/b/a ShortLine Gray Line New York Tours, Inc. New York d/b/a ShortLine 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 Transportation Company Colorado d/b/a Airport Taxicab of Colorado Springs, Inc. d/b/a Checker Taxicab, Inc. d/b/a Colorado Springs Airport Ground Transportation Authority d/b/a Colorado Springs Taxicab, Inc. d/b/a El Paso County Taxicab, Inc. d/b/a Metro Limousine d/b/a Metro Taxicab of Colorado Springs, Inc. d/b/a Towne Car, Inc. d/b/a Towne Car of Colorado Springs, Inc. d/b/a Towne Car of Denver, Inc. d/b/a Yellow Cab Company of Colorado Springs, Inc. d/b/a Yellow Cab Package Xpress Greater Colorado Transportation Company Colorado d/b/a American Cab & Limousine d/b/a American Cab of Colorado d/b/a American Cab of Colorado Springs d/b/a American Cab of Denver d/b/a American Limousine of Denver d/b/a American Limousine of North Denver d/b/a Towne Car of Denver, Inc. Greater Detroit Transportation Co., Inc. d/b/a Motor City Yellow Taxi, Inc. Greater Houston Airport Transportation Services, In Texas d/b/a Greater Houston Airport Taxi 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 Greater San Antonio Transportation Company Texas d/b/a Yellow Checker Cab Grosvenor Bus Lines, Inc. California d/b/a Coach USA - San Francisco Grayline d/b/a Gray Line of Monterey/Carmel d/b/a Gray Line of San Francisco d/b/a The Gray Line Grosvenor Limousine Service, Inc. California Gulf Coast Transportation Company Texas d/b/a Coach USA - Houston d/b/a Diamond Bus Lines 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 Hudson Transit Corporation New York d/b/a ShortLine Hudson Transit Lines, Inc. Delaware Coach USA, Inc. Subsidiaries - (Continued) NAME OF SUBSIDIARY: STATE OF INCORPORATION: d/b/a ShortLine IPD, Inc. Missouri Indianapolis Checker Cab, Inc. Indiana Indianapolis Taxi, Inc. Indiana Indianapolis Yellow Cab, Inc. Indiana International Bus Services, Inc. New York d/b/a ShortLine International Express Corp. Minnesota d/b/a Airport Express d/b/a Express Shuttle USA International Leasing and Finance Corporation New Jersey 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 Coach USA Las Vegas d/b/a Jetlink K-T Contract Services of Southern Nevada, Inc. Nevada d/b/a Coach USA - Gray Line Las Vegas d/b/a Express Shuttle USA d/b/a River Gambler Tours 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 Bluebonnet Coaches d/b/a Fort Worth Bus Charters d/b/a Gray Line of Albuquerque d/b/a Gray Line of Austin 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 Sunset Tours and Travel, Inc. d/b/a Vaught Charters, Inc. L.E.R. Transportation Company New Jersey LND, Inc. Florida Lakeland Area Bus Service, Inc. Wisconsin Lakeside Buses of Wisconsin, Inc. Wisconsin 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 d/b/a Lenzner Coach Lines Lenzner Tours, Ltd. Pennsylvania d/b/a Lenzner Coach Lines d/b/a Lenzner Tour and Travel Lenzner Transit, Inc. Pennsylvania Lenzner Transportation Group, Inc. Nevada Limousine Rental Service, Inc. New Jersey d/b/a ShortLine Locust Partners, LLC Missouri MTSI, Inc. Missouri Metro Cab, Inc. Florida Metro Cars, Inc. Michigan Metro Cars Management Corp. Michigan Metro Coach, Inc. San Juan, Puerto Rico Metro Diversified Insurance Group, Inc. Florida Metro Jitney Incorporated Florida Coach USA, Inc. Subsidiaries - (Continued) NAME OF SUBSIDIARY: STATE OF INCORPORATION: 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 Mini Coach of Boston, Inc. Massachusetts Mister Sparkle, Inc. New Jersey Mountaineer Coach, Inc. Pennsylvania Nevada Corporation, Inc. Nevada New Delaware Coach, Inc. Delaware Niagara Scenic Bus Lines, Inc. New York O'Hare Shuttle Limited Partnership Illinois OSP, Inc. Illinois Olympia Trails Bus Company, Inc. New Jersey Orange, Newark, Elizabeth Bus, Inc. New Jersey P&S Transportation, Inc. Florida d/b/a Laser Bus Lines d/b/a Royal Tours of America PCSTC, Inc. California d/b/a Gray Line of Anaheim d/b/a Pacific Coast Sightseeing Tours & Charters Para-Transit, Inc. Florida Parker Tours, Inc. New York Pawtuxet Valley Bus Lines, Inc. Rhode Island d/b/a Newport Foxwood Tours Pennsylvania Transportation Systems, Inc. Delaware Perfect Body, Inc. New Jersey Pittsburgh Transportation Charter Services, Inc. Delaware Pittsburgh Transportation Company Pennsylvania d/b/a Yellow Airport Express Powder River Transportation Services, Inc. Wyoming d/b/a Pixley Transportation, Inc. Progressive Transportation Services, Inc. New York d/b/a Empire Transit Lines d/b/a Southern Tier Express d/b/a Travel Express 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 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 Ross Tours, Inc. Mississippi Royal Tours of America, Inc. Florida d/b/a Royal Tours Salt Lake Coaches, Inc. Utah Coach USA, Inc. Subsidiaries - (Continued) NAME OF SUBSIDIARY: STATE OF INCORPORATION: d/b/a Express Shuttle USA d/b/a Gray Line Salt Lake S.E.M. Incorporated Florida SL Capital Corp. New York d/b/a ShortLine Short Line Terminal Agency, Inc. New Jersey d/b/a ShortLine Shuttle Services MIA, Inc. Florida Southfield Cab Company Michigan Southfield Red & White, Inc. Michigan Stardust Tours-Memphis, Inc. Tennessee d/b/a Gray Line of Memphis d/b/a Grayline Tours of Memphis 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 and Oswego Coach Lines, Inc. New York TFC Investments, LLC Kansas Terminal Cab, Inc. Missouri Texas Bus Lines, Inc. Texas d/b/a Airport Express d/b/a Coach USA - Houston d/b/a Express Shuttle USA Texas Shuttle, Inc. Texas The Airport Connection, Inc. Georgia The Arrow Line, Inc. Connecticut d/b/a Creative Tours d/b/a Fitzgerald Bus Company The B.T.D. Realty Corporation Connecticut The Bus Exchange, Inc. New York d/b/a ShortLine The Hudson Bus Transportation Co., Inc. New Jersey The Mapleridge Group, Inc. Michigan Tippett Travel, Inc. Florida d/b/a Marie's Charter Bus Total Vehicle Services, Inc. Florida TranServ, Inc. Michigan d/b/a Detroit Limousine d/b/a TranSedan d/b/a TranServ Executive Services Tran-Star Executive Transportation Services of Florida, Inc. Florida Trans-Hudson Express, Inc. New Jersey Trans Maintenance, Inc. New Jersey Transit Video Security Systems, 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 Coach USA d/b/a Gray Line of Orlando Coach USA, Inc. Subsidiaries - (Continued) NAME OF SUBSIDIARY: STATE OF INCORPORATION: d/b/a TryKap Management, Inc. d/b/a World Transportation, Inc. Tucker Taxi, Inc. Florida Tucker Transportation Company, Inc. Florida Twenty-Four Corp. New Jersey Tyburn Limited Delaware Utica-Rome Bus Co., Inc. New York V.I.P. Transportation, Inc. New Jersey Valen Transportation, Inc. California d/b/a Valen Transportation and Tours 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 d/b/a Paratransit Services of West Florida, Inc. Wisconsin Coach Lines, Inc. Wisconsin d/b/a Wisconsin Coach Tours Wisconsin Coach Lines - Racine, Inc. Wisconsin Wohlgemuth Bus Co. Inc. New Jersey Worthen Van Service, Inc. Wyoming Yellow Cab Company of Biloxi, Inc. Mississippi 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 4 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. 333-51695), on Form S-4 (File No. 333-33755), on Form S-8 (File No. 333-30155) and on Form S-8 (File No. 333-30157). ARTHUR ANDERSEN LLP Houston, Texas March 18, 1999 EX-27 5
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-31-1998 DEC-31-1998 8,267 0 82,078 5,330 35,196 148,816 695,583 (121,270) 1,179,243 174,244 624,308 0 0 254 350,788 1,179,243 803,563 803,563 582,917 582,917 94,577 0 36,906 89,163 34,774 54,389 0 (631) 0 53,758 2.23 2.12
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