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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended November 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File Number 000-22551
CAREY INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-1171965
(State of incorporation (IRS Employer
or organization) Identification No.)
4530 Wisconsin Avenue, NW, Fifth Floor 20016
Washington, DC
(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code: (202) 895-1200
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934, during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
10-K. [ ]
As of February 23, 1999, an aggregate of 9,571,198 shares of Common Stock, par
value $.01, were outstanding, and the aggregate market value of the Registrant's
Common Stock held by non-affiliates was $167,376,853 based upon the closing
price of the Common Stock on the Nasdaq National Market on such date.
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Part 1
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Item 1. Business
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Carey International, Inc. ("Carey" or 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 "Carey" brand name has
represented quality chauffeured vehicle services since the 1920's. The Company
owns and operates its businesses in Boston, Chicago, Indianapolis,
Jacksonville, London, Los Angeles, Miami, New York, Philadelphia, San
Francisco, Washington D.C. and West Palm Beach. In addition, the Company
generates revenues from licensing the "Carey" name and providing central
reservation, billing and sales and marketing services to its licensees. The
Company's worldwide network also includes affiliates in locations in which the
Company has neither owned and operated companies nor licensees. The Company
has continued to enhance the development of its reservation and central
billing systems and expand its worldwide service infrastructure. By leveraging
its current infrastructure and position as a market leader, the Company
intends to consolidate the highly fragmented chauffeured vehicle service
industry through the acquisition of: (i) current Carey licensees, (ii)
additional companies in markets in which the Company already owns and operates
a chauffeured vehicle service company, and (iii) companies in other strategic
markets in North America and Europe. The Company also intends to strengthen
its global presence by establishing strategic alliances with companies in the
Pacific rim in Asia and in Latin America.
The Carey network utilizes chauffeured sedans, limousines, vans,
minibuses and motor coaches to provide services for airport pick-ups and drop-
offs, inter-office transfers, business and association meetings, conventions,
road shows, promotional tours, special events, incentive travel and leisure
travel. Businesses and business travelers utilize the Company's services
primarily as a management tool to achieve more efficient use of time and other
resources.
Carey's worldwide network of chauffeured vehicle service companies allows
it to provide services with consistently high quality to its customers in
virtually every major city in the expanding global travel market. The network
is linked to over 300,000 reservation terminals in travel agencies, corporate
travel departments and government agencies by the Carey International
Reservation System (the "CIRS"), the chauffeured vehicle service industry's
most extensive centralized global reservation system.
Market Overview
The chauffeured vehicle service industry serves businesses in virtually
all sectors of the economy . The Company believes that business customers are
becoming increasingly sophisticated in their use of ground vehicle services
and are demanding a broader array of airport or other destination site "meet-
and-greet" services and other efficiency enhancing services, as well as
productivity tools in vehicles such as cellular telephones. Although there are
other forms of
1
transportation that compete with chauffeured vehicles, such as buses, jitney
services, taxis, radio cars and rental cars, the Company believes that none of
those forms of transportation provides the quality, dependability and value-
added services of chauffeur-driven vehicles. The Company also believes that
businesses place a premium on service providers that are able to coordinate
the travel itinerary of each member of a large group over many locations with
a single reservation and billing system.
Business Strategy
The Company's objective is to increase its profitability and its market
share in the chauffeured vehicle service industry by implementing the
following growth strategies:
Expand Through Internal Growth. The Company expects to continue to
generate internal growth by further enhancing its delivery of high
quality service to its customers through automation and training
initiatives, by further investment in its sales and marketing programs
and by extending its services to new industry segments, such as group
movement for meetings and special events.
Expand Through Acquisitions. The Company believes that there are
significant opportunities to acquire additional chauffeured vehicle
service companies that would benefit from the capital and management
resources that the Company can provide. Carey intends to acquire current
Carey licensees, as well as additional chauffeured vehicle service
companies both in markets in which the Company already owns and operates
such a company and in other strategic regions in North America and
Europe. Carey also intends to establish strategic alliances with
companies in the Pacific rim of Asia and in Latin America. Carey believes
it has a competitive advantage in acquiring licensees because of a right
of first refusal contained in the substantial majority of its domestic
license agreements. The Company has acquired 27 chauffeured vehicle
service businesses since November 1991.
Increase International Market Share. Approximately 12.8% of the
Company's revenue, net was derived from services performed outside the
United States during its fiscal year ended November 30, 1998. Of these
international revenues, approximately 71.3% was generated by the
Company's owned and operated business in London, approximately 28.1% was
generated by the Company's international licensees and the remainder was
generated by the Company's international affiliates. By enhancing its
international presence, the Company also expects to increase its revenues
from providing chauffeured vehicle services to international travelers
both visiting the United States and traveling abroad. Carey believes that
its network can capture a significant portion of the growing
international market for chauffeured vehicle services by intensifying its
sales and marketing efforts, strengthening its relationship with
significant domestic and international business travel arrangers,
capitalizing on the capacity of the CIRS to operate on a global scale and
acquiring or licensing additional chauffeured vehicle service companies
and otherwise implementing the Carey system outside the United States.
Expand Licensee Network Worldwide. The Company will seek to expand its
worldwide network and generate additional revenues from license and
marketing fees by licensing additional chauffeured vehicle service
companies in smaller markets that do not justify a Company-owned
presence. Ultimately, as these less strategic markets grow in size and
importance to the Company, the licensees in such markets may become
acquisition candidates.
Improve Profit Margins. The Company believes that it can improve its
profitability by continuing to deploy enterprise automation systems,
increasing the proportion of hourly business to total revenues and
converting salaried chauffeurs to independent operators in certain
businesses acquired by Carey. The objective of Carey's independent
2
operator strategy is to instill in each chauffeur the sense of purpose,
responsibility and dedication characteristic of an independent business
owner, thereby increasing the profitability of the chauffeur and the
Company. Carey's independent operator program allows the Company to
reduce its labor and capital costs, convert fixed costs to variable costs
and generate revenues from fees paid by independent operators.
Acquisition Program
Carey believes that there are significant opportunities to acquire
additional chauffeured vehicle service companies as a result of: (i) the
highly fragmented and increasingly global nature of the industry, (ii)
industry participants' capital requirements and desire for liquidity, and
(iii) the pressures of increasing competition. The Company intends to continue
to pursue its acquisition program in order to strengthen its position in its
existing markets and to acquire operations or establish strategic alliances in
new markets.
Carey intends to pursue acquisitions that will allow the Company to own
and operate chauffeured vehicle service companies in new geographic markets.
The Company currently owns and operates chauffeured vehicle service companies
in eight of the largest United States travel markets and in London, the
largest European travel market, and will seek to acquire Carey licensees in
other significant travel markets in North America and Europe, and establish
strategic alliances with companies in the Pacific rim of Asia and in Latin
America. The Company's preference is to retain key management, operating and
sales personnel of an acquired company in a new market in order to maintain
continuity of operations and customer service.
Generally, the Company believes that there is significant potential for
it to expand its business in each of the markets in which it owns and operates
a chauffeured vehicle service company through acquisitions. The Company
expects to retain key management and sales personnel of the acquired company
in markets in which it has existing operations and to seek to improve that
company's profitability through implementation of the Company's operating
strategies. In most instances, acquired operations can be integrated into the
Company's existing operations in a market, resulting in the elimination of
duplicative overhead and operating costs.
The Company believes that there are significant advantages to
consolidating the chauffeured vehicle service industry. Carey believes it can
increase revenues of acquired companies by marketing the worldwide services of
its network to customers of such companies and by increasing the productivity
of chauffeurs at the acquired companies through the implementation of training
and quality assurance programs. Moreover, Carey believes that cost savings can
be achieved following acquisitions through (i) the consolidation of certain
administrative functions and increased use of automation, (ii) the elimination
of redundant facilities, equipment and personnel, and (iii) the conversion of
salaried chauffeurs driving company-owned vehicles into independent operators
driving their own vehicles.
3
Carey has acquired 27 chauffeured vehicle service companies since
November 1991. The following table lists the date of acquisition, location of
each such chauffeured vehicle service company and whether the acquired company
was a licensee or affiliate of Company or other chauffeured vehicle service
company:
Acquisition History
November 1991--Present
Date Location Acquired Company
---- -------- ----------------
November 1991........... Washington D.C. Other
September 1992.......... Los Angeles, CA Other
August 1993............. Wilmington, DE Licensee
September 1993.......... West Palm Beach, FL Licensee
November 1993........... New York, NY Other
June 1994............... Washington, DC Other
June 1994............... Los Angeles, CA Other
December 1994........... Boca Raton, FL Other
January 1995............ San Francisco, CA Other
April 1995.............. Washington, D.C. Other
April 1995.............. Ft. Lauderdale/Miami, FL Licensee
May 1995................ San Francisco, CA Other
August 1995............. San Francisco, CA Other
August 1995............. Boca Raton, FL Other
February 1996........... London, England Affiliate
June 1997............... New York, NY Other
October 1997............ Indianapolis, IN Affiliate
October 1997............ Los Angeles, CA Affiliate
December 1997........... London, England Other
March 1998.............. Boston, MA Other
April 1998.............. Boston, MA Licensee
April 1998.............. Miami, FL Other
May 1998................ Boston, MA Other
July 1998............... Chicago, IL Licensee
September 1998.......... Chicago, IL Other
January 1999............ Jacksonville, FL Other
January 1999............ Miami, FL Other
The Company regularly reviews various strategic acquisition opportunities
and periodically engages in discussions regarding such possible acquisitions.
As the result of this review process, negotiations and acquisition agreements
may occur from time to time if appropriate opportunities arise. As
consideration for future acquisitions, the Company intends to use various
combinations of shares of Common Stock, cash and notes. Some or all of such
shares of Common Stock issued in connection with acquisitions may be
registered under the Securities Act.
4
Service Provider Network
Carey's international network of owned and operated chauffeured vehicle
service companies, licensees and affiliates, serving 420 cities in 65
countries, enables it to provide its customers chauffeured vehicles in
virtually every significant travel market throughout the world. Carey believes
that its network is the most extensive in the industry, and intends to expand
the network by adding qualified licensees and affiliates in locations
justifying new or expanded service. The Company believes that the trend toward
globalization is opening more cities for business and personal travel around
the world. The Company monitors and evaluates cities in which a demand for
chauffeured vehicle services may warrant a "Carey" presence.
The Company's network provides chauffeured vehicle services for airport
pickups and drop-offs, inter-office transfers, business and association
meetings, conventions, road shows, promotional tours, special events,
incentive travel and leisure travel. The Company also offers its clients
travel and tour planning services, "meet-and-greet" services, destination
management services for airport arrivals, group movement coordination
services, direct and central billing in U.S. dollars, and access to the
Company's 24-hour worldwide computerized reservation system, the CIRS.
The Company's fleet, primarily vehicles which are owned and operated by
independent operators in the owned and operated locations, contains five types
of vehicles: chauffeured sedans, limousines, vans, minibuses and motor coaches
some of which can carry up to 52 persons. The vehicles of the Company's
licensees and affiliates in larger markets are similar to the Company's fleet,
and in smaller markets generally consist of only chauffeured sedans and
limousines. All vehicles are driven by uniformed professional chauffeurs, most
of whom own the vehicles that they drive. Each such chauffeur drives a clean,
late model vehicle with amenities important to the business traveler, such as
cellular telephones and daily newspapers.
Owned and Operated Companies. The Company owns and operates chauffeured
vehicle service companies providing service to Boston, Chicago, Indianapolis,
Jacksonville, London, Los Angeles, Miami, New York, Philadelphia, San
Francisco, and Washington, D.C. and West Palm Beach. Revenue, net provided by
these companies represented approximately 81.2% of the Company's revenue, net
in fiscal 1997 and 84.4% in fiscal 1998.
Licensees. The Company has 38 licensees serving 105 cities in the United
States and 24 licensees serving 105 cities outside the United States, all of
which operate under the Carey name. Revenue provided by the Company's
licensees, including revenues from reservations billed centrally by the
Company as well as licensing and marketing fees, represented approximately
12.2% and 13.7% of the Company's revenue, net in fiscal 1997 and 1998,
respectively.
The domestic license fee ranges from $10,000 to $75,000, depending upon the
size of the market. The sum of the continuing fees paid by the domestic
licensee varies, but annually is generally less than 10% of its revenues or,
in some cases, less than 10% of an excess above a specified base.
Substantially all candidates contracting with the company as domestic
licensees have been in business for at least 10 years prior to the grant of a
license. The term of a domestic license agreement entered into prior to
January 1, 1996 is perpetual and subsequent to January 1, 1996 ranges from 5
to 15 years.
5
International licensees historically have not paid annual license fees;
rather, they have paid a commission on business referred to them. The term of
an international license agreement usually is from year to year, although in a
few cases it is perpetual.
Under the domestic license agreement, the Company provides the licensee
with: (i) the right to use the "Carey" name, (ii) participation in the CIRS,
(iii) various consulting services, (iv) identification in various travel
directories, (v) access to bulk purchasing arrangements for automobiles, parts
and maintenance materials, and (vi) national sales and marketing services. In
the event of a proposed transfer of a license or a licensee, the Company has
the right to approve the transfer. In addition, for most license agreements
executed prior to January 1, 1996 and all license agreements executed on or
after January 1, 1996, Carey retains a right of first refusal by which it may
acquire any license or licensee upon the same terms as the license or licensee
is proposed to be sold.
Typically, a licensee candidate acts as an affiliate before being
selected as a licensee. Licensees operate according to strict service
guidelines specified by the Company and market the Carey name in conjunction
with the Company's overall marketing program. The Company conducts ongoing
quality assurance programs and annual audits of licensees to insure that the
licensees have met the high service standards set forth by the Company. The
Company has the right to terminate any license if the licensee fails to comply
with such standards.
Affiliates. The Company utilizes affiliates to provide services to its
clients in cities where the Company does not have Company-owned operations or
licensees. Affiliates are not licensed to use the Carey name and do not pay
license fees to the Company, but must meet the Company's quality standards in
order to receive referred business. Pursuant to oral agreements between the
Company and its affiliates, the Company is entitled to receive a commission of
15% to 20% of net vehicle revenues for all referred business. The Company's
affiliates are located in 121 cities in the United States and 67 cities
outside the United States. Revenue provided by the Company's affiliates
represented approximately 1.3% and 1.0% of the Company's revenue, net in
fiscal 1997 and 1998, respectively.
Carey International Reservation System (CIRS)
The hub of the Company's network of service providers is the CIRS, the
Carey International Reservation System. The CIRS is operated on a 24-hour
basis by Carey's central reservation department, which processes reservations
through the Company's proprietary computer system. The central reservation
department receives reservations through the Company's toll free telephone
number (800-336-4646), by fax or telex, or through one of the six major
airline reservation systems, SABRE, APOLLO, WORLDSPAN, GALILEO, BABS and SITA.
These airline systems allow travel agencies, corporate travel departments and
government offices to access the CIRS through over 300,000 reservation
terminals worldwide. The Company charges a licensee or affiliate for each
reservation referred to the licensee or affiliate through the CIRS.
The CIRS can be accessed for up-to-date tariffs both in dollars and
foreign currency for 420 cities throughout the world. Through the CIRS, the
Company's reservation and customer service personnel have instant access to
all rates, services offered, types of vehicles available and special airport
greeting capabilities in each individual city. Individual customer profiles
are maintained including vehicle and chauffeur preferences, frequent pick-up
points, addresses and directions, billing requirements and account status.
6
The CIRS is used to make arrangements for a broad range of business and
consumer applications such as transportation to and from airports, association
and industry meeting and functions, road shows, transportation related to
incentive travel, boards of directors meetings and sight seeing tours. Special
customer service facilities are available with direct phone lines, including a
special service desk, executive VIP desk, international tour desk, special
event desk and road show desk.
The CIRS utilizes client/server architecture and proprietary software
developed over a five-year period which allows constant input into a complex
international network linking more than 65 countries. A primary strength of
the CIRS is the reliability of its reporting and control systems which verify
all reservations for complete information, customer service requirements and
accounting authorizations. The CIRS also contains customers invoicing programs
to allow central billing directly through the system for all services used
worldwide. In addition, the system's ability to track reservations allows more
accurate and detailed analysis for marketing purposes.
In 1992, the Company began leasing its reservation and operating systems
to its licensees. These systems create a basis for certain licensees to have
direct access to the CIRS and provide them with the ability to book local
reservations, dispatch vehicles and account for chauffeured vehicle services.
Marketing, Sales and Customer Service
The Company believes that "Carey", a registered service mark, is a highly
recognized name in the chauffeured vehicle service and travel industries
worldwide. The Company intends to continue to expand recognition of the
"Carey" name through its marketing and promotional efforts. Carey has
developed an extensive marketing program directed at both the travel arranger
and the end user of chauffeured vehicle services. The program consists of
directory listings, advertising, direct mail, public relations, cooperative
promotional and joint marketing programs, attendance at and sponsorship of
travel-related conventions and workshops and direct selling. The direct sales
force serving the Company and its licensees currently consists of
approximately 40 professionals.
Carey is listed in approximately 95 travel directories which are used by
travel arrangers to obtain information on travel related services. Advertising
targeted at travel arrangers is placed in over 35 trade journals including
Business Travel Executive, Travel Weekly, Travel Trade and Business Travel
News. In addition, the Company advertises extensively in magazines and
newspapers, consumer association books, hotel room information books and the
Yellow Pages, and on radio and television in selected markets.
The Company's continuing direct mail program is targeted at both the
travel arrangers and the end users. The program distributes approximately two
million promotional pieces annually. Most major travel arrangers receive at
least six direct mail pieces per year which include announcements of new
services, news on service providers and reservation programs, the Carey
Newsletter and listings of rates. End users and arrangers receive promotional
pieces on Carey when they are billed for the Company's services.
The Company's marketing program seeks to build upon brand name
recognition, customer loyalty, service know-how, technology and strategic
market relationship with other leaders in the travel and tourism industry,
such as airlines, travel agencies, credit card companies and central
7
reservation systems. The Company also is involved in promotional and
cooperative agreements with American Express Platinum Card and Gold Card,
Diner's Club "Club Chauffeur" program, British Airways, Air France and various
cruise lines.
The Company believes that the retention and expansion of existing
business is as important as new sales. Carey has established a base of loyal
customers in part by monitoring the standard of service through its quality
assurance and customer service programs. To assure that the Company continues
to provide consistently high quality and reliable service, Carey operates a
five-part quality assurance program. The Company's quality assurance program
utilizes survey cards that are sent to customers and travel arrangers.
In excess of 90% of the quality assurance cards returned to Carey during
the twelve-month period ended November 30, 1998 rated the Company's
reservation services, chauffeurs and vehicles as "excellent." Carey's quality
assurance program includes evaluations performed by an independent consultant
to measure the quality of chauffeur services, the appearance of chauffeurs and
vehicles and the availability of other amenities, such as cellular phones and
daily newspapers.
Independent Operators
An important component of Carey's strategy involves the preferred use of
independent operators rather than of salaried chauffeurs operating Company-
owned vehicles. An independent operator takes responsibility for owning,
operating and maintaining his or her own vehicle. The Company believes that
acting as an independent operator creates incentives for the chauffeur to
become more productive, efficient and service-oriented, thereby increasing the
profitability of the chauffeur and the Company. The objective of the
Company's independent operator strategy is to instill in each chauffeur the
sense of responsibility and dedication characteristic of an independent
business owner.
The use of independent operators allows the Company to reduce its labor
and capital costs, convert fixed costs to variable costs and generate revenues
from fees paid by independent operators. Because of the greater responsibility
borne by independent operators, the Company is able to allocate fewer
resources to oversee its vehicle operations. As a result, the Company can
focus to a greater extent on support services, business development,
administration, billing, quality assurance and sales and marketing.
Each independent operator enters into an agreement with the Company to
provide prompt and courteous service to the Company's customers with a
properly maintained, late model vehicle consistent with the Company's
standards. The cost of a new vehicle ranges from approximately $35,000 to
$65,000, depending upon whether it is a sedan or a limousine and the features
included in the vehicle. Each new independent operator agrees to pay an
initial fee to the Company, acquire his or her vehicle and pay all of the
maintenance and operating expenses of the vehicle, including gasoline. The
independent operator agreements currently entered into by the Company
generally provide for a term of 15 years, fees of $45,000 to $75,000 and an
interest rate of 15.75% per year.
The independent operator agreement provides that the Company will bill
and collect all revenues (as defined in the agreement) and remit to the
independent operator 60% to 70% of such revenues. In this arrangement, the
Company assumes the risk of collecting from each customer and generally pays
the independent operator his or her share regardless of whether the Company is
paid by the customer. An independent operator's failure to meet the high
standards of service associated with the Carey name constitutes a breach
8
of the agreement and gives rise to a right of the Company to terminate the
agreement.
Independent operators also generally require financing to purchase their
vehicles. Typically, independent operators have utilized banks, vehicle
financing companies or CLI Fleet, Inc. ("CLI Fleet"), a finance company that
specializes in providing financing to the chauffeured vehicle service
industry. See "Certain Transactions."
Customers
The Company's customer list exceeds 100,000 individuals and organizations
that are dispersed across many different industries and geographic locations.
No client accounted for more than 5% of the Company's revenue, net in 1998.
The Company's major clients include companies in the airline, travel and
related services, finance, manufacturing, pharmaceutical, insurance,
publishing, oil and gas exploration, entertainment, tobacco and food and
beverage industries.
Competition
The chauffeured vehicle service industry is highly competitive and
fragmented, with few significant national participants operating a multi-city
reservation system. Each local market usually contains numerous local
participants as well as a few companies offering regional and national
service. Chauffeured vehicle service providers compete primarily on the basis
of price, quality, scope of service and dependability. The Company also
competes with service providers offering alternative modes of transportation,
such as buses, jitney services, taxis, radio cars and rental cars. The Company
believes that its high quality of service and dependability have allowed it to
compete effectively in its markets. Carey competes both for customers and for
possible acquisitions. The Company expects its business to become more
competitive as existing competitors expand and additional companies enter the
industry. Certain of the Company's existing competitors have, and any new
competitors that enter the industry may have, access to significantly greater
financial resources than the Company.
Government Regulation
The Company's chauffeured vehicle service operations are subject to
various state and local regulations and, in many instances, require permits
and licenses from state and local authorities. In addition, the Company is
regulated by the Federal Highway Administration with respect to, among other
things, minimum vehicular insurance requirements. The Company believes that it
has all required permits and licenses to conduct its operations and that it is
in substantial compliance with applicable regulatory requirements relating to
its operations.
The Company is subject to federal and state laws, rules and regulations
governing the offer and sale of franchises. A number of states have enacted
laws that require detailed disclosure in the offer and sale of franchises
and/or the registration of the franchisers with state administrative agencies.
The Company is also subject to Federal Trade Commission and state regulations
relating to disclosure requirements in the sale of franchises. Certain states
have enacted, and others may enact, legislation governing certain aspects of
the franchise relationship and limiting the ability of the franchisers to
terminate or refuse to renew a franchise. The law applicable to franchise
sales and relationships is rapidly developing, and the Company is unable to
predict the effect on its franchise system of additional requirements or
restrictions that may be enacted or promulgated or of court decisions that
9
may be adverse to franchiser. Due to the scope of the Company's business and
the complexity of franchise regulation, compliance problems may be encountered
from time to time.
Insurance
The Company is exposed to claims for personal injury or death and
property damage as a result of automobile accidents involving chauffeured
vehicles operated by its employees and independent operators and by its
licensees and their drivers. The Company purchases automobile liability,
automobile collision and comprehensive damage, uninsured and under insured
motorist coverage, general liability, comprehensive property damage, workers'
compensation and other insurance coverages that management considers adequate
for the protection of the Company's assets and operations, although there can
be no assurance that the coverages and limits of such policies will be
adequate. The Company's standard license agreement requires that its licensees
purchase similar types of insurance and name the Company as a named insured in
such insurance policies. A successful claim against the Company beyond the
scope of its or its licensees' insurance coverage or in excess of its or its
licensees' limits could have a material adverse effect on the Company's
business, financial condition and results of operations.
Employees and Independent Operators
As of November 30, 1998, the Company had 774 full-time employees (159 of
whom were chauffeurs) and 268 part-time employees (195 of whom were
chauffeurs). As of November 30, 1998, the Company also had agreements with 751
independent operators. The Company is not a party to any collective bargaining
agreement.
Intellectual Property
The Company is the registered owner of two United States service marks
covering the "Carey" name. The Company believes that customer and travel
arranger recognition of these marks has contributed to its success. The
Company is not affiliated with Carey Transportation, Inc., a company that
provides bus transportation services in the metropolitan New York City area.
Except for Carey Transportation, Inc., the Company believes it has the
exclusive right to use the "Carey" name in connection with transportation
services in all locations in which it either owns and operates a chauffeured
vehicle service company or maintains a licensee.
10
Item 2. Properties
----------
The Company leases approximately 25,000 square feet in Washington, D.C.
for its executive and administrative offices and its central reservation
capabilities. The lease expires in 2007. Of the 14 facilities occupied by the
Company's owned and operated vehicle service companies on November 30, 1998, 12
were leased and 2 were owned by the Company. The leased facilities range in size
from 1,750 to 38,000 square feet and provide for annual minimum lease rentals
ranging from $30,000 to $360,000, with the average approximating $80,000 a year.
The Company owned facilities are located in Long Island City, New York and
Alexandria, Virginia.
Item 3. Legal Proceedings
-----------------
The Company is from time to time a party to litigation arising in the
ordinary course of business. Management believes that no pending legal
proceeding will have a material adverse effect on the business, financial
condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the Company's fiscal year 1998.
11
Part II
- -------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
Price Range of Common Stock
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "CARY." The following table sets forth for each period
indicated the high and low sale prices for the Common Stock as reported
by the Nasdaq National Market.
High Low
May 28, 1997 through August 31, 1997.........$ 15 5/8 $ 11
September 1, 1997 through November 30, 1997.. 18 13 3/4
December 1, 1997 through February 28, 1998... 18 14
March 1, 1998 through May 31, 1998........... 24 3/8 18 3/8
June 1, 1998 through August 31, 1998......... 29 1/2 16
September 1, 1998 through November 30, 1998.. 17 5/8 12 1/2
On February 23, 1999, the last reported sale price of the Common Stock was
$18.0683 and there were approximately 213 holders of record of Common
Stock.
Dividend Policy
The Company intends to retain all earnings to finance the growth and
development of its business and does not anticipate paying cash dividends
on its Common Stock in the foreseeable future. Any future determination as
to the payment of dividends on the Common Stock will depend upon the
Company's future earnings, results of operations, capital requirements and
financial condition and any other factor the Board of Directors of the
Company may consider. The Company's agreements with its principal lenders
prohibit dividend payments.
12
Item 6. Selected Financial Data
-----------------------
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data as of November 30, 1994, 1995,
1996, 1997, and 1998 and for each of the five years in the period ended November
30, 1998 have been derived from the consolidated financial statements of the
Company.
The selected consolidated financial data of the Company should be read in
conjunction with the Company's Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained elsewhere in this document.
Fiscal Year Ended November 30,
----------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- ---------
(In thousands, except share and per share data)
Consolidated Statement of Operations Data
(1):
Revenue, net.......................................... $ 40,314 $ 48,969 $ 65,545 $ 86,378 $123,218
Cost of revenue....................................... 27,700 33,027 43,649 57,890 81,973
-------- -------- -------- -------- --------
Gross profit.......................................... 12,614 15,942 21,896 28,488 41,245
Selling, general and administrative
expense............................................ 11,043 14,081 16,727 20,112 27,680
-------- -------- -------- -------- --------
Operating income...................................... 1,571 1,861 5,169 8,376 13,565
Interest income (expense) and other
income (expense), net.............................. (1,446) (1,492) (1,380) (690) 727
-------- -------- -------- -------- --------
Income before provision for income
taxes.............................................. 125 369 3,789 7,686 14,292
Provision for income taxes............................ 163 271 294 3,163 5,941
-------- -------- -------- -------- --------
Net income (loss)..................................... $ (38) $ 98 $ 3,495 $ 4,523 $ 8,351
======== ======== ======== ======== ========
Net income (loss) per common share -
basic(2)........................................... $ (0.04) $ 0.07 $ 2.57 $ 1.00 $ 0.97
======== ======== ======== ======== ========
Net income (loss) per common share -
diluted(2)......................................... $ (0.03) $0.03 $ 1.01 $ 0.77 $ 0.92
======== ======== ======== ======== ========
Weighted average common shares used
in computing net income per
common share - basic(2)............................ 1,323 1,333 1,359 4,506 8,634
======== ======== ======== ======== ========
Weighted average common shares used
in computing net income per
common share - diluted(2).......................... 1,348 2,817 3,794 6,137 9,094
======== ======== ======== ======== ========
13
November 30,
------------------------------------------------
1994 1995 1996 1997 1998
-------- -------- -------- -------- --------
Consolidated Balance Sheet Data:
Working capital (deficit)....................... $ 531 $ (1,948) $ (2,188) $ 4,999 $ 13,737
Total assets.................................... 29,494 38,729 43,967 85,394 129,212
Long-term debt and capital leases, less current
maturities................................ 12,276 14,502 12,039 4,132 2,457
Deferred revenue(3)............................. 4,484 4,726 6,181 13,396 15,085
Total stockholders' equity...................... 4,218 4,197 7,573 48,300 90,139
__________
1. The results of operations of chauffeured vehicle service companies acquired
by the Company in New York (1997), Los Angeles (1997), London (1997),
Boston (1998), Chicago (1998) and West Palm Beach (1998) have been included
in the statement of operations data from their respective dates of
acquisition.
2. Net income (loss) per common share has been restated to comply with SFAS No.
128, Earnings per Share. See Note 2 to the Company's Consolidated Financial
Statements.
3. Represents the balance of the fees deferred in connection with independent
operator agreements less amounts previously recognized. Such fees are
recognized ratably over the terms of the agreements, which typically range
from 10 to 20 years. See the Notes to the Company's Consolidated Financial
Statements.
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements and related notes thereto appearing elsewhere in this
document. Unless otherwise indicated or the context otherwise requires, each
reference to a year is to the Company's fiscal year which ends on November 30 of
such year.
Overview
The Company generates revenues primarily from chauffeured vehicle services
provided by (i) Carey's owned and operated businesses and (ii) Carey's licensees
and affiliates when services provided by such licensees and affiliates are
billed through the Company's central reservation and billing system. In 1997 and
1998, approximately 81.2% and 84.4%, respectively, of the Company's revenue, net
was generated by chauffeured vehicle services provided by the Company's owned
and operated businesses, approximately 12.2% and 13.7%, respectively, was
generated by chauffeured vehicle services provided by the Company's licensees
and billed by the Company, and approximately 1.3% and 1.0%, respectively, was
generated by chauffeured vehicle services provided by the Company's affiliates
and billed by the Company. Carey also generates revenues from its licensees
through fees (both initial and monthly) related to (i) licensing the use of its
name and service mark, (ii) its central reservation and billing services and
(iii) its marketing activities. In 1997 and 1998, approximately 2.6% and 1.7%,
respectively, of the Company's revenue, net was generated from its licensees
through such fees. To a lesser extent, the Company derives revenues from the
payment of fees by independent operators. The Company recognizes revenues from
these fees ratably over the terms of the independent operators' agreements with
the Company, which typically range from 10 to 20 years.
Cost of revenue primarily consists of amounts due to the Company's independent
operators. The amount due to independent operators is a percentage (ranging
from 60% to 70%) of the charges of services provided, net of discounts and
commissions. Cost of revenue also includes payments to service providers
unaffiliated with the Company ("farmouts") to whom the Company refers work when
business levels exceed the capacity of independent operators and employed
chauffeurs. Such amounts generally include the charges for services provided
less referral fees ranging from 15% to 25% of net vehicle service revenue. Cost
of revenue also includes amounts due to the Company's licensees and affiliates
for chauffeured vehicle services provided by them and billed by the Company.
Cost of revenue includes costs associated with owning and maintaining the
vehicles owned by the Company, telecommunications expense, salaries and benefits
for reservationists, marketing expenses for the benefit of licensees, and
commissions due to travel agents and credit card companies.
Selling, general and administrative expenses consist primarily of compensation
and related benefits for the Company's officers and administrative personnel,
marketing and promotional expenses for the Company's owned and operated
chauffeured vehicle service companies, and professional fees, as well as
amortization costs related to the intangible assets recorded in connection with
of the Company's acquisitions.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
In addition to internal growth from the Company's sales and marketing efforts,
an important component in the Company's growth to date has been the acquisition
of certain licensees and other chauffeured vehicle service companies. Since
December 1995, Carey has acquired eleven chauffeured vehicle service companies.
Ten of these acquisitions were made for cash, the issuance or assumption of
notes and/or issuance of common stock and were accounted for using the purchase
method of accounting. A substantial majority of the purchase price paid by the
Company in each such acquisition represented goodwill or franchise rights (if a
licensee was acquired). In addition, in October 1997, the Company completed a
merger with Indy Connection which was accounted for as a pooling-of-interests.
The results of operations for the acquired companies accounted for by the
purchase method have been included in the Company's consolidated financial
statements from their respective dates of acquisition. Carey generally expects
to benefit from its acquisitions by consolidating general and administrative
functions, increasing operating efficiencies, and, as a result of converting
salaried chauffeurs to independent operators, eliminating the overhead and
capital costs associated with employing salaried chauffeurs, leasing garages,
maintaining parts and fuel inventories, and owning and operating vehicles. The
Company generally realizes these benefits within six to nine months after an
acquisition, depending upon whether the acquisition is of a chauffeured vehicle
service company in a location in which the Company already operates, or of a
licensee in a market where Carey has yet to establish operations.
Results of Operations
The following table sets forth, for the periods indicated, certain financial
data for the Company expressed as a percentage of revenue, net.
Fiscal Year Ended November 30,
----------------------------------
1996 1997 1998
---------- ---------- ----------
Revenue, net................................. 100.0% 100.0% 100.0%
Cost of revenue.............................. 66.6 67.0 66.5
---------- ---------- ----------
Gross profit................................. 33.4 33.0 33.5
Selling, general and administrative expense.. 25.5 23.3 22.5
---------- ---------- ----------
Operating income............................. 7.9 9.7 11.0
Interest and other income
(expense), net.............................. (2.1) (0.8) 0.6
---------- ---------- ----------
Income before provision for income taxes..... 5.8 8.9 11.6
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Provision for income taxes.................. 0.5 3.7 4.8
Net income................................... 5.3% 5.2% 6.8%
Year Ended November 30, 1998 Compared to Year Ended November 30, 1997
Revenue, Net. Revenue, net increased approximately $36.8 million or 42.6%
from $86.4 million in 1997 to $123.2 million in 1998. Of the increase,
approximately $19.6 million was contributed by existing operations as a result
of expanded use of the Carey network, including an increase in business from
corporate travel customers and business travel arrangers, and approximately
$23.0 million was due to revenues of companies which were acquired.
Cost of Revenue. Cost of revenue increased approximately $24.1 million or
41.6% from $57.9 million in 1997 to $82.0 million in 1998. The increase was
primarily attributable to higher costs due to increased business levels and to
cost of revenue of acquired businesses. Cost of revenue decreased as a
percentage of revenue, net from 67.0% in 1997 to 66.5% in 1998 as a result of
spreading the Company's cost of revenue over a larger revenue base.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased approximately $7.6 million or 37.6% from $20.1
million in 1997 to $27.7 million in 1998. The increase was largely due to
higher administrative costs associated with additional personnel, increased
marketing expenses and higher amortization of intangibles as a result of
acquisitions. Selling, general and administrative expense decreased as a
percentage of revenue, net from 23.3% in 1997 to 22.5% in 1998 as a result of an
increase in revenue without a corresponding increase in administrative costs.
Interest Expense. Interest expense decreased from $1.1 million in 1997 to
$566,000 in 1998, primarily as a result of the use of proceeds from the
Company's 1997 initial public offering ("IPO") to repay outstanding debt and the
conversion of subordinated and certain other debt to Common Stock in connection
with the IPO.
Provision for Income Taxes. The provision for income taxes increased
from $3.2 million in 1997 to $5.9 million in 1998. The increase was the
result of the increase in pre-tax income of the Company. The Company's effective
tax rate was 41.1% in 1997 and 41.6% in 1998.
Net Income. As a result of the foregoing, the Company's net income increased
from $4.5 million in 1997 to $8.4 million in 1998.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Year Ended November 30, 1997 Compared to Year Ended November 30, 1996
Revenue, Net. Revenue, net increased $20.8 million or 31.8% from $65.5
million in 1996 to $86.4 million in 1997. Of the increase, approximately $8.8
million resulted from expanded use of the Carey network, including an increase
in business from corporate travel customers and business travel arrangers and
approximately $12.0 million of the increase was due to the revenues from
companies acquired.
Cost of Revenue. Cost of revenue increased approximately $14.2 million or
32.6% from $43.6 million in 1996 to $57.9 million in 1997. The increase was
primarily attributable to higher costs due to increased business levels and to
cost of revenue of acquired corporations. Cost of revenue increased as a
percentage of revenue, net from 66.6% in 1996 to 67.0% in 1997, primarily
reflecting increases in telephone, chauffeur and certain other costs as a
percentage of revenue, net.
Selling, General and Administrative Expense. Selling, general and
administrative expense increased approximately $3.4 million or 20.2% from $16.7
million in 1996 to $20.1 million in 1997. The increase was largely due to the
costs of additional personnel, increased marketing expenses and increased
administrative expenses related to acquired operations and generally in support
of higher business levels. Selling, general and administrative expense decreased
as a percentage of revenue, net from 25.5% in 1996 to 23.3% in 1997 as a result
of an increase in revenue, net without a corresponding increase in
administrative costs.
Interest Expense. Interest expense decreased from $1.9 million in 1996 to
$1.1 million in 1997, primarily as a result of the use of proceeds from the IPO
to repay outstanding debt and the conversion of subordinated and certain other
debt to Common Stock in connection with the IPO.
Provision for Income Taxes. The provision for income taxes increased from
approximately $294,000 in 1996 to $3.2 million in 1997. The increase was the
result of the increase in pre-tax income of the Company and the effect of the
reversal of a valuation allowance against the Company's net deferred tax asset.
The reversal reduced the provision for income taxes in 1996 by approximately
$1.5 million. As a result, the Company's effective tax rate was 7.8% in 1996
and 41.2% in 1997.
Net Income. As a result of the foregoing, the Company's net income increased
from $3.5 million in 1996 to $4.5 million in 1997.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Quarterly Results
The following table presents unaudited quarterly financial information for
1996, 1997 and 1998. This information has been prepared by the Company on a
basis consistent with the Company's audited financial statements and includes
all adjustments (consisting only of normal recurring adjustments) which
management considers necessary for a fair presentation of the results for such
quarters.
Quarter Ended
-----------------------------------------------
1996
-----------------------------------------------
Feb. May Aug. Nov.
29 31 31 30
--------- --------- ----------- ---------
Revenue, net............... $ 12,892 $ 16,695 $ 16,073 $ 19,885
Gross profit............... 4,232 5,674 5,472 6,518
Operating income........... 490 1,459 1,343 1,877
Net income................. 36 750 681 2,028
[CAPTION]
Quarter Ended
-----------------------------------------------
1997
-----------------------------------------------
Feb. May Aug. Nov.
28 31 31 30
--------- --------- ----------- ---------
Revenue, net................ $ 15,595 $18,690 $ 22,932 $ 29,161
Gross profit................ 5,126 6,495 7,574 9,293
Operating income............ 912 1,990 2,022 3,452
Net income.................. 366 1,008 1,180 1,969
Net income per common
share-basic................. 0.27 0.67 0.16 0.26
Net income per common
share-diluted............... 0.11 0.26 0.15 0.25
[CAPTION]
Quarter Ended
-----------------------------------------------
1998
-----------------------------------------------
Feb. May Aug. Nov.
28 31 31 30
--------- --------- ----------- ---------
Revenue, net................ $ 23,651 $ 30,800 $ 30,347 $ 38,421
Gross profit................ 7,474 10,118 10,046 13,608
Operating income............ 1,625 3,197 3,186 5,558
Net income.................. 917 1,888 2,186 3,361
Net income per common
share-basic................. 0.12 0.23 0.23 0.34
Net income per common
share-diluted............... 0.11 0.22 0.22 0.34
Quarter Ended
-----------------------------------------------
1996
-----------------------------------------------
Feb. May Aug. Nov.
29 31 31 30
--------- --------- ----------- ---------
Revenue, net................ 100% 100% 100% 100%
Gross profit................ 32.8 34.0 34.0 32.8
Operating income............ 3.8 8.7 8.4 9.4
Net income.................. 0.3% 4.5% 4.2% 10.2%
Quarter Ended
-----------------------------------------------
1997
-----------------------------------------------
Feb. May Aug. Nov.
28 31 31 30
--------- --------- ----------- ---------
Revenue, net................ 100% 100% 100% 100%
Gross profit................ 32.9 34.8 33.0 31.9
Operating income............ 5.8 10.6 8.8 11.8
Net income.................. 2.3% 5.4% 5.1% 6.8%
Quarter Ended
-----------------------------------------------
1998
-----------------------------------------------
Feb. May Aug. Nov.
28 31 31 30
--------- --------- ----------- ---------
Revenue, net................ 100% 100% 100% 100%
Gross profit................ 31.6 32.8 33.1 35.4
Operating income............ 6.9 10.4 10.5 14.5
Net income.................. 3.9% 6.1% 7.2% 8.7%
The Company believes that its future operating results may continue to be
subject to quarterly variations caused by such factors as seasonal business
travel, variable scheduling of special events and the timing of acquisitions by
the Company. The Company's least profitable quarter generally has been the
first quarter (ending February 28 or 29), and its most profitable quarter
generally has been the fourth quarter (ending November 30).
Liquidity and Capital Resources
Cash and cash equivalents increased approximately $9.1 million from $5.3
million at November 30, 1997 to $14.5 million at November 30, 1998. Operating
activities provided net cash of $10.4 million during 1998. The overall net
increase in cash and cash equivalents in 1998 over 1997 primarily related to
the cash proceeds to the Company from its issuance of Common Stock and net cash
provided by chauffeured vehicle service operations, offset by the use of such
cash to acquire chauffeured vehicle service companies and retire debt.
Cash used in investing activities decreased by $2.8 million over 1997. Cash
of $11.0 million was used in 1997 to acquire chauffeured vehicle service
companies and purchase fixed assets, net of cash from sale of fixed assets,
whereas $8.2 million of cash was used in 1998 to acquire several chauffeured
vehicle service companies and purchase fixed assets, net of cash from sale of
fixed assets.
Cash provided by financing activities decreased by $3.2 million over 1997,
primarily as a result of the net proceeds from the issuance of stock and after
using such proceeds to retire debt and complete the Recapitalization.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
At November 30, 1998, the Company had debt outstanding of $4.3 million,
approximately $2.7 of which is to be repaid over the next 12 months.
In January 1999, the Company entered into a new three-year Revolving Credit
Facility consisting of an unsecured revolving line of credit of $75.0 million
(the "Credit Facility"). The Credit Facility will be used for acquisitions and
working capital. Loans made under the Credit Facility will bear interest at the
Company's option at either the banks' prime lending rate or at a varying rate
above the LIBOR rate depending upon the ratio of the Company's debt to equity.
Committment fees equal to 0.375% per annum are payable on the unused portion of
the Credit Facility. The terms of the Credit Facility (i) prohibit the payment
of dividends by the Company, (ii) with certain exceptions, prevent the Company
from incurring on assuming other indebtedness that is not subordinated to the
borrowings under the Credit Facility and (iii) require the Company to comply
with certain financial covenants.
While there can be no assurance, and depending on the methods of financing and
size of potential acquisitions, management believes that cash flow from
operations, the remaining net proceeds from the sale of common stock and funds
from the Credit Facility will be adequate to meet the Company's capital
requirements for the next 12 months. While the Company historically has financed
many acquisitions primarily with cash, it may seek to finance future
acquisitions by using Common Stock for a portion or all of the consideration to
be paid.
The Company is in the process of upgrading the CIRS and subsidiary reservation
systems as well as its financial and certain other computer software and
hardware systems. The upgrades are expected to provide significant enhancements
to the Company's customer service and management information capabilities along
with increased opportunities for more efficient processing and distribution of
information. The Company's program of enhancements and upgrades overlaps with
its plans to address the Year 2000 Problem, as described in the following three
paragraphs, and replaces the need for on-going investments in its current
systems that would otherwise occur in the absence of the program of enhancements
and upgrades. The Company is currently committed to or anticipates spending an
aggregate of approximately $6 to $8 million over the next 12 to 18 months on
designing, developing and deploying software and replacing or upgrading
computer-related hardware as part of its program of enhancements and upgrades.
The Year 2000 Problem, which is common to most corporations, concerns the
inability of certain information systems, primarily computer software programs,
to properly recognize and process date sensitive information related to the year
2000 and beyond. While the Company anticipates that the upgrades referred to in
the preceding paragraph will result in systems that are Year 2000 compliant, the
Company has also developed plans to address the possible exposures of its
existing systems to the Year 2000 Problem. Key financial, managment information
and operational systems, including equipment with embedded microprocessors, have
been inventoried and assessed, and plans are in place for the necessary systems
modifications or replacements. Progress against these plans is monitored and
reported to senior management on a regular basis. Implementation of necessary
changes to critical systems is expected to be completed during fiscal 1999.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--(Continued)
Costs to remedy the Year 2000 Problem for certain key financial and
operational systems are expected to total approximately $130,000, of which
approximately 75% has been spent to date, and are charged to expense as
incurred. The Company intends to remedy its Year 2000 Problem in its computer-
related hardware and other commerically available software as part of its
overall systems upgrade discussed above. The Company is also assessing the
potential impact on operations if key third parties are not successful in
making their systems Year 2000 compliant in a timely manner. The effect, if
any, on the Company's results of operations if the Company's customers or its
suppliers are not fully Year 2000 compliant is not reasonably estimable.
The Company's emergency backup and recovery procedures to be followed in the
event of a failure of a business-critical system will be expanded to include
specific procedures for potential Year 2000 issues. Contingency plans to
protect the business from Year 2000-related interruptions are being developed
and are expected to be complete by June 1999.
Factors To Be Considered
The information set forth above contains forward-looking statements, which
involve risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in these forward-looking statements.
Readers should refer to discussion under "Risk Factors" contained in the
Company's Registration Statement on Form S-4 (No. 333-59599) filed with the
Securities and Exchange Commission, which is incorporated herein by reference,
concerning certain factors which could cause the Company's actual results to
differ materially from the results anticipated in the forward-looking statements
contained herein.
21
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
Index to Financial Statements
FINANCIAL STATEMENTS Page No.
-------------------- --------
Carey International, Inc. and Subsidiaries
Audited Consolidated Financial Statements
Report of Independent Accountants 23
Balance Sheets as of November 30, 1997 and 1998 24
Statements of Operations for the years ended
November 30, 1996, 1997 and 1998 25
Statements of Changes in Stockholders' Equity for the
years ended November 30, 1996, 1997 and 1998 26
Statements of Cash Flows for the years ended
November 30, 1996, 1997 and 1998 27
Notes to Consolidated Financial Statements 28-49
Schedule VIII Valuation and Qualifying Accounts 52
All other schedules are omitted because they are either not applicable,
or required or because the required information is included in the
consolidated financial statements or notes thereto.
22
Report of Independent Accountants
---------------------------------
To the Stockholders and Board of Directors of
Carey International, Inc.
In our opinion, the accompanying consolidated financial statements listed
on page 22 of this Form 10-K present fairly, in all material respects, the
consolidated financial position of Carey International, Inc. and subsidiaries
at November 30, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended November 30, 1998,
in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Washington, DC
January 30, 1999
23
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 30,
--------------------------
ASSETS 1997 1998
----------- ------------
Cash and cash equivalents.................................................. $ 5,333,402 $ 14,456,241
Accounts receivable, net of allowance for doubtful accounts of
$639,000 in 1997 and $736,000 in 1998..................................... 15,932,426 17,864,127
Notes receivable from contracts, current portion........................... 670,266 1,249,117
Prepaid expenses and other current assets.................................. 1,435,176 1,291,508
----------- ------------
Total current assets.................................................. 23,371,270 34,860,993
Fixed assets, net of accumulated depreciation of $5,116,000 in
1997 and $5,988,000 in 1998............................................... 9,278,319 12,912,287
Notes receivable from contracts, excluding current portion................. 8,164,337 9,538,856
Franchise rights, net of accumulated amortization of $1,965,000 in
1997 and $2,301,000 in 1998............................................... 5,112,348 10,863,968
Trade name, trademark and contract rights, net of accumulated
amortization of $1,164,000 in 1997 and $1,355,000 in 1998................. 6,493,693 6,305,359
Goodwill and other intangible assets, net of accumulated
amortization of $1,500,000 in 1997 and $2,857,000 in 1998................. 30,991,450 53,273,552
Deferred tax assets........................................................ 501,545 -
Deposits and other assets.................................................. 1,481,252 1,456,871
----------- ------------
Total assets.......................................................... $85,394,214 $129,211,886
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of notes payable........................................... $ 996,575 $ 2,652,754
Current portion of capital leases.......................................... 321,965 384,511
Accounts payable and accrued expenses...................................... 17,054,081 18,086,507
----------- ------------
Total current liabilities............................................. 18,372,621 21,123,772
Notes payable, excluding current portion................................... 2,792,022 1,665,194
Capital leases, excluding current portion.................................. 1,339,666 792,143
Deferred rent and other long- term liabilities............................. 1,193,577 406,835
Deferred revenue........................................................... 13,396,104 15,085,118
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; authorized 1,000,000
shares, none issued and outstanding..................................... - -
Common stock, $0.01 par value; authorized 20,000,000
shares; issued and outstanding 7,630,007 shares in 1997
and 9,463,614 in 1998................................................... 76,300 94,636
Additional paid-in capital............................................... 45,173,336 78,668,859
Retained earnings........................................................ 3,050,588 11,375,329
----------- ------------
Total stockholders' equity............................................ 48,300,224 90,138,824
----------- ------------
Total liabilities and stockholders' equity............................ $85,394,214 $129,211,886
=========== ============
The accompanying notes are an integral part of the
consolidated financial statements
24
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended November 30,
------------------------------------------
1996 1997 1998
----------- ------------ ------------
Revenue, net........................................ $65,544,942 $ 86,378,313 $123,218,301
Cost of revenue..................................... 43,649,178 57,890,393 81,973,011
----------- ------------ ------------
Gross profit..................................... 21,895,764 28,487,920 41,245,290
Selling, general and administrative expense......... 16,726,610 20,111,590 27,680,111
----------- ------------ ------------
Operating income................................. 5,169,154 8,376,330 13,565,179
Other income (expense):
Interest expense.................................... (1,898,231) (1,141,946) (566,432)
Interest income..................................... 162,711 231,384 1,040,623
Gain on sales of fixed assets....................... 355,754 220,004 252,322
----------- ------------ ------------
Income before provision for income taxes... 3,789,388 7,685,772 14,291,692
Provision for income taxes.......................... 294,421 3,162,282 5,940,846
----------- ------------ ------------
Net income.................................. $ 3,494,967 $ 4,523,490 $ 8,350,846
=========== ============ ============
Net income per common share-basic................... $ 2.57 $ 1.00 $ 0.97
=========== ============ ============
Net income per common share-diluted................. $ 1.01 $ 0.77 $ 0.92
=========== ============ ============
Weighted average common shares
outstanding-basic................................... 1,359,126 4,506,108 8,634,239
=========== ============ ============
Weighted average common shares
outstanding-diluted................................. 3,794,291 6,137,418 9,093,632
=========== ============ ============
Pro forma net income per common share-basic......... $ 0.81
============
Pro forma net income per common share-diluted....... $ 0.76
============
Pro forma weighted average common shares
outstanding-basic................................... 5,819,145
============
Pro forma weighted average common shares
outstanding........................................ 6,180,773
============
The accompanying notes are an integral part of the
consolidated financial statements
25
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Carey
Series A Series B Series E Series F Series G Indiana
preferred preferred preferred preferred preferred preferred
stock stock stock stock stock stock
--------- --------- --------- --------- --------- ---------
Balance at November 30, 1995.... $ 420,700 $ 95,800 $ 97,500 $ 100,000 $ 498,900 $ 40,000
Redemption of preferred stock... - - (97,500) - - (40,000)
Issuance of stock............... - - - - - -
Payment of preferred stock
dividends...................... - - - - - -
Payment of common stock
dividends...................... - - - - - -
Cumulative effect of
currency translation........... - - - - - -
Net income...................... - - - - - -
--------- --------- --------- --------- --------- ---------
Balance at November 30, 1996.... 420,700 95,800 - 100,000 498,900 -
Issuance of common stock
and redemption of
preferred stock under
Recapitalization Plan.......... (420,700) (95,800) - (100,000) (498,900) -
Issuance of common stock
in initial public offering..... - - - - - -
Issuance of common stock
in purchases of
chauffeured vehicle
companies...................... - - - - - -
Issuance of common stock
under option plans............. - - - - - -
Conversion of debt for
common stock................... - - - - - -
Payment of common stock
dividends...................... - - - - - -
Cumulative effect of
currency translation........... - - - - - -
Net income...................... - - - - - -
--------- --------- --------- --------- --------- ---------
Balance at November 30, 1997.... - - - - - -
Issuance of common stock in
public offering................ - - - - - -
Issuance of common stock
in purchase of
chauffeured vehicle
companies...................... - - - - - -
Issuance of common stock
under option plans............. - - - - - -
Cumulative effect of
currency translation........... - - - - - -
Net income...................... - - - - - -
--------- --------- --------- --------- --------- ---------
Balance at November 30, 1998.... $ - $ - $ - $ - $ - $ -
========= ========= ========= ========= ========= =========
Retained
Common Stock Additional earnings Total
---------------------------- paid-in (accumulated stockholders'
Shares $ capital deficit) equity
---------- ----------- ----------- ----------- -----------
Balance at November 30, 1995.... 1,357,714 $ 13,577 $ 7,821,570 $(4,891,009) $ 4,197,038
Redemption of preferred stock... - - - - (137,500)
Issuance of stock............... 19,842 199 19,801 - 20,000
Payment of preferred stock
dividends...................... - - - (900) (900)
Payment of common stock
dividends...................... - - - (42,057) (42,057)
Cumulative effect of
currency translation........... - - - 41,536 41,536
Net income...................... - - - 3,494,967 3,494,967
---------- ----------- ----------- ----------- -----------
Balance at November 30, 1996.... 1,377,556 13,776 7,841,371 (1,397,463) 7,573,084
Issuance of common stock
and redemption of
preferred stock under
Recapitalization Plan.......... 2,560,071 25,601 2,853,841 - 1,764,042
Issuance of common stock
in initial public offering..... 3,335,000 33,350 30,580,511 - 30,613,861
Issuance of common stock
in purchases of
chauffeured vehicle
companies...................... 292,066 2,920 3,397,080 - 3,400,000
Issuance of common stock
under option plans............. 17,207 172 53,514 - 53,686
Conversion of debt for
common stock................... 48,107 481 447,019 - 447,500
Payment of common stock
dividends...................... - - - (101,857) (101,857)
Cumulative effect of
currency translation........... - - - 26,418 26,418
Net income...................... - - - 4,523,490 4,523,490
---------- ----------- ----------- ----------- -----------
Balance at November 30, 1997.... 7,630,007 76,300 45,173,336 3,050,588 48,300,224
Issuance of common stock in
public offering................ 1,450,000 14,500 29,357,385 - 29,371,885
Issuance of common stock
in purchase of
chauffeured vehicle
companies...................... 182,535 1,825 3,491,970 - 3,493,795
Issuance of common stock
under option plans............. 201,072 2,011 646,168 - 648,179
Cumulative effect of
currency translation.......... - - - (26,105) (26,105)
Net income...................... - - - 8,350,846 8,350,846
---------- ----------- ----------- ----------- -----------
Balance at November 30, 1998.... 9,463,614 $94,636 $78,668,859 $11,375,329 $90,138,824
========== =========== =========== =========== ===========
The accompanying notes are an integral part of the
consolidated financial statements
26
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended November 30,
-----------------------------------------
1996 1997 1998
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 3,494,967 $ 4,523,490 $ 8,350,846
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of fixed assets 2,095,439 2,039,968 2,465,736
Amortization of intangible assets 1,064,255 1,313,456 1,944,983
Gain on sales of fixed assets (355,754) (220,004) (252,322)
Provision (benefit) for deferred income taxes (1,346,557) 799,650 1,027,357
Change in deferred revenue 1,455,013 565,997 1,689,014
Change in operating assets and liabilities:
Accounts receivable (545,421) (5,234,779) (356,679)
Notes receivable from contracts (1,052,838) (1,063,192) (1,953,370)
Prepaid expenses, deposits and other assets (665,084) (912,875) (278,066)
Accounts payable and accrued expenses 2,021,101 542,789 (1,040,084)
Deferred rent and other long-term liabilities (36,914) 1,082,296 (1,152,757)
----------- ------------ ------------
Net cash provided by operating activities 6,128,207 3,436,796 10,444,658
----------- ------------ ------------
Cash flows from investing activities:
Proceeds from sale of fixed assets 1,788,380 1,486,780 1,841,962
Purchases of fixed assets (3,091,353) (4,089,417) (4,473,830)
Partial redemption of investment - - 100,000
Acquisitions of chauffeured vehicle service companies (1,730,232) (8,396,017) (5,647,427)
----------- ------------ ------------
Net cash used in investing activities (3,033,205) (10,998,654) (8,179,295)
----------- ------------ ------------
Cash flow from financing activities:
Proceeds from sale of notes receivable from independent operators 733,793 - -
Principal payments under capital lease obligations (297,549) (237,359) (1,039,709)
Preferred stock dividends (900) - -
Payment of notes payable (5,976,357) (19,164,223) (22,122,879)
Proceeds from notes payable 3,857,568 2,704,162 -
Issuance of common stock 20,000 30,842,778 30,020,064
Payments under Recapitalization - (4,015,952) -
Common stock dividends (42,057) (101,857) -
Redemption of preferred stock (137,500) - -
----------- ------------ ------------
Net cash provided by (used in) financing activities (1,843,002) 10,027,549 6,857,476
----------- ------------ ------------
Net increase in cash and cash equivalents 1,252,000 2,465,691 9,122,839
Cash and cash equivalents at beginning of year 1,615,711 2,867,711 5,333,402
----------- ------------ ------------
Cash and cash equivalents at end of year $ 2,867,711 $ 5,333,402 $ 14,456,241
=========== ============ ============
The accompanying notes are an integral part of the
consolidated financial statements
27
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Background and organization
General
Carey International, Inc. (the "Company") is one of the world's largest
chauffeured vehicle service companies, providing services through a worldwide
network of owned and operated companies, licensees and affiliates serving 420
cities in 65 countries. The Company owns and operates service providers in the
form of wholly-owned subsidiaries in: Boston, Chicago, Indianapolis,
Jacksonville, London, Los Angeles, Miami, New York, Philadelphia, San
Francisco, Washington, D.C., and West Palm Beach. 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 includes affiliates in locations in which the
Company has neither owned and operated locations nor licensees. The Company
provides central reservations and billing services to such affiliates.
Acquisitions
The Company is engaged in a program of acquiring chauffeured vehicle
service businesses. Such acquisitions include unrelated chauffeured vehicle
service businesses, some of which may be in cities in which the Company has
owned and operated service providers, licensees operating under the Carey
trade name and trade mark and affiliates of the Company. In 1996, the
Company acquired a chauffeured vehicle service company in London, England.
In 1997, the Company acquired chauffeured vehicle service companies in
New York, Los Angeles, and Indianapolis. In 1998, the Company acquired
chauffeured vehicle service companies in South Florida, Boston and Chicago.
Reverse Stock Split
In connection with the Company's initial public offering ("IPO"), completed
June 2, 1997, the Company's Board of Directors authorized a one for 2.3255
reverse stock split of the outstanding shares of the Company's common stock.
All references to common stock, options, warrants and per share data have been
restated to give effect to the reverse stock split. On June 2, 1997, the
Company also effected a Recapitalization (the "Recapitalization"), which is
more fully described in Note 16.
2. Summary of significant accounting policies
Basis of presentation
The consolidated financial statements of Carey International, Inc. and
subsidiaries include the financial statements of the Company and its
subsidiaries. All significant intercompany balances and transactions have
been eliminated.
28
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
The Company considers all short-term investments with original maturities
of three months or less to be cash equivalents.
Notes receivable from contracts
An important component of the Company's operating strategy involves the
preferred use of non-employee independent operators chauffeuring their own
vehicles rather than employee chauffeurs operating Company-owned vehicles.
Each independent operator enters into an agreement with the Company to
provide 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 70% of revenues, as defined in
the agreement. Each new operator agrees to pay a one-time fee currently
ranging from $45,000 to $75,000 to the Company under the terms of the
independent operator agreement (See "Revenue recognition").
The Company typically receives a promissory note from the independent
operator as payment for the one-time fee under the terms of the Standard
Independent Operator Agreement (see Note 4) and records the note in notes
receivable from contracts. Prior to September 1996, the notes evidencing such
financing generally were sold on a non-recourse basis by the Company to third
party finance companies (see Note 10) in exchange for cash and promissory
notes. Since September 1996, the Company has ceased selling notes to third
parties. 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
29
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
10). The Company performs ongoing evaluations of each independent operator's
productivity and payment capacity and has utilized third-party financing to
reduce credit exposure.
Fixed assets
Furniture, equipment, vehicles and leasehold improvements are stated at
cost. Equipment under capital leases is stated at the lower of the present
value of minimum lease payments or the fair market value at the inception of
the lease. Depreciation on furniture, equipment, vehicles and leasehold
improvements is calculated on the straight-line method over the estimated
useful lives of the assets, generally three to five years. The buildings
owned by the Company are depreciated over 40 years on a straight-line basis.
Sales and retirements of fixed assets are recorded by removing the cost and
accumulated depreciation from the accounts. Gains or losses on sales and
retirements of property are reflected in results of operations.
The Company capitalizes software development costs relating to a
computerized system which includes applications for reservations, dispatch,
billing and accounting functions. Amortization of these costs occurs over
their estimated economic life of 5-7 years and commences upon the successful
deployment of the software.
Intangible assets
Effective September 1, 1991, the Company acquired the Carey name and
trademark and the contract rights to all royalty fee payments by various Carey
licensees for a purchase price of $7 million. These assets are being amortized
over 40 years.
The Company has acquired chauffeured vehicle service companies, all of
which have been accounted for as purchases except for Indy Connection. For
each business acquired which is a licensee of the Company, the excess of cost
over the fair market value of the net assets acquired is allocated to
franchise rights in the balance sheet. With respect to acquired businesses
which are not licensees of the Company, the excess of cost over the net assets
acquired is allocated to goodwill. Goodwill and franchise rights are
amortized over 30 years using the straight-line method. Such amortization is
included in selling, general and administrative expense in the statement of
operations. The Company evaluates the recoverability of its intangible assets
at least annually based on estimated undiscounted cash flows over the lesser
of the remaining amortization periods or calculated lives, giving
consideration to revenue expected to be realized. This determination is based
on an evaluation of such factors as the occurrence of a significant change in
the environment in which the business operates or the expected future net cash
flows (undiscounted and without interest). There have been no adjustments to
the carrying value of intangible assets resulting from this evaluation.
30
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 and affiliates - The Company charges an initial license
fee under its domestic license agreement and records the fee as revenue on
signing of the agreement. The Company also charges its domestic licensees
monthly franchise and marketing fees equal to stated percentages of monthly
revenues, as defined in the licensing agreement. Monthly fees to domestic
licensees are generally less than 10% of the licensee's monthly revenues. The
Company records such fees as revenues as they are charged to the licensees.
International licensees and the Company's domestic and international
affiliates historically have not paid fees to the Company, but have instead
given a discount on business referred to them through CIRS. Such discounts
reduce the amount of service invoices to the Company from such licensees and
affiliates for services provided to customers whose reservations have been
booked and invoiced centrally by the Company.
Independent operator fees - The Company enters into contracts with
independent operators ("Standard Independent Operator Agreements") to provide
chauffeured vehicle services exclusively to the Company's customers. When
independent operator agreements are executed, the Company defers revenue equal
to the amount of the one-time fees and recognizes the fees as revenue over the
terms of the contracts or over 20 years for perpetual contracts. Upon
termination of an independent operator agreement, the remaining deferred
revenue associated with the specific contract, less any amounts due from the
independent operator deemed uncollectible, is recognized as revenue.
Income taxes
The provision for income taxes includes income taxes currently payable and
the change during the year in the net deferred tax liabilities or assets.
Deferred income tax liabilities and assets are determined based on the
differences between the financial statement and tax bases of liabilities and
assets using enacted tax rates in effect for the year in which the differences
are expected to reverse. A valuation allowance is provided to reduce the net
deferred tax asset, if any, to a level which, more likely than not, will be
realized.
Net income per common share
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share ("FAS 128"), which establishes standards
for computing and presenting basic and diluted earnings per share. Previously
reported earnings per share data for the years ended November 30, 1996 and
1997 have been restated to conform with the provisions of FAS 128.
31
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Consistent with Staff Accounting Bulletin IB-2, the Company has
recalculated 1997 historical weighted average common shares outstanding and
net income per common share to give effect to the Recapitalization (see Note
16). 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. SFAS 123 allows companies to either account for stock-
based compensation under the fair value method of SFAS 123 or under the
provisions of Accounting Principles Board Option No. 25 ("APB 25"), Accounting
for Stock Issued to Employees. The Company has continued to apply the
provisions of APB 25 and has provided pro forma disclosure in the notes to the
financial statements. (See Note 14)
Foreign operations
The consolidated financial statements include foreign assets, liabilities
revenues and operating profit of $6.8 million, $3.9 million, $11.2 million
and $1.1 million, respectively, as of and for the year ended November 30,
1998. The consolidated financial statements include foreign assets,
liabilities, revenues and operating profits of $5.0 million, $3.6 million,
$7.2 million and $584,000, respectively, as of and for the year ended November
30, 1997. The net effects of foreign currency transactions reflected in
operations were immaterial. Assets and liabilities of the Company's foreign
operations are translated into United States dollars using exchange rates in
effect at the balance sheet date and results of operations items are
translated using the average exchange rate prevailing throughout the period.
32
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Fees from licensees
The total of all domestic license fees, franchises fees and marketing fees
earned in each of 1996, 1997 and 1998 was $2,180,540, $2,479,503 and
$1,776,541, respectively. Amounts due from licensees of $130,215 and $270,916
at November 30, 1997 and 1998, respectively, are included in accounts
receivable in the consolidated balance sheets of the Company.
4. Transactions with Independent Operators
The Company recorded approximately $2,371,000, $1,815,000 and $3,346,435 in
1996, 1997 and 1998, respectively, as deferred revenue relating to fees from
new agreements with independent operators. Amounts of deferred revenue
recognized as revenues in 1996, 1997 and 1998 amounted to approximately
$936,000, $923,000 and $1.2 million, respectively.
Notes receivable from contracts include approximately $8,605,000 and
$10,589,000 at November 30, 1997 and 1998, respectively, for amounts due from
independent operators and approximately $229,000 and $199,000 at November 30,
1997 and 1998, 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.
33
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Fixed assets
Fixed assets consist of the following:
November 30,
-------------------------
1997 1998
----------- -----------
Vehicles......................................... $ 5,586,060 $ 6,235,903
Software development costs....................... 2,658,257 4,850,973
Equipment........................................ 3,039,845 4,105,400
Furniture........................................ 1,057,644 1,426,578
Leasehold improvements........................... 469,999 696,166
Land and building................................ 1,582,406 1,585,064
----------- -----------
14,394,211 18,900,084
Less accumulated depreciation and amortization... 5,115,892 5,987,797
----------- -----------
Net fixed assets................................. $ 9,278,319 $12,912,287
=========== ===========
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,
-------------------------
1997 1998
----------- -----------
Equipment........................................ $ 731,720 $ 1,185,368
Vehicles......................................... 1,449,687 1,310,913
----------- -----------
2,181,407 2,496,281
Less accumulated amortization.................... 505,091 1,253,301
----------- -----------
$ 1,676,316 $ 1,242,980
=========== ===========
34
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Notes payable
Notes payable consist of the following:
November 30,
-----------------------
1997 1998
---------- ----------
Senior credit facility with three banks, dated August 15, 1997, consisting
of a secured revolving line of credit of $25.0 million (The Facility). The
Facility, which may be used for acquisitions and working capital, is
collateralized by the assets of the Company and its domestic operating
subsidiaries and by a pledge of the stock of its international subsidiary.
The Facility also provides availability for the issuance of letters of credit.
Loans made under the revolving line bear interest at the Company's
option at either the bank's prime lending rate or 2% above the LIBOR
rate. Commitment fees equal to 0.375% per annum are payable on the
unused portion of the revolving line of credit. On the second anniversary
of the Facility, outstanding balances under the Facility will convert to a
five-year term loan, which will bear interest either at a fixed rate (subject
to availability) or at a variable LIBOR or prime-based rate with
adjustments determined based on the Company's earnings.
(See Note 17)................................................................. $1,322,053 $ -
Note payable to bank, with an interest rate of LIBOR plus 1.95%
(9.575% at November 30, 1998) payable in quarterly principal and
interest installments of approximately $60,000................................ - 1,061,276
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................................................................ 287,641 869,043
Notes payable to bank, dated December 1, 1997, at the prime rate (8.0%
at November 30, 1998) plus 1.0% per annum and matures on or before
November 30, 1999. The notes are collateralized by vehicles.................. 928,174 206,519
Notes payable to bank, with interest at a fixed rate of 9.25% and various
payment terms. The notes require monthly principal and interest
payments of approximately $7,800. The notes are collateralized by
vehicles...................................................................... 429,911 313,980
Installment notes payable to sellers under acquisition agreements dated
various dates from September 30, 1993 to September 8, 1995. Interest
rates range from 7.5% to 8.5%. Interest is generally payable monthly.
Principal is payable in varying installments.................................. 406,873 315,206
Note payable to sellers due January 1, 1999, with an interest rate of
7.5%. The note was subsequently paid......................................... - 1,000,000
Note payable to seller dated May, 1998 with an interest rate of 8.0%.
The note is due April, 1999................................................... - 148,250
Note payable to bank, dated May 10, 1996, collateralized by the land and
building; 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%....................................................... 413,945 403,674
----------- ---------
Total notes payable........................................................... 3,788,597 4,317,948
35
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Less current installments........... 996,575 2,652,754
---------- ----------
Long-term portion................... $2,792,022 $1,665,194
========== ==========
Future annual principal payments on all notes payable at November 30, 1998
are as follows:
Year ending November 30:
1999........................ $2,652,754
2000........................ 428,942
2001........................ 801,116
2002........................ 296,416
2003........................ 138,720
----------
$4,317,948
==========
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. Additionally, these covenants restrict the
Company's capital expenditures and prohibit the payment of dividends on the
Company's common and preferred stock.
The carrying value of notes payable approximates the current value of the
notes payable at November 30, 1998. Interest paid during the years ended
November 30, 1996, 1997, and 1998 was approximately $1,883,000, $1,274,000 and
$556,000 respectively.
7. Leases
The Company has several noncancelable 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.
36
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Future minimum lease payments under noncancelable operating leases and the
present value of future minimum capital lease payments as of November 30, 1998
are as follows:
Capital Operating
Year ending November 30 leases leases
----------------------- ---------- -----------
1999.................................................................. $ 669,488 $2,646,561
2000.................................................................. 416,086 2,329,521
2001.................................................................. 234,961 1,925,302
2002.................................................................. 42,207 752,902
2003.................................................................. - 325,699
Thereafter............................................................ - 929,233
---------- -----------
Total minimum lease payments.......................................... 1,362,742 $8,909,218
===========
Less estimated executory costs........................................ 27,310
----------
1,333,432
Less amount representing interest (at rates ranging from 9% to 12%)... 156,778
----------
Present value of net minimum capital lease payments................... 1,176,654
Less current portion of obligations under capital leases.............. 384,511
----------
Obligations under capital leases, excluding current portion........... $ 792,143
==========
During the years ended November 30, 1996, 1997 and 1998 the Company
recognized $252,355, $278,218 and $310,223, respectively, of sublease rental
revenue under vehicle sublease arrangements with independent operators and
others.
During the years ended November 30, 1996, 1997 and 1998, the Company
entered into capital lease obligations of $810,993, $875,187 and $186,397,
respectively, related to the acquisition of vehicles and equipment.
Total rental expense for operating leases in 1996, 1997 and 1998 was
$2,250,335, $2,103,037 and $3,555,944, respectively.
8. Accounts payable and accrued expenses
Accounts payable and accrued expenses include the following:
November 30,
-------------------------
1997 1998
----------- -----------
Trade accounts payable................... $ 9,547,571 $10,800,691
Accrued expenses and other liabilities... 6,974,808 6,718,737
Gratuities payable....................... 531,702 567,079
----------- -----------
$17,054,081 $18,086,507
=========== ===========
37
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Income taxes
The provision for income taxes is composed of the following:
November 30,
--------------------------------------
1996 1997 1998
----------- ------------ -----------
Federal:
Current.................... $ 1,368,311 $ 1,967,356 $ 3,999,443
Deferred................... (1,197,799) 794,593 793,737
----------- ------------ -----------
170,512 2,761,949 4,793,180
----------- ------------ -----------
State and local:
Current.................... 128,296 253,896 558,193
Deferred................... (148,758) 5,057 233,620
----------- ------------ -----------
(20,462) 258,953 791,813
----------- ------------ -----------
Foreign
Current.................... 144,371 141,380 355,853
----------- ------------ -----------
Total income tax provision... $ 294,421 $ 3,162,282 $ 5,940,846
=========== ============ ===========
The Company's tax provision for the years ended November 30, 1996, 1997 and
1998, 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,
----------------------------
1996 1997 1998
-------- -------- --------
Statutory rate............................. 34.0% 34.0% 34.0%
State income tax, net of federal benefit... (1.5) 3.4 5.5
Goodwill amortization...................... .6 1.0 1.0
Non-deductible life insurance.............. .3 .4 -
Meals and entertainment expenses........... 1.1 .6 .7
Valuation allowance........................ (27.6) - -
Other...................................... .9 1.7 .4
-------- -------- --------
7.8% 41.1% 41.6%
======== ======== ========
38
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The source and tax effects of temporary differences are composed of the
following:
November 30,
--------------------------
1997 1998
----------- -----------
Allowances for bad debts.............. $ 208,000 $ -
Acquired net operating losses......... 1,500,000 2,662,000
Capital loss carryforward............. 74,000 74,000
Deferred revenue...................... 2,360,000 3,007,000
Deferred state taxes and other........ 259,000 131,000
----------- -----------
Gross deferred tax assets............. 4,401,000 5,874,000
Valuation allowance................... (1,574,000) (2,736,000)
----------- -----------
2,827,000 3,138,000
----------- -----------
Allowance for bad debts............... - (102,000)
Amortization of intangible assets..... (1,600,000) (2,035,000)
Software development costs............ (493,000) (1,279,000)
Other................................. (24,000) -
----------- -----------
Gross deferred tax liabilities........ (2,117,000) (3,416,000)
----------- -----------
Net deferred tax asset (liability).... $ 710,000 $( 278,000)
=========== ===========
In 1997, the Company acquired approximately $6.7 million net operating loss
carryforwards on which a full valuation allowance has been provided. As the
Company utilizes these net operating loss carryforwards and releases the
valuation allowance, the benefit will be offset against acquired goodwill. In
1997 and 1998, the Company utilized approximately $294,000 and $589,000 of the
acquired net operating loss carryforwards, respectively.
Income taxes paid during the years ended November 30, 1996, 1997 and 1998
amounted to approximately $616,000, $2,021,000, and $4,563,000, respectively.
10. Related-party transactions
The Company originally invested $850,000 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 unpaid balances of the promissory notes were $229,329 and
$198,986 at November 30, 1997 and 1998, respectively, and are included in
notes receivable from contracts. These promissory notes are due on demand
and, generally, monthly principal payments are received by the Company. These
notes generally bear interest at rates of 7% to 10%.
39
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $650,000. At April 30, 1998, the total assets
reported by the privately-held company were $10.8 million and stockholders'
equity was $1.3 million, revenues were $1.3 million and net income was
$87,000.
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
(aggregate cost of $812,500) per common share or market value, if higher.
11. Commitments and contingencies
The Company is from time to time a party to litigation arising in the
ordinary course of business. Management believes that no pending legal
proceeding will have a material adverse effect on the business, financial
condition or results of operations of the Company.
12. Acquisitions
In July and September of 1998, the Company acquired the stock of the
licensee of the Company in Chicago and the stock of certain companies and
certain assets and liabilities of other companies also located in the Chicago
metropolitan area. The Company is in the process of combining the operations
of these companies. The acquisition agreements allow for certain contingent
payments based on the acquired net worth of the companies.
In April 1998, the Company acquired certain assets and liabilities of a
chauffuered vehicle service company in Miami, Florida. The Company combined
the operations with its existing South Florida operations.
In March and April of 1998, the Company acquired the stock of two Boston
chauffeured vehicle service companies. The acquisition agreement of one of the
Boston companies provides for contingent consideration of up to $1,000,000 in
Company Common Stock based on a predetermined formula applied to the operating
performance of the acquired entity. The Company has combined the operations of
the two Boston companies with a third chauffeured vehicle service company
acquired in May 1998.
In December 1997, the Company acquired the stock of a chauffuered vehicle
service company in London, England. The Company combined the operations with
its existing London operations.
Effective October 31, 1997, in connection with a merger, the Company issued
721,783 shares of its common stock in exchange for all the outstanding common
stock of an Indiana company based on a conversion ratio of 1.008 shares (the
merger exchange ratio) of the Company's Common Stock for each share of the
Indiana company's common stock. The merger qualified as a tax-free
reorganization and has been accounted for as a pooling-of-interests.
40
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In October 1997, the Company acquired the stock of a Los Angeles
chauffeured vehicle service company. The Company has combined the acquired
operations with its existing Los Angeles operations.
In March 1997, the Company entered into an agreement to purchase the stock
of Manhattan International Limousine Network Ltd. and an affiliated company
(collectively, "Manhattan Limousine"). Manhattan Limousine is one of the
largest providers of chauffeured vehicle services in the New York metropolitan
area. The Company consummated the acquisition at the time of the IPO.
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:
41
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 30,
----------------------------------------
1996 1997 1998
----------- ------------ ------------
Net assets purchased
Receivables and other assets............................ $ 632,554 $ 324,964 $ 1,678,470
Notes from contracts.................................... - 6,599,459 -
Fixed assets............................................ 928,377 1,800,441 3,277,300
Franchise rights........................................ 89,243 - 6,087,264
Goodwill................................................ 447,269 24,480,299 23,631,696
Accounts payable and accrued expenses................... (367,211) (5,796,692) (2,267,868)
Deferred revenue........................................ - (6,648,960) -
----------- ------------ ------------
Fair value of assets acquired........................... $ 1,730,232 $ 20,759,511 $ 32,406,862
=========== ============ ============
Consideration:
Cash (exclusive of $223,695, $274,855 and $0 cash
acquired in 1996, 1997 and 1998, respectively)......... $ 1,730,232 $ 8,396,017 $ 5,647,427
Capital leases assumed related to vehicle acquisitions.. - 161,549 613,410
Notes assumed related to vehicle acquisitions........... - 3,061,945 2,652,230
Uncollateralized promissory notes issued to sellers..... - 5,740,000 20,000,000
Common stock............................................ - 3,400,000 3,493,795
----------- ------------ ------------
Total consideration.................................. $ 1,730,232 $ 20,759,511 $ 32,406,862
=========== ============ ============
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 $291,755, $610,872
and $296,589 for the years ended November 30, 1996, 1997 and 1998,
respectively, as contingent consideration which is reflected in the table
above.
The unaudited pro forma summary consolidated results of operations assuming
the acquisitions accounted for as purchases had occurred for the purposes of
the 1997 summary at the beginning of fiscal 1997, and for the purposes of the
1998 summary at the beginning of fiscal 1998, are as follows:
42
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
November 30,
----------------------------
1997 1998
------------ ------------
Revenue, net........................................ $ 97,870,000 $144,093,000
Cost of revenue..................................... (64,927,000) (96,189,000)
Other expense, net.................................. (24,825,000) (33,475,000)
Provision for income taxes.......................... (3,348,000) (5,998,000)
------------ ------------
Net income.......................................... $ 4,770,000 $ 8,431,000
============ ============
Pro forma net income per common stock share - basic. $ 1.02 $ 0.97
============ ============
Pro forma net income per common share - diluted..... $ 0.78 $ 0.92
============ ============
Pro forma weighted average common shares
outstanding - basic................................. 4,674,217 8,671,026
============ ============
Pro forma weighted average common shares
outstanding - diluted............................... 6,305,527 9,130,419
============ ============
13. 401(k) Plan
The Company sponsors a defined contribution plan established pursuant to
Section 401(k) of the Internal Revenue Code for the benefit of employees of
the Company. The Company made $60,162 and $113,073 in contributions in 1997
and 1998, respectively.
14. Stock option plans
The Company currently maintains the 1987 Stock Option Plan (the "1987
Plan") and the 1992 Stock Option Plan (the "1992 Plan"), both of which provide
for the award of incentive and non-statutory stock options by the Company. The
Company also maintains the 1997 Equity Incentive Plan (the "1997 Plan"), which
provides for the award of up to 1,550,000 shares of Common Stock in the form
of incentive stock options, non-statutory stock options, stock appreciation
rights, restricted stock, performance stock units and other stock units which
are valued by reference to the value of the Common Stock. The Company also
maintains a non-qualified stock option plan (the "1998 Plan") which provides
for the issuance of up to 500,000 shares of Common Stock in the form of
non-statutory stock options. The 1987 Plan, 1992 Plan, 1997 Plan and the 1998
Plan are hereinafter referred to collectively as the "Equity Plans."
Of the options granted in 1998, options to purchase 747,000 shares are
performance options (the "Performance Options") and vest
43
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(i) after the price of Common Stock on the Nasdaq or any exchange on which it
may be traded exceeds for 30 consecutive trading days the following benchmark
prices; $25, $30, $35, $40, $45 and $50 or, if earlier, (ii) on April 29,
2006. Each time one of the price benchmarks is exceeded, the Performace
Options vest with respect to one-sixth of the shares for which they were
originally exercisable.
As of November 30, 1998, options were outstanding to purchase an aggregate
of 1,895,684 shares of Common Stock under the Equity Plans, and approximately
450,000 shares of Common Stock are authorized but have not yet been granted
under awards made pursuant to such plans (including 429,500 shares pursuant to
the 1998 Plan).
Officers, key employees, non-employee directors of and consultants to the
Company are eligible to participate in the Equity Plans, except for the 1998
Plan in which directors and officers are not eligible to particiapte. The
Equity Plans are administered by the Compensation Committee of the Board of
Directors. Among other things, the Compensation Committee determines, subject
to the provisions of said plans, who shall receive awards, the types of awards
to be made, and the terms and conditions of each award. Options that are
intended to qualify as incentive stock options under the Equity Plans may be
exercisable for not more than 10 years after the date the option is awarded
and may not be granted at an exercise price less than the fair market value of
the shares of Common Stock at the time the option is granted (and, in the case
of stock options granted to holders of more than 10% of the Common Stock, may
not be granted at an exercise price less than 110% of the fair market value of
the shares of Common Stock at the time the options are granted). The
Compensation Committee may at any time, including in connection with a change
in control of the Company, accelerate the exercisability of all or any portion
of any option issued under the Equity Plans.
44
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock activity under the stock option plans is as follows:
1987 Plan 1992 Plan 1997 Plan 1998 Plan
------------------------ ----------------------- ------------------------- --------------------
Option price Option price Option price Option price
Shares per Share Shares per Share Shares per Share Shares per Share
-------- -------------- -------- ------------ --------- -------------- ------ -------------
Balance, November 30, 1995... 30,961 $ 1.44 343,935 $ 4.65
Granted...................... 38,701 $ 4.65 43,578 $ 4.65
Forfeited.................... - - (3,011) $ 4.65
-------- -------------- -------- ------------
Balance, November 30, 1996... 69,662 $ 1.44 - $4.65 384,502 $ 4.65
Granted...................... - - - - 505,389 $ 10.50-$15.00
Exercised.................... (12,042) $ 1.44 (3,167) $ 4.65 - -
-------- -------------- -------- ------------ --------- --------------
Balance, November 30, 1997... 57,620 $ 1.44 - $4.65 381,335 $ 4.65 505,389 $ 10.50-$15.00
Granted...................... - - - - 1,024,104 $ 13.75-$28.50 70,500 $13.75-$13.90
Exercised.................... (31,520) $ 1.44 - $4.65 (90,078) $ 4.65 (9,166) $ 10.50 - -
Forfeited.................... - - (11,500) $ 4.65 (1,000) $ 10.50 - -
-------- -------------- -------- ------------ --------- -------------- ------ -------------
Balance, November 30, 1998... 26,100 $ 4.65 279,757 $ 4.65 1,519,327 $ 10.50-$28.50 70,500 $13.75-$13.90
======== ============== ======== ============ ========= ============== ====== =============
Vested and exercisable at
November 30, 1998............ 26,100 $ 4.65 267,142 $ 4.65 545,005 $ 10.50 - -
======== ============== ======== ============ ========= ============== ====== =============
45
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Information with respect to stock options outstanding at November 30, 1998
is as follows:
----------------------------------------
Weighted
average
Number remaining
Price/Range of options contractual
life
========================================
$ 4.65 305,857 4.3
$ 10.50 415,973 8.6
$13.75-14.63 108,000 9.7
$ 15.00 1,036,100 9.4
$16.50-28.50 29,754 9.5
----------------------------------------
1,895,684 8.4
========================================
Information with respect to stock options exercisable at November 30, 1998
is as follows:
-------------------------------------------------------
Weighted
average
Year of option Number of exercise
expiration options price Price range
=======================================================
2002 202,203 $ 4.65 $ 4.65
2003 19,165 $ 4.65 $ 4.65
2004 4,085 $ 4.65 $ 4.65
2005 12,900 $ 4.65 $ 4.65
2006 63,904 $ 4.65 $ 4.65
2007 512,173 $11.25 $10.50 - $15.00
2008 1,081,254 $15.06 $13.75 - $28.50
-------------------------------------------------------
All Years 1,895,684 $12.37 $ 4.65 - $28.50
=======================================================
46
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In May 1996, the options granted under the 1992 Plan and a warrant to
purchase 86,003 shares of common stock were repriced to $4.65. In 1998, the
Performance Options and certain 1997 options were repriced to $15.00, the
effect of which is included in the tables above. The options and warrant were
repriced at the determined fair market value as of the date of repricing.
The Company also has a Customer Service Stock Bonus Plan (the "Bonus Plan")
for the purpose of the Company to attract and retain employees and independent
operators of the Company who are in a position to make important contributions
to the success of the Company. The total number of shares authorized under the
Bonus Plan is 50,000. As of November 30, 1998, 630 shares of Common Stock had
been issued under the Bonus Plan.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation costs for the
Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards in 1996, 1997, and 1998 under those plans
consistent with the recognition method of FASB Statement No. 123, the
Company's net income and income per share would have been reduced to the pro
forma amounts presented below:
(Dollars in thousands, except per share amounts)
1996 1997 1998
-------------------------
Net income........................... As reported $3,495 $4,523 $8,351
Pro forma 3,482 4,320 6,189
Net income per common share-basic.... As reported $ 2.57 $ 1.00 $ 0.97
Pro forma 2.56 0.96 0.72
Net income per common share-diluted.. As reported $ 1.01 $ 0.77 $ 0.92
Pro forma 1.01 0.73 0.68
The fair value of each option is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions:
1996 1997 1998
------ ------ ------
Expected life (years).......... 6 6 4.6
Interest rate.................. 6.63% 6.66% 5.30%
Volatility..................... 40.0 40.0 44.2
Dividend yield................. 0.00% 0.00% 0.00%
Weighted average fair value.... $2.31 $5.56 $9.43
47
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Net income per common share
Basic net income per common share has been computed by dividing net income
by the weighted average number of common shares outstanding during the period.
Diluted net income per common share has been computed by dividing net income,
adjusted for the effect of any dilutive securities, by the weighted average
number of common shares outstanding plus an assumed increase in common shares
outstanding for dilutive securities. Dilutive securities consist of
convertible securities which are dilutive, preferred stock, and options and
warrants to acquire common stock for a specified price and for which the
dilutive effect is measured using the treasury method.
November 30,
--------------------------------------
1996 1997 1998
----------- ------------ -----------
Net income.................................................. $3,494,967 $4,523,490 $8,350,846
Preferred stock dividends................................... (900) - -
----------- ------------ -----------
Net income available to common stockholders................. 3,494,067 4,523,490 8,350,846
Effect of conversion of subordinated debt................... 352,872 176,436 -
----------- ------------ -----------
Net income available to common stockholders plus effect of
conversions................................................. $3,846,939 $4,699,926 $8,350,846
=========== ============ ===========
Weighted average common shares outstanding-basic............ 1,359,126 4,506,108 8,634,239
Dilutive effect of:
Stock options.......................................... 21,373 288,078 372,652
Warrants............................................... - 73,550 86,741
Convertible preferred stock:
Series B preferred stock.......................... 663,761 334,609 -
Series F preferred stock.......................... 135,025 68,067 -
Series G preferred stock.......................... 673,638 339,588 -
Effect of conversion of subordinated debt.............. 941,368 527,418 -
----------- ------------ -----------
Weighted average common shares outstanding-diluted.......... 3,794,291 6,137,418 9,093,632
=========== ============ ===========
Net income per common share-basic........................... $2.57 $1.00 $ 0.97
=========== ============ ===========
Net income per common share-diluted......................... $1.01 $0.77 $ 0.92
=========== ============ ===========
48
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Recapitalization
On February 25, 1997, pursuant to an agreement reached in May 1996, the
Board of Directors authorized a recapitalization plan ("Recapitalization"),
which was implemented at the time of the IPO. Under the Recapitalization, the
$2,000,000 subordinated convertible note dated September 1, 1991 and the
$3,780,000 subordinated note dated July 30, 1992 were converted or exchanged
for 1,046,559 shares of Common Stock and payment of $912,452. The Series A
preferred stock was converted into 86,003 shares of Common Stock and redeemed
in part for $2,103,500. All of the Series F preferred stock and 3,000 shares
of Series G preferred stock was redeemed for an aggregate of $1,000,000. The
remaining preferred stock was converted into 1,427,509 shares of Common Stock.
As a result of the Recapitalization, preferred stock which had a liquidation
preference of $11,154,900 and subordinated debt with a principal amount of
$5,780,000 was converted in part into 2,560,071 shares of Common Stock and
repaid or redeemed in part for $4,015,952 in cash. All of the cash amounts
were paid out of the proceeds of the IPO.
17. Debt refinancing
In January 1999, the Company entered into a new three-year Revolving
Credit Facility consisting of an unsecured revolving line of credit of
$75.0 million (the "Credit Facility"). Loans made under the New Credit
Facility will bear interest at the Company's option at either the banks' prime
lending rate or at a varying rate above the LIBOR rate, depending on the ratio
of the Company's debt to equity. Committment fees equal to 0.375% per annum
are payable on the unused portion of the Credit Facility. The terms of the
Credit Facility (i) prohibit the payment of dividends by the Company,
(ii) with certain exceptions, prevent the Company from incurring on assuming
other indebtedness that is not subordinated to the borrowings under the Credit
Facility and (iii) require the Company to comply with certain financial
covenants.
49
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
CAREY INTERNATIONAL, INC. AND SUBSIDIARIES
Balance Charged Balance Balance
at to acquired at
Beginning Costs and as part of Deductions End of
Description of Period Expense acquisition Write-Offs Period
----------- ----------- --------- ----------- ---------- ----------
Year ended November 30, 1998
Reserve and allowance from asset
accounts:
Allowance for doubtful accounts................. $639,405 $727,848 - $(631,024) $736,229
Year ended November 30, 1997
Reserve and allowance from asset
accounts:
Allowance for doubtful accounts................. $535,408 $425,157 $188,636 $(509,796) $639,405
Year ended November 30, 1996
Reserve and allowance from asset
accounts:
Allowance for doubtful accounts................. $293,796 $508,387 - $(266,775) $535,408
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no events to report under this item.
50
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Directors and Executive Officers
The following table sets forth certain information pertaining to the
Company's directors and executive officers.
Name Age Current Position
---- --- ----------------
Vincent A. Wolfington...... 58 Chairman of the Board and Chief Executive
Officer
Don R. Dailey.............. 61 President and Director
Richard A. Anderson, Jr.... 53 Executive Vice President - Sales and Marketing
David H. Haedicke.......... 52 Executive Vice President and Chief Financial
Officer
Guy C. Thomas.............. 60 Executive Vice President - Operations
Devin J. Murphy............ 32 Senior Vice President - Operations
Michael P. O'Callaghan..... 33 Senior Vice President and Director of
Acquisitions
Sally A. Snead............. 40 Senior Vice President - Information Systems
John C. Wintle............. 52 Senior Vice President - Europe
Paul A. Sandt.............. 38 Vice President and Chief Accounting Officer
Robert W. Cox.............. 61 Director
Dennis I. Meyer............ 63 Director
Nicholas J. St. George..... 60 Director
Joseph V. Vittoria......... 63 Director
Set forth below is a description of the backgrounds of each of the
directors and executive officers of the Company.
Vincent A. Wolfington, a co-founder of the Company, has served as Chairman
of the Board of Directors and Chief Executive Officer since 1979. For over 25
years, Mr. Wolfington has been involved in the limousine industry and
directly associated with the Carey system of licensees and affiliates. Mr.
Wolfington has served as a consultant to the National Academy of Sciences
Transportation Research Board, President of the National Para-transit
Association and a member of the International Limousine Association. Mr.
Wolfington currently is a member of the Executive
51
Committee of the World Travel and Tourism Council.
Don R. Dailey, a co-founder of the Company, has served as President and a
director of the Company since 1979. Mr. Dailey has been directly involved in
the limousine business for over 30 years. Mr. Dailey serves on a number of
boards and committees related to the travel industry, including the National
Business Travel Association, the International Business Travel Association,
the Association of Corporate Travel Executives, the National Limousine
Association and the International Limousine Association (as its past president
and member of its executive committee.)
Richard A. Anderson, Jr. has served as Executive Vice President -- Sales
and Marketing since July 1998. Mr. Anderson previously served as Senior Vice
President of the Company from December 1988 to July 1998 and was Chief
Operating Officer of Carey Limousine NY, Inc., a subsidiary of the Company
from December 1988 until August 1997. Mr. Anderson was Chairman of the New
York Taxi and Limousine Commission's Limousine Advisory Board, a former board
member of the Association of Corporate Travel Executives, and a member of the
National Business Travel Association and Meeting Planners International.
David H. Haedicke has served as Executive Vice President and Chief
Financial Officer of the Company since October 1996. From August 1996 to
October 1996, he was Senior Vice President and Chief Financial Officer of
Infotechnology, Inc., Hadron, Inc. and Comtex Scientific Corporation, an
affiliated group of companies engaged in systems management and software
development. From September 1993 to May 1996, he was Chief Financial Officer
of Walcoff & Associates, Inc., a communications and information management
firm. From June 1991 to September 1993, he was Chief Financial Officer and
Vice President of Xsirus, Inc., a high technology research and development
company. Mr. Haedicke was a partner at Ernst & Young L.L.P. from 1985 to June
1991 and was an employee at that firm from 1973 to 1985. Mr. Haedicke is a
Certified Public Accountant.
Guy C. Thomas has served as Executive Vice President - Operations of the
Company since 1987. Mr. Thomas has served on a number of boards and committees
related to the travel industry, including the National Business Travel
Association, the Greater Washington Area Passenger Traffic Association, the
American Society of Association Executives, Meeting Planners International,
the Association of Corporate Travel Executives, the National Limousine
Association and the International Taxicab and Livery Association.
52
Devin J. Murphy has served as the Company's Senior Vice President-
Operations since May 1998. Previously, from April 1997 to May 1998, Mr. Murphy
served as Senior Vice President and Chief Development Officer, and from May
1996 to April 1997 he served as Vice President - Corporate Development. From
1988 to 1994, Mr. Murphy held sales and marketing positions at several high-
tech companies.
Michael P. O'Callaghan has served as a Senior Vice President and Director
of Acquisitions of the Company since June 1997. From September 1995 through
June 1996, Mr. O'Callaghan was an Associate Special Counsel to the United
States Senate Special Committee Investigation of Whitewater Development
Corporation and Other Related Matters, and from September 1992 through
September 1995 he was a staff attorney with the Enforcement Division of the
United States Securities and Exchange Commission. Mr. O'Callaghan has a Juris
Doctor Degree.
Sally A. Snead has served as the Company's Senior Vice President -
Information Systems since June 1993. From January 1987 to June 1993, she was
Executive Vice President and General Manager of Carey Limousine L.A., Inc. She
is a member of Executive Women International, the National Business Travel
Association, the Association of Corporate Travel Executives and the National
Limousine Association.
John C. Wintle has served as the Company's Senior Vice President - Europe
since May 1996 and as Executive Vice President and Managing Director of Carey
U.K. Ltd., a subsidiary of the Company, since March 1996. From 1982 to
February 1996, Mr. Wintle served Savoy Hotel PLC ("Savoy") and its affiliates,
including Camelot Barthropp Ltd. ("Camelot"), in various capacities. From
March 1993 to February 1996, Mr. Wintle was Executive Vice Chairman of
Camelot, which was acquired by Carey U.K. Ltd. in February 1996. Previously,
from 1989 to 1993, Mr. Wintle was General Manager, Restaurant Division, of
several entities affiliated with Savoy. From 1982 to 1989, Mr. Wintle was a
Group Financial Controller at Savoy.
Paul A. Sandt has served as a Vice President and Chief Accounting Officer
of the Company since October 1994. From May 1992 through September 1994, Mr.
Sandt was a staff member with the Securities and Exchange Commission, and from
December 1990 through May 1992, he was Director of Finance of The Kline
Automotive Group. From 1984 through 1990, he was employed by Coopers & Lybrand
L.L.P. Mr. Sandt is a Certified Public Accountant.
Robert W. Cox has served as a director of the Company since 1995. From 1969
until his retirement in 1994, Mr. Cox was a partner in the New York and
Chicago offices of the law firm Baker & McKenzie. From 1984 to 1992, Mr. Cox
was Chairman of the Executive Committee and Managing Partner of the firm, and
from 1993 to 1994, Mr. Cox was Chairman of the Policy Committee. Mr. Cox
currently is a director of Hon Industries, Inc. and Homebase, Inc.
Dennis I. Meyer has served as a director of the Company since June 1998.
Mr. Meyer has been a partner in the law firm of Baker & McKenzie since 1965.
Mr. Myer has previously served as Chairman of the Executive Committee and
Managing Partner of Baker & McKenzie and currently serves as the managing
partner of the North American offices of the firm. Mr. Meyer also is a
founding partner of Potomac Investment Associates, a global real estate
developer specializing in golf-oriented residential developments. Mr. Meyer
serves as a director of Oakwood Homes Corporation as well as United Financial
Banking Companies, Inc., Jordan Kitt's Music, Inc. and Daily Express, Inc.
Nicholas J. St. George has served as a director of the Company since June
1997. Mr. St. George has been Chairman and Chief Executive Officer of Oakwood
Homes Corporation ("Oakwood"), a manufacturer and retailer of manufactured
homes, since February 1979. Mr. St. George serves as a director of Oakwood,
and is also a director of American Bankers Insurance Group, Inc. and Legg
Mason, Inc.
Joseph V. Vittoria has served as a director of the Company since June 1998.
Mr. Vittoria has been Chairman and Chief Executive Officer of Travel Services
International, Inc. ("Travel Services") since Travel Services completed its
initial public offering in July 1997. From September 1987 to February 1997,
Mr. Vittoria was the Chairman and Chief Executive Officer of Avis, Inc.
("Avis"), a multinational auto rental company where he was employed for over
26 years. Mr. Vittoria was responsible for the purchase of Avis by its
employees in 1987 by creating one of the world's largest
53
Employee Stock Ownership Plans. He is a founding member of the World Travel
and Tourism Council, a global organization of the chief executive officers of
companies engaged in all sectors of the travel and tourism industry. Mr.
Vittoria serves as a director of CD Radio, Inc., Transmedia Europe, Transmedia
Asia and various non-profit associations.
Section 16(a) Beneficial Ownership Reporting Compliance
Mr. O'Callaghan filed a Form 3 with the Securities and Exchange
Commission on March 6, 1998 in connection with his appointment as an executive
officer of the Company on February 13, 1998. Ms. Snead filed a Form 4 with the
Securities and Exchange Commission on March 18, 1998 for shares purchased
pursuant to the exercise of a stock option on January 29, 1998. Messrs. Cox,
Meyer, St. George and Vittoria each intend to file a Form 4 with the
Securities and Exchange Commission in March for stock options granted on
June 3, 1998.
54
ITEM 12. Executive Compensation
Director Compensation
Members of the Board of Directors who also serve as officers of the Company
do not receive compensation for serving on the Board. Each other member of the
Board receives an annual retainer of $20,000 for serving on the Board, plus a
fee of $1,000 for each Board of Directors' meeting attended and $500 for each
committee meeting attended, except that only one fee is paid in the event that
more than one such meeting is held on a single day. All directors receive
reimbursement of reasonable expenses incurred in attending Board and committee
meetings and otherwise carrying out their duties.
At his or her election, a director may defer all or a portion of the fees
paid to him or her by the Company. If such an election is made, the deferred
fees are credited to the director's account at the end of each fiscal quarter
in the form of phantom shares of Common Stock. Each phantom share is equal to
one share of Common Stock, and the total number of phantom shares credited to
the account during any fiscal quarter is determined based on the average
closing price of the Common Stock on the Nasdaq National Market during the
last 20 trading days of such fiscal quarter. The account reaches maturity on
the last day of the Company's fiscal year in which the director ceases to be a
member of the Board of Directors. Upon maturity, payment will be made at the
director's election either in cash, shares of Common Stock equal to the number
of phantom shares in the director's account, or a combination of the two. If
all or a portion of the payment is made in cash, the value of the phantom
shares at maturity is determined based on the average closing price of the
Common Stock on the Nasdaq National Market during the last 20 trading days of
the Company's fiscal quarter in which maturity occurs. To date, elections to
defer all on a portion of fees have been made by Messrs. Cox, Meyer, St.
George and Vittoria.
The Company maintains the Stock Plan for Non-Employee Directors
(the "Directors' Plan"). A maximum of 100,000 shares of Common Stock may be
delivered upon the exercise of options granted under the Directors' Plan and
elections to receive shares in lieu of cash compensation. Only directors of
the Company who are not employees of the Company or any of its subsidiaries
(the "Non-Employee Directors") are eligible to participate in the Directors'
Plan. While grants of stock options under the Directors' Plan are automatic
and non-discretionary, all questions of interpretation of the Directors' Plan
are determined by the Board of Directors.
On the date of each annual meeting of stockholders, each Non-Employee
Director continuing in office will be granted an option pursuant to the
Directors' Plan covering 5,000 shares. Any newly elected Non-Employee Director
will be granted an option pursuant to the Directors' Plan covering 5,000
shares on the date of his or her election (whether such election occurs at an
annual meeting or otherwise). The option exercise price for all options
granted under the Directors' Plan is the closing price of a share of the
Common Stock as reported on the Nasdaq National Market on the date the option
is granted. All options granted under the Directors' Plan become fully
exercisable six months after the date of grant. Unless sooner terminated
following the death, disability or termination of service of a director,
options granted under the Directors' Plan will remain exercisable until the
fifth anniversary of the date of grant. In addition, upon certain transactions
involving a change of control or the dissolution or liquidation of the
Company, all options held by Non-Employee Directors will terminate; provided,
however, that for a period of 20 days prior to the effective date of any such
55
transaction, dissolution or liquidation, all options outstanding under the
Directors' Plan that are not otherwise exercisable shall immediately vest and
become exercisable.
Under the Directors' Plan, a Non-Employee Director may elect to be paid
all or a portion of his or her annual retainer in shares of Common Stock. Any
such election must be made in writing at least 30 days prior to the date the
annual retainer would be paid by the Company. The number of shares to be
delivered to a Non-Employee Director upon such election is determined by
dividing the amount of the annual retainer to be received in shares of Common
Stock by the closing price of a share of Common Stock as reported on the
Nasdaq National Market on the date the annual retainer is to be paid. The
Board of Directors may at any time or times amend the Directors' Plan for any
purpose which at the time may be permitted by law.
In December 1998 the Company granted options to purchase 4,000 shares of
Common Stock at an exercise price of $15.00 per share to its four non-employee
directors, Messrs. Cox, Meyer, St. George and Vittoria, in replacement of
options granted in June 1998 to the non-employee directors to purchase 5,000
shares at an exercise price of $22.125. All such options vest six months after
the date of grant.
Executive Compensation
Summary Compensation Table
The following table contains a summary of the compensation paid or
accrued during the fiscal years ended November 30, 1996, 1997 and 1998 to the
Chief Executive Officer of the Company and the four other most highly
compensated executive officers (the "Named Executive Officers").
Annual Compensation
----------------------------------------- Long-Term Compensation
Name and Principal Other Annual Awards-Shares All Other
Position Year Salary Bonus Compensation Underlying Options Compensation
- ---------------------------- ---- -------- ------- ------------ ---------------------- --------------
Vincent A. Wolfington....... 1998 $231,620 $ - 260,000(1) $41,774 (2)
Chairman and Chief 1997 231,620 85,000 100,000 12,000
Executive Officer 1996 231,620 20,000 - 57,000 (3)
Don R. Dailey............. 1998 205,000 - 260,000(1) 35,150 (2)
President and Director 1997 205,001 70,000 100,000 12,000
1996 205,001 20,000 - 57,000 (3)
David H. Haedicke......... 1998 135,000 - 120,000 __
Executive Vice 1997 135,000 45,000 30,000 __
President and Chief 1996 20,510(4) 12,500 25,800 __
Financial Officer
Guy C. Thomas............. 1998 115,000 - $ 13,020 (5) 84,000(1) 10,995 (2)
Executive Vice 1997 115,000 25,000 13,020 (5) 15,000 9,900
President-Operations 1996 115,000 10,000 13,020 (5) - 9,900
Richard A. Anderson 1998 115,570 - 15,037 (6) 6,000 6,005 (2)
Executive Vice President 1997 91,000 18,950 11,200 (6) 10,000 8,219
Sales and Marketing 1996 91,000 12,000 11,200 (6) - 9,513
- ----------------
(1) Includes options granted in December 1998 to Messrs. Wolfington, Dailey
and Thomas to purchase 80,000, 80,000 and 24,000 shares of Common Stock,
respectively, at at an exercise price of $15.00 per share, and excludes
options granted in April 1998 to Messrs. Wolfington, Dailey and Thomas to
purchase 100,000, 100,000 and 30,000 shares, respectively, at an exercise
price of $22.125 per share, which April options were replaced by the
December options.
(2) Represents the premium payment on life insurance policies for beneficiaries
designated by the Named Executive Officers.
(3) Includes $45,000 paid for providing personal guarantees on behalf of the
Company.
(4) Mr. Haedicke commenced his employment with the Company on October 7, 1996.
(5) Represents a car allowance.
(6) Includes a car allowance of $11,400 and a club membership of $3,637 for 1998
and a car allowance of $6,600 and a club membership of $4,600 for 1997 and
1996.
56
Option Grants in Last Fiscal Year
The following table sets forth certain information regarding options
granted during the fiscal year ended November 30, 1998 by the Company to each of
the Named Executive Officers:
Potential Realizable Value
at Assumed Rates of Stock
Price Appreciation For
Individual Grants Option Term
------------------------------------------------------ ------------------------
Number of
Shares % of Total
Underlying Options Granted Exercise
Options to Employees Price Expiration
Name Granted in Fiscal Year ($/Share) Date 5% 10%
- ----------------------- ------------- -------------- -------- ---------- ---------- ----------
Vincent A. Wolfington.. 180,000(1) 16.4% $ 15.00 4/29/08 $1,698,015 $4,303,105
80,000(2) 7.3% 15.00 4/29/08 754,674 1,912,491
Don R. Dailey.......... 180,000(1) 16.4% 15.00 4/29/08 1,698,015 4,303,105
80,000(2) 7.3% 15.00 4/29/08 754,674 1,912,491
David H. Haedicke...... 120,000(1) 11.0% 15.00 4/29/08 1,132,010 2,868,736
Guy C. Thomas.......... 60,000(1) 5.5% 15.00 4/29/08 566,005 1,434,368
24,000(2) 2.2% 15.00 4/29/08 226,402 573,747
Richard A. Anderson,Jr. 6,000(1) .5% 15.00 4/29/08 56,601 143,437
(1) Represents performance-based stock options ("Performance Stock Options")
granted to certain executive officers in April 1998 under the 1997 Equity
Incentive Plan. The Performance Stock Options become exercisable (i) with
respect to one-sixth of the underlying shares of Common Stock after the
price of the Common Stock as quoted on the Nasdaq National Market or any
exchange on which it may then be traded exceeds for 30 consecutive days the
following benchmark prices: $25, $30, $35, $40, $45 and $50 or (ii) with
respect to all of the underlying shares of Common Stock on April 29, 2006.
On October 5, 1998, the Performance Stock Options were repriced from
$22.125 per share to $15.00 per share.
(2) Represents options granted in December 1998 to Messrs. Wolfington, Dailey
and Thomas (which were immediately exercisable) to purchase 80,000, 80,000
and 24,000 shares of Common Stock, respectively, at an exercise price of
$15.00 per share, and excludes options granted in April 1998 to Messrs.
Wolfington, Dailey and Thomas (which became exercisable in May 1998 upon
the closing of the Company's 1998 public offering) to purchase 100,000,
100,000 and 30,000 shares, respectively, at an exercise price of $22.125
per share, which April options were replaced by the December options.
57
Aggregated Options Exercised in the Last Fiscal Year and Year-End Stock Option
Values
The following table sets forth certain information regarding the aggregate
number and dollar value of all options exercised by each of the Named
Executive Officers and the aggregate number and value of all unexercised
options held by each of the Named Executive Officers during the fiscal year
ended November 30, 1998.
Number of Shares Value of Unexercised
Underlying Unexercised Options In-the-Money Options at
at November 30, 1998 November 30, 1998(2)
------------------------------- --------------------------
Shares Number of Number of
Acquired Value Exercisable Unexercisable Exercisable Unexercisable
Name On Exercise Realized(1) Shares Shares Value Value
- ---- ----------- ----------- ----------- ------------- ----------- -------------
Vincent A. Wolfington - $ - 285,706(3) 180,000 $ 2,115,469 $ 360,000
Don R. Dailey 49,999 979,980 235,707(3) 180,000 1,497,981 360,000
David H. Haedicke - - 35,800 140,000 383,630 370,000
Guy C. Thomas - - 61,018(3) 70,000 475,935 185,000
Richard A. Anderson,Jr. 8,600 129,516 11,052 19,334 82,498 68,670
____________
(1) Value is calculated based upon the difference between the option exercise
price and the closing market price of the Company's Common Stock on the
Nasdaq National Market on the date of exercise.
(2) Value of unexercised in-the-money options based upon $17.00, the closing
price of the Company's Common Stock on the Nasdaq National Market on
November 30, 1998.
(3) Includes options granted in December 1998 to Messrs. Wolfington, Dailey and
Thomas to purchase 80,000, 80,000 and 24,000 shares of Common Stock,
respectively, at an exercise price of $15.00 per share, and excludes
options granted in April 1998 to Messrs. Wolfington, Dailey and Thomas to
purchase 100,000, 100,000 and 30,000 shares, respectively, at an exercise
price of $22.125 per share, which April options were replaced by the
December options.
Equity Incentive Plans
The Company currently maintains the 1987 Stock Option Plan (the "1987
Plan") and the 1992 Stock Option Plan (the "1992 Plan"), under which the
Company has awarded incentive and non-statutory stock options. The Company
also maintains the 1997 Equity Incentive Plan (the "1997 Plan"), which
provides for the award of up to 1,550,000 shares of Common Stock in the form
of incentive stock options, non-statutory stock options, stock appreciation
rights, restricted stock, performance stock units and other stock units which
are valued by reference to the value of the Common Stock. In addition, the
Company maintains the 1998 Non-Qualified Stock Option Plan (the "1998 Plan")
which provides for the award of up to 500,000 shares of Common Stock in the
form of non-statutory stock options. The 1987 Plan, 1992 Plan, 1997 Plan and
1998 Plan are hereinafter referred to collectively as the "Equity Plans."
As of November 30, 1998 options were outstanding to purchase an aggregate
of 1,895,684 shares of Common Stock under the Equity Plans, and approximately
450,000 shares of Common Stock are authorized but have not yet been granted
under options pursuant to such plans (including 429,500 shares pursuant to the
1998 Plan).
58
Officers, key employees, non-employee directors of and consultants to the
Company are eligible to participate in the Equity Plans, except the officers
and directors are not eligible to participate in the 1998 Plan. The Equity
Plans are administered by the Compensation Committee of the Board of
Directors. Among other things, the Compensation Committee determines, subject
to the provisions of said plans, who shall receive awards, the types of awards
to be made, and the terms and conditions of each award. Options that are
intended to qualify as incentive stock options under the Equity Plans may be
exercisable for not more than 10 years after the date the option is awarded
and may not be granted at an exercise price less than the fair market value of
the shares of Common Stock at the time the option is granted (and, in the case
of stock options granted to holders of more than 10% of the Common Stock, may
not be granted at an exercise price less than 110% of the fair market value of
the shares of Common Stock at the time the options are granted). The 1997 Plan
and 1998 Plan provide that in the event of a merger or other transaction that
results or will result in the Company's Common Stock not being registered
under Section 12 of the Securities Exchange Act of 1934, as amended, any
unexercisable options or awards will become fully exercisable 20 days prior to
the effective date of the merger or other transaction.
The Compensation Committee may amend, modify or terminate any outstanding
award under the Company's Equity Plans with the participant's consent, except
consent shall not be required if the Compensation Committee determines that
such action will not materially and adversely affect the participate. The
Board may amend, suspend or terminate any of the Equity Plans, or any part of
such plans, at any time, except that no amendment may be made without
stockholder approval if such approval is necessary to comply with any
applicable tax or regulatory requirement.
59
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth, as of February 23, 1999 certain information
with respect to the beneficial ownership of Common Stock for each beneficial
owner of more than 5% of the Company's Common Stock, each director of the
Company, each Named Executive Officer of the Company and all directors and
executive officers as a group. As of February 23, 1999, there were 9,571,198
shares of the Company's Common Stock outstanding. Except as indicated in the
footnotes below, the persons named in this table have sole investment and
voting power with respect to the shares beneficially owned by them.
Shares
Beneficially Percent
Name Owned Owned
- ---- ------------ -------
Vincent A. Wolfington........................................... 386,069(1) 3.9
Don R. Dailey................................................... 375,176(2) 3.8
David H. Haedicke............................................... 32,700(3) *
Guy C. Thomas................................................... 83,800(4) *
Richard A. Anderson............................................. 18,619(5) *
Robert W. Cox................................................... 20,400(6) *
Dennis I. Meyer................................................. 5,000(7) *
Nicholas J. St. George.......................................... 12,500(8) *
Joseph V. Vittoria.............................................. -- *
Gilder Gagnon Howe & Co. LLC.................................... 1,547,809(9) 16.2
1775 Broadway
26th Floor
New York, NY 10019
Alliance Capital Management L.P................................. 1,310,200(10) 13.7
1290 Avenue of the Americas
New York, NY 10104
Kaufman Fund, Inc............................................... 520,000 5.4
140 East 45th St.
43rd Floor
New York, NY 10017
All directors and executive officers as a group................. 975,947(11) 9.5
* Less than 1%
(1) Includes options to purchase 285,706 shares of Common Stock. Also
includes (i) 1,183 shares of Common Stock currently held by a company
controlled by Mr. Wolfington and (ii) 1,560 shares held by a limited
partnership which are attributable to Mr. Wolfington's wife (780)
shares) and one of his children (780) shares and (iii) 430 shares held
by one of his children. Excludes shares held by Yerac Associates, L.P.
("Yerac"), a limited partnership of which Mr. Wolfington is a limited
partner, with respect to which shares Mr. Wolfington has no voting or
investment power.
(2) Includes options to purchase 235,707 shares of Common Stock. Excludes
shares held by Yerac, of which Mr. Dailey is a limited partner, with
respect to which shares Mr. Dailey has no voting or investment power.
(3) Represents options to purchase shares of Common Stock.
(4) Includes options to purchase 41,018 shares of Common Stock.
(5) Includes options to purchase 7,719 shares of Common Stock. Also
includes 1,500 shares held by a trust of which Mr. Anderson is the
beneficiary and 500 shares held by Mr. Anderson's wife.
(6) Represents options to purchase shares of Common Stock.
(7) Includes 5,000 shares of Common Stock held by Mr. Meyer's wife.
(8) Includes options to purchase 7,500 shares of Common Stock.
(9) This information is based upon the Schedule 13G dated February 16, 1999
filed by Gilder Gagnon Howe & Co. LLC.
(10) This information is based upon the Schedule 13G dated February 16, 1999
filed by AXA Conseil Vie Assurance Mutuelle, AXA Assurances I.A.R.D.
Mutuelle, AXA Assurances Vie Mutuelle, AXA and The Equitable Companies
Incorporated, as a group, on February 16, 1999.
(11) See Notes 1-9. Includes options to purchase 668,313 shares of Common
Stock.
60
Item 13. Certain Relationships and Related Transactions
During 1993, for an aggregate purchase price of $850,000, the Company
acquired 85 shares of non-voting redeemable preferred stock of CLI Fleet, Inc.
("CLI Fleet") a privately-held finance company formed for the purpose of
financing the chauffeured vehicle service industry. As a holder of CLI Fleet
preferred stock, the Company is currently entitled to receive an annual
dividend of $500 per share. The Company waived the right to receive any
dividends accrued in respect of its preferred stock through April 30, 1996.
Also during 1998, CLI Fleet redeemed 10 shares of preferred stock held by the
Company for an aggregate redemption price of $100,000. The remaining shares of
preferred stock are subject to mandatory redemption by redemption payments of
$100,000 and $550,000 in May, 1999 and 2000, respectively. Under the terms of
an agreement with CLI Fleet, commencing in April 1997, the Company has an
exclusive option to purchase all of the outstanding shares of common stock of
CLI Fleet at a purchase price equal to the greater of $187,500 or CLI Fleet's
liquidating value as determined by an independent appraisal.
To date, CLI Fleet has provided financing to the Company's independent
operators, without recourse to the Company, for both initial fees due under
the Company's independent operator agreements and with respect to vehicles
purchased by independent operators. Each of the Company's owned and operated
chauffeured vehicle service companies has entered into a Finance & Service
Agreement with CLI Fleet, which provides that the Company will recommend and
refer independent operators to CLI Fleet for financing of vehicles. To date,
CLI Fleet also has purchased from the Company notes receivable due from
independent operators in exchange for cash or demand notes on a non-recourse
basis. The Company sold $1,015,897 of independent operator notes receivable to
CLI Fleet for cash $733,793 and demand promissory notes of $282,104 in 1996.
These promissory notes are due on demand, although monthly principal payments
generally are received. These notes bear interest at rates ranging from 5% to
7%. The Company generally no longer sells notes receivables from independent
operators to CLI Fleet, although CLI Fleet continues to provide vehicle
financing to the Company's independent operators.
In May 1996, the exercise price of a warrant to purchase 86,003 shares of
Common Stock owned by Yerac was reduced from $6.14 to $4.65 per share. In
addition, in connection with the Recapitalization, Yerac converted the entire
outstanding balance of a $2.0 million subordinated note held by it into
approximately 430,000 shares of Common Stock. From the net proceeds of the
IPO, the Company repaid approximately $1.1 million of additional outstanding
indebtedness to Yerac. Messrs. Wolfington and Dailey are limited partners of
Yerac. See "Principal Stockholders."
61
Vincent A. Wolfington, the Company's Chairman and Chief Executive Officer,
and Don R. Dailey, the Company's President, each personally guaranteed certain
indebtedness of the Company in the original principal amount of $4.5 million.
The Company paid Messrs. Wolfington and Dailey $45,000 each during 1996 as a
fee for guaranteeing such indebtedness. The Company used part of the net
proceeds of the Company's 1997 IPO to repay the entire outstanding amount of
such indebtedness, and following the repayment the guarantees were terminated.
In connection with the Recapitalization effected in connection with the IPO,
Messrs. Wolfington and Dailey received $20,250 and $13,650, respectively, and
7,569 shares and 5,123 shares of Common Stock, respectively, as a result of
the redemption of the shares of Series A Preferred Stock and the conversion of
the shares of Series G Preferred Stock beneficially owned by each of them.
62
Part IV
- -------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- -------- ---------------------------------------------------------------
(a) 1. Financial Statements. See Item 8 for a list of Financial
Statements.
2. Financial Statement Schedules. See Item 8 for a list of the
Financial Statement Schedules.
3. Exhibits.
Exhibit No. Description
- ----------- -----------
2.1 Stock Purchase Agreement dated as of March 1, 1997, by and among
Carey International, Inc., Alfred J. Hemlock and Lupe C. Hemlock
(incorporated by reference from the Company's Registration
Statement on Form S-1 (File No. 333-22651)).
2.2 Agreement and Plan of Merger dated as of March 1, 1997, by and
among Carey International, Inc., Manhattan International
Limousine Network Ltd., MLC Acquisition Corporation and Michael
Hemlock (incorporated by reference from the Company's
Registration Statement on Form S-1 (File No. 333-22651)).
2.3 Form of Stockholder Action by Written Consent Adopted in
Connection with the Recapitalization (incorporated by reference
from the Company's Registration Statement on Form S-1 (File No.
333-22651)).
2.4 Amended and Restated Agreement and Plan of Merger made as of
October 10, 1997 by and among Carey International, Inc., Carey
Limousine Indiana, Inc., Indy Connection Limousines, Inc.,
Transit Tours, Inc., K.D. & Associates Professional Corporation,
Craig Del Fabro and Kim Del Fabro (incorporated by reference
from the Company's Current Report on Form 8-K dated November 13,
1997.)
2.5 Amended and Restated Purchase Agreement dated as of October 2,
1998 by and among Carey International, Inc., Airport Limousine
Acquisition Corp., Airport Limousine Partners, Inc. d/b/a
American Airport Limousine Corporation, American Limousine
Repair Service, Inc., George Jacobs, Aubrey Jacobs, Hyma Levin
and Harriet Jacobs (incorporated by reference from the Company's
Quarterly Report on Form 10-Q dated October 15, 1998).
3.1 Form of Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference from the Company's
Registration Statement on Form S-1 (File No. 333-22651)).
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference from the Company's Registration Statement on Form S-1
(File No. 333-22651)).
4.1 Specimen Stock Certificate (incorporated by reference from the
Company's Registration Statement on Form S-1 (File No. 333-
22651)).
4.2 Form of Warrants Issued in June 1997 (incorporated by reference
from the Company's Registration Statement on Form S-1 (File No.
333-22651)).
4.3 Carey International, Inc. Common Stock Purchase Warrant dated
September 1, 1991, issued to Yerac Associates, L.P.
(incorporated by reference from the Company's Registration
Statement on Form S-1 (File No. 333-22651)).
4.4 Form of Registration Rights Agreement between Carey
International, Inc. and Michael Hemlock (incorporated by
reference from the Company's Registration Statement on Form S-1
(File No. 333-22651)).
10.1 1997 Equity Incentive Plan, as amended (incorporated by
reference from the Company's definitive Proxy Statement dated
May 6, 1998).
10.2 1992 Stock Option Plan (incorporated by reference from the
Company's Registration Statement on Form S-1 (File No. 333-
22651)).
10.3 1987 Stock Option Plan (incorporated by reference from the
Company's Registration Statement on Form S-1 (File No. 333-
22651)).
10.4 Stock Plan for Non-Employee Directors (incorporated by reference
from the Company's Registration Statement on Form S-1 (File No.
333-22651)).
10.5 Lease dated July 5, 1989 for 4530 Wisconsin Avenue, Washington,
D.C., between Carey International, Inc. and 4530 Wisconsin
Associates, as lessor, including Addendum, Exhibit B and Exhibit
C; and Second Amendment to Lease dated August 6, 1993, including
Exhibit A (incorporated by reference from the Company's
Registration Statement on Form S-1 (File No. 333-22651)).
10.6 Form of Escrow Agreement by and among Michael Hemlock, Alfred J.
Hemlock, Lupe C. Hemlock and a bank to be named (incorporated by
reference from the Company's Registration Statement on Form S-1
(File No. 333-22651)).
10.7 Current form of Standard Master License Agreement (incorporated
by reference from the Company's Registration Statement on Form
S-1 (File No. 333-22651)).
10.8 Current form of Standard International License Agreement
(incorporated by reference from the Company's Registration
Statement on Form S-1 (File No. 333-22651)).
10.9 Form of Promissory Notes in connection with Acquisition of
Manhattan Limousine (incorporated by reference from the
Company's Registration Statement on Form S-1 (File No. 333-
22651)).
10.10 Current from of Standard Independent Operator Agreement
(incorporated by reference from the Company's Registration
Statement on Form S-1 (File No. 333-22651)).
10.11 Form of Director's Deferment of Compensation Agreement
(incorporated by reference from the Company's Registration
Statement on Form S-1 (File No. 333-50245)).
10.12 1998 Non-Qualified Stock Option Plan (incorporated by reference
from the Company's Registration Statement on Form S-8 (File
No.333-59631)).
10.13 1998 Customer Service Stock Bonus Plan (incorporated by
reference from the Company's Registration Statement on Form S-8
(File No. 333-66155)).
10.14 Amended and Restated Revolving Credit Agreement dated as of
January 15, 1999 among Carey International, Inc., Fleet Bank,
N.A., NationsBank, N.A., First Union National Bank and United
Bank (filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
23.1 Consent of Coopers & Lybrand L.L.P. (filed herewith).
27 Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
None.
63
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
and to the capacities and on the dates indicated.
Name Title Date
- ---- ----- -----------------
/s/ Vincent A. Wolfington Chairman of the Board and February 26, 1999
- ----------------------------- Chief Executive Officer
Vincent A. Wolfington
/s/ Don R. Dailey President and Director February 26, 1999
- -----------------------------
Don R. Dailey
/s/ David H. Haedicke Chief Financial Officer February 26, 1999
- -----------------------------
David H. Haedicke
/s/ Paul A. Sandt Principal Accounting Officer February 26, 1999
- -----------------------------
Paul A. Sandt
/s/ Robert W. Cox Director February 26, 1999
- -----------------------------
Robert W. Cox
/s/ Dennis I. Meyer Director February 26, 1999
- -----------------------------
Dennis I. Meyer
/s/ Nicholas J. St. George Director February 26, 1999
- -----------------------------
Nicholas J. St. George
/s/ Joseph V. Vittoria Director February 26, 1999
- -----------------------------
Joseph V. Vittoria
64