<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1997
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 000-22551
CAREY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1171965
(State of incorporation (IRS Employer
or organization) Identification No.)
4530 WISCONSIN AVENUE, NW, FIFTH FLOOR 20016
WASHINGTON, DC (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (202) 895-1200
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01
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 last 90 days. Yes [X] No [_]
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 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 10-K. [_]
As of February 24, 1998, an aggregate of 7,680,691 shares of Common
Stock, par value $.01, were outstanding, and the aggregate market value of the
Registrant's Common Stock held by non-affiliates was $104,243,382 based upon the
closing price of the Common Stock on the Nasdaq National Market on such date.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, filed pursuant
to Section 14(a) of the Act in connection with the registrant's 1998 annual
meeting of shareholders, may be incorporated by reference in Part III of this
report.
================================================================================
<PAGE>
PART 1
- ------
Item 1. Business
--------
Carey International, Inc. is one of the world's largest chauffeured
vehicle service companies, providing services through a worldwide network of
owned and operated companies, licensees and affiliates serving 420 cities in
65 countries. (Unless the context otherwise requires, "Carey" or the
"Company" refers to Carey International, Inc. and its subsidiaries.) The
"Carey" brand name has represented quality chauffeured vehicle services since
the 1920's. The Company owns and operates its service providers in New York,
San Francisco, Los Angeles, London, Washington D.C., Indianapolis, South
Florida and Philadelphia. In addition, the Company generates revenues from
licensing the "Carey" name and providing central reservation, billing and
sales and marketing services to its licensees. The Company's worldwide
network also includes affiliates in locations in which the Company has
neither owned and operated companies nor licensees. Over the past five years,
the Company has invested significant capital in developing its reservation,
central billing and worldwide service infrastructure. By leveraging its
current infrastructure and position as a market leader, the Company intends
to consolidate the highly fragmented chauffeured vehicle service industry
through the acquisition of: (i) current Carey licensees, (ii) additional
companies in markets in which the Company already owns and operates a
chauffeured vehicle service company, and (iii) companies in other strategic
markets in North America and Europe. The Company also intends to add to its
global presence by establishing strategic alliances with companies in the
Pacific rim of Asia and in Latin America.
The Carey network utilizes chauffeured sedans, limousines, vans and
minibuses to provide services for airport pick-ups and drop-offs, inter-
office transfers, business and association meetings, conventions, road shows,
promotional tours, special events, incentive travel and leisure travel.
Businesses and business travelers utilize the Company's services primarily as
a management tool to achieve more efficient use of time and other resources.
Carey's worldwide network of chauffeured vehicle service companies
allows it to provide services with consistently high quality to its customers
in virtually every major city in the expanding global travel market. The
network is linked to over 300,000 reservation terminals in travel agencies,
corporate travel departments and government agencies by the Carey
International Reservation System (the "CIRS"), the chauffeured vehicle
service industry's most extensive centralized global reservation system.
MARKET OVERVIEW
The Company estimates that the United States chauffeured vehicle
service industry generated revenues of approximately $3.9 billion in 1996,
the latest year for which statistics are available, and has undergone steady
growth in recent years, with revenues increasing at a compound annual growth
rate of 10.9% between 1990 and 1996. The industry is highly fragmented, with
approximately 9,000 companies utilizing over 100,000 vehicles. The Company
believes that during 1997 no chauffeured vehicle service company accounted
for more than 2% of total United States industry revenues. The Company also
believes that similar fragmentation exists in the chauffeured vehicle service
industry outside the United States.
1
<PAGE>
The chauffeured vehicle service industry serves businesses in
virtually all industrial and financial sectors of the economy . The Company
believes that business customers are becoming increasingly sophisticated in
their use of ground vehicle services and are demanding a broader array of
"meet-and-greet" and other services, as well as business amenities such as
cellular phones. Although there are other forms of transportation that
compete with chauffeured vehicles, such as buses, jitney services, taxis,
radio cars and rental cars, the Company believes that none of those forms of
transportation provides the quality, dependability and value-added services
of chauffeur-driven vehicles. The Company also believes that businesses place
a premium on service providers that are able to coordinate the travel
itinerary of each member of a large group over many locations with a single
reservation and billing system.
BUSINESS STRATEGY
The Company's objective is to increase its profitability and its
market share in the chauffeured vehicle service industry by implementing the
following growth strategies:
Expand Through Acquisitions. The Company believes that there are
significant opportunities to acquire additional chauffeured vehicle
service companies that would benefit from the capital and management
resources that the Company can provide. Carey intends to acquire
current Carey licensees, as well as additional chauffeured vehicle
service companies both in markets in which the Company already owns
and operates such a company and in other strategic regions in North
America and Europe. Carey also intends to establish strategic
alliances with companies in the Pacific rim of Asia and in Latin
America. Carey believes it has a competitive advantage in acquiring
licensees because of a right of first refusal contained in the
substantial majority of its domestic license agreements. The Company
has successfully begun to implement its acquisition strategy, having
acquired 19 chauffeured vehicle service companies since November 1991.
Increase International Market Share. Approximately 11.5% of the
Company's revenue, net was derived from services performed outside the
United States during its fiscal year ended November 30, 1997. Of these
international revenues, approximately 72.0% was generated by the
Company's owned and operated business in London, approximately 27.2%
was generated by the Company's international licensees and the
remainder was generated by the Company's international affiliates.
Carey believes that its network can capture a significant portion of
the growing international market for chauffeured vehicle services by
acquiring or licensing additional chauffeured vehicle service
companies and otherwise implementing the Carey system outside the
United States. The Company intends to increase its international
presence by intensifying its sales and marketing efforts,
strengthening its relationship with significant domestic and
international business travel arrangers, and capitalizing on the
capacity of the CIRS to operate on a global scale. By enhancing its
international presence, the Company also expects to increase its
revenues from providing chauffeured vehicle services to international
travelers both visiting the United States and traveling abroad.
Expand Licensee Network Worldwide. The Company will seek to expand
its worldwide network and generate additional revenues from license
and marketing fees by licensing additional chauffeured vehicle service
companies in smaller markets that do not
2
<PAGE>
justify a Company-owned presence. Ultimately, as these less strategic
markets grow in size and importance to the Company, the licensees in
such markets may become acquisition candidates.
Convert Salaried Chauffeurs to Independent Operators. The Company
believes that it can improve its profitability by continuing to convert
salaried chauffeurs to independent operators in certain businesses
acquired by Carey. The objective of Carey's independent operator
strategy is to instill in each chauffeur the sense of purpose,
responsibility and dedication characteristic of an independent business
owner, thereby increasing the profitability of the chauffeur and the
Company. Carey's independent operator program allows the Company to
reduce its labor and capital costs, convert fixed costs to variable
costs and generate revenues from fees paid by independent operators.
ACQUISITION STRATEGY
Carey believes that there are significant opportunities to acquire
additional chauffeured vehicle service companies as a result of: (i) the
highly fragmented and increasingly global nature of the industry, (ii)
industry participants' capital requirements and desire for liquidity, and
(iii) the pressures of increasing competition. The Company intends to
continue to pursue its acquisition program in order to strengthen its
position in its existing markets and to acquire operations or establish
strategic alliances in new markets.
Carey intends to pursue acquisitions that will allow the Company to
own and operate chauffeured vehicle service companies in new geographic
markets. The Company currently owns and operates chauffeured vehicle service
companies in seven of the largest United States travel markets and in London,
the largest European travel market, and will seek to acquire Carey licensees
in other significant travel markets in North America and Europe, and
establish strategic alliances with companies in the Pacific rim of Asia and
in Latin America. The Company believes that its ability to acquire its
licensees will be enhanced by a right of first refusal that is contained in a
substantial majority of its domestic license agreements and the limited terms
of most of its international license agreements. The Company's preference is
to retain key management, operating and sales personnel of an acquired
company in a new market in order to maintain continuity of operations and
customer service.
The Company believes that it has a market share of less than 10% in
each of the markets in which it owns and operates a chauffeured vehicle
service company, and that there is significant potential for it to expand its
business in such markets through acquisitions. When justified by the size of
an existing market acquisition, the Company expects to retain key management
and sales personnel of the acquired company and to seek to improve that
company's profitability through implementation of the Company's operating
strategies. In most instances, acquired operations can be integrated into the
Company's existing operations in a market, resulting in the elimination of
duplicative overhead and operating costs.
The Company believes that there are significant advantages to
consolidating the chauffeured vehicle service industry. Carey believes it can
increase revenues of acquired companies by marketing the worldwide services
of its network to customers of such companies, and by increasing
3
<PAGE>
the productivity of chauffeurs at the acquired companies through the
implementation of training and quality assurance programs. Moreover, Carey
believes that cost savings can be achieved following acquisitions through (i)
the consolidation of certain administrative functions and increased use of
automation, (ii) the elimination of redundant facilities, equipment and
personnel, and (iii) the conversion of salaried chauffeurs driving company-
owned vehicles into independent operators driving their own vehicles.
Carey has successfully begun its acquisition strategy, having acquired
19 chauffeured vehicle service companies since November 1991. The following
table lists the date of acquisition, location of each such chauffeured
vehicle service company and whether the acquired company was a licensee or
affiliate of Company or other chauffeured vehicle service company:
ACQUISITION HISTORY
NOVEMBER 1991--PRESENT
<TABLE>
<CAPTION>
Date Location Acquired Company
- ---- -------- ----------------
<S> <C> <C>
November 1991.............. Washington D.C. Other
September 1992............. Los Angeles, CA Other
August 1993................ Wilmington, DE Licensee
September 1993............. West Palm Beach, FL Licensee
November 1993.............. New York, NY Other
June 1994.................. Washington, DC Other
June 1994.................. Los Angeles, CA Other
December 1994.............. Boca Raton, FL Other
January 1995............... San Francisco, CA Other
April 1995................. Washington, D.C. Other
April 1995................. Ft. Lauderdale/Miami, FL Licensee
May 1995................... San Francisco, CA Other
August 1995................ San Francisco, CA Other
August 1995................ Boca Raton, FL Other
February 1996.............. London, England Affiliate
June 1997.................. New York, NY Other
October 1997............... Indianapolis, IN Affiliate
October 1997............... Los Angeles, CA Affiliate
December 1997.............. London, England Other
</TABLE>
The Company has analyzed significant data on the chauffeured vehicle
service industry and individual businesses within that industry and believes
that it is well positioned to further implement its acquisition program. The
Company believes that management's lengthy tenure with the Company, extensive
experience in the chauffeured vehicle service industry and relationships with
acquisition candidates provide the Company with significant knowledge that
will assist the Company in its attempts to acquire licensees of the Company
and other chauffeured vehicle service companies. The Company regularly
reviews various strategic acquisition opportunities and periodically engages
in discussions regarding such possible acquisitions. As the result of this
review process, negotiations and acquisition agreements may occur from time
to time if appropriate opportunities arise.
4
<PAGE>
The acquisition of Manhattan International Limousine Network, Ltd
("Manhattan Limousine") in June 1997 has solidified the Company's presence
in the New York metropolitan area and diversified its customer base. The
Company has benefitted from Manhattan Limousine's contracts with many New
York-based participants in the airline and hotel industries, including
airlines such as Virgin Atlantic Airways and Aer Lingus, and hotels such as
the Plaza Hotel and Mark Hotel. Typically these arrangements are terminable
by the airline or hotel upon 30 days' notice. While the Company has begun to
consolidate certain administrative operations of Manhattan Limousine with its
own to eliminate redundant facilities, equipment and personnel, Manhattan
Limousine otherwise will retain its separate identity until June 1998, if not
later.
Manhattan Limousine historically provided services solely through
independent operators rather than salaried chauffeurs. See "Independent
Operators." As a result of the acquisition, Carey assumed Manhattan
Limousine's network of approximately 300 affiliates from which Manhattan
Limousine received fees for referred business. A significant majority of
Manhattan Limousine's affiliates are located in cities in which the Company
already has affiliates, and in some cities Manhattan Limousine and the
Company share common affiliates.
As consideration for future acquisitions, the Company intends to use
various combinations of shares of Common Stock, cash and notes. The Company
has filed a Registration Statement on Form S-4 under which it may issue up to
1,500,000 shares of Common Stock in connection with acquisitions.
SERVICE PROVIDER NETWORK
Carey's international network of owned and operated chauffeured
vehicle service companies, licensees and affiliates, serving 420 cities in 65
countries, enables it to provide its customers chauffeured vehicles in
virtually every significant travel market throughout the world. Carey
believes that its network is the most extensive in the industry, and intends
to expand the network by adding qualified licensees and affiliates in
locations justifying new or expanded service. The Company believes that the
trend toward globalization is opening more cities for business and personal
travel around the world. The Company monitors and evaluates cities in which a
demand for chauffeured vehicle services may warrant a "Carey" presence.
The Company's network provides chauffeured vehicle services for
airport pickups and drop-offs, inter-office transfers, business and
association meetings, conventions, road shows, promotional tours, special
events, incentive travel and leisure travel. The Company also offers its
clients travel and tour planning services, "meet-and-greet" services,
destination management services for airport arrivals, group movement
coordination services, direct and central billing in U.S. dollars, and access
to the Company's 24-hour worldwide computerized reservation system, the CIRS.
The Company's fleet, primarily vehicles which are owned and operated
by independent operators in the owned and operated locations, contains four
types of vehicles: chauffeured sedans, limousines, vans and minibuses, some
of which can carry up to 30 persons. In addition, the Company subcontracts
from time to time for buses that can carry a greater number of passengers.
The vehicles of the Company's licensees and affiliates in larger markets are
similar to the Company's fleet, and in smaller markets generally consist of
only chauffeured sedans and limousines. All vehicles are driven by uniformed
professional chauffeurs, most of whom own the vehicles that they drive. Each
such
5
<PAGE>
chauffeur drives a clean, late model vehicle with amenities important to the
business traveler, such as cellular telephones and daily newspapers.
Owned and Operated Companies. The Company owns and operates
chauffeured vehicle service companies providing service to New York, San
Francisco, Indianapolis, Los Angeles, London, Washington, D.C., South
Florida, and Philadelphia. Revenue, net provided by these companies
represented approximately 76.1% of the Company's revenue, net in fiscal 1996
and 81.2% in fiscal 1997.
Licensees. The Company has 39 licensees serving 106 cities in the
United States and 24 licensees serving 105 cities outside the United States,
all of which operate under the Carey name. Revenue provided by the Company's
licensees represented approximately 17.1% and 14.7% of the Company's revenue,
net in fiscal 1996 and 1997, respectively.
The Company's domestic license fee ranges from $15,000 to $75,000,
depending upon the size of the market. The sum of the continuing fees paid by
the domestic licensee varies, but annually is generally less than 10% of its
revenues or, in some cases, less than 10% of an excess above a specified
base. Substantially all candidates appointed as domestic licensees have been
in business for at least 10 years prior to the grant of a license. The term
of a domestic license agreement entered into prior to January 1, 1996 is
perpetual and subsequent to January 1, 1996 is 10 years.
International licensees historically have not paid annual license
fees; rather, they have paid a commission on business referred to them. The
term of an international license agreement usually is from year to year,
although in a few cases it is perpetual.
Under the domestic license agreement, the Company provides the
licensee with: (i) the right to use the "Carey" name, (ii) participation in
the CIRS, (iii) various consulting services, (iv) identification in various
travel directories, (v) access to bulk purchasing arrangements for
automobiles, parts and maintenance materials, and (vi) national sales and
marketing services. In the event of a proposed transfer of a license or a
licensee, the Company has the right to approve the transfer. In addition, for
most license agreements executed prior to January 1, 1996 and all license
agreements executed on or after January 1, 1996, Carey retains a right of
first refusal by which it may acquire any license or licensee upon the same
terms as the license or licensee is proposed to be sold.
Typically, a licensee candidate acts as an affiliate before being
selected as a licensee. Licensees operate according to strict service
guidelines specified by the Company and market the Carey name in conjunction
with the Company's overall marketing program. The Company conducts ongoing
quality assurance programs and annual audits of licensees to insure that the
licensees have met the high service standards set forth by the Company. The
Company has the right to terminate any license if the licensee fails to
comply with such standards.
Affiliates. The Company utilizes affiliates to provide services to
its clients in cities where the Company does not have Company-owned
operations or licensees. Affiliates are not licensed to use the Carey name
and do not pay license fees to the Company, but must meet the Company's
quality standards in order to receive referred business. Pursuant to oral
agreements between the Company and its affiliates, the Company is entitled to
receive a commission of
6
<PAGE>
15% of net vehicle revenues for all referred business. The Company's
affiliates are located in 121 cities in the United States and 67 cities
outside the United States. Revenue provided by the Company's affiliates
represented approximately 1.8% and 1.3% of the Company's revenue, net in
fiscal 1996 and 1997, respectively.
CAREY INTERNATIONAL RESERVATION SYSTEM (CIRS)
The hub of the Company's network of service providers is the CIRS, the
Carey International Reservation System. The CIRS is operated on a 24-hour
basis by Carey's central reservation department, which processes reservations
through the Company's proprietary computer system. The central reservation
department receives reservations through the Company's toll free "800"
telephone number (800-336-4646), by fax or telex, or through one of the six
major airline reservation systems, SABRE, APOLLO, WORLDSPAN, GALILEO, BABS
and SITA. These airline systems allow travel agencies, corporate travel
departments and government offices to access the CIRS through over 300,000
reservation terminals worldwide. The Company charges a licensee or affiliate
for each reservation referred to the licensee or affiliate through the CIRS.
The CIRS can be accessed for up-to-date tariffs both in dollars and
foreign currency for 420 cities throughout the world. Through the CIRS, the
Company's reservation and customer service personnel have instant access to
all rates, services offered, types of vehicles available and special airport
greeting capabilities in each individual city. Individual customer profiles
are maintained including vehicle and chauffeur preferences, frequent pick-up
points, addresses and directions, billing requirements and account status.
The CIRS is used to make arrangements for a broad range of business
and consumer applications such as transportation to and from airports,
association and industry meeting and functions, road shows, transportation
related to incentive travel, boards of directors meetings and sight seeing
tours. Special customer service facilities are available with direct phone
lines, including a special service desk, executive VIP desk, international
tour desk, special event desk and road show desk.
The CIRS utilizes client/server architecture and proprietary software
developed over a five-year period which allows constant input into a complex
international network linking more than 65 countries. A primary strength of
the CIRS is the reliability of its reporting and control systems which verify
all reservations for complete information, customer service requirements and
accounting authorizations. The CIRS also contains customers' invoicing
programs to allow central billing directly through the system for all
services used worldwide. In addition, the system's ability to track
reservations allows more accurate and detailed analyses for marketing
purposes.
In 1992, the Company began leasing its reservation and operating
systems to its licensees. These systems create a basis for certain licensees
to have direct access to the CIRS and provide them with the ability to book
local reservations, dispatch vehicles and account for chauffeured vehicle
services.
7
<PAGE>
MARKETING, SALES AND CUSTOMER SERVICE
The Company believes that "Carey," a registered service mark, is a
highly recognized name in the chauffeured vehicle service and travel
industries worldwide. The Company intends to continue to expand recognition
of the "Carey" name through its marketing and promotional efforts. Carey has
developed an extensive marketing program directed at both the travel arranger
and the end user of chauffeured vehicle services. The program consists of
directory listings, advertising, direct mail, public relations, cooperative
promotional and joint marketing programs, attendance at and sponsorship of
travel-related conventions and workshops and direct selling. The direct sales
force serving the Company and its licensees currently consists of
approximately 30 professionals.
Carey is listed in approximately 95 travel directories which are used
by travel arrangers to obtain information on travel related services.
Advertising targeted at travel arrangers is placed in over 35 trade journals
including Business Travel Executive, Travel Weekly, Travel Trade and Business
Travel News. In addition, the Company advertises extensively in magazines and
newspapers, consumer association books, hotel room information books and the
Yellow Pages, and on radio and television in selected markets.
The Company's continuing direct mail program is targeted at both the
travel arrangers and the end users. The program distributes approximately two
million promotional pieces annually. Most major travel arrangers receive at
least six direct mail pieces per year which include announcements of new
services, news on service providers and reservation programs, the Carey
Newsletter and listings of rates. End users and arrangers receive promotional
pieces on Carey when they are billed for the Company's services.
The Company's marketing program seeks to build upon brand name
acceptance, customer loyalty, service know-how, technology and strategic
market relationship with other leaders in the travel and tourism industry,
such as airlines, travel agencies, credit card companies and central
reservation systems. The Company also is involved in promotional and
cooperative agreements with American Express Platinum Card and Gold Card,
Diner's Club "Club Chauffeur" program, British Airways, Air France and
various cruise lines.
The Company believes that the retention and expansion of existing
business is as important as new sales. Carey has established a base of loyal
customers in part by monitoring the standard of service through its quality
assurance and customer service programs. To assure that the Company continues
to provide consistently high quality and reliable service, Carey operates a
five-part quality assurance program. The Company's quality assurance program
utilizes survey cards that are sent to customers and travel arrangers.
Approximately 90% of the quality assurance cards returned to Carey during the
twelve-month period ended November 30, 1997 rated the Company's reservation
services, chauffeurs and vehicles as "excellent." Carey's quality assurance
program includes evaluations performed by an independent consultant to
measure the quality of chauffeur services, the appearance of chauffeurs and
vehicles and the availability of other amenities, such as cellular phones and
daily newspapers.
8
<PAGE>
INDEPENDENT OPERATORS
An important component of Carey's strategy involves the preferred use
of independent operators rather than of salaried chauffeurs operating
Company-owned vehicles. An independent operator takes responsibility for
owning, operating and maintaining his or her own vehicle. The Company
believes that acting as an independent operator creates incentives for the
chauffeur to become more productive, efficient and service-oriented, thereby
increasing the profitability of the chauffeur and the Company. The objective
of the Company's independent operator strategy is to instill in each
chauffeur the sense of responsibility and dedication characteristic of an
independent business owner.
The use of independent operators allows the Company to reduce its
labor and capital costs, convert fixed costs to variable costs and generate
revenues from fees paid by independent operators. Because of the greater
responsibility borne by independent operators, the Company is able to
allocate fewer resources to oversee its vehicle operations. As a result, the
Company can focus to a greater extent on support services, business
development, administration, billing, quality assurance and sales and
marketing.
Each independent operator enters into an agreement with the Company to
provide prompt and courteous service to the Company's customers with a
properly maintained, late model vehicle consistent with the Company's
standards. The cost of a new vehicle ranges from $35,000 to $65,000,
depending upon whether it is a sedan or a limousine and the features included
in the vehicle. Each new independent operator agrees to pay an initial fee to
the Company, acquire his or her vehicle and pay all of the maintenance and
operating expenses of the vehicle, including gasoline.
Prior to December 1996, the Company's typical agreement with an
independent operator had a term of 10 years and provided for a fee ranging
from $30,000 to $45,000 (depending on the local market) that was financed by
the Company at an annual interest rate of 9% to 12%. The notes evidencing
such financing generally were sold by the Company to third parties. Since
December 1996, the independent operator agreements entered into by the
Company generally have provided for, and the Company intends that future
agreements will provide for, a term of 15 years, fees of $45,000 to $75,000
and an interest rate of 15% per year. Currently, the Company does not intend
to continue its former practice of selling to third parties notes evidencing
independent operator financing. To date, the Company has not incurred any
material losses as a result of defaults under such notes, and any potential
future losses will be mitigated from an accounting perspective because of the
Company's policy of deferral of revenue recognition in connection with
independent operator fees.
The independent operator agreement provides that the Company will bill
and collect all revenues (as defined in the agreement) and remit to the
independent operator 60% to 67% of such revenues. In this arrangement, the
Company assumes the risk of collecting from each customer and generally pays
the independent operator his or her share regardless of whether the Company
is paid by the customer. An independent operator's failure to meet the high
standards of service associated with the Carey name constitutes a breach of
the agreement and gives rise to a right of the Company to terminate the
agreement.
9
<PAGE>
Independent operators also generally require financing to purchase
their vehicles. Typically, independent operators have utilized banks, vehicle
financing companies or CLI Fleet, Inc. ("CLI Fleet"), a finance company that
specializes in providing financing to the chauffeured vehicle service
industry.
CUSTOMERS
The Company's customer list exceeds 75,000 individuals and
organizations that are dispersed across many different industries and
geographic locations. No client accounted for more than 5% of the Company's
revenue, net in 1997. The Company's major clients include companies in the
airline, travel and related services, finance, manufacturing, pharmaceutical,
insurance, publishing, oil and gas exploration, entertainment, tobacco and
food and beverage industries.
COMPETITION
The chauffeured vehicle service industry is highly competitive and
fragmented, with few significant national participants operating a multi-city
reservation system. Each local market usually contains numerous local
participants as well as a few companies offering regional and national
service. Chauffeured vehicle service providers compete primarily on the basis
of price, quality, scope of service and dependability. The Company also
competes with service providers offering alternative modes of transportation,
such as buses, jitney services, taxis, radio cars and rental cars. The
Company believes that its high quality of service and dependability have
allowed it to compete effectively in its markets. Carey competes both for
customers and for possible acquisitions. The Company expects its business to
become more competitive as existing competitors expand and additional
companies enter the industry. Certain of the Company's existing competitors
have, and any new competitors that enter the industry may have, access to
significantly greater financial resources than the Company.
GOVERNMENT REGULATION
The Company's chauffeured vehicle service operations are subject to
various state and local regulations and, in many instances, require permits
and licenses from state and local authorities. In addition, the Company is
regulated by the Federal Highway Administration with respect to, among other
things, minimum vehicular insurance requirements. The Company believes that
it has all required permits and licenses to conduct its operations and that
it is in substantial compliance with applicable regulatory requirements
relating to its operations.
The Company is subject to federal and state laws, rules and
regulations governing the offer and sale of franchises. A number of states
have enacted laws that require detailed disclosure in the offer and sale of
franchises and/or the registration of the franchisor with state
administrative agencies. The Company is also subject to Federal Trade
Commission and state regulations relating to disclosure requirements in the
sale of franchises. Certain states have enacted, and others may enact,
legislation governing certain aspects of the franchise relationship and
limiting the ability of the franchisor to terminate or refuse to renew a
franchise. The law applicable to franchise sales and relationships is rapidly
developing, and the Company is unable to predict the effect on its franchise
system of additional requirements or restrictions that may be enacted or
promulgated or of court decisions that may be adverse to franchisors. Due to
the scope of the Company's business and the complexity of
10
<PAGE>
franchise regulation, compliance problems may be encountered from time to
time.
INSURANCE
The Company is exposed to claims for personal injury or death and
property damage as a result of automobile accidents involving chauffeured
vehicles operated by its employees and independent operators and by its
licensees and their drivers. The Company purchases automobile liability,
automobile collision and comprehensive damage, general liability, comprehensive
property damage, workers' compensation and other insurance coverages that
management considers adequate for the protection of the Company's assets and
operations, although there can be no assurance that the coverages and limits of
such policies will be adequate. The Company's standard license agreement
requires that its licensees purchase similar types of insurance and name the
Company as a named insured in such insurance policies. A successful claim
against the Company beyond the scope of its or its licensees' insurance
coverage or in excess of its or its licensees' limits could have a material
adverse effect on the Company's business, financial condition and results of
operations.
FACILITIES
The Company owns facilities in Alexandria, Virginia and Long Island
City, New York used by owned and operated chauffeured vehicle service
companies providing services in the Washington, DC and New York metropolitan
areas, respectively. The Company leases its corporate headquarters in
Washington, DC and also leases seven administrative and/or operating
facilities in California, New York, Indiana, Pennsylvania, Florida and
London. Management believes that the Company's facilities are adequate for
its present needs and that suitable additional or replacement space will be
available as required.
EMPLOYEES AND INDEPENDENT OPERATORS
As of November 30, 1997, the Company had 488 full-time employees (125
of whom were chauffeurs) and 178 part-time employees (116 of whom were
chauffeurs). As of November 30, 1997, the Company also had agreements with
452 independent operators. The Company is not a party to any collective
bargaining agreement.
INTELLECTUAL PROPERTY
The Company is the registered owner of two United States service marks
covering the "Carey" name. The Company believes that customer and travel
arranger recognition of these marks has contributed to its success. The
Company is not affiliated with Carey Transportation, Inc., a company that
provides bus transportation services in the metropolitan New York City area.
Except for Carey Transportation, Inc., the Company believes it has the
exclusive right to use the "Carey" name in connection with transportation
services in all locations in which it either owns and operates a chauffeured
vehicle service company or maintains a licensee.
11
<PAGE>
Item 2. Properties
----------
The Company leases approximately 14,000 square feet in Washington, DC
for its executive and administrative offices and its central
reservation capabilities. The lease expires in 2007. Of the nine
buildings occupied by the company-owned operations, on November 30,
1997 seven were leased and two were owned. The facilities leased by
the company-owned operations range in size from 1,750 to 38,000 square
feet and provide for annual minimum lease rentals ranging from $31,500
to $340,000, with the average approximating $101,500 a year.
The Company owns two buildings located in Long Island City, New York
and Alexandria, Virginia which house the operations of Manhattan
International Limousine Network, Ltd. and Carey Limousine DC, Inc. The
property in Alexandria, Virginia is mortgaged to collateralize
indebtedness (see Note 6 of Notes to Consolidated Financial
Statements).
-
Item 3. Legal Proceedings
-----------------
The Company, certain of the Company's subsidiaries and certain
officers and directors of the Company were named in a civil action
filed on May 16,1996 in the United States District Court for the
Eastern District of Pennsylvania entitled "Felix v. Carey
International, Inc., et al." The Company has reached a settlement with
the plaintiff and plaintiff's counsel. The settlement did not have a
material effect on the Company's business, financial condition,
results of operations or cash flows.
12
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year 1997.
Item 4.a Background of Management
------------------------
EXECUTIVE OFFICERS
The following table sets forth certain information pertaining to
the executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE CURRENT POSITION
---- --- ----------------
<S> <C> <C>
Vincent A. Wolfington..... 57 Chairman of the Board and Chief Executive
Officer
Don R. Dailey............. 60 President and Director
Guy C. Thomas............. 59 Executive Vice President - Operations
David H. Haedicke......... 51 Executive Vice President and Chief
Financial Officer
Richard A. Anderson, Jr... 52 Senior Vice President
Sally A. Snead............ 37 Senior Vice President - Information
Systems
John C. Wintle............ 51 Senior Vice President - Europe
Paul A. Sandt............. 37 Vice President and Chief Accounting
Officer
Devin J. Murphy........... 31 Senior Vice President and Chief
Development Officer
S. Terrell Mellen......... 41 Senior Vice President - Sales and
Marketing
</TABLE>
Vincent A. Wolfington, a co-founder of the Company, has served as
its Chairman of the Board of Directors and Chief Executive Officer since
1979. For over 25 years, Mr. Wolfington has been involved in the limousine
industry and directly associated with the Carey system of licensees and
13
<PAGE>
affiliates. Mr. Wolfington has served as a consultant to the National
Academy of Sciences Transportation Research Board, President of the
National Para-transit Association and a member of the International
Limousine Association. Mr. Wolfington currently is a member of the
Executive Committee of the World Travel and Tourism Council.
Don R. Dailey has been President and a director of the Company,
which he co-founded, since 1979. Mr. Dailey has been directly involved
in the limousine business for over 30 years. Mr. Dailey serves on a
number of boards and committees related to the travel industry,
including the National Business Travel Association, the International
Business Travel Associates, the Association of Corporate Travel
Executives, the National Limousine Association and the International
Limousine Association (as its past president and member of its
executive committee.)
Guy C. Thomas has served as Executive Vice President - Operations
of the Company since 1987. Mr. Thomas has served on a number of boards
and committees related to the travel industry, including the National
Business Travel Association, the Greater Washington Area Passenger
Traffic Association, the American Society of Association Executives,
Meeting Planners International, the Association of Corporate Travel
Executives, the National Limousine Association and the International
Taxicab and Livery Association.
David H. Haedicke has been an Executive Vice President and Chief
Financial Officer of the Company since October 1996. From August 1996
to October 1996, he was Senior Vice President and Chief Financial
Officer of Infotechnology, Inc., Hadron, Inc. and Comtex Scientific
Corporation, an affiliated group of companies engaged in systems
management and software development. From September 1993 to May 1996,
he was Chief Financial Officer of Walcoff & Associates, Inc., a
communications and information management firm. From June 1991 to
September 1993, he was Chief Financial Officer and Vice President of
Xsirus, Inc., a high technology research and development company. Mr.
Haedicke also was a partner at Ernst & Young L.L.P. from 1985 to June
1991, and was an employee at that firm from 1973 to 1985. Mr. Haedicke
is a Certified Public Accountant.
Richard A. Anderson, Jr. has served as Senior Vice President of the
Company since December 1988. Mr. Anderson also was Chief Operating
Officer of the Company's New York subsidiary, Carey Limousine NY,
Inc., from December 1988 until August 1997. Mr. Anderson is a member
of the New York Taxi and Limousine Commission's Limousine Advisory
Board, a former board member of the Association of Corporate Travel
Executives, a member of the National Business Travel Association and
Meeting Planners International, and Honorary Board Member of Executive
Women International, NY.
Sally A. Snead has served as the Company's Senior Vice President-
Information Systems since June 1993. From January 1987 to June 1993,
she was Executive Vice President and General Manager of Carey
Limousine L.A., Inc. She is a member of Executive Women International,
the National Business Travel Association, the Association of Corporate
Travel Executives and the National Limousine Association.
14
<PAGE>
John C. Wintle has served as the Company's Senior Vice President-
Europe since May 1996 and as Executive Vice President and Managing
Director of Carey U.K. Ltd., a subsidiary of the Company, since March
1996. From 1982 to February 1996, Mr. Wintle served Savoy Hotel PLC
("Savoy") and its affiliates, including Camelot Barthropp Ltd.
("Camelot"), in various capacities. From March 1993 to February 1996,
Mr. Wintle was Executive Vice Chairman of Camelot, which was acquired
by Carey U.K. Ltd. in February 1996. Previously, from 1989 to 1993,
Mr. Wintle was General Manager, Restaurant Division, of several
entities affiliated with Savoy. From 1982 to 1989, Mr. Wintle had been
Group Financial Controller at Savoy.
Paul A. Sandt has served as a Vice President and Chief Accounting
Officer of the Company since October 1994. From May 1992 through
September 1994, Mr. Sandt was a staff member with the Securities and
Exchange Commission, and from December 1990 through May 1992, he was
Director of Finance of The Kline Automotive Group. From 1984 through
1990, he was employed by Coopers & Lybrand L.L.P. Mr. Sandt is a
Certified Public Accountant.
Devin J. Murphy has served as a Vice President of the Company since
May 1996, and became Senior Vice President and Chief Development
Officer in April 1997. Mr. Murphy received a Master's Degree in
Business Administration from Duke University in May 1996. For the six
years prior to the commencement of his MBA program in September 1994,
Mr. Murphy held various sales and marketing positions at companies
within the information technology industry. These companies include
Bay Networks, Inc., where Mr. Murphy was Marketing Manager from
January 1993 to August 1994, Motorola Inc., where he was Manager,
Major Accounts from February 1991 to January 1993, and Hewlett-Packard
Co. Inc., where he was Territory Manager from 1988 to 1991.
S. Terrell Mellen has served as Senior Vice President -Sales and
Marketing of the Company since September 1997. From September 1994
until September 1997, Ms. Mellen was Executive Director of the
Association of Corporate Travel Executives (ACTE), a professional
organization serving 1,800 members in 13 countries. From October 1988
until September 1994; Ms. Mellen was Director of Marketing and
Industry Relations for the Air Travel Card, a corporate payment system
issued by seven major U.S. airlines. Prior to joining Air Travel Card,
Ms. Mellen held sales positions at Computer Associates International
and Piedmont Airlines.
15
<PAGE>
PART II
- -------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market
under the symbol "CARY." The following table sets forth for each
period indicated the high and low sale prices for the Common Stock as
reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
-------- -------
<S> <C> <C>
May 28, 1997 through June 30, 1997................... $15 5/8 $11
July 1, 1997 through August 31, 1997................. 15 1/2 13 1/2
September 1, 1997 through November 30, 1997.......... 18 13 3/4
December 1, 1997 through February 23, 1998........... 17 5/8 14 7/8
</TABLE>
On February 23, 1998, the last reported sale price of the Common Stock
was $17.25 and there were approximately 107 holders of record of
Common Stock.
DIVIDEND POLICY
---------------
The Company intends to retain all earnings to finance the growth and
development of its business and does not anticipate paying cash
dividends on its Common Stock in the foreseeable future. Any future
determination as to the payment of dividends on the Common Stock will
depend upon the Company's future earnings, results of operations,
capital requirements and financial condition and any other factor the
Board of Directors of the Company may consider. The Company's
agreements with its principal lenders prohibit dividend payments.
16
<PAGE>
Item 6. Selected Financial Data
- ------- -----------------------
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of November 30, 1993,
1994, 1995, 1996, and 1997 and for each of the five years in the period ended
November 1997 have been derived from the consolidated financial statements of
the Company. The selected consolidated financial data and the consolidated
financial statements of the Company have been prepared to give retroactive
effect to the merger of Indy Connection Limousine, Inc. and subsidiary ("Indy
Connection") with and into the Company on October 31, 1997. The merger was
accounted for as a pooling-of-interests.
The selected consolidated financial data of the Company should be read
in conjunction with the Company's Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained elsewhere in this document.
<TABLE>
<CAPTION>
Fiscal Year Ended November 30,
-----------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations Data:
Revenue, net........................... $ 33,651 $ 40,314 $ 48,969 $ 65,545 $ 86,378
Cost of revenue........................ 24,495 27,700 33,027 43,649 57,890
--------- --------- --------- --------- ---------
Gross profit........................... 9,156 12,614 15,942 21,896 28,488
Selling, general and administrative
expense............................... 9,336 11,043 14,081 16,727 20,112
--------- --------- --------- --------- ---------
Operating income (loss)................ (180) 1,571 1,861 5,169 8,376
Interest income (expense) and other
income (expense)...................... (1,367) (1,446) (1,492) (1,380) (690)
--------- --------- --------- --------- ---------
Income (loss) before provision for
income taxes.......................... (1,547) 125 369 3,789 7,686
Provision for income taxes............. 10 163 271 294 3,163
--------- --------- --------- --------- ---------
Net income (loss)...................... $ (1,557) $ (38) $ 98 $ 3,495 $ 4,523
========= ========= ========= ========= =========
Pro forma net income per share......... $ 0.90/1/ $ 0.76/1/
========= =========
Pro forma weighted average shares
outstanding........................... 4,213,320/1/ 6,188,010/1/
========= =========
Consolidated Balance Sheet Data:
Working capital (deficit).............. $ 903 $ 531 $ (1,948) $ (2,188) $ 4,999
Total assets........................... 30,028 29,494 38,729 43,967 85,394
Long-term debt, less current
maturities............................ 12,827 12,276 14,502 12,039 4,132
Deferred revenue/2/.................... 4,330 4,484 4,726 6,181 13,396
Total stockholders' equity............. $ 4,771 $ 4,218 $ 4,197 $ 7,573 $ 48,300
- ------------------------
</TABLE>
1. Gives effect to the conversion of certain preferred stock and subordinated
debt into Common Stock and the elimination of associated interest expense on
the subordinated debt as a result of the Recapitalization (defined in Note 17
to the Company's Consolidated Financial Statements).
2. Represents the balance of the fees deferred in connection with independent
operator agreements less amounts previously recognized. Such fees are
recognized ratably over the terms of the agreements, which typically range
from 10 to 20 years. See the Notes to the Company's Consolidated Financial
Statements.
17
<PAGE>
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
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto appearing elsewhere
in this document. Unless otherwise indicated or the context otherwise requires,
each reference to a year is to the Company's fiscal year which ends on November
30 of such year.
OVERVIEW
The Company generates revenues primarily from chauffeured vehicle services
provided by (i) Carey's owned and operated businesses and (ii) Carey's licensees
and affiliates when services provided by such licensees and affiliates are
billed through the Company's central reservation and billing system. In 1996 and
1997, approximately 76.1% and 81.2%, respectively, of the Company's revenue, net
was generated by chauffeured vehicle services provided by the Company's owned
and operated businesses, approximately 14.1% and 12.2%, respectively, was
generated by chauffeured vehicle services provided by the Company's licensees
and billed by the Company, and approximately 1.8% and 1.3%, respectively, was
generated by chauffeured vehicle services provided by the Company's affiliates
and billed by the Company. Carey also generates revenues from its licensees
through fees (both initial and monthly) related to (i) licensing the use of its
name and service mark, (ii) its central reservation and billing services and
(iii) its marketing activities. In 1996 and 1997 approximately 3.0% and 2.6%,
respectively, of the Company's revenue, net was generated from its licensees
through such fees. To a lesser extent, the Company derives revenues from the
payment of fees by independent operators. The Company recognizes revenues from
these fees ratably over the terms of the independent operators' agreements with
the Company, which typically range from 10 to 20 years.
Cost of revenue primarily consists of amounts due to the Company's
independent operators. The amount due to independent operators is a percentage
(ranging from 60% to 67%) of the charges of services provided, net of discounts
and commissions. Cost of revenue also includes amounts due to the Company's
licensees and affiliates for chauffeured vehicle services provided by them and
billed by the Company. Such amounts generally include the charges for service
provided less a referral fee ranging from 15% to 25% of net vehicle service
revenue. Cost of revenue includes costs associated with owning and maintaining
the vehicles owned by the Company, telecommunications expense, salaries and
benefits for reservationists, marketing expenses for the benefit of licensees,
and commissions due to travel agents and credit card companies.
Selling, general and administrative expenses consist primarily of
compensation and related benefits for the Company's officers and administrative
personnel, marketing and promotional expenses for the Company's owned and
operated chauffeured vehicle service companies, and professional fees, as well
as amortization costs related to the intangibles recorded as a result of the
Company's acquisitions.
In addition to internal growth from the Company's sales and marketing
efforts, an important component in the Company's growth to date has been the
acquisition of its licensees and other chauffeured vehicle service companies.
Since December 1994, Carey has acquired 12 chauffeured vehicle service
companies. These acquisitions were made for cash, the issuance or assumption of
notes, and/or issuance of Common Stock. Eleven of these acquisitions were
accounted for using the purchase method of accounting. A substantial majority of
the purchase price paid by the Company in each such acquisition represented
goodwill, franchise rights (if a license was acquired) and/or intangibles. The
Company's October 1997 acquisition of Indy Connection was accounted as a
pooling-of-interest.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
The results of operations for the acquired companies accounted for by the
purchase method have been included in the Company's consolidated financial
statements from their respective dates of acquisition. Carey expects to benefit
from its acquisitions by consolidating general and administrative functions,
increasing operating efficiencies, and, in acquisitions where it converts
salaried chauffeurs to independent operators, eliminating the overhead and
capital costs associated with employing salaried chauffeurs, leasing garages,
maintaining parts and fuel inventories, and owning and operating vehicles. The
Company generally realizes these benefits within six to twelve months after an
acquisition, depending upon whether the acquisition is of a chauffeured vehicle
service company in a location in which the Company already operates, or of a
licensee in a market where Carey has yet to establish operations.
In June 1997 the Company completed an initial public offering of 3,335,000
shares of Common Stock (the IPO).
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
financial data for the Company expressed as a percentage of revenue, net.
<TABLE>
<CAPTION>
Fiscal Year Ended November 30,
------------------------------
1995 1996 1997
--------- ------ -------
<S> <C> <C> <C>
Revenue, net................................................. 100.0% 100.0% 100.0%
Cost of revenue.............................................. 67.4 66.6 67.0
--------- ------ -------
Gross profit................................................. 32.6 33.4 33.0
Selling, general and administrative expense.................. 28.8 25.5 23.3
--------- ------ -------
Operating income............................................. 3.8 7.9 9.7
Interest income (expense) and other income (expense)......... (3.0) (2.1) (0.8)
--------- ------ -------
Income before provision for income taxes.................... 0.8 5.8 8.9
Provision for income taxes.................................. 0.6 0.5 3.7
--------- ------ -------
Net income................................... 0.2% 5.3% 5.2%
========= ====== =======
</TABLE>
YEAR ENDED NOVEMBER 30, 1997 COMPARED TO YEAR ENDED NOVEMBER 30, 1996
Revenue, Net. Revenue, net increased $20.8 million or 31.8% from $65.5
million in 1996 to $86.4 million in 1997. Of the increase, $8.8 million resulted
from expanded use of the Carey network,
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
including an increase in business from corporate travel customers and business
travel arrangers. The remaining $12.0 million of the increase was due to the
revenues from companies acquired by Carey, including Manhattan International
Limousine Network Ltd ("Manhattan Limousine"), which was acquired on June 2,
1997, Carey U.K., which was acquired February 29, 1996 and Commonwealth
Limousine, which was acquired on October 1, 1997.
Cost of Revenue. Cost of revenue increased $14.2 million or 32.6% from
$43.6 million in 1996 to $57.9 million in 1997. The increase was primarily
attributable to higher costs due to increased business levels and to cost of
revenue of acquired corporations. Cost of revenue increased slightly as a
percentage of revenue, net from 66.6% in 1996 to 67.0% in 1997, primarily
reflecting increases in telephone, chauffeur and certain other costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $3.4 million or 20.2% from
$16.7 million in 1996 to $20.1 million in 1997. The increase was largely due to
the costs of additional personnel, increased marketing expenses and increased
administrative expenses related to acquired operations and generally in support
of higher business levels. Selling, general and administrative expenses
decreased as a percentage of revenue, net from 25.5% in 1996 to 23.3% in 1997
largely due to the fact that the Company's revenue, net has increased more
rapidly than its administrative costs.
Interest Expense. Interest expense decreased approximately $756,000 or
39.8% from approximately $1.9 million in 1996 to approximately $1.1 million in
1997. Interest expense decreased as a percentage of revenue, net from 2.9% in
1996 to 1.3% in 1997. The decrease resulted from both the use of proceeds from
the Company's initial public offering ("IPO") to repay outstanding debt and the
conversion of subordinated and certain other debt to Common Stock coincident
with the IPO.
Provision for Income Taxes. The provision for income taxes increased
approximately $2.9 million from approximately $294,000 in 1996 to approximately
$3.2 million in 1997. The increase primarily related to the increase in pre-tax
income of the Company from approximately $3.8 million in the 1996 to $7.7
million in the 1997. In addition, the Company utilized the benefit of net
operating loss carryovers ("NOLs") in determining its provision for income taxes
in 1996, but such NOLs were not available to the Company in 1997.
Net Income. As a result of the foregoing, the Company's net income
increased approximately $1.0 million or 29.4% from approximately $3.5 million in
1996 to approximately $4.5 million in 1997.
YEAR ENDED NOVEMBER 30, 1996 COMPARED TO YEAR ENDED NOVEMBER 30, 1995
Revenue, Net. Revenue, net increased approximately $16.6 million or 33.8%
from $49.0 million in 1995 to $65.5 million in 1996. Of the increase,
approximately $10.2 million was contributed by existing operations as a result
of expanded use of the Carey network, including an increase in business from
corporate travel customers and business travel arrangers, and approximately $6.4
million was due to revenues of companies which were acquired from December 1994
through February 1996.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Cost of Revenue. Cost of revenue increased approximately $10.6 million or
32.2% from $33.0 million in 1995 to $43.6 million in 1996. The increase was
primarily attributable to higher costs due to increased business levels. Cost of
revenue decreased as a percentage of revenue, net from 67.4% in 1995 to 66.6% in
1996 as a result of spreading the fixed costs of the Company's reservations
infrastructure over a larger revenue base.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased approximately $2.6 million or 18.8% from $14.1
million in 1995 to $16.7 million in 1996. The increase was largely due to higher
administrative costs associated with additional personnel, increased marketing
expenses, and higher amortization of intangibles as a result of the
acquisitions. Selling, general and administrative expenses decreased as a
percentage of revenue, net from 28.8% in 1995 to 25.5% in 1996 as a result of an
increase in revenue without a corresponding increase in administrative costs.
Interest Expense. Interest expense was $1.9 million in 1995 and 1996,
respectively. Interest expense decreased as a percentage of revenue, net from
3.9% in 1995 to 2.9% in 1996.
Provision for Income Taxes. The provision for income taxes increased
approximately $24,000 from approximately $271,000 in 1995 to approximately
$294,000 in 1996. Prior to 1996, the Company recorded a valuation allowance
against its net deferred tax assets. This allowance was eliminated in 1996 in
accordance with generally accepted accounting principles and this reduced the
net provision for income taxes in 1996 by approximately $1.5 million. The
increase in the provision recordable in 1996, which was offset by the effect of
eliminating the valuation allowance against deferred tax assets, was
attributable to the Company's increased pretax profit level in 1996 which
exceeded the beneficial tax effect of net operating loss carryforwards of prior
years. The Company utilized the full amount of its remaining net operating loss
carryforwards in 1996.
Net Income. As a result of the foregoing, the Company's net income
increased approximately $3.4 million to approximately $3.5 million in 1996
compared to a net income of approximately $98,000 in 1995.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
QUARTERLY RESULTS
The following table presents unaudited quarterly financial information for
1995, 1996 and 1997. This information has been prepared by the Company on a
basis consistent with the Company's audited financial statements and includes
all adjustments (consisting only of normal recurring adjustments) which
management considers necessary for a fair presentation of the results for such
quarters.
<TABLE>
<CAPTION>
Quarterly Results
-------------------------------------------------------------------------------
$ %
-------------------------------------- --------------------------------------
(In thousands)
Operating Net Operating Net
Revenue, Gross income income Revenue, Gross income income
net profit (loss) (loss) net profit (loss) (loss)
-------- ------ --------- ------ -------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997
February 28..... $15,595 $5,126 $ 912 $ 366 100.0% 32.9% 5.8% 2.3%
May 31.......... 18,690 6,495 1,990 1,008 100.0 34.8 10.6 5.4
August 31....... 22,932 7,574 2,022 1,180 100.0 33.0 8.8 5.1
November 30..... 29,161 9,293 3,452 1,969 100.0 31.9 11.8 6.8
1996
February 29..... 12,892 4,232 490 36 100.0 32.8 3.8 0.3
May 31.......... 16,695 5,674 1,459 750 100.0 34.0 8.7 4.5
August 31....... 16,073 5,472 1,343 681 100.0 34.0 8.4 4.2
November 30..... 19,885 6,518 1,877 2,028 100.0 32.8 9.4 10.2
1995
February 28..... 9,503 3,081 (42) (385) 100.0 32.4 (0.4) (4.1)
May 31.......... 11,865 3,874 548 111 100.0 32.7 4.6 0.9
August 31....... 11,686 3,610 (27) (538) 100.0 30.9 (0.2) (4.6)
November 30..... 15,916 5,377 1,382 910 100.0 33.8 8.7 5.7
</TABLE>
The Company believes that its future operating results may continue to be
subject to quarterly variations caused by such factors as seasonal business
travel, variable scheduling of special events and the timing of acquisitions by
the Company. The Company's least profitable quarter generally has been the first
quarter (ending February 28 or 29), and its most profitable quarter generally
has been the fourth quarter (ending November 30).
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $2.5 million from $2.9 million at
November 30, 1996 to $5.3 million at November 30, 1997. Operating activities
provided net cash of $3.4 million during 1997. The overall net increase in cash
and cash equivalents during 1997 primarily related to the cash proceeds to the
Company from its IPO and net cash provided by operations, offset by the use of
such cash to retire debt, acquire Manhattan Limousine and redeem certain shares
of preferred stock.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
Cash used in investing activities increased by $8.0 million over 1996. Cash
of $1.7 million was used in 1996 to acquire operations in London, whereas $8.4
million of cash was used in 1997 to acquire Manhattan Limousine and Commonwealth
and to make additional payments of contingent consideration for the London
acquisition.
Cash provided by financing activities increased by $11.9 million over 1996,
primarily as a result of the net proceeds from the IPO, after using such
proceeds to retire debt and complete the Recapitalization.
In connection with the IPO, the Company issued a total of 3,335,000 shares
of Common Stock and received proceeds, net of underwriters' discounts and
commissions and offering costs, of $30.6 million. The Company utilized the net
proceeds from the IPO to repay principal on indebtedness of approximately $7.1
million and to fund the Recapitalization by repaying principal on subordinated
indebtedness of approximately $912,000 and redeeming preferred stock for $3.1
million. Additionally, the Company completed its acquisition of Manhattan
Limousine by paying $11.8 million to the sellers of Manhattan Limousine and
repaying $3.5 million of indebtedness of Manhattan Limousine. The remaining net
proceeds has been used for acquisitions and other general corporate purposes,
including working capital.
As part of the Recapitalization, a further $4.9 million of debt was
converted to Common Stock of the Company. At November 30, 1997, the Company had
borrowings of $3.8 million, approximately $997,000 of which is to be repaid over
the next 12 months.
On August 15, 1997, the Company entered into a senior credit facility with
three banks consisting of a secured revolving line of credit of $25.0 million
(the "Facility"). The Facility, which may be used for acquisitions and working
capital, is collateralized by the assets of the Company and its domestic
operating subsidiaries and by a pledge of the stock of its international
subsidiary. The Facility also provides availability for the issuance of letters
of credit. Loans made under the revolving line of credit bear interest at the
Company's option at either the bank's prime lending rate or 2.0% above the LIBOR
rate. Commitment fees equal to 0.375% per annum are payable on the unused
portion of the revolving line of credit. On the second anniversary of the
Facility, outstanding balances under the Facility will convert to a five-year
term loan, which will bear interest either at a fixed rate (subject to
availability) or at a variable LIBOR or prime-based rate with adjustments
determined based on the Company's earnings. The terms of the Facility (i)
prohibit the payment of dividends by the Company, (ii) with certain exceptions,
prevent the Company from incurring or assuming other indebtedness that is not
subordinated to borrowings under the Facility and (iii) require the Company to
comply with certain financial covenants.
While there can be no assurance, and depending on the methods of financing
and size of potential acquisitions, management believes that cash flow from
operations, the remaining net proceeds from the IPO and funds from the credit
Facility will be adequate to meet the Company's capital requirements for the
next 12 months. While the Company historically has financed acquisitions
primarily with cash, it may seek to finance future acquisitions by using Common
Stock for a portion or all of the consideration to be paid.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(CONTINUED)
The Company is in the process of upgrading the CIRS and related computer
functionality to insure increasingly high standards of customer service and more
sophisticated management information. Such upgrades, which will continue
throughout 1998 and 1999, will also insure such systems functionality with
respect to the "Year 2000" millenium change. The Company does not anticipate
that the cost of these upgrades will be material to its liquidity, balance sheet
and results of operations in any single future year.
FACTORS TO BE CONSIDERED
The information set forth above contains forward-looking statements, which
involve risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in these forward-looking statements.
Readers should refer to discussion under "Risk Factors" contained in the
Company's Registration Statement on Form S-1 (No. 333-22651) filed with the
Securities and Exchange Commission, which is incorporated herein by reference,
concerning certain factors which could cause the Company's actual results to
differ materially from the results anticipated in the forward-looking statements
contained herein.
24
<PAGE>
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
FINANCIAL STATEMENTS Page No.
-------------------- --------
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
Audited Consolidated Financial Statements
Report of Independent Accountants 26
Balance Sheets as of November 30, 1996 and 1997 27
Statements of Operations for the years ended 28
November 30, 1995, 1996 and 1997
Statements of Changes in Stockholders' Equity for the 29
years ended November 30, 1995, 1996 and 1997
Statements of Cash Flows for the years ended 30
November 30, 1995, 1996 and 1997
Notes to Consolidated Financial Statements 31-52
FINANCIAL STATEMENT SCHEDULE
----------------------------
Report of Independent Accountants 53
Schedule VIII Valuation and Qualifying Accounts 54
All other schedules are omitted because they are either not
applicable or required or because the required information is
included in the consolidated financial statements or notes
thereto.
25
<PAGE>
Report of Independent Accountants
---------------------------------
To the Stockholders and Board of Directors of
Carey International, Inc.
We have audited the accompanying consolidated balance sheets of Carey
International, Inc. and Subsidiaries as of November 30, 1996 and 1997, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for each of the three years in the period ended November 30,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Carey
International Inc. and Subsidiaries as of November 30, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended November 30, 1997, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Washington, D.C.
January 30, 1998
26
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
November 30,
--------------------------
ASSETS 1996 1997
----------- -----------
<S> <C> <C>
Cash and cash equivalents.................................................... $ 2,867,711 $ 5,333,402
Accounts receivable, net of allowance for doubtful accounts of
$535,000 in 1996 and $639,000 in 1997....................................... 10,542,331 15,932,426
Notes receivable from contracts, current portion............................. 402,751 670,266
Prepaid expenses and other current assets.................................... 2,061,738 1,435,176
----------- -----------
Total current assets.................................................. 15,874,531 23,371,270
Fixed assets, net of accumulated depreciation of $4,687,000 in
1996 and $5,116,000 in 1997................................................. 5,790,391 9,278,319
Notes receivable from contracts, excluding current portion................... 769,201 8,164,337
Franchise rights, net of accumulated amortization of $1,729,000 in
1996 and $1,965,000 in 1997................................................. 5,348,264 5,112,348
Trade name, trademark and contract rights, net of accumulated
amortization of $973,000 in 1996 and $1,164,000 in 1997..................... 6,685,135 6,493,693
Goodwill and other intangible assets, net of accumulated
amortization of $840,000 in 1996 and $1,500,000 in 1997..................... 7,285,933 30,991,450
Deferred tax assets.......................................................... 949,962 501,545
Deposits and other assets.................................................... 1,263,525 1,481,252
----------- -----------
Total assets.......................................................... $43,966,942 $85,394,214
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of notes payable............................................. $ 5,858,249 $ 996,575
Current portion of capital leases............................................ 199,224 321,965
Current portion of subordinated notes payable................................ 440,000 -
Accounts payable and accrued expenses........................................ 11,564,963 17,054,081
----------- -----------
Total current liabilities............................................. 18,062,436 18,372,621
Notes payable, excluding current portion..................................... 6,035,964 2,792,022
Capital leases, excluding current portion.................................... 663,030 1,339,666
Subordinated notes payable, excluding current portion........................ 5,340,000 -
Deferred rent and other long- term liabilities............................... 111,281 1,193,577
Deferred revenue............................................................. 6,181,147 13,396,104
Commitments and contingencies
Stockholders' equity:
Preferred stock........................................................... 1,115,400 -
Class A common stock, $.01 par value; authorized 314,000
shares, none issued and outstanding...................................... - -
Common stock, $0.01 par value; authorized 20,000,000
shares; issued and outstanding 1,377,556 shares in 1996
and 7,630,007 in 1997.................................................... 13,776 76,300
Additional paid-in capital................................................ 7,841,371 45,173,336
Retained earnings (accumulated deficit)................................... (1,397,463) 3,050,588
----------- -----------
Total stockholders' equity............................................ 7,573,084 48,300,224
----------- -----------
Total liabilities and stockholders' equity............................ $43,966,942 $85,394,214
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
27
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended November 30,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Revenue, net.................................... $48,969,395 $65,544,942 $86,378,313
Cost of revenue................................. 33,027,209 43,649,178 57,890,393
----------- ----------- -----------
Gross profit................................. 15,942,186 21,895,764 28,487,920
Selling, general and administrative expense..... 14,081,152 16,726,610 20,111,590
----------- ----------- -----------
Operating income........................... 1,861,034 5,169,154 8,376,330
Other income (expense):
Interest expense........................... (1,910,966) (1,898,231) (1,141,946)
Interest income............................ 262,647 162,711 231,384
Gain on sales of fixed assets.............. 156,005 355,754 220,004
----------- ----------- -----------
Income before provision for income taxes....... 368,720 3,789,388 7,685,772
Provision for income taxes...................... 270,599 294,421 3,162,282
----------- ----------- -----------
Net income...................................... $ 98,121 $ 3,494,967 $ 4,523,490
=========== =========== ===========
Pro forma net income per common share........... $ 0.90 $ 0.76
=========== ===========
Pro forma weighted average common shares
outstanding.................................... 4,213,320 6,188,010
=========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
28
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Series A Series B Series E Series F Series G Carey Indiana
preferred preferred preferred preferred preferred preferred
stock stock stock stock stock stock
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at November 30, 1994...................... $420,700 $95,800 $186,250 $100,000 $498,900 $80,000
Issuance of common stock.......................... - - - - - -
Accretion of redeemable preferred stock........... - - 4,375 - - -
Redemption of preferred stock..................... - - (62,500) - - (40,000)
Payment of preferred stock dividends.............. - - (30,625) - - -
Payment of common stock dividends................. - - - - - -
Net income........................................ - - - - - -
--------- -------- --------- --------- --------- --------
Balance at November 30, 1995...................... 420,700 95,800 97,500 100,000 498,900 40,000
Redemption of preferred stock..................... - - (97,500) - - (40,000)
Issuance of stock................................. - - - - - -
Payment of preferred stock dividends.............. - - - - - -
Payment of common stock dividends................. - - - - - -
Cumulative effect of currency translation......... - - - - - -
Net income........................................ - - - - - -
--------- -------- --------- --------- --------- --------
Balance at November 30, 1996...................... 420,700 95,800 - 100,000 498,900 -
Issuance of common stock and redemption of
preferred stock under Recapitalization Plan...... (420,700) (95,800) - (100,000) (498,900) -
Issuance of common stock in initial
public offering.................................. - - - - - -
Issuance of common stock in purchases of
chauffeured vehicle companies.................... - - - - - -
Issuance of common stock under option plans....... - - - - - -
Conversion of debt for common stock............... - - - - - -
Payment of common stock dividends................. - - - - - -
Cumulative effect of currency translation......... - - - - - -
Net income........................................ - - - - - -
--------- -------- --------- --------- --------- --------
Balance at November 30, 1997...................... $ - $ - $ - $ - $ - $ -
========= ======== ========= ========= ========= ========
<CAPTION>
Retained
Common Stock Additional earnings Total
------------------ paid-in (accumulated stockholders'
Shares $ capital deficit) equity
--------- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at November 30, 1994...................... 1,325,032 $13,250 $ 7,791,552 $(4,968,229) $ 4,218,223
Issuance of common stock.......................... 32,682 327 34,393 - 34,720
Accretion of redeemable preferred stock........... - - (4,375) - -
Redemption of preferred stock..................... - - - - (102,500)
Payment of preferred stock dividends.............. - - - - (30,625)
Payment of common stock dividends................. - - - (20,901) (20,901)
Net income........................................ - - - 98,121 98,121
--------- -------- ----------- ----------- -----------
Balance at November 30, 1995...................... 1,357,714 13,577 7,821,570 (4,891,009) 4,197,038
Redemption of preferred stock..................... - - - - (137,500)
Issuance of stock................................. 19,842 199 19,801 - 20,000
Payment of preferred stock dividends.............. - - - (900) (900)
Payment of common stock dividends................. - - - (42,057) (42,057)
Cumulative effect of currency translation......... - - - 41,536 41,536
Net income........................................ - - - 3,494,967 3,494,967
--------- -------- ----------- ----------- -----------
Balance at November 30, 1996...................... 1,377,556 13,776 7,841,371 (1,397,463) 7,573,084
Issuance of common stock and redemption of
preferred stock under Recapitalization Plan...... 2,560,071 25,601 2,853,841 - 1,764,042
Issuance of common stock in initial
public offering.................................. 3,335,000 33,350 30,580,511 - 30,613,861
Issuance of common stock in purchases of
chauffeured vehicle companies.................... 292,066 2,920 3,397,080 - 3,400,000
Issuance of common stock under option plans....... 17,207 172 53,514 - 53,686
Conversion of debt for common stock............... 48,107 481 447,019 - 447,500
Payment of common stock dividends................. - - - (101,857) (101,857)
Cumulative effect of currency translation......... - - - 26,418 26,418
Net income........................................ - - - 4,523,490 4,523,490
--------- -------- ----------- ----------- -----------
Balance at November 30, 1997...................... 7,630,007 76,300 $45,173,336 $ 3,050,588 $48,300,224
========= ======== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
29
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
November 30,
----------------------------------------
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 98,121 $ 3,494,967 $ 4,523,490
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of fixed assets 2,087,370 2,095,439 2,039,968
Amortization of intangible assets 714,199 1,064,255 1,313,456
Gain on sales of fixed assets (156,005) (355,754) (220,004)
Provision (benefit) for deferred income taxes 102,000 (1,346,557) 799,650
Change in deferred revenue 237,306 1,455,013 565,997
Change in operating assets and liabilities:
Accounts receivable (2,601,429) (545,421) (5,234,779)
Notes receivable from contracts 11,000 (1,052,838) (1,063,192)
Prepaid expenses, deposits and other assets (189,180) (665,084) (912,875)
Accounts payable and accrued expenses 3,306,393 2,021,101 542,789
Deferred rent and other long-term liabilities 87,490 (36,914) 1,082,296
----------- ----------- ------------
Net cash provided by operating activities 3,697,265 6,128,207 3,436,796
----------- ----------- ------------
Cash flows from investing activities:
Proceeds from sale of fixed assets 1,639,766 1,788,380 1,486,780
Purchases of fixed assets (2,768,982) (3,091,353) (2,740,603)
Software development costs (203,529) - (1,348,814)
Redemption of investment in affiliate 100,000 - -
Acquisitions of chauffeured vehicle service companies (3,949,393) (1,730,232) (8,396,017)
----------- ----------- ------------
Net cash used in investing activities (5,182,138) (3,033,205) (10,998,654)
----------- ----------- ------------
Cash flow from financing activities:
Proceeds from sale of notes receivable from independent operators 1,493,399 733,793 -
Principal payments under capital lease obligations (436,169) (297,549) (237,359)
Preferred stock dividends (30,625) (900) -
Payment of notes payable (4,496,659) (5,976,357) (19,164,223)
Proceeds from notes payable 5,141,022 3,857,568 2,704,162
Issuance of common stock 34,720 20,000 30,842,778
Payments under Recapitalization Plan - - (4,015,952)
Common stock dividends (20,901) (42,057) (101,857)
Redemption of preferred stock (102,500) (137,500) -
----------- ----------- ------------
Net cash provided by (used in) financing activities 1,582,287 (1,843,002) 10,027,549
----------- ----------- ------------
Net increase in cash and cash equivalents 97,414 1,252,000 2,465,691
Cash and cash equivalents at beginning of year 1,518,297 1,615,711 2,867,711
----------- ----------- ------------
Cash and cash equivalents at end of year $ 1,615,711 $ 2,867,711 $ 5,333,402
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
30
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND AND ORGANIZATION
General
Carey International, Inc. (the Company) is one of the world's largest
chauffeured vehicle service companies, providing services through a
worldwide network of owned and operated companies, licensees and affiliates
serving 420 cities in 65 countries. The Company owns and operates service
providers in the form of wholly-owned subsidiaries in: New York (Carey
Limousine NY, Inc. and Manhattan International Limousine Network, Ltd.),
San Francisco (Carey Limousine SF, Inc.), Los Angeles (Carey Limousine
L.A., Inc.), London (Carey UK Limited), Indianapolis (Carey Limousine
Indiana, Inc., See Note 2), Washington, DC (Carey Limousine DC, Inc.),
South Florida (Carey Limousine Florida, Inc.) and Philadelphia (Carey
Limousine Corporation, Inc.). In addition, the Company generates revenues
from licensing the "Carey" name, and from providing central reservations,
billing, sales and marketing services to its licensees. The Company's
worldwide network also included affiliates in locations in which the
Company has neither owned and operated locations nor licensees. The Company
provides central reservations and billing services to such affiliates.
Acquisitions
The Company is engaged in a program of acquiring chauffeured vehicle
service businesses. Such acquisitions include unrelated chauffeured vehicle
service businesses, some of which may be in cities in which the Company has
owned and operated service providers, licensees operating under the Carey
name and trademark, and affiliates of the Company. In 1995, these
acquisitions included chauffeur vehicle service companies operating in
Washington, DC, South Florida and San Francisco. In 1996, the Company
acquired a chauffeured vehicle service company in London, England. In 1997,
the Company acquired chauffeured vehicle service companies in New York, Los
Angeles and Indianapolis.
Reverse Stock Split
In connection with the Company's initial public offering ("IPO")
completed June 2, 1997, the Company's Board of Directors authorized a one
for 2.3255 reverse stock split of the outstanding shares of the Company's
common stock. All references to common stock, options, warrants and per
share data have been restated to give effect to the reverse stock split. On
February 25, 1997, the Board of Directors also authorized a
Recapitalization Plan the ("Recapitalization"), which is more fully
described in Note 17.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements of Carey International, Inc. and
subsidiaries have been prepared to give retroactive effect to the merger of
Indy Connection Limousines, Inc. and subsidiary (Indy Connection) with and
into Carey International, Inc. and subsidiaries on October 31, 1997 in a
transaction accounted for as a pooling-of-interest (See Note 13). The
consolidated financial statements include the financial statements of the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
31
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Cash and cash equivalents
The Company considers all short-term investments with original
maturities of three months or less to be cash equivalents.
Notes receivable from contracts
An important component of the Company's operating strategy involves
the preferred use of non-employee independent operators chauffeuring their
own vehicles rather than employee chauffeurs operating Company-owned
vehicles.
Each independent operator enters into an agreement with the Company to
provide prompt and courteous service to the Company's customers with a
properly maintained, late model vehicle which he or she owns and for which
he or she pays all of the maintenance and operating expenses, including
gasoline. The Company, under the independent operator agreement, agrees to
bill and collect all revenues and remit to the independent operator 60% to
67% of revenues, as defined in the agreement. Each new operator agrees to
pay a one-time fee generally ranging from $30,000 to $75,000 to the Company
under the terms of the independent operator agreement (See "Revenue
recognition").
The Company typically receives a promissory note from the independent
operator as payment for the one-time fee under the terms of the Standard
Independent Operator Agreement (see Note 4) and records the note in notes
receivable from contracts. Prior to September 1996, the notes evidencing
such financing generally were sold on a non-recourse basis by the Company
to third party finance companies (see Note 11) in exchange for cash and
promissory notes. Since September 1996, the Company has ceased selling
notes to third parties. Such promissory notes due from finance companies
also have been recorded in notes receivable from contracts in the
consolidated balance sheets.
Concentration of credit risk
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash and
cash equivalents, accounts receivable and notes receivable from contracts.
The Company maintains its cash and cash equivalents with various financial
institutions. In order to limit exposure to any one institution, the
Company's cash equivalents are composed mainly of overnight repurchase
agreements collateralized by U.S. Government securities. Accounts
receivable are generally diversified due to the large number of entities
comprising the Company's customer base and their dispersion across many
different industries. The Company performs ongoing credit evaluations of
its customers, and may require credit card documentation or prepayment of
selected transactions. Notes receivable from contracts are supported by the
underlying base of revenue serviced by each respective independent operator
(see Notes 4 and
32
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11). The Company performs ongoing evaluations of each independent
operator's productivity and payment capacity and has utilized third-party
financing to reduce credit exposure.
Fixed assets
Furniture, equipment, vehicles and leasehold improvements are stated
at cost. Equipment under capital leases is stated at the lower of the
present value of minimum lease payments or the fair market value at the
inception of the lease. Depreciation on furniture, equipment, vehicles and
leasehold improvements is calculated on the straight-line method over the
estimated useful lives of the assets, generally three to five years. The
buildings owned by the Company are depreciated over 40 years on a straight-
line basis. Sales and retirements of fixed assets are recorded by removing
the cost and accumulated depreciation from the accounts. Gains or losses on
sales and retirements of property are reflected in results of operations.
The Company capitalizes software development costs relating to a
computerized system which includes applications for reservations, dispatch,
billing and accounting functions. Amortization of these costs occurs over
their estimated economic life of 60 months and commences upon the
installation of the software.
Intangible assets
Effective September 1, 1991, the Company acquired the Carey name and
trademark and the contract rights to all royalty fee payments by various
Carey licensees for a purchase price of $7 million. These assets are being
amortized over 40 years.
The Company has acquired chauffeured vehicle service companies, all of
which have been accounted for as purchases, and has merged with Indy
Connection Limousines, Inc. and subsidiary (Indy Connection), in a
transaction which has been accounted for as a pooling-of-interests. For
each business acquired which is a licensee of the Company, the excess of
cost over the fair market value of the net assets acquired is allocated to
franchise rights in the balance sheet. With respect to acquired businesses
which are not licensees of the Company, the excess of cost over the net
assets acquired is allocated to goodwill. Goodwill and franchise rights are
amortized over 30 years using the straight-line method. Such amortization
is included in selling, general and administrative expense in the statement
of operations. The Company evaluates the recoverability of its intangible
assets at least annually based on estimated undiscounted cash flows over
the lesser of the remaining amortization periods or calculated lives,
giving consideration to revenue expected to be realized. This determination
is based on an evaluation of such factors as the occurrence of a
significant change in the environment in which the business operates or the
expected future net cash flows (undiscounted and without interest). There
have been no adjustments to the carrying value of intangible assets
resulting from this evaluation.
Revenue recognition
Chauffeured vehicle services - The Company's principal source of
revenue is from chauffeured vehicle services provided by its operating
subsidiaries. Such revenue, net of discounts, is recorded when such
services are provided. The Company, through the Carey International
Reservation System ("CIRS"), has a central
33
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
reservation system capable of booking reservations on behalf of its
licensees and affiliates. Under most circumstances, central reservations
are billed by the Company to the customer when the Company receives a
service invoice from the licensee or affiliate that provided the service.
At such time, the Company also records the gross revenue for the
transaction.
Fees from licensees - The Company charges an initial license fee under
its domestic license agreement and records the fee as revenue on signing of
the agreement. The Company also charges its domestic licensees monthly
franchise and marketing fees equal to stated percentages of monthly
revenues, as defined in the licensing agreement. Monthly fees to domestic
licensees are generally less than 10% of the licensee's monthly revenues.
The Company records such fees as revenues as they are charged to the
licensees.
International licensees and the Company's domestic and international
affiliates historically have not paid fees to the Company, but have instead
given a discount on business referred to them through CIRS. Such discounts
reduce the amount of service invoices to the Company from such licensees
and affiliates for services provided to customers whose reservations have
been booked and invoiced centrally by the Company.
Independent operator fees - The Company enters into contracts with
independent operators ("Standard Independent Operator Agreements") to
provide chauffeured vehicle services exclusively to the Company's
customers. When independent operator agreements are executed, the Company
defers revenue equal to the amount of the one-time fees and recognizes the
fees as revenue over the terms of the contracts or over 20 years for
perpetual contracts. Upon termination of an independent operator agreement,
the remaining deferred revenue associated with the specific contract, less
any amounts due from the independent operator deemed uncollectible, is
recognized as revenue.
Income taxes
The provision for income taxes includes income taxes currently payable
and the change during the year in the net deferred tax liabilities or
assets. Deferred income tax liabilities and assets are determined based on
the differences between the financial statement and tax bases of
liabilities and assets using enacted tax rates in effect for the year in
which the differences are expected to reverse. A valuation allowance is
provided to reduce the net deferred tax asset, if any, to a level which,
more likely than not, will be realized.
Pro forma net income per common share
Consistent with Staff Accounting Bulletin IB-2, the Company has
recalculated historical weighted average common shares outstanding and net
income per common share to give effect to the Recapitalization (see Note
17). The recalculated pro forma net income per common share is determined
by (i) adjusting net income available to common shareholders to reflect the
elimination in interest expense, net of taxes, resulting from the
conversion of $4,867,546 of subordinated debt into common stock and (ii)
increasing the weighted average common shares outstanding by the number of
common shares resulting from the conversion of such debt, as well as the
partial conversion of the Series A Preferred Stock.
34
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock-based Compensation
In October 1995, the Financial Accounting Standards Boards issued
Statement of Financial Accounting Standards No. 123 ("SFAS 123") Accounting
for Stock-Based Compensation, which is effective for the Company's
financial statements for the fiscal year ended November 30, 1997. SFAS 123
allows companies to either account for stock-based compensation under the
fair value method of SFAS 123 or under the provisions of Accounting
Principles Board Option No. 25 ("APB 25"), Accounting for Stock Issued to
Employees. The Company has continued to apply the provisions of APB 25 and
has provided pro forma disclosure in the notes to the financial statements.
(See Note 15)
Foreign operations
The consolidated financial statements include foreign assets,
liabilities and revenues of $5.0 million, $3.6 million and $7.2 million,
respectively, as of November 30, 1997. The consolidated financial
statements include foreign assets, liabilities and revenues of $3.7
million, $2.7 million and $4.6 million, respectively, as of November 30,
1996. The net effects of foreign currency transactions reflected in
operations were immaterial. Assets and liabilities of the Company's foreign
operations are translated into United States dollars using exchange rates
in effect at the balance sheet date and results of operations items are
translated using the average exchange rate prevailing throughout the
period.
Reclassifications
Certain accounts in 1995 and 1996 have been reclassified to conform
with the 1997 presentation.
3. FEES FROM LICENSEES
The total of all domestic license fees, franchises fees and marketing
fees earned in each of 1995, 1996 and 1997 was $1,228,472, $2,180,540 and
$2,479,503, respectively. Amounts due from licensees of $143,041 and
$130,215 at November 30, 1996 and 1997, respectively, are included in
accounts receivable in the consolidated balance sheets of the Company.
4. TRANSACTIONS WITH INDEPENDENT OPERATORS
The Company recorded approximately $1,130,000, $2,371,000 and
$1,815,000 in 1995, 1996 and 1997, respectively, as deferred revenue
relating to fees from new agreements with independents operators. Amounts
of deferred revenue recognized as revenues in 1995, 1996 and 1997 amounted
to approximately $889,000, $936,000 and $923,000, respectively.
Notes receivable from contracts include approximately $917,000 and
$8,605,000 at November 30, 1996 and 1997, respectively, for amounts due
from independent operators and approximately $255,000 and $229,000 at
November 30, 1996 and 1997, respectively, for amounts due from a related
party financing company (see Note 11).
35
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In the normal course of business, the Company's independent operators
are responsible for financing their own vehicles through third parties.
From time to time, the Company has arranged lease and purchase financing
for certain vehicles and has in turn leased back such vehicles to
independent operators on terms and conditions similar to those under which
the Company is obligated.
5. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
November 30,
-------------------------
1996 1997
------------ -----------
<S> <C> <C>
Vehicles................................................ $ 5,026,897 $ 5,586,060
Equipment............................................... 2,303,348 3,039,845
Software development costs.............................. 1,448,593 2,658,257
Furniture............................................... 749,840 1,057,644
Leasehold improvements.................................. 419,232 469,999
Land and building....................................... 529,634 1,582,406
------------ -----------
10,477,544 14,394,211
Less accumulated depreciation and amortization.......... 4,687,153 5,115,892
------------ -----------
Net fixed assets........................................ $ 5,790,391 $ 9,278,319
============ ===========
</TABLE>
The Company is obligated under various vehicle and equipment capital
leases. Vehicles and equipment under capital leases included in fixed
assets are as follows:
<TABLE>
<CAPTION>
November 30,
-------------------------
1996 1997
------------ -----------
<S> <C> <C>
Equipment............................................... $ 1,048,633 $ 731,720
Vehicles................................................ 621,420 1,449,687
------------ -----------
1,670,053 2,181,407
Less accumulated amortization........................... 561,871 505,091
------------ -----------
$ 1,108,182 $ 1,676,316
============ ===========
</TABLE>
36
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
November 30,
-------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Senior credit facility with three banks, dated August 15, 1997, consisting
of a secured revolving line of credit of $25.0 million (the Facility).
The Facility, which may be used for acquisitions and working capital,
is collateralized by the assets of the Company and its domestic operating
subsidiaries and by a pledge of the stock of its international subsidiary.
The Facility also provides availability for the issuance of letters of
credit. Loans made under the revolving line bear interest at the Company's
option at either the bank's prime lending rate (8.5% at November 30, 1997)
or 2% above the LIBOR rate. Commitment fees equal to 0.375% per annum are
payable on the unused portion of the revolving line of credit. On the
second anniversary of the Facility, outstanding balances under the Facility
will convert to a five-year term loan, which will bear interest either at a
fixed rate (subject to availability) or at a variable LIBOR or prime-based
rate with adjustments determined based on the Company's earnings........... $ - $ 1,322,053
Bank revolving credit/term loan dated April 13, 1995, modified December 1, 1996.
Collateralized by accounts receivable of the Company and the pledge of
common stock of the Company's U.S. subsidiaries. Interest only was payable
until June 30, 1996; beginning July 1, 1996, quarterly principal payments
required in an amount sufficient to amortize the outstanding balance over a
four-year period. Interest payable monthly at a floating rate based on the
Wall Street Journal prime plus 1.25%. This loan was guaranteed by the
Chairman of the Board and the President of the Company..................... 3,937,500 -
Note payable dated September 1, 1991, at an annual rate of interest of 7.74%,
collateralized by the assets of Carey Licensing, Inc. Pursuant to an
agreement with the lender effective November 30, 1996, principal payments
of $220,000 were due quarterly from December 31, 1996 through December 31,
1997 and a final principal payment of $240,000 due March 1, 1998........... 1,340,000 -
Bank line of credit of $1,000,000, dated October 17, 1994, collateralized by
accounts receivable of Carey NY and assignment of license agreement between
the Company and Carey NY; due April 30, 1997. Interest was payable monthly
at a variable interest rate of .75% above the bank's prime rate............ 990,000 -
Various installment notes payable, with interest rates ranging from 8.75% to
14.5%, collateralized by certain vehicles and equipment of the Company's
subsidiaries; principal and interest are payable monthly over 36-month
terms...................................................................... 555,834 287,641
Notes payable to bank, dated March 26, 1996, at the prime rate (8.0% at
November 30, 1997) plus 1.0% per annum and matures on January 31, 1998. The
notes are collateralized by substantially all Carey Limousine Indiana, Inc.'s
assets. Under the terms of the agreement, Carey Limousine Indiana, Inc. is
subject to various general covenants....................................... 497,582 928,174
</TABLE>
37
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
November 30,
-------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Discretionary credit agreement with a bank that allows the Company to purchase
revenue earning vehicles under installment notes. Separate notes are
required for each vehicle purchase with a maximum term of thirty-six
months. These notes bear interest at rates ranging from 8.9% to 11.0%. The
notes were collateralized by Indy Connection's accounts receivable,
inventory and equipment and were subject to various restrictive covenants.
The agreement was subsequently renegotiated at similar terms............... 411,402 -
Two notes payable to bank, with interest at a fixed rate of 9.25% and 48 and
84 month terms, respectively. The notes require monthly principal and
interest payments of $4,413. The notes are collateralized by vehicles. The
agreement subjects Carey Limousine Indiana, Inc. to various general
covenants.................................................................. 363,705 429,911
Installment notes payable to sellers under acquisition agreements dated
various dates from September 30, 1993 to September 8, 1995. Interest rates
range from 7.5% to 8.5%. Interest is generally payable monthly. Principal
is payable in varying installments......................................... 1,422,240 406,873
Notes payable to banks, with various dates, payable in monthly installments.
Interest rates were determined on the banks' prime rate of interest........ 853,770 -
Note payable to bank, dated October 17, 1994, collateralized by accounts
receivable and fixed assets of Carey NY. Principal and interest payments of
$2,848 were payable monthly. Interest rate was fixed at 9.25%.............. 149,001 -
Bank lines of credit of $950,000, dated February 26, 1996, collateralized by
accounts receivable of Carey Licensing, Inc. and Carey FLA; due March 31,
1997. Interest was payable monthly at 1% above the Wall Street Journal's
"Prime Rate"............................................................... 950,000 -
Note payable to bank, dated May 10, 1996, collateralized by the land and
building held by Carey DC; monthly payments of $3,863 of principal and
interest are due through April 10, 2001 and a balloon payment of $375,468
on May 10, 2001. Interest fixed at 8.75%................................... 423,179 413,945
-------------- --------------
Total notes payable............................................................. 11,894,213 3,788,597
Less current installments....................................................... 5,858,249 996,575
-------------- --------------
Long-term portion............................................................... $ 6,035,964 $ 2,792,022
============== ==============
</TABLE>
38
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subordinated notes payable consist of the following:
<TABLE>
<CAPTION>
November 30,
-------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
Subordinated convertible note, dated September 1, 1991, with the principal
of $2,000,000 was due on August 30, 2000; interest payable quarterly at a
fixed rate of 7.74%. After September 1, 1992, this debt is convertible into
shares of common stock of the Company at the discretion of the holder at a
conversion price of $6.14. A warrant for the purchase of 86,003 shares of
common stock of the Company was issued in connection with the note. The
warrant is exercisable immediately, expires at the earlier of the third
anniversary of an initial public offering or November 30, 2001, and has an
exercise price of $4.65 per share and remains outstanding. The note
contains certain antidilutive provisions which lower its conversion price
in the event dilutive securities are subsequently issued by the Company at
prices below the note's conversion price. The warrant has not been
exercised. The terms of the agreement have been modified as part of the
"Recapitalization" (see Notes 15 and 17).................................... $ 2,000,000 -
Subordinated note dated July 30, 1992, interest only payable quarterly until
September 30, 1995. The interest rate was fixed at 12%. Principal of
$220,000 was paid on September 30, 1995. Pursuant to an agreement with the
lender effective November 30, 1996, principal payments of $220,000 are due
from June 30, 1997 until December 31, 1997; an installment of principal of
$880,000 is due March 31, 1998; and a final payment of principal of
$2,240,000 is due June 30, 1998. A warrant for the purchase of 616,544
shares of Class A common stock or common stock was issued in connection
with the note and was exercised as part of the Recapitalization. The terms
of the agreement have been modified as part of the "Recapitalization" (see
Note 17).................................................................... 3,780,000 -
-------------- --------------
Total subordinated notes payable............................................... 5,780,000 -
Less current installments...................................................... 440,000 -
-------------- --------------
Subordinated notes payable, excluding current installments $ 5,340,000 $ -
============== ==============
</TABLE>
39
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future annual principal payments on all notes payable at November 30,
1997 are as follows:
<TABLE>
<CAPTION>
Year ending November 30:
------------------------
<S> <C>
1998............................... $ 996,575
1999............................... 622,986
2000............................... 522,795
2001............................... 855,679
2002............................... 303,253
2003 and thereafter................ 487,309
----------
$3,788,597
==========
</TABLE>
Certain loan agreements contain restrictive covenants which include
financial ratios related to working capital, debt service coverage, debt to
net worth and maintenance of a minimum tangible net worth, and submission
of audited financial statements, prepared in accordance with generally
accepted accounting principles. Additionally, these covenants restrict the
Company's capital expenditures and prohibit the payment of dividends on the
Company's common and preferred stock, except for the Series E preferred
stock and Indy Connection preferred stock.
The carrying value of notes payable approximates the current value of
the notes payable at November 30, 1997. Interest paid during the years
ended November 30, 1995, 1996, and 1997 was approximately $1,878,000,
$1,883,000 and $1,274,000, respectively.
7. LEASES
The Company has several noncancelable operating leases, primarily for
office space and equipment, that expire over the next five years. Certain
of the Company's facilities are under operating leases which provide for
rent adjustments based on increases of defined indexes, such as the
Consumer Price Index. These agreements also typically include renewal
options.
40
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under noncancelable operating leases and
the present value of future minimum capital lease payments as of November
30, 1997 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year ending November 30 leases leases
----------------------- ----------- -----------
<S> <C> <C>
1998................................................................. $ 483,421 $ 1,336,517
1999................................................................. 609,284 1,004,736
2000................................................................. 822,155 695,832
2001................................................................. 149,889 422,114
Thereafter........................................................... 271 33,844
----------- -----------
Total minimum lease payments......................................... 2,065,020 $ 3,493,043
===========
Less estimated executory costs....................................... 32,003
-----------
2,033,017
Less amount representing interest (at rates ranging from 9% to 12%).. 371,386
-----------
Present value of net minimum capital lease payments.................. 1,661,631
Less current portion of obligations under capital leases............. 321,965
-----------
Obligations under capital leases, excluding current portion.......... $ 1,339,666
===========
</TABLE>
During the years ended November 30, 1995, 1996 and 1997 the Company
recognized $508,724, $252,355 and $278,218, respectively, of sublease
rental revenue under vehicle sublease arrangements with independent
operators and others.
During the years ended November 30, 1995, 1996 and 1997, the Company
entered into capital lease obligations of $346,666, $810,993 and $875,187,
respectively, related to the acquisition of vehicles and equipment.
Total rental expense for operating leases in 1995, 1996 and 1997 was
$1,362,518, $2,250,335 and $2,103,037, respectively.
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following:
<TABLE>
<CAPTION>
November 30,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
Trade accounts payable...................... $ 5,385,328 $ 9,547,571
Accrued expenses and other liabilities...... 4,895,495 6,974,808
Gratuities payable.......................... 458,801 531,702
Accrued offering costs...................... 825,339 -
----------- -----------
$11,564,963 $17,054,081
=========== ===========
</TABLE>
41
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. INCOME TAXES
The provision for income taxes is composed of the following:
<TABLE>
<CAPTION>
November 30,
---------------------------------------
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
Federal:
Current................. $ 139,401 $ 1,368,311 $ 1,967,356
Deferred................ 87,000 (1,197,799) 794,593
------------ ----------- -----------
226,401 170,512 2,761,949
------------ ----------- -----------
State and local:
Current................. 29,198 128,296 253,896
Deferred................ 15,000 (148,758) 5,057
------------ ----------- -----------
44,198 (20,462) 258,953
------------ ----------- -----------
Foreign
Current................. - 144,371 141,380
------------ ----------- -----------
Total income tax provision $ 270,599 $ 294,421 $ 3,162,282
============ =========== ===========
</TABLE>
The Company's tax provision for the years ended November 30, 1995,
1996 and 1997, respectively, differs from the statutory rate for federal
income taxes as a result of the tax effect of the following factors:
<TABLE>
<CAPTION>
Years ended November 30,
---------------------------------------
1995 1996 1997
------------ ----------- -----------
<S> <C> <C> <C>
Statutory rate............................ 34.0% 34.0% 34.0%
State income tax, net of federal benefit.. 7.2 (1.5) 3.4
Goodwill amortization..................... 6.0 .6 1.0
Non-deductible life insurance............. 10.9 .3 .4
Meals and entertainment expenses.......... 16.9 1.1 .6
Valuation allowance....................... (13.0) (27.6) -
Other..................................... 11.4 .9 1.7
------------ ----------- -----------
73.4% 7.8% 41.1%
============ =========== ===========
</TABLE>
42
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The source and tax effects of temporary differences are composed of
the following:
<TABLE>
<CAPTION>
November 30,
-------------------------
1996 1997
----------- -----------
<S> <C> <C>
Allowances for bad debts........... $ 176,000 $ 208,000
Acquired net operating losses...... - 1,500,000
Capital loss carryforward.......... 74,000 74,000
Deferred revenue................... 2,040,000 2,360,000
Deferred state taxes and other..... 558,000 259,000
----------- -----------
Gross deferred tax assets.......... 2,848,000 4,401,000
Valuation allowance................ (74,000) (1,574,000)
----------- -----------
2,774,000 2,827,000
----------- -----------
Amortization of intangible assets.. (1,350,000) (1,600,000)
Software development costs......... (53,000) (493,000)
Other.............................. (109,000) (24,000)
----------- -----------
Gross deferred tax liabilities..... (1,512,000) (2,117,000)
----------- -----------
Net deferred tax assets............ $ 1,262,000 $ 710,000
=========== ===========
</TABLE>
A valuation allowance was provided in 1995 to reduce the net deferred
tax asset to $0. In the fourth quarter of 1996, the Company concluded that
it was more likely than not that substantially all of the deferred tax
assets would be realized and reduced the valuation allowance by $1,499,000.
In 1997, the Company acquired net operating loss carryforwards on
which a full valuation allowance has been provided. As the Company utilizes
these net operating loss carryforwards, the benefit will be offset against
acquired goodwill. In 1997, the Company utilized $115,000 of the acquired
net operating loss carryforwards.
Income taxes paid during the years ended November 30, 1995, 1996 and
1997 amounted to approximately $187,000, $616,000, and $2,021,000,
respectively.
10. PREFERRED STOCK
The Company had the following series of preferred stock:
<TABLE>
<CAPTION>
November 30,
----------------------------
1996 1997
----------- -----------
<S> <C> <C>
Series A, par value $10.00, authorized 43,000 shares, issued and outstanding 42,070 shares,
at November 30, 1996 (none at November 30, 1997) (liquidation preference of $4,207,000,
redeemable at option of the Company). Non-cumulative dividend of $7.00 per annum when
declared by the Board of Directors......................................................... $ 420,700 $ -
Series B, par value $10.00, authorized 10,000 shares, issued and outstanding 9,580 shares, at
November 30, 1996 (none at November 30, 1997) (liquidation preference of $958,000).
Non-cumulative dividend of $5.00 per annum when declared by the Board of Directors......... 95,800 -
</TABLE>
43
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Series F, par value $10.00, authorized 10,000 shares, issued and outstanding 10,000 shares,
at November 30, 1996 (none at November 30, 1997) (liquidation preference of $1,000,000).
Non-cumulative dividend of $5.00 per annum when declared by the Board of Directors. 100,000 -
Series G, par value $10.00, authorized 110,000 shares, issued and outstanding 49,890 shares,
at November 30, 1996 (none at November 30, 1997) (liquidation preference of $4,989,900).
Non-cumulative dividend of $5.00 per annum when declared by the Board of Directors. 498,900 -
---------- ----------
$1,115,400 $ -
========== ==========
</TABLE>
See Note 17 for discussion of the Recapitalization, pursuant to which
all of the preferred stock was redeemed or converted into common stock.
11. RELATED-PARTY TRANSACTIONS
The Company has invested $750,000 in non-voting redeemable preferred
stock of a privately-held finance company formed for the purpose of
providing financing to the chauffeured vehicle service industry. This
entity provides financing to the Company's independent operators, without
recourse to the Company, for both automobiles and amounts due under
independent operator agreements. The Company sold $1,762,345 and $1,015,897
of independent operator notes receivable to this related-party finance
company for cash of $1,290,899 and $733,793 and demand promissory notes of
$471,446 and $282,104 in 1995 and 1996, respectively. The unpaid balances
of the promissory notes were $255,664 and $229,329 at November 30, 1996 and
1997, respectively, and are included in notes receivable from contracts.
These promissory notes are due on demand and, generally, monthly principal
payments are received by the Company. These notes generally bear interest
at rates of 7% to 10%.
It is not practicable to estimate the fair value of a preferred stock
investment in a privately-held company. As a result; the Company's
investment in the privately-held finance company noted above is carried at
its original cost (less redemptions) of $750,000. At April 30, 1997, the
total assets reported by the privately-held company were $10,075,613 and
stockholders' equity was $1,244,857, revenues were $1,442,344 and net
income was $136,409.
Pursuant to a stock ownership agreement between the common
stockholders of the related party finance company and the Company, the
Company has an option to purchase all of the outstanding common stock of
the affiliate at $12,500 per common share or market value, if higher. The
option is not exercisable until April 15, 1998.
12. COMMITMENTS AND CONTINGENCIES
The Company, certain of the Company's subsidiaries and certain
officers and directors of the Company were named in a civil action filed on
May 16,1996 in the United States District Court for the Eastern District of
Pennsylvania entitled "Felix v. Carey International, Inc., et al." The
Company has reached a final settlement with the plaintiff and plaintiff's
counsel. The settlement did not have a material effect on the Company's
business, financial condition, results of operations or cash flows.
44
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. ACQUISITIONS
Effective October 31, 1997, in connection with a merger, the Company
issued 721,783 shares of its common stock in exchange for all the
outstanding common stock of Indy Connection based on a conversion ratio of
1.008 shares (the merger exchange ratio) of the Company's common stock for
each share of Indy Connection common stock, for a total value of
approximately $12.0 million. The merger qualified as a tax-free
reorganization and has been accounted for as a pooling-of-interests.
Accordingly, the Company's consolidated financial statements have been
restated for all periods prior to the business combination to include the
combined financial results of Carey International, Inc. and Indy
Connection (See Note 2).
Revenue, net and net income (loss) for the individual companies
reported prior to the merger are as follows:
<TABLE>
<CAPTION>
November 30,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenue, net:
Carey International, Inc............... $ 43,483,947 $ 59,505,698 $ 79,477,393
Indy Connection........................ 5,485,448 6,080,105 6,969,779
Elimination............................ - (40,861) (68,859)
------------ ------------ ------------
Total............................ $ 48,969,395 $ 65,544,942 $ 86,378,313
============ ============ ============
Net income (loss):
Carey International, Inc. $ (195,195) $ 2,816,104 $ 3,567,053
Indy Connection 293,316 678,863 956,437
------------ ------------ ------------
Total: $ 98,121 $ 3,494,967 $ 4,523,490
============ ============ ============
</TABLE>
Conforming the accounting practices of the Company and Indy Connection
resulted in no adjustments to net income (loss) or stockholders' equity.
The Company estimates that transaction costs associated with the
merger will be approximately $200,000. All fees and transaction expenses
related to the merger and the restructuring of the combined companies will
be expensed as required under the pooling-of-interests accounting method.
In October 1997, the Company acquired the stock of Commonwealth
Limousine Services, Ltd. ("Commonwealth"). The Company is in the process of
combining Commonwealth's operations with its existing Los Angeles
operations.
In March 1997, the Company entered into an agreement to purchase the
stock of Manhattan International Limousine Network Ltd. and an affiliated
company (collectively, "Manhattan Limousine"). Manhattan Limousine is one
of the largest providers of chauffeured vehicle services in the New York
metropolitan area. The Company consummated the acquisition at the time of
the IPO.
45
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In February 1996, the Company acquired certain assets and liabilities
of a chauffeured vehicle service company in London, England. Additional
contingent consideration of up to $1,000,000 may be payable with respect to
each of the two years ending February 28, 1998 based on the level of
revenues referred to the acquired company by the seller. In addition, the
Company is required to pay a standard commission to the seller of the
acquired chauffeured vehicle service company for business referral, which
is expensed as incurred.
In April 1995, the Company acquired certain assets and liabilities of
a chauffeured vehicle service company in the Washington, DC area and
combined the acquired operations with those of Carey DC.
In January 1995, the Company acquired certain assets and liabilities
of the Carey licensee in San Francisco, California (Carey SF).
Subsequently, the Company acquired the business of two additional
chauffeured service companies (in May and August 1995) and combined the
acquired operations with those of Carey SF.
All acquisitions have been accounted for as purchases (except for the
pooling as described above). The net assets acquired and results of
operations have been included in the financial statements as of and from,
respectively, the effective dates of the acquisitions. The total
consideration was allocated to the assets acquired based upon their
estimated fair values with any remaining considerations allocated to either
franchise rights or goodwill, as follows:
<TABLE>
<CAPTION>
November 30,
----------------------------------------
1995 1996 1997
------------ ----------- ------------
<S> <C> <C> <C>
Net assets purchased
Receivables and other assets............................ $ - $ 632,554 $ 324,964
Notes from contracts.................................... - - 6,599,459
Fixed assets............................................ 1,703,521 928,377 1,800,441
Franchise rights........................................ 1,527,402 89,243 -
Goodwill................................................ 5,013,731 447,269 24,480,299
Accounts payable and accrued expenses................... - (367,211) (5,796,692)
Deferred revenue........................................ - - (6,648,960)
------------ ----------- ------------
Fair value of assets acquired........................... $ 8,244,654 $ 1,730,232 $ 20,759,511
============ =========== ============
Consideration:
Cash (exclusive of $223,695 and $274,855 cash
acquired in 1996 and 1997 respectively)................. $ 3,949,393 $ 1,730,232 $ 8,396,017
Capital leases assumed related to vehicle acquisitions.. 346,666 - 161,549
Notes assumed related to vehicle acquisitions........... 895,571 - 3,061,945
Uncollateralized promissory notes issued to sellers..... 3,053,024 - 5,740,000
Common stock............................................ - - 3,400,000
------------ ----------- ------------
Total consideration................................ $ 8,244,654 $ 1,730,232 $ 20,759,511
============ =========== ============
</TABLE>
Certain of these acquisitions require the payment of contingent
consideration based on percentages of annual net revenue of the acquired
entities over a defined future period. The Company paid $315,773, $291,755
and $610,872 for the years ended November 30, 1995, 1996 and 1997,
respectively, as contingent consideration which is reflected in the table
above.
46
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Of the total uncollateralized promissory notes issued to sellers in
1995, two notes totaling $303,000 were subject to reduction based upon the
results of the acquired entities (see Note 6). The two notes were repaid in
1996 for approximately $211,000 and the difference of approximately $92,000
reduced recorded goodwill.
The unaudited pro forma summary consolidated results of operations
assuming the acquisitions accounted for as purchases had occurred for the
purposes of the 1996 summary at the beginning of fiscal 1996, and for the
purposes of the 1997 summary at the beginning of fiscal 1997, are as
follows:
<TABLE>
<CAPTION>
November 30,
---------------------------
1996 1997
------------ ------------
<S> <C> <C>
Revenue, net.......................................... $ 66,483,000 $ 97,870,000
Cost of revenue....................................... (44,515,000) (64,927,000)
Other expense, net.................................... (18,320,000) (24,825,000)
Provision for income taxes............................ (235,000) (3,348,000)
------------ ------------
Net income............................................ $ 3,413,000 $ 4,770,000
============ ============
Pro forma net income per common share................. $ 1.30 $ 0.82
============ ============
Pro forma weighted average common shares outstanding.. 3,417,739 5,807,988
============ ============
</TABLE>
14. 401 (K) PLAN
The Company sponsors a defined contribution plan established pursuant
to Section 401 (k) of the Internal Revenue Code for the benefit of
employees of the Company. The Company made $0, $0, and $60,162 in
contributions in 1995, 1996 and 1997, respectively.
15. STOCK OPTION PLANS
On December 1, 1987, the Company established a Stock Option Plan (the
"1987 Plan") that included all officers and key employees of the Company,
non-employee directors of the Company, and certain persons retained by the
Company as consultants. In accordance with the 1987 Plan, the Company's
Board of Directors may, from time to time, determine the persons to whom
the stock options are to be granted, the number of shares under option, the
option price and the manner in which payment of the option price shall be
made. The 1987 Plan provides for the options to be exercised 25% each year
beginning after the year following the grant. The options are exercisable
for a period of ten years after grant date. The total number of shares
authorized to be issued under the 1987 Plan is 195,656.
On July 28, 1992, the Company established a Stock Option Plan (the
"1992 Plan") that included all officers and key employees of the Company,
non-employee directors of the Company, and certain persons retained by the
Company as consultants. In accordance with the 1992 Plan, the Company's
Board of Directors may, from time to time, determine the persons to whom
the stock options are to be granted, the number of shares under option, the
option price, the time or times during the exercise period
47
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
at which each such option shall become exercisable, and the manner in which
payment of the option price shall be made. The options are exercisable for
a period of ten years after grant date. The total number of shares
authorized to be issued under the 1992 plan is 388,647.
On February 25, 1997, the Company established a Stock Option Plan (the
"1997 Plan") that included all officers and key employees of the Company,
non-employee directors, and certain persons retained by the Company as
consultants. In accordance with the 1997 Plan, the Company's Board of
Directors may, from time to time, determine the persons to whom the stock
options are to be granted, the number of shares under option, the option
price, the time or times during the exercise period at which each such
option shall become exercisable, and the manner in which payment of the
option price shall be made. The options are exercisable for a period of ten
years after grant date. The total number of shares authorized to be issued
under the 1997 Plan is 650,000.
On February 25, 1997, the Board of Directors, subject to stockholder
approval, adopted the Stock Plan for Non-Employee Directors (the
"Directors' Plan"). A total of 100,000 shares of common stock of the
Company are reserved for issuance under the Directors' Plan. Options to
purchase at the IPO price a total of 30,000 shares of common stock were
granted under the Directors' Plan, such grants to be effective upon and
vest six months from execution of an underwriting agreement in connection
with the IPO.
48
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock activity under the 1987 Plan, the 1992 Plan and the 1997 Plan is
as follows:
<TABLE>
<CAPTION>
1987 PLAN 1992 PLAN 1997 Plan/Directors' Plan
======================== ==================== =========================
Option price Option Option price
Shares per Share Shares price per Shares per Share
-------- ------------- -------- --------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 1, 1994 64,502 $ 1.44 383,247 $ 4.65
Granted.......................... - - 21,673 4.65
Exercised........................ (32,681) 1.44 - -
Forfeited........................ (860) 1.44 (60,985) 4.65
-------- ------------- -------- -------
Balance, November 30, 1995 30,961 1.44 343,935 4.65
Granted.......................... 38,701 4.65 43,578 4.65
Forfeited........................ - - (3,011) 4.65
-------- ------------- -------- -------
Balance, November 30, 1996 69,662 1.44 - 4.65 384,502 4.65
Granted.......................... - - - - 505,389 $10.50 - 15.75
Exercised........................ (12,042) 1.44 (3,167) 4.65 - -
-------- ------------- -------- ------- -------- --------------
Balance, November 30, 1997....... 57,620 $ 1.44 - 4.65 381,335 $ 4.65 505,389 $10.50 - 15.75
======== ============= ======== ======= ======== ==============
Vested and exercisable at
November 30, 1997............ 40,421 $1.44 - $4.65 335,530 $ 4.65 200,000 $ 10.50
======== ============= ======== ======= ======== ==============
</TABLE>
Information with respect to stock options outstanding at November 30,
1997 is as follows:
<TABLE>
<CAPTION>
---------------------------------------
Weighted
average
Number remaining
Price of options contractual life
=======================================
<S> <C> <C>
$ 1.44 18,919 0.1
$ 4.65 420,036 5.7
$ 10.50 431,500 9.5
$ 14.00 15,000 9.6
$ 15.00 50,000 9.8
$ 15.75 8,889 9.8
---------------------------------------
944,344 7.6
=======================================
</TABLE>
49
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
----------------------------------------------------
Weighted
Number average
Year of option of exercise
expiration options price Price range
====================================================
<S> <C> <C> <C>
1998 18,920 $ 1.44 $ 1.44
2002 270,503 $ 4.65 $ 4.65
2003 33,541 $ 4.65 $ 4.65
2004 12,685 $ 4.65 $ 4.65
2005 21,672 $ 4.65 $ 4.65
2006 81,634 $ 4.65 $ 4.65
2007 505,389 $11.14 $10.50 - $15.75
----------------------------------------------------
All Years 944,344 $ 8.06 $ 1.44 - $15.75
====================================================
</TABLE>
In May 1996, the options granted under the 1992 Plan and a warrant to
purchase 86,003 shares of common stock (see Note 6) were repriced to $4.65.
The options and warrant were repriced at the determined fair market value
as of the date of repricing.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation costs for the
Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards in 1996 and 1997 under those plans
consistent with the recognition method of FASB Statement No. 123, the
Company's net income and income per share would have been reduced to the
pro forma amounts presented below:
<TABLE>
<CAPTION>
(Dollars in thousands, except per share amounts)
1996 1997
-------- --------
<S> <C> <C> <C>
Net income........................................ As reported $ 3,495 $ 4,523
Pro forma 3,482 4,320
Net income per share.............................. As reported $ 0.90 $ 0.76
Pro forma 0.89 0.72
</TABLE>
50
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of each option is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Expected life (years)............ 6 6
Interest rate.................... 6.63% 6.66%
Volatility....................... 40.0 40.0
Dividend yield................... 0.00% 0.00%
Weighted average fair value...... $2.31 $5.56
</TABLE>
16. NET INCOME PER COMMON SHARE
<TABLE>
<CAPTION>
November 30,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net income available to common
stockholders...................... $ 93,746 $3,494,097 $4,523,490
========== ========== ==========
Weighted average common shares
outstanding....................... 3,089,895 3,125,673 5,639,879
========== ========== ==========
Net income per common share $ 0.03 $ 1.12 $ 0.80
========== ========== ==========
</TABLE>
Common equivalent shares are included in the per share calculations
where the effect of their inclusion would be dilutive. Common equivalent
shares consist of common shares issuable upon (a) conversion of Series B, F
and G preferred stock and (b) the assumed exercise of outstanding stock
options and warrants. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin (SAB) No. 83, the common equivalent shares issued by
the Company during the twelve months preceding the effective date of the
Registration Statement relating to the Company's initial public offering,
using the treasury stock method and an assumed public offering price of
$10.50 per share, have been included in the calculation of net income per
common share.
51
<PAGE>
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net income available to common shareholders is the net income for the
fiscal year less accretion of dividends on the preferred stock of $4,375,
$900 and $0 for 1995, 1996 and 1997, respectively.
In February 1997, the Financial Accounting Standards Boards issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(FAS 128). FAS 128 simplifies the existing earnings per share (EPS)
computations under Accounting Principles Board Opinion No. 15, "Earnings
Per Share," revises disclosure requirements, and increases the
comparability of EPS data on an international basis. In simplifying the EPS
computations, the presentation of primary EPS is replaced with basic EPS,
with the principal difference being that common stock equivalents are not
considered in computing basic EPS. In addition, FAS 128 requires dual
presentation of basic and diluted EPS. FAS 128 is effective for financial
statements issued for periods ending after December 15, 1997. The Company's
pro forma basic EPS under FAS 128 would have been $1.00 and dilutive EPS
under FAS 128 would not differ significantly form the reported pro forma
net income per share.
17. RECAPITALIZATION PLAN
On February 25, 1997, pursuant to an agreement reached in May 1996,
the Board of Directors authorized a recapitalization plan
("Recapitalization"), which was implemented at the time of the IPO. Under
the Recapitalization, the $2,000,000 subordinated convertible note dated
September 1, 1991 and the $3,780,000 subordinated note dated July 30, 1992
were converted or exchanged for 1,046,559 shares of common stock and
payment of $912,452. The Series A preferred stock was converted into 86,003
shares of common stock and redeemed in part for $2,103,500. All of the
Series F preferred stock and 3,000 shares of Series G preferred stock was
redeemed for an aggregate of $1,000,000. The remaining preferred stock was
converted into 1,427,509 shares of common stock. As a result of the
Recapitalization, preferred stock which had a liquidation preference of
$11,154,900 and subordinated debt with a principal amount of $5,780,000 was
converted in part into 2,560,071 shares of common stock and repaid or
redeemed in part for $4,015,952 in cash. All of the cash amounts were paid
out of the proceeds of the IPO.
52
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Carey International, Inc.
is included on page 26 of this Form 10-K. In connection with our audits of such
financial statements, we have also audited the related financial statement
schedule listed in the index on page 54 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Washington, D.C.
January 30, 1998
53
<PAGE>
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Balance
Balance at Charged to acquired as
Beginning of Costs and part of Deductions-- Balance at
Description Period Expense acquisition Write-Offs End of Period
----------- ------------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Year ended November 30, 1997
Reserve and allowance from asset
accounts:
Allowance for doubtful accounts................. $ 535,408 $ 425,157 $ 188,636 $ (509,796) $ 639,405
Year ended November 30, 1996
Reserve and allowance from asset
accounts:
Allowance for doubtful accounts................. $ 293,796 $ 508,387 - $ (266,775) $ 535,408
Year ended November 30, 1995
Reserve and allowance from asset
accounts:
Allowance for doubtful accounts................. $ 203,872 $ 403,099 - $ (313,175) $ 293,796
</TABLE>
54
<PAGE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
There are no events to report under this item.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information required by this Item is included in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A in connection
with the Company's 1998 annual meeting of shareholders and is incorporated
herein by reference.
ITEM 11 - EXECUTIVE COMPENSATION
- --------------------------------
The information required by this Item is included in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A in connection
with the Company's 1998 annual meeting of shareholders and is incorporated
herein by reference.
ITEM 12 - SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
- ----------------------------------------------------------------
The information required by this Item is included in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A in connection
with the Company's 1998 annual meeting of shareholders and is incorporated
herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this Item is included in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A in connection
with the Company's 1998 annual meeting of shareholders and is incorporated
herein by reference.
55
<PAGE>
PART IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports in Form 8-K
- -------- ---------------------------------------------------------------
(a)(1) Financial Statements
See the first page of Item 8 for an index of the financial
statements included in this report.
(a)(2) Financial Statement Schedules
Schedule VIII-Valuation and Qualifying Accounts
(a)(3) Exhibits
Sequential
Exhibit No. Description Page No.
- ----------- ----------- ----------
*2.1 Stock Purchase Agreement dated as of March 1,
1997, by and among Carey International, Inc.,
Alfred J. Hemlock and Lupe C. Hemlock
*2.2 Agreement and Plan of Merger dated as of March 1,
1997, by and among Carey International, Inc.,
Manhattan International Limousine Network Ltd.,
MLC Acquisition Corporation and Michael Hemlock
*2.3 Form of Stockholder Action by Written Consent
Adopted in Connection with the Recapitalization
**2.4 Amended and Restated Agreement of Plan of Merger
made as of October 10, 1997 by and amoung Carey
International, Inc., Carey Limousine Indiana, Inc.,
Indy Connection Limousines, Inc., Transit Tours, Inc.,
K.D. & Associates Professional Corporation.
Craig Del Fabro and Kim Del Fabro
*3.1 Form of Amended and Restated Certificate of
Incorporation of the Company
*3.2 Amended and Restated Bylaws of the Company
*4.1 Specimen Stock Certificate
*4.2 Form of Warrants
*4.3 Carey International Inc. Common Stock Purchase
Warrant dated September 1, 1991, issued to
Yerac Associates, L.P.
*4.4 Form of Registration Rights Agreement between
Carey International, Inc. and Michael Hemlock
*10.1 1997 Equity Incentive Plan
*10.2 1992 Stock Option Plan
*10.3 1987 Stock Option Plan
*10.4 Stock Plan for Non-Employee Directors
*10.5 Lease dated July 5, 1989 for 4530 Wisconsin Avenue,
Washington, D.C., between Carey International, Inc.
and 4530 Wisconsin Associates, as lessor, including
Addendum, Exhibit B and Exhibit C: and Second
Amendment to Lease dated August 6, 1993, including
Exhibit A
*10.6 Form of Escrow Agreement by and among Michael Hemlock,
Alfred J. Hemlock, Lupe C. Hemlock and a bank to be
named
*10.7 Current form of Standard Master License Agreement
*10.8 Current form of Standard International License Agreement
*10.9 Form of Promissory Notes in connection with Acquisition
of Manhattan Limousine
*10.10 Current form of Standard Independent Operator Agreement
+10.11 Form of Revolving Credit and Term Loan Agreement by and
among Carey International, Inc., certain of its direct
and indirect wholly-owned subsidiaries, and Fleet Bank,
N.A., Banco Popular de Puerto Rico and George Mason
Bank
++11 Statements Regarding Computation of Per Share Earnings
*21 Subsidiaries of the Registrant
++23.1 Consent of Coopers & Lybrand L.L.P.
++27 Financial Data Schedule
- -------------
* Incorporated by reference to the Company's Registration Statement on Form S-1
(File No. 333-22651).
** Incorporated by reference to the Company's Current Report on Form 8-K dated
October 31, 1997.
+ Incorporated by reference to the Company's Registration Statement on Form S-4
(File No. 333-34897).
++ Filed hereinto.
(b) Reports on Form 8-K
The Company filed a Comment Request on Form 8-K dated November
13, 1997 and amended on Form 8-K/A dated January 13, 1998
reporting under Item 2 the acquisition of Indy Connection
Limousines, Inc. and subsidiary.
56
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CAREY INTERNATIONAL, INC.
By: /s/ David H. Haedicke
----------------------------------
David H. Haedicke
Executive Vice President
Chief Financial Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and to the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ---- ----- ----
<S> <C> <C>
/s/ Vincent A. Wolfington Chairman of the Board and February 28, 1998
- ----------------------------------------------- Chief Executive Officer
Vincent A. Wolfington
/s/ Don R. Dailey President and Director February 28, 1998
- -----------------------------------------------
Don R. Dailey
/s/ David H. Haedicke Chief Financial Officer February 28, 1998
- -----------------------------------------------
David H. Haedicke
/s/ Paul A. Sandt Principal Accounting Officer February 28, 1998
- -----------------------------------------------
Paul A. Sandt
/s/ David McL. Hillman Director February 28, 1998
- -----------------------------------------------
David McL. Hillman
/s/ Robert W. Cox Director February 28, 1998
- -----------------------------------------------
Robert W. Cox
/s/ Nicholas J. St. George Director February 28, 1998
- -----------------------------------------------
Nicholas J. St. George
</TABLE>
57
<PAGE>
EXHIBIT 11
STATEMENTS REGARDING COMPUTATION OF PER SHARE EARNINGS
HISTORICAL EARNINGS PER SHARE
<TABLE>
<CAPTION>
November 30, November 30, November 30,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net income available to common
shareholders:
Net income................................................. $ 98,121 $3,494,967 $4,523,490
Preferred stock dividends.................................. (4,375) (900) -
---------- ---------- ----------
Net income available to common
shareholders........................................... $ 93,746 $3,494,067 $4,523,490
========== ========== ==========
Common Stock and Common Stock Equivalents:
Weighted average shares outstanding........................ 1,332,879 1,359,073 4,506,108
Convertible Securities:
Series B Preferred Stock............................... 663,761 663,761 334,609
Series F Preferred Stock............................... 135,025 135,025 68,067
Series G Preferred Stock............................... 673,638 673,638 339,588
Options (calculated on Treasury Method) 1987
Plan................................................... 11,790 21,374 16,939
Options and warrants issued within one year of
the offering (calculated on Treasury Method):
Vested options repriced or granted..................... 207,020 207,020 292,862
Warrants repriced...................................... 65,782 65,782 81,706
---------- ---------- ----------
272,802 272,802 374,568
---------- ---------- ----------
Total common stock and common stock
equivalents...................................... 3,089,895 3,125,673 5,639,879
========== ========== ==========
Earnings per common share.......................................... $ 0.03 $ 1.12 $ 0.80
========== ========== ==========
</TABLE>
11.1
<PAGE>
EXHIBIT 11
STATEMENTS REGARDING COMPUTATION OF PER SHARE EARNINGS (CONTINUED)
PRO FORMA EARNINGS PER SHARE
TO GIVE EFFECT TO THE RECAPITALIZATION
(Presented on the face of the November 30, 1996
and 1997 Statements of Operations)
<TABLE>
<CAPTION>
November 30, November 30,
1996 1997
------------ ------------
<S> <C> <C>
Pro forma net income:
Net income........................................................................... $ 3,494,967 $ 4,523,490
Add back interest (tax effected) on debt included in Recapitalization:
$2,867,546 subordinated note (12.0%) converted to stock in
Recapitalization................................................................ 206,464 103,232
$2,000,000 subordinated note (7.74%) converted to stock in
Recapitalization................................................................. 92,879 46,440
------------ ------------
Pro forma net income................................................................. $ 3,794,310 $ 4,673,162
============ ============
Common Stock and Common Stock Equivalents:
Historical weighted average shares outstanding....................................... 3,125,673 5,639,879
Add back:
Less common stock equivalents included in historical earnings per share:
Series B Preferred Stock......................................................... (663,761) (334,609)
Series F Preferred Stock......................................................... (135,025) (68,067)
Series G Preferred Stock......................................................... (673,638) (339,588)
Add effect of Recapitalization:
Series A Preferred Stock......................................................... 86,003 43,355
Series B Preferred Stock......................................................... 663,761 334,609
Series F & G Preferred Stock..................................................... 763,748 385,013
Shares for $2,867,546 of subordinated debt....................................... 616,544 310,806
Shares for $2,000,000 of subordinated debt....................................... 430,015 216,612
------------ ------------
Total pro forma common stock and common stock equivalents............................ 4,213,320 6,188,010
============ ============
Pro forma earnings per common share...................................................... $ 0.90 $ 0.76
============ ============
</TABLE>
11.2
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Carey International, Inc. on Form S-4 (File No. 333-34897) and on Form S-8
(333-32335) of our reports dated January 30, 1998, on our audits of the
consolidated financial statements and financial statement schedule of Carey
International, Inc. as of November 30, 1997 and 1996, and for the years ended
November 30, 1997, 1996 and 1995, which reports are included in this Annual
Report on Form 10-K.
Coopers & Lybrand L.L.P.
Washington, DC
February 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> NOV-30-1997
<CASH> 5,333,402
<SECURITIES> 0
<RECEIVABLES> 16,602,692
<ALLOWANCES> 639,000
<INVENTORY> 0
<CURRENT-ASSETS> 23,371,270
<PP&E> 9,278,319
<DEPRECIATION> 5,116,000
<TOTAL-ASSETS> 85,394,214
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 76,300
<OTHER-SE> 48,223,924
<TOTAL-LIABILITY-AND-EQUITY> 85,394,214
<SALES> 86,378,313
<TOTAL-REVENUES> 86,378,313
<CGS> 57,890,393
<TOTAL-COSTS> 78,001,983
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,141,946
<INCOME-PRETAX> 7,685,772
<INCOME-TAX> 3,162,282
<INCOME-CONTINUING> 4,523,490
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,523,490
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0
</TABLE>
