Exhibit 99.2
Report of Independent Accountants
---------------------------------
To the Stockholders and Board of Directors of
Carey International, Inc.
We have audited the accompanying supplemental consolidated balance sheets
of Carey International, Inc. and Subsidiaries as of November 30, 1995 and 1996,
and the related supplemental consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended November 30, 1996. 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 supplemental consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Carey International Inc. and Subsidiaries as of November 30, 1995 and 1996, and
the results of their operations and their cash flows for each of the three years
in the period ended November 30, 1996, in conformity with generally accepted
accounting principles.
The supplemental financial statements give retroactive effect to the merger
on October 31, 1997, of Carey International, Inc., Indy Connection Limousine,
Inc. and Subsidiary, which has been accounted for as a pooling-of-interests as
described in Notes 1, 2 and 13 to the supplemental consolidated financial
statements. Generally accepted accounting principles proscribe giving effect to
a consummated business combination accounted for by the pooling-of-interests
method in financial statements that do not include the date of consummation.
These financial statements do not extend through the date of consummation;
however, they will become the historical consolidated financial statements of
Carey International, Inc. and Subsidiaries after financial statements covering
the date of consummation of the business combination are issued.
As discussed in Note 16 to the supplemental consolidated financial
statements, the accompanying supplemental consolidated balance sheets as of
November 30, 1994 and 1995, and the related supplemental consolidated statements
of operations, changes in stockholders' equity and cash flows for each of the
two years in the period ended November 30, 1995, have been restated for a change
in the revenue recognition method.
Washington, D.C. Coopers & Lybrand, L.L.P.
January 31, 1997, except
for Note 18, as to which
the date is March 1, 1997,
and Notes 1, 2 and 13 and
the fourth paragraph above,
as to which the date is
January 9, 1998
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
November 30,
----------------------------
ASSETS 1995 1996
------------ ------------
Cash and cash equivalents....................... $ 1,615,711 $ 2,867,711
Accounts receivable, net of allowance for
doubtful accounts of $294,000 in
1995 and $535,000 in 1996...................... 9,364,356 10,542,331
Notes receivable from contracts,
current portion................................ 659,609 402,751
Prepaid expenses and other current assets....... 481,947 2,061,738
------------ ------------
Total current assets................... 12,121,623 15,874,531
Fixed assets, net of accumulated depreciation
of $3,643,000 in 1995 and $3,394,000 in 1996... 4,318,711 5,634,910
Notes receivable from contracts, excluding
current portion................................ 193,298 769,201
Franchise rights, net of accumulated
amortization of $1,494,000 in 1995 and
$1,729,000 in 1996............................. 5,533,956 5,348,264
Trade name, trademark and contract rights,
net of accumulated amortization of
$781,000 in 1995 and $973,000 in 1996.......... 6,876,578 6,685,135
Goodwill and other intangible assets, net of
accumulated amortization of $585,000 in
1995 and $840,000 in 1996...................... 7,139,263 7,285,933
Deferred tax assets............................. 892,993 2,461,573
Deposits and other assets....................... 1,652,892 1,419,006
------------ ------------
Total assets........................... $38,729,314 $45,478,553
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of notes payable................ $ 5,365,412 $ 5,858,249
Current portion of capital leases............... 252,953 199,224
Current portion of subordinated notes payable... 100,000 440,000
Accounts payable and accrued expenses........... 8,351,312 11,564,963
------------ ------------
Total current liabilities.............. 14,069,677 18,062,436
Notes payable, excluding current portion........ 8,639,769 6,035,964
Capital leases, excluding current portion....... 82,021 663,030
Subordinated notes payable, excluding
current portion................................ 5,780,000 5,340,000
Deferred rent and other long-term liabilities... 148,195 111,281
Deferred tax liabilities........................ 1,086,480 1,511,611
Deferred revenue................................ 4,726,134 6,181,147
Commitments and contingencies
Stockholders' equity:
Preferred stock............................. 1,252,900 1,115,400
Class A common stock, $.01 par value,
authorized 314,000 Shares, issued
and outstanding............................ - -
Common stock, $0.01 par value; issued and
outstanding 1,377,556 shares............... 13,577 13,776
Additional paid-in capital.................. 7,821,570 7,841,371
Accumulated deficit......................... (4,891,009) (1,397,463)
------------ ------------
Total stockholders' equity............. 4,197,038 7,573,084
------------ ------------
Total liabilities and stockholders'
equity................................ $38,729,314 $45,478,553
============ ============
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
2
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended November 30,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
Revenue, net.................... $40,313,722 $48,969,395 $65,544,942
Cost of revenue................. 27,699,677 33,027,209 43,649,178
----------- ----------- -----------
Gross profit................ 12,614,045 15,942,186 21,895,764
Selling, general and
administrative expense......... 11,042,949 14,081,152 16,726,610
----------- ----------- -----------
Operating income............ 1,571,096 1,861,034 5,169,154
Other income (expense):
Interest expense............ (1,513,163) (1,910,966) (1,898,231)
Interest income............. 173,313 262,647 162,711
Gain (loss) on sales of
assets..................... (106,568) 156,005 355,754
----------- ----------- -----------
Income before provision for
income taxes................... 124,678 368,720 3,789,388
Provision for income taxes...... 162,810 270,599 294,421
----------- ----------- -----------
Net income (loss)............... $ (38,132) $ 98,121 $ 3,494,967
=========== =========== ===========
Pro forma net income per
common share................... $ 0.90
===========
Weighted average common shares
outstanding.................... 4,230,023
===========
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
3
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Series A Series B Series E Series F Series G Carey Indiana
preferred preferred preferred preferred preferred preferred
stock stock stock stock stock stock
---------- ---------- ---------- ---------- ---------- -------------
Balance at November 30, 1993...... $ 420,700 $ 95,800 $ 266,250 $ 100,000 $ 498,900 $ 400,000
Accretion of redeemable
preferred stock.................. - - 8,750 - - -
Issue Class B preferred stock..... - - - - - 80,000
Payment of common stock
dividends........................ - - - - - -
Redemption of preferred
stock............................ - - (62,500) - - (400,000)
Issue common stock................ - - - - - -
Exchange stock for
investment in
discontinued operations.......... - - - - - -
Payment of accrued
dividends........................ - - (26,250) - - -
Payment of Series E
dividends........................ - - - - - -
Net loss.......................... - - - - - -
---------- ---------- ---------- ---------- ---------- -------------
Balance at November 30, 1994...... 420,700 95,800 186,250 100,000 498,900 80,000
Accretion of redeemable
preferred stock.................. - - 4,375 - - -
Payment of common stock
dividends........................ - - - - - -
Redemption of preferred
stock............................ - - (62,500) - - (40,000)
Payment of preferred stock
dividends........................ - - (30,625) - - -
Issuance of stock................. - - - - - -
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 options at
below fair market value.......... - - - - - -
Payment of preferred stock
dividend......................... - - - - - -
Payment of common stock
dividend......................... - - - - - -
Cumulative effect of
currency translation............. - - - - - -
Net income........................ - - - - - -
---------- ---------- ---------- ---------- ---------- -------------
Balance at November 30, 1996...... $ 420,700 $ 95,800 $ - $ 100,000 $ 498,900 $ -
========== ========== ========== ========== ========== =============
Common Stock
---------------------- Additional Total
Shares $ paid-in Accumulated stockholders'
capital deficit equity
---------- ---------- ---------- ------------ -------------
Balance at November 30, 1993.......... $1,323,048 $ 13,230 $7,798,322 $(4,822,643) $ 4,770,559
Accretion of redeemable
preferred stock...................... - - (8,750) - -
Issue Class B preferred
stock................................ - - - - 80,000
Payment of common stock
dividends............................ - - - (103,076) (103,076)
Redemption of preferred
stock................................ - - - - (462,500)
Issue common stock.................... 14,881 149 14,851 15,000
Exchange stock for
investment in
discontinued operations.............. (12,897) (129) (12,871) - (13,000)
Payment of accrued
dividends............................ - - - - (26,250)
Payment of Series E
dividends............................ - - - (4,378) (4,378)
Net loss.............................. - - - (38,132) (38,132)
---------- ---------- ---------- ------------ -------------
Balance at November 30, 1994.......... 1,325,032 13,250 7,791,552 (4,968,229) 4,218,223
Accretion of redeemable
preferred stock...................... - - (4,375) - -
Payment of common stock
dividends............................ - - - (20,901) (20,901)
Redemption of preferred
stock................................ - - - - (102,500)
Payment of preferred stock
dividends............................ - - - - (30,625)
Issuance of stock..................... 32,682 327 34,393 - 34,720
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 options at
below fair market value.............. 19,842 199 19,801 - 20,000
Payment of preferred stock
dividend............................. - - - (900) (900)
Payment of common stock
dividend............................. - - - (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
========== ========== ========== ============ =============
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
4
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended November 30,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ (38,132) $ 98,121 $ 3,494,967
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization of fixed assets 1,816,307 2,087,370 2,095,439
Amortization of intangible assets 672,983 714,199 1,064,255
(Gain) loss on sales of fixed assets 106,568 (156,005) (355,754)
Deferred income taxes benefit 70,000 102,000 (1,346,557)
Change in deferred revenue 184,220 237,306 1,455,013
Change in operating assets and liabilities:
Accounts receivable (948,971) (2,601,429) (545,421)
Notes receivable from contracts (519,155) 11,000 (1,052,838)
Prepaid expenses, deposits and other assets (362,838) (189,180) (665,084)
Accounts payable and accrued expenses 810,819 3,306,393 2,021,101
Deferred rent and other long-term liabilities (61,967) 87,490 (36,914)
------------ ------------ ------------
Net cash provided by operating activities 1,729,834 3,697,265 6,128,207
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of fixed assets 971,864 1,639,766 1,788,380
Purchases of fixed assets (2,347,495) (2,768,982) (3,091,353)
Software development costs - (203,529) -
Redemption of investment in affiliate - 100,000 -
Acquisitions of chauffeured vehicle service companies (128,596) (3,949,393) (1,730,232)
------------ ------------ ------------
Net cash used in investing activities (1,504,227) (5,182,138) (3,033,205)
------------ ------------ ------------
Cash flow from financing activities:
Proceeds from sale of notes receivable from independent operators 378,733 1,493,399 733,793
Principal payments under capital lease obligations (384,181) (436,169) (297,549)
Preferred stock dividends (30,628) (30,625) (900)
Payment of notes payable (4,036,740) (4,496,659) (5,976,357)
Proceeds from notes payable 3,357,185 5,141,022 3,857,568
Issuance of common stock 15,000 34,720 20,000
Common stock dividends (103,076) (20,901) (42,057)
Issue preferred stock 80,000 - -
Redemption of preferred stock (462,500) (102,500) (137,500)
------------ ------------ ------------
Net cash provided by (used in) financing activities (1,186,207) 1,582,287 (1,843,002)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (960,600) 97,414 1,252,000
Cash and cash equivalents at beginning of year 2,478,897 1,518,297 1,615,711
------------ ------------ ------------
Cash and cash equivalents at end of year $ 1,518,297 $ 1,615,711 $ 2,867,711
============ ============ ============
The accompanying notes are an integral part of these
supplemental consolidated financial statements.
5
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL 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.), San Francisco (Carey Limousine SF, Inc.), Los Angeles (Carey Limousine
L.A., Inc.), London (Carey UK Limited), Indianapolis (Indy Connection
Limousine, 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 and franchises
The Company is engaged in a program of acquiring chauffeur vehicle service
businesses, including licensees operating under the Carey name and trademark.
These acquisitions are accounted for as purchases. The carrying value of the
assets acquired is determined by the negotiated purchase price. In addition
to acquiring licensees operating under the Carey name, the Company has
acquired chauffeured vehicle service businesses in cities where the Company
operates. In 1995, these acquisitions included chauffeur vehicle service
companies operating in Washington, D.C., Miami, West Palm Beach and San
Francisco. In 1996, the Company acquired a chauffeured vehicle service
company in London, England.
Reverse Stock Split
On February 25, 1997, the Board of Directors authorized management of the
Company to file a Registration Statement with the Securities and Exchange
Commission permitting the Company to sell shares of its common stock in an
initial public offering (the "IPO"). The Board of Directors, at the same
meeting and subject to stockholder approval, authorized a reverse stock split
of approximately one-for-2.3255 of the outstanding shares of the Company's
common stock. A majority of the Company's stockholders have approved the
reverse stock split. All references to common stock, options, warrants and
per share data have been restated to give effect to the reverse stock split.
The Board of Directors also authorized a Recapitalization (see Note 18) on
February 25, 1997.
6
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Summary of significant accounting policies
Basis of presentation
The supplemental 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
(See Note 13). Generally accepted accounting principles proscribe giving
effect to a consummated business combination accounted for by the pooling-of-
interests method in financial statements that do not include the date of
consummation. These supplemental financial statements do not extend through
the date of consummation; however, they will become the historical
consolidated financial statements of Carey International, Inc. and
subsidiaries after financial statements covering the date of consummation of
the business combination are issued.
The supplemental consolidated financial statements include the financial
statements of the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated.
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
65% of revenues, as defined in the agreement. Each new operator agrees to pay
a one-time fee generally ranging from $30,000 to $45,000 to the Company under
the terms of the independent operator agreement. Through 1996,
7
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the term of the independent operator agreement generally ranged from 10 years
to perpetuity. (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 3) and records the note in notes
receivable from contracts. 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 have also 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 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 building owned
by the Company is 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.
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 held by
Carey Licensing, Inc. and are being amortized over 40 years.
8
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company has acquired chauffeured vehicle service companies, all of
which have been accounted for as purchases, except for Indy Connection 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 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 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
9
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 following matters pursuant to the
Recapitalization (see Note 18). 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.
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 fiscal years beginning after December 15, 1995. SFAS 123 allows companies to
either account for stock-based compensation under the new provisions of SFAS 123
or under the provisions of Accounting Principles Board Option No. 25 ("APB 25"),
Accounting for Stock Issued to Employees. The Company will continue to apply the
provisions of APB 25 and provide pro forma disclosure in the notes to the
financial statements.
Foreign operations
The Consolidated Balance Sheets include foreign assets and liabilities of
$3.7 million and $2.7 million as of November 30, 1996. The net effects of
foreign currency transactions reflected in income 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.
10
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications
Certain accounts in 1994 and 1995 have been reclassified to conform with
the 1996 presentation.
3. Fees from licensees
The total of all domestic license fees, franchises fees and marketing fees
earned in each of 1994, 1995 and 1996 was $1,466,588, $1,228,472 and
$2,180,540, respectively. Amounts due from licensees of $46,520 and $143,041
at November 30, 1995 and 1996, respectively, are included in accounts
receivable in the consolidated balance sheets of the Company.
4. Transactions with Independent Operators
The Company recorded approximately $1,153,000, $1,130,000 and $2,371,000 in
1994, 1995 and 1996, respectively, as deferred revenue relating to fees from
new agreements with independents operators. Amounts of deferred revenue
recognized as revenues in 1994, 1995 and 1996 amounted to approximately
$969,000, $889,000 and $936,000, respectively.
Notes receivable from contracts include approximately $305,000 and $917,000
at November 30, 1995 and 1996, respectively, for amounts due from independent
operators and approximately $548,000 and $255,000 at November 30, 1995 and
1996, respectively, for amounts due from a related party financing company
(see Note 11).
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
(see Note 5).
11
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Fixed assets
Fixed assets consist of the following:
November 30,
-----------------------------
1995 1996
------------ ------------
Vehicles......................................... $ 5,352,304 $ 5,026,897
Equipment........................................ 1,801,668 2,303,348
Furniture........................................ 543,782 749,840
Leasehold improvements........................... 263,758 419,232
Land and building................................ - 529,634
------------ ------------
7,961,512 9,028,951
Less accumulated depreciation and amortization... (3,642,801) (3,394,041)
------------ ------------
Net fixed assets................................. $ 4,318,711 $ 5,634,910
============ ============
The Company is obligated under various vehicle and equipment capital
leases. Vehicles and equipment under capital leases included in fixed assets are
as follows:
November 30,
-----------------------------
1995 1996
------------ ------------
Equipment........................................ $ 444,983 $ 1,048,633
Vehicles......................................... 352,796 621,420
------------ ------------
797,779 1,670,053
Less accumulated amortization.................... (536,713) (561,871)
------------ ------------
$ 261,066 $ 1,108,182
============ ============
12
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Notes payable
Notes payable consist of the following:
November 30,
-----------------------------
1995 1996
------------ ------------
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
is payable until June 30, 1996; beginning July 1, 1996, quarterly
principal payments are required in an amount sufficient to amortize the
outstanding balance over a four-year period. Interest is payable monthly
at a floating rate based on the Wall Street Journal prime plus 1.25%
(9.5% at November 30, 1996). This loan is guaranteed by the Chairman of
the Board and the President of the Company.............................. $ 4,500,000 $ 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 are due quarterly from December 31, 1996 through
December 31, 1997 and a final principal payment of $240,000 due March 1,
1998.................................................................... 2,220,000 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 is
payable monthly at a variable interest rate of .75% above the bank's
prime rate (9.0% at November 30, 1996).................................. 990,000 990,000
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.......................................................... 1,514,715 555,834
Notes payable to bank, dated March 26, 1996, at the prime rate (8.25 at
November 30, 1996) plus 1.0% per annum and matures on January 31, 1998.
The notes are collateralized by substantially all Indy Connection's
assets. Under the terms of the agreement, Carey Limousine Indiana is
subject to various general covenants. The bank also required the
personal guaranty by the former shareholder of Indy Connection.......... - 497,582
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 on the
note being thirty-six months. These notes bear interest at rates ranging
from 8.9% to 11.0%. The notes are collateralized by Indy Connection's
accounts receivable, inventory and equipment and is subject to various
restrictive covenants. The agreement was subsequently renegotiated at
similar terms........................................................... 845,753 411,402
13
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Two notes payable to bank, with interest at a fixed rate of 9.25% and a 48
month and 84 month term, respectively. The notes require monthly
principal and interest payments that total $4,413. The notes are
collateralized by vehicles. The agreement subjects Indy Connection to
various general covenants and required a personal guaranty by the former
owners of Indy Connection............................................... 390,263 363,705
Installment notes payable to sellers under acquisition agreements dated
various dates from June 30, 1994 to September 8, 1995. Interest rates
ranges from 7.5% to 8.5%. Interest is generally payable monthly.
Principal is payable in varying installments............................ 2,339,418 1,305,574
Convertible note payable to seller under acquisition agreement dated
September 30, 1993 at an annual rate of 7.5%, interest payable
quarterly; principal due in two equal annual installments of $116,667 on
January 2, 1996 and 1997. The note was repaid in January 1997........... 233,333 116,666
Bank line of credit $200,000, dated October 31, 1995 at variable interest
rate (10% at November 30, 1995), collateralized by accounts receivable
of Carey DC. This facility was refinanced by a term loan with the same
bank on March 1, 1996................................................... 200,000 -
Amount payable to seller under acquisition agreement dated January 1, 1995.
Due 30 days after receipt of an audit of the predecessor company. Amount
of the payment is subject to reduction based on the results of the
audit. The audit has been completed and the amount was subsequently
reduced in 1996 to $210,821 and has been repaid......................... 250,000 -
Note payable to bank, dated September 30, 1995, payable in monthly
installments of $4,167 plus interest. Interest rate is variable at
bank's prime plus 1% (10.0% at November 30, 1996)....................... 241,667 191,717
Note payable to bank, dated August 30, 1993, collateralized by accounts
receivable, fixed assets and intangible assets of Carey DC; monthly
payments of $9,401 for principal and interest are due through August 31,
1996. Interest rate is fixed at 8%. This note was refinanced on March 1,
1996 by a term loan with the same bank.................................. 90,631 -
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 are payable monthly. Remaining balance is due October 17,
1999. Interest rate is fixed at 9.25%................................... 189,401 149,001
Bank line of credit of $750,000, dated February 26, 1996 collateralized by
accounts receivable of Carey Licensing, Inc.; due March 31, 1997.
Interest is payable monthly at 1% above the Wall Street Journal's "Prime
Rate" (9.25% at November 30, 1996)...................................... - 750,000
Bank line of credit of $200,000, dated February 26, 1996, collateralized by
accounts receivable of Carey FLA; due March 31, 1997. Interest is
payable monthly at 1% above Wall Street Journal's "Prime Rate" (9.25% at
November 30, 1996)...................................................... - 200,000
14
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note payable to bank, dated March 1, 1996, collateralized by accounts
receivable of Carey DC Monthly payments of $12,735 of principal and
interest through March 1, 2001. Interest is payable monthly at .5% above
the bank's Prime Rate (9.5% at November 30, 1996)....................... - 662,053
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
----------- -----------
Total notes payable........................................................ 14,005,181 11,894,213
Less current installments.................................................. 5,365,412 5,858,249
----------- -----------
Long-term portion.......................................................... $ 8,639,769 $ 6,035,964
=========== ===========
Subordinated notes payable consist of the following:
November 30,
------------------------------
1995 1996
------------ ------------
Subordinated convertible note, dated September 1, 1991, with the principal
of $2,000,000 is due on August 30, 2000; interest payable quarterly as 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 $6.14 per share. 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 18)............................ $ 2,000,000 $ 2,000,000
15
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Subordinated note dated July 30, 1992, interest only payable quarterly
until September 30, 1995. The interest rate is 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. The warrant is exercisable
immediately, has an exercise price of $6.14 per share and expires at the
earlier fifth anniversary of the repayment of the note or July 30, 2000.
The warrants contain certain antidilutive provisions which lower their
exercise price in the event dilutive securities are subsequently issued
by the Company at prices below the warrant's exercise price. The warrant
has not been exercised. The terms of the agreement have been modified as
part of the "Recapitalization" (see Note 18)............................ 3,780,000 3,780,000
Convertible note payable to seller under acquisition agreement, dated
September 30, 1992; interest payable quarterly at a fixed rate of 7.74%.
The note was repaid in September 1996................................... 100,000 -
------------ ------------
Total subordinated notes payable........................................... 5,880,000 5,780,000
Less current installments.................................................. 100,000 440,000
------------ ------------
Subordinated notes payable, excluding current installments................. $ 5,780,000 $ 5,340,000
============ ============
Future annual principal payments on all notes payable at November 30, 1996
are as follows:
Year ending November 30:
- -----------------------
1997 $ 6,298,249
1998 6,129,209
1999 1,691,567
2000 924,900
2001 and thereafter 2,630,288
-------------
$ 17,674,213
=============
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, within 120 days after the end of the fiscal year. 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 Company did
not meet certain covenants related to the timely submission of financial
statements, working capital, debt to net worth and maintenance of a minimum
tangible net worth at November 30, 1996. The Company obtained waivers for
compliance with these covenants through and including November 30, 1996.
16
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The carrying value of notes payable approximates the current value of the
notes payable at November 30, 1996. (See Note 18 for discussions of the fair
value for the subordinated debt). Interest paid during the years ended
November 30, 1994, 1995, and 1996 was approximately $1,512,000, $1,878,000
and $1,883,000, 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.
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments as of November 30,
1996 are as follows:
Capital Operating
Year ending November 30 leases leases
- ----------------------- ------------ ------------
1997 $ 233,778 $ 1,395,093
1998 171,653 1,277,009
1999 155,984 662,698
2000 155,984 245,746
2001 138,659 219,128
Thereafter 138,169 -
------------ ------------
Total minimum lease payments 994,227 $ 3,799,674
============
Less estimated executory costs 5,189
------------
989,038
Less amount representing interest (at rates ranging from
9% to 12%) 126,784
------------
Present value of net minimum capital lease payments 862,254
Less current portion of obligations under capital lease 199,224
------------
Obligations under capital leases, excluding current portion $ 663,030
============
During the years ended November 30, 1994, 1995 and 1996 the Company
recognized $1,004,818, $508,724 and $252,355, respectively, of sublease
rental revenue under vehicle sublease arrangements with independent operators
and others.
During the years ended November 30, 1994, 1995 and 1996, the Company
entered into capital lease obligations of $79,414, $346,666 and $810,993,
respectively, related to the acquisition of vehicles and equipment.
Total rental expense for operating leases in 1994, 1995 and 1996 was
$1,075,029, $1,362,518 and $2,250,335, respectively.
17
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Accounts payable and accrued expenses
Included in accounts payable and accrued expenses are the following:
November 30,
--------------------------
1995 1996
------------ ------------
Trade accounts payable.................... $ 5,273,123 $ 5,385,328
Accrued expenses and other liabilities.... 2,632,204 4,895,495
Gratuities payable........................ 445,985 458,801
Accrued offering costs.................... - 825,339
------------ ------------
$ 8,351,312 $ 11,564,963
============ ============
9. Income taxes
The provision for income taxes is composed of the following:
November 30,
---------------------------------------
1994 1995 1996
------------ ------------ ------------
Federal:
Current................................................ $ 65,558 $ 139,401 $ 1,368,311
Deferred............................................... 63,000 87,000 (1,197,799)
------------ ------------ ------------
128,558 226,401 170,512
------------ ------------ ------------
State and local:
Current................................................ 27,252 29,198 128,296
Deferred............................................... 7,000 15,000 (148,758)
------------ ------------ ------------
34,252 44,198 (20,462)
------------ ------------ ------------
Foreign
Current................................................ - - 144,371
------------ ------------ ------------
Total income tax provision.................................. $ 162,810 $ 270,599 $ 294,421
============ ============ ============
The Company's tax provision for the years ended November 30, 1994, 1995 and
1996, respectively, differs from the statutory rate for federal income taxes
as a result of the tax effect of the following factors:
Years ended November 30,
------------------------------
1994 1995 1996
-------- -------- --------
Statutory rate............................ 34.0% 34.0% 34.0%
State income tax, net of federal benefit.. 18.0 7.2 (1.5)
Goodwill amortization..................... 11.5 6.0 .6
Non-deductible life insurance............. 8.7 10.9 .3
Meals and entertainment expenses.......... 10.8 16.9 1.1
Valuation allowance....................... 11.8 (13.0) (27.6)
Other..................................... 35.8 14.7 1.0
-------- -------- --------
130.6% 76.7% 7.9%
======== ======== ========
18
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The source and tax effects of temporary differences are composed of the
following:
November 30,
--------------------------
1995 1996
------------ ------------
Allowances for bad debts............... $ 108,000 $ 176,000
Net operating losses carry-forward..... 266,000 -
Capital loss carryforward.............. 119,000 74,000
Deferred revenue....................... 1,701,000 2,040,000
Deferred state taxes and other......... 425,000 558,000
------------ ------------
Gross deferred tax asset............... 2,619,000 2,848,000
Valuation allowance.................... (1,618,000) (74,000)
------------ ------------
1,001,000 2,774,000
------------ ------------
Amortization of intangible assets...... (951,000) (1,350,000)
Other.................................. (135,000) (162,000)
------------ ------------
Gross deferred tax liability........... (1,086,000) (1,512,000)
------------ ------------
Net deferred tax asset................. $ (85,000) $ 1,262,000
============ ============
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.
Income taxes paid during the years ended November 30, 1994, 1995 and 1996
amounted to approximately $0, $187,000 and $616,000, respectively.
10. Preferred stock
The Company had the following series of preferred stock:
November 30,
-----------------------------------
1995 1996
------------ ------------
Series A, par value $10.00, authorized 43,000 shares, issued and
outstanding 42,070 shares (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 $ 420,700
Series B, par value $10.00, authorized 10,000 shares, issued and
outstanding 9,580 shares (liquidation preference of $958,000). Non-
cumulative dividend of $5.00 per annum when declared by the Board of
Directors............................................................... 95,800 95,800
Series E, par value $10.00, authorized 50 shares, issued and outstanding
12.5 shares at November 30, 1995 (liquidation preference of $97,500).... 97,500 -
Series F, par value $10.00, authorized 10,000 shares, issued and
outstanding 10,000 shares (liquidation preference of $1,000,000). Non-
cumulative dividend of $5.00 per annum when declared by the Board of
Directors............................................................... 100,000 100,000
Series G, par value $10.00, authorized 110,000 shares, issued and
outstanding 49,890 shares, (liquidation preference of $4,989,900). Non-
cumulative dividend of $5.00 per annum when declared by the Board of
Directors............................................................... 498,900 498,900
19
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Class B, par value $4.00, 20,000
shares, authorized, issued and
outstanding (All shares were
redeemed at September 30, 1996)................ 40,000 -
------------ ------------
$ 1,252,900 $ 1,115,400
============ ============
At the option of the preferred stockholders or upon closing of
underwritten public offering, yielding net proceeds of at least $10,000,000
and having an offering price of at least $14.81 per share, each share of the
series B, F and G preferred stock is convertible into the number of shares
of common stock equal to 500, 100 and 100 divided by the conversion price,
respectively. The conversion price at November 30, 1996 was $7.216, $7.406
and $7.406 for Series B, F and G preferred stock, respectively. The Company
has reserved 663,759, 135,025 and 633,393 shares of common stock,
respectively, for conversion of the Series B, F and G preferred stock.
Antidilutive provisions lower the conversion price if certain securities are
issued by the Company at a price below the respective conversion prices then
in effect. The Company must redeem, on a pro rata basis, the outstanding
shares of Series A preferred stock plus for $100 per share any declared and
unpaid dividends upon the completion of an initial public offering yielding
net proceeds to the Company of at lease $10,000,000. Series A, B, and G
preferred stock have voting rights and Series F preferred stock is non-
voting, except to certain circumstances (see Note 18 for discussion of the
Recapitalization, pursuant to which all of the preferred stock will be
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 $378,733, $1,762,345 and $1,015,897 of
independent operator notes receivable to this related-party finance company
for cash of $378,733, $1,290,899 and $733,793 and demand promissory notes of
$0, $471,446 and $282,104 in 1994, 1995 and 1996, respectively. The unpaid
balances of the promissory notes were $547,930 and $255,664 at November 30,
1995 and 1996, 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%.
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, 1996, the
total assets reported by the privately-held company were $10,502,234 and
stockholders' equity was $1,108,448, revenues were $1,088,720 and net income
was $96,681.
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.
20
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A guarantee fee of $45,000 has been paid to both the Chairman of the
Board and the President of the Company for guaranteeing certain indebtedness
(see Note 6).
12. Commitments and contingencies
In the normal course of business, the Company is subject to various legal
actions which are not material to the financial position, the results of
operations or cash flows of the Company.
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
plaintiff's complaint, which purports to be a class action, alleges that the
plaintiff and others similarly situated suffered monetary damages as a
result of misrepresentations by the various defendants in their use of a
surface transportation billing charge. The plaintiff seeks damages in excess
of $1 million on behalf of the class for each of the counts in the complaint
including fraud, negligent misrepresentation and violations of the Racketeer
Influenced and Corrupt Organizations Act of 1970. A class has not yet been
certified in this case. At the appropriate time, the Company intends to file
an answer denying any liability in connection with this litigation. The
Company has agreed to indemnify and defend its officers and directors who
were named as defendants in the case, subject to conditions imposed by
applicable law. The Company does not believe that this litigation will have
a material adverse effect on its financial condition, results of operations
or cash flows of the Company.
13. Acquisitions
Effective October 31, 1997, in connection with the 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 supplemental 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:
November 30,
------------------------------------------
1994 1995 1996
------------ ------------ ------------
Revenue, net
Carey International, Inc. .... $ 35,525,309 $ 43,483,947 $ 59,505,698
Indy Connection............... 4,788,413 5,485,448 6,080,105
Elimination................... - - (40,861)
------------ ------------ ------------
Total....................... $ 40,313,722 $ 48,969,395 $ 65,544,942
============ ============ ============
21
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net Income (loss)
Carey International, Inc. $ (128,993) $ (195,195) $ 2,816,104
Indy Connection 90,861 293,316 678,863
------------ ------------ ------------
Total: $ (38,132) $ 98,121 $ 3,494,967
============ ============ ============
The conforming of the accounting practices of the Company and Indy
Connection resulted in no adjustments to net income (loss) or shareholders'
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. These expenses
have not been reflected in the supplemental consolidated statements of
operations, but will be reflected in the consolidated statements of
operations of the Company in the fourth quarter of 1997.
In February 1996, the Company acquired certain assets and liabilities of
a chauffeured vehicle service company in London, England for approximately
$1,500,000. The acquisition was financed through the incurrence of $950,000
in debt and a payment of $550,000. 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. As of November 30, 1996, the Company has paid
$278,304 in contingent consideration in the acquisition of the London
company. 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 will be 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.
In December 1994, the Company acquired certain assets and liabilities of
a chauffeured vehicle service company in Boca Raton, Florida and
consolidated the operations within its existing operations in West Palm
Beach. Subsequently, the Company acquired an additional chauffeured vehicle
service company in Boca Raton (in August 1995) and the Carey licensee in
Fort Lauderdale-Miami (in April 1995) and consolidated the two additional
businesses into the Carey Florida operations.
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:
22
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year ended November 30,
---------------------------------------
1994 1995 1996
---------- ---------- ----------
Net assets purchased
Receivables and other assets..... $ - $ - $ 632,554
Fixed assets..................... - 1,703,521 928,377
Franchise rights................. - 1,527,402 89,243
Goodwill......................... 128,596 5,013,731 447,269
Accounts payable and accrued
expenses......................... - - (367,211)
---------- ---------- ----------
Fair value of assets acquired.... $ 128,596 $8,244,654 $1,730,232
========== ========== ==========
Consideration
Cash (exclusive of $223,695
cash acquired in 1996).......... $ 128,596 $3,949,393 $1,730,232
Capital leases assumed related
to vehicle acquisitions......... - 346,666 -
Notes assumed related to vehicle
acquisitions.................... - 895,571 -
Uncollateralized promissory
notes issued to sellers......... - 3,053,024 -
---------- ---------- ----------
Total consideration....... $ 128,596 $8,244,654 $1,730,232
========== ========== ==========
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 $39,521, $315,773
and $291,755 for the years ended November 30, 1994, 1995 and 1996,
respectively, as contingent consideration (see Note 2) which is reflected in
the table above.
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 had occurred for the purposes of the 1995 summary
at the beginning of fiscal 1995, and for the purposes of the 1996 summary at
the beginning of fiscal 1996, are as follows:
Year ended November 30,
---------------------------
1995 1996
------------ ------------
(Unaudited)
Revenue..................................... $ 56,975,000 $ 66,483,000
Cost of revenue............................. (38,182,000) (44,515,000)
Other expense, net.......................... (18,109,000) (18,320,000)
Provision for income taxes.................. (316,000) (235,000)
------------ ------------
Net income.................................. $ 368,000 $ 3,413,000
============ ============
Net income per common share................. $ .12 $ 1.09
============ ============
Weighted average common shares outstanding.. 3,089,895 3,124,314
============ ============
23
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
14. 401 (k) Plan
The Company sponsors (but has made no contributions to) a defined
contribution plan established pursuant to Section 401 (k) of the Internal
Revenue Code for the benefit of employees of the Company.
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 options
authorized 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 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 options authorized under the
1992 plan is 388,647.
24
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock activity under the 1987 Plan and the 1992 Plan is as follows:
1987 Plan 1992 Plan
--------------------- --------------------
Option Option
Price per price per
Shares Share Shares Share
-------- ----------- --------- ---------
Balance, December 1, 1993... 64,502 $ 1.44 384,494 $7.40
Granted..................... - - 12,040 7.40
Exercised................... - - - -
Forfeited................... - - (13,287) -
-------- ----------- --------- ---------
Balance, November 30, 1994.. 64,502 1.44 383,247 7.40
Granted..................... - - 21,673 7.40
Exercised................... (32,681) - - -
Forfeited................... (860) - (60,985) -
-------- ----------- --------- ---------
Balance, November 30, 1995.. 30,961 1.44 343,935 7.40
Granted..................... 38,701 4.65 43,578 4.65
Exercised................... - - - -
Forfeited................... - - (3,011) -
-------- ----------- --------- ---------
Balance, November 30, 1996.. 69,662 $1.44-$4.65 384,502 $4.65
======== =========== ========= =========
Vested and Exercisable at
November 30, 1996......... 43,861 $1.44-$4.65 341,948 $4.65
======== =========== ========= =========
In May of 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 (see Note 18).
On February 25, 1997, the Board of Directors adopted the 1997 Equity
Incentive Plan and the Stock Plan for Non-Employee Directors (see Note 18).
16. Revenue recognition method
The Company enters into agreements with independent operators under which
the independent operator contracts to provide chauffeured vehicle services
exclusively to the Company's customers over a contract period pursuant to a
Standard Independent Operator Agreement. Upon signing the Standard
Independent Operator Agreement, the Company is entitled to receive a one-
time fee from the independent operator. Previously, the Company would
recognize the one-time fee as revenue upon signing of the independent
operator agreement and when collection of the fee was reasonably assured. In
accordance with APB 20, the financial statements have been retroactively
restated to report such fees as deferred revenue which are recognized as
revenue over the terms of the contracts. (See Note 2). The effect of such
restatements was to reduce 1994 and 1995 revenue, results of operations and
stockholders' equity by $665,391 and $1,144,511, respectively (net of income
taxes of $0 and $586,680 for 1994 and 1995, respectively).
25
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
17. Net income per common share
Net income per common share, on a historic basis, is as follows:
Year ended November 30,
------------------------------------
1994 1995 1996
---------- ---------- ----------
Net income (loss) available
to common shareholders....... $ (46,882) $ 93,746 $3,494,067
========== ========== ==========
Weighted average common
shares outstanding........... 3,109,905 3,106,598 3,142,376
========== ========== ==========
Net income (loss) per
common share................. $ (0.02) $ 0.03 $ 1.11
========== ========== ==========
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 anticipated 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 $11.00 per share, have been included in the calculation of net
income per common share.
Net income (loss) available to common shareholders is the net income
(loss) for the fiscal year less accretion of dividends on the Series E
preferred stock of $8,750 and $4,375 for 1994 and 1995, respectively, and
$900 of preferred dividends from Indy Connection preferred stock in 1996.
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 supplemental pro
forma basic EPS under FAS 128 for the year ended November 30, 1996 would
have been $2.57 and supplemental dilutive EPS under FAS 128 would not differ
significantly form the reported pro forma net income per share.
18. Subsequent events
On February 25, 1997, pursuant to an agreement reached in May 1996, the
Board of Directors authorized a recapitalization ("Recapitalization Plan"),
which will be 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
will be converted or exchanged for 1,046,559 shares of common stock and
payment of $912,454. The Series A preferred stock will be 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
will be redeemed for an
26
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO THE SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
aggregate of $1,000,000. The remaining preferred stock will be converted into
1,427,509 shares of common stock. As a result of the Recapitalization, preferred
stock with a liquidation preference of $11,154,900 and subordinated debt with a
principal amount of $5,780,000 will be 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 will be paid out of the proceeds of the IPO.
On February 25, 1997, the Board of Directors adopted the 1997 Equity
Incentive Plan (the "1997 Plan"). A total of 650,000 shares of common stock are
reserved for issuance under the 1997 Plan. The Board of Directors also granted
options to purchase at the IPO price a total of 411,500 shares of common stock
under the 1997 Plan, such grants to be effective upon the execution of an
underwriting agreement in connection with the IPO.
Also 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 22,500 shares of common stock will be granted under the Directors'
Plan, such grants to be effective upon the execution of an underwriting
agreement in connection with the IPO.
Also on February 25, 1997, the Board of Directors approved amendments to
the Company's Certificate of Incorporation increasing the number of authorized
shares of the Company's Common Stock from 9,512,950 to 20,000,000, and
increasing the number of authorized shares of the Company's preferred stock from
173,050 to 1,000,000.
On March 1, 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 expects to consummate the acquisition at the time of the IPO.
If the acquisition of Manhattan Limousine is not completed by June 2, 1997, the
Company has agreed to pay additional purchase price in the amount of $7,500 for
each day after such date until the closing of the acquisition, up to an
aggregate of $675,000.
27