SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended MARCH 31, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 0-28056
------------------
COACH USA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 76-0496471
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE RIVERWAY, SUITE 500
HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 888-0104
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 [ ]
The number of shares of Common Stock of the Registrant, par value $.01 per
share, outstanding at May 7, 1999 was 25,429,490.
<PAGE>
COACH USA, INC.
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
PAGE
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
COACH USA, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets......................... 3
Condensed Consolidated Statements of Income................... 4
Condensed Consolidated Statements of Stockholders' Equity..... 5
Condensed Consolidated Statements of Cash Flows............... 6
Notes to Condensed Consolidated Financial Statements.......... 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 18
Item 3 - Quantitative and Qualitative Disclosure About Market
Risk....................................................... 23
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K........................... 24
(a) Exhibits.
27 - Financial Data Schedule.
(b) Reports on Form 8-K.
SIGNATURE.............................................................. 25
2
<PAGE>
COACH USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------- -------------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 8,267 $ 8,079
Accounts receivable, net of allowance of $5,330 and $5,149 ............. 76,748 75,782
Inventories ............................................................ 35,196 37,769
Notes receivable, current portion ...................................... 4,856 5,160
Prepaid expenses and other current assets .............................. 23,749 30,416
----------- -----------
Total current assets ............................................ 148,816 157,206
PROPERTY AND EQUIPMENT, net ..................................................... 574,313 596,349
NOTES RECEIVABLE, net of allowance of $500 and $500 ............................. 23,658 24,571
GOODWILL, net ................................................................... 404,992 406,344
OTHER ASSETS, net ............................................................... 27,464 19,457
----------- -----------
Total assets .................................................... $ 1,179,243 $ 1,203,927
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations ............................ $ 23,072 $ 16,059
Current maturities of convertible subordinated notes ................... 12,415 13,250
Accounts payable and accrued liabilities ............................... 138,757 144,056
----------- -----------
Total current liabilities ....................................... 174,244 173,365
LONG-TERM OBLIGATIONS, net of current maturities ................................ 372,482 405,453
SENIOR SUBORDINATED NOTES ....................................................... 150,000 150,000
CONVERTIBLE SUBORDINATED NOTES, net of current maturities ....................... 66,339 61,348
DEFERRED INCOME TAXES ........................................................... 65,136 63,957
----------- -----------
Total liabilities ............................................... 828,201 854,123
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock $.01 par, 500,000 shares authorized, 1 share issued
and outstanding ..................................................... -- --
Common stock $.01 par, 100,000,000 shares authorized, 25,412,130 and
25,427,140 shares issued and outstanding, respectively .............. 254 254
Additional paid-in capital ............................................. 258,709 259,003
Cumulative other comprehensive income .................................. (961) (904)
Retained earnings ...................................................... 93,040 91,451
----------- -----------
Total stockholders' equity ...................................... 351,042 349,804
----------- -----------
Total liabilities and stockholders' equity ...................... $ 1,179,243 $ 1,203,927
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
<PAGE>
COACH USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1999
--------- ---------
REVENUES ......................................... $ 149,983 $ 201,599
OPERATING EXPENSES ............................... 117,980 155,946
--------- ---------
Gross profit ............................ 32,003 45,653
GENERAL AND ADMINISTRATIVE EXPENSES .............. 18,814 26,038
AMORTIZATION EXPENSE ............................. 1,439 2,687
--------- ---------
Operating income ........................ 11,750 16,928
INTEREST EXPENSE ................................. 7,745 10,990
--------- ---------
INCOME BEFORE INCOME TAXES,
EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE ... 4,005 5,938
PROVISION FOR INCOME TAXES ....................... 1,562 2,375
--------- ---------
INCOME BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ....................... 2,443 3,563
EXTRAORDINARY ITEMS, net of income taxes ......... (88) --
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE, net of income taxes . -- (5,152)
--------- ---------
NET INCOME (LOSS) ................................ $ 2,355 $ (1,589)
========= =========
BASIC EARNINGS PER COMMON SHARE:
INCOME BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE .................... $ .11 $ .14
EXTRAORDINARY ITEMS .......................... -- --
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE ................. -- (.20)
--------- ---------
NET INCOME (LOSS) ............................ $ .11 $ (.06)
========= =========
DILUTED EARNINGS PER COMMON AND COMMON
EQUIVALENT SHARE:
INCOME BEFORE EXTRAORDINARY ITEMS AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ....................... $ .11 $ .14
EXTRAORDINARY ITEMS .......................... (.01) --
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE .................. -- (.20)
--------- ---------
NET INCOME (LOSS) ............................ $ .10 $ (.06)
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
COACH USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
CUMULATIVE
COMMON STOCK ADDITIONAL OTHER TOTAL
COMPREHENSIVE ------------------ PAID-IN COMPREHENSIVE RETAINED STOCKHOLDERS'
INCOME SHARES AMOUNT CAPITAL INCOME EARNINGS EQUITY
------------- --------- -------- ---------- ------------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Issuance of Common Stock:
Exercise of stock options ............ 15 -- 294 -- -- 294
Comprehensive income:
Other comprehensive income:
Foreign currency translation
adjustments .................. $ 57 -- -- -- 57 -- 57
Net loss ............................. (1,589) -- -- -- -- (1,589) (1,589)
---------
Comprehensive income ............. $ (1,532) -- -- -- -- -- --
========= ------- ------- --------- --------- --------- ---------
BALANCE AT MARCH, 1999 (unaudited) ............ 25,427 $ 254 $ 259,003 $ (904) $ 91,451 $ 349,804
======= ======= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
<PAGE>
COACH USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1998 1999
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................................. $ 2,355 $ (1,589)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities -
Depreciation and amortization ........................................... 11,117 16,559
(Gain) loss on sale of assets ........................................... (251) 28
Deferred income tax provision (benefit) ................................. 1,702 (4,614)
Effect of cumulative change in accounting principle ..................... -- 8,588
Changes in operating assets and liabilities, net of effect of
Purchased Companies -
Accounts receivable, net ........................................... (4,681) 1,026
Inventories ........................................................ (3,176) (5,017)
Prepaid expenses and other current assets .......................... 2,247 (6,623)
Accounts payable and accrued liabilities ........................... (8,109) 2,847
Other .............................................................. 54 (785)
-------- --------
Net cash provided by operating activities ..................... 1,258 10,420
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ................................................ (35,340) (32,744)
Proceeds from sales of property and equipment ...................................... 3,180 2,277
Cash consideration paid for Purchased Companies, net of cash acquired .............. (18,385) (1,123)
Increase in notes receivable ....................................................... (1,693) (1,217)
-------- --------
Net cash used in investing activities ......................... (52,238) (32,807)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term obligations ........................................ (30,253) (12,621)
Proceeds from issuance of long-term obligations .................................... 80,249 34,469
Proceeds from issuance of Common Stock ............................................. 1,463 294
-------- --------
Net cash provided by financing activities ..................... 51,459 22,142
EFFECT OF EXCHANGE RATE CHANGES ........................................................ 24 57
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................... 503 (188)
CASH AND CASH EQUIVALENTS, beginning of period ......................................... 3,648 8,267
-------- --------
CASH AND CASH EQUIVALENTS, end of period ............................................... $ 4,151 $ 8,079
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest ........................................................ $ 11,365 $ 14,123
Cash paid for income taxes .................................................... 6,676 350
Assets acquired under capital leases .......................................... -- 1,081
Convertible subordinated notes and other notes issued for Purchased Companies . 9,626 --
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
6
<PAGE>
COACH USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
In September 1995, Coach USA, Inc. ("Coach USA" or the "Company") was
founded to create a national company providing motorcoach transportation
services, including charter and tour services, and related passenger ground
transportation services.
In May 1996, Coach USA acquired, simultaneously with the closing of its
initial public offering, six established businesses. Through March 31, 1999, the
Company has acquired over 70 additional passenger ground transportation
businesses. Of these additional businesses acquired, 22 were accounted for as
poolings-of-interests. The remaining businesses acquired were accounted for as
purchases and are referred to herein as the "Purchased Companies" (see Note 5).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Coach USA and the Purchased Companies since their respective dates
of acquisition.
INTERIM CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The unaudited condensed consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
(SEC). Certain information and footnote disclosures, normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to fairly present the financial position, results of operations and
cash flows with respect to the interim consolidated financial statements, have
been included. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
It is suggested that these condensed consolidated financial statements be
read in conjunction with the audited consolidated financial statements and notes
thereto included in Coach USA's Annual Report on Form 10-K for the year ended
December 31, 1998, as filed with the SEC.
SEASONALITY
The timing of certain holidays, weather conditions and seasonal vacation
patterns may cause the Company's quarterly results of operations to fluctuate
significantly. The Company expects to realize higher revenues, operating income
and net income during the second and third quarters and lower revenues and net
income during the first and fourth quarters.
7
<PAGE>
COACH USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(CONTINUED)
RECLASSIFICATIONS
Certain reclassifications have been made in prior periods to conform with
the current presentation. All significant intercompany transactions have been
eliminated in consolidation.
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 an element of comprehensive income and as a separate
component of stockholders' equity. Gains and losses from transactions in foreign
currencies are reported in other income and are not significant.
CUMULATIVE OTHER COMPREHENSIVE INCOME
As of March 31, 1999, the components of cumulative other comprehensive
income include $0.3 million related to a minimum pension liability and $0.6
million in cumulative foreign currency translation adjustments. In addition,
comprehensive income for the three months ended March 31, 1998 was $2.4 million.
NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standard (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.
In April 1998, the American Institute of Certified Public Accountants 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 has adopted SOP 98-5 effective
January 1, 1999. The adoption of SOP 98-5 resulted in a non-recurring, non-cash,
after-tax charge of approximately $5.2 million.
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.
3. NET INCOME PER COMMON SHARE
Earnings per share amounts are based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. The weighted average number of shares used to compute basic and diluted
earnings per share for the three months ended March 31, 1998 and 1999 are
illustrated below (in thousands):
8
<PAGE>
COACH USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------
1998 1999
--------- ---------
<S> <C> <C>
Net income (loss):
Net income for basic earnings per share -
income available to common stockholders .............. $ 2,355 $ (1,589)
Effect of convertible subordinated notes under the
"if converted" method - interest expense addback,
net of taxes (1) ..................................... -- --
-------- --------
Net income (loss) for diluted earnings per share - income
available to common stockholders ..................... $ 2,355 $ (1,589)
======== ========
Weighted average shares:
Weighted average shares outstanding for
basic earnings per share ............................. 22,024 25,421
Effect of dilutive stock options and warrants ........... 599 333
Effect of convertible subordinated notes under
the "if converted" method - weighted average
convertible shares issuable (1) ...................... -- --
-------- --------
Weighted average shares outstanding for diluted
earnings per share ................................... 22,623 25,754
======== ========
</TABLE>
(1) All convertible subordinated notes outstanding as of March 31,1998 and 1999
are anti-dilutive for purposes of determining earnings per share. As such,
they have been excluded from the calculation for the respective periods
presented.
4. LONG TERM OBLIGATIONS
REVOLVING CREDIT FACILITIES
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 March 31,
1999, the Company had a total of $421.5 million outstanding under the revolving
and other outside credit 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 $61.7 million under
the revolving and other outside credit facilities.
9
<PAGE>
COACH USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(CONTINUED)
CONVERTIBLE SUBORDINATED NOTES
As of March 31, 1999, the Company had outstanding $74.6 million of
convertible subordinated notes issued 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 4.58% and are convertible
by the holder into shares of Common Stock, at any time after one year of
issuance.
5. BUSINESS COMBINATIONS
PURCHASES
During 1998, the Company acquired several businesses in transactions
accounted for as purchases. The aggregate consideration paid in these
transactions was $186.7 million in cash, net of cash acquired, approximately
331,000 shares of the Company's Common Stock, $49.7 million in subordinated
notes convertible into approximately 971,000 shares of Common Stock and $18.4
million of other subordinated notes payable. The accompanying condensed
consolidated balance sheet as of March 31, 1999, includes certain preliminary
allocations of the respective purchase prices and is subject to final
adjustment. The preliminary allocations resulted in goodwill recognized of
$258.6 million, representing the excess of the purchase price over the fair
value of the net assets acquired.
During the three months ended March 31, 1999, the Company acquired
additional businesses in transactions accounted for as purchases. The aggregate
consideration paid in these transactions was $1.3 million in cash, net of cash
acquired. The accompanying condensed consolidated balance sheet as of March 31,
1999, includes certain preliminary allocations of the respective purchase prices
and is subject to final adjustment. The preliminary allocations resulted in
goodwill recognized of $1.4 million, representing the excess of the purchase
price over the fair value of the net assets acquired.
The PRO FORMA FOR PURCHASED COMPANIES data below gives pro forma effect to
the acquisition of the Purchased Companies as if those acquisitions occurred on
January 1, 1998, and gives further pro forma effect to (i) certain reductions in
salaries and benefits to the former owners of the Purchased Companies which were
agreed to in connection with the acquisitions of the Purchased Companies
(collectively, the "Compensation Differential"), (ii) the amortization of
goodwill, (iii) interest expense attributable to cash expended and convertible
subordinated and other notes issued in connection with the acquisition of the
Purchased Companies, (iv) an adjustment to record the interest savings related
to the repayment of debt from proceeds of the secondary offering of Common Stock
completed in May 1998, as if the offering had been completed at the beginning of
all periods presented, and (v) income tax adjustments attributable to the above
adjustments (in thousands, except per share data).
10
<PAGE>
COACH USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(CONTINUED)
PRO FORMA FOR PURCHASED COMPANIES:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1999
-------- --------
(unaudited)
<S> <C> <C>
Revenues ........................................................ $194,838 $202,099
Income before extraordinary items and cumulative
effect of change in accounting principle ..................... 2,231 3,617
Diluted earnings per share before extraordinary items
and cumulative effect of change in accounting principle ...... .09 .14
</TABLE>
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.
6. COMMITMENTS AND CONTINGENCIES
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 is also subject to routine litigation
regarding contracts and employment claims. The Company has provided for certain
of these actions in the accompanying interim condensed consolidated financial
statements. In the opinion of management, uninsured losses, if any, resulting
from the ultimate resolution of these matters will not be material to the
Company's financial position or results of operations.
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 May 7, 1999, the STB
had approved or 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 the acquisitions completed after August 1998 or future
acquisitions.
ESTIMATED INSURANCE CLAIMS
The primary casualty 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 $1,000,000, with a
majority of claims being made against the motorcoach operations, where the per
incident deductible is $1,000,000. As such, any claim within the deductible per
incident would be the financial obligation of the Company.
The accrued insurance claims, included in accounts payable and accrued
liabilities on the accompanying condensed consolidated balance sheet, represents
management's estimate of the Company's potential claims
11
<PAGE>
COACH USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(CONTINUED)
costs in satisfying the deductible provisions of its insurance policies for
claims occurring through March 31, 1999. The accrual is based on known facts and
historical trends. Management believes such accrual to be adequate.
7. 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 thousands).
THREE MONTHS ENDED
MARCH 31,
---------------------
1998 1999
-------- -------
(unaudited)
BY SEGMENT:
Revenues:
Motorcoach Transportation................. $126,048 $171,953
Taxicab Services.......................... 23,935 29,646
-------- --------
Total................................. $149,983 $201,599
======== ========
Operating Profit:
Motorcoach Transportation................. $ 8,398 $ 12,312
Taxicab Services.......................... 3,352 4,616
-------- --------
Total................................. $ 11,750 $ 16,928
======== ========
BY GEOGRAPHIC AREA:
Revenues:
United States............................. $142,879 $194,660
Canada ................................... 7,104 6,939
-------- --------
Total................................. $149,983 $201,599
======== ========
12
<PAGE>
COACH USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(CONTINUED)
8. SUPPLEMENTAL GUARANTOR INFORMATION
The Company's payment obligations under the Senior Subordinated Notes are
jointly and severally guaranteed by all domestic subsidiaries (the Guarantors)
of the Company. The following unaudited condensed consolidating balance sheet,
statement of income and statement of cash flows presents the combined financial
statements of the Guarantors and non-guarantor subsidiaries. Separate financial
statements and other disclosures concerning the Guarantors are not deemed
material to investors. Information as of March 31, 1999 and for the three 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.
13
<PAGE>
COACH USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COACH GUARANTOR NONGUARANTOR
USA, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................ $ -- $ 4,610 $ (459) $ -- $ 4,151
Accounts receivable, net of allowance ................ -- 46,639 2,787 -- 49,426
Inventories .......................................... -- 24,502 1,655 -- 26,157
Notes receivable, current portion .................... -- 4,497 -- -- 4,497
Prepaid expenses and other current assets ............ -- 21,304 1,486 -- 22,790
--------- --------- --------- --------- ---------
Total current assets ........................... -- 101,552 5,469 -- 107,021
PROPERTY & EQUIPMENT, net ............................ -- 445,976 14,960 -- 460,936
NOTES RECEIVABLE, net of allowance ................... -- 10,240 -- -- 10,240
GOODWILL, net ........................................ -- 164,688 9,326 -- 174,014
INTERCOMPANY & INVESTMENTS
IN SUBSIDIARIES ................................ 504,560 -- -- (504,560) --
OTHER ASSETS, net .................................... 7,039 10,406 380 -- 17,825
--------- --------- --------- --------- ---------
Total assets ................................... $ 511,599 $ 732,862 $ 30,135 $(504,560) $ 770,036
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations .......... $ -- $ 5,352 $ 9,340 $ -- $ 14,692
Current maturities of convertible
subordinated notes ............................. -- 8,330 -- -- 8,330
Accounts payable and accrued liabilities ............. 3,899 84,826 4,862 -- 93,588
--------- --------- --------- --------- ---------
Total current liabilities ...................... 3,899 98,508 14,202 -- 116,610
LONG-TERM OBLIGATIONS, net of current
maturities ........................................... 186,043 471,695 10,058 (433,046) 234,750
SENIOR SUBORDINATED NOTES ................................. 150,000 -- -- -- 150,000
CONVERTIBLE SUBORDINATED NOTES,
net of current maturities ............................ -- 51,596 -- -- 51,596
DEFERRED INCOME TAXES ..................................... -- 42,965 2,458 -- 45,423
--------- --------- --------- --------- ---------
Total liabilities .............................. 339,942 664,764 26,719 (433,046) 598,379
STOCKHOLDERS' EQUITY:
Preferred stock ...................................... -- -- -- -- --
Common stock ......................................... 222 80 5 (85) 222
Additional paid-in capital ........................... 130,253 55,442 1,668 (57,110) 130,253
Cumulative other comprehensive income ................ (455) -- (455) 455 (455)
Retained earnings .................................... 41,637 12,576 2,198 (14,774) 41,637
--------- --------- --------- --------- ---------
Total stockholders' equity ..................... 171,657 68,098 3,416 (71,514) 171,657
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity ..... $ 511,599 $ 732,862 $ 30,135 $(504,560) $ 770,036
========= ========= ========= ========= =========
</TABLE>
14
<PAGE>
COACH USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COACH GUARANTOR NONGUARANTOR
USA, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES ..................................... $ -- $ 142,812 $ 7,171 $ -- $ 149,983
OPERATING EXPENSES ........................... -- 110,514 7,466 -- 117,980
--------- --------- --------- --------- ---------
Gross profit ............................ -- 32,298 (295) -- 32,003
GENERAL AND ADMINISTRATIVE EXPENSES .......... 18 17,960 836 -- 18,814
AMORTIZATION EXPENSE ......................... 372 997 70 -- 1,439
--------- --------- --------- --------- ---------
Operating income ........................ (390) 13,341 (1,201) -- 11,750
INTEREST EXPENSE ............................. -- 7,356 389 -- 7,745
EQUITY IN INCOME OF SUBSIDIARIES ............. 2,745 -- -- (2,745) --
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEMS ..................... 2,355 5,985 (1,590) (2,745) 4,005
PROVISION FOR INCOME TAXES ................... -- 2,215 (653) -- 1,562
--------- --------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEMS ............ 2,355 3,770 (937) (2,745) 2,443
EXTRAORDINARY ITEMS, net of income taxes ..... -- (88) -- -- (88)
--------- --------- --------- --------- ---------
NET INCOME ................................... $ 2,355 $ 3,682 $ (937) $ (2,745) $ 2,355
========= ========= ========= ========= =========
</TABLE>
15
<PAGE>
COACH USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COACH GUARANTOR NONGUARANTOR
USA, INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
---------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................ $ 2,355 $ 3,682 $ (937) $ (2,745) $ 2,355
Adjustments to reconcile net income -
Depreciation and amortization ......................... 372 10,577 168 -- 11,117
Equity in income of subsidiaries ...................... (2,745) -- -- 2,745 --
Gain on sale of assets ................................ -- (88) (163) -- (251)
Deferred income tax provision ......................... -- 2,118 (417) -- 1,702
Changes in operating assets and liabilities, net of
effect of Purchased Companies -
Accounts receivable, net .......................... -- (5,191) 510 -- (4,681)
Inventories ....................................... -- (2,992) (184) -- (3,176)
Prepaid expenses and other current assets ......... -- 2,087 160 -- 2,247
Accounts payable and accrued liabilities .......... (3,993) (3,079) (1,037) -- (8,109)
Other ............................................. 123 4 (73) -- 54
-------- -------- -------- -------- --------
Net cash provided by operating activities ...... (3,888) 7,119 (1,973) -- 1,258
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ....................... -- (34,598) (742) -- (35,340)
Proceeds from sales of property and equipment ............. -- 2,899 281 -- 3,180
Cash consideration paid for Purchased Companies, net ...... (18,385) -- -- -- (18,385)
Increase in notes receivable .............................. -- (1,693) -- -- (1,693)
-------- -------- -------- -------- --------
Net cash used in investing activities .......... (18,385) (33,392) (461) -- (52,238)
CASH FLOWS FROM FINANCING ACTIVITIES:
Intercompany activity ..................................... (45,890) 45,890 -- -- --
Principal payments on long-term obligations ............... -- (29,915) (338) -- (30,253)
Proceeds from issuance of long-term obligations ........... 76,320 1,862 2,067 -- 80,249
Proceeds from issuance of Common Stock .................... 1,463 -- -- -- 1,463
Proceeds from issuance of Common Stock .................... -- -- -- -- --
-------- -------- -------- -------- --------
Net cash provided by financing activities ...... 31,893 17,837 1,729 -- 51,459
EFFECT OF EXCHANGE RATE CHANGES .............................. -- -- 24 -- 24
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH .............................. 9,620 (8,436) (681) -- 503
CASH AND CASH EQUIVALENTS,
beginning of period ....................................... (9,620) 13,046 222 -- 3,648
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, end of period ..................... $ -- $ 4,610 $ (459) $ -- $ 4,151
======== ======== ======== ======== ========
</TABLE>
16
<PAGE>
COACH USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
(CONTINUED)
9. SUBSEQUENT EVENTS
Subsequent to March 31, 1999, the Company acquired several taxicab
operations and two additional motorcoach businesses. The aggregated
consideration paid in these transactions was $7.4 million in cash and $2.1
million in convertible subordinated notes convertible into approximately 52,000
shares of the Company's Common Stock. These subsequent acquisitions were
accounted for as purchases.
17
<PAGE>
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THE COMPANY'S DISCLOSURE AND ANALYSIS IN THIS REPORT CONTAINS SOME
FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS GIVE CURRENT EXPECTATIONS
OR FORECASTS OF FUTURE EVENTS. THESE STATEMENTS ARE IDENTIFIED 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, THE COMPANY ALSO MAY
PROVIDE ORAL OR WRITTEN FORWARD-LOOKING STATEMENTS IN OTHER MATERIALS THE
COMPANY RELEASES TO THE PUBLIC.
ANY OR ALL OF THE FORWARD-LOOKING STATEMENTS IN THIS REPORT AND IN ANY OTHER
PUBLIC STATEMENTS THE COMPANY MAKES MAY TURN OUT TO BE WRONG. THEY CAN BE
AFFECTED BY INACCURATE ASSUMPTIONS THE COMPANY MIGHT MAKE OR BY KNOWN OR UNKNOWN
RISKS AND UNCERTAINTIES. CONSEQUENTLY, NO FORWARD-LOOKING STATEMENT CAN BE
GUARANTEED. ACTUAL FUTURE RESULTS MAY VARY MATERIALLY.
THE COMPANY UNDERTAKES 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 THE COMPANY MAKES ON RELATED
SUBJECTS IN THE COMPANY'S 10-Q, 8-K AND 10-K REPORTS TO THE SEC INCLUDING THE
CAUTIONARY DISCUSSION OF RISKS, UNCERTAINTIES AND POSSIBLY INACCURATE
ASSUMPTIONS RELEVANT TO OUR BUSINESS. THE FACTORS THAT THE COMPANY THINKS COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM EXPECTED AND HISTORICAL RESULTS
INCLUDE: A LIMITED COMBINED OPERATING HISTORY, THE ABILITY TO EXECUTE THE
COMPANY'S ACQUISITION STRATEGY, CAPITAL AVAILABILITY AND ACQUISITION FINANCING,
THE EFFECTS OF LEVERAGE, SEASONALITY OF THE MOTORCOACH BUSINESS, FLUCTUATIONS IN
FUEL PRICES AND TAXES, INCREASES IN INSURANCE COSTS AND CLAIMS, COMPETITION,
LABOR RELATIONS, RELIANCE ON GOVERNMENTAL FUNDING, IMPACT OF GOVERNMENTAL
REGULATION, AND ENVIRONMENTAL LIABILITIES. 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.
The Company was founded in September 1995 to create a nationwide provider of
motorcoach and other ground transportation services. Today, the Company is 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 the initial public offering in May 1996 through March 31, 1999,
the Company has 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.
The Company continues to realize savings by consolidating certain general,
administrative and purchasing functions and reducing insurance expenses. In
addition, the Company continues to realize savings from its ability to borrow at
lower interest rates than the acquired companies. These savings are partially
offset by the costs of being a public company and the incremental costs related
to the corporate
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
management group. 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.
The Company's motorcoach revenues are derived from fares charged to
individual passengers and fees charged under contracts and other arrangements to
provide motorcoach services. Taxicab operation revenues are derived from fees
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.
RESULTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------------------------------
1998 1999
--------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues ...................................................... $149,983 100.0% $201,599 100.0%
Operating expenses ............................................ 117,980 78.7 155,946 77.4
-------- ----- -------- -----
Gross profit .......................................... 32,003 21.3 45,653 22.6
General and administrative expenses ........................... 18,814 12.5 26,038 12.9
Amortization expense .......................................... 1,439 1.0 2,687 1.3
-------- ----- -------- -----
Operating income ...................................... 11,750 7.8 16,928 8.4
Interest expense .............................................. 7,745 5.2 10,990 5.5
-------- ----- -------- -----
Income before income taxes and extraordinary items
and cumulative effect of change in accounting principle 4,005 2.7 5,938 2.9
Provision for income taxes .................................... 1,562 1.0 2,375 1.2
-------- ----- -------- -----
Income before extraordinary items
and cumulative effect of change in accounting principle $ 2,443 1.6% $ 3,563 1.8%
======== ===== ======== =====
</TABLE>
The historical results above include the results of the Company, for all
periods presented, and the Purchased Companies from their respective dates of
acquisition.
HISTORICAL RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO 1999
Revenues increased by 34.4% to $201.6 million for the three months ended
March 31, 1999. The increase in revenues was primarily due to the incremental
revenues of certain Purchased Companies acquired in 1998 of $43.3 million and
additional revenues of approximately $8.3 million related to the expansion of
privatization and outsourcing services and continued internal growth in the
charter, tour and taxicab operations.
Operating expenses increased 32.2% to $155.9 million for the three months
ended March 31, 1999, from $118.0 million for the three months ended March 31,
1998. The increase in operating expenses was primarily due to the acquisition of
the Purchased Companies in 1998. However, operating expenses as a percentage of
revenues decreased from 78.7% for the three months ended March 31, 1998 to 77.4%
for the three months ended March 31, 1999. This improvement is primarily
attributable to lower maintenance parts costs as a result of new equipment
purchases and savings from the continued implementation of our
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
national parts buying program, lower insurance costs and a decline in fuel and
oil costs as a result of lower fuel prices.
General and administrative expenses increased 38.4% to $26.0 million for
the three months ended March 31, 1999, from $18.8 million for the three months
ended March 31, 1998. The increase in general and administrative expenses was
primarily due to the acquisition of the Purchased Companies in 1998 and the
additional costs of the corporate management group required to execute corporate
strategy and to manage the consolidated group of companies. In addition, as a
percentage of revenues, general and administrative expenses increased from 12.5%
for the three months ended March 31, 1998 to 12.9% for the three months ended
March 31, 1999. This increase is primarily due to certain companies acquired
during the second and third quarter of 1998 that historically operate with
higher levels of general and administrative expenses as compared to the Company
on a consolidated basis.
Interest expense increased $3.2 million for the three months ended March
31, 1999, as compared to the three months ended March 31, 1998, due to higher
levels of debt resulting from cash paid, debt assumed and convertible
subordinated and other notes issued in connection with the acquisition of
certain Purchased Companies in 1998 and 1999, and additional equipment and other
capital purchases. This increase was partially offset by lower rates under the
Company's revolving credit facilities.
Net income before extraordinary items and cumulative effect of change in
accounting principle increased during the three months ended March 31, 1999 as
compared to the three months ended March 31, 1998, primarily due to the
acquisitions of the Purchased Companies and the effects of increased purchasing
power on lowering certain operating costs and lower fuel prices.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $10.4 million for the three
months ended March 31, 1999. Capital expenditures during the period, net of
trade-ins and proceeds from sales of property and equipment, totaled $30.4
million. The majority of the capital expenditures were for the purchase of
motorcoach equipment for fleet additions.
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 facility 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 May 6, 1999,
the Company had a total of $436.2 million outstanding under the revolving and
other outside credit facilities and had utilized $21.8 million of the facilities
for letters of credit securing certain
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
insurance obligations and performance bonds, resulting in a borrowing
availability of $47.0 million under the revolving and other outside credit
facilities.
In May 1999, the Company announced its intention to offer $150 million to
$200 million of senior subordinated notes in order to improve the Company's
financial flexibility and provide further resources for its acquisition program.
Proceeds from the debt offering would be used to reduce indebtedness under the
Company's revolving credit facilities. The Company has not signed a definitive
agreement with an underwriter at this time, therefore the Company can not
guarantee that it will be successful in completing any offering of debt
securities.
Management believes that the Company's revolving credit facility, its cash
flows from operations, and shares of Common Stock available under its shelf
registration statement will provide sufficient liquidity or acquisition currency
to execute the Company's acquisition and internal growth plans for the next
twelve months. Should the Company accelerate its acquisition program, the
Company may need to seek additional financing through the public or private sale
of equity or debt securities. There can be no assurance that the Company could
secure such financing if and when it is needed or on terms the Company deems
acceptable.
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-five percent complete and the amount
expended to date is approximately $520,000. We believe that the cost to replace
the remaining non- compliant systems or the cost to update the systems in 1999
should not exceed $280,000, 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
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS - (CONTINUED)
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.
22
<PAGE>
PART I, ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to market risk primarily from interest rates and
certain commodity prices. Management is actively involved in monitoring exposure
to market risks and continues to develop and utilize appropriate risk management
techniques. As such, the Company may enter into certain derivative financial
instruments such as interest rate caps or swaps and commodity forward contracts.
The Company does 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 the
Company's 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 management may take to mitigate exposure to such changes. The market
changes, assumed to occur as of March 31, 1999, 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.
INTEREST RATES. As of March 31, 1999, the Company had no derivative
financial instrument to manage interest rate risk. As such, the Company is
exposed to earnings and fair value risk due to changes in interest rates with
respect to our long-term obligations. As of March 31, 1999, approximately 53.5%
of our long-term obligations were floating rate obligations. The detrimental
effect on annual earnings of the hypothetical 100 basis point increase in
interest rates described above would be approximately $3.5 million before income
taxes. This effect is primarily due to the floating rate borrowings under the
Company's revolving credit facilities. As of March 31, 1999, the fair value of
the Company's fixed-rate debt is approximately $297.4 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 the Company's fixed-rate debt resulting from a hypothetical 100 basis
point decrease in interest rates, was approximately $0.7 million as of March 31,
1999.
COMMODITY PRICES. The Company's results of operations are impacted by
changes in the price of diesel fuel. Diesel fuel accounts for approximately 4.5%
of annual operating expenses. Based on the Company's 1999 projected fuel
consumption, a $0.05 change in the average price per gallon of diesel fuel would
impact annual fuel expense by approximately $0.6 million, after the effect of
hedging instruments currently in place. In order to offset its exposure to a
potential change in price for diesel fuel, the Company has 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 the Company not benefitting from certain fuel price declines. As of
March 31, 1999, the Company had hedged over 70% of its remaining 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 $1.3 million as of March 31, 1999. This amount excludes
the offsetting impact of the price risk inherent in the physical purchase of the
underlying commodity.
23
<PAGE>
COACH USA, INC.
PART II - OTHER INFORMATION - (CONTINUED)
Item 1. LEGAL PROCEEDINGS.
None.
Item 2. CHANGES IN SECURITIES.
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
Item 5. OTHER INFORMATION.
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 - Financial Data Schedule.
(b) Reports on Form 8-K.
None.
24
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Coach USA, Inc., has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
COACH USA, INC.
Dated: May 14, 1999
By: /s/ LAWRENCE K. KING
Name: Lawrence K. King
Title: Chairman of the Board and
Chief Executive Officer
Dated: May 14, 1999 /s/ RAYMOND K. TURNER
By: Raymond K. Turner
Name: Vice President of Finance and
Title: Corporate Controller
(Principal Accounting Officer)
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 8,079
<SECURITIES> 0
<RECEIVABLES> 80,931
<ALLOWANCES> (5,149)
<INVENTORY> 37,769
<CURRENT-ASSETS> 157,206
<PP&E> 729,000
<DEPRECIATION> (132,651)
<TOTAL-ASSETS> 1,203,927
<CURRENT-LIABILITIES> 173,365
<BONDS> 646,110
0
0
<COMMON> 254
<OTHER-SE> 349,550
<TOTAL-LIABILITY-AND-EQUITY> 1,203,927
<SALES> 201,599
<TOTAL-REVENUES> 201,599
<CGS> 155,946
<TOTAL-COSTS> 155,946
<OTHER-EXPENSES> 28,725
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,990
<INCOME-PRETAX> 5,938
<INCOME-TAX> 2,375
<INCOME-CONTINUING> 3,563
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (5,152)
<NET-INCOME> (1,589)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
