| Basis of Presentation | 2. Basis of Presentation
These consolidated financial statements have been prepared by
management in accordance with accounting principles generally
accepted in the United States (“US GAAP”). The
accompanying consolidated financial statements include the accounts
of the Company and all of its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
The significant accounting policies used to prepare the financial
statements are described below:
Foreign Currency Translation
Monetary assets and liabilities denominated in a currency other
than the functional currency are translated at the rate of exchange
prevailing at the balance sheet date. Transactions denominated in a
currency other than the functional currency are translated at the
rate of exchange prevailing on the transaction date. Gains and
losses on translation of these items are considered transaction
gain and losses and are included in the consolidated statements of
operations in foreign currency (gain) loss.
The functional currency of STI, the parent, STA ULC and the
Company’s Canadian operations, is the Canadian dollar. The
functional currency of STA Holdings and the Company’s
operations in the United States is the U.S. dollar. The
Company’s financial statements are reported in U.S. dollars,
as the principal operations and cash flows of its subsidiaries are
conducted in U.S. dollars.
As a result, the assets and liabilities of the STI, STA ULC and the
Company’s Canadian operations are translated into U.S.
dollars using the exchange rate in effect at the period end and
revenues and expenses are translated at the average rate during the
period. Exchange gains or losses on translation are deferred as a
separate component of shareholders’ equity. The
Company’s Cdn$ 6.75% convertible subordinated unsecured
debentures (the “Cdn$ 6.75% Convertible Debentures”)
and the Cdn$ 6.25% convertible subordinated unsecured debentures
(the “Cdn$ 6.25% Convertible Debentures”), as described
in Note 9, of STI are denominated in Canadian dollars. As the
functional currency of STI is the Canadian dollar, exchange gains
or losses related to the Cdn$ 6.75% Convertible Debentures and the
Cdn$ 6.25% Convertible Debentures on the translation of the STI
financial statements into U.S. dollars, the reporting currency, are
deferred as a separate component of shareholders’ equity. The
US$ 6.25% convertible subordinated unsecured debentures (the
“6.25% Convertible Debentures”) of STI as described in
Note 9 are denominated in U.S. dollars. As the functional currency
of STI is the Canadian dollar, unrealized gains or losses on
re-measurement of the US$ 6.25% Convertible Debentures into
Canadian dollars are considered transaction gains and losses, at
the STI level, and are included in the consolidated statement of
operations.
Foreign currency transactions gains and losses, related to
short-term related intercompany loans are recorded in the
Consolidated Statement of Operations as incurred. Foreign currency
transaction gains and losses for intercompany loans that are
considered long-term in nature are recorded in Accumulated Other
Comprehensive Loss as incurred.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly
liquid investments with maturities of three months or less from the
date of purchase. At June 30, 2015 and June 30, 2014
there were no cash equivalents.
Use of Estimates
The preparation of financial statements in conformity with
US GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the
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.
The Company bases its estimates on historical experience, actuarial
evaluations and on various other assumptions that it believes are
reasonable under the circumstances.
Amounts reported based upon these estimates include, but are not
limited to, insurance reserves, income taxes, goodwill and
intangible assets, derivatives, certain components of long term
debt, Class B common share liability and impairment testing of
long-lived assets.
Allowance for Doubtful Accounts
The Company establishes provisions for losses on accounts
receivable if it is determined that all or part of the outstanding
balance is not collectable. Collectability is reviewed regularly
and an allowance is established or adjusted, as necessary, using
the specific identification method.
Concentration of Credit Risk
Credit is extended based on an evaluation of the customer’s
financial condition and, generally, advance payment is not
required. The Company has no individual customers which account for
more than 10% of its revenues.
Anticipated credit losses are provided for in the financial
statements. Management monitors the financial condition of its
customers to reduce the risk of loss.
Inventories
Inventories, consisting primarily of repair parts and vehicle
accessories, are valued at the lower of cost or market determined
on a first-in,
Property and Equipment
Property and equipment is recorded at cost or at fair value if
obtained as part of a business acquisition, less accumulated
depreciation. Ordinary maintenance and repairs are expensed as
costs are incurred. Depreciation on transportation equipment is
computed on a usage basis over the estimated useful lives of the
assets, which approximate a range from seven to eleven years.
Leasehold improvements are amortized over the shorter of the lease
term or the estimated useful lives of the assets. Buildings are
depreciated on a straight line basis over 40 years. Other property
and equipment is depreciated on a straight line basis over three to
five years.
The Company recorded depreciation expense of $46.6 million and
$45.2 million for the years ended June 30, 2015 and 2014,
respectively.
The Company accrued approximately $21.0 million in fixed assets at
June 30, 2015, related to fiscal year 2016 growth vehicles,
which has been recorded as a non-cash investing activity for fiscal
year 2015.
Goodwill and Indefinite Lived Intangibles
Goodwill represents the excess of cost over fair value of net
assets acquired in business combinations accounted for under the
purchase method. Goodwill and trade names are not amortized but
rather assessed for impairment annually or more frequently if
circumstances change and indicators of impairment are present. The
annual impairment testing is performed in the fourth quarter.
The annual assessment of goodwill impairment, may be performed
either on a quantitative or qualitative basis. In accordance with
Accounting Standards Codification (“ASC”) 350-20,
Intangibles-Goodwill and Other, .
ASC 350-20 was amended in September 2011, and gives the Company the
option to perform a qualitative assessment for goodwill impairment.
Under the qualitative assessment, consideration is given to both
external factors (including the macroeconomic and industry
conditions) and the Company’s own internal factors (including
internal costs, recent financial performance, management, business
strategy, customers, and stock price). Facts and circumstances are
evaluated each year to determine whether to use the qualitative or
quantitative assessment. We performed a qualitative assessment
during the fourth quarter of 2015, and there was no indication of
impairment for goodwill.
Other Identifiable Intangible Assets
When assessing the impairment for indefinite-lived trade names, the
Company performs the assessment in accordance with ASC 350-30,
Intangibles other than Goodwill Intangibles Other than Goodwill,
indication of impairment. Definite-lived intangible assets consist
of contract rights and covenants not to compete. Contract rights,
which include customer relationships, are amortized on a
straight-line basis over an estimated useful life of 20 to 23
years. The useful life for contract rights was determined based on
third party valuation reports prepared for the Company. The
valuations took into account the average length of the contracts,
the expected renewal periods and assumptions regarding future
renewals based upon historical customers lives. Covenants
not-to-compete are amortized on a straight-line basis over an
estimated useful life of two to five years. The Company recorded
amortization expense associated with its intangible assets of $3.4
million and $3.6 million for the years ended June 30, 2015 and
2014, respectively.
Convertible Debentures
The principal amounts of the Cdn$ 6.75% Convertible Debentures,
which were redeemed on June 30, 2015, and the Cdn$ 6.25%
Convertible Debentures are convertible into common shares of the
Company at the option of the holders and the Company under certain
conditions. The Company has determined that the debentures are not
required to be bifurcated into separate debt and equity components.
In accordance with ASC 470-20, Debt with Conversion and Other
Options,
In accordance with ASC 815, Derivatives and Hedging
Deferred Financing Costs
The Company incurred costs related to obtaining debt financing. The
Company capitalized costs associated with its Credit Agreement,
Senior Secured Notes and costs related to the issuances of the
Convertible Debentures. These costs have been capitalized and are
being amortized to interest expense over the term of the related
debt using the effective interest rate method. The carrying
value of the deferred financing costs was $5.8 million and $7.4
million as of June 30, 2015 and 2014 respectively.
Amortization expense totaled $1.9 million and $1.6 million for the
years ended June 30, 2015 and 2014, respectively. Deferred
financing costs are included in other assets in the consolidated
balance sheet.
Impairment of Long-Lived Assets
Management continually evaluates whether events or circumstances
have occurred that indicate that the remaining estimated useful
lives of property and equipment, contract rights and covenants not
to compete may warrant revision or that the remaining balances may
not be recoverable. Events or circumstances that would trigger
testing for impairment include, but are not limited to, the loss of
a significant school district customer contract, a significant
increase in the Company’s expense levels absent a
corresponding increase in revenue that causes operating or cash
flow losses or projected operating or cash flow losses, significant
adverse changes in legal factors or the business climate in which
the Company operates that could affect the value of long-lived
assets, or the expectation that a long-lived asset will be sold or
otherwise disposed of at a loss before the end of its previously
estimated useful life. If this review indicates that the assets
will not be recoverable, as determined based on the undiscounted
future cash flows from the use of the assets, the carrying value of
the assets will be reduced to their estimated fair value. There
were no indicators of impairment during the years ended
June 30, 2015 and 2014.
Business Combinations
The Company accounts for business combinations under the principles
codified in ASC 805, Business Combinations
Income Taxes
Income taxes have been computed utilizing the asset and liability
approach, under which deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary
differences between the financial reporting and tax bases of assets
and liabilities. Deferred tax assets and liabilities are measured
using the currently enacted tax rates expected to be in effect for
the years in which those taxes are expected to be realized or
settled. A valuation allowance is recorded to reduce deferred tax
assets to the amount that is believed to be more likely than not to
be realized. The recorded deferred income tax liability results
from a difference between the book and tax basis of certain
transportation equipment, other equipment and intangible
assets.
The Company uses judgment in determining income tax provisions and
in evaluating its tax positions under the accounting guidance for
income taxes. Additional provisions for income taxes are
established when, despite the belief that tax positions are fully
supportable, there remain certain positions that do not meet the
minimum probability threshold, which is a tax position that is
more-likely-than-not to be sustained upon examination by the
applicable taxing authority. The Company and its subsidiaries are
examined by various federal and state tax authorities. The Company
regularly assesses the potential outcomes of these examinations and
any future examinations for the current or prior years in
determining the adequacy of its provision for income taxes. The
Company continually assesses the likelihood and amount of potential
adjustments and adjusts the income tax provision, the current tax
liability and deferred taxes in the period in which the facts that
give rise to a revision become known. The Company recognizes
interest and penalties related to underpayment of income taxes in
income tax provision (benefit) (see Note 8).
Revenue Recognition
Revenue from the Company’s school bus operations is
recognized when the following criteria are met: persuasive evidence
of an arrangement exists, services have been rendered, the price to
the buyer is fixed and determinable, and collectability is
reasonably assured. The Company bills customers on a monthly basis
upon the completion of school bus routes, which are based on
contracts or extension agreements with customers.
Revenue from oil and gas interests is derived from the
Company’s partial ownership in various oil and gas wells. As
a non-operator, the Company records revenue from its oil and gas
interests based on its share of the sales value of production from
producing wells. Revenue is received from the well operators and is
recognized when the commodities are delivered to customers, the
price is fixed or determinable and collectability is assured.
Insurance Reserves
The Company had approximately $25.9 million and $22.1 million in
recorded insurance reserves at June 30, 2015 and 2014,
respectively. These reserves reflect the estimated deductible
amounts the Company is responsible for under its workers’
compensation and vehicle liability insurance programs. Insurance
expense for these items is largely dependent on the Company’s
claims experience and the Company’s ability to control such
claims, in addition to third party premiums/expenses associated
with this coverage. The Company has recorded estimated insurance
reserves for the anticipated losses on open claims and estimated
reserves for incurred but not recorded claims under the
workers’ compensation and vehicle liability programs based
upon actuarial analysis prepared by an independent third party
actuary. Although the estimates of these accrued liabilities are
based on the factors mentioned above; it is possible that future
cash flows and results of operations could be materially affected
by changes in our assumptions or changes in claims experience.
Insurance reserves are included in accrued expenses and other
current liabilities and other liabilities on the consolidated
balance sheet.
Stock-Based Compensation
The Company accounts for stock-based compensation and other
stock-based payments using the fair value method. Under the fair
value method, the fair value of stock-based compensation and other
stock-based payments are estimated at the grant date and the total
fair value is amortized over the vesting schedule of the awards as
compensation expense. The Class B Series Two and Class B Series
Three common shares issued by STA Holdings are fully vested on the
grant date, and, as such, the Company recognizes compensation
expense when the shares are issued. STA Holdings has issued only
Class B Series Three common shares pursuant to the EIP during
fiscal year 2015 and fiscal year 2014. In May 2015 the Company
redeemed all of the remaining Class B Series Two common shares by
exchanging them for Class B Series Three common shares, based on
the fair market value of each class of shares. Subsequent to March
2010, all new share awards under the EIP have only been in the form
of grants of Class B Series Three common shares. These shares are
accounted for as a liability upon issuance and remeasured at fair
value on a quarterly basis (see Note 13). The Company recognized
$4.2 million and $3.9 million in non-cash stock- based compensation
expense based on the estimated fair value on the date of grant of
the shares issued, for the years ended June 30, 2015 and 2014,
respectively.
The Class B common shares are not traded in an active market and
have certain restrictions on their transferability. These shares
are accounted for as a liability upon issuance, as a result of a
put option they contain. In the case of the Class B Series Two
common shares issued pursuant to the EIP during the period the IPS
structure was in place, the put option provided for a fair market
value of Class B Series Two common shares put at an amount equal to
the weighted average trading price of the STI common shares for the
ten consecutive trading days immediately prior to the date of put,
plus Cdn. $3.847 (an amount
equivalent to the historical value of the Subordinated Note
component of the IPS). In the case of the Class B Series Three
common shares utilized for EIP share grants subsequent to the end
of the IPS structure, the put option provides for a fair market
value of Class B Series Three common shares put at an amount equal
to the weighted average trading price of the STI common shares for
the ten consecutive trading days immediately prior to the date of
put.
Stock-based compensation expense associated with the issuance of
Class B Series Three common shares is based on the trading value of
the STI common shares at the date of grant, similar to the fair
value of such common shares in connection with the put option
values described above.
Accounting for Derivatives and Hedging Activities
Derivatives are recorded at fair value on the balance sheet, which,
in accordance with ASC 820, Fair Value Measurements and
Disclosure,
Segment Reporting
The Company has two reportable segments, a transportation segment
and an oil and gas segment. The transportation segment provides
school bus and management services to public and private schools in
North America. The oil and gas segment represents the
Company’s investments as a non-operator in oil and gas
interests.
Oil and Gas Interests
The Company holds non-operating interests in oil and gas
properties, which are jointly owned with others. The financial
statements reflect the Company’s proportionate interest in
the oil and gas activities as a non-operator.
The Company uses the full-cost method of accounting for oil and gas
interests to determine the capitalized cost, whereby certain
expenditures related to the acquisition, exploration and
development of oil and gas properties are capitalized. Capitalized
costs include the cost of land acquired or leased, intangible
drilling costs such as those for equipment, casing and attachments
on
both productive and non-productive wells. These costs, net of
salvage values, are accumulated in a single cost center and are
depleted and amortized using the units-of production method.
Natural gas reserves and production are converted, at a ratio of
six thousand cubic feet of natural gas to one barrel of oil, for
depletion and depreciation purposes.
In connection with the oil and gas interests, the Company has an
asset retirement obligation which represents the liability
associated with the retirement of long-lived assets that arise from
the acquisition, construction, development or normal operation of
such assets.
Under US GAAP, the impairment test for oil and gas assets (the
“ceiling test”) requires the Company to use tax
effected discounted cash flow using a present value technique.
Under ASC 932, Extractive Industries – Oil and Gas,
Earnings per Share
Basic and diluted earnings per share are calculated by dividing the
net income for the period by the weighted number of shares
outstanding during each period. The shares used in the calculation
of basic earnings per share are based on the weighted average
number of shares outstanding. Shares used in the calculation of
diluted earnings per share are based on the weighted average number
of shares outstanding plus an adjustment for the incremental shares
that would be outstanding assuming the exercise of the
Company’s Convertible Debentures. The net income for basic
earnings per share is net earnings available to common
stockholders. The net income for diluted earnings per share is net
earnings available to common stockholders with interest expense
associated with the Convertible Debentures added back (net of tax)
for the assumed conversion of the Convertible Debentures into
common stock.
Seasonality
The Company’s operations are seasonal and follow the school
calendars of the public and private schools it serves. During the
summer school break, revenue is derived primarily from summer camps
and private charter services. Since schools are not in session,
there is no school bus transportation revenue. Depreciation of
fixed assets occurs in the months during which schools are in
session, which is generally September through June. A full
year’s worth of depreciation is recorded in these ten months
to match the vehicles’ usage.
Recent Adopted Accounting Standards
In July 2013, the FASB issued ASU 2013-11, Presentation of an
Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a
Similar Tax Loss or a Tax Credit Carryforward Exists. This ASU
provides for the presentation of all or a portion of an
unrecognized tax benefit as a reduction
to a deferred tax asset for a net operating loss carryforward, a
similar tax loss, or a tax credit carryforward unless such balances
are not available at the reporting date at which point the
unrecognized tax benefit should be presented in the financial
statements as a liability and should not be combined with deferred
tax assets. The Company adopted this standard prospectively for all
unrecognized tax benefits that existed beginning in the first
quarter of fiscal 2015. This presentation is consistent with how
the Company historically presents unrecognized tax benefits;
therefore the adoption of this standard did not have a material
impact on the Company’s consolidated financial
statements.
Recently Issued Accounting Standards
In January 2014, the FASB issued ASU 2015-05, Service Concession
Arrangements. This ASU applies to an operating entity of a service
concession arrangement entered into with a public-sector entity
grantor when the arrangement meets both of the following
conditions: (i) the grantor controls or has the ability to
modify or approve the services that the operating entity must
provide with the infrastructure, to whom it must provide them and
at what price and (ii) the grantor controls, through
ownership, beneficial entitlement, or otherwise, any residual
interest in the infrastructure at the end of the term of the
arrangement. This is effective for annual periods beginning after
December 15, 2014 (including interim periods within those
fiscal years) and should be applied on a modified retrospective
basis to service concession arrangements in existence at the
beginning of the fiscal year of adoption. The Company is required
to adopt this standard for the first quarter of fiscal 2016. Early
adoption is permitted. The Company is currently evaluating the
requirements of this ASU to determine the impact on their
consolidated financial statements, but currently does not
anticipate this standard having a significant impact.
In April 2014, the FASB issued ASU 2014-08, an update modifying the
criteria under which asset disposal activities qualify for
presentation as a discontinued operation. The amendment restricts
presentation as a discontinued operation to disposals that
represent a strategic shift that has, or will have a major effect
on an entity’s operations and financial results. The
amendments in this update are to be applied prospectively to all
disposals or classifications as held for sale of components of an
entity. The Company is required to adopt this standard for the
first quarter of fiscal 2016. Early adoption is permitted, but only
for disposals or classifications as held for sale that have not
been reported in financial statements previously issued. This
standard is not anticipated to have an impact on the
Company’s consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts
With Customers. This new revenue recognition standard will
supersede most existing revenue recognition guidance and is
intended to improve revenue recognition and related financial
reporting requirements. The standard will require companies to
review contract arrangements with customers and ensure that all
separate performance obligations are properly recognized in the
compliance with the new guidance. The standard allows for either
“full retrospective” or “cumulative effect”
adoption. In
July 2015, the FASB delayed the effective date of this standard.
The Company is now required to adopt this standard effective
July 1, 2018. Early adoption is permitted beginning with the
original effective date of July 1, 2017. The Company is
currently evaluating both the method of adoption as well as the
impact that ASU 2014-09 will have on its consolidated financial
statements and related disclosures.
In August 2014, the FASB issued ASU 2014-15, Disclosure of
Uncertainties about an Entity’s Ability to Continue as a
Going Concern, which requires an entity to evaluate whether
conditions or events, in the aggregate, raise substantial doubt
about the entity’s ability to continue as a going concern for
one year from the date the financial statements are issued or are
available to be issued. The guidance is effective for the annual
period ending after December 15, 2016 and for annual and
interim periods thereafter, with early adoption permitted. The
Company is in the process of evaluating the impact of this guidance
on its consolidated financial statements, but currently does not
anticipate this standard having a significant impact.
In January 2015, The FASB issued ASU 2015-01, Income
Statement-Extraordinary and Unusual Items (Subtopic 225-20),
Simplifying Income Statement Presentation by Eliminating the
Concept of Extraordinary Items, which simplifies income statement
presentation by eliminating the need to determine whether to
classify an item as an extraordinary item. The guidance is
effective for the annual period ending after December 15, 2015
and for annual and interim periods thereafter, with early adoption
permitted. The Company is in the process of evaluating the impact
of this guidance on its consolidated financial statements, but
currently does not anticipate this standard having a significant
impact.
In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic
810), Amendments to the Consolidation Analysis, to improve the
targeted areas of the consolidation guidance for legal entities
such as limited partnerships, limited liability corporations
similar entities and reduce the number of consolidation models. The
guidance is effective for the annual period ending after
December 15, 2015 and for annual and interim periods
thereafter, with early adoption permitted. The Company is in the
process of evaluating the impact of this guidance on its
consolidated financial statements, but currently does not
anticipate this standard having a significant impact.
In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of
Interest (Subtopic 835-30)-Simplifying the Presentation of Debt
Issuance Costs, which simplifies the presentation of debt issuance
costs by requiring debt issuance costs to be presented as a
deduction from the corresponding debt liability. The guidance is
effective for the annual period ending after December 15, 2015
and for annual and interim periods thereafter, with early adoption
permitted. The Company is in the process of evaluating the impact
of this guidance on its consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05 Customer’s
Accounting for Fees Paid in a Cloud Computing Arrangement which
requires that if a cloud computing arrangement includes a software
license, then a customer should account for the software license
element of the arrangement consistent with the acquisition of other
software licenses. If a cloud computing arrangement does not
include a software license, the customer should account for the
arrangement as a service contract. The guidance is effective for
the annual period ending after December 15, 2015 and for
annual and interim periods thereafter, with early adoption
permitted. The Company is in the process of evaluating the impact
of this guidance on its consolidated financial statements.
Certain amounts have been reclassified in our prior period
consolidated balance sheets to conform to current year presentation
and such amounts were not material to current and prior
periods. |
