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Student Transportation Inc. – ‘40-F’ for 6/30/14 – ‘EX-99.2’

On:  Thursday, 9/25/14, at 5:11pm ET   ·   For:  6/30/14   ·   Accession #:  1193125-14-353312   ·   File #:  1-35233

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 9/25/14  Student Transportation Inc.       40-F        6/30/14  104:8.7M                                   Donnelley … Solutions/FA

Document/Exhibit                   Description                      Pages   Size 

 1: 40-F        Registration Statement or Annual Report by a        HTML     73K 
                Canadian Issuer                                                  
 2: EX-99.1     Miscellaneous Exhibit                               HTML    489K 
11: EX-99.10    Miscellaneous Exhibit                               HTML     35K 
 3: EX-99.2     Miscellaneous Exhibit                               HTML    493K 
 4: EX-99.3     Miscellaneous Exhibit                               HTML    289K 
 5: EX-99.4     Miscellaneous Exhibit                               HTML     27K 
 6: EX-99.5     Miscellaneous Exhibit                               HTML     32K 
 7: EX-99.6     Miscellaneous Exhibit                               HTML     32K 
 8: EX-99.7     Miscellaneous Exhibit                               HTML     28K 
 9: EX-99.8     Miscellaneous Exhibit                               HTML     28K 
10: EX-99.9     Miscellaneous Exhibit                               HTML     35K 
72: R1          Document and Entity Information                     HTML     48K 
59: R2          Consolidated Balance Sheets                         HTML    112K 
70: R3          Consolidated Balance Sheets (Parenthetical)         HTML     29K 
76: R4          Consolidated Statements of Operations               HTML     95K 
95: R5          Consolidated Statements of Comprehensive Income     HTML     42K 
61: R6          Consolidated Statements of Shareholders' Equity     HTML     62K 
69: R7          Consolidated Statements of Cash Flows               HTML    141K 
53: R8          General                                             HTML     30K 
43: R9          Basis of Presentation                               HTML     74K 
96: R10         Business Combinations                               HTML     54K 
78: R11         Property and Equipment                              HTML     46K 
77: R12         Oil and Gas Interests                               HTML     33K 
83: R13         Goodwill and Other Intangible Assets                HTML     55K 
84: R14         Income Taxes                                        HTML     65K 
81: R15         Debt                                                HTML     81K 
85: R16         Asset Retirement Obligation                         HTML     31K 
71: R17         Common Shares                                       HTML     38K 
73: R18         Earnings Per Share                                  HTML     40K 
80: R19         Stock Based Compensation                            HTML     59K 
104: R20         Financial Instruments                               HTML     82K  
91: R21         Segment Information                                 HTML     64K 
65: R22         Lease Commitments                                   HTML     39K 
79: R23         Employee Benefit Plans                              HTML     29K 
67: R24         Related Party Transactions                          HTML     33K 
34: R25         Commitments and Contingencies                       HTML     32K 
92: R26         Additional Financial Information                    HTML     40K 
100: R27         Subsequent Events                                   HTML     30K  
48: R28         Basis of Presentation (Policies)                    HTML    145K 
47: R29         Business Combinations (Tables)                      HTML     48K 
51: R30         Property and Equipment (Tables)                     HTML     44K 
52: R31         Oil and Gas Interests (Tables)                      HTML     33K 
54: R32         Goodwill and Other Intangible Assets (Tables)       HTML     58K 
26: R33         Income Taxes (Tables)                               HTML     70K 
89: R34         Debt (Tables)                                       HTML     54K 
63: R35         Earnings Per Share (Tables)                         HTML     40K 
66: R36         Stock Based Compensation (Tables)                   HTML     50K 
38: R37         Financial Instruments (Tables)                      HTML     70K 
103: R38         Segment Information (Tables)                        HTML     62K  
18: R39         Lease Commitments (Tables)                          HTML     36K 
56: R40         Additional Financial Information (Tables)           HTML     40K 
94: R41         General - Additional Information (Detail)           HTML     35K 
36: R42         Basis of Presentation - Additional Information      HTML     89K 
                (Detail)                                                         
46: R43         Acquisition - Additional Information (Detail)       HTML     54K 
50: R44         Purchase Price Allocation (Detail)                  HTML     47K 
60: R45         Amount of Revenue and Net Income Associated with    HTML     35K 
                Acquisitions included in Consolidated Operations                 
                (Detail)                                                         
25: R46         Unaudited Pro Forma and Actual Financial            HTML     34K 
                Information of 2012 acquisition (Detail)                         
42: R47         Components of Property and Equipment (Detail)       HTML     53K 
20: R48         Components of Oil and Gas Interests (Detail)        HTML     33K 
93: R49         Oil and Gas Interests - Additional Information      HTML     30K 
                (Detail)                                                         
35: R50         Components of Intangible Assets (Detail)            HTML     48K 
90: R51         Estimated Annual Amortization Expense for           HTML     41K 
                Intangible Assets (Detail)                                       
39: R52         Changes in Carrying Amount of Goodwill (Detail)     HTML     38K 
57: R53         Components of Provision (Benefit) for Income Taxes  HTML     66K 
                (Detail)                                                         
19: R54         Components of Income Before Income Tax Provision    HTML     35K 
                (Benefit) for Income Taxes (Detail)                              
23: R55         Reconciliation of Income Taxes (Detail)             HTML     51K 
49: R56         Significant Components of Deferred Tax Assets and   HTML     53K 
                Liabilities (Detail)                                             
29: R57         Income Taxes - Additional Information (Detail)      HTML     46K 
97: R58         Gross Amount of Unrecognized Tax Benefits (Detail)  HTML     32K 
62: R59         Components of Indebtedness (Detail)                 HTML     36K 
82: R60         Maturities of long-term Debt (Detail)               HTML     51K 
41: R61         Debt - Additional Information (Detail)              HTML    136K 
44: R62         Asset Retirement Obligation - Additional            HTML     38K 
                Information (Detail)                                             
88: R63         Common Shares - Additional Information (Detail)     HTML     65K 
86: R64         Basic and Diluted Weighted Average Share Amounts    HTML     36K 
                (Detail)                                                         
64: R65         Computation for Basic and Diluted Income Per        HTML     46K 
                Common Share (Detail)                                            
87: R66         Stock Based Compensation - Additional Information   HTML     55K 
                (Detail)                                                         
40: R67         Summary of Class B Series Two Common Shares         HTML     37K 
                Granted (Detail)                                                 
68: R68         Summary of Class B Series Three Common Shares       HTML     40K 
                Granted (Detail)                                                 
99: R69         Financial Assets and Liabilities (Detail)           HTML     56K 
22: R70         Financial Instruments - Additional Information      HTML     79K 
                (Detail)                                                         
33: R71         Fair Values of Company's Financial Assets and       HTML     43K 
                Liabilities Measured on Recurring Basis (Detail)                 
58: R72         Summary of Changes in Level Three Financial         HTML     36K 
                Instruments (Detail)                                             
28: R73         Outstanding Contracts Relating to Dividend and      HTML     38K 
                Interest Payments (Detail)                                       
102: R74         Segment Information - Additional Information        HTML     39K  
                (Detail)                                                         
37: R75         Revenue and Assets by Geographical Area for         HTML     41K 
                Transportation Segment (Detail)                                  
30: R76         Reportable Operating Segments (Detail)              HTML     58K 
32: R77         Lease Commitments - Additional Information          HTML     30K 
                (Detail)                                                         
24: R78         Future Minimum Rental Payments and Operating Lease  HTML     52K 
                Payments under Non Cancelable Operating Leases                   
                (Detail)                                                         
27: R79         Employee Benefit Plans - Additional Information     HTML     29K 
                (Detail)                                                         
75: R80         Related Party Transactions - Additional             HTML     32K 
                Information (Detail)                                             
31: R81         Commitments and Contingencies- Additional           HTML     33K 
                Information (Detail)                                             
98: R82         Balance Sheet Information (Detail)                  HTML     72K 
55: R83         Subsequent Events - Additional Information          HTML     54K 
                (Detail)                                                         
101: XML         IDEA XML File -- Filing Summary                      XML    153K  
21: EXCEL       IDEA Workbook of Financial Reports                  XLSX    224K 
45: EXCEL       IDEA Workbook of Financial Reports (.xls)            XLS   1.01M 
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13: EX-101.SCH  XBRL Schema -- stb-20140630                          XSD    202K 
74: ZIP         XBRL Zipped Folder -- 0001193125-14-353312-xbrl      Zip    206K 

Exhibit 99.2

CONSOLIDATED FINANCIAL STATEMENTS

Student Transportation Inc.

For the years ended June 30, 2014 and 2013

Student Transportation Inc.

Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Student Transportation Inc.:

We have audited the accompanying consolidated balance sheets of Student Transportation Inc. as of June 30, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for the years then ended, and the notes to the consolidated financial statements.

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with United States generally accepted accounting principles, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Student Transportation Inc. as at June 30, 2014 and 2013 and the consolidated results of its operations and its cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.

/s/ Ernst & Young LLP

Independent Registered Public Accounting Firm

MetroPark, New Jersey USA

September 15, 2014

3

Student Transportation Inc.

Consolidated Balance Sheets

(000’s of U.S. dollars)

See accompanying notes.

4

Student Transportation Inc.

Consolidated Statements of Operations

(000’s of U.S. dollars, unless specified, except share and per share amounts)

See accompanying notes.

5

Student Transportation Inc.

Consolidated Statements of Comprehensive Income

(000’s of U.S. Dollars)

See accompanying notes.

6

Student Transportation Inc.

Consolidated Statements of Shareholders’ Equity

(000’s of U.S. Dollars)

See accompanying notes.

7

Student Transportation Inc.

Consolidated Statements of Cash Flows

(000’s of U.S. Dollars)

See accompanying notes.

8

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

1. General

Student Transportation Inc. (“STI” or the “Company”) is a corporation established under the laws of the Province of Ontario. STI together with its indirect subsidiary Student Transportation of America ULC (“STA ULC” and together with STI the “Issuer”), completed an Initial Public Offering (the “IPS Offering”) on December 21, 2004 through the issuance of income participating securities (“IPSs”). Each IPS consisted of one common share of STI and Cdn $3.847 principal amount of 14% subordinated notes of STA ULC (the “Subordinated Notes”). On December 21, 2009, the Company redeemed the remaining Subordinated Notes, originally issued as a component of the IPSs, as the final step in the process of converting from the IPS structure to a traditional common share structure. STI owns 100% of the Class A common shares of Student Transportation of America Holdings, Inc. (“STA Holdings”). Management owns 100% of the Class B Series Two and Class B Series Three common shares of STA Holdings pursuant to the grant of shares under the STA Holdings Equity Incentive Plan (“EIP”) (see Note 12). STI currently holds a 98.6% interest in STA Holdings, through its ownership of the Class A shares of STA Holdings. STI also owns 100% of the outstanding shares of Parkview Transit.

STA Holdings owns 100% of the outstanding shares of Student Transportation of America, Inc. (“STA, Inc.”). The Company, through its ownership of STA Holdings and Parkview Transit, is the third largest provider of school bus transportation services in North America.

2. Basis of Presentation

These consolidated financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States (“US GAAP”). The accompanying consolidated financial statements include the accounts of the Company and all of its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

The significant accounting policies used to prepare the financial statements are described below:

Foreign Currency Translation

Monetary assets and liabilities denominated in a currency other than the functional currency are translated at the rate of exchange prevailing at the balance sheet date. Transactions denominated in a currency other than the functional currency are translated at the rate of exchange prevailing on the transaction date. Gains and losses on translation of these items are considered transaction gain and losses and are included in the consolidated statements of operations in foreign currency (gain) loss.

The functional currency of STI, the parent, STA ULC and the Company’s Canadian operations, is the Canadian dollar. The functional currency of STA Holdings and the Company’s operations in the United States is the U.S. dollar. The Company’s financial statements are reported in U.S. dollars, as the principal operations and cash flows of its subsidiaries are conducted in U.S. dollars.

9

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

2. Basis of Presentation (continued)

As a result, the assets and liabilities of the STI, STA ULC and the Company’s Canadian operations are translated into U.S. dollars using the exchange rate in effect at the period end and revenues and expenses are translated at the average rate during the period. Exchange gains or losses on translation are deferred as a separate component of shareholders’ equity. The Company’s Cdn$ 7.5% convertible subordinated unsecured debentures (the “Cdn$ 7.5% Convertible Debentures”), the Cdn$ 6.75% convertible subordinated unsecured debentures (the “Cdn$ 6.75% Convertible Debentures”) and the Cdn$ 6.25% convertible subordinated unsecured debentures (the “Cdn$ 6.25% Convertible Debentures”), as described in Note 8, of STI are denominated in Canadian dollars. As the functional currency of STI is the Canadian dollar, exchange gains or losses related to the Cdn$ 7.5% Convertible Debentures, the Cdn$ 6.75% Convertible Debentures and the Cdn$ 6.25% Convertible Debentures on the translation of the STI financial statements into U.S. dollars, the reporting currency, are deferred as a separate component of shareholders’ equity. The US$ 6.25% convertible subordinated unsecured debentures (the “6.25% Convertible Debentures”) of STI as described in Note 8, are denominated in U.S. dollars. As the functional currency of STI is the Canadian dollar, unrealized gains or losses on re-measurement of the US$ 6.25% Convertible Debentures into Canadian dollars are considered transaction gains and losses, at the STI level, and are included in the consolidated statement of operations.

Foreign currency transactions gains and losses, related to short-term related intercompany loans are recorded in the Consolidated Statement of Operations as incurred. Foreign currency transaction gains and losses for intercompany loans that are considered long-term in nature are recorded in Accumulated Other Comprehensive Loss as incurred.

Cash and Cash Equivalents

Cash and cash equivalents include all cash balances and highly liquid investments with maturities of three months or less from the date of purchase. At June 30, 2014 and June 30, 2013 there were no cash equivalents.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

The Company bases its estimates on historical experience, actuarial evaluations and on various other assumptions that it believes are reasonable under the circumstances.

10

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

2. Basis of Presentation (continued)

Amounts reported based upon these estimates include, but are not limited to, insurance reserves, income taxes, goodwill and intangible assets, derivatives, certain components of long term debt, Class B Series Two and Series Three common share liability and impairment testing of long-lived assets.

Allowance for Doubtful Accounts

The Company establishes provisions for losses on accounts receivable if it is determined that all or part of the outstanding balance is not collectable. Collectability is reviewed regularly and an allowance is established or adjusted, as necessary, using the specific identification method.

Concentration of Credit Risk

Credit is extended based on an evaluation of the customer’s financial condition and, generally, advance payment is not required. The Company has no individual customers which account for more than 10% of its revenues.

Anticipated credit losses are provided for in the financial statements. Management monitors the financial condition of its customers to reduce the risk of loss.

Inventories

Inventories, consisting primarily of repair parts and vehicle accessories, are valued at the lower of cost or market determined on a first-in, first-out (FIFO) method.

Property and Equipment

Property and equipment is recorded at cost or at fair value if obtained as part of a business acquisition, less accumulated depreciation. Ordinary maintenance and repairs are expensed as costs are incurred. Depreciation on transportation equipment is computed on a usage basis over the estimated useful lives of the assets, which approximate a range from seven to eleven years.

Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the assets. Buildings are depreciated on a straight line basis over 40 years. Other property and equipment is depreciated on a straight line basis over three to five years.

The Company recorded depreciation expense of $45.2 million and $40.9 million for the years ended June 30, 2014 and 2013, respectively.

11

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

2. Basis of Presentation (continued)

Goodwill and Indefinite Lived Intangibles

Goodwill represents the excess of cost over fair value of net assets acquired in business combinations accounted for under the purchase method. Goodwill and trade names are not amortized but rather assessed for impairment annually or more frequently if circumstances change and indicators of impairment are present. The annual impairment testing is performed in the fourth quarter.

The annual assessment of goodwill impairment, may be performed either on a quantitative or qualitative basis. In accordance with Accounting Standards Codification (“ASC”) 350-20, Intangibles-Goodwill and Other, the quantitative assessment is a two step impairment test. The Company first compares the fair value of the reporting unit with its carrying value, including goodwill. If the carrying value exceeds the fair value, the carrying value is then compared to the implied fair value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss will be recognized in the statement of earnings in an amount equal to the difference and the implied fair value of goodwill becomes the new carrying value of goodwill for that reporting unit which is then used in future impairment tests.

ASC 350-20 was amended in September 2011, and gives the Company the option to perform a qualitative assessment for goodwill impairment. Under the qualitative assessment, consideration is given to both external factors (including the macroeconomic and industry conditions) and the Company’s own internal factors (including internal costs, recent financial performance, management, business strategy, customers, and stock price). Facts and circumstances are evaluated each year to determine whether to use the qualitative or quantitative assessment. We performed a qualitative assessment during the fourth quarter of 2014, and there was no indication of impairment for goodwill.

Other Identifiable Intangible Assets

When assessing the impairment for indefinite-lived trade names, the Company performs the assessment in accordance with ASC 350-30, Intangibles other than Goodwill which states that when the carrying value exceeds the fair value, an impairment loss will be recognized in the statement of earnings in an amount equal to the excess. Fair values are derived by using discounted cash flow analyses which requires, among other factors, estimates of the amount and timing of projected cash flows and the appropriate discount rate. ASC 350-30, Intangibles Other than Goodwill, was amended in July 2012, and gives the Company the option to first assess qualitative factors to determine if a quantitative impairment test of the indefinite-live intangible asset is necessary. If the qualitative assessment reveals that it’s more likely than not that the asset is impaired, a calculation of the assets’ fair value is required. Otherwise, no quantitative calculation is necessary. The Company performed the quantitative assessment of trade names and there was no

12

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

2. Basis of Presentation (continued)

indication of impairment. Definite-lived intangible assets consist of contract rights and covenants not to compete. Contract rights, which include customer relationships, are amortized on a straight-line basis over an estimated useful life of 20 to 23 years. The useful life for contract rights was determined based on third party valuation reports prepared for the Company. The valuations took into account the average length of the contracts, the expected renewal periods and assumptions regarding future renewals based upon historical customers lives. Covenants not-to-compete are amortized on a straight-line basis over an estimated useful life of two to five years. The Company recorded amortization expense associated with its intangible assets of $3.6 million and $4.2 million for the years ended June 30, 2014 and 2013, respectively.

Convertible Debentures

The principal amounts of the Cdn$ 7.5% Convertible Debentures were and the Cdn$ 6.75% Convertible Debentures and the Cdn$ 6.25% Convertible Debentures are convertible into common shares of the Company at the option of the holders and the Company under certain conditions. The Company has determined that the debentures are not required to be bifurcated into separate debt and equity components. In accordance with ASC 470-20, Debt with Conversion and Other Options, if the conversion feature of the debenture is non-beneficial (i.e. “out of the money”) upon issuance and the Company cannot settle conversions in cash, the full proceeds from these debentures should be recorded as a liability with no value attributed to the conversion feature. As such, the Company has recorded the full amount of the debentures as a liability.

In accordance with ASC 815, Derivatives and Hedging, as the conversion feature on STI’s US$ 6.25% Convertible Debentures provides that the US dollar denominated notes can be converted at a US dollar denominated strike price into common shares of STI, a Canadian dollar functional currency entity, the conversion feature represents an embedded derivative that must be bifurcated and accounted for separately. The embedded conversion feature is recorded at fair value in other liabilities at each reporting period end with the non-cash changes in fair value included in the consolidated statement of operations. The Company recorded a non-cash gain for the year ended June 30, 2014 of $0.7 million in connection with the change in fair value of the embedded conversion feature during the 2014 fiscal year. The value of the embedded conversion feature represents a liability of $0.2 million and $1.0 million as at June 30, 2014 and 2013, respectively, which are included within other liabilities in the consolidated balance sheet.

Deferred Financing Costs

The Company incurred costs related to obtaining debt financing. The Company capitalized costs associated with its Credit Agreement, Senior Secured Notes and costs related to the issuances of the Convertible Debentures. These costs have been capitalized and are being amortized to interest expense over the term of the related debt using the effective interest rate method. The carrying

13

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

2. Basis of Presentation (continued)

value of the deferred financing costs was $7.4 million and $5.5 million as of June 30, 2014 and 2013 respectively. Amortization expense totaled $1.6 million and $2.2 million for the years ended June 30, 2014 and 2013, respectively. Deferred financing costs are included in other assets in the consolidated balance sheet.

Impairment of Long-Lived Assets

Management continually evaluates whether events or circumstances have occurred that indicate that the remaining estimated useful lives of property and equipment, contract rights and covenants not to compete may warrant revision or that the remaining balances may not be recoverable. Events or circumstances that would trigger testing for impairment include, but are not limited to, the loss of a significant school district customer contract, a significant increase in the Company’s expense levels absent a corresponding increase in revenue that causes operating or cash flow losses or projected operating or cash flow losses, significant adverse changes in legal factors or the business climate in which the Company operates that could affect the value of long-lived assets, or the expectation that a long-lived asset will be sold or otherwise disposed of at a loss before the end of its previously estimated useful life. If this review indicates that the assets will not be recoverable, as determined based on the undiscounted future cash flows from the use of the assets, the carrying value of the assets will be reduced to their estimated fair value. There were no indicators of impairment during the years ended June 30, 2014 and 2013.

Business Combinations

The Company accounts for business combinations under the principles codified in ASC 805, Business Combinations. The principles set forth how an acquirer recognizes and measures assets acquired, liabilities assumed, non-controlling interest and goodwill in a business combination. Key components include: (i) recognition of transaction costs in current period earnings and included in the consolidated statement of operations in acquisition expense; (ii) recognition of the estimated fair value of all contingent consideration at the acquisition date and an adjustment to fair value at each reporting date with an offset to current period earnings included in the consolidated statement of operations in other (income) expense; (iii) adjustments to deferred tax asset valuation allowances and income tax uncertainties recorded at the acquisition date to be recognized in current period earnings; (iv) acquisition method accounting is applied on the date that control is obtained in step acquisitions; (v) re-measurement of previously acquired non-controlling equity investments at fair value as at the acquisition date with an offset to current period earnings; and (vi) any excess of fair value of acquired net assets over the acquisition consideration results in a bargain purchase which is recognized in the statement of operations.

14

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

2. Basis of Presentation (continued)

Income Taxes

Income taxes have been computed utilizing the asset and liability approach, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the currently enacted tax rates expected to be in effect for the years in which those taxes are expected to be realized or settled. A valuation allowance is recorded to reduce deferred tax assets to the amount that is believed to be more likely than not to be realized. The recorded deferred income tax liability results from a difference between the book and tax basis of certain transportation equipment, other equipment and intangible assets.

The Company uses judgment in determining income tax provisions and in evaluating its tax positions under the accounting guidance for income taxes. Additional provisions for income taxes are established when, despite the belief that tax positions are fully supportable, there remain certain positions that do not meet the minimum probability threshold, which is a tax position that is more-likely-than-not to be sustained upon examination by the applicable taxing authority. The Company and its subsidiaries are examined by various federal and state tax authorities. The Company regularly assesses the potential outcomes of these examinations and any future examinations for the current or prior years in determining the adequacy of its provision for income taxes. The Company continually assesses the likelihood and amount of potential adjustments and adjusts the income tax provision, the current tax liability and deferred taxes in the period in which the facts that give rise to a revision become known. The Company recognizes interest and penalties related to underpayment of income taxes in income tax provision (benefit). (see Note 7).

Revenue Recognition

Revenue from the Company’s school bus operations is recognized when the following criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the price to the buyer is fixed and determinable, and collectability is reasonably assured. The Company bills customers on a monthly basis upon the completion of school bus routes, which are based on contracts or extension agreements with customers.

Revenue from oil and gas interests is derived from the Company’s partial ownership in various oil and gas wells. As a non-operator, the Company records revenue from its oil and gas interests based on its share of the sales value of production from producing wells. Revenue is received from the well operators and is recognized when the commodities are delivered to customers, the price is fixed or determinable and collectability is assured.

15

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

2. Basis of Presentation (continued)

Insurance Reserves

The Company had approximately $22.1 million and $17.5 million in recorded insurance reserves at June 30, 2014 and 2013, respectively. These reserves reflect the estimated deductible amounts the Company is responsible for under its workers’ compensation and vehicle liability insurance programs. Insurance expense for these items is largely dependent on the Company’s claims experience and the Company’s ability to control such claims, in addition to third party premiums/expenses associated with this coverage. The Company has recorded estimated insurance reserves for the anticipated losses on open claims and estimated reserves for incurred but not recorded claims under the workers’ compensation and vehicle liability programs based upon actuarial analysis prepared by an independent third party actuary. Although the estimates of these accrued liabilities are based on the factors mentioned above, it is possible that future cash flows and results of operations could be materially affected by changes in our assumptions or changes in claims experience.

Stock Based Compensation

The Company accounts for stock-based compensation and other stock-based payments using the fair value method. Under the fair value method, the fair value of stock based compensation and other stock-based payments are estimated at the grant date and the total fair value is amortized over the vesting schedule of the awards as compensation expense. The Class B Series Two and Class B Series Three common shares issued by STA Holdings are fully vested on the grant date, and, as such, the Company recognizes compensation expense when the shares are issued. STA Holdings has issued only Class B Series Three common shares pursuant to the EIP during fiscal year 2014 and fiscal year 2013. All future share awards under the EIP plan will be in the form of grants of Class B Series Three common shares, and there will be no further issuance of Class B Series Two common shares. These shares are accounted for as a liability upon issuance and remeasured at fair value on a quarterly basis (see Note 12). The Company recognized $3.9 million and $3.3 million in non-cash stock-based compensation expense based on the estimated fair value on the date of grant of the shares issued, for the years ended June 30, 2014 and 2013, respectively.

The Class B Series Two and Class B Series Three common shares are not traded in an active market and have certain restrictions on their transferability. These shares are accounted for as a liability upon issuance, as a result of a put option they contain. In the case of the Class B Series Two common shares issued pursuant to the EIP during the period the IPS structure was in place, the put option provides for a fair market value of Class B Series Two common shares put at an amount equal to the weighted average trading price of the STI common shares for the ten consecutive trading days immediately prior to the date of put, plus Cdn. $3.847 (an amount equivalent to the historical value of the Subordinated Note component of the IPS). In the case of the Class B Series Three common shares to be utilized for EIP share grants subsequent to the end of the IPS structure, the put option provides for a fair market value of Class B Series Three common shares put at an amount equal to the weighted average trading price of the STI common shares for the ten consecutive trading days immediately prior to the date of put.

16

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

2. Basis of Presentation (continued)

Stock based compensation expense associated with the issuance of Class B Series Two and Class B Series Three common shares is based on the trading value of the STI common shares at the date of grant, similar to the fair value of such common shares in connection with the put option values described above.

Accounting for Derivatives and Hedging Activities

Derivatives are recorded at fair value on the balance sheet, which, in accordance with ASC 820, Fair Value Measurements and Disclosure, requires that a company take into account its own credit risk and the credit risk of the counterparty when determining the fair value of financial assets and financial liabilities, including derivative instruments. Changes in fair value will be recorded in the income statement or through other comprehensive income depending on the nature of the derivative instrument. The Company did not elect hedge accounting for any of its derivative financial instruments and therefore records all changes in fair value in the income statement. The Company has offset the fair value amounts recorded on its forward foreign currency contracts executed with the same counterparty under an executed master netting arrangement.

Segment Reporting

The Company has two reportable segments, a transportation segment and an oil and gas segment. The transportation segment provides school bus and management services to public and private schools in North America. The oil and gas segment represents the Company’s investments as a non-operator in oil and gas interests.

Oil and Gas Interests

The Company holds non-operating interests in oil and gas properties, which are jointly owned with others. The financial statements reflect the Company’s proportionate interest in the oil and gas activities as a non-operator.

The Company uses the full-cost method of accounting for oil and gas interests to determine the capitalized cost, whereby certain expenditures related to the acquisition, exploration and development of oil and gas properties are capitalized. Capitalized costs include the cost of land acquired or leased, intangible drilling costs such as those for equipment, casing and attachments on both productive and non-productive wells. These costs, net of salvage values, are accumulated in a single cost center and are depleted and amortized using the units-of production method. Natural gas reserves and production are converted, at a ratio of six thousand cubic feet of natural gas to one barrel of oil, for depletion and depreciation purposes.

17

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

2. Basis of Presentation (continued)

In connection with the oil and gas interests, the Company has an asset retirement obligation which represents the liability associated with the retirement of long-lived assets that arise from the acquisition, construction, development or normal operation of such assets.

Under US GAAP, the impairment test for oil and gas assets (the “ceiling test”) requires the Company to use tax effected discounted cash flow using a present value technique. Under ASC 932, Extractive Industries – Oil and Gas, the pricing assumption to be used in the ceiling test calculation is defined as the twelve month average of realized prices.

Earnings per Share

Basic and diluted earnings per share are calculated by dividing the net income for the period by the weighted number of shares outstanding during each period. The shares used in the calculation of basic earnings per share are based on the weighted average number of shares outstanding. Shares used in the calculation of diluted earnings per share are based on the weighted average number of shares outstanding plus an adjustment for the incremental shares that would be outstanding assuming the exercise of the Company’s Convertible Debentures. The net income for basic earnings per share is net earnings available to common stockholders. The net income for diluted earnings per share is net earnings available to common stockholders with interest expense associated with the Convertible Debentures added back (net of tax) for the assumed conversion of the Convertible Debentures into common stock.

Seasonality

The Company’s operations are seasonal and follow the school calendars of the public and private schools it serves. During the summer school break, revenue is derived primarily from summer camps and private charter services. Since schools are not in session, there is no school bus transportation revenue. Depreciation of fixed assets occurs in the months during which schools are in session, which is generally September through June. A full year’s worth of depreciation is recorded in these ten months to match the vehicles’ usage.

Recent Accounting Pronouncements

In January 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-01, Scope Clarification of Disclosures about Offsetting Assets and Liabilities, to limit the scope of the new balance sheet offsetting disclosure requirements to derivatives (including bifurcated embedded derivatives), repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions. For public companies, the ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2012, or the first quarter of 2013 for fiscal years beginning after December 15, 2013 and interim and annual periods thereafter. The ASU should be applied prospectively. Early adoption is permitted.

18

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

2. Basis of Presentation (continued)

In February 2013, the FASB issued ASU 2013-02 to improve the reporting of reclassifications out of accumulated other comprehensive income (AOCI). The ASU sets requirements for presentation for significant items reclassified to net income in their entirety during the period and for items not reclassified to net income in their entirety during the period. This is effective for annual periods beginning on or after January 1, 2013 (including interim periods within them) and retrospectively for all periods presented on the balance sheet.

ASC 350-30, Intangibles Other than Goodwill, was amended in July 2012, and gives Companies the option to first assess qualitative factors to determine if a quantitative impairment test of the indefinite-live intangible asset is necessary. If the qualitative assessment reveals that it’s more likely than not that the asset is impaired, a calculation of the assets’ fair value is required. Otherwise, no quantitative calculation is necessary. This is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted.

The Company adopted these standards on July 1, 2013 and they did not have a material effect on its consolidated financial statements.

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss or a Tax Credit Carryforward Exists. This ASU provides for the presentation of all or a portion of an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward unless such balances are not available at the reporting date at which point the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This is effective for annual periods beginning after December 15, 2013 (including interim periods within those fiscal years). The ASU should be applied prospectively to unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company is required to adopt this standard prospectively for all unrecognized tax benefits that exist for the first quarter of fiscal 2015. Early adoption is permitted. This presentation is consistent with how the Company is currently presenting unrecognized tax benefits; therefore the adoption of this standard should not have a material impact on our consolidated financial statements.

In January 2014, the FASB issued ASU 2015-05, Service Concession Arrangements. This ASU applies to an operating entity of a service concession arrangement entered into with a public-sector entity grantor when the arrangement meets both of the following conditions: (i) the grantor controls or has the ability to modify or approve the services that the operating entity must provide with the infrastructure, to whom it must provide them and at what price and (ii) the grantor

19

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

2. Basis of Presentation (continued)

controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement. This is effective for annual periods beginning after December 15, 2014 (including interim periods within those fiscal years) and should be applied on a modified retrospective basis to service concession arrangements in existence at the beginning of the fiscal year of adoption. The Company is required to adopt this standard for the first quarter of fiscal 2016. Early adoption is permitted. The Company is currently evaluating the requirements of this ASU to determine the impact on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue From Contracts With Customers. This new revenue recognition standard will supersede most existing revenue recognition guidance and is intended to improve revenue recognition and related financial reporting requirements. The standard will require companies to review contract arrangements with customers and ensure that all separate performance obligations are properly recognized in the compliance with the new guidance. The standard allows for either “full retrospective” or “cumulative effect” adoption. The standard is effective for the Company on July 1, 2017 with early adoption prohibited. The Company is currently assessing whether the adoption of this guidance will have a significant impact on our consolidated financial statements.

3. Business Combinations

2014 Acquisitions

Atlantic Express Transportation Corporation

On February 10, 2014, the Company closed the acquisition of certain assets and contracts in California from Atlantic Express Transportation Corporation (“AE”). STI’s subsidiary School Wheels Direct (“SWD”) managed the California operations from January 10, 2014 to February 9, 2014. Earnings of the acquired company are included in the Company’s results of operations from February 10, 2014. The aggregate purchase price of these assets was approximately $17.2 million.

The purchase price consisted of $17.2 million in cash. Identifiable intangible assets consisted of contracts rights of $1.7 million that will be amortized over 20 years. Approximately $0.2 million of acquisition-related costs have been recognized as an expense in the statement of operations during fiscal year 2014.

20

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

3. Business Combinations (continued)

AE filed for protection under the federal bankruptcy protection rules. The SWD management services contract and the agreement to acquire the California assets of AE, including vehicles and school contracts, were both approved by the bankruptcy court. The purchase price was lower than the fair market value of the business acquired. Therefore, the Company has recognized a gain of approximately $2.8 million, net of tax, which is included in the consolidated statement of operations.

Williams Bus Line Co.

On August 27, 2013, the Company closed its acquisition of all of the outstanding common stock of Williams Bus Lines Co., (“Williams”), located in Wilkes Barre, Pennsylvania. Earnings of the acquired company are included in the Company’s results of operations from August 27, 2013. The aggregate purchase price of this acquisition was $3.4 million.

The purchase price consisted of $3.4 million in cash. Approximately forty-seven thousand dollars of acquisition-related costs have been recognized as an expense in the statement of operations during fiscal year 2014. The goodwill attributed to this acquisition includes the value of the workforce acquired, the opportunity to expand within the marketplace and other key competitive advantages. None of the goodwill related to this acquisition is deductible for tax purposes.

Scholastic Bus Co.

On July 23, 2013, the Company closed its acquisition of all of the outstanding common stock of Scholastic Bus Co., (“Scholastic”), located in Fairlawn, New Jersey. Earnings of the acquired company are included in the Company’s results of operations from the acquisition date. The aggregate purchase price of this acquisition was $2.4 million.

21

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

3. Business Combinations (continued)

The purchase price consisted of $2.2 million in cash and $0.2 million in deferred payments. Approximately twenty-seven thousand dollars of acquisition-related costs have been recognized as an expense in the statement of operations during fiscal year 2014. The goodwill attributed to this acquisition includes the value of the workforce acquired, the opportunity to expand within the marketplace and other key competitive advantages. None of the goodwill related to this acquisition is deductible for tax purposes.

The amount of revenue and net income associated with the 2014 acquisitions included in the 2014 consolidated operations are as follows:

The net income for the AE acquisition includes the bargain gain.

The following unaudited pro forma financial information combines the consolidated results from operations as if all of the 2014 acquisitions had occurred as of July 1, 2012. Pro forma adjustments include the bargain gain, the adjustment for amortization on acquired intangibles and the adjustment to record the tax impact on the pro forma financial results. The unaudited results are as follows:

The pro forma financial information is not necessarily indicative of operating results that would have occurred had the 2014 acquisitions been consummated as of July 1, 2012, nor is it indicative of future operating results.

The Company did not complete any business acquisitions during fiscal 2013.

22

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

4. Property and Equipment

Property and equipment consist of the following:

5. Oil and Gas Interests

Oil and gas interests consist of the following:

The Company does not capitalize any of its own administrative or interest costs and accounts for these costs as expenses during the year. There were no costs excluded from costs subject to depletion and depreciation at the balance sheet dates.

23

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

5. Oil and Gas Interests (continued)

Under full cost accounting many costs incurred will be capitalized even though they have not resulted in an increase in the future revenue generating capacity of the enterprise. Accordingly, it is widely recognized that there should be a limit on the aggregate costs that may be carried forward for amortization against revenue of future periods (the “ceiling test”); the Company performed a ceiling test calculation at both June 30, 2014 and 2013. The ceiling test requires the Company to use tax effected discounted cash flows using a present value technique. The sales prices used for the ceiling test at June 30, 2014 were $99.44 per barrel for oil and $4.74 per thousand cubic feet of natural gas. Based on the calculations under the first step of the ceiling test, the Company determined that its oil and gas interests are recoverable.

6. Goodwill and Other Intangible Assets

Intangible assets consist of the following:

24

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

6. Goodwill and Other Intangible Assets (continued)

Estimated annual amortization expense for intangibles assets is as follows:

The following table represents the changes in the carrying amount of goodwill for the years ended June 30, 2014 and 2013 (see Note 7):

7. Income Taxes

The components of the (benefit) provision for income taxes are as follows:

25

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

7. Income Taxes (continued)

The components of income before income tax (benefit) provision for income taxes are as follows:

The difference between the effective rate reflected in the income tax (benefit) provision for income taxes and the amount determined by applying the Canadian statutory rate to income before income taxes for the fiscal year ended June 30, 2014 and June 30, 2013 is analyzed below:

Deferred taxes arise because of the differences in the book and tax basis of certain assets and liabilities. Significant components of deferred tax assets and (liabilities) are as follows:

In the fourth quarter of 2014, the Company decreased goodwill and net non-current deferred income tax liabilities by $1.9 million to correct the purchase price allocation associated with the acquisition of the school bus division of Ayr Coach Lines in July 2006. This correction related to the deferred tax carryforwards that were acquired in connection with the acquisition.

26

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

7. Income Taxes (continued)

It is the Company’s intention to reinvest the undistributed earning of its foreign subsidiaries and thereby indefinitely postpone their remittance. As a result, deferred income taxes have not been provided on undistributed earnings of foreign subsidiaries of the Company.

The following table summarizes the gross amounts of unrecognized tax benefits without regard to reduction in tax liabilities if such unrecognized tax benefits were settled.

The total amount of the unrecognized tax benefits, if recognized would favorably impact the effective tax rate by $1.7 million. Not included in the amounts above are approximately $0.2 million and $0.1 million of interest and penalties for the fiscal years ended June 30, 2014 and 2013, respectively, which are included as a component of the income tax (benefit) provision on the consolidated statement of operations. All tax years starting with June 30, 2012 are currently open in the United States. All tax year starting with June 30, 2005 are currently open in Canada. The Company is currently undergoing an examination of one of its Canadian entities for the years ended June 30, 2011 and June 30, 2012. The tax positions under examination have previously established corresponding uncertain tax positions. As a result of the examination, the unrecognized tax benefits have the potential to reverse in the next year.

At June 30, 2014, the Company has available U.S. net operating loss carry forwards of approximately $46.6 million expiring in the years 2016 through 2026 and Canadian non-capital loss carry forwards of approximately $8.1 million expiring in the years 2018 through 2033. These deferred tax assets are offset by a valuation allowance of approximately $0.3 million.

27

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the years ended June 30, 2014 and 2013

(000’s of U.S. Dollars, unless specified, except share and per share amounts)

8. Debt

Indebtedness of the Company includes the following: