UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---- ----
Commission file number 1-10841
GREYHOUND LINES, INC.
and its Subsidiaries identified in Footnote (1) below
(Exact name of registrant as specified in its charter)
DELAWARE 86-0572343
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
15110 N. DALLAS PARKWAY, SUITE 600
DALLAS, TEXAS 75248
(Address of principal executive offices) (Zip code)
(972) 789-7000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if
changed since last report)
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
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
As of August 9, 2002, the registrant had 587 shares of Common Stock, $0.01
par value, outstanding all of which are held by the registrant's parent
company.
(1) This Form 10-Q is also being filed by the co-registrants specified under
the caption "Co-Registrants", each of which is a wholly-owned subsidiary of
Greyhound Lines, Inc. and each of which has met the conditions set forth in
General Instructions H(1)(a) and (b) of Form 10-Q for filing Form 10-Q in a
reduced disclosure format.
CO-REGISTRANTS
This Form 10-Q is also being filed by the following entities. Except as set
forth below, each entity has the same principal executive offices, zip code and
telephone number as that set forth for Greyhound Lines, Inc. on the cover of
this report:
<Table>
<Caption>
I.R.S. EMPLOYER JURISDICTION
COMMISSION IDENTIFICATION OF
NAME FILE NO. NO. INCORP.
- ---- ----------- --------------- ------------
Atlantic Greyhound Lines of Virginia, Inc. 333-27267-01 58-0869571 Virginia
GLI Holding Company 333-27267-04 75-2146309 Delaware
Greyhound de Mexico, S.A. de C.V. 333-27267-05 None Republic of
Mexico
Sistema Internacional de Transporte de Autobuses, Inc. 333-27267-08 75-2548617 Delaware
802 Commerce Street, 3rd Floor
Dallas, Texas 75201
(214) 849-8616
Texas, New Mexico & Oklahoma Coaches, Inc. 333-27267-10 75-0605295 Delaware
1313 13th Street
Lubbock, Texas 79408
(806) 763-5389
T.N.M. & O. Tours, Inc. 333-27267-11 75-1188694 Texas
(Same as Texas, New Mexico & Oklahoma Coaches, Inc.)
Vermont Transit Co., Inc. 333-27267-12 03-0164980 Vermont
345 Pine Street
Burlington, Vermont 05401
(802) 862-9671
</Table>
As of June 30, 2002, Atlantic Greyhound Lines of Virginia, Inc. had 150 shares
of common stock outstanding (at a par value of $50.00 per share); GLI Holding
Company had 1,000 shares of common stock outstanding (at a par value of $0.01
per share); Greyhound de Mexico, S.A. de C.V. had 10,000 shares of common stock
outstanding (at a par value of $0.10 Mexican currency per share); Sistema
Internacional de Transporte de Autobuses, Inc. had 1,000 shares of common stock
outstanding (at a par value of $0.01 per share); Texas, New Mexico & Oklahoma
Coaches, Inc. had 1,000 shares of common stock outstanding (at a par value of
$0.01 per share); T.N.M. & O. Tours, Inc. had 1,000 shares of common stock
outstanding (at a par value of $1.00 per share); and Vermont Transit Co., Inc.
had 505 shares of common stock outstanding (no par value). Each of the above
named co-registrants (1) have 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 such co-registrant was required to file such
reports), and (2) have been subject to such filing requirements for the past 90
days.
2
GREYHOUND LINES, INC. AND SUBSIDIARIES
<Table>
<Caption>
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Interim Consolidated Statements of Financial Position as of
June 30, 2002 (Unaudited) and December 31, 2001........................ 5
Interim Consolidated Statements of Operations for the Three and
Six months Ended June 30, 2002 and 2001 (Unaudited).................... 6
Condensed Interim Consolidated Statements of Cash Flows for the
Six months Ended June 30, 2002 and 2001 (Unaudited).................... 7
Notes to Interim Consolidated Financial Statements (Unaudited)............ 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................. 16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders......................... 17
Item 6. Exhibits and Reports on Form 8-K............................................ 17
SIGNATURES ......................................................................... 18
</Table>
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
4
GREYHOUND LINES, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2002 2001
------------- -------------
(UNAUDITED)
Current Assets
Cash and cash equivalents ..................................................... $ 8,062 $ 20,913
Accounts receivable, less allowance for doubtful accounts of $1,073 and $915 . 62,456 59,977
Inventories, less allowance for shrinkage of $276 and $177 ................... 9,140 8,409
Prepaid expenses .............................................................. 6,020 7,158
Current portion of deferred tax assets ........................................ 16,721 12,238
Other current assets .......................................................... 3,827 2,154
------------- -------------
Total Current Assets ..................................................... 106,226 110,849
Property, plant and equipment, net of accumulated depreciation of $238,769
and $229,502 ................................................................. 408,248 412,027
Investments in unconsolidated affiliates .......................................... 16,231 15,896
Deferred income taxes ............................................................. 50,530 48,609
Insurance and security deposits ................................................... 29,373 29,142
Goodwill .......................................................................... 3,040 43,087
Intangible assets, net of accumulated amortization of $37,897 and $34,487 ......... 28,031 28,847
------------- -------------
Total Assets ............................................................. $ 641,679 $ 688,457
============= =============
Current Liabilities
Accounts payable .............................................................. $ 28,559 $ 24,638
Accrued liabilities ........................................................... 63,517 66,961
Rents payable ................................................................. 12,950 11,839
Unredeemed tickets ............................................................ 12,830 12,001
Current portion of claims liability ........................................... 12,809 2,935
Current maturities of long-term debt .......................................... 11,500 7,975
------------- -------------
Total Current Liabilities ................................................ 142,165 126,349
Pension obligation ................................................................ 48,860 46,432
Claims liability .................................................................. 27,603 18,615
Long-term debt, net ............................................................... 249,893 272,591
Minority interests ................................................................ 4,774 6,166
Other liabilities ................................................................. 28,951 30,385
------------- -------------
Total Liabilities ........................................................ 502,246 500,538
------------- -------------
Stockholder's Equity
Common stock (1,000 shares authorized; par value $.01; 587 shares issued) ..... -- --
Capital in excess of par value ................................................ 320,391 320,391
Retained deficit .............................................................. (128,023) (79,003)
Accumulated other comprehensive loss, net of tax benefit of
$28,503 and $28,791 ......................................................... (52,935) (53,469)
------------- -------------
Total Stockholder's Equity ............................................... 139,433 187,919
------------- -------------
Total Liabilities and Stockholder's Equity ............................... $ 641,679 $ 688,457
============= =============
</Table>
The accompanying notes are an integral part of these statements.
5
GREYHOUND LINES, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
(Unaudited) (Unaudited)
OPERATING REVENUES
Passenger services .......................... $ 208,366 $ 223,629 $ 392,311 $ 415,252
Package express ............................. 10,024 10,398 19,492 20,319
Food services ............................... 10,659 11,024 20,477 21,000
Other operating revenues .................... 20,915 19,887 40,018 37,064
------------ ------------ ------------ ------------
Total Operating Revenues ................ 249,964 264,938 472,298 493,635
------------ ------------ ------------ ------------
OPERATING EXPENSES
Maintenance ................................. 25,229 25,196 49,668 49,769
Transportation .............................. 62,510 66,312 118,484 128,871
Agents' commissions and station costs ....... 45,265 47,456 88,573 92,547
Marketing, advertising and traffic .......... 8,758 9,701 13,639 18,399
Insurance and safety ........................ 19,882 14,261 36,103 26,438
General and administrative .................. 31,492 37,944 64,125 69,755
Depreciation and amortization ............... 12,432 11,873 24,808 23,203
Operating taxes and licenses ................ 15,635 16,084 30,354 31,377
Operating rents ............................. 20,224 12,757 39,839 33,284
Cost of goods sold - food services .......... 6,991 7,488 13,538 14,439
Other operating expenses .................... 736 988 1,347 2,687
------------ ------------ ------------ ------------
Total Operating Expenses ................ 249,154 250,060 480,478 490,769
------------ ------------ ------------ ------------
Operating Income (Loss) ........................... 810 14,878 (8,180) 2,866
Interest Expense .................................. 6,702 7,651 13,511 14,963
------------ ------------ ------------ ------------
Income (Loss) Before Income Taxes, Minority
Interests and Cumulative Effect of Accounting
Change ......................................... (5,892) 7,227 (21,691) (12,097)
Income Tax Provision (Benefit) .................... 804 3,087 (8,676) (5,353)
Minority Interests ................................ (465) 154 (1,559) 26
------------ ------------ ------------ ------------
Income (Loss) Before Cumulative Effect
of Accounting Change ........................... (6,231) 3,986 (11,456) (6,770)
Cumulative Effect of a Change in Accounting
for Goodwill, net of tax (Note 2) .............. -- -- (37,564) --
------------ ------------ ------------ ------------
Net Income (Loss) ................................. $ (6,231) $ 3,986 $ (49,020) $ (6,770)
============ ============ ============ ============
</Table>
The accompanying notes are an integral part of these statements.
6
GREYHOUND LINES, INC. AND SUBSIDIARIES
CONDENSED INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
2002 2001
------------- -------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ................................................. $ (49,020) $ (6,770)
Cumulative effect of accounting change ................... 37,564 --
Non-cash expenses and gains included in net loss ......... 20,296 23,170
Net change in certain operating assets and liabilities ... 16,536 (11,505)
------------- -------------
Net cash provided by operating activities .............. 25,376 4,895
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ..................................... (24,314) (16,565)
Proceeds from assets sold ................................ 6,001 546
Payments for business acquisitions, net of cash acquired . -- (1,320)
Other investing activities ............................... 161 (383)
------------- -------------
Net cash used for investing activities ................. (18,152) (17,722)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on debt and capital lease obligations ........... (4,731) (3,291)
Redemption of preferred stock ............................ -- (3,497)
Payment of quarterly preferred dividends ................. -- (43)
Redemption 81/2% debentures .............................. (45) --
Proceeds from equipment borrowing ........................ -- 7,850
Net change in revolving credit facility .................. (15,299) 11,053
------------- -------------
Net cash provided by (used for) financing activities ... (20,075) 12,072
------------- -------------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................. (12,851) (755)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............. 20,913 10,206
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................... $ 8,062 $ 9,451
============= =============
</Table>
The accompanying notes are an integral part of these statements.
7
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)
1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the unaudited Interim Consolidated Financial
Statements of Greyhound Lines, Inc. and Subsidiaries ("Greyhound" or the
"Company") include all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the Company's financial position as of
June 30, 2002, the results of its operations for the three and six months ended
June 30, 2002 and 2001 and cash flows for the six months ended June 30, 2002 and
2001. Due to the seasonality of the Company's operations, the results of its
operations for the interim period ended June 30, 2002 may not be indicative of
total results for the full year. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to the
rules and regulations promulgated by the Securities and Exchange Commission. The
unaudited Interim Consolidated Financial Statements should be read in
conjunction with the audited Consolidated Financial Statements of Greyhound
Lines, Inc. and Subsidiaries and accompanying notes for the year ended December
31, 2001. Certain reclassifications have been made to the prior period
statements to conform them to the current year presentation. For the three and
six months ended June 30, 2002 and 2001, the Company's comprehensive income
(loss) approximated its net income (loss).
On March 16, 1999, the Company's stockholders approved the Agreement and Plan of
Merger with Laidlaw Inc. ("Laidlaw") pursuant to which the Company became a
wholly owned subsidiary of Laidlaw (the "Merger"). The consolidated financial
statements of the Company do not reflect any purchase accounting adjustments
relating to the Merger.
On June 28, 2001, as part of a financial restructuring, Laidlaw USA, Inc.,
Laidlaw Inc., Laidlaw International Finance Corporation, Laidlaw Investments
Ltd., Laidlaw One, Inc. and Laidlaw Transporation, Inc. filed voluntary
petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the
United States Bankruptcy Court for the Western District of New York, under a
jointly administered case captioned, In re: Laidlaw USA, Inc., et al, Case No.
01-14099. On that date, Laidlaw Inc. and Laidlaw Investments Ltd. also filed
cases under the Canada Companies' Creditors Arrangement Act in the Ontario
Superior Court of Justice in Toronto, Canada, court file no. 01-CL-4178.
Laidlaw is the ultimate parent company of Greyhound. Neither Greyhound, nor any
of its subsidiaries were included in, or made party to, these reorganization
filings and proceedings.
The reorganization filings and proceedings do not cause a cross default with any
of the Company's debt which would place the Company's debt in default with its
financial institutions and, as of the date of this report, the Company is in
compliance with all covenants in its various debt agreements. Although the
outcome of the foregoing matters is uncertain, management believes that the
likely outcome will have no material impact on the Company's financial position,
cash flows or results of operations.
In July 2002, the Company amended the Revolving Credit Facility to extend the
maturity date one year, to October 24, 2004.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 ("SFAS 142") "Accounting for Goodwill and Other Intangible
Assets" and, as a result, the Company ceased to amortize goodwill. In lieu of
amortization, SFAS 142 requires that goodwill be reviewed for impairment upon
adoption of SFAS 142 and at least annually thereafter. Under SFAS 142, goodwill
impairment is deemed to exist if the net book value of a reporting unit exceeds
its estimated fair value. To determine estimated fair value of the reporting
units the Company utilizes both a discounted cash flow methodology as well as
the implied values of comparable companies. This methodology differs from the
Company's previous accounting policy, which used undiscounted cash flows to
determine possible impairment.
8
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2002
(UNAUDITED)
2. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
The Company recently completed the initial impairment assessment as required by
SFAS 142 and has determined that the carrying value of its Bus Operations
reporting unit exceeded that unit's fair value. As a result, effective to the
first quarter of 2002, the Company recorded a non-cash charge of $40.0 million
($37.6 million after tax) as a cumulative effect of a change in accounting for
goodwill. The Company's remaining goodwill ($3.0 million) relates to the Courier
Services reporting unit where fair value exceeds carrying value.
In connection with adopting SFAS 142 the Company reassessed the useful lives and
classification of its identifiable intangible assets and, with the exception of
the useful life of trademarks, determined that the useful lives and
classifications continue to be appropriate. Trademarks, which had previously
been amortized over a fifteen year life, are now considered to have an
indefinite life and are no longer amortized. During the first quarter of 2002
the Company completed an impairment test on its trademarks as required by SFAS
142 which did not result in an impairment charge. The trademarks will be
subjected to an impairment test in the future at least annually.
The following table provides information relating to the Company's amortized and
unamortized intangible assets as of June 30, 2002 and December 31, 2001 (in
thousands):
<Table>
<Caption>
JUNE 30, 2002 DECEMBER 31, 2001
------------------------------- -------------------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
-------------- -------------- -------------- --------------
Amortized intangible assets:
Software $ 48,734 $ 29,294 $ 46,070 $ 27,154
Debt issuance costs 9,757 5,829 9,758 4,825
Deferred lease costs 3,847 2,630 3,847 2,357
Other 277 144 346 151
-------------- -------------- -------------- --------------
Total $ 62,615 $ 37,897 $ 60,021 $ 34,487
============== ============== ============== ==============
Unamortized intangible assets:
Trademark $ 3,313 $ 3,313
</Table>
Amortization expense for intangible assets during the three and six months ended
June 30, 2002 was $1.9 million and $3.5 million, respectively. Estimated
amortization expense, excluding the effect of costs that may be capitalized in
future periods, for the year ended December 31, 2002 and the four succeeding
years are as follows: $7.0 million (2002); $6.2 million (2003); $4.4 million
(2004); $3.8 million (2005) and $2.8 million (2006).
Actual results of operations for the three and six months ended June 30, 2002
and proforma results of operations for the three and six months ended June 30,
2001 had the Company applied the provisions of SFAS 142 in that period is as
follows (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------------ ------------------------------
2002 2001 2002 2001
------------- ------------- ------------- -------------
Reported Net Income (Loss) $ (6,231) $ 3,986 $ (49,020) $ (6,770)
Add: goodwill and trademark
amortization, net of tax -- 520 -- 1,040
------------- ------------- ------------- -------------
Adjusted Net Income (Loss) $ (6,231) $ 4,506 $ (49,020) $ (5,730)
============= ============= ============= =============
</Table>
9
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2002
(UNAUDITED)
3. RELATED PARTY TRANSACTIONS
During the three months ended June 30, 2002 the Company sold buses to Greyhound
Canada Transportation Corp. ("GCTC"), an affiliated company owned by Laidlaw,
which resulted in a recorded gain of $0.3 million on gross proceeds from the
sale of approximately $5.7 million.
The Company makes available to Hotard Coaches, Inc. ("Hotard"), an affiliated
company engaged in the travel services business in the U.S., a revolving credit
line subject to a maximum availability of $3.0 million. Borrowings are available
at a rate equal to the prime rate plus 2.5%, and mature the earlier of October
23, 2002 or upon 30 days notice by the Company. The revolving credit line is
secured by liens on substantially all of the assets of Hotard. At June 30, 2002,
outstanding borrowings were $2.9 million.
Included in accounts receivable on the Company's Consolidated Statements of
Financial Position at June 30, 2002, are amounts due from Laidlaw of $1.6
million, amounts due from GCTC of $0.7 million and $2.9 million due from Hotard
for outstanding borrowings under their revolving credit facility with the
Company.
4. MATERIAL CONTINGENCIES
GOLDEN STATE INDICTMENT
In December 2001, Gonzalez, Inc. d/b/a Golden State Transportation ("Golden
State") and 22 current and former employees and agents of Golden State were
indicted as part of a 42-count federal criminal proceeding. The case, filed
before the United States District Court for the District of Arizona, is styled
U.S. v. Gonzalez, Inc, et al., Case No. CR 01-1696-TUC-RCC. The indictment
alleges that the defendants were engaged in a conspiracy, spanning over a
two-year period, to transport and harbor illegal aliens within the United
States. As part of the indictment, the U.S. Government has sought a forfeiture
of substantially all of Golden State's assets and obtained a restraining order
restricting access to bank accounts and restraining certain other real property
and vehicles. The restraining order allows Golden State to continue to operate
its business in the ordinary course and the order has been modified to permit
the payment of certain normal course expenses. On July 2, 2002, the restraining
order was lifted entirely as to Golden State's bank accounts and future cash
receipts.
Golden State and the individuals have pleaded not guilty to the charges. Golden
State intends to vigorously defend the matter. No trial date has been set for
this case. Golden State is currently in the process of obtaining and assessing
the significant volume of evidence amassed by the Government. At this early
stage in the proceeding, the probable outcome of this case cannot be predicted.
Additionally, management is unable to make a reasonable estimate of the
liability that may result from the final resolution of the indictment.
Accordingly, no liability relating to this matter has been recorded in the
Company's Consolidated Financial Statements.
Greyhound has a 51.4% ownership interest in Golden State and, at June 30, 2002,
the Company's investment in Golden State totaled $2.5 million. In addition, the
Company leases to, or guarantees the leases of, 67 of Golden State's buses and
the Company has a receivable of approximately $1.0 million due from Golden
State. As of the date of this report these buses are subject to $12.1 million of
third-party liens, which is comparable to management's estimate of the fair
market value of the buses.
10
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2002
(UNAUDITED)
4. MATERIAL CONTINGENCIES (CONTINUED)
POTENTIAL PENSION PLAN FUNDING REQUIREMENTS
The Company maintains nine defined benefit pension plans, the most significant
of which (the "ATU Plan") covers approximately 14,500 current and former
employees, fewer than 1,200 of which are active employees of the Company. The
ATU Plan was closed to new participants in 1983 and over 85% of its participants
are over the age of 50. For financial reporting and investment planning
purposes, the Company currently uses an actuarial mortality table that closely
matches the actual experience related to the existing participant population.
For funding purposes, legislation passed by the United States Congress mandates
the use of a prescribed actuarial mortality table and discount rates that differ
from those used by the Company for financial reporting and investment planning
purposes. Based upon the application of the actuarial mortality table, discount
rates and funding calculations prescribed by current regulations, and further
assuming a continuation of the freeze of wage and service accruals and that the
ATU Plan assets can obtain annual investment returns of 7.5%, estimated Company
contributions to the ATU Plan total $73 million over the next five years.
Lowering the assumed investment return on ATU plan assets to 5% results in
estimated contributions over the next five years of $91 million, while a 10%
return results in estimated contributions over the next five years of $64
million. However, no contributions are projected during the next two years under
either of the three scenarios discussed above. Nevertheless, there is no
assurance that the ATU Plan will be able to earn the assumed rate of return,
that new regulations may result in changes in the prescribed actuarial mortality
table and discount rates, or that there will be market driven changes in the
discount rates, which would result in the Company being required to make
contributions in the future that differ significantly from the estimates above.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Greyhound is the only nationwide provider of scheduled intercity bus
transportation services in the United States. The Company's primary business
consists of scheduled passenger service, package express service and food
services at certain terminals. The Company's consolidated operations include a
nationwide network of terminal and maintenance facilities, a fleet of
approximately 2,900 buses and approximately 1,800 sales outlets.
The Company's business is seasonal in nature and generally follows the pattern
of the travel industry as a whole, with peaks during the summer months and the
Thanksgiving and Christmas holiday periods. As a result, the Company's operating
cash flows are also seasonal with a disproportionate amount of the Company's
annual operating cash flows being generated during the peak travel periods. The
day of the week on which certain holidays occur, the length of certain holiday
periods, and the date on which certain holidays occur within the fiscal quarter,
may also affect the Company's quarterly results of operations.
RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations as a
percentage of total operating revenue for the three and six months ended June
30, 2002 and 2001:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2002 2001 2002 2001
------------- ------------- ------------- -------------
Operating Revenues
Passenger services ..................... 83.3% 84.4% 83.1% 84.1%
Package Express ........................ 4.0 3.9 4.1 4.1
Food services .......................... 4.3 4.2 4.3 4.3
Other operating revenues ............... 8.4 7.5 8.5 7.5
------------- ------------- ------------- -------------
Total Operating Revenues ............. 100.0 100.0 100.0 100.0
------------- ------------- ------------- -------------
Operating Expenses
Maintenance ............................ 10.1 9.5 10.5 10.1
Transportation ......................... 25.0 25.0 25.1 26.1
Agents' commissions and station costs .. 18.1 17.9 18.8 18.7
Marketing, advertising and traffic ..... 3.5 3.7 2.9 3.7
Insurance and safety ................... 7.9 5.4 7.6 5.4
General and administrative ............. 12.6 14.3 13.6 14.1
Depreciation and amortization .......... 5.0 4.5 5.2 4.7
Operating taxes and licenses ........... 6.3 6.1 6.4 6.4
Operating rents ........................ 8.1 4.8 8.4 6.7
Cost of goods sold - food services ..... 2.8 2.8 2.9 3.0
Other operating expenses ............... 0.3 0.4 0.3 0.5
------------- ------------- ------------- -------------
Total Operating Expenses ............. 99.7 94.4 101.7 99.4
------------- ------------- ------------- -------------
Operating Income (Loss) .................. 0.3 5.6 (1.7) 0.6
Interest Expense ......................... 2.7 2.9 2.9 3.1
------------- ------------- ------------- -------------
Income (Loss) Before Income Taxes ........ (2.4) 2.7 (4.6) (2.5)
Income Tax Provision (Benefit) ........... 0.3 1.1 (1.9) (1.1)
Minority Interests ....................... (0.2) 0.1 (0.3) 0.0
------------- ------------- ------------- -------------
Income (Loss) Before Cumulative Effect
of Accounting Change .................. (2.5) 1.5 (2.4) (1.4)
Cumulative Effect of a Change in
Accounting for Goodwill, net of Tax ... -- -- (8.0) --
------------- ------------- ------------- -------------
Net Income (Loss) ........................ (2.5) 1.5 (10.4) (1.4)
============= ============= ============= =============
</Table>
12
The following table sets forth certain operating data for the Company for the
three and six months ended June 30, 2002 and 2001. Certain statistics have been
adjusted and restated from that previously published to provide consistent
comparisons.
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 % CHANGE 2002 2001 % CHANGE
---------- ---------- ---------- ---------- ---------- ----------
Regular Service Miles (000's) ... 84,297 88,234 (4.5%) 162,427 168,171 (3.4%)
Total Bus Miles (000's) ......... 86,792 91,062 (4.7%) 167,204 173,325 (3.5%)
Passenger Miles (000's) ......... 2,190,769 2,284,856 (4.1%) 4,159,131 4,277,907 (2.8%)
Passengers Carried (000's) ...... 5,680 6,387 (11.1%) 11,043 12,120 (8.9%)
Average Trip Length (passenger
miles / passengers carried) .... 386 358 7.8% 377 353 6.8%
Load (avg number of passengers
per regular service mile) ...... 26.0 25.9 0.4% 25.6 25.4 0.8%
Load Factor (% of available
seats filled) .................. 51.7% 51.9% (0.4%) 50.9% 51.0% (0.2%)
Yield (regular route revenue /
passenger miles) ............... $ 0.0951 $ 0.0979 (2.9%) $ 0.0943 $ 0.0971 (2.9%)
Total Revenue Per Total Bus Mile $ 2.880 $ 2.909 (1.0%) $ 2.825 $ 2.848 (0.8%)
Cost Per Total Bus Mile:
Maintenance ................... $ 0.291 $ 0.277 5.1% $ 0.297 $ 0.287 3.5%
Transportation ................ $ 0.720 $ 0.728 (1.1%) $ 0.709 $ 0.744 (4.7%)
</Table>
THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE SAME PERIODS IN 2001
Operating Revenues. Total operating revenues decreased $15.0 million, down 5.7%,
and $21.3 million, down 4.3% for the three and six months ended June 30, 2002,
compared to the same periods in 2001.
Passenger services revenues decreased $15.3 million, down 6.8%, and $22.9
million, down 5.5%, for the three and six months ended June 30, 2002, compared
to the same periods in 2001. Subsequent to the events of September 11, 2001, and
continuing through the second quarter of 2002, the Company has experienced
significant declines in its short haul markets (450 miles and less), while long
haul travel (over 450 miles) has increased. Although long haul passenger traffic
continues to grow, the declines in short haul passengers have more than offset
long haul traffic gains resulting in a 4.1% and 2.8% decline in passenger miles
during the three and six months ended June 30, 2002, respectively. Additionally,
the change in passenger mix has resulted in an increase in average trip length
of 7.8% and 6.8% during the three and six months ended June 30, 2002,
respectively. Because longer trips produce lower revenue per mile, the change in
passenger mix has also resulted in a 2.9% decline in yield. Second quarter 2002
passenger revenue declines exceed first quarter declines due to the calendar
placement of Easter (which occurred in the first quarter of 2002 as compared to
the second quarter of 2001).
Package express revenues decreased $0.4 million, down 3.6%, and $0.8 million,
down 4.1%, for the three and six months ended June 30, 2002, compared to the
same periods in 2001. The Company continues to experience reduced standard
product deliveries (the traditional, low value, terminal to terminal market
segment) which has more than offset growth in the Company's same day delivery
product and freight forwarding services.
Food services revenues decreased $0.4 million, down 3.3%, and $0.5 million, down
2.5%, for the three and six months ended June 30, 2002, compared to the same
periods in 2001. Food services revenues decreased over the prior year due
primarily to the declines in passenger miles, offset somewhat by product price
increases.
Other operating revenues, consisting primarily of revenue from travel services
and in-terminal sales and services, increased $1.0 million, up 5.2%, and $3.0
million, up 8.0%, for the three and six months ended June 30, 2002, compared to
the same periods in 2001. The increase is principally due to increased charter
services and government provided route subsidies, offset somewhat by decreases
in our "meet and greet" service provided to cruise lines.
13
Operating Expenses. Total operating expenses decreased $0.9 million, down 0.4%,
and $10.3 million, down 2.1%, for the three and six months ended June 30, 2002,
compared to the same periods in 2001. The decrease is attributable to a 4.7%
decrease in bus miles during the three months ended June 30, 2002 and a 3.5%
decrease in bus miles operated for the six months ended June 30, 2002. In
addition, the Company experienced decreases in fuel cost, driver training and
hiring costs, marketing costs, incentive costs and ticket and express
commissions due to lower sales, offset somewhat by increases in insurance,
employee benefits costs and operating rents, when compared with the same periods
in 2001.
Maintenance costs were essentially flat for the three and six months ended June
30, 2002, compared to the same periods in 2001. On a per mile basis, maintenance
cost increased 5.1% and 3.5%, for the three and six months ended June 30, 2002,
due to a higher average fleet age, fewer buses under warranty and increased
material and labor related to accident repairs.
Transportation expenses which consist primarily of fuel costs and driver
salaries, decreased $3.8 million, down 5.7%, and $10.4 million, down 8.1%, for
the three and six months ended June 30, 2002, compared to the same periods in
2001, due primarily to decreased fuel prices and driver hiring and training
costs. During the three and six months ended June 30, 2002 the average cost per
gallon of fuel was $0.74 and $0.69 per gallon, compared to $0.91 and $0.92 per
gallon during the same periods in 2001, resulting in reduced fuel costs of $2.6
million and $6.5 million, respectively. Additionally, driver hiring and training
costs were $2.6 million lower during the six months ended June 30, 2002 as the
Company needed to hire fewer drivers due to the reduction in bus miles operated.
On a per-mile basis, excluding the effects of fuel price changes and driver
hiring costs, transportation expenses increased by 2.7% and 2.5%, for the three
and six months ended June 30, 2002.
Agents' commissions and station costs decreased $2.2 million, down 4.6%, and
$4.0 million, down 4.3%, for the three and six months ended June 30, 2002,
compared to the same periods in 2001. The decrease is primarily due to lower
commissions and terminal wages from decreased ticket sales, offset somewhat by
increased security costs.
Marketing, advertising and traffic expenses decreased $0.9 million, down 9.7%,
and $4.8 million, down 25.9%, for the three and six months ended June 30, 2002,
compared to the same periods in 2001. Since September 11, 2001, leisure or
discretionary travel in non-peak periods has been soft. As a result management
viewed the opportunity to stimulate discretionary travel during the
traditionally slow winter travel period as being low, and substantially reduced
advertising spending during the first quarter of 2002. However, to support the
heavy summer travel period, the Company increased spending in the second quarter
of 2002 (albeit still at lower levels than the prior period) and currently
expects spending in future quarters to be at levels consistent with the prior
year.
Insurance and safety costs increased $5.6 million, up 39.4%, and $9.7 million,
up 36.6%, for the three and six months ended June 30, 2002, compared to the same
periods in 2001. The increase is primarily due to an increase in the cost of
excess insurance coverage and a growth in the average cost per claim due
principally to medical cost inflation.
General and administrative expenses decreased $6.5 million, down 17.0%, and $5.6
million, down 8.1%, for the three and six months ended June 30, 2002, compared
to the same periods in 2001. During the three months ended June 30, 2002, the
decrease is attributable to lower incentive plan costs ($4.5 million) due to the
Company's reduced financial performance, lower pension costs ($1.8 million) as
the second quarter of 2001 included a year-to-date adjustment, a decrease in
management fees ($0.9 million) charged by the Company's parent, Laidlaw Inc.,
offset somewhat by higher health and welfare costs ($1.2 million) due
principally to medical cost inflation. During the six months ended June 30,
2002, the decrease is due to lower incentive plan costs ($5.1 million) and a
decrease in management fees ($1.7 million), offset somewhat by higher health and
welfare costs ($1.4 million).
Depreciation and amortization expenses increased $0.6 million, up 4.7%, and $1.6
million, up 6.9%, for the three and six months ended June 30, 2002, compared to
the same periods in 2001. The increases are primarily due to inflationary
increases in the cost of recent capital expenditures for buses, structures and
capitalized software which, due to the long-lived nature of the Company's
assets, significantly exceeds the historical cost basis of asset disposals,
offset by a decrease in goodwill and trademark amortization.
Operating taxes and licenses expense decreased $0.4 million, down 2.8%, and $1.0
million, down 3.3%, for the three and six months ended June 30, 2002, compared
to the same periods in 2001. The decrease is due to lower payroll taxes
resulting from decreased wages.
14
Operating rents increased $7.5 million, up 58.5%, and $6.6 million, up 19.7%,
for the three and six months ended June 30, 2002, compared to the same periods
in 2001. This is due to the settlement of the Port Authority license agreement
in June 2001 that resulted in a reduction to operating rents of approximately
$7.5 million in the second quarter of 2001.
Food services cost of goods sold decreased $0.5 million, down 6.6%, and $0.9
million, down 6.2%, for the three and six months ended June 30, 2002, compared
to the same periods in 2001. This is primarily due to the decrease in food
services revenues related to decreased passenger counts.
Other operating expenses decreased $0.3 million, down 25.5%, and $1.3 million,
down 49.9% for the three and six months ended June 30, 2002, compared to the
same periods in 2001. The decrease for the three and six months ended June 30,
2002 is principally due to losses on disposals of property plant and equipment
in 2001 compared to small gains recorded in 2002.
Interest expense decreased $0.9 million, down 12.4%, and $1.5 million, down
9.7%, for the three and six months ended June 30, 2002, compared to the same
periods in 2001, due to a decrease in the average debt outstanding and a
decrease in interest rates.
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 "Accounting for Goodwill and Other Intangible Assets" and, as
a result, recorded a non-cash charge of $37.6 million (after tax) as a
cumulative effect of a change in accounting principle. See Note 2 to the Interim
Consolidated Financial Statements for further discussion.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements are to provide working capital,
to finance capital expenditures, including bus acquisitions and to meet debt
service requirements, including the payment of interest on the 11 1/2% Senior
Notes. The Company's principal sources of liquidity are expected to be cash flow
from operations and borrowings under the Revolving Credit Facility. The Company
believes that its cash flow from operations, together with borrowings under the
Revolving Credit Facility, will fund its working capital and near-term capital
expenditure needs. As of June 30, 2002, the Company had outstanding borrowings
under the Revolving Credit Facility of $42.7 million, issued letters of credit
of $26.9 million and availability of $55.4 million. In July 2002, the Company
amended the Revolving Credit Facility to extend the maturity date one year, to
October 24, 2004.
Net cash provided by operating activities for the six months ended June 30, 2002
was $25.4 million, an increase of $20.5 million compared to $4.9 million
provided by operating activities during the same period of 2001. The principal
reason for the increase is an increase in claims liabilities under the Company's
self-insurance program. Net cash used for investing activities for the six
months ended June 30, 2001 was $18.2 million compared to $17.7 million net cash
used for investing during the same period in 2001. The $0.5 million change is
principally due to a slight increase in net capital expenditures compared to the
same period in 2001. Net cash used by financing activities for the six months
ended June 30, 2002 was $20.1 million as compared to net cash provided by
financing activities of $12.1 million during the same period in 2001. The $32.2
million difference is principally due to the pay down of the Revolving Credit
Facility from the increased operating cash flow and reduction of cash balances.
GOLDEN STATE INDICTMENT
In December 2001, Gonzalez, Inc. d/b/a Golden State Transportation ("Golden
State") and 22 current and former employees and agents of Golden State were
indicted as part of a 42-count federal criminal proceeding. The case, filed
before the United States District Court for the District of Arizona, is styled
U.S. v. Gonzalez, Inc, et al., Case No. CR 01-1696-TUC-RCC. The indictment
alleges that the defendants were engaged in a conspiracy, spanning over a
two-year period, to transport and harbor illegal aliens within the United
States. As part of the indictment, the U.S. Government has sought a forfeiture
of substantially all of Golden State's assets and obtained a restraining order
restricting access to bank accounts and restraining certain other real property
and vehicles. The restraining order allows Golden State to continue to operate
its business in the ordinary course and the order has been modified to permit
the payment of certain normal course expenses. On July 2, 2002, the restraining
order was lifted entirely as to Golden State's bank accounts and future cash
receipts.
15
Golden State and the individuals have pleaded not guilty to the charges. Golden
State intends to vigorously defend the matter. No trial date has been set for
this case. Golden State is currently in the process of obtaining and assessing
the significant volume of evidence amassed by the Government. At this early
stage in the proceeding, the probable outcome of this case cannot be predicted.
Additionally, management is unable to make a reasonable estimate of the
liability that may result from the final resolution of the indictment.
Accordingly, no liability relating to this matter has been recorded in the
Company's Consolidated Financial Statements.
Greyhound has a 51.4% ownership interest in Golden State and, at June 30, 2002,
the Company's investment in Golden State totaled $2.5 million. In addition, the
Company leases to, or guarantees the leases of, 67 of Golden State's buses and
the Company has a receivable of approximately $1.0 million due from Golden
State. As of the date of this report these buses are subject to $12.1 million of
third-party liens, which is comparable to management's estimate of the fair
market value of the buses.
POTENTIAL PENSION PLAN FUNDING REQUIREMENTS
The Company maintains nine defined benefit pension plans, the most significant
of which (the "ATU Plan") covers approximately 14,500 current and former
employees, fewer than 1,200 of which are active employees of the Company. The
ATU Plan was closed to new participants in 1983 and over 85% of its participants
are over the age of 50. For financial reporting and investment planning
purposes, the Company currently uses an actuarial mortality table that closely
matches the actual experience related to the existing participant population.
For funding purposes, legislation passed by the United States Congress mandates
the use of a prescribed actuarial mortality table and discount rates that differ
from those used by the Company for financial reporting and investment planning
purposes. Based upon the application of the actuarial mortality table, discount
rates and funding calculations prescribed by current regulations, and further
assuming a continuation of the freeze of wage and service accruals and that the
ATU Plan assets can obtain annual investment returns of 7.5%, estimated Company
contributions to the ATU Plan total $73 million over the next five years.
Lowering the assumed investment return on ATU plan assets to 5% results in
estimated contributions over the next five years of $91 million, while a 10%
return results in estimated contributions over the next five years of $64
million. However, no contributions are projected during the next two years under
either of the three scenarios discussed above. Nevertheless, there is no
assurance that the ATU Plan will be able to earn the assumed rate of return,
that new regulations may result in changes in the prescribed actuarial mortality
table and discount rates, or that there will be market driven changes in the
discount rates, which would result in the Company being required to make
contributions in the future that differ significantly from the estimates above.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q
Statements in this Form 10-Q that are not purely historical facts, including
statements regarding our beliefs, expectations, intentions, projections or
strategies for the future, may be "forward-looking statements" under the Private
Securities Litigation Reform Act of 1995. All forward-looking statements involve
risks and uncertainties that could cause actual results to differ materially
from the plans, intentions and expectations reflected in or suggested by the
forward-looking statements. Such risks and uncertainties include, among others,
the general economic condition of the United States and the future level of bus
travel demand; the impact of future terrorist incidents; operational disruptions
as a result of bad weather; the Company's future yields; increased costs for
security; the cost and availability of excess insurance coverage and the
Company's ability to retain authority to self-insure; the impact of changes in
fuel prices; the effect of future Government regulations; potential pension plan
funding requirements; limitations on financing flexibility and availability due
to changing credit markets and the uncertainty surrounding the outcome of the
Laidlaw Inc. reorganization proceedings; and other factors described from time
to time in the Company's publicly available Securities and Exchange Commission
filings. The Company undertakes no obligation to publicly update or revise any
forward-looking statements to reflect events or circumstances that may arise
after the date of this filing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in market risk from the disclosures provided
in Item 7A. Quantitative and Qualitative Disclosures About Market Risk as set
forth in the Company's 2001 Form 10-K.
16
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ELECTION OF DIRECTORS
On April 9, 2002, by written consent in lieu of an annual meeting of
shareholders, Laidlaw Transportation, Inc., the holder of all of the voting
securities of the Company re-elected John R. Grainger as the sole member of the
Board of Directors of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.19 Amendment Number Two to Loan and Security Agreement among Greyhound
Lines, Inc., as Borrower, the Financial Institutions named as Lenders,
and Foothill Capital Corporation as Agent dated July 24, 2002
10.20 Amendment Number Three to Loan and Security Agreement among Greyhound
Lines, Inc., as Borrower, the Financial Institutions named as Lenders,
and Foothill Capital Corporation as Agent dated July 26, 2002
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
None
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2002
GREYHOUND LINES, INC.
By: /s/ Jeffrey W. Sanders
---------------------------------------
Jeffrey W. Sanders
Senior Vice President and Chief
Financial Officer
ATLANTIC GREYHOUND LINES OF
VIRGINIA, INC.
By: /s/ Jeffrey W. Sanders
---------------------------------------
Jeffrey W. Sanders
Senior Vice President and Chief
Financial Officer
GLI HOLDING COMPANY
By: /s/ Jeffrey W. Sanders
---------------------------------------
Jeffrey W. Sanders
Senior Vice President and Chief
Financial Officer
GREYHOUND de MEXICO, S.A. de C.V.
By: /s/ Cheryl W. Farmer
---------------------------------------
Cheryl W. Farmer
Examiner
SISTEMA INTERNACIONAL de
TRANSPORTE de AUTOBUSES, INC.
By: /s/ Cheryl W. Farmer
---------------------------------------
Cheryl W. Farmer
Senior Vice President and Chief
Financial Officer
TEXAS, NEW MEXICO & OKLAHOMA
COACHES, INC.
By: /s/ Jeffrey W. Sanders
---------------------------------------
Jeffrey W. Sanders
Senior Vice President and Chief
Financial Officer
T.N.M. & O. TOURS, INC.
By: /s/ Jeffrey W. Sanders
---------------------------------------
Jeffrey W. Sanders
Senior Vice President and Chief
Financial Officer
VERMONT TRANSIT CO., INC.
By: /s/ Jeffrey W. Sanders
---------------------------------------
Jeffrey W. Sanders
Senior Vice President and Chief
Financial Officer
18
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
10.19 Amendment Number Two to Loan and Security Agreement among Greyhound
Lines, Inc., as Borrower, the Financial Institutions named as Lenders,
and Foothill Capital Corporation as Agent dated July 24, 2002
10.20 Amendment Number Three to Loan and Security Agreement among Greyhound
Lines, Inc., as Borrower, the Financial Institutions named as Lenders,
and Foothill Capital Corporation as Agent dated July 26, 2002
99.1 Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
</Table>