ITEM 1. BUSINESS
GENERAL
Greyhound Lines, Inc. and subsidiaries (the "Company") is the only nationwide provider of scheduled intercity bus transportation services in the United States. The Company serves the value-oriented customer by connecting rural and urban markets throughout the United States, offering scheduled passenger service to more than 2,600 destinations with a fleet of approximately 2,400 buses and approximately 1,600 sales locations. The Company also provides package express service, charter bus service and, in many terminals, food service. For the year ended December 31, 1997, the Company generated total operating revenues of $771.1 million and EBITDA (as defined herein) of $68.4 million.
The Company serves a diverse customer base, consisting primarily of low to middle income passengers from a wide variety of ethnic backgrounds. Management believes that the demographic groups that make up the core of the Company's customer base are growing at rates faster than the U.S. population as a whole. The Company believes that it is uniquely positioned to serve this broad and growing market because (i) the Company's operating costs, which are lower on an available-seat-mile basis than other modes of intercity transportation, enable it to offer passengers everyday low prices, (ii) the Company offers the only means of regularly scheduled intercity transportation in many of its markets, and (iii) the Company provides additional capacity during peak travel periods to accommodate passengers who lack the flexibility to shift their travel to off-peak periods .
BUSINESS STRATEGY
In late 1994 and early 1995, under the direction of a new management team, the Company developed a "back-to-basics" operating strategy. This strategy focused on providing a good customer-oriented product with a capacity-flexible, sound bus operation.
To implement this strategy, the Company improved customer service by (i) rebuilding its infrastructure, (ii) expanding the frequency and convenience of its schedule offerings and providing flexible scheduling of its equipment, drivers and other resources to meet peak travel demand, and (iii) introducing everyday low prices and actively managing fares in individual markets. In response to these initiatives, the Company has experienced year-over-year revenue growth in each of its last eleven consecutive quarters.
The following table illustrates the Company's significant improvements in operating and financial performance comparing 1997 to 1996 and 1994:
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(1) Represents earnings before interest, taxes, depreciation and amortization and extraordinary items. For 1994, EBITDA includes $54.9 million in certain operating charges. Excluding the impact of those certain operating charges, 1994 EBITDA would have been $25.5 million. When comparing the 1994 EBITDA, adjusted for these charges, to the 1997 EBITDA, 1997 shows a 168.2% increase over the adjusted 1994 EBITDA.
GROWTH STRATEGY
By the end of 1996, with the "back to basics" strategy fully implemented and providing a foundation of operating quality, the Company began to emphasize growth in each of its principal businesses.
Management believes the following represent significant growth opportunities for the Company:
o CORE PASSENGER GROWTH. The Company believes that its revenues will continue to grow as its core demographic customer base expands, and that this customer base is growing at a rate that exceeds the U.S. population growth rate as a whole. The Company also believes that there are opportunities to obtain incremental revenues from its existing customer base through continued targeted advertising and promotional programs and refinements in pricing and schedule offerings designed to reinforce the Company's position as the low-cost alternative to other forms of intercity transportation. In 1997, the Company served only 2% of the U.S. population while about 30% of the population has similar income and demographic characteristics to our served market. Because bus transportation represents one of the smallest and most capacity flexible segments of the intercity transportation market, the Company believes that it has a unique opportunity to realize substantial incremental revenues and operating profits by increasing its share of this market.
o CHARTER BUSINESS. As the Company expands its fleet size and driver corps to support the growth of the core passenger business, it will provide a significant, complementary growth opportunity in the charter business. The incremental fleet and driver corps will allow the Company to increase sales of charters during the off-peak periods and also provide the Company additional internal resources during the peak periods to support growth in the core business. The increased charter activity will provide additional profit margin while also "smoothing" seasonal earnings trends for the drivers.
o DOMESTIC ACQUISITIONS, INTERLINE RELATIONSHIPS AND INTERMODAL ALLIANCES. The bus transportation industry is highly fragmented. Accordingly, significant opportunities exist for the Company to acquire regional bus operators or to form strategic alliances with these carriers to increase its penetration of existing markets. During the third quarter of 1997, the Company completed two acquisitions involving regional bus carriers. On July 9, 1997, the Company purchased Carolina Coach Company, and affiliates ("Carolina"), a Mid-Atlantic bus carrier and on August 25, 1997, the Company purchased Valley Transit, Inc., and affiliates ("Valley"), a South Texas bus carrier. The Company expects to realize revenue growth and operating efficiencies as a result of these acquisitions. In addition, the Company has entered into and will continue to seek, new "pooling" arrangements, which typically result in reduced expenses due to the consolidation of terminal facilities and the elimination of redundant schedule offerings, while providing incremental revenue opportunities due to improved schedule patterns. The Company is currently a party to five pooling arrangements with regional carriers serving overlapping markets (one of which was implemented on January 13, 1998). The Company also has two pooling arrangements approved by the U.S. Surface Transportation Board ("STB") but not implemented and two additional pooling arrangements pending approval by the STB. Management believes future acquisitions of domestic regional carriers and the establishment of additional pooling arrangements, as well as intermodal alliances with airlines and Amtrak, represent opportunities to achieve further growth in passenger revenues by capitalizing on the Company's ability to serve additional passengers without proportionately increasing expenses.
o HISPANIC MARKETS. Management believes the Spanish speaking markets in the U.S. and Mexico represent a significant growth opportunity. The Company believes that the most effective way to service passengers in this market is through joint ventures or other business combinations with Mexico-based bus carriers and U.S.-based bus carriers that primarily serve these markets. With this goal in mind, the Company, on February 9, 1998, purchased a majority interest in Golden State, a family-owned bus carrier in Southern California. Additionally, during 1997 the Company invested in joint ventures that provide through-bus service on selected routes between destinations in the United States and Mexico and is involved in negotiations to establish other similar arrangements.
o EXPRESS BUSINESS. The Company is implementing programs to rebuild its package express business and capitalize on the market niche opportunities, specific to the Company's service. Improvements were put in place in 1997, including increased hours of service, improved billing, and the addition of more convenient schedules. These service improvements and the increased focus that the Company has placed on package express allowed the Company to capitalize on the business available during the United Parcel Service strike in August of this year. The Company will continue to develop and implement programs designed to further build the package express business. These programs focus on system upgrades to improve service, billing and package tracking for customers, and localized marketing strategies to capitalize on the Company's competitive strengths. The Company is concentrating on its market niche, which is same day or early next morning service, seven days-a-week, linking large and small markets. The Company is in a unique position to provide these types of services at an affordable price. Most importantly, the Company is focusing on developing door-to-door service across a significant portion of its network through strategic alliances with, or acquisitions of, pick-up and delivery ("P&D") carriers. The Company believes that door-to-door service combined with the Company's market advantages and low costs will position it for growth in the package delivery market.
Additionally, the Company believes other revenue growth opportunities are available, such as providing increased bus service to casino and commuter markets and marketing selected products or services to its unique customer base.
MARKETS
Passengers. While the Company's major passenger markets are large metropolitan areas, its business is geographically fragmented with the 50 largest sales outlets accounting for approximately 50% of 1997 ticket sales, and the 1,000 largest origin/destination city pairs producing only 46% of 1997 ticket sales. Demographic studies have shown that the Company's potential riders are concentrated in the northeastern, southern and industrial midwestern United States, as well as Texas and California. The typical passenger travels to visit friends and relatives and generally has an annual income of below $35,000. Based on market studies, the Company believes its customers are more price sensitive than time sensitive. In many cases, the Company's passengers report that they own automobiles considered sufficiently reliable for a trip of a similar distance, but travel by bus because they are traveling alone or because of the lower cost of bus travel. The majority of the Company's customers usually make the decision to take a trip only a short time before actually traveling and, for the most part, pay cash for their tickets on the day of departure.
Package Express. The Company's package express service caters to commercial shippers and delivery companies that require rapid delivery of small parcels, typically within 300 miles. Shipments include automotive repair parts, computer parts and forms, fresh flowers, eyeglasses, medical and dental supplies, architectural and legal documents, and pharmaceutical products. With its extensive network and multiple schedules, the Company is able to provide expedited service, especially to small towns. Most shipments arrive at their destination on the same day they are shipped or by early the following morning.
Food Service. The Company's food service division manages facilities in approximately 160 locations, which primarily serve the Company's passengers. These operations include Company-operated facilities and contract concessionaires and range in service levels from full-service cafeterias to vending machines.
MARKETING AND ADVERTISING
The Company's marketing and advertising philosophy is geared toward stimulating extra travel through price awareness, improving the awareness and image of Greyhound among potential customers and inducing first-time and repeat travel. The Company uses various means to advertise its passenger travel business including radio, television and print media (primarily yellow pages and magazines). Additionally, the Company offers convenient around-the-clock fare and schedule quotations via a toll-free telephone number through its telephone information centers. The Company's telephone centers handled 32.1 million calls in 1997, an increase of 17.3% over 1996. The Company also markets its other passenger and in-terminal services through advertising in the terminal facilities and in print media.
OPERATIONS
The Company utilizes approximately 125 company-operated bus terminals and approximately 1,500 agency-operated terminals and/or sales agencies organized in 11 districts and lead by district managers of customer service. Maintenance garages are maintained at 14 strategic locations and are supplemented by company-operated service islands and fueling points. The Company currently has approximately 4,300 drivers based in 87 different locations across the country. The drivers report to driver supervisors who are organized into 11 districts reporting to district managers of driver operations. The scheduling and dispatch of the Company's bus fleet and driver corps is a coordinated and centralized function performed by the Company's resource management group. This group's purpose is to serve as a liaison between management and the field in the planning and execution of daily operations through the Company's existing network. This is accomplished through the management of national dispatch operations for equipment and drivers, rental of additional buses to cover peak demand periods, planning and coordinating extra sections with the field and analyzing and implementing pooling arrangements with other carriers. This group also plans the fleet size and driver requirements by location during the year and assists in determining the resource needs based on the sales plan each year.
Information technology is an integral component of the Company's operations. The Company's information systems support, among other things, its scheduling and pricing, dispatch, operations planning, bus maintenance, telephone information center, customer service, point of sale, payroll and finance functions. As of December 31, 1997, the Company's automated fare and schedule quotation and ticketing system, called TRIPS, was in use at 319 locations.
COMPETITION
Passengers. The transportation industry is highly competitive. The Company's primary sources of competition for passengers are automobile travel, low cost air travel from both regional and national airlines, and in certain markets, regional bus companies and trains. During the past few years, airlines have increased their penetration in intermediate-haul markets (450 to 1,000 miles), which has resulted in the bus industry, in general, reducing prices in these markets in order to compete. Additionally, airline discount programs have attracted certain long-haul passengers away from the Company. However, these lower airline fares usually contain restrictions and require advance purchase. Typically, the Company's customers decide to travel only a short time before their trip and purchase their tickets on the day of travel. The Company's everyday low pricing strategy results in "walk-up" fares substantially below comparable airline fares. In instances where the Company's fares exceed an airline discount fare, the Company believes the airline fares typically are more restrictive and less readily available than travel provided by the Company. In addition, the Company believes that in many cases it offers more destination choices and more convenient schedules.
The automobile is the most significant form of competition to the Company. The out-of-pocket costs of operating an automobile are generally less expensive than bus travel, particularly for multiple persons traveling in a single car. The Company meets this competitive threat through price and convenient scheduling. To some extent, the Company is protected from the incremental economies of auto travel since many of its customers travel alone. The lack of multiple, reliable cars within a family and the fear of driving alone for long distances serve to offset the reduced convenience of bus travel and the economic advantage of multi-person travel in a single car.
Competition from regional bus companies has increased materially during the past several years. Price, frequency of service and convenient scheduling are the current strategies of the Company to meet this competition. The Company's competitors possess operating authority for, but do not currently operate over, numerous routes potentially competitive to the Company. Based on market and competitive conditions, the regional bus companies could operate such routes in the future. Competition by U.S.-based bus and van operators for the market represented by Spanish speaking customers in the U.S. is growing. As of January 1, 1997, barriers to entry into the cross-border intercity bus market between the U.S. and Mexico were reduced under the North American Free Trade Agreement ("NAFTA"). Entry into either market is still regulated by the respective U.S. and Mexican regulatory authorities. The U.S. government currently has a moratorium on grants of cross-border authority to Mexican-owned or controlled carriers of freight and passengers. There is no current indication as to when the moratorium will be lifted; however, should the moratorium be lifted, the Company could experience significant new competition on routes to, from and across
Mexican border points. Nevertheless, certain U.S.-based operators are providing cross-border service into Mexico at this time. NAFTA also permits U.S. carriers to make non-controlling, minority investments in Mexican-owned carriers and permits Mexican carriers to make non-controlling, minority investments in U.S.-owned carriers. In addition to bringing new competition, the Company believes that the changes under NAFTA will increase the volume of bus travel along both sides of the border and provide the Company with a growth opportunity. The Company believes that the most effective way to service passengers in this market is through joint ventures or other business combinations with Mexico-based bus carriers and U.S.-based bus operators that primarily serve these Spanish-speaking markets. The Company has established a separate operating subsidiary that has completed joint ventures that provide through-bus service on selected routes between destinations in the United States and Mexico, has made investments in U.S.-based carriers and is involved in negotiations to establish other similar arrangements.
Package Express. The Company faces intense competition in its package express service from local courier services, the U.S. Postal Service and overnight, express and ground carriers. The Company continues to develop programs to meet this competition and rebuild its package express business. These programs focus on system upgrades to improve service, billing and tracking for its customers, localized marketing strategies, and local or regional alliances with, or acquisitions of, P&D carriers. Due to the incremental nature of the package express business, the Company is able to provide same-day package express service at distances of up to 400 miles at a substantially lower price than prices charged by other delivery services. Management believes that if this capability is conveniently aligned with P&D services at both ends, the revenue potential of a value-priced, door-to-door, same-day delivery service will enable package express revenues to grow.
Food Service. The captive nature of the food service operations in the Company's terminals limits competition; however, in some locations proximity to fast food outlets and convenience stores can pose a competitive factor.
SEASONALITY
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 cash flows are seasonal in nature with a disproportionate amount of the Company's annual cash flows being generated during the peak travel periods. Therefore, an event that adversely affects ridership during any of these peak periods could have a material adverse effect on the Company's financial condition and results of operations for that year. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Seasonality."
WORKFORCE
At March 5, 1998, the Company employed approximately 11,700 workers, consisting of approximately 4,000 terminal employees, 4,300 drivers, 1,200 supervisory personnel, 800 mechanics, 900 telephone information agents and 500 clerical workers. Of the total workforce, approximately 9,400 are full-time employees and approximately 2,300 are part-time employees.
At March 5, 1998, approximately 46% of the Company's employees were represented by collective bargaining agreements. The Amalgamated Transit Union (the "ATU") represents approximately 4,800 of the Company's employees, including drivers, telephone information agents in the Omaha location, terminal workers in seven locations (approximately 170 employees) and about one-half of the Company's mechanics. The largest ATU agreement, which covers the drivers and maintenance employees, expires on January 31, 1999. In January 1998, the Company and the ATU reached a tentative agreement for a new labor contract. The agreement was submitted to the ATU membership for ratification and on March 14, 1998, the ATU membership rejected this agreement. The International Association of Machinists and Aerospace Workers (the "IAM") represents approximately 350 of the Company's employees, including the remaining mechanics. The IAM agreements expire on October 1, 1999. The Company also has bargaining agreements with the International Brotherhood of Teamsters, which represent approximately 108 employees at 3 terminal locations and the United Transportation Union, which represents employees at one of the Company's subsidiaries. Additionally during 1997, the ATU and Teamsters attempted to unionize employees in five terminal locations and one food service location. These unions succeeded in organizing employees at three terminals and one food service location; contracts for all but one of these locations are still in
negotiation involving approximately 100 employees still without a contract.
TRADEMARKS
In 1997 the Company acquired from the predecessor owner of Greyhound's domestic bus operations, now known as Viad Corp ("Viad"), the Greyhound name and trademarks and the "image of the running dog" trademarks worldwide, except in Canada. The Company believes that this name and the trademarks have substantial consumer awareness.
GOVERNMENT REGULATION
The Department of Transportation. As a motor carrier engaged in interstate, as well as intrastate, transportation of passengers and express shipments, the Company is, and must remain, registered with the United States Department of Transportation (the "DOT"). Failure to maintain a satisfactory safety rating, designate agents for service of process or to meet minimum financial responsibility requirements, after notice and opportunity to remedy, may result in the DOT's ordering the suspension or revocation of the registration of the Company and its right to provide transportation. DOT regulations also govern the qualifications, duties and hours of service of drivers, the standards for vehicles, parts and accessories, the maintenance of records and the submission of reports pertaining to the Company's drivers, buses and operations. The Company is subject to periodic and random inspections and audits by the DOT or, pursuant to cooperative arrangements with the DOT, by state police or officials, to determine whether the Company's drivers, buses and records are in compliance with the DOT's regulations. The Company, from time to time, has been cited by the DOT for noncompliance with its regulations but, nevertheless, has retained a satisfactory safety rating. The DOT establishes minimum financial responsibility requirements for motor carriers; the Company has met these requirements and has been authorized to partially self-insure its bodily injury and property damage liability. See "-- Insurance Coverage." The DOT also administers regulations to assure compliance with vehicle noise and emission standards prescribed by the Environmental Protection Agency (the "EPA"). All of the buses in the Company's fleet contain engines that comply with, or are exempt from compliance with, EPA regulations, but, on occasion, the Company has been cited and fined for non-compliance with noise or emission standards. Additionally, there is currently litigation pending in California, to which the Company is not presently a party, seeking to enforce the posting of public health warnings at locations where diesel fuel emissions are present.
Surface Transportation Board. The Company is also regulated by the DOT's Surface Transportation Board (the "STB"). The STB must grant advance approval for the Company to pool operations or revenues with another passenger carrier. The Company currently has two applications pending before the STB seeking approval of pooling agreements with Peter Pan Bus Lines. The STB, moreover, must authorize any merger by the Company with, or its acquisition or control of, another motor carrier of passengers. The Company must maintain reasonable through routes with other motor carriers of passengers, and, if found not to have done so, the STB can prescribe them. The Company is party to certain agreements, which are subject to STB authorization and supervision, for the adoption of mileage guides, rules, divisions or general rate adjustments.
State Regulations. As an interstate motor carrier of passengers, the Company may engage in intrastate operations over any of its authorized routes. By federal law, states are pre-empted from regulating the Company's fares or its schedules, including the withdrawal of service over any route. However, the Company's buses remain subject to state vehicle registration requirements, bus size and weight limitations, fuel sales and use taxes, speed and traffic regulations and other local standards not inconsistent with federal requirements.
Other. The Company is subject to regulation under the Americans with Disabilities Act (the "ADA"). Under the ADA and interim guidelines promulgated by the DOT, the Company is required to make its transportation system accessible to disabled persons. The DOT is currently developing final regulations regarding bus access. Following the promulgation of final regulations, which the DOT has announced are expected to be finalized by September 1998, the Company will have two years before the new regulations become effective. The Company believes that the DOT has several alternatives under consideration, ranging from requiring all of the Company's new buses to be equipped with lift equipment to requiring only that terminals be equipped with stationary lift devices. The ADA does not require the retrofitting of existing buses with lift equipment. The Company is unable to predict which of the various alternatives the DOT will select. However, the Company has concluded that the implementation of certain of these alternatives under consideration by
the DOT could be material to the Company's liquidity, financial condition and results of operations. Additionally, the ADA requires the Company to design its new terminal facilities and, where readily achievable, retrofit existing terminal facilities to eliminate barriers affecting access by handicapped persons. The Company has a program to identify and address mobility barriers at its facilities and has made, and is expected to continue to make, expenditures to address these issues.
INSURANCE COVERAGE
The predecessor agency to the STB granted the Company authority to self-insure its automobile liability exposure for interstate passenger service up to a maximum level of $5.0 million per occurrence which has been continued by the DOT. To maintain self-insurance authority, the Company is required to maintain a satisfactory safety rating by the DOT, a tangible net worth of $10.0 million (as of December 31, 1997, the Company's tangible net worth was $119.1 million) and a $15.0 million trust fund (currently fully funded) to provide security for payment of claims. Subsequent to the self-insurance grant by the federal government, 38 states granted the Company the authority to self-insure its intrastate automobile liability exposure. The Company maintains comprehensive automobile liability and general liability insurance to insure its assets and operations subject to a $1.5 million self-insured retention or deductible per occurrence. The Company also maintains property insurance subject to a $0.1 million deductible per occurrence and maintains workers' compensation insurance subject to a $1.0 million deductible per occurrence. Additionally, the Company is required by some states and some of its insurance carriers to maintain collateral deposits (which is discussed below in Liquidity and Capital Resources).
Insurance coverage and risk management expense are key components of the Company's cost structure. The DOT is currently studying whether to continue or modify the self-insurance program available to the motor carrier industry. The loss of self-insurance authority from the DOT or a decision by the Company's insurers to modify the Company's program substantially, by either increasing cost, reducing availability or increasing collateral, could have a materially adverse effect on the Company's liquidity, financial condition, and results of operations.
ENVIRONMENTAL MATTERS
The Company may be liable for certain environmental liabilities and clean-up costs relating to underground fuel storage tanks and systems in the various facilities presently or formerly owned or leased by the Company. Based upon surveys conducted solely by Company personnel or its experts, 45 locations have been identified as remaining sites requiring potential clean-up and/or remediation as of December 31, 1997. The Company has estimated the clean-up and/or remediation costs of these sites to be $2.9 million, of which approximately $0.3 million is indemnifiable by Viad.
The Company has potential liability with respect to two locations which the EPA has designated Superfund sites. The Company, as well as other parties designated by the EPA as potentially responsible parties, face exposure for costs related to the clean-up of those sites. Based on the EPA's enforcement activities to date, the Company believes its liability at these sites will not be material because its involvement was as a de minimis generator of wastes disposed of at the sites. In light of its minimal involvement, the Company has been negotiating to be released from liability in return for the payment of immaterial settlement amounts. Additionally, there are 12 Superfund sites that Viad had initially assumed responsibility and liability for addressing under the indemnity provisions of the 1987 acquisition agreement, as amended in 1991. All of these locations involve alleged disposal of hazardous wastes occurring years prior to the Company's corporate existence. In late 1997, Viad notified the Company, and asserted that the Company was responsible for any liabilities at such sites. The Company is contesting Viad's assertions and believes that the acquisition agreement, as amended, requires Viad to bear these liabilities. Viad had previously acknowledged in writing to the Company its responsibility for certain of the sites; in some cases, Viad has been managing the liability since mid-1991. Viad has advised the Company that, to date, it has incurred approximately $0.2 million in clean-up costs at these sites. At this point, the Company is unable to assess on-going or future potential liabilities at such sites should it be determined that the Company, and not Viad, will assume the liabilities at some or all of the 12 locations.
The Company has recorded a total environmental reserve of $2.7 million at December 31, 1997, a portion of which has also been recorded as a receivable from Viad for indemnification. The environmental reserve relates to
sites identified for potential clean-up and/or remediation and represents the present value of estimated cash flows discounted at 8.0%. As of the date of this filing, the Company is not aware of any additional sites to be identified, and management believes that adequate accruals have been made related to all known environmental matters.
ITEM 2.
ITEM 2. PROPERTIES
LAND AND BUILDINGS
At December 31, 1997, the Company used 507 parcels of real property in its operations, of which it owns 161 properties and leases 346 properties. Of those properties, 379 are bus terminals, 31 are maintenance facilities, 30 are terminal/maintenance facilities, and the remaining properties consist of driver dormitories, parking/storage lots, office/storage/warehouse buildings and telephone information centers. These properties are located throughout the United States. The Company believes the current makeup of its properties is adequate for its operations, and although there can be no assurance, based on its recent experience, the Company believes that it will be able to find suitable replacement properties on acceptable terms for any properties the Company chooses to replace, or which are condemned, or for which leases are not renewed or are otherwise terminated.
FLEET COMPOSITION, FLEET AGE AND BUS ACQUISITIONS
During 1997, the Company took delivery of 210 buses, retired 82 buses and through the acquisitions of Carolina and Valley added 137 buses, resulting in a fleet of 2,373 buses at year-end. Through January 31,1998, the Company has taken delivery of an additional 32 buses and retired 90 buses. At January 31, 1998, the Company owned 893 buses and leased an additional 1,422 buses. Motor Coach Industries, Inc. ("MCI") or its affiliate, Dina Autobuses, S.A. de C.V. ("DASA"), hereafter referred to collectively as "MCI", produced all but 109 of these buses. In January 1998, the Company entered into a new long-term supply agreement with MCI. The new agreement is for a term of ten years. If the Company decides to acquire new buses, the Company and its affiliates must purchase at least 80% of its new bus requirements from MCI pursuant to the agreement. The Company has ordered 163 new buses to be delivered during the first half of 1998. The Company is evaluating the possibility of additional deliveries during the second half of 1998. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources".
The average age of the Company's bus fleet has been reduced from 9.5 years in January 1993 to approximately 6.3 years as of January 31, 1998. However, 26% of the Company's bus fleet remains in excess of 10 years old. The Company intends, over time, to replace these older, less reliable vehicles with new buses. The Company believes that newer buses, as well as older buses with newer engines, are more fuel efficient than buses with older engines. In addition, new buses are generally less costly to maintain, in part because of warranty coverage, and generally enhance customer satisfaction.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
SECURITIES AND DERIVATIVE LITIGATION; SEC INVESTIGATION.
Between August and December 1994, seven purported class action lawsuits were filed by purported owners of the Company's Common Stock, Convertible Debentures and 10% Senior Notes against the Company and certain of its former officers and directors. The suits sought unspecified damages for securities laws violations as a result of statements made in public reports and press releases and to securities analysts during 1993 and 1994 that were alleged to have been false and misleading.
All the purported class action cases referred to above (with the exception of one suit that was dismissed before being served on any defendants) were transferred to the United States District Court for the Northern District of Texas, the Court in which the first purported class action suit was filed, and were pending under a case styled In re Greyhound Securities Litigation, Civil Action 3-94-CV-1793-G. A joint pretrial order was entered in the litigation which consolidated for pretrial and discovery purposes all of the stockholder actions and, separately, all of the debtholder actions. The joint pretrial order required plaintiffs to file consolidated amended complaints and excused answers to the original complaints. In July 1995, the plaintiffs filed their consolidated amended complaints, naming the Company, Frank J. Schmieder, J. Michael Doyle, Phillip W. Taff, Robert R. Duty, Don T. Seaquist, Charles J. Lee, Charles A. Lynch and Smith Barney Incorporated as defendants. Messrs. Lee, Lynch and Taff were subsequently dismissed from the case by the plaintiffs. In September 1995, the various defendants filed motions to dismiss plaintiffs' complaints. In October 1995, plaintiffs filed a motion seeking to certify the class of plaintiffs.
On October 3, 1996, the Court ruled in favor of the Company and all other defendants, granting defendants' motions to dismiss. Pursuant to the Court's order, the complaints were dismissed, with leave granted to the plaintiffs to refile amended complaints within 20 days thereafter. On October 23, 1996, an amended complaint was tendered to the Court. All seven class representatives involved in the prior complaints were dropped from the case. A new purported class plaintiff, John Clarkson, was named. A motion was filed seeking leave to permit Mr. Clarkson to intervene as the new class representative. The amended complaint alleged a class period of May 4, 1993 to October 26, 1993 and was brought only on behalf of holders of Common Stock. The amended complaint named the same defendants involved in the dismissed cases (the Company, Messrs. Schmieder, Doyle, Duty and Seaquist and Smith Barney Incorporated); no new defendants were added and none were dropped. The Court advised the parties that no responsive pleading needed to be filed to the amended complaint until such time as the Court ruled on the motion for intervention filed by Mr. Clarkson. In December 1996, the defendants filed responses to plaintiff's motion for intervention. In January 1997, the plaintiff filed a reply brief.
On August 15, 1997, the Court denied Mr. Clarkson leave to intervene and dismissed the litigation, noting that all claims asserted had been adjudicated. On September 12, 1997, a notice of appeal was filed by counsel for the original seven plaintiffs, seeking a review of the Court's ruling of October 3, 1996. On February 9, 1998, plaintiffs dismissed their appeal, without prejudice, with a right to re-file the appeal within six months.
In November 1994, a shareholder derivative lawsuit was filed by Harvey R. Rice, a purported owner of the Company's Common Stock, against present directors and former officers and directors of the Company and the Company as a nominal defendant. The suit seeks to recover monies obtained by certain defendants by allegedly trading in the Company's securities on the basis of nonpublic information and to recover monies for certain defendants' alleged fraudulent dissemination of false and misleading information concerning the Company's financial condition and future business prospects. The suit, filed in the Delaware Court of Chancery, New Castle County, is styled Harvey R. Rice v. Frank J. Schmieder, J. Michael Doyle, Charles A. Lynch, Richard J. Caley, Thomas F. Meagher, Thomas G. Plaskett, Kenneth R. Norton, Robert B. Gill, Alfred E. Osborne, Jr., J. Patrick Foley, Charles J. Lee and Greyhound Lines, Inc., Civil Action No. 13854. Pursuant to a stipulation, the time for all defendants to answer, move or otherwise plead with respect to the derivative complaint is not yet due.
In May 1995, a lawsuit was filed on behalf of two individuals, purported owners of the Company's Common Stock, against the Company and certain of its former officers and directors. The suit sought unspecified damages for securities laws violations as a result of statements made in public reports and press releases and to securities analysts during 1993 and 1994 that are alleged to have been misleading. The suit, filed in the United States District Court for
the Northern District of Ohio, was styled James Illius and Theodore J. Krawec v. Greyhound Bus Lines, Inc., Frank J. Schmieder and J. Michael Doyle, Civil Action No. 1-95-CV-1140. The defendants filed a motion to transfer venue seeking to have the case transferred to the United States District Court for the Northern District of Texas where the class action litigation described above was pending. In September 1995, the defendants' motion was granted, and the matter was transferred and was consolidated into the Federal Court class action litigation described above.
On October 29, 1996, a purported class action lawsuit was brought by a purported holder of Common Stock against the Company, certain of its former officers and directors and Smith Barney and Morgan Stanley & Company, Inc. The suit seeks unspecified damages for alleged federal and Texas state securities laws violations in connection with a Common Stock offering made by the Company in May 1993. The suit, filed in the 44th Judicial District Court of Dallas County, Texas, is styled John Clarkson v. Greyhound Lines, Inc., Frank Schmieder, J. Michael Doyle, Robert R. Duty, Don T. Seaquist, Smith Barney, Inc. and Morgan Stanley & Company, Inc., Case No. 96-11329-B. Plaintiff, John Clarkson, is the same individual who sought to intervene in the Federal Court class action litigation described above, and the same law firms have appeared for the plaintiff in both cases. On December 20, 1996, the defendants filed their answers to the lawsuit and pleas in abatement asking the Court to stay all proceedings pending resolution of the intervention motion and Federal Court class action lawsuit. On February 28, 1997, the suit was transferred to a different judge in the 68th Judicial District Court in Dallas. On March 28, 1997, the Court denied the defendants' pleas in abatement requesting the stay. In addition, on September 12, 1997, plaintiff filed a motion seeking to certify the class of plaintiffs. This motion, which will be contested by the defendants, is currently set for hearing on April 13, 1998. The Court has presently set a trial date for this case of June 16, 1998. No additional hearings or proceedings are scheduled.
Based on a review of the litigation, a limited investigation of the underlying facts and discussions with legal and outside counsel, the Company does not believe that the outcome of the above described lawsuits would have a material adverse effect on its business, financial condition, results of operations and liquidity. The Company intends to defend against the actions vigorously. To the extent permitted by Delaware law, the Company is obligated to indemnify and bear the cost of defense with respect to lawsuits brought against its officers and directors. The Company maintains directors' and officers' liability insurance that provides certain coverage for itself and its officers and directors against claims of the type asserted in the subject litigation. The Company has notified its insurance carriers of the asserted claims. Preliminary settlement discussions have taken place among the Company, the Company's insurance carriers and the plaintiffs but no agreement has been reached.
In January 1995, the Company received notice that the Securities and Exchange Commission is conducting a formal, non-public investigation into possible securities laws violations allegedly involving the Company and certain of its former officers, directors and employees and other persons. The Commission's Order of Investigation (the "Order of Investigation") states that the Commission is exploring possible insider trading activities, as well as possible violations of the federal securities laws relating to the adequacy of the Company's public disclosures with respect to problems with its passenger reservation system implemented in 1993 and lower-than-expected earnings for 1993. In addition, the Commission has stated that it will investigate the adequacy of the Company's record keeping with respect to the passenger reservation system and its internal auditing controls. Although the Commission has not announced the targets of the investigation, it does not appear from the Order of Investigation that the Company is a target of the insider trading portion of the investigation. In September 1995, the Commission served a document subpoena on the Company requiring the production of documents, most of which the Company had voluntarily produced to the Commission in late 1994. The Company has fully cooperated with the Commission's investigation of these matters. The Company has had limited contact with the Commission in connection with the investigation since January 1996. The probable outcome of this investigation cannot be predicted at this stage in the proceeding.
OTHER LEGAL PROCEEDINGS.
In addition to the litigation discussed above, the Company is a defendant in various lawsuits arising in the ordinary course of business, primarily cases involving personal injury and property damage claims and employment-related claims. Although these lawsuits involve a variety of different facts and theories of recovery, the majority arise from traffic accidents involving buses operated by the Company. The vast majority of the personal injury and property damage claims are covered by insurance for amounts in excess of the self-retention or deductible portion of the policies. Therefore, based on the Company's assessment of known claims and its historical claims payout pattern
and discussion with legal and outside counsel and risk management personnel, management believes that there is no proceeding either threatened or pending against the Company relating to such personal injury and/or property damage claims arising in the ordinary course of business that, if resolved against the Company, would materially exceed the amounts recorded.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The common stock of the Company, par value $.01 per share (the "Common Stock"), is listed on the American Stock Exchange under the symbol "BUS." The following table sets forth the high and low sale prices for the Company's Common Stock during the periods indicated as reported by the American Stock Exchange:
HOLDERS
The number of shares of Common Stock outstanding as of March 11, 1998, was 59,456,628. The Company has issued 59,565,820 shares of Common Stock, of which 109,192 shares are currently held by the Company as treasury stock. As of March 11, 1998 there were approximately 11,402 recordholders of Common Stock.
DIVIDENDS
The Company has not paid any dividends on the Common Stock in the past and does not expect to pay any dividends on the Common Stock in the foreseeable future. The indenture governing the Company's 11 1/2% Senior Notes and the Revolving Credit Facility restricts the Company's ability to pay dividends on the Common Stock. In the event the Company was contractually permitted to pay dividends, the holders of Common Stock would be entitled to receive dividends only when, as and if declared by the Board of Directors of the Company, subject to the prior rights and preferences, if any, of holders of preferred stock.
CONVERTIBLE DEBENTURES
At December 31, 1997, the Company had outstanding $9.8 million aggregate principal amount of its 8 1/2% Convertible Subordinated Debentures due March 31, 2007 (the "Convertible Debentures"). At the option of the holders thereof, the Convertible Debentures may be converted into shares of Common Stock at any time prior to maturity (unless earlier redeemed or repurchased), at a conversion rate of approximately 80.81 shares (subject to adjustment in certain events) of Common Stock per $1,000 principal amount of Convertible Debentures.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL INFORMATION
The statement of operations data and statement of financial position data set forth below have been derived from the audited Consolidated Financial Statements of the Company for each of the respective periods indicated. The following financial information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Business" and the Consolidated Financial Statements and notes thereto included elsewhere in this filing. Certain reclassifications have been made to the prior period statements to conform them to the December 31, 1997 classifications.
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FOOTNOTES TO SELECTED CONSOLIDATED FINANCIAL INFORMATION
(a) The 1994 results reflect $61.9 million in certain operating charges, including increases in insurance and legal reserves to recognize pre-bankruptcy claims previously thought to have been barred in the Company's Chapter 11 reorganization (which concluded in October 1991), adverse claims development in 1994 and certain litigation exposure; write-downs of real estate and other assets (including $7.0 million of depreciation); costs associated with an operational restructuring; and a $17.0 million increase in the income tax provision due to the reversal of a previously recognized deferred tax benefit.
(b) Operating rents include bus operating lease payments of $32.1 million, $27.5 million, $23.7 million, $22.7 million, and $20.0 million for the years ended December 31, 1997, 1996, 1995, 1994, and 1993, respectively.
(c) For the year ended December 31, 1997, the Company recorded an extraordinary loss of $25.3 million relating to (i) the retirement of an interest rate swap ($2.5 million), (ii) the retirement of the 10% Senior Notes ($21.3 million) and (iii) the write-off of debt issuance costs related to the Revolving Credit Facility in place prior to the amended and restated Revolving Credit Facility that was completed in May 1997 ($1.5 million). For the year ended December 31, 1994, the Company recorded (i) an extraordinary loss of $3.6 million, of which $3.2 million related to the write-off of debt issuance costs and $0.4 million related to professional fees in conjunction with the replacement of the Company's existing credit agreement with a new credit agreement and (ii) an extraordinary gain of $41.9 million related to the conversion of $89.0 million of Convertible Debentures into Common Stock. For the year ended December 31, 1993, the Company recorded an extraordinary loss of $0.4 million on the write-off of debt issuance costs related to the replacement of the Company's then existing credit agreement with a new credit agreement.
(d) The net impact from adoption of SFAS No. 109, "Accounting For Income Taxes," was $0.7 million and is reported as a charge to earnings as the cumulative effect of a change in accounting principle for the year ended December 31, 1993.
(e) In January 1995, the Company issued an additional 16.3 million shares of Common Stock in connection with the consummation of its Common Stock rights offering, which provided net proceeds of approximately $28.9 million. The Company issued 4.0 million shares of Common Stock on October 3, 1995 in a public offering, which provided net proceeds of $15.4 million. The completion of the Company's 1994 financial restructuring resulted in the issuance of approximately 22.8 million shares of Common Stock in December 1994 upon the conversion of approximately $89.0 million of Convertible Debentures into Common Stock.
(f) The Company adopted SFAS No. 128 "Earnings Per Share" (SFAS No. 128) effective December 15, 1997. This statement requires the replacement of primary and fully diluted earnings per share with basic and diluted earnings per share. The calculation of diluted earnings per share uses the average share price for the period rather than the more dilutive greater of average share price or end of the period price required by APB Opinion 15. The adoption of SFAS No. 128 did not have a material impact on the earnings per share calculation.
(g) Represents income before interest, taxes, depreciation and amortization, extraordinary items and changes in accounting principles. EBITDA is presented because management believes investors consider it useful in evaluating a company's ability to service and/or incur debt. EBITDA should not be considered in isolation from or as a substitute for net income, cash flows from operating activities and other consolidated income or cash flow data prepared in accordance with generally accepted accounting principles or as a measure of profitability or liquidity.
ITEM 7.
ITEM 7. 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, which accounted for 85.4%, 4.6% and 2.8%, respectively, of the Company's total operating revenues for 1997. The Company's operations include a nationwide network of terminal and maintenance facilities, a fleet of approximately 2,400 buses and over 1,600 sales outlets.
In late 1994 and early 1995, under the direction of the Company's new management team, the Company implemented a "back-to-basics" operating strategy. This strategy focused on the Company's national bus network and capitalizing on its low operating costs to attract and retain customers, which management identified as the first step in rebuilding the Company's financial performance. By the end of 1996, with the "back to basics" strategy fully implemented and providing a foundation of operating quality, the Company began to emphasize growth in each of its principal businesses.
The Company believes that incremental increases in passenger revenues will produce disproportionately larger increases in operating profits as many of the Company's operating expenses are fixed, such as depreciation, amortization, overhead and lease expenses related to buses and facilities. In addition, the operating costs necessary to produce the Company's base schedule of offerings, which consist of labor, fuel, maintenance, insurance and long-term bus leases, cannot be changed rapidly. Accordingly, these costs do not vary proportionately with short-term increases in demand for the Company's services.
RESULTS OF OPERATIONS
The following table sets forth the Company's results of operations as a percentage of total operating revenue for 1997, 1996 and 1995:
The following table sets forth certain operating data for the Company for 1997, 1996 and 1995. Certain statistics have been adjusted and restated from those previously published to provide consistent comparisons.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The Company's results of operations include the operating results of Carolina Coach Company, and affiliates ("Carolina") and Valley Transit, Inc., and affiliates ("Valley"), collectively referred to as "the acquisitions". The results for the acquisitions are included as of their respective purchase dates, both of which occurred during the third quarter of 1997.
Operating Revenues. Total operating revenues increased $70.3 million (or 10.0%) for the year ended December 31, 1997 compared to the same period in 1996. Transportation services revenues increased $62.8 million (or 9.9%) in 1997 compared to 1996 due to a $60.6 million (or 10.1%) increase in regular route revenues (including $11.9 million related to the acquisitions) and a $2.2 million (or 6.4%) increase in package express revenues (including $0.7 million related to the acquisitions). The 10.1% increase in regular route revenues reflects a 13.0% increase in the number of passengers carried offset by a 1.4% decrease in yield. Excluding the impact of the acquisitions, the Company recognized a 7.3% increase in passengers carried, a 2.6% increase in trip length and a 1.8% decrease in yield. The decrease in yield reflects a significant growth in long-haul traffic (passengers traveling more than 450 miles), as the Company has promoted and priced this product for growth. However, the reduction in yield was partially offset by growth in the short-haul market (passengers traveling less than 450 miles), which typically produces higher yields and, in 1997, was further offset by price increases where appropriate. The Company was able to realize these price improvements on the short-haul traffic while substantially increasing the number of passengers carried. The Company was able to achieve this "double positive" through continued emphasis on improving service while actively managing fares in individual markets. On a consolidated basis, the decrease in trip length reflects the impact of the acquisitions, as both Carolina and Valley have significantly shorter trip lengths than the Company as a whole.
The following chart reflects the increase in regular route passenger revenue by quarter:
In 1997 the Company saw an increase in package express revenues, after nine years of year-over-year declines. Package express revenues increased due to an increase in shipments handled as a result of the United Parcel Service labor strike in August 1997, the retention of a portion of those customers subsequent to the strike and a price increase. In addition, in select markets, the Company has implemented a centralized telephone customer service department dedicated to package express service and coordinated pick-up and delivery services.
Food service and other operating revenues increased $7.5 million (or 10.8%) for the year ended December 31, 1997 compared to the same period in 1996 primarily due to a $2.6 million (or 30.1%) increase in charter service revenues (including $0.4 million related to the acquisitions) and an increase in revenues from other in-terminal services, such as money order sales, prepaid ticket orders and increased sales of food service and retail products in the Company's in-terminal stores.
Operating Expenses. Total operating expenses increased $54.0 million (or 7.9%) for the year ended December 31, 1997, compared to the same period in 1996. The increase is due primarily to increased bus miles (7.9%), higher driver wages, increased terminal salaries, increased ticket and express commissions due to higher sales, and increased bus operating leases. Additionally, expenses attributable to the operations of the acquisitions ($9.9 million) are included as of their acquisition dates, which both occurred in the third quarter. Despite these increases, total operating expenses decreased as a percentage of total operating revenues.
Maintenance costs increased $3.6 million (or 4.9%) for the year ended December 31, 1997, compared to the same period in 1996, primarily due to increased bus miles and the inclusion of the acquisitions. Despite these increases, maintenance costs decreased on a per-mile basis and as a percentage of total operating revenues. The Company
intends to continue to manage the average age of its fleet in order to increase the reliability of its service while reducing overall costs.
Transportation expenses, which consist primarily of fuel costs and driver salaries, increased $16.3 million (or 9.6%) for the year ended December 31, 1997, compared to the same period in 1996, due primarily to increased bus miles, a contractual driver wage increase, and the inclusion of the acquisitions. The additional miles resulted in higher overall fuel expense and an increase in driver wages and related driver expenses. Transportation expenses decreased on a per-mile basis, but increased as a percentage of total operating revenues due primarily to the impact of the contractual wage increase which was partially offset by lower fuel prices. The Company has taken steps to limit its exposure to fluctuations in fuel prices by contracting for delivery of a portion of its 1998 fuel purchases at prices below 1997 levels for the same periods.
Agents' commissions and station costs increased $9.4 million (or 7.1%) for the year ended December 31, 1997, compared to the same period in 1996, primarily due to commissions from increased ticket and express sales and the inclusion of the acquisitions. Despite these increases, agents' commissions and station costs decreased as a percentage of total operating revenues.
Marketing, advertising and traffic expenses increased $1.0 million (or 4.1%) for the year ended December 31, 1997, compared to the same period in 1996, but decreased as a percentage of total operating revenues. The increase is primarily due to higher advertising agency fees and production costs. Media advertising increased over 1996 but the increased costs were entirely offset by the exchange of bus wrap advertising for trade discounts. Additionally, cost savings were recognized related to bringing in-house certain computing services. As part of the Company's growth strategy, the Company expects to continue to increase advertising expenditures in 1998.
Insurance and safety costs increased $4.8 million (or 11.6%) for the year ended December 31, 1997, compared to the same period in 1996, due primarily to increased bus miles and the inclusion of the acquisitions.
General and administrative expenses increased $10.3 million (or 12.7%) for the year ended December 31, 1997, compared to the same period in 1996, primarily due to additions to administrative personnel in late 1996, officer severance, an increase in the pay-out of the management incentive plan related to improved company performance, and the inclusion of the acquisitions.
Depreciation and amortization expense increased $0.6 million (or 1.9%) for the year ended December 31, 1997, compared to the same period in 1996, primarily due to the purchase of additional buses in 1997 and late 1996 and the depreciation and amortization attributable to the acquisitions. Depreciation and amortization expense decreased as a percentage of total operating revenues.
Operating taxes and license costs increased $1.7 million (or 3.4%) for the year ended December 31, 1997, compared to the same period in 1996, primarily due to increased payroll taxes resulting from increased salaries and headcounts related to higher business volume and the inclusion of the acquisitions. Operating taxes and license costs decreased as a percentage of total operating revenues.
Operating rents increased $5.1 million (or 9.5%) for the year ended December 31, 1997, compared to the same period in 1996, primarily due to an increase in the number of buses leased under operating leases in 1997 and the inclusion of the acquisitions. Operating rents were 7.7% of total operating revenues in each of 1997 and 1996.
Other operating expenses increased $1.7 million (or 20.7%) for the year ended December 31, 1997, compared to the same period in 1996, primarily due to higher costs of goods sold associated with increased retail sales. As a result, other operating expenses as a percentage of total operating revenues increased slightly.
Interest expense increased $0.3 million (or 1.1%) for the year ended December 31, 1997, compared to the same period in 1996, as a result of increased borrowing on the Revolving Credit Facility partially offset by lower effective interest rates on the Company's 11 1/2% Senior Notes compared to the effective interest rate on the retired 10% Senior Notes and renegotiated Revolving Credit Facility. The increased borrowing is attributed to the purchase of the
acquisitions, the five terminals purchased from Viad, and the buses purchased for sale/leaseback transactions partially offset by proceeds from the Preferred Stock offering in April 1997. Additionally, the Company added three new capital leases for 77 buses in December 1996. Interest expense decreased as a percentage of total operating revenues.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Operating Revenues. Total operating revenues increased $43.8 million (or 6.7%) for the year ended December 31, 1996, compared to the same period in 1995. Transportation services revenues increased $35.4 million (or 5.9%) in 1996 compared to 1995 due to a $37.5 million (or 6.7%) increase in regular route revenues, offset in part by a $2.2 million (or 6.1%) decrease in package express revenues. The 6.7% increase in regular route revenues reflects a 4.6% increase in the number of passengers carried and a 3.0% increase in yield. The increase in yield is due in part to an increase in short-haul (less than 450 miles) and intermediate-haul (450 to 1,000 miles) traffic, which generally generate a higher yield than long-haul traffic. The following chart reflects the increase in regular route passenger revenue by quarter:
Package express revenues declined due to the continuing effects of a reduction in 1994 of the number of routes served and the number of hours that the Company's terminals were open, which resulted in a loss of customers that had not been regained. In 1996, the Company increased its focus on the package express business in an effort to reverse the decline in package express service revenues. The Company implemented increased hours of service, improved billing and added more convenient schedules. In addition, in select markets, the Company implemented a centralized telephone customer service department dedicated to package express service.
Food service revenues increased $2.0 million (or 10.3%) for the year ended December 31, 1996, compared to the same period in 1995, primarily due to the addition of five new locations and the increase in passenger traffic, offset in part by the closing of two locations.
Other operating revenues, consisting primarily of revenue from charter and in-terminal sales and services, increased $6.4 million (or 15.3%) for the year ended December 31, 1996, compared to the same period in 1995, primarily due to a $2.9 million increase in charter service revenues and an increase in revenues from other in-terminal services, such as money order sales, prepaid ticket orders and increased sales of gifts and other retail products.
Operating Expenses. Total operating expenses increased $32.3 million (or 5.0%) for the year ended December 31, 1996 compared to the same period in 1995.
Maintenance costs increased $4.9 million (or 7.2%) for the year ended December 31, 1996, compared to the same period in 1995, due to a 4.0% increase in bus miles and a 3.0% increase in maintenance costs per bus mile. Maintenance costs increased on a per-mile basis due to an increase in the number of engine changes, contractual pay increases for hourly maintenance employees, the opening of an additional maintenance facility in March 1996 and a rate increase from a third-party provider of bus cleaning services.
Transportation expenses, which consist primarily of fuel costs and driver salaries, increased $14.1 million (or 9.0%) for the year ended December 31, 1996, compared to the same period in 1995, due to the 4.0% increase in bus miles and a 4.8% increase in transportation expenses per bus mile. Transportation expenses increased on a per-mile basis due to a $5.8 million impact of increased fuel prices (average price per gallon of $0.71 in 1996 versus $0.59 in 1995), a contractual pay increase for drivers and additions to the driver supervisory staff. Transportation expenses increased as a percentage of total operating revenues.
Agents' commissions and station costs increased $6.0 million (or 4.8%) for the year ended December 31, 1996, compared to the same period in 1995, primarily due to increased ticket sales, as well as the conversion of 75 Company-operated ticketing facilities to commissioned agencies, offset in part by the elimination of facility, utility
and supply costs associated with the converted ticketing facilities. The conversions also serve to reduce insurance and general and administrative costs. Increased costs associated with higher call volumes were entirely offset by lower long distance telephone rates and the discontinuance of a third-party provider of telephone customer services. Despite the increase, agents' commissions and station costs decreased as a percentage of total operating revenues.
Marketing, advertising and traffic expenses increased $0.3 million (or 1.2%) for the year ended December 31, 1996, compared to the same period in 1995, primarily due to an increase in advertising expenses in the fourth quarter of 1996.
Insurance and safety costs decreased $11.7 million (or 22.2%) for the year ended December 31, 1996, compared to the same period in 1995, as the increased exposure relating to the 4.0% increase in bus miles was more than offset by continued favorable claims experience resulting from the Company's increased focus on claims management and risk reduction programs.
General and administrative expenses increased $8.4 million (or 11.7%) for the year ended December 31, 1996, compared to the same period in 1995, primarily due to additions to administrative personnel and increased benefit costs Company-wide and to a reduction in pension income from $2.1 million in 1995 to $1.0 million in 1996.
Depreciation and amortization expense decreased $0.3 million (or 1.0%) for the year ended December 31, 1996, compared to the same period in 1995, primarily due to the write-down in the fourth quarter of 1995 of the realizable value of some older buses and certain real estate that subsequently was sold, offset in part by the depreciation on 102 buses acquired in December 1995 (51 of which were sold and leased back in 1996) and 35 buses acquired in 1996.
Operating taxes and license costs increased $1.6 million (or 3.3%) for the year ended December 31, 1996, compared to the same period in 1995, primarily due to increased fuel and oil taxes resulting from a 4.0% increase in total bus miles in 1996 compared to 1995 and increased payroll taxes resulting from higher salaries. Despite the increase, operating taxes and license costs decreased as a percentage of total operating revenues.
Operating rents increased $6.1 million (or 12.7%) for the year ended December 31, 1996, compared to the same period in 1995, primarily due to an increase in the number of bus operating leases in 1996 and an increase in casual bus rentals to accommodate higher peak traffic volume in 1996 compared to 1995.
Other operating expenses increased $1.6 million (or 24.2%) for the year ended December 31, 1996, compared to the same period in 1995, primarily due to a $1.2 million gain in 1995 on the repurchase by the Company of $10.7 million aggregate principal amount of 10% Senior Notes.
Interest expense increased $0.5 million (or 1.9%) for the year ended December 31, 1996, compared to the same period in 1995, as a result of higher borrowings under the Revolving Credit Facility, offset in part by the elimination of interest expense on the portion of the 10% Senior Notes repurchased by the Company in 1995. Despite the increase, interest expense decreased as a percentage of total operating revenues.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements are to provide working capital, to finance capital expenditures, including bus acquisitions, to meet debt service requirements, including the payment of interest on borrowings under the Revolving Credit Facility and interest on the 11 1/2% Senior Notes and to pay Preferred Stock dividends. 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 be sufficient to meet its liquidity needs for the foreseeable future.
Net cash provided by operating activities was $50.4 million, $16.0 million and $29.5 million for the years ended December 31, 1997, 1996 and 1995, respectively. Net cash used for investing activities was $81.4 million, $24.1 million and $34.1 million for 1997, 1996 and 1995, respectively, principally due to capital expenditures, consisting
primarily of acquisitions of buses and real estate and facility improvements, totaling $45.1 million, $38.4 million and $46.4 million for 1997, 1996 and 1995, respectively, offset in part by proceeds of assets sold of $6.0 million, $16.7 million and $12.3 million, respectively. Additionally, cash used in 1997 for investing activities includes payments for business combinations of $40.1 million relating to the acquisitions. Net cash provided by (used for) financing activities was $32.1 million, $5.5 million and ($1.4) million for 1997, 1996 and 1995, respectively.
As a part of its operating strategy, the Company anticipates continuing to make significant capital expenditures in connection with improvements to its infrastructure, including acquiring buses, making improvements to its terminals and maintaining and upgrading its computer systems. The Company's experience indicates that as the age of its bus fleet increases, the dependability and quality of service declines, which may make the Company less competitive. In addition, the Company believes that acquiring new buses and improving the Company's terminals and computer systems will permit the Company to continue to improve customer service, which the Company believes has contributed significantly to its improved operating results in 1995, 1996 and 1997. The Company has ordered 163 new buses to be delivered during the first half of 1998, the majority of which will be temporarily financed through MCI or one of its affiliates and/or the Revolving Credit Facility. The Company intends to seek permanent operating lease financing for these buses.
The Company generally uses lease financing with purchase options as the principal source of bus financing in order to achieve the lowest net cost of bus financing. Depending on the specific terms of a lease, such lease may be accounted for as either an operating or capital lease. The Company may also acquire buses outright and may purchase buses and subsequently engage in sale-leaseback transactions with respect to such buses.
The following table summarizes the Company's bus acquisitions and other capital expenditures for 1997, 1996 and 1995:
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(1) Includes buses that were purchased in the year indicated and that subsequently were sold and leased back by the Company in such year. Excludes buses that were purchased in a prior year and sold and leased back by the Company in the year indicated.
(2) Includes buses that were purchased in the year indicated and that were sold and leased back by the Company in a subsequent year. Excludes buses that were purchased in the year indicated and that subsequently were sold and leased back by the Company in such year.
(3) Consists of the purchase price of buses purchased in the year indicated, including the purchase price of buses that subsequently were sold and leased back by the Company, minus the net proceeds to the Company from all sale-leaseback transactions and other sales of buses during such year.
The Company requires significant cash flows to meet its debt service and other continuing obligations. As of December 31, 1997, the Company had $208.0 million of long-term indebtedness outstanding, including $25.8 million of borrowings under the Revolving Credit Facility and $150.0 million of 11 1/2% Senior Notes. In addition, as of December 31, 1997, the Company had total availability of $79.1 million under the Revolving Credit Facility.
The Company is a party to a Revolving Credit Facility which was renegotiated in December 1996 and May 1997. The amended and restated Revolving Credit Facility consists of (i) a revolving facility providing for advances of up to $92.5 million based on the liquidation value of certain core vehicles, (ii) a revolving facility providing for advances of up to $2.5 million based on a formula of eligible accounts receivable and (iii) a real estate facility providing for borrowings of up to $30.0 million based on fair market value of certain core real property collateral (the "Real Estate Facility"). The Revolving Credit Facility has two interest rate options, prime and LIBOR. As of March 5, 1998, the Company had borrowings under the Revolving Credit Facility bearing interest at prime rate plus 0.25% (8.75%) and LIBOR plus 1.75% (weighted average of 7.405%). The weighted average interest rate for all Revolving Credit Facility borrowings was 7.483% at March 5, 1998. Borrowings under the Revolving Credit Facility mature on May 21, 2002, although availability under the Real Estate Facility will be subject to yearly reductions commencing in 1999. The Revolving Credit Facility is secured by liens on substantially all of the assets of the Company. The Revolving Credit Facility is subject to certain operating and financial covenants, including maintenance of a minimum consolidated net worth, ratio of total indebtedness to cash flow and ratio of cash flow to interest expense. In addition, non-bus capital expenditures are limited to $30.0 million annually with no spending limitations on bus purchases. However, in 1997, the Company obtained a waiver to allow for an additional $3.0 million of capital expenditures. As of December 31, 1997, the Company was in compliance with all such covenants.
The Company has entered into four advance purchase commitments for fuel. Under these agreements the Company agrees to take delivery of fuel at a specific location at a fixed price at a specific date in the future. The agreements have been entered into with four suppliers for approximately 27% of projected fuel needs for 1998, at an average price per gallon of $0.5863. Management believes that this strategy is a conservative method to hedge against fuel price fluctuations.
The Company maintains cash deposits held for insurance claims and bus lease collateral, which as of March 5, 1998 aggregated approximately $79.5 million, including the following deposits. The Company maintains $15.0 million on deposit in a trust fund to support its self-insurance program pursuant to the U.S. Department of Transportation's approval of such program. As of March 5, 1998, the Company had pledged $30.3 million in cash and $10.1 million in letters of credit to secure its other liability insurance obligations. Depending on the Company's future claims history and the policies of its insurance carriers, the amount of collateral that the Company is obligated to pledge to secure its liability insurance obligations may vary. The Company also has deposits of $24.7 million (at market value) pledged as collateral in connection with the sale and leaseback of 319 buses. Additionally, the Company has a deposit of $9.3 million (at market value) pledged as collateral in connection with a sale and leaseback agreement for 125 buses.
The Company maintains nine defined benefit pension plans, the most significant of which (the ATU Plan) covers approximately 16,400 current and former employees, fewer than 1,500 of which are active employees of the Company. The ATU Plan was closed to new participants in 1983 and, as a result, 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. Based upon the application of this table and other actuarial and investment assumptions, the Company believes that the ATU Plan is adequately funded.
For funding purposes, legislation passed by the United States Congress in 1994, and amended in 1997, 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. Nevertheless, based upon the application of the actuarial mortality table, discount rates and funding calculations prescribed by the legislation, as amended, the Company does not anticipate that it will be required to make any contributions to the ATU Plan in the foreseeable future. However,
there is no assurance, that the ATU Plan will be able to obtain the assumed rate of return or that contributions to the ATU Plan will not be significant.
COMPUTER SYSTEMS/YEAR 2000
Many existing computer systems and software products, including several used by the Company, are coded to accept only two digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, the Company's date critical functions related to 2000 and beyond, such as scheduling, dispatch, sales, purchasing, planning and financial systems may be materially adversely affected unless these computer systems are, or become, year 2000 compliant.
During the past three years, the Company has been replacing and enhancing its computer systems to gain operational efficiencies. In addition, management has initiated an enterprise-wide program to prepare the Company's computer systems and applications for the year 2000. Many of the Company's computer systems or applications which may not be year 2000 compliant are being upgraded or replaced in the normal course of business as the Company takes steps to improve its customer service and operating efficiencies. The Company's dispatching and bus and driver tracking system is the most significant of those systems being upgraded. The system is not currently year 2000 compliant and must be replaced. The Company expects to begin the conversion of this system in the second quarter of 1998 and expects to complete the conversion by the second quarter of 1999.
Additionally, to ensure that the Company has identified all software that is not year 2000 compliant, the Company is completing a comprehensive assessment of all of its systems and applications, as well as, third party systems on which the Company relies. The Company expects the assessment of these systems and an estimate of the costs to upgrade or revise, where necessary, to be complete by mid-year 1998. The Company expects to make the necessary revisions or upgrades to its software or processes to render it year 2000 compliant prior to the end of 1999. In addition, the Company is taking steps to ensure that adequate contingency measures are in place to eliminate or minimize the adverse operational impact of problems which may occur during the transition to the upgraded or revised systems or as the result of a delay in any implementations. There can be no assurance that these transitions will not have a material adverse effect on the Company's financial condition or results of operations. Despite the Company's efforts there can be no assurance that these efforts will be timely and successful and that the Company's systems, or those of other companies on which the Company's systems rely, will be timely converted, revised or upgraded or that any such failure to convert, revise or upgrade would not have a material adverse effect on the Company's systems.
SEASONALITY
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 cash flows are seasonal in nature with a disproportionate amount of the Company's annual cash flows being generated during the peak travel periods. Therefore, an event that adversely affects ridership during any of these peak periods could have a material adverse effect on the Company's financial condition and results of operations for that year. 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 a fiscal quarter, may also affect the Company's quarterly results of operations. The following table sets forth certain operating data of the Company by quarter for 1997 and 1996 (in millions):
- ---------
(1) Represents earnings before interest, taxes, depreciation and amortization and extraordinary items.
(2) Third quarter and fourth quarter 1997 include results of operations for Carolina and Valley, which were acquired during the third quarter of 1997.
(3) Note that the earnings per share for the year will not be equal to the summation of the individual quarters due to earnings per share utilizing weighted average shares, which would be different for the year compared to the quarters.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Greyhound Lines, Inc. and its subsidiaries (the "Company") has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis and are not misstated due to fraud or material error. The financial statements include amounts that are based on management's best estimates and judgments. Management also prepared the other information in the annual report on Form 10-K and is responsible for its accuracy and consistency with the financial statements.
The Company's consolidated financial statements have been audited by Arthur Andersen LLP, independent public accountants approved by the Board of Directors. Management has made available to Arthur Andersen LLP all the Company's financial records and related data, as well as the minutes of the stockholders' and directors' meetings. Furthermore, management believes that all representations made to Arthur Andersen LLP during its audits were valid and appropriate.
Management of the Company has established and maintains a system of internal control that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting. The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process and updated as necessary. Management continually monitors the internal control system for compliance. The Company maintains an internal auditing program that independently assesses the effectiveness of the internal controls and recommends possible improvements thereto. In addition, as part of its audits of the Company's consolidated financial statements, Arthur Andersen LLP considered the Company's system of internal control to the extent they deemed necessary to determine the nature, timing and extent of audit tests to be applied. Management has considered the internal auditors' and Arthur Andersen LLP's recommendations concerning the Company's system of internal control and has taken actions that the Company believes respond appropriately to these recommendations. Management believes that the Company's system of internal control is adequate to accomplish the objectives discussed herein.
Management also recognizes its responsibility for fostering a strong ethical climate so that the Company's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in the Company's code of corporate conduct, which is publicized throughout the Company. The code of conduct addresses, among other things, the necessity of ensuring open communication within the Company; potential conflicts of interests; compliance with all domestic and foreign laws, including those relating to financial disclosure; and the confidentiality of proprietary information. The Company maintains a systematic program to assess compliance with these policies.
T. Scott Kirksey Vice President and Chief Accounting Officer
Dallas, Texas March 19, 1998
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Greyhound Lines, Inc.:
We have audited the accompanying consolidated statements of financial position of Greyhound Lines, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Greyhound Lines, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index at Item 8 (Schedule II) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Dallas, Texas February 3, 1998
GREYHOUND LINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
The accompanying notes are an integral part of these statements.
GREYHOUND LINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
The accompanying notes are an integral part of these statements.
GREYHOUND LINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
The accompanying notes are an integral part of these statements.
GREYHOUND LINES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these statements.
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997
1. BACKGROUND AND OPERATING ENVIRONMENT
Greyhound Lines, Inc. and subsidiaries (the "Company") is the only nationwide provider of scheduled intercity bus service in the United States. The Company provides various services including scheduled passenger service, package express service and food services at certain terminals. The Company's operations include a nationwide network of terminal and maintenance facilities, a fleet of approximately 2,400 buses and approximately 1,600 sales outlets. The Company's operating subsidiaries include Texas, New Mexico & Oklahoma Coaches, Inc. ("TNM&O"), Vermont Transit Co., Inc. ("VTC"), Carolina Coach Company ("Carolina"), Valley Transit Co., Inc. ("Valley") and Sistema Internacional de Transporte de Autobuses, Inc. ("SITA"). The Company is subject to regulation by the Department of Transportation (the "DOT") and certain states.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company. Investments in companies that are 20% to 50% owned ("affiliates") are accounted for using the equity method. All significant intercompany transactions and balances have been eliminated.
Certain Reclassifications
Certain reclassifications have been made to the prior period statements to conform them to the December 31, 1997 classifications.
Cash and Cash Equivalents
Cash and cash equivalents include short-term investments that are part of the Company's cash management portfolio. These investments are highly liquid and have original maturities of three months or less.
Inventories
Inventories are stated at the lower of cost or market, with costs determined using the first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment, including capitalized leases, are recorded at cost, including interest during construction, if any. Depreciation is recorded over the estimated useful lives or lease terms, net of assumed residual values, ranging from three to 20 years for structures and improvements, four to 12 years for revenue equipment, and five to 10 years for all other items. The Company principally uses the straight-line method of depreciation for financial reporting purposes and accelerated methods for tax reporting purposes. Maintenance costs are expensed as incurred, and renewals and betterments are capitalized.
Goodwill
Goodwill represents the excess of cost over fair value of assets acquired related to the acquisition of regional bus carriers as prescribed by the purchase method of accounting. Additionally, the Company is amortizing Goodwill on a straight-line basis over a 20 to 30 year period.
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Debt Issuance Costs and Discounts
Costs incurred related to the issuance of debt are deferred, and such costs and any related discounts are amortized to interest expense using the straight-line method over the life of the related debt.
Software Development Costs
The direct costs of internally developed software are capitalized when technological feasibility has been established, and amortization of the software begins when the software is ready for use. The cost of the capitalized software is amortized over a period of five years.
Income Taxes
Deferred tax assets and liabilities are based upon the estimated future tax effects of the differences in the tax bases of existing assets and liabilities and the related financial statement carrying amounts, using currently enacted tax laws and rates.
Reserve for Injuries and Damages
The Company maintains comprehensive automobile liability, general liability, workers' compensation, and property insurance to insure its assets and operations. Automobile and general liability insurance coverages are subject to a $1.5 million self-insured retention or deductible per occurrence. The Company also maintains property insurance subject to a $0.1 million deductible per occurrence, and maintains workers' compensation insurance, subject to a $1.0 million deductible per occurrence.
Successful claims against the Company, which do not exceed the deductible or self-insured retention, are paid out of operating cash flows. A reserve for injuries and damages has been established for these claim payments. The reserve is based on an assessment of actual claims and claims incurred but not reported, based upon historical experience. This reserve also includes an estimate of environmental liabilities.
Revenue Recognition
Transportation revenue is recognized when the service is provided. A liability for tickets sold but not used is recorded as unredeemed tickets.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions 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 these estimates.
Long-Lived Assets
The Company periodically evaluates whether the remaining useful life of long-lived assets may require revision or whether the remaining unamortized balance is recoverable. When factors indicate that an asset should be evaluated for possible impairment, the Company uses an estimate of the asset's cash flow in evaluating its fair value.
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Earnings Per Share
The Company adopted SFAS No. 128 "Earnings Per Share" (SFAS No. 128) effective December 15, 1997. This statement requires the replacement of primary and fully diluted earnings per share with basic and diluted earnings per share. The calculation of earnings per share under SFAS No. 128 has a favorable impact on earnings per share as it excludes potentially dilutive options from the calculation of basic earnings per share. Additionally, the calculation of diluted earnings per share uses the average share price for the period rather than the potentially more dilutive greater of average share price or end of the period price required by APB Opinion 15. The adoption of SFAS No. 128 did not have a material impact on the earnings per share calculation.
Basic earnings (loss) per common share is calculated by dividing net income (loss) attributable to common stockholders by the weighted average shares of common stock of the Company ("Common Stock"). The calculation of diluted earnings (loss) per share of Common Stock considers the effect of Common Stock equivalents outstanding during the period, the conversion of the Company's 8 1/2% Convertible Subordinated Debentures due 2007 (the "Convertible Debentures") and 8 1/2% Convertible Exchangeable Preferred Stock (the "Preferred Stock"). Common Stock equivalents represent the dilutive effect of the assumed exercise of certain outstanding stock options. For the year ended December 31, 1997, the assumed conversion of the Preferred Stock and Convertible Debentures has an anti-dilutive effect. Additionally, for the years ended December 31, 1996 and 1995, the assumed exercise of outstanding in-the-money stock options and conversion of Convertible Debentures has an anti-dilutive effect. As a result, these shares are excluded from the final determination of the weighted average shares outstanding at December 31, 1997, 1996 and 1995.
Also note that the 1997 earnings per share calculation reflects the pro rata impact of dividends which will accrue to the holders of the Preferred Stock. The following tables detail the components utilized to calculate earnings per share for 1997, 1996 and 1995.
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Future Accounting Changes
The Company plans to adopt Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting Comprehensive Income", effective for the Company's fiscal year beginning January 1, 1998. SFAS No. 130 established standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Comprehensive income is defined as the total of net income and all other non-owner changes in equity. The Company's only non-owner change in equity at December 31, 1997, is a minimum pension liability adjustment. Upon adoption, comprehensive income and the cumulative other comprehensive income will be reported in a consolidated statement of shareholders' equity.
The Company plans to adopt Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"), "Disclosures about Segments of an Enterprise and Related Information", effective for the Company's fiscal year beginning January 1, 1998. This Statement requires a public business enterprise to report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company will not be required to make changes related to this standard, as the Company has only one reportable segment.
The Company plans to adopt Statement of Financial Accounting Standards No. 132 ("SFAS No. 132"), "Employers' Disclosures about Pensions and Other Postretirement Benefits", effective for the Company's fiscal year beginning January 1, 1998. This Statement standardizes the disclosure requirements for pensions and other postretirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis and eliminates other disclosures no longer useful as prescribed in previous standards. The Company anticipates that its' disclosure will be affected by this standard, and the Company will comply by the effective date.
The Company plans to adopt Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Cost of Computer Software Developed or Obtained for Internal-Use", effective for the Company's fiscal year beginning January 1, 1999. SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal-use and identifies the characteristics of internal-use software. The Company has determined the impact of adoption will be minimal.
3. STATEMENTS OF CASH FLOWS SUPPLEMENTARY DISCLOSURES
Cash paid for interest was $29.4 million, $24.5 million and $22.7 million for the years ended December 31, 1997, 1996 and 1995, respectively. There were no cash payments for federal income taxes for the years ended December 31, 1997, 1996 and 1995, other than payments related to an Internal Revenue Service "IRS" audit of the Company's 1987 through 1989 tax returns which resulted in a $0.3 million payment in 1996.
Significant noncash investing and financing activities during 1997 included $0.9 million primarily related to stock issued in July for consideration in the purchase of Carolina. In 1996, noncash activity included 77 buses which were acquired under a capital lease for $17.9 million and computer equipment which was acquired under a capital lease for $2.1 million.
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. INVENTORIES
Inventories consisted of the following (in thousands):
5. PREPAID EXPENSES
Prepaid expenses consisted of the following (in thousands):
6. OTHER CURRENT ASSETS
Other current assets consisted of the following (in thousands):
The deposits on insurance held as of December 31, 1997 and 1996, are the current portion of insurance deposits that include self-insurance deposits required by the Company's primary insurance carrier to cover interstate and certain intrastate claims for bodily injury and property damage liability. Deposits on business combinations represented deposits on two acquisitions pending at the end of 1996, which were subsequently completed in 1997. Deferred acquisition costs represent costs associated with potential acquisitions by SITA. These acquisition costs will be considered as part of the cost of the acquisitions when determining the purchase price allocation, or expensed when it is determined that the purchase will not be completed.
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
7. BENEFIT PLANS
Pension Plans
The Company has nine defined benefit pension plans. The first plan (the "ATU Plan") covers substantially all of the Company's ongoing hourly employees hired before November 1, 1983. The Company's hourly plan provides normal retirement benefits to the covered employees based upon a percentage of average final earnings, reduced pro rata for service of less than 15 years. Participants in this plan will continue to accrue benefits as long as no contributions are due from the Company. In the event a contribution is required, the plan benefits will be frozen until such time as the assets of the plan exceed 115% of the plan liabilities. The second plan covered salaried employees through May 7, 1990, when the plan was curtailed. The third plan is a multi-employer pension plan, instituted in 1992, to cover certain union mechanics. The remaining six plans are held by TNM&O, VTC, and Carolina and cover substantially all of their salaried and hourly personnel. It is the Company's policy to fund the minimum required contribution under existing laws.
The Company's net periodic pension expense (income) included the following (in thousands):
The following table sets forth the funded status and amounts recognized in the consolidated statements of financial position for the pension plans (in thousands):
Statement of Financial Accounting Standards No. 87, "Employers Accounting for Pensions," required the Company to record an additional minimum liability of $1.0 million as of December 31, 1997. This provision is reflected as a reduction of stockholders' equity.
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In determining the benefit obligations and service costs for the Company's defined benefit pension plans, the following assumptions were used:
Plan assets consist primarily of government-backed securities, corporate equity securities, guaranteed insurance contracts, annuities and corporate debt obligations.
Cash or Deferred Retirement Plans
The Company sponsors 401(k) cash or deferred retirement plans that cover substantially all of its ongoing salaried, hourly and represented employees. Costs to the Company related to these plans were $1.7 million, $2.1 million, and $1.1 million for the years ended December 31, 1997, 1996 and 1995, respectively. On October 31, 1991, the Company contributed 500,000 shares of its Common Stock to an employee stock ownership plan ("ESOP") for its employees. Effective December 31, 1994, this plan was amended to merge it into the Company's 401(k) profit sharing plan. An IRS determination letter relating to this merger was filed and received in 1996.
Other Plans
A contributory trusteed health and welfare plan has been established for all active hourly employees which are represented by collective bargaining agreements and a contributory health and welfare plan has been established for salaried employees and hourly employees who are not represented by collective bargaining agreements. For the years ended December 31, 1997, 1996 and 1995, the Company incurred costs of $17.8 million, $16.3 million, and $13.9 million, respectively, related to these plans. No post-retirement health and welfare plans exist.
The Company also has a Supplemental Executive Retirement Plan (the "SERP"), which covers only key executives of the Company. During 1995, the SERP was converted from a defined benefit plan to a defined contribution plan. For the years ended December 31, 1997, 1996 and 1995, the Company incurred costs of $0.2 million, $0.4 million and $0.3 million, respectively.
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment consisted of the following (in thousands):
During 1997, the Company took delivery of 210 buses, all but six of which were manufactured by Motor Coach, Inc. ("MCI") or its affiliate, Dina Autobuses, S.A. de C.V. ("DASA"); hereafter referred to collectively as "MCI." The Company purchased 20 of these buses and the remaining were financed as long-term operating leases. The Company purchased 58 buses throughout the year that were later sold and then leased back.
The Company paid $10.3 million to Viad in the fourth quarter of 1997 to acquire terminal facilities in San Jose, CA, Nashville, TN and Reno, NV and Viad's joint venture interests in the terminals in Denver, CO, and Albuquerque, NM.
Accumulated depreciation of capitalized leased assets amounted to $12.1 million and $9.2 million at December 31, 1997 and 1996, respectively.
9. INSURANCE AND SECURITY DEPOSITS
Insurance and security deposits consisted of the following (in thousands):
Insurance deposits are required by the Company's self-insurance authorizations and the Company's primary insurance carrier to cover self-insured interstate and certain intrastate auto liability as well as workers' compensation coverage in certain states.
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Security deposits at December 31, 1997 and 1996, include (i) a $24.7 million (at current market value) pledge of assets required as a collateral deposit for a $70.1 million sale/leaseback of 319 buses, and (ii) a $9.3 million (at current market value) deposit required by the lessor in conjunction with a separate sale/leaseback of 125 buses.
10. INTANGIBLE ASSETS
Intangible assets consisted of the following (in thousands):
Trademarks are amortized using the straight-line method over 15 years.
11. ACCRUED LIABILITIES
Accrued liabilities consisted of the following (in thousands):
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
12. LONG-TERM DEBT AND INTEREST EXPENSE
Long-term debt consisted of the following (in thousands):
Revolving Credit Facility
The Company is a party to a Revolving Credit Facility which was renegotiated in December 1996 and May 1997. This renegotiation of the Revolving Credit Facility resulted in an extraordinary loss of $1.5 million, relating to the write-off of the previous debt issuance costs that were being amortized.
The amended Revolving Credit Facility consists of (i) a revolving facility providing for advances of up to $92.5 million based on the liquidation value of certain core vehicles, (ii) a revolving facility providing for advances of up to $2.5 million based on a formula of eligible accounts receivable and (iii) a real estate facility providing for borrowings of up to $30.0 million based on the fair market value of certain core real property collateral (the "Real Estate Facility"). The Revolving Credit Facility has two interest rate options, prime and LIBOR. As of March 5, 1998, the Company had borrowings under the Revolving Credit Facility bearing interest at prime rate plus 0.25% (8.75%) and LIBOR plus 1.75% (weighted average 7.405%). The weighted average interest rate for all Revolving Credit Facility borrowings was 7.483% at March 5, 1998. Borrowings under the Revolving Credit Facility mature on May 21, 2002, although availability under the Real Estate Facility will be subject to yearly reductions commencing in 1999. The Revolving Credit Facility is secured by liens on substantially all of the assets of the Company.
10% Senior Notes
The Company retired the 10% Senior Notes in May 1997 with the proceeds from the issuance of the 11 1/2% Senior Notes and the Company's 8 1/2% Convertible Exchangeable Preferred Stock. This transaction resulted in an extraordinary loss of $21.3 million relating to the write-off of the discount and debt issuance costs, combined with the prepayment penalties.
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company's 10% Senior Notes due 2001 (the "10% Senior Notes") bore interest at the rate of 10% per annum, payable each January 31 and July 31. The 10% Senior Notes had an original stated principal amount of $165.0 million, of which $1.7 million had been held by the Company prior to December 1995. During December 1995, the Company repurchased (the "Senior Note Repurchase") an additional $10.7 million aggregate principal amount of the 10% Senior Notes pursuant to a put/call agreement with one of the Company's principal stockholders. The 10% Senior Notes are reflected net of unamortized discount in the Consolidated Statements of Financial Position to reflect an imputed interest rate of 13.5%, and also net of any Senior Notes held by consolidated subsidiaries.
11 1/2% Senior Notes
The Company's 11 1/2% Senior Notes due 2007 (the "11 1/2% Senior Notes") bear interest at the rate of 11 1/2% per annum, payable each April 15 and October 15 commencing on October 15, 1997. The 11 1/2% Senior Notes are redeemable at the option of the Company in whole or in part, at any time on or after April 15, 2002, at redemption prices of 105.750% in 2002, 103.834% in 2003, 101.917% in 2004 and 100% in 2005 and thereafter plus any accrued but unpaid interest. Upon a change of control of the Company, as defined in the indenture, the Company will be required to make an offer to repurchase all or any part of each holder's 11 1/2% Senior Notes at a price equal to 101% of the principal amount thereof plus interest. The 11 1/2% Senior Note indenture contains certain covenants that, among other things, limit the ability of the Company to incur additional indebtedness, pay dividends or make other distributions, repurchase equity interests or subordinated indebtedness, create certain liens, sell assets or enter into certain mergers or consolidations.
Convertible Debentures
During 1992, the Company issued $98.9 million of 8 1/2% Convertible Subordinated Debentures ("Convertible Debentures") of which $9.8 million remains outstanding. Interest on the Convertible Debentures is payable semiannually (each March 31 and September 30). The Convertible Debentures are convertible at the option of the holder at any time prior to maturity, unless previously redeemed, into Common Stock at the conversion price of $12.375 per share (equivalent to a conversion rate of approximately 80.81 shares per $1,000 principal amount of Convertible Debentures), subject to adjustment in certain events.
Other
Under the most restrictive provisions of all its debt agreements, the Company is limited in incurring additional indebtedness, is limited on the payment of dividends on its Common Stock, and may not enter into certain mergers, or acquire or dispose of any assets (except in the ordinary course of business). The Revolving Credit Facility is subject to certain operating and financial covenants, including maintenance of a minimum consolidated net worth, ratio of total indebtedness to cash flow and ratio of cash flow to interest expense. In addition, non-bus capital expenditures are limited to $30.0 million annually with no spending limitations on bus purchases. However, in 1997, the Company obtained a waiver to allow for an additional $3.0 million of capital expenditures. As of December 31, 1997, the Company was in compliance with all such covenants.
During March 1994, the Company ordered 151 new buses from MCI for an aggregate cost of $34.8 million. The buses were 90% financed through a ten-year installment note, which was secured by the purchased buses and which bore interest at a rate of prime plus 1.5 percent. In February 1995, the Company made a prepayment on the amount owed of $12.9 million. The remainder of these notes were paid in April 1997 with the proceeds from the sale of the Company's securities.
During 1993, the Company executed three interest rate swap agreements whereby fixed interest rates were swapped for variable interest rates. The purpose of these agreements was to hedge the interest rates related to the
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company's 10% Senior Notes and the Convertible Debentures. The five-year swap transactions totaled $150.0 million, and a deposit of $10.0 million was provided to secure the transaction. When the Company entered into a previous bank credit facility in December 1993, the deposit was returned to the Company. During January 1994, the Company terminated a $75.0 million interest rate swap agreement. The gain resulting from the termination was $1.6 million and is being recognized evenly over the remaining term of the five-year agreement.
The Company amended its two remaining interest rate swap agreements during October 1994, to lock in the future payments under the agreements until maturity in July 1998. The net result of the amendments was to ensure that these swaps would not be subject to interest rate risk. These agreements were terminated in April 1997, with proceeds from the sale of the Company's securities. This transaction resulted in an extraordinary loss of $1.5 million. The net interest expense during 1997 and 1996 resulting from the interest rate swap agreements was $0.3 million and $1.2 million, respectively.
At December 31, 1997, maturities of long-term debt for the next five fiscal years ending December 31 and all years thereafter, are as follows (in thousands):
13. INCOME TAXES
Income Tax Provision
The income tax provision consisted of the following (in thousands):
GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Effective Tax Rate
The differences, expressed as a percentage of income before taxes and extraordinary items, between the statutory and effective federal income tax rates are as follows:
Deferred Tax Assets
Significant components of deferred income taxes at December 31, 1997 and 1996, were as follows (in thousands):
With the Company reporting income before taxes and extraordinary items, a provision is required to be recognized as if the extraordinary item had not occurred. Before the extraordinary loss, the Company would use previously unrecognized deferred tax assets to offset taxes on the income. Use of the deferred tax asset would normally reflect the recognition of tax expense and an equal benefit due to the reduction of the valuation allowance, resulting in no impact to the provision. However, a portion of the Company's deferred tax asset arose prior to the fresh start date, and as a result, $0.6 million of the reversal of the related valuation allowance was used to increase capital in excess of par rather than reduce tax expense at December 31, 1997. Therefore, a provision would be required equal to the portion of the valuation allowance reduction related to deferred tax assets that arose prior to the fresh start date. The benefit from the extraordinary loss has been fully reserved as the Company currently does not believe that a sufficient history of earnings has been established to make realization of the deferred tax asset more likely than not. At December 31, 1997, the remaining deferred tax asset that arose prior to the fresh start date was $4.2 million. Future recognition of these assets will increase capital in excess of par rather than reduce tax expense.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Availability and Amount of NOL's
The Financial Restructuring resulted in an ownership change, as defined under Section 382 of the Internal Revenue Code (the "Code"). The provisions of the Code, as they apply to the Company, require that an annual limitation be placed on the amount of net operating loss ("NOL") carryforwards which may be utilized. Consequently, the Company's NOL carryforwards from 1994 are now subject to an annual limitation of $2.1 million. Any unused portion of the current annual limitation may be carried forward to the following year. The Company estimates a 1997 taxable loss of $19.6 million. Additionally, the Company incurred taxable losses in 1996 and 1995 of $19.7 million and $29.8 million respectively. Neither the 1997, 1996, nor 1995 loss is subject to limitation under Section 382. The Company will also carry forward the unused 1997, 1996, and 1995 annual limitation of $2.1 million from the 1994 NOL carryforward. As a result, the Company will carryforward available NOL's of $100.6 million, $25.2 million of which is subject to the annual $2.1 million limitation. The NOL carryforwards expire as follows (in thousands):
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS No. 107"), requires disclosure of the fair value of financial instruments. The following methods and assumptions were used by the Company in estimating the fair value disclosures for its financial instruments.
For cash and cash equivalents, accounts receivable, and the revolving bank loans, the carrying amounts reported in the Consolidated Statements of Financial Position approximate fair value. The fair values of the interest rate swaps, short-term deposits and long-term insurance deposits are based upon quoted market prices at December 31, 1997 and 1996, where available. For the portion of short-term deposits and long-term insurance and security deposits where no quoted market price is available, the carrying amounts are believed to approximate fair value. For the other secured indebtedness, real estate mortgages, note payable and other long-term debt, the fair values are estimated using discounted cash flow analysis, based upon the Company's incremental borrowing rates for similar types of borrowing arrangements. The fair values of the Senior Notes and the Convertible Debentures were based upon quoted market prices at December 31, 1997 and 1996.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The carrying amounts and fair values of the Company's financial instruments at December 31, 1997 and 1996, are as follows (in thousands):
15. LEASE COMMITMENTS
The Company leases buses and terminals from various parties pursuant to capital and operating leases expiring at various dates through 2065.
At December 31, 1997, scheduled future minimum payments for the next five fiscal years ending December 31, under the capital leases and noncancelable operating leases are as follows (in thousands):
For the years ended December 31, 1997, 1996 and 1995, rental expenses for operating leases (net of sublease rental income of approximately $2.1 million, $2.2 million and $1.9 million, respectively) amounted to $57.6 million, $52.4 million, and $47.8 million, respectively. Rental expenses for bus operating leases, excluding casual rents and other short term leases during peak periods, amounted to $32.1 million, $27.5 million and $23.7 million in 1997, 1996 and 1995, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
16. STOCK OPTION PLANS
As of December 31, 1997, the Company's five stock option plans have authorized the grant of options to employees and outside directors for up to 7,939,446 shares of the Company's Common Stock. All options granted have five to 10 year terms and vest over a three to four year period of continued employment or service on the Company's Board of Directors.
The Company has elected to continue to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options. However, pro forma information regarding net income and earnings per share is required by FASB Statement No. 123 "Accounting for Stock-Based Compensation" (SFAS 123), and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997: risk-free interest rates of 6.0%; dividend yield of zero; volatility factor of the expected market price of the Company's Common Stock of 0.40; and a weighted-average expected life of the options of 7.1 years, and the assumptions for 1996: risk-free interest rates of 6.0% and 7.0%; dividend yield of zero; volatility factor of the expected market price of the Company's Common Stock of 0.35; and a weighted-average expected life of the options of 5.7 years.
The Black-Scholes option valuation model (the "Black-Scholes Model") was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
Had compensation cost for these plans been determined consistent with SFAS 123, the Company's net loss and earnings per share would have been reduced to the following:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the Company's stock option activity and related information for the years ended December 31 follows:
The table below details the Company's options outstanding by related option exercise price.
Additionally, the Company had 2,150,515 and 683,986 options exercisable at December 31, 1996 and 1995, respectively. Included in the above options granted for 1997 and 1996 were options granted at a value less than market value on that date. For 1997, of the 1,324,000 options granted, 703,300 were granted at market value with a weighted average exercise price of $4.27, while 620,700 shares were granted below market value with a weighted average exercise price of $0.92 and a fair value of $3.32. For 1996, of the 1,352,000 options granted, 1,318,000 were granted at market value with a weighted average exercise price of $3.66, while 34,000 shares were granted below market value with no weighted average exercise price and a fair value of $3.69.
17. STOCKHOLDERS' EQUITY
The Company is authorized to issue 100,000,000 shares of $.01 par value common stock.
The Company is authorized to issue 10,000,000 shares of $.01 par value preferred stock. The Board of Directors may designate and issue one or more series of preferred stock from the authorized and unissued shares of preferred stock. As of December 31, 1997, the Company has designated 1,500,000 shares of preferred stock as "Series A" junior preferred stock in connection with the stockholders rights plan discussed below. No "Series A" junior preferred stock had been issued as of December 31, 1997.
During 1997, the Company issued 2,400,000 shares of 8 1/2% convertible exchangeable preferred stock ("the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Preferred Stock"). The Preferred Stock carries a liquidation preference of $25.00 per share plus accumulated and unpaid dividends. The holders of the Preferred Stock are currently entitled to vote with the holders of the Common Stock on all matters submitted to a vote of stockholders of the Company, each share of Preferred Stock entitling the holder thereof to one vote. The Company, however, may seek stockholder approval to amend the Restated Certificate of Incorporation of the Company to eliminate the provisions thereof providing such voting rights to holders of Preferred Stock. If such amendment is approved, holders of the Preferred Stock will have no voting rights except as provided by law or set forth in the Certificate of Designations. Dividends accrue at a rate per annum equal to 8 1/2% of the liquidation preference per share of Preferred Stock and are payable quarterly in arrears on February 1, May 1, August 1 and November 1 of each year commencing August 1, 1997. The Preferred Stock is convertible at any time after July 15, 1997, at the option of the holder thereof, into Common Stock of the Company at a conversion price of $4.875 per share. The Preferred Stock will be redeemable at the option of the Company, in whole or in part, at any time on or after May 3, 2000, at redemption prices of 104.86% in 2000, 103.64% in 2001, 102.43% in 2002, 101.21% in 2003 and 100% in 2004 and thereafter plus accumulated and unpaid dividends. Upon a change of control of the Company (as defined), the Company will be required to make an offer to repurchase all or any part of each holder's Preferred Stock at a price equal to 100% of the liquidation preference plus accumulated and unpaid dividends.
On March 22, 1994, the Company's Board of Directors adopted a stockholder rights plan (the "Rights Plan"). The Rights Plan, which was amended in 1997, provides for a dividend distribution of a Preferred Stock Purchase Right (the "Rights") for each share of Common Stock held by stockholders of record at the close of business on April 4, 1994. The Rights will become exercisable only in the event that, with certain exceptions, an acquiring party accumulates 20% or more of the Company's voting stock or a person's or group's commences or announces intentions to commence a tender or exchange offer the consummation of which would result in the ownership of 30% or more of the Company's outstanding voting stock (even if no shares are actually purchased pursuant to such offer). The Rights have no voting rights and are not entitled to receive dividends. The Rights will expire on March 22, 2004. Each Right will entitle the holder to buy 1/1000th of a share of Series A preferred stock at a price of $35. The Series A preferred stock would have one vote, voting together with the Common Stock upon issuance. In addition, upon the occurrence of certain events, holders of the Rights will be entitled to purchase either Common Stock or shares in an acquiring entity at 50% of the market value. The Company will be entitled to redeem the Rights at $.01 per Right at any time through the tenth day following the acquisition of a 20% position in its voting stock.
In October 1995, the Company completed a sale of 10,004,144 shares of Common Stock. Four million shares were sold by the Company and 6,004,144 shares were sold by Motor Coach Industries Limited, a selling stockholder. The Company did not receive any portion of the proceeds from the sale of shares of Common Stock by the selling stockholder. Net proceeds to the Company from the sale of the 4,000,000 shares of Common Stock offered by the Company were $15.4 million. The Company used $9.7 million of the net proceeds it received for the Senior Note Repurchase. The purchase price for the Senior Notes was based on arm's-length negotiations. The Company used the remaining net proceeds from the sale of the Common Stock for general corporate purposes.
18. ACQUISITIONS
During 1997, the Company completed two acquisitions involving regional bus carriers. These purchases were accounted for using the purchase method of accounting; accordingly, the acquired companies' results of operations are included in the Company's consolidated financial statements from the dates of acquisition. On July 9, 1997, the Company purchased Carolina and affiliates, a Mid-Atlantic bus carrier, for the purchase price of approximately $25.3 million comprised of $20.4 million in cash, the assumption of $4.1 million of indebtedness and the issuance of $0.75 million in Common Stock of the Company (167,597 shares based on average market prices of the Company's Common Stock prior to closing). Additionally, on August 25, 1997, the Company purchased Valley and affiliates, a South Texas bus carrier, for $19.0 million in cash. The preliminary allocation of the purchase price among assets and liabilities resulted in liabilities in excess of assets of $30.0 million, which is subject to final adjustment. This amount
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
has been recorded as Goodwill and is being amortized over a 30 year period. The remaining Goodwill relates to acquisitions made by SITA and is being amortized over a 20 year period. Amortization of Goodwill at December 31, 1997, was $0.5 million.
19. COMMITMENTS AND CONTINGENCIES
SECURITIES AND DERIVATIVE LITIGATION; SEC INVESTIGATION.
Between August and December 1994, seven purported class action lawsuits were filed by purported owners of the Company's Common Stock, Convertible Debentures and 10% Senior Notes against the Company and certain of its former officers and directors. The suits sought unspecified damages for securities laws violations as a result of statements made in public reports and press releases and to securities analysts during 1993 and 1994 that were alleged to have been false and misleading.
All the purported class action cases referred to above (with the exception of one suit that was dismissed before being served on any defendants) were transferred to the United States District Court for the Northern District of Texas, the Court in which the first purported class action suit was filed, and were pending under a case styled In re Greyhound Securities Litigation, Civil Action 3-94-CV-1793-G. A joint pretrial order was entered in the litigation which consolidated for pretrial and discovery purposes all of the stockholder actions and, separately, all of the debtholder actions. The joint pretrial order required plaintiffs to file consolidated amended complaints and excused answers to the original complaints. In July 1995, the plaintiffs filed their consolidated amended complaints, naming the Company, Frank J. Schmieder, J. Michael Doyle, Phillip W. Taff, Robert R. Duty, Don T. Seaquist, Charles J. Lee, Charles A. Lynch and Smith Barney Incorporated as defendants. Messrs. Lee, Lynch and Taff were subsequently dismissed from the case by the plaintiffs. In September 1995, the various defendants filed motions to dismiss plaintiffs' complaints. In October 1995, plaintiffs filed a motion seeking to certify the class of plaintiffs.
On October 3, 1996, the Court ruled in favor of the Company and all other defendants, granting defendants' motions to dismiss. Pursuant to the Court's order, the complaints were dismissed, with leave granted to the plaintiffs to refile amended complaints within 20 days thereafter. On October 23, 1996, an amended complaint was tendered to the Court. All seven class representatives involved in the prior complaints were dropped from the case. A new purported class plaintiff, John Clarkson, was named. A motion was filed seeking leave to permit Mr. Clarkson to intervene as the new class representative. The amended complaint alleged a class period of May 4, 1993 to October 26, 1993 and was brought only on behalf of holders of Common Stock. The amended complaint named the same defendants involved in the dismissed cases (the Company, Messrs. Schmieder, Doyle, Duty and Seaquist and Smith Barney Incorporated); no new defendants were added and none were dropped. The Court advised the parties that no responsive pleading needed to be filed to the amended complaint until such time as the Court ruled on the motion for intervention filed by Mr. Clarkson. In December 1996, the defendants filed responses to plaintiff's motion for intervention. In January 1997, the plaintiff filed a reply brief.
On August 15, 1997, the Court denied Mr. Clarkson leave to intervene and dismissed the litigation, noting that all claims asserted had been adjudicated. On September 12, 1997, a notice of appeal was filed by counsel for the original seven plaintiffs, seeking a review of the Court's ruling of October 3, 1996. On February 9, 1998, plaintiffs dismissed their appeal, without prejudice, with a right to re-file the appeal within six months.
In November 1994, a shareholder derivative lawsuit was filed by Harvey R. Rice, a purported owner of the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Company's Common Stock, against present directors and former officers and directors of the Company and the Company as a nominal defendant. The suit seeks to recover monies obtained by certain defendants by allegedly trading in the Company's securities on the basis of nonpublic information and to recover monies for certain defendants' alleged fraudulent dissemination of false and misleading information concerning the Company's financial condition and future business prospects. The suit, filed in the Delaware Court of Chancery, New Castle County, is styled Harvey R. Rice v. Frank J. Schmieder, J. Michael Doyle, Charles A. Lynch, Richard J. Caley, Thomas F. Meagher, Thomas G. Plaskett, Kenneth R. Norton, Robert B. Gill, Alfred E. Osborne, Jr., J. Patrick Foley, Charles J. Lee and Greyhound Lines, Inc., Civil Action No. 13854. Pursuant to a stipulation, the time for all defendants to answer, move or otherwise plead with respect to the derivative complaint is not yet due.
In May 1995, a lawsuit was filed on behalf of two individuals, purported owners of the Company's Common Stock, against the Company and certain of its former officers and directors. The suit sought unspecified damages for securities laws violations as a result of statements made in public reports and press releases and to securities analysts during 1993 and 1994 that are alleged to have been misleading. The suit, filed in the United States District Court for the Northern District of Ohio, was styled James Illius and Theodore J. Krawec v. Greyhound Bus Lines, Inc., Frank J. Schmieder and J. Michael Doyle, Civil Action No. 1-95-CV-1140. The defendants filed a motion to transfer venue seeking to have the case transferred to the United States District Court for the Northern District of Texas where the class action litigation described above was pending. In September 1995, the defendants' motion was granted, and the matter was transferred and was consolidated into the Federal Court class action litigation described above.
On October 29, 1996, a purported class action lawsuit was brought by a purported holder of Common Stock against the Company, certain of its former officers and directors and Smith Barney and Morgan Stanley & Company, Inc. The suit seeks unspecified damages for alleged federal and Texas state securities laws violations in connection with a Common Stock offering made by the Company in May 1993. The suit, filed in the 44th Judicial District Court of Dallas County, Texas, is styled John Clarkson v. Greyhound Lines, Inc., Frank Schmieder, J. Michael Doyle, Robert R. Duty, Don T. Seaquist, Smith Barney, Inc. and Morgan Stanley & Company, Inc., Case No. 96-11329-B. Plaintiff, John Clarkson, is the same individual who sought to intervene in the Federal Court class action litigation described above, and the same law firms have appeared for the plaintiff in both cases. On December 20, 1996, the defendants filed their answers to the lawsuit and pleas in abatement asking the Court to stay all proceedings pending resolution of the intervention motion and Federal Court class action lawsuit. On February 28, 1997, the suit was transferred to a different judge in the 68th Judicial District Court in Dallas. On March 28, 1997, the Court denied the defendants' pleas in abatement requesting the stay. In addition, on September 12, 1997, plaintiff filed a motion seeking to certify the class of plaintiffs. This motion, which will be contested by the defendants, is currently set for hearing by the court on April 13, 1998. The Court has presently set a trial date of June 16, 1998. No additional hearings or proceedings are scheduled.
Based on a review of the litigation, a limited investigation of the underlying facts and discussions with legal and outside counsel, the Company does not believe that the outcome of the above described lawsuits would have a material adverse effect on its business, financial condition, results of operations and liquidity. The Company intends to defend against the actions vigorously. To the extent permitted by Delaware law, the Company is obligated to indemnify and bear the cost of defense with respect to lawsuits brought against its officers and directors. The Company maintains directors' and officers' liability insurance that provides certain coverage for itself and its officers and directors against claims of the type asserted in the subject litigation. The Company has notified its insurance carriers of the asserted claims. Preliminary settlement discussions have taken place among the Company, the Company's insurance carriers and the plaintiffs but no agreement has been reached.
In January 1995, the Company received notice that the Securities and Exchange Commission is conducting a formal, non-public investigation into possible securities laws violations allegedly involving the Company and certain of its former officers, directors and employees and other persons. The Commission's Order of Investigation (the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
"Order of Investigation") states that the Commission is exploring possible insider trading activities, as well as possible violations of the federal securities laws relating to the adequacy of the Company's public disclosures with respect to problems with its passenger reservation system implemented in 1993 and lower-than-expected earnings for 1993. In addition, the Commission has stated that it will investigate the adequacy of the Company's record keeping with respect to the passenger reservation system and its internal auditing controls. Although the Commission has not announced the targets of the investigation, it does not appear from the Order of Investigation that the Company is a target of the insider trading portion of the investigation. In September 1995, the Commission served a document subpoena on the Company requiring the production of documents, most of which the Company had voluntarily produced to the Commission in late 1994. The Company has fully cooperated with the Commission's investigation of these matters. The Company has had limited contact with the Commission in connection with the investigation since January 1996. The probable outcome of this investigation cannot be predicted at this stage in the proceeding.
INSURANCE COVERAGE
The predecessor agency to the STB granted the Company authority to self-insure its automobile liability exposure for interstate passenger service up to a maximum level of $5.0 million per occurrence which has been continued by the DOT. To maintain self-insurance authority, the Company is required to maintain a satisfactory safety rating by the DOT, a tangible net worth of $10.0 million (as of December 31, 1997, the Company's tangible net worth was $119.1 million) and a $15.0 million trust fund (currently fully funded) to provide security for payment of claims. Subsequent to the self-insurance grant by the federal government, 38 states granted the Company the authority to self-insure its intrastate automobile liability exposure. The Company maintains comprehensive automobile liability and general liability insurance to insure its assets and operations subject to a $1.5 million self-insured retention or deductible per occurrence. The Company also maintains property insurance subject to a $0.1 million deductible per occurrence and maintains workers' compensation insurance subject to a $1.0 million deductible per occurrence. Additionally, the Company is required by some states and some of its insurance carriers to maintain collateral deposits (which was discussed in Liquidity and Capital Resources).
Insurance coverage and risk management expense are key components of the Company's cost structure. The DOT is currently studying whether to continue or modify the self-insurance program available to the motor carrier industry. The loss of self-insurance authority from the DOT or a decision by the Company's insurers to modify the Company's program substantially, by either increasing cost, reducing availability or increasing collateral, could have a materially adverse effect on the Company's liquidity, financial condition and results of operations.
ENVIRONMENTAL MATTERS
The Company may be liable for certain environmental liabilities and clean-up costs relating to underground fuel storage tanks and systems in the various facilities presently or formerly owned or leased by the Company. Based upon surveys conducted solely by Company personnel or its experts, 45 locations have been identified as remaining sites requiring potential clean-up and/or remediation as of December 31, 1997. The Company has estimated the clean-up and/or remediation costs of these sites to be $2.9 million, of which approximately $0.3 million is indemnifiable by Viad.
The Company has potential liability with respect to two locations which the EPA has designated Superfund sites. The Company, as well as other parties designated by the EPA as potentially responsible parties, face exposure for costs related to the clean-up of those sites. Based on the EPA's enforcement activities to date, the Company believes its liability at these sites will not be material because its involvement was as a de minimis generator of wastes disposed of at the sites. In light of its minimal involvement, the Company has been negotiating to be released from liability in return for the payment of immaterial settlement amounts. Additionally, there are 12 Superfund sites that Viad had initially assumed responsibility and liability for addressing under the indemnity provisions of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
the 1987 acquisition agreement, as amended in 1991. All of these locations involve alleged disposal of hazardous wastes occurring years prior to the Company's corporate existence. In late 1997, Viad notified the Company, and asserted that the Company was responsible for any liabilities at such sites. The Company is contesting Viad's assertions and believes that the acquisition agreement, as amended, requires Viad to bear these liabilities. Viad had previously acknowledged in writing to the Company its responsibility for certain of the sites; in some cases, Viad has been managing the liability since mid-1991. Viad has advised the Company that, to date, it has incurred approximately $0.2 million in clean-up costs at these sites. At this point, the Company is unable to assess on-going or future potential liabilities at such sites should it be determined that the Company, and not Viad, will assume the liabilities at some or all of the 12 locations.
The Company has recorded a total environmental reserve of $2.7 million at December 31, 1997, a portion of which has also been recorded as a receivable from Viad for indemnification. The environmental reserve relates to sites identified for potential clean-up and/or remediation and represents the present value of estimated cash flows discounted at 8.0%. As of the date of this filing, the Company is not aware of any additional sites to be identified, and management believes that adequate accruals have been made related to all known environmental matters.
At December 31, 1997, clean-up and/or remediation costs under the plan are as follows (in thousands):
POTENTIAL PENSION PLAN FUNDING REQUIREMENTS
The Company maintains nine defined benefit pension plans, the most significant of which (the ATU Plan) covers approximately 16,400 current and former employees, fewer than 1,500 of which are active employees of the Company. The ATU Plan was closed to new participants in 1983 and, as a result, 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. Based upon the application of this table and other actuarial and investment assumptions, the Company believes that the ATU Plan is adequately funded.
For funding purposes, legislation passed by the United States Congress in 1994, and amended in 1997, mandates the use of a prescribed actuarial mortality table and discount rates that differ from these used by the Company for financial reporting and investment planning purposes. Nevertheless, based upon the application of the actuarial mortality table, discount rates and funding calculations prescribed by the legislation, the Company does not anticipate that it will be required to make any contributions to the ATU Plan in the foreseeable future. However, there is no assurance, that the ATU Plan will be able to obtain the assumed rate of return or that contributions to the ATU Plan will not be significant.
OTHER LEGAL PROCEEDINGS
In addition to the litigation discussed above, the Company is a defendant in various lawsuits arising in the ordinary course of business, primarily cases involving personal injury and property damage claims and employment-related claims. Although these lawsuits involve a variety of different facts and theories of recovery, the majority arise from traffic accidents involving buses operated by the Company. The vast majority of the personal injury and property damage claims are covered by insurance for amounts in excess of the self-retention or deductible portion of the policies. Therefore, based on the Company's assessment of known claims and its historical claims payout pattern
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
and discussion with legal and outside counsel and risk management personnel, management believes that there is no proceeding either threatened or pending against the Company relating to such personal injury and/or property damage claims arising in the ordinary course of business that, if resolved against the Company, would materially exceed the amounts recorded.
20. RELATED PARTY TRANSACTIONS
Motor Coach Industries International, Inc.
In connection with the Company's financial restructuring, Motor Coach Industries Limited, an affiliate of MCI, purchased 6,004,144 shares in January 1995, thus becoming a beneficial owner of greater than 5% of the Company's Common Stock. This stock was sold, in its entirety, in October 1995.
As an inducement to purchase the shares, the Company paid an affiliate of MCI fees of approximately $524,000. In addition, the Company extended the term of the Bus Purchase Requirements Agreement dated March 18, 1987 between the Company, MCI and Transit Bus International, Inc., which also is a subsidiary of MCI, to continue through March 18, 1998. The Company also agreed to prepay debt owed to MCI Acceptance Corp. ("MCIAC"), an affiliate of MCI. This pre-payment, in the amount of $12.9 million, was made in February 1995. In January 1998, the Company entered into a new long-term supply agreement with MCI. The new agreement is for a term of ten years and requires the Company and its affiliates to purchase at least 80% of its new bus requirements from MCI pursuant to the agreement.
The Company's President and Chief Executive Officer, Craig R. Lentzsch, previously served as Executive Vice President and Chief Financial Officer of MCII where he had been employed from 1992 to November 1994. Additionally, the Company's Vice President of Corporate Development, Jeffrey W. Sanders, previously served as Vice President and Controller of MCII where he had been employed from 1993 to January 1997.
Universal Coach Parts, Inc.
Universal Coach Parts, Inc. ("UCP") is a nationwide distributor of service parts and since December 1992 has provided inventory and inventory management services for the Company. UCP is also a wholly owned subsidiary of MCII. For the years ended December 31, 1997, 1996 and 1995, the Company paid $14.4 million, $15.0 million, and $15.2 million, respectively, to UCP for the purchase of inventory and inventory management services. Additionally, at December 31, 1997 and 1996, the Company included in its Consolidated Statements of Financial Position net amounts payable to UCP of $2.1 million and $1.3 million, respectively.
Connor, Clark & Company, Ltd.
In connection with the Company's financial restructuring, Connor, Clark & Company, Ltd. ("Connor Clark"), formerly the Company's largest shareholder, agreed to act as a standby purchaser for up to 650,000 shares, all of which were purchased by it in January 1995. As an inducement to serve as a standby purchaser, the Company paid Connor Clark fees of approximately $84,000.
Herbert Abramson, Director and Vice President of Connor Clark, served on the Company's Board of Directors from September 21, 1994 until his resignation on October 26, 1995.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Snyder Capital Management, Inc.
In connection with the Company's financial restructuring, Snyder Capital Management, Inc., on behalf of 49 accounts managed by it (the "SCM Accounts"), committed to oversubscribe for up to an aggregate of 2,181,977 shares which were purchased in January 1995. In consideration for the committed oversubscription, the Company paid the SCM Accounts fees of approximately $282,000.
Put/Call Agreement with Certain Shareholder
In June 1995, the Company entered into a Put/Call agreement with a certain shareholder in which the shareholder was to purchase, on the market, up to $15.0 million face amount of the Company's 10% Senior Notes. In December 1995, the Company exercised its option to purchase the $10.7 million aggregate principal of its Senior Notes held by the shareholder for the purchase price of $9.7 million, as specified under the terms of the agreement. The completion of this transaction satisfied each party's obligations under the agreement, and it has been terminated.
Frederick F. Richards
Frederick F. Richards has been engaged by the Company as an independent management consultant on an at-will basis since November 1994, supplying consulting services to the Company on a variety of operational and technology issues. Mr. Richards received $340,000, $180,000 and $160,000 for these services in 1997, 1996 and 1995, respectively, from the Company. On December 9, 1997, Mr. Richards became an executive officer of the Company and serves as Senior Vice President and Chief Information Officer. Mr. Richards is the son-in-law of A. A. Meitz, a director of the Company since November 21, 1995.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
21. QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected unaudited quarterly financial data for the years ended December 31, 1997 and 1996 are as follows (in thousands, except per share amounts):
SCHEDULE II
GREYHOUND LINES, INC. AND SUBSIDIARIES(a) VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997 (IN THOUSANDS)
- ----------
(a) This schedule should be read in conjunction with the Company's audited consolidated financial statements and related notes thereto.
(b) Write-off of uncollectible receivables net of recovery of bad debt.
(c) Write-off of other assets and deferred costs.
(d) Payments of settled claims.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Election of Directors", "Continuing Directors", "Executive Officers of the Company" and "Section 16 (a) Beneficial Ownership Reporting Compliance" in the definitive proxy statement is incorporated herein by reference.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
"Executive Compensation" in the definitive proxy statement is incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Outstanding Voting Securities of the Company and Principal Holders Thereof" in the definitive proxy statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Certain Relationships and Other Matters " in the definitive proxy statement is incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) CERTAIN DOCUMENTS FILED AS PART OF THE FORM 10-K
1. AND 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENTS SCHEDULES
The following financial statements and financial statements schedules are set forth in Item 8 of the Form 10-K Annual Report. Financial Statement Schedules not included in this Form 10-K Annual Report have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. Fifty percent or less owned companies accounted for by the equity method have been omitted because, considered in the aggregate, they have not been considered to constitute a significant subsidiary.
3. EXHIBITS
3.1 --Restated Certificate of Incorporation of Greyhound Lines, Inc.(2) 3.2 --Restated Bylaws of Greyhound Lines, Inc.(2) 3.3 --Article Fourth of the Restated Certificate of Incorporation of the Registrant relating to its capital stock.(4) 3.4 --Certificate of Amendment in the Restated Certificate of Incorporation of the Registrant amending Article Fourth thereof.(5) 3.5 --Certificate of Amendment in the Restated Certificate of Incorporation of the Registrant amending Article Eighth thereof.(8) 3.6 --Form of Certificate of Amendment to Certificate of Incorporation.(10) 4.1 --Certificate of Designations of Series A Junior Preferred Stock of the Registrant.(8) 4.2 --Indenture governing the 8 1/2% Convertible Subordinated Debentures due March 31, 2007, including the form of 8 1/2% Convertible Subordinated Debentures due March 31, 2007.(3) 4.3 --Form of First Supplemental Indenture to the Indenture between the Registrant and Shawmut Bank Connecticut, N.A., as Trustee.(11) 4.4 --Amended and Restated Rights Agreement, dated as of April 8, 1997, between the Registrant and Mellon Securities Trust Company, as Rights Agent. (18) 4.5 --Indenture, dated April 16, 1997, by and among the Company, the Guarantors and PNC Bank, N.A., as Trustee. (19) 4.6 --First Supplemental Indenture dated as of July 9, 1997 between the Registrant and PNC Bank, N.A. as Trustee.(23) 4.7 --Second Supplemental Indenture dated as of August 25, 1997 between the Registrant and PNC Bank, N.A. as Trustee.(24)
4.8 --Form of 11 1/2% Series A Senior Notes due 2007.(19) 4.9 --Form of 11 1/2% Series B Senior Notes due 2007.(21) 4.10 --Form of Guarantee of 11 1/2% Series A and B Senior Notes.(21) 4.11 --Indenture dated April 16, 1997 by and between the Company and U.S. Trust of Texas, N.A., as Trustee. (20) 4.12 --Certificates of Designation for the 8 1/2% Convertible Exchangeable Preferred Stock. (22) 10.1 --Acquisition Agreement dated December 22, 1986, among The Greyhound Corporation, Greyhound Lines, Inc., the Registrant, GLI Holding Company, GLI Bus Operations Holding Company and GLI Merger Company.(1) 10.2 --First Amendment to Acquisition Agreement dated January 31, 1987.(1) 10.3 --Second Amendment to Acquisition Agreement dated March 18, 1987.(1) 10.4 --Third Amendment to Acquisition Agreement dated March 18, 1987.(1) 10.5 --Fourth Amendment to Acquisition Agreement dated September 18, 1987.(1) 10.6 --Contested Claim Pool Trust Agreement to be entered into as of October 31, 1991, by and between the Registrant and Smith Barney Trust Company, as trustee.(2) 10.7 --Claims Treatment Agreement dated August 23, 1991, by and among Eagle Bus Manufacturing, Inc., the Registrant, Trailways Commuter Transit, Inc., GLI Bus Operations Holding Company, GLI Food Services, Inc., Southern Greyhound Lines Co., GLI Holding Company, Central Greyhound Lines Co., Greyhound Travel Services, Inc., Eastern Greyhound Lines, Co., and Western Greyhound Lines Co., on the one hand, and The Dial Corp, on the other.(2) 10.8 --Memorandum of Agreement, dated as of October 1, 1996, between Greyhound Lines, Inc. and District No. 9, International Association of Machinists, AFL-CIO.(17) 10.9 --Memorandum of Agreement, dated as of October 1, 1996, between Greyhound Lines, Inc. and the International Association of Machinists and Aerospace Workers covering garage employees at Miami, Florida; St. Petersburg, Florida; Columbia, South Carolina; Orlando, Florida; Charleston, West Virginia and Tallahassee, Florida.(17) 10.10 --Memorandum of Agreement, dated as of October 1, 1996, between Greyhound Lines, Inc. and the International Association of Machinists and Aerospace Workers covering garage employees at Dallas, Texas, Houston, Texas, Kansas City, Missouri, San Antonio, Texas, Brownsville, Texas and Grand Junction, Colorado.(17) 10.11 --Memorandum of Agreement, dated as of May 25, 1993, between the Registrant and the Amalgamated Council of Greyhound Local Unions.(6) 10.12 --Lease Agreement No. 1, dated as of December 29, 1993, between Wilmington Trust Company and the Registrant.(6) 10.13 --Lease Agreement No. 2, dated as of December 29, 1993, between Wilmington Trust Company and the Registrant.(6) 10.14 --Lease Agreement No. 3, dated as of December 29, 1993, between Wilmington Trust Company and the Registrant.(6) 10.15 --Lease Supplement No. 1-1, dated as of December 30, 1993, between Wilmington Trust Company and the Registrant.(6) 10.16 --Lease Supplement No. 2-1, dated as of December 30, 1993, between Wilmington Trust Company and the Registrant.(6) 10.17 --Lease Supplement No. 3-1, dated as of December 30, 1993, between Wilmington Trust Company and the Registrant.(6) 10.18 --Tax Indemnification Agreement, dated as of December 29, 1993, between NationsBank Lease Investments, Inc. and the Registrant.(6) 10.19 --Pledge Agreement, dated as of December 29, 1993, among the Registrant, Wilmington Trust Company and NationsBank Lease Investments, Inc.(6) 10.20 --Participation Agreement, dated as of December 29, 1993, among NationsBank Lease Investments, Inc. and the Registrant.(6) 10.21 --Greyhound Lines, Inc. 1991 Management Incentive Stock Option Plan.(2)
10.22 --Greyhound Lines, Inc. 1993 Management Incentive Stock Option Plan.(5) 10.23 --Greyhound Lines, Inc. 1993 Non-Employee Director Stock Option Plan.(8) 10.24 --First Amendment to the Registrant 1993 Non-Employee Director Stock Option Plan.(9) 10.25 --Second Amendment to Greyhound Lines, Inc. 1993 Non-Employee Director Stock Option Plan.(13) 10.26 --Greyhound Lines, Inc. Supplemental Executive Retirement Plan.(16) 10.27 --Amendment to the Greyhound Lines, Inc. Supplemental Executive Retirement Plan.(17) 10.28 --Lease Agreement, dated as of March 28, 1994, between Wilmington Trust Company and the Registrant.(7) 10.29 --Lease Supplement No. 1, dated as of March 28, 1994, between Wilmington Trust Company and the Registrant.(7) 10.30 --Pledge Agreement, dated as of March 28, 1994, among the Registrant, Wilmington Trust Company and Cargill Leasing Corporation.(7) 10.31 --Participation Agreement, dated as of March 28, 1994, among Cargill Leasing Corporation and the Registrant.(7) 10.32 --Bill of Sale, dated as of March 28, 1994, between the Registrant and Wilmington Trust Company.(7) 10.33 --Tax Indemnification Agreement, dated as of March 28, 1994, between Cargill Leasing Corporation and the Registrant.(7) 10.34 --Lease Agreement, dated as of March 29, 1994, between Wilmington Trust Company and the Registrant.(7) 10.35 --Lease Supplement No. 1, dated as of March 29, 1994, between Wilmington Trust Company and the Registrant.(7) 10.36 --Pledge Agreement, dated as of March 29, 1994, among the Registrant, Wilmington Trust Company and Cargill Leasing Corporation.(7) 10.37 --Participation Agreement, dated as of March 29, 1994, among Cargill Leasing Corporation and the Registrant.(7) 10.38 --Bill of Sale, dated as of March 29, 1994, between the Registrant and Wilmington Trust Company.(7) 10.39 --Tax Indemnification Agreement, dated as of March 29, 1994, between Cargill Leasing Corporation and the Registrant.(7) 10.40 --Employment Agreement dated November 15, 1994, between Registrant and Craig R. Lentzsch.(12) 10.41 --Greyhound Lines, Inc. 1995 Long Term Stock Incentive Plan.(14) 10.42 --Greyhound Lines, Inc. 1995 Director's Stock Incentive Plan.(14) 10.43 --Employment Agreement dated September 18, 1995 between Registrant and John Werner Haugsland.(15) 10.44 --1995 Bus Purchase Agreement.(16) 10.45 --Third Amended and Restated Loan and Security Agreement dated as of May 21, 1997 by and between Greyhound Lines, Inc. and Foothill Capital Corporation and BankBoston.(23) 11 --Computation of Registrant's earnings per share for the year ended December 31, 1995.(16) 11.1 --Computation of Registrant's earnings per share for the year ended December 31, 1996.(17) 11.2 --Computation of Registrant's earnings per share for the year ended December 31, 1997.(25) 21 --Subsidiaries of the Registrant.(25) 23.1 --Consent of Arthur Andersen LLP.(25) 27 --Financial Data Schedule as of and for the year ended December 31, 1997.(26)
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(1) Incorporated by reference from the Annual Report Form 10-K/A for the year ended December 31, 1994.
(2) Incorporated by reference from the Registration Statement on Form S-1 (File Nos. 33-45060-01 and 33-45060-02) regarding the Registrant's 8 1/2% Convertible Subordinated Debentures Due 2007.
(3) Incorporated by reference from the Company's Registration Statement on Form S-1 (File No. 33-47908) regarding the Registrant's Common Stock and 10% Senior Notes Due 2001 held by the Contested Claims Pool Trust.
(4) Incorporated by reference from the Company's Registrant Statement on Form S-3 (File No. 33-61044).
(5) Incorporated by reference from the Company's Registrant Statement on Form S-8 (File No. 33-63506) regarding the Registrant's 1991 and 1993 Management Stock Option Plans.
(6) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.
(7) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
(8) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.
(9) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994.
(10) Incorporated by reference from the Registration Statement on Form S-1 (File No. 33-56131) regarding the Registrant's Common Stock.
(11) Incorporated herein by reference from the Registrant's Issuer Tender Offer Statement on Schedule 13E-4 (File No. 5-41800).
(12) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.
(13) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
(14) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
(15) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995.
(16) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.
(17) Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1996.
(18) Incorporated by reference from the Registrant's Quarterly Report on Form 8-K regarding the Rights Agreement dated April 8, 1997.
(19) Incorporated by reference from the Company's Registration Statement on Form S-4 regarding the Company's 11 1/2% Series B Senior Notes due 2007.
(20) Incorporated by reference from the Company's Registration Statement on Form S-3 regarding the Company's 8 1/2% Convertible Exchangeable preferred Stock, Common Stock and 8 1/2% Convertible Subordinated Debentures due 2009.
(21) Incorporated by reference from Amendment 1 to Form S-4 filed on June 27, 1997.
(22) Incorporated by reference from Amendment 1 to Form S-3 filed on June 27, 1997.
(23) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(24) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
(25) Filed herewith.
(26) Filed only in EDGAR format with the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997.
(b) REPORTS ON FORM 8-K
The Company filed no current reports on Form 8-K with the Securities and Exchange Commission during the quarter ended December 31, 1997, nor was it required to do so.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of Dallas and the State of Texas, on March 19, 1997.
GREYHOUND LINES, INC.
By: /s/ CRAIG R. LENTZSCH ------------------------------------- Craig R. Lentzsch President and Chief Executive Officer (Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
INDEX TO EXHIBITS