Annual Report — Form 10-K Filing Table of Contents
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(Address,
including zip code, and telephone number, including area
code,
of
Registrant’s principal executive
offices)
Securities
Registered Pursuant to Section 12(b) of the Act:
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of Each Class
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of Each Exchange on Which Registered
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in rule 405 of the Securities Act. Yes £
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by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes S
No
£
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by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes
S
No
£
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by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
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Form 10-K. S
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Non-accelerated filer R Smaller
reporting company £
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by check mark whether the registrant is a shell company (as defined in Rule
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£
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S
The
aggregate market value of voting and non-voting equity held by non-affiliates
of
the Registrant on December 31, 2007 was $0.
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INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
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£
We
are
Atlantic Express Transportation Corp., a New York corporation. In this document,
we refer to ourselves as the “Company”, “we”, “us” and “our”. We are the third
largest provider of school bus transportation in the United States and the
leading provider in New York City, the largest market in which we operate.
We
also provide paratransit services for physically and mentally challenged
passengers to a public transit system, and we offer fixed route transit, express
commuter line and charter and tour bus services.
We
have
been in operation for over 40 years and have grown from a small local bus
company with a fleet of 16 buses to one of the largest national school bus
transportation companies in the country with a fleet of approximately 5,500
vehicles as of June 30, 2008. We were founded in 1968 as a school bus company
based in Staten Island, New York. Domenic Gatto, our Chief Executive Officer
and
President, commenced employment with us in 1973 and purchased our company in
1974, at which time we operated only 16 buses. In 1979, we were awarded two
major school bus transportation contracts by the
New York
City Department of Education (the “DOE”),
which
substantially increased our revenues. These contracts, which were originally
awarded for a period of three years, have been extended successively through
June 30, 2010. From 1982 to 1987, we strengthened our presence in New York
City through the acquisition of 14 regional school bus transportation companies.
In 1986, we won and purchased additional contracts in New York City, which
also
have been extended successively through June 30, 2010. From 1986 to 1989,
we further strengthened our presence in New York City through the acquisitions
of four local contractors and expanded our operations to Nassau and Suffolk
counties on Long Island, New York, through a combination of acquisitions and
winning new contracts. From 1990 to 1997, we consummated six additional
acquisitions in the New York metropolitan area and three acquisitions on Long
Island, New York. In addition to our expansion in the New York greater
metropolitan area, we extended our operations to Philadelphia in 1993, where
we
were the successful bidder for a new contract, and made subsequent acquisitions
in 1993 and won additional new contracts in 1996 and 1997. We also established
operations in St. Louis in 1995 and in Los Angeles in 1997 by winning contracts.
We
have
focused on developing our favorable reputation in the areas of passenger safety,
timeliness and quality of service, key factors used by school bus transportation
administrators in selecting and renewing our services. We believe the expertise
we have gained in our long operating history enables us to establish strong
relationships with our customers and provides us with a competitive advantage
when renewing contracts or bidding on new business. Customers representing
approximately 98% of our fiscal year 2008 contract revenue from operations
have
been with us for over five years.
On
November 4, 1998, GSCP II Holdings (AE), LLC, an affiliate of Greenwich
Street Capital (‘GSC”), acquired an approximately 83% equity interest in our
recapitalized parent, Atlantic Express Transportation Group, Inc. or (“AETG”),
which owned all of the issued and outstanding shares of our capital stock at
that time.
We
generated revenues from operations of $433.5 million for the fiscal year ended
June 30, 2008 and incurred a net loss of $34.4 million for the fiscal
year.
Business
Operations
We
derive
our revenue from two segments: School Bus Operations and Paratransit and Transit
Operations (for additional segment information see Note 18 of Notes to
Consolidated Financial Statements included elsewhere in this Form
10-K)
School
Bus Operations (89.1% of revenues from operations for the year ended June 30,2008)
We
have
contracts to provide school bus transportation in 104 school districts in New
York, Missouri, Massachusetts, California, Pennsylvania, New Jersey and
Illinois. As of June 30, 2008, we had a fleet of approximately 5,100 vehicles
to
service our school bus operations, consisting of school buses, minivans and
cars, lift and ramp-equipped vehicles, coaches and service and support vehicles.
2
Services.
We
generally provide services for transportation of open enrollment ("Regular
Education") students through the use of standard school buses, and the
transportation of physically or mentally challenged ("Special Education")
students through the use of an assortment of vehicles, including standard school
buses, passenger vans and lift-gate vehicles, which are capable of accommodating
wheelchair-bound students. In most jurisdictions serviced by us, escorts are
required to accompany drivers on Special Education vehicles.
Contracts.
Our
school bus transportation contracts are awarded by school districts through
a
public bidding or request for proposal ("RFP") process. Our school bus
transportation contracts have provided a relatively predictable and stable
stream of revenues over their terms, which initially range from one to five
years. Compensation under school bus transportation contracts is generally
based
upon a daily rate per vehicle, which is established either by public bidding
or
by proposal and negotiation with respect to RFP contracts. Contracts in New
York
City provide for the payment of the daily vehicle rate for days of scheduled
performance in accordance with the school calendar and provide for payment
of
85% of the daily rate for any vehicle not used due to school cancellations
on
any scheduled school day. Daily vehicle rates earned under contract renewals
are
generally increased from previous rates by application of the Consumer Price
Index. Our cost increases have in the past and could in the future outpace
such
revenue increases. The number of vehicles required is determined by the school
districts, initially pursuant to their bid specifications and/or RFP, and is
subject to change.
Our
school bus transportation contracts generally provide for performance security
in one or more of the following forms: performance bonds, letters of credit
and
cash retainages. In most instances, we have opted to satisfy our security
performance requirements by posting performance bonds.
Customers.
We have
longstanding relationships with many of the school districts that we service.
School districts with which we do business generally appoint a business manager
and/or transportation supervisor to oversee school bus transportation
operations. Larger school districts have separate bureaus or divisions, which
regulate and supervise the providing of school bus transportation services.
Passenger safety, timeliness and quality of service are among the factors used
by school bus transportation administrators to evaluate us.
In
our
experience, unless a school district is dissatisfied with the services of a
school bus transportation contractor, school districts tend to extend existing
contracts rather than solicit bids from potential replacement contractors,
unless applicable law or the terms of the contract otherwise require. We believe
that replacing an existing contractor through a bidding process generally has
resulted in higher prices to districts than contract extensions because of
the
significant start-up costs that a replacement contractor faces. Bidding also
exposes a school district to uncertainty in the quality of service that would
be
provided by a new contractor.
Historically,
school districts awarded school bus transportation contracts through a public
bidding process by which such contracts were required to be awarded to the
lowest responsible bidder, without regard to quality of service. However,
management believes that, due in part to the poor performance of certain
low-priced school bus transportation contractors, school districts will
increasingly rely on a RFP process, which enables school administrators to
broaden the factors considered when awarding a contract. Factors such as
passenger safety, timeliness and quality of service, among others, are generally
considered under the RFP process. In 1996, the State of New York (where we
have
our largest concentration of school bus transportation contracts) adopted
legislation, which, for the first time, permitted school districts in the State
of New York to select school bus transportation contractors through a RFP
process. We believe that because of the reputation we have developed in the
school bus transportation industry, we are well positioned to obtain contracts
that are awarded by the RFP process as well as by public bidding. The DOE
accounted for 53.3%, 53.8% and 51.1% of our total revenues from operations
in
fiscal years 2008, 2007 and 2006, respectively. No other customer contributed
greater than 3.9% of our revenues from operations during these periods.
Most
of
the DOE contracts were originally awarded to us in 1979 and have been renewed
and extended since then. The latest extension occurred in June 2005 and extended
the contracts through June 30, 2010. Although the DOE has the option to
reduce our routes, the DOE, since the inception of the first contract, has
often
increased the number of routes but has never substantially reduced them. Our
ability to generate cash flow is heavily dependent on our contracts with the
DOE, and we expect it to continue in the future.
Paratransit
and Transit Operations (10.9% of revenues from operations for the year ended
June 30, 2008)
For
fiscal year 2008, we had one contract to provide paratransit service in New
York
City for physically and mentally challenged persons who are unable to use
standard public transportation. The remainder of our paratransit and transit
operations revenue comes from fixed route transit, express commuter lines and
charter and tour bus services. This division is primarily dependant on the
New
York City Transit Authority (“TA”) contract which will expire in December 2008.
We received a preliminary approval
for a ten year contract
with the
TA commencing January 2009. While
we
anticipate
the contract being awarded to us prior to the expiration of our current
contract,
there is
no assurance this contract will be awarded.
As of
June 30, 2008, we had a fleet of approximately 400 vehicles to service our
paratransit and transit operations.
3
To
enhance passenger safety and to satisfy paratransit contract requirements,
we
have instituted a comprehensive driver-training course, which encompasses
defensive driving, passenger sensitivity, first aid and CPR procedures,
passenger assistance techniques and detailed information about the disabilities
of the passengers that we transport. Paratransit services are primarily funded
by public transit systems.
Services.
Our
paratransit services are rendered based upon advance call-in requests for
transportation, which are primarily scheduled by an independent third party.
The
paratransit services operation has developed a substantial degree of expertise
in developing and providing transportation services required by our physically
or mentally challenged passengers.
Contract.
The term
of our paratransit contract was for five years and has been extended for an
additional two years to December 2008. Under our paratransit operations
vehicles, liability insurance and fuel are provided by the transit agency.
We
are entitled to a specified charge per hour of vehicle service together with
other fixed charges. Paratransit users pay a fixed amount per trip determined
by
the local transit system governmental entity (which may be equal to or based
upon prevailing public transportation fees in the jurisdiction in question),
which is credited against the monthly contract price due from the local transit
system.
Seasonality
The
school bus transportation operation, which averaged approximately 89.0% of
our
revenues from operations for the last three fiscal years, is seasonal in nature
and generally follows the pattern of the school year, with sustained levels
of
business during the months of September through June. As a result, we have
experienced, and expect to continue to experience, a substantial decline in
revenues from late June through early September. Our quarterly operating results
have also fluctuated due to a variety of factors, including variation in the
number of school days in each quarter (which is affected by the timing of the
first and last days of the school year, holidays, the month in which spring
break occurs and adverse weather conditions, which can close schools) and the
profitability of our other operations. In particular, historically we have
generated operating losses during the first quarter of each fiscal year.
Consequently, interim results are not necessarily indicative of the full fiscal
year and quarterly results may vary substantially, both within a fiscal year
and
between comparable fiscal years. See "Management's Discussion and Analysis
of
Financial Condition and Results of Operations."
Focus
on Passenger Safety and Service
Management
has developed a corporate culture focused on passenger safety and service.
All
drivers are required to attend periodic safety workshops and training programs,
which emphasize defensive driving and courteous behavior. We attempt to buy
school buses which comply with New York State safety regulations, among the
most
stringent in the country, which allows us to give our customers the benefit
of
the safety features and gives us flexibility in moving or selling vehicles
in
our fleet to transportation operators in other states as well. We believe that
our emphasis on passenger safety and service provides us with a competitive
advantage and is a major contributor to our success in extending existing
contracts and winning new contracts.
Fleet
Management and Maintenance
As
of
June 30, 2008, we operated a fleet of approximately 5,500 vehicles. The average
age of our fleet, exclusive of 265 vehicles provided by various transportation
authorities as of that date, was 8.7 years.
As
of
June 30, 2008, the fleet was maintained by our trained mechanics at our
approximately 50 facilities. We have a comprehensive preventive maintenance
program for our equipment to minimize equipment down time and prolong equipment
life. Programs implemented by us include standard maintenance, regular safety
checks, lubrication, wheel alignments and oil and filter changes, all of which
are performed on a regularly scheduled basis by our mechanics.
The
following is a breakdown of our fleet of owned vehicles as of June 30, 2008
by
age:
School
Buses
Minivans
And Cars
Lift/Ramp
Equipped
Vehicles
Coaches
Service and
Support
Vehicles
Total
Less
than 2 years old
105
1
5
2
3
116
2-5 years
old
344
111
52
4
38
549
6-10 years
old
1,634
64
207
7
48
1,960
11-15 years
old
1,063
1
88
9
51
1,212
Greater
than 15 years
325
—
40
—
13
378
Total
3,471
177
392
22
153
4,215
4
The
following is a breakdown of our fleet of leased vehicles as of June 30, 2008
by
age:
School
Buses
Minivans
And Cars
Lift/Ramp
Equipped
Vehicles
Coaches
Service and
Support
Vehicles
Total
Less
than 2 years old
258
—
35
14
1
308
2-5 years
old
384
29
93
12
1
519
6-10 years
old
127
—
—
18
—
145
11-15 years
old
25
—
—
—
—
25
Total
794
29
128
44
2
997
In
addition to the vehicles in the tables above, as of June 30, 2008, we operated
265 vehicles provided by various transportation authorities pursuant to their
respective contracts.
Employees
As
of
June 30, 2008, we had approximately 7,600 employees to provide transportation
services, consisting of approximately 5,400 drivers, 1,300 escorts, 500
maintenance workers and 400 employees in executive, operations, clerical and
sales functions. Our drivers and escorts are required to undergo background
checks, drug and alcohol testing and fingerprinting as a condition for
employment. All drivers are licensed to drive school buses and/or motor coaches
in accordance with federal and state licensing requirements.
We
require our drivers to complete a thorough and comprehensive training process
in
addition to satisfying federal and state requirements. In some states, such
as
New York, a special subclass of license is required for school bus drivers.
Our
paratransit drivers are also required to complete special training. Drivers
undergo a 20-hour basic training course once a year and a two-hour refresher
class twice per year. In addition, drivers are required to be fingerprinted
and
pass a defensive driving test, as well as physical, oral and written tests.
Further, all drivers must pass a pre-employment drug test as well as random
drug
and alcohol tests during the course of each year. Pursuant to federal and state
law, each year we are required to randomly test 50% of our drivers for drug
use
and 25% for alcohol use.
As
of
June 30, 2008, approximately 81% of our employees were members of various labor
unions. At that date we were party to 31 collective bargaining agreements,
of
which four agreements, covering approximately 400 employees, have already
expired. 20 agreements, covering approximately 4,300 employees will expire
over
the next two years (including three labor agreements with Local 1181 that will
expire on June 30, 2009 that will effect approximately 2,700 employees), with
the remainder to expire over the next three to five years. We
believe that our relations with employees are satisfactory. As
of
June 30, 2008, approximately 53% of the Company’s union employees were
represented by Local 1181-1061 Amalgamated Transit Union AFL-CIO (“Local 1181”),
which primarily represents personnel rendering services on behalf of the DOE.
Labor agreements with Local 1181 require contributions to the Local 1181 welfare
fund and pension plan on behalf of drivers, mechanics and escorts. All contracts
awarded by the DOE during the past 25 years contain employee protection
provisions and require continued contributions to the Local 1181 pension plan
and welfare fund for rehired employees opting to remain in such plan and such
fund. Pursuant to a plan amendment approved by the Pension Benefit Guaranty
Corporation, withdrawal liability for contributing employers to the plan, such
as our company, is essentially eliminated, provided that withdrawal is based
upon the loss of DOE contracts and that the successor contractor becomes a
contributing employer to the plan.
5
Competition
The
school bus transportation industry and paratransit services industry are highly
competitive. We compete on the basis of our reputation for passenger safety,
quality of service and price. We believe we are competitive in each of these
areas. Contracts are generally awarded pursuant to public bidding, where price
is the primary criteria for a contract award. We have many competitors in the
school bus and paratransit transportation business, including transportation
companies with resources and facilities substantially greater than those of
ours. We compete with First Transit and First Student, divisions of First Group
America, Inc., the largest private transportation contractor in North
America, and National Express Corporation the second largest private
transportation contractor in North America, in addition to other regional and
local companies.
Risk
Management and Insurance
We
maintain various forms of liability insurance against claims made by third
parties for bodily injury or property damage resulting from operations. Such
insurance consists of (1) general liability insurance of $1.0 million
per occurrence with a $50,000 deductible against claims arising from other
(e.g., non-vehicle) liability exposure and (2) our present primary
$1 million vehicle liability policy, which covers approximately 50% of all
our vehicles. It does not cover those vehicles providing service to the TA,
the
DOE, and our Massachusetts operations.
Under
our
primary vehicle liability insurance policy, we pay fronting charges to our
insurance carrier and we are required to contribute to a loss fund. The carrier
pays the first $500,000 per occurrence from this loss fund, up to a maximum
amount determined for each policy period. We are entitled to obtain a refund
from the carrier based upon a calculation of ratable losses valued as of a
date
42 to 54 months after the effective date of the policy. The carrier is
required to pay for all losses in excess of $500,000, up to $1 million, per
occurrence and any excess of the aggregate maximum ratable losses agreed to
for
that policy period. The TA provides $3 million insurance per occurrence for
our TA vehicles at no cost to us. The DOE provides $1 million insurance per
occurrence for our DOE vehicles, for which they deduct an agreed upon amount
from our monthly invoices. Our Massachusetts vehicles are covered under various
"First Dollar" policies with no deductibles. In addition, we cover all of our
vehicles with an additional umbrella policy with a minimum of $10 million per
occurrence. Beyond the occurrence limits mentioned herein, the vehicle liability
coverage provides indemnity for an unlimited number of occurrences. Our
insurance policies provide coverage for a one-year term and therefore, are
subject to annual renewal.
Under
our
primary workers' compensation insurance policy, we pay fronting charges to
our
carrier and we are required to contribute to a loss fund. The carrier pays
the
first $500,000 per occurrence from this loss fund, up to a maximum amount
determined for each policy period. We are entitled to obtain a refund from
the
carrier based upon a calculation of ratable losses valued as of a date 42 to
54 months after the effective date of the policy. The carrier is required
to pay for all losses in excess of $500,000, up to $1 million, per
occurrence and any excess of the aggregate maximum ratable losses agreed to
for
that policy period. Atlantic Escorts, Inc. is covered under a “First Dollar”
policy with no deductibles.
In
addition, we maintain catastrophic coverage of $25.0 million per
occurrence, for an unlimited number of occurrences, subject to a $100,000
deductible per occurrence. This insurance provides replacement cost coverage
for
losses on our fleet and insurance against business interruptions resulting
from
the occurrence of natural catastrophes, excluding flooding. We also maintain
property insurance for the replacement cost of all of our real and personal
property.
Environmental
Matters
Our
operations are subject to extensive and constantly evolving federal, state
and
local environmental and occupational health and safety laws and regulations,
including laws and regulations governing air emissions, wastewater discharges,
the storage and handling of chemicals and hazardous substances, and the
remediation of contaminated soil and groundwater ("Environmental Laws"). We
take
into account the requirements of such Environmental Laws in the improvement,
modernization, expansion and start-up of our facilities. As with most
transportation companies, we could incur significant costs related to
environmental compliance or remediation; however, any such cost would most
likely be incurred over a period of years. Compliance with Environmental Laws
or
more vigorous enforcement policies of regulatory agencies, or stricter or
different interpretations of such laws and future regulatory action regarding
the presence of hazardous substances in soil or groundwater, may require
material expenditures by us.
Under
various Environmental Laws, a current or previous owner or operator of real
estate may be liable for the costs of removal or remediation of certain
hazardous substances or petroleum products on, under or in such property,
without regard to whether the owner or operator knew of, or caused, the presence
of such substances. The presence of (or failure to properly remediate) such
substances may adversely affect the ability to sell or rent such real estate
or
to borrow using such real estate as collateral. Similarly, persons who generate
or arrange for the disposal or treatment of hazardous substances may be liable
for the costs of investigation, remediation or removal of such hazardous
substances at or from the disposal or treatment facility regardless of whether
such facility is owned or operated by such persons. Finally, the owner of a
site
may be subject to common law claims by third parties based on damages and costs
resulting from environmental contamination emanating from a site.
6
As
outlined above, we may be potentially liable for costs related to environmental
compliance and remediation. We cannot predict with any certainty the costs
of
remediation or compliance, including potential penalties, which costs could
have
a material adverse effect on us.
Government
Regulation
We
are
subject to a wide variety of federal, state and municipal laws and regulations
concerning (1) vehicle standards and equipment maintenance,
(2) qualification, training and testing of employees and
(3) qualification and maintenance of operating facilities. Our vehicles are
subject to federal motor vehicle safety standards established by the National
Highway Traffic Safety Administration ("NHTSA"). Specific standards are
promulgated by NHTSA with regard to school buses pursuant to the School Bus
Safety Act of 1974. Our vehicles are also subject to the laws and regulations
of
each state in which we operate, which are often more stringent than applicable
federal requirements. For example, in New York State, in addition to federal
standards, regulations promulgated by the New York State Department of Motor
Vehicles and the New York State Department of Transportation ("NYSDOT") require
that school buses be equipped with safety belts (for vehicles manufactured
after
1988), high back seats, left-handed emergency door exits, 16-gauge side panels
and illuminated school bus signs. All school buses and paratransit vehicles
are
required to be inspected twice annually by NYSDOT inspectors in accordance
with
a rigorous set of standards covering each mechanical component of the vehicles.
Our
employees are subject to various federal and state laws and regulations
pertaining to driver qualifications and drug, alcohol and substance abuse
testing. The Commercial Motor Vehicle Safety Act of 1986 requires drivers of
commercial vehicles, including school buses, motor coaches and paratransit
vehicles, to obtain a commercial driver's license. Many states have additional
licensing requirements for subclasses of drivers such as school bus drivers
and/or paratransit drivers. Under regulations enacted at the state and/or local
levels, our school bus drivers and paratransit drivers are required to complete
certain minimum basic training and refresher classes annually. Our drivers
are
kept up to date with changes in applicable regulations through these refresher
classes. Pursuant to regulations promulgated by the United States Department
of
Transportation under the Drug Free Workplace Act of 1988, our drivers are
required to undergo pre-employment drug and alcohol testing, and we are required
to conduct random testing for drug and/or alcohol abuse. Similar drug and
alcohol abuse testing is also required under various state laws. Our operating
and maintenance facilities are also required to be maintained in accordance
with
regulations promulgated by various federal and state agencies, including
departments of education, departments of motor vehicles, and state departments
of transportation.
Item
1A. Risk
Factors.
Risk
Factors Relating to Our Business
Our
business is dependent upon school bus transportation contracts with school
districts, which contracts may not be renewed or
rebid.
Historically,
our school bus transportation contracts have had initial terms between one
and
five years, generally subject to extension, where permitted by law, upon
expiration at the discretion of the school districts with our agreement for
additional contract periods. Although since 1979 we have achieved a
substantially high contract renewal rate, the decision to renew contracts is
not
made solely
by
us and may be based upon factors beyond our control. Any significant decrease
in
this historical renewal rate could have a material adverse
effect on us. There can be no assurance that any of our current or future
contracts will be extended, or if extended, that the rates of compensation
for
such extensions will be acceptable to us. Moreover, there can be no assurance
that the school districts that currently employ our services will not seek
to
satisfy their transportation needs in the future by alternative means. A loss
of
a significant number of contracts, or those contracts which account for a
significant percentage of our revenues, would have a material adverse effect
on
our results of operations.
Our
bankruptcy reorganizations could harm our business, financial condition and
results of operations.
In
December 2003, we emerged from reorganization under Chapter 11 of the
United States Bankruptcy Code. As of June 30, 2008, we have recorded liabilities
of approximately $0.1 million for priority tax claims, certain cure costs
and claims to be negotiated for leases and contracts, collectively recorded
as
payable to creditors under our plan of reorganization. Our past inability to
meet our obligations that resulted in our filing for bankruptcy protection,
or
the perception that we may not be able to meet our obligations in the future,
could adversely affect our ability to obtain adequate financing and our
relationships with our customers, as well as our ability to retain or attract
high-quality employees.
7
We
may be adversely affected by rising insurance costs.
Our
cost
of maintaining vehicle liability, personal injury, property damage and workers'
compensation insurance is significant. We could experience higher insurance
premiums as a result of adverse claims experience or because of general
increases in premiums by insurance carriers for reasons unrelated to our own
claims experience. As an operator of school buses and other high occupancy
vehicles, we are exposed to claims for personal injury or death and property
damage as a result of accidents. Our insurance policies must be renewed
annually. Our ability to continue to obtain insurance at affordable premiums
also depends upon our ability to continue to operate with an acceptable safety
record. A significant increase in the number of claims against us, the assertion
of one or more claims in excess of our policy limits or the inability to obtain
adequate insurance coverage at acceptable rates, or at all, could have a
material adverse effect on us. In addition, the running of statutes of
limitations for personal injuries to minor children typically is suspended
during the children's legal minority. Therefore, it is possible that accidents
causing injuries to minors on school buses may not give rise to lawsuits until
a
number of years later, which could also have a material adverse effect on us.
Additionally,
we typically negotiate transportation contracts on a different time frame than
our contracts for insurance and our transportation contracts are typically
fixed
price contracts. As a result, we were unable to absorb increases in insurance
and other operating expenses in recent years. Our inability to pass on changes
in underlying costs was a significant reason for our seeking protection from
creditors in our Chapter 11 bankruptcy case. We cannot assure you that such
increases in insurance and other expenses will not happen again in the future.
See "Business—Risk Management and Insurance."
Fluctuations
in the cost of fuel could adversely affect our
business.
We
operated a fleet of approximately 5,500 vehicles as of June 30, 2008 and consume
substantial quantities of fuel for our operations. Our fuel costs for the year
ended June 30, 2008 were approximately $30.3 million as compared to
$21.8 million for the year ended June 30, 2007. Historically, we have been
unable to pass through most increases in the price of fuel to the school
districts we service. From time to time in the past, we have entered into
hedging contracts to protect ourselves from fluctuations in the cost of fuel
and
we may seek to do the same in the future. Based on our current operations,
an
increase in fuel costs of 10 cents per gallon will increase our cost of fuel
purchased by approximately $0.9 million on an annual basis. No assurance
can be given that we will be able to adequately protect ourselves from
fluctuating fuel costs.
We
may not be able to maintain letters of credit or performance bonds required
by
our transportation contracts.
Our
school bus transportation contracts generally provide for performance security
in one or more of the following forms: performance bonds, letters of credit
and
cash retainages. There can be no assurance that either letters of credit or
performance bonds will continue to be available to us as security for our
contracts or, if available, at a cost that does not adversely affect our margins
or cash flow. All school bus contracts can be terminated by school districts
for
not meeting certain performance related criteria.
Some
of our transportation contracts may be terminated or services to be provided
reduced due to factors beyond our control.
Some
of
our school bus transportation contracts may be terminated due to factors beyond
our control, such as decreases in funding for our customers. Paratransit
contracts may be cancelled on short notice at the option of our customers.
In
addition, the number of school buses to be provided under our contracts may
decrease, and hence the revenues generated under such contracts may decrease
based on the requirements of our customers. Although we believe we have
established strong relationships with our customers, there can be no assurance
that our contracts will not be affected by circumstances beyond our control.
Our
fixed contract rates may not be sufficient to absorb future cost
increases.
The
school bus transportation industry is characterized by fixed price contracts
between transportation companies and municipalities, or school districts whereby
changes in underlying costs to transportation companies are not automatically
passed along to the customer. Our inability to pass on our insurance costs
was a
significant reason for our seeking protection from our creditors in our Chapter
11 bankruptcy case. Our contracts for school bus transportation and paratransit
services have average terms of one to five years. We set contract rates when
we
enter into such contracts, often before other expenses have been firmly
established, for the duration of the transportation contract, and before we
have
complete knowledge of the costs of insurance, labor and other expenses. After
we
have established contract rates, we may be unable to adjust them for cost
increases in insurance, labor and other expenses. We have been able to leverage
our relationships with our customers to achieve high contract renewal rates
with
price increases and obtain concessions in some existing contracts to absorb
cost
increases to maintain profitability levels. We cannot assure you that the price
increases in our contracts will be sufficient to absorb any cost increases
in
the future or that we will be able to obtain concessions in existing contracts
to absorb cost increases in the future.
8
We
may incur additional labor costs due to labor unions and collective bargaining
agreements.
As
of
June 30, 2008, approximately 81% of our employees were members of various labor
unions. At that date we were party to 31 collective bargaining agreements,
of
which four agreements, covering approximately 400 employees, have already
expired. 20 agreements, covering approximately 4,300 employees will expire
over
the next two years (including three labor agreements with Local 1181 that will
expire on June 30, 2009 that will effect approximately 2,700 employees), with
the remainder to expire over the next three to five years. Although no assurance
can be given, we do not believe that the expiration of such collective
bargaining agreements will have a material adverse effect on our labor costs.
No
assurance can be given as to the outcome of negotiations with the
representatives of the unionized employees.
Our
labor
contracts are not necessarily for the same terms as our revenue contracts.
Although we believe that historically we have had satisfactory labor relations
with our employees and their unions, our inability to negotiate acceptable
union
contracts in the future or a deterioration of labor relations could result
in
strikes or work stoppages and increased operating costs as a result of higher
wages or benefits paid to union members, which would have a material adverse
effect on us. In addition, labor shortages in selected markets could materially
adversely affect our ability to enter or expand in such markets. There can
be no
assurance that we will not have a strike or work stoppage in the future. See
"Business—Employees."
Several
officers of Local 1181 have been convicted of engaging in criminal activity
including the extortion of student transportation companies. We have been
informed by the US Attorney’s office that we are not a target or subject of its
investigation. No assurance can be given that the change in the union leadership
will not have a material averse effect on the Company’s labor relations.
We
may be adversely affected by a shortage of qualified drivers and possible
resulting increase in labor costs.
As
of
June 30, 2008, we had approximately 7,600 employees to provide transportation
services, including approximately 5,400 drivers. We require our drivers to
complete a thorough and comprehensive training process and to satisfy federal
and state requirements. There may be a shortage of qualified drivers due to
factors that are beyond our control, such as competition from other available
employment opportunities, including opportunities outside the industry in which
we operate. As a result, we may be required to increase driver compensation
to
attract and retain a sufficient number of qualified drivers to service existing
routes or possible future expansion routes, and such increases may be material.
Even if we are able to offer significant increases in an amount acceptable
to
us, there is no assurance that we will be able to meet all of our needs for
qualified drivers. An inability to do so could affect our ability to provide
services as required on existing business and prevent us from obtaining future
business.
We
may be adversely affected by environmental
requirements.
Our
operations are subject to extensive and constantly evolving federal, state
and
local environmental and occupational health and safety laws and regulations,
including laws and regulations governing air emissions, wastewater discharges,
the storage and handling of chemicals and hazardous substances and the
remediation of contaminated soil and groundwater. Additional expenditures,
beyond those currently included in capital and operating budgets, may be
incurred in order to comply with either new environmental legislation and
regulations, new interpretations of existing laws and regulations or more
rigorous enforcement of such laws and regulations. It is not possible to predict
whether these new expenditures will be material. We may also be subject to
liability for the investigation and remediation of environmental contamination
(including contamination caused by other parties) at properties that we own
or
operate and at other properties where we or our predecessors have operated
or
arranged for the disposal of hazardous substances. We are not presently aware
of
any such liabilities or environmental compliance obligations that we believe
will have a material adverse effect on our business or operations. However,
we
cannot make assurances that such liabilities or compliance obligations will
not
increase in the future or will not become material. See "Business —
Environmental Matters."
9
We
may be adversely affected by current and new governmental laws and
regulations.
We
are
required to comply with laws and regulations relating to safety, driver
qualifications, insurance and other matters promulgated by various federal
and
state regulatory agencies including, among others, state motor vehicle agencies,
state departments of education, the Federal Highway and Safety Administration,
the National Highway Traffic Safety Administration and the Occupational Safety
and Health Administration. We are also required to comply with certain statutes,
such as the Americans with Disabilities Act. We have incurred, and expect to
incur, costs for our operations to comply with these legal requirements, and
these costs could increase in the future. Many of these legal requirements
provide for substantial fines, orders, including orders to cease operations,
and
criminal sanctions for violations. Although we believe we are in material
compliance with applicable safety laws and regulations, it is difficult to
predict the future development of such laws and regulations or their impact
on
our business or results of operations. We anticipate that standards under these
types of laws and regulations will continue to tighten and that compliance
will
require increased capital and other expenditures. Furthermore, we cannot predict
whether new laws or regulations will be adopted and, if adopted, no assurance
can be given that the implementation of such laws or regulations and any
additional compliance costs associated therewith will not have a material
adverse effect on us. Also, a significant order or judgment against us, the
loss
of a significant permit or license or the imposition of a significant fine
or
any other liability in excess of, or not covered by, our insurance could
adversely affect our business, financial condition and results of operations.
See "Business—Government Regulation."
We
have significant capital expenditure requirements.
In
order
to maintain our school bus fleet, we will be required to make significant
capital expenditures. We normally make non-vehicle capital expenditures of
approximately $5 million annually, plus capital expenditures for vehicles,
which
amount varies from year to year depending on our company's needs and business
conditions. For the years ended June 30, 2007 and June 30, 2008 the majority
of
our new vehicle requirements were financed though operating leases. For the
fiscal years ended June 30, 2006, 2007 and 2008, we made total capital
expenditures of $6.5 million ($1.4 million of vehicle capital expenditure),
$18.2 million ($13.7 million of vehicle capital expenditure including $12.1
million buy out of existing operating leases in May 2007) and $10.8 million
($5.9 million of vehicle capital expenditure), respectively. There can be no
assurance that cash flow from operations will enable us to acquire a sufficient
number of new vehicles or make capital expenditures necessary to implement
any
expansion of service. If we are required to obtain additional financing, there
can be no assurance that we can obtain financing on terms acceptable to us.
Our
inability to procure the financing necessary to acquire additional school buses
or make needed capital improvements could delay or prevent us from implementing
our business strategy and would have a material adverse effect on us. See
"Business—Fleet Management and Maintenance."
We
depend on management and key personnel.
Domenic
Gatto, who is our Chief Executive Officer and President, is key to our
management and direction. The loss of the services of Mr. Gatto could have
a material adverse effect on us, and there can be no assurance that we would
be
able to find a replacement for Mr. Gatto with the equivalent business
experience and skills. Mr. Gatto's current employment contract with us
expires in December 2009, which is subject to renewal at our option.
The
interests of our significant shareholders may be different than your
interests.
As
of
June 30, 2008, GSC beneficially owned 83.9% of AETG's outstanding common shares.
AETG owns 91.6% of our issued and outstanding common shares on a fully diluted
basis. Pursuant to a stockholders agreement for AETG's common shares, GSC is
entitled to designate a majority of the directors to AETG's board of directors
so long as it beneficially owns at least 35% of AETG's outstanding common
shares. As a result, the directors appointed by GSC are in a position to control
all matters affecting AETG and our company. Such concentration of ownership
may
have the effect of preventing a change in control. Further, as a result, GSC
will continue to have the ability to elect and remove directors and determine
the outcome of matters presented for approval by our shareholders. The interests
of our significant shareholder may not be fully aligned with and could conflict
with, the interests of the holders of our Senior Secured Notes due 2012 (the
“notes”).
We
may be adversely affected by substantial competition in the school bus
transportation industry and increased consolidation within the
industry.
The
school bus transportation industry is highly competitive and we expect that
there will continue to be substantial competition for contract bidding and
for
prospective acquisitions. Such competition may decrease the profitability
associated with any contract and increase
the cost of acquisitions. Contracts are generally awarded pursuant to public
bidding, where price is the primary criteria for a contract award. We have
many
competitors in the school bus transportation business, including transportation
companies with resources and facilities substantially
greater
than ours. There can be no assurance that we will be able to identify, acquire
or profitably manage additional contracts. In addition, there can be no
assurance that either school bus transportation contracts or acquired businesses
will achieve anticipated levels of profitability. Although we have historically
been competitive in the market for new contracts as well as for acquisitions
of
other companies, there can be no assurance that we will be able to compete
effectively in the future.
10
In
particular, the school bus transportation industry is undergoing significant
consolidation that has intensified the competition for contracts and
acquisitions. From time to time, we make inquiries with respect to possible
acquisitions and from time to time have received inquiries with respect to
a
possible acquisition of our company. Whether such inquiries will result in
further communications, or ultimately, an acquisition, has depended and will
depend upon the facts and circumstances in each case. Any failure to compete
effectively could have a material adverse effect on us. See
"Business—Competition" and "Business—Business Operations—School Bus Operations."
Our
business is subject to seasonality and fluctuations in quarterly operating
results.
The
school bus transportation operation, which accounted for at approximately 89.0%
of our revenues from operations for each of the last three fiscal years, is
seasonal in nature and generally follows the pattern of the school year, with
sustained levels of business during the months of September through June. As
a
result, we have experienced, and expect to continue to experience, a substantial
decline in revenues from late June through early September. Our quarterly
operating results have also fluctuated due to a variety of factors, including
variation in the number of school days in each quarter (which is affected by
the
timing of the first and last days of the school year, holidays, the month in
which spring break occurs and adverse weather conditions, which can close
schools) and the profitability of our other operations. In particular,
historically we have generated operating losses during the first quarter of
each
fiscal year. Consequently, interim results are not necessarily indicative of
the
full fiscal year and quarterly results may vary substantially, both within
a
fiscal year and between comparable fiscal years. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Risk
Factors Relating to the Notes
Our
substantial indebtedness could adversely affect our financial condition and
prevent us from fulfilling our obligations under the
notes.
As
of
June 30, 2008, we had total indebtedness of $193.0 million (net of
unamortized original issue discount of $2.1 million). Our
substantial indebtedness could have important consequences to you and our
company and significant effects on our business, including the
following:
•
make
it more difficult for us to satisfy our obligations with respect
to the
notes and our other indebtedness and contractual and commercial
commitments and, if we fail to comply with these requirements, an
event of
default could result;
•
increase
our vulnerability to general adverse economic and industry
conditions;
•
require
us to dedicate a substantial portion of our cash flow from operations
to
payments on our indebtedness, thereby reducing the availability of
our
cash flow to fund working capital, capital expenditures and other
general
corporate purposes;
•
limit
our flexibility in planning for, or reacting to, changes in our business
and the industry in which we
operate;
•
place
us at a competitive disadvantage compared to our competitors that
have
less debt; and
•
limit
our ability to borrow additional
funds.
The
occurrence of any one of these events could have a materially adverse effect
on
our business, financial condition, results of operations, prospects and ability
to satisfy our obligations under the notes.
Restrictive
covenants in our Amended and Restated Credit Facility, the indenture governing
the notes and our other current and future indebtedness could adversely restrict
our operating flexibility.
The
discretion of our management with respect to certain business matters may be
limited by covenants contained in our Amended and Restated Credit Facility
and
the indenture governing the notes, as well as other current and future debt
instruments. Among other things, these covenants may include restrictions on
our
ability to:
•
incur
or guarantee additional indebtedness or issue disqualified capital
stock;
•
pay
dividends or make other
distributions;
•
issue
capital stock of our restricted
subsidiaries;
•
transfer
or sell assets, including capital stock of our restricted
subsidiaries;
•
make
certain investments or
acquisitions;
11
•
grant
liens on our assets;
•
incur
dividends or other payment restrictions affecting our restricted
subsidiaries;
•
enter
into certain transactions with affiliates;
and
•
merge,
consolidate or transfer all or substantially all of our
assets.
In
addition, the credit agreement governing our Amended and Restated Credit
Facility includes other and more restrictive covenants including those that
will
restrict our ability to prepay our other indebtedness, including the notes,
while borrowings under our Amended and Restated Credit Facility remain
outstanding. Our Amended and Restated Credit Facility requires us to achieve
a
specified LTM EBITDA under certain conditions. Our ability to comply with this
covenant may be affected by events beyond our control.
The
restrictions contained in the indenture governing the notes and the credit
agreement governing our Amended and Restated Credit Facility could:
•
limit
our ability to plan for or react to market conditions or meet capital
needs or otherwise restrict our activities or business plans;
and
•
adversely
affect our ability to finance our operations, acquisition opportunities
or
other capital needs or to engage in other business activities that
would
be in our interest.
A
breach
of any of the restrictive covenants or our inability to comply with the EBITDA
covenant (if required under certain conditions) could result in a default under
the credit agreement governing our Amended and Restated Credit Facility. If
a
default occurs, the lenders under our Amended and Restated Credit Facility
may
elect to:
•
declare
all borrowings outstanding, together with accrued interest and other
fees,
to be immediately due and payable;
and
•
prevent
us from making payments on the
notes,
either
of
which would result in an event of default under the indenture governing the
notes and could result in a cross default under our other debt instruments.
The
lenders would also have the right in these circumstances to terminate any
commitments they have to provide us with further borrowings. If the borrowings
under our Amended and Restated Credit Facility and the notes were to be
accelerated, we cannot assure you that we would be able to repay in full the
notes.
Despite
current indebtedness levels and restrictive covenants, we may still be able
to
incur substantial additional debt, which could exacerbate the risks described
above.
We
may be
able to incur additional debt in the future. Although the indenture governing
the notes and the credit agreement governing our Amended and Restated Credit
Facility contain restrictions on our ability and the ability of our restricted
subsidiaries to incur indebtedness, those restrictions are or will be subject
to
a number of exceptions and qualifications and, under certain circumstances,
debt
incurred in compliance with these restrictions could be substantial. For
example, the indenture governing the notes will allow us to incur additional
indebtedness if our consolidated fixed charge coverage ratio, after giving
effect to the incurrence, is greater than 2.0 to 1.0 and also allow us to borrow
money to buy out our existing vehicle operating leases. In addition, if we
are
able to designate some of our restricted subsidiaries under the indenture
governing the notes as unrestricted subsidiaries, those unrestricted
subsidiaries would be permitted to borrow beyond the limitations specified
in
the indenture and engage in other activities in which restricted subsidiaries
may not engage. In addition, the indenture governing the notes will not prevent
us from incurring obligations that do not constitute indebtedness. Adding new
debt to current debt levels could intensify the leverage-related risks that
we
and our subsidiaries now face.
To
service our indebtedness, we will require a significant amount of cash. Our
ability to generate cash depends on many factors beyond our control.
Our
ability to make payments on the notes and our other indebtedness and to fund
planned capital expenditures will depend on our ability to generate cash in
the
future. This, to a certain extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
Based
on
our current level of operations and anticipated operating improvements, we
believe that our cash flow from operations, available cash and available
borrowings under our Amended and Restated Credit Facility should be adequate
to
meet our liquidity needs for the next year. However, we cannot assure you that
our business will generate sufficient cash flow from operations or that future
borrowings will be available to us under our Amended and Restated Credit
Facility in an amount sufficient to enable us to pay our indebtedness, including
the notes, or to fund our other liquidity needs.
12
If
we do
not have sufficient funds, we may be required to sell assets or incur additional
debt. We may need to refinance all or a portion of our indebtedness, including
the notes, on or before their stated maturity. We cannot assure you that we
will
be able to refinance any of our indebtedness, including our Amended and Restated
Credit Facility and the notes, on commercially reasonable terms, or at all.
In
addition, the terms of existing or future debt agreements may restrict us from
adopting any of these alternatives. The failure to generate sufficient cash
flow
or to achieve any of these alternatives could materially adversely affect the
value of the notes and our ability to pay the amounts due under the
notes.
We
have a history of net losses and may incur additional losses in the
future.
We
sustained net losses of $29.6 million, $17.1 million and
$34.4 million for the fiscal years ended 2006, 2007, and 2008,
respectively. Future losses could adversely affect our ability to fund planned
capital expenditures and to make payments on the notes. As a result, you could
lose all or part of your investment. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
We
may not have access to the cash flow and other assets of our subsidiaries that
may be needed to make payments on the notes.
We
are a
holding company that derives all of our operating income and cash flow from
our
subsidiaries and accordingly, our ability to make payments on the notes is
dependent on the earnings and the distribution of funds from our subsidiaries.
However, none of our subsidiaries is obligated to us to make funds available
for
payment on the notes. Our subsidiaries will be permitted to incur additional
indebtedness that may limit the making of distributions, the payment of
dividends or the making of loans by such subsidiaries to us. We cannot assure
you that the agreements governing the current and future indebtedness of our
subsidiaries will permit our subsidiaries to provide us with sufficient
dividends, distributions or loans to fund payments on these notes when
due.
The
value of the collateral securing the notes may not be sufficient to satisfy
our
and our subsidiaries’ obligations under the notes.
The
notes
and the related guarantees are not secured by a first priority lien on all
of
our assets. The notes and the related guarantees are secured by a first priority
lien, subject to certain permitted prior liens, on all but one of our and our
guarantor subsidiaries’ owned real properties and certain of our and our
guarantor subsidiaries’ hereafter acquired real properties (the ‘‘first lien
real property’’) and on substantially all of our and our guarantor subsidiaries’
owned motor vehicles, other than those constituting excluded assets, whether
now
owned or hereafter acquired, other than motor vehicles which are subject to
purchase money liens (the ‘‘motor vehicles,’’ and together with the first lien
real property, the ‘‘first lien collateral’’). The lenders under our Amended and
Restated Credit Facility have a first priority lien on substantially all of
our
and our guarantor subsidiaries’ assets, subject to certain permitted prior
liens, other than the first lien collateral and certain excluded assets (the
‘‘second lien collateral’’), and a second priority lien on the first lien real
property. The notes benefit from a second priority lien on the second lien
collateral. The lenders under our Amended and Restated Credit Facility do not
have a lien on the motor vehicles.
The
proceeds from the sale of the first lien collateral may not be sufficient to
pay
all amounts owed on the notes. The first lien collateral may be less liquid
than
the second lien collateral. Additionally, the amount to be received upon the
sale of such collateral will depend on many factors, as more fully described
in
the risk factor ‘‘—The collateral securing the notes may be reduced or diluted
under certain circumstances.’’ We cannot assure you that the liquidation value
of the first lien collateral would be adequate to repay the principal amount
of,
or premium, if any, and any accrued and unpaid interest on all of the
outstanding notes.
The
lenders under our Amended and Restated Credit Facility will be entitled to
receive proceeds from any sale of the second lien collateral to repay their
obligations in full before the holders of the notes will be entitled to any
proceeds from any such sale of the second lien collateral. The proceeds from
the
second lien collateral may not be sufficient to repay both the lenders under
our
Amended and Restated Credit Facility and the holders of the notes. We cannot
assure you that, in the event of a foreclosure, the proceeds from the sale
of
all second lien collateral would be sufficient to pay in full all obligations
secured by the first priority liens on such collateral or any portion of the
amounts owed under the outstanding notes.
If
the
proceeds from the sale of the first lien collateral and the second lien
collateral were not sufficient to repay all obligations secured by such
collateral, then the holders of the notes, to the extent not repaid from the
proceeds of the sale of the first lien collateral and second lien collateral,
would only have an unsecured claim against our remaining assets, if any. This
claim would rank equal in priority to the unsecured claims with respect to
any
unsatisfied obligations under our Amended and Restated Credit Facility and
our
other unsecured senior indebtedness and the unsecured senior indebtedness of
our
guarantor subsidiaries.
We
have
not performed any recent appraisals on the value of the collateral. The book
value of the collateral should not be relied on as a measure of realizable
value
for such assets. By their nature, portions of the collateral may be illiquid
and
may have no readily ascertainable market value. In addition, a significant
portion of the collateral includes assets that may only be usable, and thus
retain value, as part of our existing operating businesses. Accordingly, any
such sale of the collateral separate from the sale of certain operating
businesses may not be feasible or of significant value. Also, an entity that
forecloses on the real property comprising a portion of the collateral is
potentially liable for environmental claims. See the risk factor ‘‘—Because the
collateral includes real property, the holders of the notes may be liable under
limited circumstances for environmental claims related to real property.’’ In
addition, the collateral is located in a number of locations, and the
multi-jurisdictional nature of any foreclosure on the collateral may limit
the
realizable value of the collateral.
13
The
ability of the trustee to foreclose on the collateral on behalf of the holders
of the notes may also be subject to perfection, the consent of third parties,
governmental approvals and practical problems associated with the realization
of
the collateral agent’s security interest in the collateral. We have not obtained
the consent of third parties whose consent may be necessary to allow the
collateral agent to foreclose on the collateral consisting of contract rights
or
collateral as to which third parties have contractual rights. We cannot assure
you that the consents of such third parties or any required approvals of
governmental entities will be given when required to facilitate a foreclosure
on
such assets.
Holders
of the notes will not control decisions regarding the second lien collateral.
We
entered into security documents which granted the administrative agent for
the
lenders under our Amended and Restated Credit Facility a first lien on the
second lien collateral, and gave the administrative agent certain rights with
respect to the second lien collateral. The collateral agent entered into an
intercreditor agreement with the administrative agent which will define the
rights of the parties with respect to the second lien collateral and the
parties’ liens thereon. The administrative agent and the lenders under our
Amended and Restated Credit Facility, who have a first priority lien on the
second lien collateral, control substantially all matters related to the second
lien collateral and the collateral agent’s rights and remedies with respect
thereto. At any time that obligations are outstanding under our Amended and
Restated Credit Facility, the administrative agent shall have the sole and
exclusive right to control, administer, account for and otherwise deal with
the
second lien collateral and to determine the manner of every sale or other
disposition of the second lien collateral, in each case, upon enforcement of
the
administrative agent’s interest, and to foreclose on the second lien collateral
in any order which it deems appropriate. As a result, the administrative agent
for the lenders may dispose of or foreclose on, or take other actions with
respect to, the second lien collateral with which the holders of the notes
may
disagree or that may be contrary to the interests of the holders of the notes.
Also, the collateral agent and the holders of the notes will be unable to
exercise remedies with respect to the second lien collateral unless and until
the administrative agent for the lenders exercises its rights and remedies
with
respect to the second lien collateral, and then only on a limited basis.
The
sale of assets constituting collateral securing the notes may be used to repay
our obligations on our Amended and Restated Credit
Facility.
Certain
asset sales, including certain sales of assets constituting first lien
collateral or second lien collateral, are subject to compliance with a covenant
contained in the indenture governing the notes. Under that covenant, we are
permitted to use the proceeds from such asset sales to repay outstanding
indebtedness under our Amended and Restated Credit Facility. Any such repayment
need not cause any permanent reduction in borrowing capacity under our revolving
credit facility. Our Amended and Restated Credit Facility requires us to offer
to use the proceeds from any such asset sale (including sales of first lien
collateral) to repay outstanding obligations under it. Therefore, the value
of
the collateral securing the notes may diminish as a result of any such asset
sales, and the proceeds therefrom may not be reinvested in the Company or used
to make an offer to redeem the notes.
The
collateral securing the notes may be reduced or diluted under certain
circumstances, including the issuance of additional notes.
The
value
of the collateral and the amount to be received upon a sale of such collateral
will depend upon many factors including, among others, the condition of the
collateral, the ability to sell the collateral in an orderly sale, the condition
of national and local economies, the availability of buyers and similar factors.
To the extent that other persons enjoy liens, including statutory liens, whether
or not permitted by the indenture governing the notes, such persons may have
rights and remedies with respect to the collateral securing the notes that,
if
exercised, could reduce the proceeds available to satisfy the obligations under
the notes.
The
indenture governing the notes requires us to issue, and, in certain
circumstances, permits us to issue thereunder and without limitation on the
maximum principal amount, additional notes on substantially identical terms
as
the notes. Any additional notes subsequently issued will be secured equally
and
ratably with the outstanding notes. The issuance of additional notes will have
the effect of diluting the value of the security interest in the first lien
collateral and second lien collateral for then outstanding notes. Such dilution
will reduce your pro rata share of any proceeds from the sale of any first
lien
collateral and second lien collateral.
The
indenture governing the notes and the agreements governing our other secured
indebtedness may also permit us to designate one or more of our restricted
subsidiaries as an unrestricted subsidiary. If we designate an unrestricted
subsidiary, all of the liens on any collateral owned by the unrestricted
subsidiary and any guarantee of the notes by the unrestricted subsidiary will
be
released under the indenture, but the guarantee of our Amended and Restated
Credit Facility by the unrestricted subsidiary may not be released under our
Amended and Restated Credit Facility. Designation of an unrestricted subsidiary
will reduce the aggregate value of the collateral to the extent that liens
on
the assets of the unrestricted subsidiary are released and the notes will be
structurally subordinated to the debt and other obligations of the unrestricted
subsidiary. This may materially reduce the collateral securing the notes.
14
Rights
of holders of the notes in the collateral may be adversely affected by the
failure to perfect security interests in certain collateral acquired in the
future.
The
security interest in the collateral securing the notes and the guarantees
includes certain of our assets and certain assets of substantially all of our
subsidiaries, both tangible and intangible, whether now owned or acquired or
arising in the future. With respect to certain subsequently acquired property
and rights, including, without limitation, motor vehicles and deposit accounts,
the security interest securing the notes will not be perfected unless
appropriate action (e.g., noting the lien on the related certificate of title
or
giving the trustee control over the deposit account) is taken to perfect the
security interest on or after the time that we or our guarantor subsidiaries
acquire rights therein. There can be no assurance that the trustee will monitor,
or that we will inform the trustee of, the future acquisition of property and
rights that constitute collateral, and that the necessary action will be taken
to properly perfect the security interest in such after acquired collateral.
The
trustee for the notes has no obligation to monitor the acquisition of additional
property or rights that constitute collateral or the perfection of any security
interests therein. Such failure may result in the loss of perfection of the
security interest therein or the priority of the security interest in favor
of
the notes against third parties. Moreover, in the event that we or our guarantor
subsidiaries were to file for bankruptcy, the security interest securing the
notes generally will not extend to any property or rights acquired by us or
our
guarantor subsidiaries after the date of such bankruptcy.
Holders
of the notes may not have a perfected security interest in the motor vehicle
or
the real property portion of the collateral.
The
first
lien collateral securing the notes includes all but one of our and our guarantor
subsidiaries’ owned real properties and certain of our and our guarantor
subsidiaries’ hereafter acquired real properties and on substantially all of our
and our guarantor subsidiaries’ owned motor vehicles, other than those
constituting excluded assets, whether now owned or hereafter acquired. Each
state has its own laws regarding the recording of liens and the perfection
of
security interest in motor vehicles in general. Typically, in order to perfect
a
security interest in motor vehicles, the lien must be noted or transcribed
on
the face of the title. There are inherent delays in the process of perfecting
such security interests and security interests in our motor vehicles which
still
may not be recorded. For so long as the security interest in any motor vehicle
collateral remains unperfected, such security interest may not be enforceable
against another secured creditor of ours or our guarantor subsidiaries and,
in
the event that we or our guarantor subsidiaries were to become bankrupt, would
not be enforceable against any bankruptcy trustee of ours or our guarantor
subsidiaries.
Additionally,
holders of the notes may not have a perfected security interest in the real
property portion of the collateral. Typically, in order to perfect a security
interest in real property, a mortgage must be filed at the county recorder’s
office in the county in which such real property is located. During such time
as
the security interest in the real property collateral remains unperfected,
such
security interest may not be enforceable against another secured creditor of
ours or our guarantor subsidiaries and, in the event that we or our guarantor
subsidiaries were to become bankrupt, would not be enforceable against any
bankruptcy trustee of ours or our guarantor subsidiaries.
Because
the collateral includes real property, holders of the notes may be liable under
limited circumstances for environmental claims related to the real property.
A
portion
of the collateral securing the notes and the guarantees is comprised of real
property. The real property portion of the collateral may be subject to known
and unforeseen environmental risks. Under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, or CERCLA, a lender may be
held liable for the costs of remediating or preventing releases, or threatened
releases, of hazardous substances at mortgaged property if the lender takes
title to the property by foreclosure, or even if the lender does not foreclose,
but exercises actual control over operations or decision-making. However, the
1996 amendments to CERCLA established certain protections from such liability
for lenders who do not act as owners or operators of the property. A lender
who
holds indicia of ownership, such as title or rights of access and inspection,
primarily to protect its security interest, or who forecloses and then re-sells
or re-leases a property in which it holds a security interest within a
commercially reasonable time, is not liable as an owner or operator under CERCLA
unless that lender participates in the management of the property. Participation
in management is generally interpreted to mean exercising actual control or
decision-making authority over general operations or over environmental
compliance at the facility. There may also be other bases for lender liability,
such that a lender’s involvement in operational decisions or environmental
compliance matters may create liability under the common law or other
environmental statutes, both state and federal. A lender’s CERCLA liability is
not limited by the value of the secured interest and could extend to the entire
cost of the remediation. As a result, a holder of the notes who is determined
to
be an owner or operator of real property securing the notes may have joint
and
several liability in a cost recovery or contribution action under CERCLA. This
liability would not be limited by the principal amount of the notes held by
the
holder of the notes or the value of the real property. See
‘‘Business—Environmental Matters.’’
Third
party claims may significantly diminish the value of our real property
collateral.
The
title
insurance policies on the real property portion of the collateral may contain
exceptions as to rights of third parties. Third parties may make claims that
they are entitled to exercise such rights in a manner which is adverse to our
real estate interests and/or improvements. If any such claims are pursued and
upheld, this may significantly diminish the value, if any, of such real property
collateral. In addition, we may be required to take corrective action as a
result of such claims, including procuring additional real estate interests
and/or relocating improvements, and we may sustain costs, expenses and/or a
reduction in revenue as a result of such circumstances. These reductions in
value, costs, expenses and losses associated with excepted matters would not
be
covered by title insurance. Insolvency and administrative laws could adversely
affect noteholder’s ability to enforce its rights under the notes, the note
guarantees and the security documents. If a bankruptcy proceeding were to be
commenced under the federal bankruptcy laws by or against us or any subsidiary
guarantor, it is likely that delays will occur in any payment upon acceleration
of the notes and in enforcing remedies under the related indenture, including
with respect to the liens securing the notes and the note guarantees, because
of
specific provisions of such laws or by a court applying general principles
of
equity. Provisions under federal bankruptcy laws or general principles of equity
that could result in the impairment of your rights include, but are not limited
to: the automatic stay; avoidance of preferential transfers by a trustee or
debtor-in-possession; substantive consolidation; limitations on collectability
of unmatured interest or attorney fees; fraudulent conveyance; and forced
restructuring of the notes, including reduction of principal amounts and
interest rates and extension of maturity dates, over the holders’
objections.
15
Additionally,
applicable federal bankruptcy laws generally permit a debtor to continue to
retain and to use collateral, even if the debtor is in default under the
applicable debt instruments, provided that the secured creditor is given
‘‘adequate protection.’’ The interpretation of the term ‘‘adequate protection’’
may vary according to circumstances, but it is intended, in general, to protect
the value of the secured creditor’s interest in collateral. Because the term
‘‘adequate protection’’ is subject to varying interpretation and because of the
broad discretionary powers of a bankruptcy court, it is impossible to predict
(1) whether payments under any of the notes would be made following commencement
of and during a bankruptcy case, (2) whether or when the lenders under the
Amended and Restated Credit Facility could foreclose upon or sell any collateral
or (3) whether or to what extent holders of the notes would be compensated
for
any delay in payment or loss of value of the collateral under the doctrine
of
‘‘adequate protection.’’ Furthermore, in the event a bankruptcy court were to
determine that the value of the collateral was not sufficient to repay all
amounts due on the notes, the holders of such notes would become holders of
‘‘under-secured claims.’’ Applicable federal bankruptcy laws generally do not
permit the payment or accrual of interest, costs and attorneys’ fees for
‘‘under-secured claims.’’
The
notes and the note guarantees and the granting of the collateral securing the
note guarantees may be voidable, subordinated or limited in scope under laws
governing fraudulent transfers and insolvency.
Although
the notes are our obligations, they will be unconditionally guaranteed on a
senior secured basis by the subsidiary guarantors. We are a holding company
that
derives all of our operating income and cash flow from our subsidiaries. The
performance by each subsidiary guarantor of its obligations with respect to
its
subsidiary guarantee may be subject to review under relevant federal and state
fraudulent conveyance and similar statutes in a bankruptcy or reorganization
case or lawsuit by or on behalf of unpaid creditors of such subsidiary
guarantor. Under these statutes, if a court were to find under relevant federal
or state fraudulent conveyance statutes that a subsidiary guarantor did not
receive fair consideration or reasonably equivalent value for incurring its
subsidiary guarantee of the notes, and that, at the time of incurrence, the
subsidiary guarantor (1) was insolvent, (2) was rendered insolvent by reason
of
the incurrence or grant, (3) was engaged in a business or transaction for which
the assets remaining with the subsidiary guarantor constituted unreasonably
small capital or (4) intended to incur, or believed that it would incur, debts
beyond its ability to pay these debts as they matured, then the court, subject
to applicable statutes of limitation, could void the subsidiary guarantor’s
obligations under its subsidiary guarantee, recover payments made under the
subsidiary guarantee, subordinate the subsidiary guarantee to other indebtedness
of the subsidiary guarantor or take other action detrimental to the holders
of
the notes.
The
measure of insolvency for these purposes will depend upon the governing law
of
the relevant jurisdiction. Generally, however, a company will be considered
insolvent for these purposes if the sum of that company’s debts is greater than
the fair value of all of that company’s property or if the present fair salable
value of that company’s assets is less than the amount that will be required to
pay its probable liability on its existing debts as they become absolute and
matured or if a company is not able to pay its debts as they become due.
Moreover, regardless of solvency, a court could void an incurrence of
indebtedness, including the subsidiary guarantees, if it determined that the
transaction was made with the intent to hinder, delay or defraud creditors.
In
addition, a court could subordinate the indebtedness, including the subsidiary
guarantees, to the claims of all existing and future creditors on similar
grounds. The subsidiary guarantees could also be subject to the claim that,
since the subsidiary guarantees were incurred for our benefit, and only
indirectly for the benefit of the subsidiary guarantors, the obligations of
the
subsidiary guarantors thereunder were incurred for less than reasonably
equivalent value or fair consideration. Neither we nor any subsidiary guarantor
believes that, after giving effect to the offering, any of the subsidiary
guarantors (1) was insolvent or rendered insolvent by the incurrence of the
guarantees in connection with the offering, (2) was not in possession of
sufficient capital to run their business effectively or (3) incurred debts
beyond our or its ability to pay as the same mature or become due.
There
can
be no assurance as to what standard a court would apply in order to determine
whether a subsidiary guarantor was ‘‘insolvent’’ upon the sale of the notes or
that, regardless of the method of valuation, a court would not determine that
the subsidiary guarantor was insolvent at the time of the sale of the
notes.
Our
ability to purchase the notes upon a change of control may be limited.
Upon
the
occurrence of a specified change of control, each holder of notes will have
the
right to require us to repurchase all or a portion of such holder’s notes at a
price in cash equal to 101% of their principal amount, plus accrued and unpaid
interest, if any, to the date of repurchase. However, our ability to repurchase
the notes upon a change of control may be limited by the terms of our then
existing contractual obligations and the obligations of our subsidiaries. In
addition, the occurrence of a change of control is expected to require the
repayment of borrowings under our Amended and Restated Credit Facility. There
can be no assurance that we will have the financial resources to repay amounts
due under our Amended and Restated Credit Facility, or to repurchase or redeem
the notes. If we fail to repurchase all of the notes tendered for purchase
upon
the occurrence of a change of control, this failure will constitute an event
of
default under the indenture. See the risk factor ‘‘—Our substantial indebtedness
could adversely affect our financial condition and prevent us from fulfilling
our obligations under the notes’’ above.
16
With
respect to the sale of assets referred to in the definition of ‘‘change of
control’’ under the indenture, the meaning of the phrase ‘‘all or substantially
all’’ as used in that definition varies according to the facts and circumstances
of the subject transaction, has no clearly established meaning under the
relevant law and is subject to judicial interpretation. Accordingly, in certain
circumstances there may be a degree of uncertainty in ascertaining whether
a
particular transaction would involve a disposition of ‘‘all or substantially
all’’ of the assets of a person and therefore it may be unclear whether a change
of control has occurred and whether the notes are subject to an offer to
repurchase.
The
change of control provision may not necessarily afford the holders protection
in
the event of a highly leveraged transaction, including a reorganization,
restructuring, merger or other similar transaction involving us that may
adversely affect the holders, because these transactions may not involve a
shift
in voting power or beneficial ownership or, even if they do, may not involve
a
shift of the magnitude required under the definition of ‘‘change of control’’
under the indenture to trigger these provisions. Except as upon a “change of
control” under the indenture, the indenture does not contain provisions that
permit the holders of the notes to require us to repurchase or redeem the notes
in the event of a takeover, recapitalization or similar
transaction.
The
collateral is subject to casualty risks.
We
are
obligated under the collateral arrangements to maintain adequate insurance
or
otherwise insure against hazards as is usually done by corporations operating
properties of a similar nature in the same or similar localities. There are,
however, certain losses that may be either uninsurable or not economically
insurable, in whole or in part. As a result, it is possible that the insurance
proceeds will not compensate us fully for our losses. If there is a total or
partial loss of any of the pledged collateral, we cannot assure you that any
insurance proceeds received by us will be sufficient to satisfy all of our
secured obligations, including the notes.
The
ability of the collateral agent to foreclose on the collateral may be limited
pursuant to bankruptcy laws.
The
right
of the collateral agent, as a secured party under the collateral documents
for
the benefit of itself, the trustee and the holders of the notes, to foreclose
upon and sell the collateral upon the occurrence of a payment default is likely
to be significantly impaired by applicable bankruptcy laws, including the
automatic stay provision contained in Section 362 of the Bankruptcy Code. Under
applicable federal bankruptcy laws, a secured creditor is prohibited from
repossessing its security from a debtor in a bankruptcy case, or from disposing
of security repossessed from such a debtor, without bankruptcy court approval.
Moreover, applicable federal bankruptcy laws generally permit a debtor to
continue to retain and use collateral even though that debtor is in default
under the applicable debt instruments so long as the secured creditor is
afforded ‘‘adequate protection’’ of its interest in the collateral. Although the
precise meaning of the term ‘‘adequate protection’’ may vary according to
circumstances, it is intended in general to protect a secured creditor against
any diminution in the value of the creditor’s interest in its collateral.
Accordingly, the bankruptcy court may find that a secured creditor is
‘‘adequately protected’’ if, for example, the debtor makes certain cash payments
or grants the creditor liens on additional or replacement collateral as security
for any diminution in the value of the collateral occurring for any reason
during the pendency of the bankruptcy case.
In
view
of the lack of a precise definition of the term ‘‘adequate protection’’ and the
broad discretionary powers of a bankruptcy court, we cannot predict whether
payments under the notes would be made following commencement of, and during
the
pendency of, a bankruptcy case, whether or when the collateral agent could
foreclose upon or sell the collateral or whether or to what extent holders
of
notes would be compensated for any delay in payment or loss of value of the
collateral. Furthermore, if a bankruptcy court determines that the value of
the
collateral is not sufficient to repay all amounts due on the notes, holders
of
notes would hold ‘‘under-secured claims.’’ Applicable federal bankruptcy laws do
not permit the payment or accrual of interest, costs and attorney’s fees for
‘‘under-secured claims’’ during a debtor’s bankruptcy case.
None
of
our future foreign subsidiaries or unrestricted domestic subsidiaries, if any,
will guarantee the notes. If any of our future foreign subsidiaries or
unrestricted domestic subsidiaries becomes insolvent, liquidates, reorganizes,
dissolves or otherwise winds up, holders of its indebtedness and its trade
creditors generally will be entitled to payment on their claims from the assets
of such subsidiary before any of those assets would be made available to us.
Consequently, holders’ claims in respect of the notes effectively would be
subordinated to all of the existing and future liabilities of our future foreign
subsidiaries and our unrestricted domestic subsidiaries, if any.
There
is no or only a limited public trading market for the notes, and holder’s
ability to sell the notes is limited.
There
is
no existing public market for the notes. No assurances can be made that any
liquid market will develop for the notes or that holders of the notes will
be
able to sell their notes, and no assurances can be made concerning the price
at
which the holders will be able to sell their notes. Future trading prices of
the
notes will depend on many factors, including, among other things, prevailing
interest rates, our operating results and the market for similar securities.
Accordingly, no market for the notes may develop, and any market that develops
may not persist. We did not apply for listing of the notes on any securities
exchange or other market, other than on PORTAL. The liquidity of the trading
market and the trading price of the notes may be adversely affected by changes
in our financial performance or prospects and by changes in the financial
performance of or prospects for companies in our industry generally. As a
result, holders may be required to bear the financial risk of their investment
in the notes indefinitely.
17
The
trading price of the notes may be volatile.
Historically,
the market for non-investment grade debt has been subject to disruptions that
have caused substantial volatility in the prices of securities similar to the
notes. Any such disruptions could adversely affect the prices at which holders
may sell their notes. In addition, subsequent to their initial issuance, the
notes may trade at a discount from the initial offering price of the notes,
depending on the prevailing interest rates, the market for similar notes, our
performance and other factors, many of which are beyond our control.
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties.
Our
subsidiaries provide services from approximately 50 facilities for buses (of
which five are owned) in seven states. The facilities are utilized for repair
and maintenance and/or administrative purposes. We believe that our facilities
are adequate to service our present business and the currently anticipated
expansion of existing operations.
The
following table details the facilities that we own and our material leased
facilities, used for our school bus operations and paratransit and transit
operations.
Location
Ownership
Sq.
Ft.
Medford,
NY
Owned
280,000
Oceanside,
NY
Owned
220,000
South
Hampton, NJ
Owned
210,000
Ridgewood,
NY
Owned
203,158
Setauket,
NY
Owned
68,000
Maspeth,
NY
Leased
120,000
Los
Angeles, CA
Leased
159,587
Staten
Island, NY
Leased
144,292
St.
Louis, MO
Leased
244,000
Jamaica,
NY
Leased
225,000
Bronx,
NY
Leased
223,000
Brooklyn,
NY
Leased
186,840
Bronx,
NY
Leased
147,000
Bronx,
NY
Leased
208,000
Item
3. Legal Proceedings.
From
time
to time, we are involved in litigation that we consider to be in the normal
course of business. We are not presently involved in any legal proceedings
that
we expect individually or in the aggregate to have a material adverse effect
on
our financial condition, results of operations or liquidity.
Item
4. Submission of Matters to a Vote of Security Holders.
None.
18
PART
II
Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
As
of
June 30, 2008 our authorized capital stock consisted of 1,303,200 common shares,
par value $.01 per share, based upon an amendment to our certificate of
incorporation, effective April 21, 2004, whereby we split our authorized
capital stock. AETG owns 945,263 shares of our common stock. In
May
2008, we issued 87,030 common shares, representing 8.4% of our then outstanding
common shares, pursuant to the timely exercise of warrants which had been issued
in connection with our previously outstanding 12% Senior Secured Notes due
2008
and Senior Secured Floating Rate Notes due 2008 (collectively, the “Old Notes”).
In July 2008, we issued 20,362 common shares pursuant to the exercise of
warrants which had been issued in connection with out previously outstanding
third priority senior secured notes.
As of
June 30, 2008, GSC and its affiliates owned 83.9% of outstanding common shares
of AETG. There is no established public trading market for the Company’s common
shares.
Holders
of outstanding common shares are entitled, for each share held, to one vote
upon
each matter submitted to a vote at a meeting of our shareholders.
Holders
of our common shares are entitled to receive a pro rata share of dividends
when,
as and if declared by us out of funds legally available for the payment of
dividends and to participate pro rata in liquidating distributions. Our ability
to pay dividends is limited by agreements governing our indebtedness, including
the notes and our Amended and Restated Credit Facility.
Our
board
of directors may authorize the issuance of fractions of shares represented
by a
certificate, or uncertificated, which shall entitle the holder to exercise
voting rights, receive dividends and participate in liquidating distributions,
in proportion to the fractional holdings; or it may authorize the payment in
cash of the fair value of fractions of shares at the time when those entitled
to
receive such fractions are determined; or in lieu of fractional shares it may
authorize the issuance, as permitted by law, of scrip exchangeable as therein
provided for full shares, but such scrip shall not entitle the holder to any
rights of a shareholder, except as therein provided.
AETG
AETG
is
authorized to issue 1,650,000 common shares, par value $0.001 per share. As
of
June 30, 2008, 128,240 common shares of AETG have been issued and are
outstanding.
Holders
of outstanding AETG common shares are entitled, for each share held, to one
vote
upon each matter submitted to a vote at a meeting of its shareholders. Holders
of AETG's common shares are entitled to receive a pro rata share of dividends,
when, as and if declared by AETG out of funds legally available for the payment
of dividends and to participate pro rata in liquidating distributions. AETG
does
not presently anticipate that dividends will be paid on the common shares in
the
foreseeable future.
AETG's
certificate of incorporation prohibits issuances or redemptions of common
shares, issuances of warrants or options (other than certain compensatory
options), and transfers of AETG's common shares by GSC until the earlier of
the
third anniversary of the effectiveness of the plan of reorganization or when
AETG's board of directors determines that the restrictions do not provide AETG
with significant tax benefits. Holders of AETG's common shares have no
subscription, redemption or conversion rights.
AETG
is
authorized to issue 500,000 preferred shares, par value $0.001 per share, of
which 100,000 shares have been designated as Series E Convertible Preferred
Stock (the “Series E Preferred Stock”). As of June 30, 2008, 75,543.58 shares of
Series E Preferred Stock were outstanding.
Holders
of the Series E Preferred Stock are not entitled to any voting rights except
as
required by law and as provided under AETG’s certificate of amendment governing
the Series E Preferred Stock. The holders of the Series E Preferred Stock are
entitled to dividends at the rate of 10% per annum payable quarterly in shares
of Series E Preferred Stock. Each share of the Series E Preferred Stock is
convertible into one share of AETG common stock, at any time following (i)
a
liquidation event, (ii) a bona fide public offering of AETG common shares
resulting in proceeds of at least $50 million, or (iii) receipt of a notice
of
redemption. In the event of a liquidation, dissolution or winding up of AETG
or
of a change in control, merger or sale of substantially all the assets of AETG,
the Series E Preferred Stock is entitled to liquidation preference (senior
to
all other capital stock of AETG) in the amount of $84.77 per share. The Series
E
Preferred Stock is subject to mandatory redemption in April 2009 on the first
anniversary date of the original maturity date of our Old Notes at a price
of
$84.77 per share.
19
Item
6. Selected Financial Data.
You
should read the information set forth below in conjunction with our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes included
elsewhere in this Form 10-K.
We
derived the Statement of Operations Data and the Other Financial Data for the
years ended June 30, 2006, 2007 and 2008 and the Balance Sheet Data as of
June 30, 2007 and 2008 from our audited financial statements included
elsewhere in this 10-K. We derived the Statement of Operations Data for the
years ended June 30, 2004 and June 30, 2005 and the Balance Sheet Data as
of June 30, 2004, 2005 and June 30, 2006 from our audited financial
statements that are not included in this Form 10-K.
Contractual
interest was $32.6 million for the fiscal year ended June 30,2004.
(2)
For
the fiscal year ended June 30, 2004 reorganization costs consisted
primarily of fees for both our restructuring advisors and our creditors'
restructuring advisors and legal counsel. For the fiscal years ending
June30, 2005, 2006 and 2007 reorganization costs were primarily legal
counsel
and United States trustee fees.
(3)
As
a result of our plan of reorganization becoming effective, liabilities
that were subject to compromise were settled, which resulted in the
recognition of forgiveness of indebtedness income based upon the
estimated
settlement amounts.
Item
7.Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
The
following discussion should be read in conjunction with the "Selected Financial
Data" and our historical consolidated financial statements, including the notes
thereto, included elsewhere in this Form 10-K.
General
We
are
the third largest provider of school bus transportation in the United States
and
the leading provider in New York City, the largest market in which we operate.
We have contracts with 104 school districts in New York, Missouri,
Massachusetts, California, Pennsylvania, New Jersey and Illinois. For fiscal
year 2008, we had a contract to provide paratransit services in New York City
to
physically and mentally challenged passengers who are unable to use standard
public transportation. We also provide other transportation services, including
fixed route transit, express commuter line and charter and tour buses through
our coach services. As of June 30, 2008, we operated a fleet of approximately
5,500 vehicles operating from approximately 50 facilities.
School
bus transportation services accounted for 88.9%, 89.1% and 89.1% of our revenues
from operations in our fiscal years ended June 30, 2006, 2007 and 2008,
respectively. Our school bus transportation contracts have provided a relatively
predictable and stable stream of revenues over their terms, which generally
range from one to five years. Since 1979, we have
achieved
substantial contract renewals, which we believe is due to (1) our
reputation for passenger safety and providing efficient, on-time service,
(2) our long standing relationships with the school districts we service,
(3) the preference of school districts to maintain continuity of service
with their current proven contractor rather than risk the uncertainty associated
with a replacement and (4) the disadvantage of prospective competitors, who
generally would have to make substantially greater investments than we would
in
new equipment and who may experience difficulty obtaining suitable parking
and
maintenance facilities in our primary markets, especially in the New York City
greater metropolitan area.
The
daily
price charged per vehicle varies, depending upon a wide range of factors
including (1) vehicle type (standard school buses, minivans, or vehicles
with wheelchair lifts), (2) the nature of service to be provided
(transportation of regular enrollment students or transportation of physically
or mentally challenged students), (3) special requirements of a particular
school district concerning age of vehicles and/or upgrades on equipment and
(4) the cost of labor. Wages and related labor costs are the most
significant factors in our cost structure. In urban areas, particularly those
with a strong union presence, the cost of providing school bus transportation
is
substantially greater than in suburban and rural areas, where wages are
generally lower. As a result, prices paid by school districts vary accordingly.
21
School
bus transportation revenues have historically been seasonal, based on the school
year and holiday schedules. During the months of September through June, our
fleet of school buses has been generally fully utilized. Historically, during
the summer months, only a portion of our school buses have been required to
fulfill our summer contracts for school and camp activities and special trips.
The
paratransit and transit services operations accounted for 11.1%, 10.9%, and
10.9% of our revenues from operations in our fiscal years ended June 30, 2006,
2007 and 2008, respectively. The terms of our paratransit contracts initially
range from one to five years. The contracts are awarded by public transit
systems through a public bidding or RFP process. We are generally entitled
to a
specified charge per hour of vehicle service together with other fixed charges.
The method of contract compensation also varies.
The
principal elements of our cost of operations are wages and related labor costs,
fuel, parts, vehicle insurance, workers' compensation insurance and rent.
Historically, the vast majority of our cost of operations have varied directly
in proportion to revenues As of June 30, 2008, approximately 81% of our
employees were members of various labor unions. At that date we were party
to 31
collective bargaining agreements, of which four agreements, covering
approximately 400 employees, have already expired. 20 agreements, covering
approximately 4,300 employees will expire over the next two years (including
three labor agreements with Local 1181 that will expire on June 30, 2009 that
will effect approximately 2,700 employees), with the remainder to expire over
the next three to five years. We believe that our relations with employees
are
satisfactory.
General
and administrative expenses include costs primarily associated with our
headquarters in Staten Island, New York, as well as terminal office and
managerial salaries. We believe that we currently have sufficient staff to
support anticipated revenue levels. Cost increases are anticipated to be offset
somewhat as our business grows and we realize economies of scale by spreading
the cost of the administrative staff and facilities over a larger revenue base.
Revenues.
Revenues
from school bus operations were $386.3 million for the year ended June 30,2008
compared to $382.0 million for the year ended June 30, 2007, an increase of
$4.3 million, or 1.1%. This increase was due to
$7.0
million
of price increases, $4.1 million in new contracts and $1.5 million increase
in
DOE escort cost reimbursement revenue partially offset
by
a
reduction of service requirements of $4.6 million, due primarily to one
less
DOE
revenue day and a
reduction in DOE routes, a reduction of $0.4 million in
summer
revenues and
$3.3
million in lost contracts.
Revenues
from paratransit and transit operations were $47.2 million for the year ended
June 30, 2008 compared to $46.8 million for the year ended June 30, 2007, an
increase of $0.4 million or 0.8%. This increase was primarily due to price
increases and an increase in charter revenue offset partially by a reduction
of
service requirements due to a ten day labor strike that affected our paratransit
operations in December 2007.
22
Cost
of Operations.
Cost of
operations of school bus operations was $355.7 million for the year ended June30, 2008 compared to $338.9 million for the year ended June 30, 2007, an
increase of $16.8 million or 4.9%. This increase was primarily due to a
$7.6 million increase in fuel expense, a $7.2 million increase in salaries
and
wages and $2.4 million in health and welfare costs primarily under our New
York
City labor contract, partially offset by a $1.0 million decrease in vehicle
insurance expense. Salaries and wages were $192.7 million for the year ended
June 30, 2008 compared to $185.5 million for the year ended June 30, 2007,
an
increase of $7.2 million or 3.9% due to contractual wage increases
partially offset by fewer routes. As a percentage of revenues, salaries and
wages increased to 49.9% for the year ended June 30, 2008, from 48.6% for the
year ended June 30, 2007. As a percentage of revenues, cost of operations
increased to 92.1% for the year ended June 30, 2008, from 88.7% for the year
ended June 30, 2007.
Cost
of
operations of paratransit and transit operations were $41.9 million for the
year ended June 30, 2008 compared to $41.6 million for the year ended June30,2007, an increase of $0.3 million or 0.7%. This increase was primarily due
to a $0.9 million increase in fuel expense partially offset by a $0.6 million
decrease in driver wages, due primarily to a decrease in driver overtime and
a
ten day labor strike that affected our paratransit operations in December 2007,
partially offset by an increase in charter revenue. As a percentage of revenues,
salaries and wages decreased to 49.5% for the year ended June 30, 2008, from
50.6% for the year ended June 30, 2007. As a percentage of revenues, cost of
operations were 88.8% for the years ended June 30, 2007 and 2008.
General
and administrative expenses.
General
and administrative expenses from school bus operations were $15.1 million for
the year ended June 30, 2008 compared to $15.0 million for the year ended June30, 2007, an increase of $0.1 million or 0.2%. This increase was primarily
due
to increases in bad debt expense and professional fees partially offset by
a
decrease in administrative payroll. As a percentage of revenues, general and
administrative expenses were 3.9% for the years ended June 30, 2007 and
2008.
General
and administrative expenses from paratransit and transit operations were $2.7
million for the year ended June 30, 2008 compared to $2.8 million for the year
ended June 30, 2007, a decrease of $0.1 million or 3.1%. This decrease was
primarily due to a decrease in administrative payroll and fringe benefits.
As a
percentage of revenues, general and administrative expenses decreased to 5.8%
from 6.0% for the year ended June 30, 2007.
Depreciation
and amortization.
Depreciation and amortization expense from school bus operations was
$17.6 million for the year ended June 30, 2008 compared to
$17.7 million for the year ended June 30, 2007, a decrease of
$0.1 million or 0.5%. This decrease was primarily due to the Company having
lower depreciation expense for the year ended June 30, 2008 as some of the
assets are now fully depreciated.
Depreciation
and amortization expense from paratransit and transit operations was $1.4
million for the years ended June 30, 2007 and 2008.
Income
(loss) from operations.
Loss
from school bus operations was $2.3 million for the year ended June 30,2008 compared to $10.4 million of income from operations for the year ended
June30, 2007, an increase in loss from operations of $12.7 million, due to the
net effect of the items discussed above.
Income
from paratransit and transit operations was $1.1 million for the year ended
June 30, 2008 compared to $1.0 million for the year ended June 30, 2007, an
increase of $0.2 million, due to the net effect of the items discussed
above.
Interest
expense. Interest
expense was $33.3 million for the year ended June 30, 2008 compared to $34.8
million for the year ended June 30, 2007, a decrease of $1.4 million, or 4.1%.
This decrease was primarily due to a $6.2 million reduction of amortization
of
deferred financing charges and original issue discount and a $3.5 million
reduction for a prepayment penalty on the redemption of the Old Notes in fiscal
year 2007, partially offset by a $6.7 million change in the fair market value
of
interest rate swap expense and $1.6 million of other increases in interest
expense, primarily due to increases in long-term debt.
Reorganization
costs. Reorganization
costs were $0.1 million for the years ended June 30, 2007 and 2008.
Loss
before benefit from income taxes and discontinued operations.
Due to
the net effect of the items discussed above we experienced a loss before a
benefit from income taxes and discontinued operations of $34.4 million for
the year ended June 30, 2008, compared to a loss of $23.0 million for the year
ended June 30, 2007, an increase in loss of $11.4 million.
Gain
from discontinued operations.
We
experienced a gain from discontinued operations of $5.6 million from the sale
of
T-NT Bus Service Inc. for the year ended June 30, 2007. There was no gain or
loss from discontinued operations for the year ended June 30,2008.
Revenues.
Revenues
from school bus operations were $382.0 million for the year ended June 30,2007 compared to $368.1 million for the year ended June 30, 2006, an
increase of $13.9 million, or 3.8%. This increase was due to $14.1 million
of price increases and $11.6 million of service requirement increases due
primarily to five
more
revenue days in NYC which increased revenue by approximately $4.8 million and
approximately
140 new routes in NYC operations that started February 22, 2006 which increased
revenue by $4.9 million offset
by
$10.7 million in sold contracts
and $1.1 million
in lost
contracts.
Revenues
from paratransit and transit operations were $46.8 million for the year ended
June 30, 2007 compared to $46.0 million for the year ended June 30, 2006,
an increase of $0.9 million or 1.9% due to price increases and increases in
service requirements from existing contracts.
Cost
of Operations.
Cost of
operations of school bus operations were $338.9 million for the year ended
June30, 2007 compared to $330.7 million for the year ended June 30, 2006, an
increase of $8.2 million or 2.5%. As a percentage of revenues, cost of
operations decreased to 88.7% for the year ended June 30, 2007 from 89.9% for
the year ended June 30, 2006. Salaries and wages were $185.5 million for the
year ended June 30, 2007 compared to $181.4 million for the year ended June30,2006, an increase of $4.1 million or 2.3%. This increase was primarily due
to more employees needed to service additional routes and an increase in payroll
days in New York City. As a percentage of revenues, salaries and wages decreased
to 48.6% for the year ended June 30, 2007 from 49.3% for the year ended June30,2006. Employee fringe benefits increased by $1.8 million and vehicle lease
expense increased by $6.2 million as the Company continues to finance its
vehicle requirements through the use of operating leases. These increases were
partially offset by a decreases in liquidated damages of $1.4 million, vehicle
insurance of $1.4 million and $0.9 million in fuel expense.
Cost
of
operations of paratransit and transit operations were $41.6 million for the
year ended June 30, 2007 compared to $39.5 million for the year ended June30,2006, an increase of $2.1 million or 5.4%. This increase was primarily due
to an
increase in salaries and wages, employee fringe benefits and an increase in
vehicle maintenance costs. As a percentage of revenues, salaries and wages
increased to 50.7%, for the year ended June 30, 2007 from 50.4% for the year
ended June 30, 2006. As a percentage of revenues, cost of operations increased
to 88.8% from 85.9% for the year ended June 30, 2006.
General
and administrative expenses.
General
and administrative expenses from school bus operations were $15.0 million for
the year ended June 30, 2007 compared to $16.7 million for the year ended June30, 2006, a decrease of $1.7 million or 10.0%. This decrease was primarily
due
to decreases in administrative payroll including a $0.5 million contract renewal
bonus paid to certain executives in connection with the extension agreement
with
the DOE and
$0.2
million in executive severance pay and
$0.5
million in costs for establishing vehicle lease financing facilities for the
year ended June 30, 2006. As a percentage of revenues, general and
administrative expenses decreased to 3.9% from 4.5% for the year ended and
June30, 2006.
General
and administrative expenses from paratransit and transit operations were $2.8
million for the year ended June 30, 2007 compared to $2.3 million for the year
ended June 30, 2006, an increase of $0.5 million or 20.5%. This increase was
primarily due to an increase in administrative payroll and fringe benefits.
As a
percentage of revenues, general and administrative expenses increased to 6.0%
from 5.1% for the year ended June 30, 2006.
Depreciation
and amortization.
Depreciation and amortization expense from school bus operations was
$17.7 million for the year ended June 30, 2007 compared to
$26.6 million for the year ended June 30, 2006, a decrease of
$8.9 million or 33.5%. This decrease was primarily due to a $5.7 million
impairment charge on fixed assets for the year ended June 30, 2006 and the
Company having $3.2 million of lower depreciation expense for the year ended
June 30, 2007 as some of the assets are now fully depreciated. The Company
continues to finance its vehicle requirements through the use of operating
leases.
Depreciation
and amortization expense from paratransit and transit operations was $1.4
million for the year ended June 30, 2007 compared to $1.6 million for the year
ended June 30, 2006, a decrease of $0.2 million or 12.1%.
Income
(loss) from operations.
Income
from school bus operations was $10.4 million for the year ended June 30,2007 compared to a $5.9 million loss for the year ended June 30, 2006, an
increase in income from operations of $16.3 million, due to the net effect
of the items discussed above.
Income
from paratransit and transit operations was $0.9 million for the year ended
June 30, 2007 compared to $2.5 million for the year ended June 30, 2006, a
decrease of $1.6 million, due to the net effect of the items discussed
above.
24
Interest
expense.
Interest
expense was $34.8 million for the year ended June 30, 2007 compared to $25.9
million for the year ended June 30, 2006, an increase of $8.8 million, or
34.0%. The increase was primarily due to a $2.9 million write-off of deferred
financing expenses in relation to the redemption of the Old Notes, $3.5 million
prepayment penalty on the repayment of the Notes, $1.8 million of PIK interest
and a $0.8 million increase in amortization of the original issue discount
offset partially by a $0.5 million of interest rate swap income.
Reorganization
costs. Reorganization
costs were $0.1 million compared to $0.6 million for the year ended June 30,2006, a decrease of $0.5 million.
Loss
before benefit from income taxes and discontinued operations.
Due to
the net effect of the items discussed above we experienced a loss before a
benefit from income taxes and discontinued operations of $23.0 million for
the year ended June 30, 2007, compared to a loss of $29.5 million for the year
ended June 30, 2006, a decrease in loss of $6.5 million.
Gain
(loss) from discontinued operations.
We
experienced a gain from discontinued operations of $5.6 million from the sale
of
T-NT Bus Service Inc. for the year ended June 30, 2007 compared to a minimal
loss from discontinued operations for the year ended June 30, 2006.
Liquidity
and Capital Resources
Liquidity
and Capital Resources
The
statements regarding the Company’s anticipated capital expenditures and service
requirements are “forward looking” statements which involve unknown risks and
uncertainties, such as the Company’s ability to meet or exceed its growth plans
and/or available financing, which may cause actual capital expenditures to
differ materially from currently anticipated amounts.
The
Company operated a fleet of approximately 5,500 vehicles as of June 30, 2008
and
consumes substantial quantities of fuel for its operations. Based on the
Company’s current operations, an increase in fuel costs of 10 cents per gallon
will increase its cost of fuel purchased by approximately $0.9 million on an
annual basis.
Capital
expenditures for the fiscal years ended June 30, 2007 and June 30, 2008 totaled
$18.2 million and $10.8 million, respectively. Vehicle capital expenditures
accounted for $13.7 million (including $12.1 million for the buyout of operating
leases) and $5.9 million for the fiscal years ended June 30, 2007 and 2008,
respectively. The Company has met substantially all of its vehicle
capital expenditures requirements
by the use of operating leases. The
Company’s vehicle lease expense was $15.1 million for the fiscal year ended June30, 2008 compared to $14.4 million for the fiscal year ended June 30, 2007,
an
increase of $0.7 million.
The
Company anticipates capital expenditures of approximately $7 million (including
approximately $5 million of non-vehicle capital expenditures) for fiscal 2009
and an increase in vehicle lease expense of approximately $3.3
million.
On
May15, 2007the Company issued $185.0 million aggregate principal amount of Senior
Secured Floating Rate Notes due 2012 (the “notes”). The notes were issued with
an original issue discount of $2.8 million, which is being amortized over the
term of the notes. The net proceeds of the notes were used to repay $116.3
million of our
previously outstanding Old Notes,
$15.5
million of the third-priority senior secured notes, $4.9 million of the senior
unsecured notes, repayment of a $3.5 million letter of credit advance, $1.6
million of PIK interest converted into debt, $12.1 million for the buyout of
vehicle operating leases and $4.8 million for outstanding administrative
priority claims. The balance was used for other corporate purposes.
Effective
as of May 15, 2007, we entered into an interest swap agreement (the “Swap”) to
reduce our exposure to interest rate fluctuations on the notes, which bear
interest at LIBOR plus a margin of 7.25%. The Swap has a notional amount of
$185
million with a fixed rate of 5.21% thereby effectively converting the floating
rate notes to a fixed rate obligation of 12.46%. The Swap will expire in April15, 2010. On the interest payment dates of the notes, the difference between
LIBOR and 5.21% is required to be settled in cash. In accordance with SFAS
No. 133, Accounting
for Derivative Instruments and Hedging Activities,
the Swap
does not qualify for "Cash Flow Hedge Accounting" treatment since the
documentation of the accounting treatment was not done contemporaneously with
entering into the agreement. The reduction in the fair market value of this
interest swap agreement of approximately $6.2 million is reflected as an
addition to interest expense for the year ended June 30, 2008.
Our
obligation under the Swap is secured by the collateral securing our Amended
and
Restated Credit Facility and in connection therewith total reserves of
approximately $6.8 million, $6.7 million, $7.4 million and $7.8 million for
June
2008, July 2008, August 2008 and September 2008, respectively, were established
against our borrowing base. In February 2008, our senior credit facility
was
amended to change the calculation of the borrowing base for the purpose of
the
calculation of excess availability, solely in relation to testing the EBITDA
covenant (see Note 7 (b) to Notes to Consolidated Financial Statements included
elsewhere in this Form 10-K) to exclude the first $5.0 million of reserves
established in connection with our Swap. This change is effective from January1, 2008 until February 15, 2009. Until August 28, 2008, excess availability
was
required to be at least $5.0 million at all times during the period from
July 1
to August 31 of any year, and $8.0 million for the balance of the fiscal
year.
As of August 28, 2008, the senior credit facility was amended to extend the
period where excess availability required is $5.0 million from August 31
of any
year to September 15 of any year. As of September 25, 2008, the senior credit
facility was further amended such that the excess availability requirement
is as
follows: (i) $5,000,000 at all times during the period from July 1, 2008
to
September 15, 2008, (ii) $8,000,000 at all times during the period from
September 16, 2008 to September 30, 2008, (iii) $4,500,000 at all
times during the period from October 1, 2008 to July 31, 2009, (iv) $4,000,000
at all times during the period from August 1, 2009 to September 15, 2009,
(v)
$4,500,000 at all times during the period from September 16, 2009 to November1,2009, (vi) $8,000,000 at all times during the period from November 2,2009 to June 30, 2010, (vii) $5,000,000 at all times during the period from
July 1 to September 15 of any year (commencing in 2010), and
(viii) $8,000,000 at all times during the period from September 16 of any
year (commencing in 2010) through June 30 of the immediately following year.
Based upon these amendments, the Company did not need to test the EBITDA
covenant through September 26, 2008.
25
Concurrently
with the issuance of the notes, the Company and substantially all of its
subsidiaries also amended and restated its existing senior credit facility
with
Wachovia Bank, National Association (“Wachovia”) as agent, to provide up to
$35.0 million of borrowing availability under a revolving credit facility,
subject to customary borrowing conditions, plus a $10.0 million letters of
credit facility. The Amended and Restated Credit Facility is secured by a first
priority lien on substantially all of the Company’s and its subsidiaries’
assets, other than collateral securing the Notes on a first priority basis.
In
addition, the term of the credit facility was extended from February 29, 2008
to
December 31, 2011. The Amended and Restated Credit Facility contains customary
events of default and contains a minimum last 12 month (“LTM”) EBITDA covenant
of $26.0 million, which will only be tested if excess availability falls below
certain levels. The LTM EBITDA was $18.3 million as of June 30, 2008, but was
not tested because the Company met the availability requirements.
The
borrowing capacity under the Amended and Restated Credit Facility is based
upon
85% of the net amount of eligible accounts receivable less reserves. Our senior
lender has established borrowing base reserves of approximately $6.8 million,
$6.7 million, $7.4 million and $7.8 million for June 2008, July 2008, August
2008 and September 2008, respectively, in connection with our Swap (see Note
2
to Notes to Consolidated Financial Statements included elsewhere in this Form
10-K). Loans under the facility bear interest at the prime rate (the prime
rate
at June 30, 2008 was 5%). Letters of credit are subject to a fee of 1% per
annum
payable monthly in arrears and any amounts paid by lenders for letters of credit
will bear the same rate as loans under our revolving facility. The Company
paid
a closing fee of $400,000 and is required to pay a servicing fee of $10,000
per
month, plus pay a monthly fee of 0.5% on any unused portion of its Amended
and
Restated Credit Facility.
In
December 2007, one of the Company’s insurance carriers issued us approximately
$9.0 million in credits, representing retrospective adjustments for various
years, by offsetting approximately $2.2 million of current premiums due in
January 2008, returning funds of $6.0 million and adding $0.8 million to our
cash collateral account. In addition, the insurance company did not renew a
$0.7
million letter of credit held as collateral. This letter of credit was
collateralized by restricted cash which became available for working capital.
The transaction had no effect on the Company’s consolidated statements of
operations for the year ended June 30, 2008 and has no impact on future
insurance expense.
Under
the
terms of our contract with the DOE (our largest customer) the Company will
receive a CPI increase of 4% for the fiscal year ending June 30, 2009. However,
a reduction in the number of routes or a change in the configuration of routes
for that year may effectively reduce this increase to less.
The
Company operated a fleet of approximately 5,500 vehicles as of June 30, 2008
and
uses substantial quantities of fuel in its operations. The Company’s fuel
expense for the year ended June 30, 2008 was $30.3 million compared to $21.8
million for the year ended June 30, 2007, an increase of $8.5 million, or 39.2%.
Based on the Company’s current operations, an increase in fuel costs of 10 cents
per gallon will increase its cost of fuel purchased by approximately $0.9
million on an annual basis. If the cost of fuel continues to increase it will
have an adverse effect on the Company’s liquidity.
The
Company, in addition to normal working capital requirements, has significant
interest obligations and capital expenditure requirements to finance its
operations. Our senior lender has established borrowing base reserves of
approximately $6.8 million, $6.7, $7.4 million and $7.8 million for June 2008,
July 2008, August 2008 and September 2008, respectively, in connection with
our
Swap (see Note 2 to Notes to Consolidated Financial Statements included
elsewhere in this Form 10-K). If these reserves increase they may have a
significant adverse effect on the Company’s liquidity.
The
Company believes that borrowings under the Amended and Restated Credit Facility,
anticipated retrospective insurance credits to be received from its insurance
company together with its existing cash and cash flow from operations should
be
sufficient to fund the Company’s anticipated liquidity requirements for the next
year. However, significant increases in the cost of fuel or other unforeseen
increases in expenses could require the Company to pursue additional funding
alternatives, including the sale of certain assets or operations, in order
to
improve its liquidity position.
LTM
EBITDA was $18.3 million as of June 30, 2008 and we expect LTM EBITDA to be
below $26.0 million for the next twelve months. If our excess availability
for
the purpose of testing the EBITDA covenant (see Notes 2 and 7(b) to Notes to
Consolidated Financial Statements included elsewhere in this Form 10-K) falls
below certain levels, this will generate a default under our Amended and
Restated Credit Facility and under certain circumstances cause a cross default
under the notes. Although the Company believes that it would be able to receive
a waiver of this default from Wachovia, there can be no assurance that this
is
the case or what the cost to the Company might be. If the Company would not
be
able to receive a waiver, then the amount of the Amended and Restated Credit
Facility would be reclassified to a current liability.
26
As
of
June 30, 2008, total current assets were $82.6 million and total current
liabilities were $30.9 million. At
June30, 2008, the Company’s debt under its $35.0 million Amended and Restated Credit
Facility was $6.0 million, and it had $13.2 million of borrowing availability
after $6.8 million of reserves, based on the Company’s borrowing base
calculations. Approximately
$9.3 million of the Company’s $10.0 million letter of credit facility was used
as of the same date. On September 15, 2008, under our Amended and Restated
Credit Facility the Company had a credit balance of $3.9 million, and it had
$8.3 million in borrowing availability after $7.8 million of reserves, based
upon the Company’s borrowing base calculations.
Net
cash provided by (used in) operating activities. Net
cash provided by operating activities was $4.2 million for the year ended June30, 2008, resulting primarily from proceeds of cash due to changes in the
components of working capital of $9.9 million (primarily decrease in prepaid
expenses of $6.4 million due to refunds of auto and workers’ compensation
insurance loss funds) and $27.7 million of non-cash items ($21.1 million of
depreciation and amortization, $6.3 million interest swap expense and $0.3
million contract right impairment), partially offset by $33.4 million used
in
operating activities.
Net
cash
used in operating activities was $12.8 million for the year ended June 30,2007,
resulting primarily from a use of cash due to changes in the components of
working capital of $15.6 million and $25.8 million used in operating activities,
partially offset by $28.6 million of non-cash items of depreciation,
amortization and interest.
Net
cash provided by (used in) investing activities. Net
cash
used in investing activities for the year ended June 30, 2008 was $8.7 million
resulting primarily from $10.8 million of capital expenditures (including,
$0.2
million directly financed with purchase money debt and $0.7 million of the
acquisition cost of vehicles exchanged), less $0.6 million proceeds from sales
of assets and $0.7 million decrease in restricted cash and cash equivalents.
Net
cash
provided by investing activities for the year ended June 30, 2007 was $2.4
million resulting primarily from $12.5 million of proceeds from the sale of
assets, $3.1 million decrease in restricted cash and $5.1 million of proceeds
from sales or redemptions of marketable securities, partially offset by the
$18.2 million of capital expenditures. Of these, $0.6 million of capital
expenditures were directly financed with purchase money debt, $12.1 million
financed from the proceeds from the issuance of the notes and the balance were
financed from operating cash flows.
Net
cash provided by financing activities. Net
cash provided by financing activities totalled $0.3 million for the year ended
June 30, 2008 primarily due to $2.9 million increase in net borrowings under
our
Amended and Restated Credit Facility, partially offset by $2.4 million in
payments on borrowings under capital leases and purchase money mortgages.
Net
cash
provided by financing activities totalled $16.8 million for the year ended
June30, 2007 due primarily to $182.2 million in proceeds from the issuance of the
notes partially offset by repayment of $116.3 million for our Old Notes,
repayment of $15.5 million for the our previously outstanding third priority
notes, repayment of $4.9 million for senior unsecured note, repayment of $3.5
million for the letter of credit advance, $14.7 million decrease in net
borrowings under our Amended and Restated Credit Facility, $7.8 million in
new
deferred financing costs and $2.7 million in payments on borrowings under
capital leases and purchase money mortgages.
Commitments
and Contractual Obligations
Our
contractual obligations and commitments principally include obligations
associated with our outstanding indebtedness and future minimum operating lease
obligations as set forth in the following table.
The
following table shows our contractual obligations and commitments as of June30,2008, and the payments due by period.
(1) The
management fee to related parties has no expiration date and terminates only
upon the related party ceasing to own of record any shares of the common stock
issued to them.
(2) Priority
tax claims are claims of state and local governments for unpaid taxes relating
to the year 2002. In accordance with federal bankruptcy law, these claims
survived the Company’s chapter 11 proceedings.
AETG
and
our Company have entered into employment agreements with Domenic Gatto, our
Chief Executive Officer and President, whose agreement provides for his
continued employment with us through December 31, 2009, and Nathan
Schlenker, our Chief Financial Officer, whose agreement provides for his
continued employment with us through December 31, 2008. Our total base
salary contractual obligations under these employment agreements include
required base salary payments of $803,565,
for the
fiscal year ending June 30, 2009. See "—Executive Compensation” included
elsewhere in this Form 10-K for more information about the terms of these
employment agreements.
We
have
no off-balance sheet debt or similar obligations.
Quarterly
Financial Information
The
table
below sets forth unaudited summary quarterly financial information for the
Company for the last eight quarters. This information has been prepared by
the
Company on a basis consistent with its audited Consolidated Financial Statements
and includes all adjustments that management considers necessary for a fair
presentation of the results for such quarters.
Item
7A.Quantitative
and Qualitative Disclosures About Market Risks.
In
the
normal course of operations, we are exposed to market risks arising from adverse
changes in interest rates. Market risk is defined for these purposes as the
potential change in the fair value of financial assets or liabilities resulting
from an adverse movement in interest rates.
We
operated a fleet of approximately 5,500 vehicles as of June 30, 2008 and consume
substantial quantities of fuel for our operations. Based on our current
operations, an increase in fuel costs of 10 cents per gallon would increase
our
cost of fuel purchased by approximately $0.9 million on an annual basis.
From time to time in the past, we have entered into hedging contracts to protect
ourselves from fluctuations in the cost of fuel, and we may seek to do the
same
in the future. We currently do not have any fuel hedging agreements in place,
but we continually evaluate entering into such agreements if we believe
increases in fuel costs are likely. No assurance can be given that we will
be
able to adequately protect ourselves from fluctuating fuel costs even if we
enter into hedging contracts.
28
As
of
June 30, 2008, our only variable rate borrowings are the notes (LIBOR plus
7.25%
interest) and the Amended and Restated Credit Facility (prime rate). On
May15,2007 we reduced our exposure to interest rate fluctuations on our
notes
by
entering into the
Swap.
The Swap has a notional amount of $185 million with a fixed rate of 5.21%
thereby effectively converting the floating rate notes to a fixed rate
obligation of 12.46%. The Swap will expire on April 15, 2010. On the interest
payment dates of the notes, the difference between LIBOR and 5.21% will be
settled in cash. As of June 30, 2008 the fair market value of the Swap was
a
$5.8 million liability. Our obligation under the Swap is secured by the
collateral securing our Amended and Restated Credit Facility. As
of
June 30,
2008,
based
upon our variable interest rate borrowings, a 100 basis point increase in
interest rates, applied to our maximum variable rate borrowings, would have
no
material effect on cash flows until periods commencing April 16, 2010.
Critical
Accounting Policies
In
presenting our consolidated financial statements in conformity with U.S.
generally accepted accounting principles, we are required to make estimates
and
judgments that affect the amounts reported therein. Some of the estimates and
assumptions we are required to make relate to matters that are inherently
uncertain as they pertain to future events. We base these estimates on
historical experience and on various other assumptions that we believe to be
reasonable and appropriate. Actual results may differ significantly from these
estimates. The following is a description of our accounting policies that we
believe require subjective and complex judgments, and could potentially have
a
material effect on our reported financial condition or results of operation.
Property,
Plant and Equipment.
We
depreciate our property, plant and equipment over their useful lives, which
range from 3 to 31.5 years, on a straight-line basis. These useful lives
are based upon our estimates of the periods that the assets will provide
economic benefit. Our policy is to review the carrying value of our long-lived
assets whenever events or changes in circumstances occur that indicate the
carrying value may not be recoverable. Our definite-life assets will continue
to
be depreciated or amortized over their estimated useful lives and are subject
to
the impairment criteria as required by SFAS No. 144.
Transportation
Contract Rights.
Transportation contract rights primarily represent the value we assigned to
the
cost of investments in school bus companies in excess of the book value of
the
companies acquired. In addition, we have purchased from unrelated third parties
certain transportation contract rights with respect to revenue contracts and
travel routes. Transportation contract rights are assessed for impairment at
least annually and whenever events or changes in circumstances indicate that
the
carrying value may not be recoverable. Important factors that could trigger
an
impairment review include significant underperformance relative to historical
or
projected future operating results, significant changes in the use of the
acquired assets or the strategy of the overall business, and significant
negative industry or economic trends. If indicators of impairment are present,
management evaluates the carrying value of the intangibles in relation to the
projection of future undiscounted cash flows of the underlying assets. Projected
cash flows are based on historical results adjusted to reflect management's
best
estimate of future market and operating conditions, which may differ from actual
cash flow. Transportation contract rights are amortized on a straight-line
basis
over 12 years, which represents the Company's estimate of the average length
of
the contracts and expected renewal periods. We recorded an impairment charge
of
$0.3 million for the year ended June 30, 2008, which is included in
the school bus operations segment to adjust the transportation contract rights
to fair value. The requirements for this impairment charge was determined by
management's evaluation that the future undiscounted cash flows attributable
to
the underlying assets were unlikely to exceed the carrying value of the
transportation contract rights assets for a subsidiary school bus company
located in New Jersey. The impairment charge was the difference between book
value of the transportation contract rights and estimated fair value, determined
by the estimated future cash flows. See Note 2 of Notes to Consolidated
Financial Statements included elsewhere in this Form 10-K for further
discussion.
Income
Taxes.
We
follow the liability method under SFAS No. 109, Accounting
for Income Taxes.
The
primary objectives of accounting for taxes under SFAS No. 109 are to
(1) recognize the amount of tax payable for the current year and
(2) recognize the amount of deferred tax liability or asset for the future
tax consequences attributable to temporary differences between the financial
statements' carrying amounts of existing assets and liabilities and their
respective tax bases and of events that have been reflected in our financial
statements or tax returns. When the realization of a deferred tax asset is
not
considered to be more likely than not, a valuation allowance is recorded against
that deferred tax asset.
As
discussed in Note 11 of Notes to Consolidated Financial Statements, we have
net deferred tax assets resulting primarily from net operating losses ("NOL")
that would reduce taxable income in future periods. SFAS No. 109 requires
that a valuation allowance be established when it is "more likely than not"
that
all or a portion of net deferred tax assets will not be realized. A review
of
all available positive and negative evidence needs to be considered, including
expected reversals of significant deductible temporary differences, a company's
recent financial performance, the market environment in which a company
operates, tax planning strategies and the length of the NOL carry-forward
period. Management believes that the realization of a portion of the deferred
tax assets is not considered to be more likely than not and, accordingly, has
provided a valuation allowance.
29
We
file
consolidated federal and state income tax returns with our parent, AETG, and
its
affiliates. The income tax charge or benefits allocated to us is based upon
an
allocation method determined by the group under its tax sharing agreement.
The
balance identified as deferred tax assets and liabilities can, in substance,
be
considered the equivalent to amounts due from and due to this affiliated group
based upon the application of this method.
Allowance
for Doubtful Accounts.
We
maintain an allowance for estimated losses resulting from the inability of
our
customers to make required payments. We estimate uncollectible amounts based
upon historical bad debts, current customer receivable balances, age of customer
receivable balances, the customer's financial condition and current economic
trends. If the actual uncollected amounts were to significantly exceed the
estimated allowance, our results of operations would be materially adversely
affected.
Revenue
Recognition.
Revenues
from school bus and paratransit and transit operations are recognized when
services are provided. We bill our customers on a monthly basis based upon
the
completion of bus routes and service hours completed to all paratransit
customers, which in most cases are based upon contracts or extension agreements
we have with our customers.
Insurance
Coverage and Reserves. Approximately
50% of the Company’s primary automobile coverage ($1 million per occurrence) and
all of the Company’s workers’ compensation insurance coverage (except for one
subsidiary which has “First Dollar” coverage) is administered through a
third-party insurance company. The Company funds, through monthly installments,
loss funds specified by the insurance company, plus fronting charges. These
loss
funds are used to pay up to the first $500,000 of each loss. Operating costs
are
charged and prepaid assets are reduced by estimated claim losses and fronting
charges. The charges are based upon estimated ultimate liability related to
these claims and differ from period to period due to claim payments, and
settlement practices as well as changes in development factors due to the
assumed future cost increases and discount rates. On a quarterly basis, the
Company receives from the insurance company estimates of selected ultimate
losses that are based on actuarial analysis. Charges to operations are then
adjusted to reflect these calculations.
For
the
years ended June 30, 2006 2007 and 2008, the Company recorded adjustments
related to expenses (income) changes in prior years claims estimates to its
insurance expense as follows:
Prior
to
the year ended June 30, 2002, the Company self insured its deductibles and
recorded reserves for these deductibles based upon estimated ultimate claim
losses, including those incurred but not reported. Reserve requirements at
June30, 2008 in relation to these deductibles were $0.8 million.
Interest
Rate Swap
Effective
as of May 15, 2007, we entered into the Swap to reduce our exposure to interest
rate fluctuations on our notes, which bear interest at LIBOR plus a margin
of
7.25%. The Swap has a notional amount of $185 million with a fixed rate of
5.21%
thereby effectively converting the floating rate notes to a fixed rate
obligation of 12.46%. The Swap will expire on April 15, 2010. On the interest
payment dates of the notes, the difference between LIBOR and 5.21% will be
settled in cash. In accordance with SFAS No. 133, Accounting
for Derivative Instruments and Hedging Activities
the Swap
does not qualify for "Cash Flow Hedge Accounting" treatment since the
documentation of the accounting treatment was not done contemporaneously with
entering into the agreement. The change in the fair market value of the Swap
of
$(461,786) is reflected as a reduction of interest expense and $6,247,854 is
reflected as an increase of interest expense at June 30, 2007 and 2008,
respectively.
30
Recent
Accounting Pronouncements
In
June
2006, the FASB issued Interpretation 48, “Accounting
for Uncertainty in Income Taxes – an Interpretation of FASB Statement No.
109”
(“FIN
48”). FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. FIN 48 was effective for the fiscal year
ended June 30, 2008 year for positions for which it is reasonably possible
that
the total amounts of unrecognized tax benefits will significantly increase
or
decrease within 12 months of the reporting date. The Company has assessed the
impact of FIN 48 and it did not have a material effect on its consolidated
financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements,
which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing
a
fair value hierarchy used to classify the source of the information. This
statement is effective for us for the fiscal year beginning July 1, 2008.
We currently believe that adoption of SFAS No. 157 will not have a material
impact on our financial statements.
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities.
SFAS
No. 159 gives us the irrevocable option to carry many financial assets and
liabilities at fair values, with changes in fair value recognized in earnings.
This statement is effective for us for the fiscal year beginning July 1,2008. We currently believe that adoption of SFAS No. 159 will not have a
material impact on our financial statements.
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
2007), Business
Combinations,
which
replaces SFAS No. 141. The statement retains the purchase method of accounting
for acquisitions, but requires a number of changes, including changes in the
way
assets and liabilities are recognized in the purchase accounting. It also
changes the recognition of assets acquired and liabilities assumed arising
from
contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. SFAS No. 141R is effective for us beginning July 1,2009 and will apply prospectively to business combinations completed on or
after
that date.
In
March
2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
No. 161, Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133, which
requires additional disclosures about the objectives of the derivative
instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a
tabular disclosure of the effects of such instruments and related hedged items
on our financial position, financial performance, and cash flows. SFAS
No. 161 is effective for us beginning January 1, 2009. We are
currently assessing the potential impact that adoption of SFAS No. 161 may
have on our financial statements.
Item
8. Financial Statements and Supplementary Data.
See
Index
to Consolidated Financial Statements, which appears on page F-1
herein
Item
9. Changes in Disagreements with Accountants on Accounting and Financial
Disclosure.
None.
Item
9A(T). Controls and Procedures.
Evaluation
of the Company’s Disclosure Controls and Procedures
As
of the
end of the period covered by this Annual Report on Form 10-K, we carried out
an
evaluation under the supervision and with the participation of our management,
including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as defined in Exchange Act Rules 13a-15(e) and
15d-15(e). Disclosure controls and procedures are designed to ensure
that information required to be disclosed in our reports filed under the
Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms and that such information is accumulated and communicated to our
management, including the Chief Executive Officer and Chief Financial Officer,
to allow timely decisions regarding required disclosure. Based on
this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that the design and operation of our disclosure controls and
procedures were effective as of June 30, 2008.
31
Management’s
Annual Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rules 13a-15(f)
and
15d-15(f). Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes
in
accordance with generally accepted accounting principles. Because of
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of
the
effectiveness of our internal control over financial reporting as of June 30,2008 based on the criteria established in
Internal Control — Integrated Framework
and
additional guidance provided by
Internal Control over Financial Reporting – Guidance for Smaller Public
Companies
as
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on the results of this evaluation, we concluded that our internal control
over financial reporting was effective as of June 30 2008. The Company continues
to review its internal control over financial reporting in order to improve
its
effectiveness.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
Changes
in Internal Control over Financial Reporting
The
Company has engaged a consultant in connection with the process of becoming
compliant under Sarbanes-Oxley section 404 (“SOX”), however there were no
changes in our internal controls over financial reporting, identified in
connection with the evaluation of such internal control that occurred during
our
last fiscal quarter, that have materially affected, or are reasonably likely
to
materially affect, our internal controls over financial reporting.
Item
9B. Other Information.
Not
Applicable.
32
PART
III
Item
10. Directors, Executive Officers and Corporate
Governance.
The
following table sets forth certain information concerning the members of our
board of directors and our executive officers as of June 30, 2008.
Name
Age
Position
Domenic
Gatto
59
Director,
Chief Executive Officer and President
Nathan
Schlenker
69
Chief
Financial Officer
Jerome
Dente
62
Chief
Operating Officer, Secretary and Treasurer
Noel
Cabrera
48
Executive
Vice President
Peter
Frank
60
Chairman
of the Board
Matthew
Kaufman
37
Director
Adam
Draizin
38
Director
Domenic
Gatto, Director, Chief Executive Officer and President.
Mr. Gatto has served as Director, Chief Executive Officer and President
since our formation, and has held such positions at AETG since its formation.
Mr. Gatto, a Vietnam veteran, began his career in the school bus business
as a bus driver and has been responsible for the development of all facets
of
our business.
Nathan
Schlenker, Chief Financial Officer. Mr.
Schlenker has been with the Company and its predecessor since 1990. During
that
period he has served as Executive Vice President, Secretary, Treasurer, Director
of Finance and Chief Financial Officer. He was the Chief Financial Officer
of
the Company since its formation until 2004, at which point he assumed the duties
of Director of Finance. He also served as Executive Vice President, Secretary
and Treasurer of the Company and AETG from 1998 to 2004. In April 2006 he
reassumed the duties of Chief Financial Officer.
Jerome
Dente, Chief Operating Officer, Secretary and Treasurer.
Mr. Dente has served as Chief Operating Officer since December 1997
and was director of New York School Bus Operations from 1994 through 1997.
Mr. Dente was elected to serve as Secretary and Treasurer of our Company
and AETG in January 2002.
Noel
Cabrera, Executive Vice President.
Mr. Cabrera has served as Executive Vice President since our formation, and
has served as Executive Vice President of AETG since 1996.
Peter
Frank, Chairman of the Board.
Mr. Frank was appointed Chairman of the Board in December 2003 upon
the effectiveness of our plan of reorganization. He served as our Chief
Restructuring Officer from July 2002 to December 2003. Prior to his
employment with our company, Mr. Frank operated, purchased and sold
businesses for over 25 years. Prior to that, he was an investment banker at
Goldman, Sachs & Co. Mr. Frank is a director and Chairman of the
Board of Worldtex, Inc. and Scovill Fasteners, Inc. (both of which are
majority owned by GSC) and a director of Northstar Travel Media LLC and K-R
Automation Corp. He received an MBA from Harvard University and a BSEE from
the
University of Michigan.
Matthew
Kaufman, Director.
Mr. Kaufman has served as a Director since December 2003.
Mr. Kaufman joined GSCP (NJ), Inc. in 1997, where he is currently a
Managing Director. He was previously Director of Corporate Finance with NextWave
Telecom, Inc. Prior to that, he was with The Blackstone Group, in the
Merchant Banking and Mergers & Acquisitions departments. He is Chairman
of the Board of Pacific Aerospace & Electronics, Inc. and a
director of Burke Industries, Inc., Day International Group, Inc.,
e-talk Corporation, Safety-Kleen Corp., Waddington North America, Inc. and
Worldtex, Inc. (all of which are majority owned by GSC, except Safety-Kleen
Corp.). Mr. Kaufman received a B.B.A. and MACC from the University of
Michigan.
Adam
R. Draizin, Director.
Mr. Draizin has served as a Director since August 2004.
Mr. Draizin is a Principal at American Traffic Solutions serving as
Executive Vice President and Chief Financial Officer. Prior to American Traffic
Solutions, he served as a Senior Advisor to the President to British Petroleum’s
US Fuels on a strategy consulting project. Mr. Draizin was Chief Executive
Officer of RAD Energy Corp., a New York based oil distributor with approximately
$350 million in revenue. In January 2001, Mr. Draizin oversaw RAD's
successful private sale to Sprague Energy. Mr. Draizin served on the Board
of the Society of Independent Gasoline Marketers of America and worked as an
investment-banking analyst at Kidder, Peabody & Company.
Mr. Draizin holds an MBA from the Harvard Business School and a BA from
Washington University.
There
are
no family relationships between any of the aforementioned persons.
33
Board
of Directors
Currently,
our board of directors consists of four directors, Messrs. Gatto, Frank,
Kaufman and Draizin.
Our
board
of directors consists of the same directors who sit on AETG's board of
directors. Pursuant to a stockholders agreement for AETG, as more fully
described under "Certain Relationships and Related Transactions-Stockholders
Agreement," GSC is entitled to designate a majority of AETG's directors and
the
Chief Executive Officer of AETG is to be appointed as a director of AETG. Our
directors serve for indefinite terms until their successors are qualified and
elected.
Because
we do not have any securities listed on a national securities exchange, we
are
eligible for exemptions from provisions of the Exchange Act requiring
independent directors, certain independent board committees and written charters
addressing certain corporate governance matters. We have elected to take
advantage of these exemptions and did not establish an independent audit
committee. We believe that the size of our company does not warrant the need
to
recruit and retain independent directors solely for the purpose of establishing
an independent audit committee.
Board
Committees
We
established an audit committee at the first meeting of our board of directors
following the registration statement for the exchange offer on the notes.
However, as discussed immediately above, our audit committee does not consist
of
independent directors.
The
audit
committee which consists of two of our current directors (Messrs. Gatto and
Frank), reviews and reports to the board of directors the scope and results
of
audits by our outside auditor and our internal auditing staff and reviews with
the outside auditors the adequacy of our system of internal controls. It reviews
transactions between our directors and officers and our Company. The audit
committee also recommends to the board of directors a firm of registered public
accountants to serve as our outside auditors for each fiscal year, review the
audit and other professional services rendered by the outside auditor and
periodically review the independence of the outside auditor. While we do not
currently have a director who would meet the qualification of an "audit
committee financial expert" as defined in Item 401(k) to
Regulation S-K, we believe that each of our current directors are
financially literate. Because we do not have any securities listed on a national
securities exchange, we are eligible for exemptions from provisions of the
Exchange Act requiring an audit committee financial expert. We have elected
to
take advantage of these exemptions. We believe that our two current directors,
who make up our audit committee, collectively possess the knowledge and
experience needed to carry out the duties of the audit committee.
Code
of Ethics
We
have
not adopted a code of ethics for our principal executive officer and senior
financial officer. Because
we do not have any securities listed on a national securities exchange, we
are
not required to have a code of ethics. Furthermore, we believe that a
written code of ethics is not necessary at this time because we believe our
executives adhere to and follow ethical standards without the necessity of
a
written policy and because 89.8% of our outstanding shares are owned by AETG,
members of our board are kept abreast of the activities of our executive
officers.
Item
11. Executive Compensation.
Compensation
Discussion and Analysis
Base
Salary
Base
salary is intended to reward the executive for his core competence and for
services rendered by the executive. Base salaries are established based upon
on
the scope of the executive’s responsibilities and his relevant experience,
taking into account, where available competitive market compensation paid by
other companies in our industry for similar positions. However, the Company
does
not benchmark in establishing total compensation or material elements of total
compensation such as base salary. Raises
for executives, with the exception of
Messrs. Gatto and Schlenker,
are
determined by the CEO taking into consideration the overall performance of
duties by the executives including efforts and time expended in performance
of
these duties plus cost of living increases based upon the Consumer Price Index
(the “CPI”) for the region in which the executive operates. Raises for
Messrs.
Gatto and Schlenker
are
contractually related to the CPI as more fully described under “—Employment
Agreements.”
34
In
addition all executives and any other employees who do not qualify to
participate in the Company’s 401(k) plan ( generally highly compensated
employees), receive, as additional base salary, 7 ½% of their annual salary (as
reflected on their prior year W-2 form).
Annual
Incentive Awards
With
the
exception of Messrs. Gatto and Schlenker, annual incentive awards are determined
by
the CEO
and are discretionary in nature and absent of any pre-determined performance
objectives.
As
more
fully described under “—Employment
Agreements.” the
annual cash incentive bonus for Messrs. Gatto and Schlenker is determined by
the
Company exceeding adjusted EBITDA projections established by management and
accepted by the Board of Directors. Under the employment agreements, EBITDA
is
determined from the Company’s consolidated statement of operations. Adjusted
EBITDA is determined by subtracting from EBITDA excess capital expenditures
determined from the Company’s consolidated statement of cash flow in excess of
projected capital expenditures determined by management and accepted by the
Board of Directors. Prior to the commencement of the fiscal years June30,2008
and
2009, Messrs.
Gatto and Schlenker have waived this incentive bonus for the fiscal year ended
June 30, 2008 and for the fiscal year ending June 30, 2009.
Change
in
Control and Termination Benefits
For
payments due to our executive officers upon a change of control or upon
termination, please see “Payments Upon Change of Control or Upon Termination”
below. The payments upon a change of control are intended to align the financial
interests of our executive officers with those of our shareholders. In addition,
the change of control benefits and the termination benefits also are intended
to
reward our executive officers for the years of dedicated service of such
executive officers.
Benefits
and Perquisites
We
provide executive officers with benefits and perquisites that we believe are
reasonable and consistent with those offered by other companies in our industry
with whom we compete for experienced management personnel. For more information
regarding benefits and perquisites for our executive officers, see “Summary
Compensation Table” and the footnotes thereto.
Employment
Agreements
Domenic
Gatto
AETG
and
the Company have entered into an amended and restated employment agreement,
dated as of April 18, 2007, with Domenic Gatto that provides for his continued
employment with the Company through December 31, 2009. The term of
Mr. Gatto’s employment may be extended each year for a period of one year
at the option of the Company. Mr. Gatto was appointed Chief Executive
Officer, President and Vice Chairman of the Board under the employment
agreement. Under the terms of the employment agreement, Mr. Gatto receives
annual compensation in the amount of $609,927 base salary, which will be
increased on November 1, 2008 and each anniversary date thereafter, by the
greater of 3% or the last 12 months’ increase in the consumer price index.
Mr. Gatto is entitled to receive an annual bonus equal to 15% of his base
salary for each fiscal year in which the Company’s actual adjusted EBITDA
exceeds by 10% the projected EBITDA. The annual bonus is increased to 25% of
his
base salary for each year in which the actual adjusted EBITDA exceeds the
projected EBITDA by 15%. Prior
to
the commencement of the fiscal years 2008 and 2009, Mr.
Gatto
waived this incentive bonus for the fiscal year ended June 30, 2008 and for
the
fiscal year ending June 30, 2009.
In the
event of a specified change of control of AETG or the Company, Mr. Gatto
will receive a cash exit bonus equal to 1.5% of the fair market value of the
Company’s common shares on a fully diluted basis as of the date of such change
of control. If the fair market value of all of the outstanding common stock
is
equal to or in excess of $50.0 million or $70.0 million, he is entitled to
receive a bonus equal to 2.5% or 3.0% of the fair market value of the Company’s
common stock, respectively.
If
Mr. Gatto is terminated with cause, as defined in his employment agreement,
he will receive (i) his accrued but unpaid annual bonus, (ii) his cash exit
bonus upon a change of control; and (iii) provided that executive is not
terminated for being disloyal by assisting a competitor of AETG or the Company,
severance equal to six months of his base salary, payable in a lump sum. In
addition, if Mr. Gatto is terminated due to his death, he also will receive
(i)
a pro-rata share of his accrued annual bonus through the date of termination
and
(ii) severance in an additional amount equal to six months of his base salary,
payable in a lump sum. If Mr. Gatto is terminated due to his permanent
disability, he also will receive for a period of 12 months (i) benefits provided
to other senior executives (including health insurance), (ii) disability
insurance, (iii) automobile allowance of $2,150 per month, (iv) life insurance
premium allowance of $35,000 per year and (v) continued use of a company car
and
driver. If Mr. Gatto is terminated without cause, as defined in his
employment agreement, or by Mr. Gatto for good reason, as defined in his
employment agreement, or if the Company elects not to extend the term of his
employment, he also will receive the remainder of his salary and the perquisites
described in the preceding sentence for the outstanding term of his contract.
If
Mr. Gatto terminates his employment without good reason, he will receive (i)
his
accrued but unpaid annual bonus and (ii) his cash exit bonus upon a change
of
control. The receipt of severance upon termination of Mr. Gatto’s employment is
contingent upon his delivery of a release in favor of AETG and the
Company.
35
The
agreement also contains covenants governing confidentiality, non-competition
and
non-solicitation upon the termination of his employment. The non-compete
continues for a period of 18 months (24 months if a majority of the
common shares of AETG is then owned by the current shareholders) following
termination of Mr. Gatto’s employment by AETG and the Company.
Nathan
Schlenker
AETG
and
the Company have entered into an amended and restated employment agreement,
dated as of April 18, 2007, with Nathan Schlenker, which provides for his
continued employment with the Company through December 31, 2008. The term of
Mr. Schlenker’s employment may be extended each year for a period of one
year at the option of the Company. The agreement covers Mr. Schlenker’s
employment as our Chief Financial Officer. Mr. Schlenker receives an annual
compensation of $359,285, which will be increased on November 1, 2008 and
each anniversary date thereafter by the greater of 3% or the last 12 months’
increase in the consumer price index. Mr. Schlenker is entitled to receive
an annual bonus equal to 15% of his base salary for each fiscal year in which
the Company’s actual adjusted EBITDA exceeds by 10% the projected EBITDA. The
annual bonus is increased to 25% of his base salary for each year in which
the
actual adjusted EBITDA exceeds the projected EBITDA by 15%. Prior to the
commencement of the fiscal years 2008 and 2009, Mr.
Schlenker waived this incentive bonus for the fiscal year ended June 30, 2008
and for the fiscal year ending June 30, 2009. In
the
event of a specified change of control of the Company or AETG,
Mr. Schlenker will receive a cash exit bonus equal to 0.5% of the fair
market value of the Company’s common shares on a fully diluted basis as of the
date of such change of control. If the fair market value of all of the
outstanding common stock is equal to or in excess of $50.0 million or $70.0
million, he is entitled to receive a bonus equal to 1.0 or 1.5% of the fair
market value of the Company’s common stock, respectively.
Upon
termination of Mr. Schlenker’s employment for any reason, he will receive health
insurance coverage for a period of 18 months and his cash exit bonus upon a
change of control. In addition, if Mr. Schlenker’s employment is terminated
for any reason other than for cause, as defined in his employment agreement,
due
to death or permanent disability or by Mr. Schlenker without good reason,
as defined in his employment agreement, he will receive severance equal to
six
months of his base salary. The receipt of severance upon termination of Mr.
Schlenker’s employment is contingent upon his delivery of a release in favor of
AETG and the Company. In addition, upon termination of Mr. Schlenker’s
employment for any reason other than for cause for good reason, the Company
will
retain Mr. Schlenker as a consultant for a period of six months and will
pay him his base salary for such six month period.
The
employment agreement also contains covenants governing confidentiality,
non-competition and non-solicitation upon termination of Mr. Schlenker’s
employment. The non-compete continues for a period of 18 months (24 months
if a
majority of the common shares of AETG is then owned by the current shareholders)
following termination of Mr. Schlenker’s employment by AETG and the
Company.
Payments
Upon Change of Control or Upon Termination
As
more
fully described under “—Employment
Agreements.” Messrs.
Gatto and Schlenker are entitled to payments upon a change of control and upon
termination of their employment, however based
on the
fair market value of the Company’s common shares on a fully diluted basis as
of
June 30,2008 there would be no compensation that would be due to Messrs. Gatto and
Schlenker in the event there was a change in control as of June 30,2008.
The
following table sets forth compensation information for our Chief Executive
Officer and the three most highly compensated named executive officers under
"—Directors and Executive Officers."
36
Summary
Compensation Table
Annual Compensation
Name and Principal Position
Fiscal Year
Salary ($)
Bonus ($)
Other Annual
Compensation
($)
All Other
Compensation
($)
Total Compensation
($)
Domenic
Gatto
Chief
Executive Officer and President
2008
2007
2006
664,402
677,897
673,694
—
—
500,000
60,800
60,800
60,800
(1)
(1)
(1)
77,791
—
50,000
(3)
(2)
802,993
738,697
1,234,494
Nathan
Schlenker
Chief
Financial Officer(5)
2008
2007
2006
402,002
387,788
363,825
18,000
18,000
57,500
3,000
3,000
3,000
(4)
(4)
(4)
—
—
—
423,002
408,788
424,325
Jerome
Dente
Chief
Operating Officer, Secretary and Treasurer
2008
2007
2006
166,840
175,602
186,106
71,887
48,119
16,060
9,900
9,900
9,900
(4)
(4)
(4)
—
—
—
248,627
233,621
212,066
Noel
Cabrera
Executive
Vice President
2008
2007
2006
161,824
164,146
156,818
34,167
40,833
27,000
9,900
9,900
9,900
(4)
(4)
(4)
—
—
—
205,890
214,879
193,718
(1)
Includes
$25,800 for automobile allowance and $35,000 for life insurance allowance.
(2)
This
represents a payment of $50,000 in connection with Mr. Gatto
providing a personal guarantee, as required by Wachovia, to support
our
Amended Receivable Agreement in fiscal year
2005.
(3)
This
represents a payment of $77,791 in connection with Mr. Gatto
providing a personal guarantee, as required by a surety company,
to
support required surety bonds for a school district in fiscal year
2008.
(4)
Represents
automobile allowance
(5)
Mr. Schlenker
served as our Chief Financial Officer for most of the time from 1990
through May 2004. He then served as Director of Finance and in April
2006 resumed the duties of Chief Financial Officer.
FISCAL
2008 DIRECTOR COMPENSATION
The
following table shows compensation paid to all directors who are not also
employees during the fiscal year ended June 30, 2008.
Mr.
Draizin receives $5,000 as compensation for every Board of Directors
meeting he attends.
Compensation
Committee Report
We
have
not established a compensation committee or other board committee performing
the
equivalent function. As a result, our Board of Directors reviewed and discussed
the “Compensation Discussion and Analysis” section with management, and has
approved the inclusion of the “Compensation Discussion and Analysis” in this
Annual Report on Form 10-K.
Members
of the Board of Directors
Peter
Frank
Domenic
Gatto
Matthew
Kaufman
Adam
Draizin
37
Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The
following table sets forth information with respect to the beneficial ownership
of the common shares of the Company as of September 26, 2008, held
by:
•
each
person whom we know to beneficially own more than five percent of
our
outstanding common shares;
•
each
of our directors;
•
our
Chief Executive Officer and the other executive officers listed in
the
Summary Compensation Table under ‘‘Executive Compensation—Summary
Compensation Table’’; and
•
all
our directors and executive officers as a
group.
The
persons or entities listed below have sole voting and investment power with
respect to the shares beneficially owned by them. Except as noted, the address
for all persons listed below is: c/o Atlantic Express Transportation
Group, Inc., 7 North Street, Staten Island, NY10302-1205.
All
our directors and executive officers as a group
(6 persons)
—
—
(1) As
of
September 26, 2008, we had 1,052,655 common shares outstanding.
38
The
following table sets forth information with respect to the beneficial ownership
of the common shares of AETG as of September 26, 2008, held by:
•
each
person whom we know to beneficially own more than five percent of
the
outstanding common shares of AETG;
•
each
director of AETG;
•
AETG’s
Chief Executive Officer and the other executive officers listed in
the
Summary Compensation Table under ‘‘Executive Compensation—Summary
Compensation Table’’; and
•
all
directors and executive officers of AETG as a
group.
Our
board
of directors consists of the same members as AETG’s board of directors. The
persons or entities listed below have sole voting and investment power with
respect to the shares beneficially owned by them. Except as noted, the address
for all persons listed below is: c/o Atlantic Express Transportation
Group, Inc., 7 North Street, Staten Island, NY10302-1205.
GSCP
II Holdings (AE), L.L.C. owns 83,776 common shares of AETG, GSC Recovery
II, L.P. owns 18,133 shares and GSC Partners CDO Fund, Limited owns
5,684
shares.
(3)
In
addition, Hare & Co is the holder of 16,000 common shares of the
Company.
39
All
of
the membership interests of GSCP II Holdings (AE), L.L.C. are owned by Greenwich
Street Capital Partners II, L.P., Greenwich Fund, L.P., Greenwich Street
Employees Fund, L.P., TRV Executive Fund, L.P. and GSCP Offshore Fund, L.P.
(collectively, the ‘‘Greenwich Street Funds’’).
Greenwich
Street Investments II, L.L.C. is the general partner and GSCP (NJ), L.P. is
the
manager of the Greenwich Street Funds.
GSC
Recovery II GP, L.P. is the general partner of GSC Recovery II, L.P.
GSC RII, L.L.C. is the managing member of GSC Recovery II GP, L.P. GSCP
(NJ) Holdings, L.P. is the general partner of GSC RII, L.L.C.
GSCP
(NJ), L.P. is the collateral manager of the GSC Partners CDO Fund,
Limited.
GSCP
(NJ), Inc. is the general partner of GSCP (NJ), L.P. and GSCP (NJ) Holdings,
L.P. GSCP (NJ), Inc. is wholly owned by GSC Group, Inc., a Delaware corporation
which also owns substantially all of GSCP (NJ), L.P. and GSCP (NJ), Holdings,
L.P. Alfred C. Eckert III, Richard M. Hayden, Robert F. Cummings, Jr., David
L.
Goret, Robert A. Hamwee, Joseph H. Wender and Andrew J. Wagner are the executive
officers of each of GSC Group, Inc. and GSCP (NJ), Inc.
By
virtue
of each of the above entities’ and individuals’ relationship with GSCP II
Holdings (AE), L.L.C., GSC Recovery II, L.P. and GSC Partners CDO Fund, Limited,
each may be deemed to have shared voting and investment power over, and be
the
indirect beneficial owner of the common shares of AETG owned by GSCP II Holdings
(AE), L.L.C., GSC Recovery II, L.P. and GSC Partners CDO Fund, Limited. Each
of
the above entities and individuals disclaims beneficial ownership of AETG’s
common shares except to the extent of each entity’s and individual’s pecuniary
interest in AETG’s common shares.
Each
of
these entities has an address c/o GSC Group, 12 East 49th Street, Suite 3200,
New York, NY10017.
Item
13. Certain Relationships and Related Transactions.
Receivables
Purchase Agreement Guarantee
On
November 2, 2005the Company entered into the Amended Receivable Agreement
to
sell to Wachovia, without recourse, up to a maximum $8.2 million (previously
$5.9 million) of accounts receivable. Domenic Gatto increased his existing
personal guarantee in full support of the amended receivable agreement and
received an additional $50,000 guarantee fee. The amended receivable agreement
terminated on
May15, 2007, when the Company and substantially all of its subsidiaries amended
and
restated its existing senior credit facility with Wachovia.
The
stockholders agreement prohibits transfers of common shares except (1) to
investors who join the stockholders agreement, (2) in a registered public
offering, (3) pursuant to "Tag-Along Rights," which would require
shareholders to include shares of holders of 10% or greater of common shares
(as
of the effective date of our plan of reorganization), at their option, in the
event of a sale to a third party, (4) pursuant to "Drag-Along Rights,"
which would require shareholders to sell all or part of their common shares
in
the event of a sale by GSC of a majority or more of the issued and outstanding
common shares, and (5) to a financial institution to secure borrowings in a
bona fide pledge.
The
stockholders agreement contains "Preemptive Rights," which allow shareholders
the right to purchase common shares if AETG makes certain sales of common shares
at less than fair market value (as determined by AETG's board of directors),
allowing investors to maintain their respective ownership percentage in AETG.
Corporate
Governance
The
stockholders agreement provides that each shareholder thereto will vote its
common shares towards the election of (i) directors nominated by GSC
constituting a majority of the board so long as GSC is the record holder of
at
least 35% of AETG's common shares, or at least one director nominated by GSC
so
long as GSC is the record holder of at least 10% of AETG's common shares, and
(ii) the Chief Executive Officer of AETG as a director.
40
Minority
Shareholder Protection
AETG
will
not, without prior approval of the holders of a majority of common shares that
is not owned by GSC:
•
redeem
or repurchase any common shares unless each holder of common shares
may
participate on a pro rata basis;
•
pay
dividends on its common shares unless the dividend is paid to all
holders
of common shares on a pro rata basis;
•
with
some exceptions, engage (or permit any subsidiary to engage) in any
transaction with a director, officer or affiliate unless (a) the
transaction is approved by a majority of the directors of AETG who
have no
financial interest in the transaction and (b) such transaction is
fair to AETG from a financial standpoint or on terms comparable to
terms
that would be obtained in an arm's-length transaction; or
•
amend
or modify AETG's charter documents in a way that materially limits
or
conflicts with the terms of the stockholders agreement.
Registration
Rights
The
stockholders agreement also contains registration rights for the common shares.
Shareholders have "Piggyback Registration Rights," which require AETG, if it
proposes to register any of its common shares under the Securities Act of 1933,
as amended in connection with the offering of such shares, to register all
of
the shares of shareholders who request registration. GSC has three "Demand
Registrations" as long as GSC is the record holder of at least 20% of AETG's
common shares. A Demand Registration requires AETG to prepare and file with
the
SEC a registration statement on the appropriate form and maintain the
effectiveness for 180 days or until all shares subject to the Demand
Registration have been sold.
Amendment
The
stockholders agreement may be amended only with the approval of AETG, holders
of
at least 90% of the common shares and GSC (so long as it holds at least 35%
of
AETG's common shares).
Management
Agreements
Upon
the
effectiveness of our plan of reorganization, AETG and the Company entered into
an advisory services agreement, dated December 24, 2003, with
GSCP, Inc., an affiliate of GSC. Under the agreement, GSCP, Inc.
agreed to advise and consult with our boards of directors and management on
certain business, operational and financial matters and provides other advisory
services. The agreement provides that AETG and the Company will pay
GSCP, Inc. an annual fee of $500,000. The Company expensed $400,000,
$400,000 and $500,000 annually for the years ended June 30, 2006, 2007, and
2008, respectively. The balance of the fee was charged to AETG in fiscal years
ended June 30, 2006 and 2007. The advisory services agreement terminates when
GSC ceases to own any common shares issued upon the effectiveness of the plan
of
reorganization.
On
February 10, 2004, we entered into a management agreement with Atlantic
Transit II Corp. ("ATC") and Atlantic School Bus Corp. ("ASBC"), subsidiaries
of
AETG. Under the agreement, we provide certain administrative services on behalf
of ATC and ASBC and their affiliates. The agreement provides that ASBC will
pay
us a monthly fee of $30 per route vehicle for which we provide administrative
services. The agreement continues until either ATC or the Company elects to
terminate it. Under this agreement, the Company earned $56,250, $4,710 and
$0
for the years ended June 30, 2006, 2007 and 2008, respectively. The
assets of ASBC were sold in July 2006, and this agreement has been
terminated.
Tax
Sharing Agreement
AETG
and
its subsidiaries, including the Company, entered into a tax sharing agreement,
dated December 22, 2000, that provides for a consolidated filing of federal
income tax and allocates federal tax liabilities.
Review
of Transactions with Related Parties
The
Company does not have a written policy regarding the review, approval and
ratification of transactions with related parties. Instead, as a general matter,
the Company’s Board of Directors and management review and approve all material
transactions with related parties. Such review is conducted in order to, among
other things, insure that such transactions comply with the terms of the
stockholders agreement, the indenture governing the notes and our Amended and
Restated Credit Facility (and previously, the terms of the indentures governing
our previously outstanding notes and our prior senior credit facilities), each
of which contain covenants prohibiting transactions with our officers, directors
and affiliates if certain requirements are not met. In addition, the
stockholders agreement and the management agreement with GSCP, Inc. were entered
into pursuant to our plan of reorganization, as approved by the United States
Bankruptcy Court.
41
Item
14. Principal Accounting Fees and Services.
The
following table sets forth the aggregate fees billed by BDO Seidman for
professional services rendered to the Company for the audit of the Company's
annual financial statements for the fiscal years ended June 30, 2007 and 2008,
for the reviews of the financial statements included in the Company's Quarterly
Reports on Form 10-Q for those fiscal years, and for other services rendered
on
behalf of the Company during those fiscal years. All of such fees were
pre-approved by the Company’s Board of Directors.
Fiscal year 2007
Fiscal year 2008
Audit
Fees
$
555,925
$
408,800
Audit
Related Fees
—
—
Tax
Fees
—
—
All
Other Fees
—
—
42
Part
IV
Item
15. Exhibits, Financial Statement Schedules.
(a)
1.
Financial statements filed in item 8 of this Form 10-K.
Indenture,
dated May 15, 2008, relating to the Senior Secured Floating Notes
due
2012, among the Company, the guarantors party thereto and The Bank
of New
York, as trustee and collateral agent, including the form of the
note
(incorporated herein by reference to Exhibit 4.1 to Atlantic Express
Transportation Corp.'s Registration Statement on Form S-4, File
No. 333-144249).
Security
Agreement, dated May 15, 2008, among the Company, the guarantors
party
thereto and The Bank of New York, as collateral agent (incorporated
herein
by reference to Exhibit 4.3 to Atlantic Express Transportation
Corp.'s Registration Statement on Form S-4, File
No. 333-144249).
4.4
Intercreditor
Agreement, dated May 15, 2008, among the Company, the guarantors
party
thereto, The Bank of New York, as collateral agent, and Wachovia
Bank,
National Association (incorporated by reference to Exhibit 4.4 of the
Atlantic Express Transportation Corp.'s Registration Statement on
Form S-4, File No. 333-144249).
10.1
Third
Amended and Restated Loan and Security Agreement, dated May 15, 2008
(incorporated herein by reference to Exhibit 10.1 to Atlantic Express
Transportation Corp.'s Registration Statement on Form S-4, File
No. 333- 144249).
10.2
Fifth
Amended and Restated Employment Agreement, dated April 18, 2008,
among,
Atlantic Express Transportation Group Inc., the Company and Domenic
Gatto (incorporated herein by reference to Exhibit 10.1 to Atlantic
Express Transportation Corp.'s Current Report of Form 8-K, filed
with the
SEC on April 24, 2008, File No. 000-24247).
10.3
Fifth
Amended and Restated Employment Agreement, dated April 18, 2008,
among,
Atlantic Express Transportation Group Inc., the Company and Nathan
Schlenker (incorporated herein by reference to Exhibit 10.2 to
Atlantic Express Transportation Corp.'s Current
Report of Form 8-K, filed with the SEC on April 24, 2008, File
No. 000-24247).
10.4
Retention
Agreement, dated December 24, 2003, between Atlantic Express
Transportation Group Inc. and Peter Frank (incorporated herein by
reference to Exhibit 10.4 to Atlantic Express Transportation Corp.'s
Registration Statement on Form S-4, File
No. 333-116749).
10.5
Advisory
Services Agreement, dated December 24, 2003, among Atlantic Express
Transportation Group Inc., the Company and GSCP, Inc.
(incorporated herein by reference to Exhibit 10.6 to Atlantic Express
Transportation Corp.'s Registration Statement on Form S-4, File
No. 333-116749).
10.6
Stockholders
Agreement, dated as of December 24, 2003, between Atlantic Express
Transportation Group Inc. and its stockholders (incorporated herein
by reference to Exhibit 10.7 to Atlantic Express Transportation
Corp.'s Registration Statement on Form S-4, File
No. 333-116749).
10.7
The
Board of Education of the City of New York, serial no. 0070, dated
July 19, 1979 (incorporated by reference to Exhibit 10.12 of the
Company's Annual Report on Form 10-K, filed with the SEC on
October 15, 1997, File No. 333-25507).
Extension
and Thirteenth Amendment of Contract for Special Education Pupil
Transportation Services by and among The Board of Education of the
City of
New York, Amboy Bus Co., Inc. and Staten Island Bus, Inc.
(incorporated by reference to Exhibit 10.9 of the Atlantic Express
Transportation Corp.'s Registration Statement on Form S-4, File
No. 333-144249).
43
10.10
The
Board of Education of the City of New York, serial no. 9888 by and
between The Board of Education of the City of New York and Amboy
Bus
Co., Inc. (incorporated by reference to Exhibit 10.15 of the
Company's Annual Report on Form 10-K, filed with the SEC on
October 15, 1997, File No. 333-25507).
10.11
Extension
and Eleventh Amendment of Contract for Regular Education Pupil
Transportation Services, by and between The Board of Education of
the City
of New York and Amboy Bus Co., Inc. and Atlantic Queens Bus Corp.
(incorporated by reference to Exhibit 10.11 of the Atlantic Express
Transportation Corp.'s Registration Statement on Form S-4, File
No. 333-144249).
10.12
New
York City Transit Authority Contract #00D7815B, dated July 2001,
by and
between New York City Transit Authority and Atlantic Paratrans, Inc.
(incorporated herein by reference to Exhibit 10.14 to Atlantic
Express Transportation Corp.'s Registration Statement on Form S-4,
File No. 333-116749).
10.13
Tax
Sharing Agreement, dated as of December 22, 2000, between Atlantic
Express Transportation Group Inc. and the Company (incorporated
herein by reference to Exhibit 10.15 to Atlantic Express
Transportation Corp.'s Registration Statement on Form S-4, File
No. 333-116749).
10.14
Amendment
No.1 to Third Amended and Restated Loan and Security Agreement, dated
as
of January 1, 2008 (incorporated by reference to Exhibit 10.1 of
Atlantic
Express Transportation Corp.’s Quarterly Report, filed with the SEC on May14, 2008, File No. 000-24247).
10.15
Amendment
No. 2 to Third Amended and Restated Loan and Security Agreement,
dated as
of August 28, 2008.
(incorporated
by reference to Exhibit 10.1 of Atlantic Express Transportation Corp.’s
Current Report of Form 8-K, filed with the SEC on September 3, 2008,
File
No. 000-24247).
10.16*
Amendment
No. 3 to Third Amended and Restated Loan and Security Agreement,
dated as
of September 25, 2008.
Certification
of Chief Executive Office pursuant to Rule
13a-14/15d-14(a).
31.2*
Certification
of Chief Financial Officer pursuant to Rule
13a-14/15d-14(a).
32.1*
Certification
of Chief Executive Office pursuant to Section 1350
32.2*
Certification
of Chief Financial Officer pursuant to Section
1350
*
Filed
herewith
44
ATLANTIC
EXPRESS TRANSPORTATION CORP.
TABLE
OF CONTENTS
Page
Report
of Independent Registered Public Accounting Firm
F-2
Consolidated
Balance Sheets
F-3
Consolidated
Statements of Operations
F-4
Consolidated
Statements of Shareholders’ Equity (Deficit)
F-5
Consolidated
Statements of Cash Flows
F-6
Notes
to Consolidated Financial Statements
F-8
F-1
Report
of Independent Registered Public Accounting Firm
Board
of
Directors
Atlantic
Express Transportation Corp.
Staten
Island, New York
We
have
audited the accompanying consolidated balance sheets of Atlantic Express
Transportation Corp. and Subsidiaries as of June 30, 2007 and 2008 and the
related consolidated statements of operations, shareholders’ equity (deficit),
and cash flows for each of the three years in the period ended June 30, 2008.
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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits include 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, 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 consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Atlantic Express
Transportation Corp. and Subsidiaries at June 30, 2007 and 2008, the
results of their operations and their cash flows for each of the three years
in
the period ended June 30, 2008 in conformity with accounting principles
generally accepted in the United States of America.
Proceeds
from (payments to) Amended and Restated Credit Facility
(1,653,051
)
(14,727,909
)
2,924,483
Payment
of senior unsecured notes
—
(4,900,000
)
—
Payment
of third priority senior secured notes
—
(15,480,506
)
—
Distribution
to parent company
(110,000
)
(115,000
)
(150,000
)
Payment
of letter of credit advance
—
(3,500,000
)
—
Principal
payments on borrowings and capital lease obligations
(3,314,360
)
(2,697,658
)
(2,400,437
)
Deferred
financing costs
(307,262
)
(7,776,030
)
(96,222
)
Net
cash provided by (used in) financing activities
(484,673
)
16,762,897
278,694
Net
increase (decrease) in cash and cash equivalents
(6,333,690
)
6,380,567
(4,199,086
)
Cash
and cash equivalents, beginning of year
6,834,961
501,271
6,881,838
Cash
and cash equivalents, end of period
$
501,271
$
6,881,838
$
2,682,752
Supplemental
disclosures on cash flow information:
Cash
paid during the period for:
Interest
$
20,468,888
$
27,572,904
$
22,853,230
Income
taxes
$
236,467
$
145,621
$
91,501
Supplemental
disclosure of non-cash financing activities:
Trade-in
value of vehicles exchanged
$
—
$
—
$
980,000
Acquisition
cost of vehicles exchanged
$
—
$
—
$
675,006
Loans
incurred for purchases of vehicles
$
461,510
$
590,528
$
206,623
Conversion
of PIK interest into debt
$
—
$
1,577,037
$
—
See
accompanying Notes.
F-7
Atlantic
Express Transportation Corp. and Subsidiaries
Notes
to Consolidated Financial Statements
1.
Business
Atlantic
Express Transportation Corp. ("AETC" or the "Company"), a subsidiary of Atlantic
Express Transportation Group Inc. ("AETG"), is one of the largest providers
of school bus transportation in the United States, providing services currently
to various municipalities in New York, Missouri, Massachusetts, California,
Pennsylvania, New Jersey and Illinois. In addition to its school bus
transportation operations, AETC also provides services to a public transit
system for physically or mentally challenged passengers, fixed route transit,
express commuter line charter and tour services. Since 1998, GSC NJ through
its
affiliate Greenwich Street Capital ("GSC") has been the majority holder of
AETG.
2.
Summary
of Significant Accounting
Policies
Basis
of Presentation
The
consolidated financial statements include the accounts of AETC and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
Use
of Estimates
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires
management to make judgments, estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amount
of
revenues and expenses and the accompanying notes. Actual results could differ
from those estimates.
The
Company bases its estimates and judgments on historical experience and on
various other assumptions that it believes are reasonable under the
circumstances. Amounts reported based upon these assumptions, include but are
not limited to property, plant and equipment, transportation contract rights,
insurance reserves, allowance for doubtful accounts, income taxes, revenues
and
other long-lived assets.
Revenue
Recognition
Revenues
from school bus and paratransit and transit operations are recognized when
services are provided. The Company bills customers on a monthly basis based
upon
the completion of bus routes to all school bus customers and service hours
completed to all paratransit customers, which in most cases are based upon
contracts with customers.
Cash
Equivalents
Cash
equivalents consist of short-term, highly liquid investments with maturities
of
90 days or less when purchased, which are readily convertible into
cash.
Inventories
Inventories
primarily consist of fuel, parts and supplies, which are valued at the lower
of
cost or market value. Cost is determined using the first-in, first-out
method.
Property,
Plant and Equipment
Property,
plant and equipment are stated at cost and depreciated utilizing the
straight-line method over the lives of the related assets. The useful lives
of
property, plant and equipment for purposes of computing depreciation are as
follows:
Years
Building
and improvements
10 - 31.5
Transportation
equipment
5 - 15
Other
3 - 7
Maintenance
costs are expensed as incurred and renewals and improvements are
capitalized.
F-8
Long-Lived
Assets
Long-lived
assets, such as intangible assets and property, plant and equipment, are
evaluated for impairment when events or changes in circumstances indicate that
the carrying amounts of the assets may not be recoverable through the estimated
undiscounted future cash flows from the use of these assets. When any such
impairment exists, the related assets will be written down to their fair value.
Based upon proceeds from auction sales of vehicles and offers to purchase assets
or sale of assets of certain of the Company’s operations the Company recorded
impairment charges of $5,738,676 for the fiscal year ended June 30, 2006. These
charges are included in depreciation and amortization on the Consolidated
Statements of Operations and shown separately on the Consolidated Statements
of
Cash Flows.
Transportation
contract rights primarily represent the value the Company assigned to the cost
of investments in certain of our school bus subsidiaries in excess of the book
value of the companies acquired. In addition, AETC has purchased from unrelated
third parties certain transportation contract rights with respect to revenue
contracts and travel routes. Using earnings before interest, income taxes,
depreciation and amortization (“EBITDA”) as a measurement tool, the Company
reviews the financial performance of its subsidiary bus companies that have
transportation contract rights, at least annually. If this review indicates
that
the transportation contract rights are likely to be impaired in value, the
Company projects the future undiscounted cash flows attributable to such
subsidiary bus company and compares it to the carrying value of the
transportation contract rights assets. The major impacts to the future
undiscounted cash flows are either a reduction of service requirements (e.g.,
routes) that decrease revenue, an increase in costs and expenses at a rate
greater than the corresponding contractual revenue increase, or a combination
of
both factors. If this comparison indicates that the future undiscounted cash
flows attributable to the underlying assets are unlikely to exceed the carrying
value of the transportation contract rights, an impairment charge is taken
based
on the difference between the estimated future cash flows, determined to be
the
estimated fair value, and the carrying value of the transportation contract
rights. Using this methodology, it was determined that an impairment charge
of
$267,958 for the fiscal year ended June 30, 2008, was necessary to adjust
the transportation contract rights to fair value. The impairment charge in
the
fiscal year ended June 30, 2008 was in a subsidiary bus company in New
Jersey. There was no impairment charges for the fiscal years ended June 30,2006
and June 30, 2007.
Transportation
contract rights are amortized on a straight-line basis over a 12 year period,
which represents the Company's estimate of the average length of the contracts
and expected renewal periods.
Transportation
contract rights are comprised of the following:
Deferred
financing costs of $7.7 million which were incurred in connection with the
issuance of the $185,000,000
Senior Secured Floating Rate Notes due 2012 (the “Notes”)
and the
Amended and Restated Credit Facility are amortized on a straight-line basis,
which approximates the effective interest rate method, over the term of the
financing to which the costs relate, which range from 55.5 to 59 months.
Unamortized deferred financing costs of $2.9 million associated with the
$105,000,000
million 12% Senior Secured Notes due 2008 and $10,000,000 million Senior Secured
Floating Rate Notes due 2008 (collectively
the “Old Notes”)
and the
previous senior credit facility were expensed in May 2007. These charges are
included in interest expense on the Consolidated Statements of
Operations.
F-9
Insurance
Coverage and Reserves
The
majority of the Company’s primary automobile coverage ($1 million per
occurrence) and all of the Company’s workers compensation insurance coverage
(except for one subsidiary which has “First Dollar” coverage) is administered
through a third party insurance company. The Company funds, through monthly
installments, loss funds specified by the insurance company, plus fronting
charges. These loss funds are used to pay up to the first $500,000 of each
loss;
operating costs are charged and prepaid assets are reduced by estimated claim
losses and fronting charges. The charges are based upon estimated ultimate
liability related to these claims and differ from period to period due to claim
payments, and settlement practices as well as changes in development factors
due
to the assumed future cost increases and discount rates. On a quarterly basis,
the Company receives from the insurance company estimates of selected ultimate
losses that are based on actuarial analysis. Charges to operations are then
adjusted to reflect these calculations.
For
the
years ended June 30, 2006, 2007 and 2008the Company recorded adjustments
related to expenses (income) changes in prior years claims estimates to its
insurance expense as follows:
Prior
to
the year ended June 30, 2002, the Company self insured its deductibles and
recorded reserves for these deductibles based upon estimated ultimate claim
losses, including those incurred but not reported. Reserve requirements at
June30, 2008 in relation to these deductibles were $0.8 million.
Income
Taxes
AETC
follows the liability method under Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes." The primary objectives of
accounting for taxes under SFAS No. 109 are to (a) recognize the
amount of tax payable for the current year and (b) recognize the amount of
deferred tax liability or asset for the future tax consequences attributable
to
temporary differences between the financial statements' carrying amounts of
existing assets and liabilities and their respective tax bases and of events
that have been reflected in AETC's financial statements or tax returns. When
the
realization of a deferred tax asset is not considered to be more likely than
not, a valuation allowance is recorded against that deferred tax
asset.
AETC
files consolidated federal, state and local income tax returns with its parent
and affiliates. The income tax charge or benefits allocated to AETC is based
upon an allocation method determined by the group under a tax sharing agreement.
The balance identified as deferred tax assets and liabilities can, in substance,
be considered the equivalent to amounts due from and due to this affiliated
group based upon the application of this method.
Fair
Value of Financial Instruments
The
carrying value of financial instruments including cash and cash equivalents,
accounts receivable including retainage, accounts payable, and short term debt
approximated their fair value as of June 30, 2007 and 2008, due to either
their short maturity or terms similar to those available to similar companies
in
the open market. At June 30, 2008, the fair value of the Company's Notes
was approximately $82.8 million (based upon trade closest to year end
received from the underwriter) compared to the carrying value of
$185.0 million (before original issue discount). At June 30, 2007, the
fair value of the Company's Notes was approximately $187.8 million (based
upon trade closest to year end received from the underwriter) compared to the
carrying value of $185.0 million (before original issue
discount).
F-10
Interest
Rate Swap
Effective
as of May 15, 2007, we entered into an interest swap agreement (the “Swap”) to
reduce our exposure to interest rate fluctuations on our notes, which bear
interest at LIBOR plus a margin of 7.25%. The Swap has a notional amount of
$185
million with a fixed rate of 5.21% thereby effectively converting the floating
rate notes to a fixed rate obligation of 12.46%. The Swap will expire in April15, 2010. On the interest payment dates of the notes, the difference between
LIBOR and 5.21% will be settled in cash. In accordance with SFAS No. 133,
Accounting
for Derivative Instruments and Hedging Activities
the Swap
does not qualify for "Cash Flow Hedge Accounting" treatment since the
documentation of the accounting treatment was not done contemporaneously with
entering into the agreement. The change in the fair market value of the Swap
of
$(461,786) is reflected as a reduction of interest expense and $6,247,854 is
reflected as an increase of interest expense at June 30, 2007 and 2008,
respectively.
Recent
Accounting Pronouncements
In
June
2006, the FASB issued Interpretation 48, “Accounting
for Uncertainty in Income Taxes – an Interpretation of FASB Statement No.
109”
(“FIN
48”). FIN 48 prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken
or
expected to be taken in a tax return. FIN 48 was effective for the fiscal year
ended June 30, 2008 year for positions for which it is reasonably possible
that
the total amounts of unrecognized tax benefits will significantly increase
or
decrease within 12 months of the reporting date. The Company has assessed the
impact of FIN 48 and it did not have a material effect on its consolidated
financial statements.
In
September 2006, the FASB issued SFAS No. 157, Fair
Value Measurements,
which
defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS No. 157 does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing
a
fair value hierarchy used to classify the source of the information. This
statement is effective for us for the fiscal year beginning July 1, 2008.
We currently believe that adoption of SFAS No. 157 will not have a material
impact on our financial statements.
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities.
SFAS
No. 159 gives us the irrevocable option to carry many financial assets and
liabilities at fair values, with changes in fair value recognized in earnings.
This statement is effective for us for the fiscal year beginning July 1,2008. We currently believe that adoption of SFAS No. 159 will not have a
material impact on our financial statements.
In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
2007), Business
Combinations,
which
replaces SFAS No. 141. The statement retains the purchase method of accounting
for acquisitions, but requires a number of changes, including changes in the
way
assets and liabilities are recognized in the purchase accounting. It also
changes the recognition of assets acquired and liabilities assumed arising
from
contingencies, requires the capitalization of in-process research and
development at fair value, and requires the expensing of acquisition-related
costs as incurred. SFAS No. 141R is effective for us beginning July 1,2009 and will apply prospectively to business combinations completed on or
after
that date.
In
March
2008, the FASB issued Statement of Financial Accounting Standards (“SFAS”)
No. 161, Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133, which
requires additional disclosures about the objectives of the derivative
instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a
tabular disclosure of the effects of such instruments and related hedged items
on our financial position, financial performance, and cash flows. SFAS
No. 161 is effective for us beginning January 1, 2009. We are
currently assessing the potential impact that adoption of SFAS No. 161 may
have on our financial statements.
3.
Retainage
Pursuant
to a certain municipal school bus contract and paratransit contract, certain
contractual amounts (retainage) are withheld by customers from billings as
a
guarantee of performance by AETC. At June 30, 2007 and at June 30, 2008
retainage was $2,458,848 and $1,916,667, respectively. These amounts are
classified as current accounts receivable, as they are normally paid within
one
year.
F-11
4.
Restricted
Cash and Cash Equivalents
Restricted
cash and cash equivalents of $675,642 at June 30, 2007 was pledged as collateral
security for letters of credit outstanding in the amount of $643,851 as of
June30, 2007.
5.
Property,
Plant and Equipment
Property,
plant and equipment consists of the following:
Transportation
equipment acquired under capital leases
10,360,898
10,360,898
Machinery
and equipment
38,949,049
39,302,913
Furniture
and fixtures
5,101,648
5,756,705
276,620,255
276,763,053
Less
accumulated depreciation
(184,638,193
)
(193,720,744
)
$
91,982,062
$
83,042,309
Based
upon proceeds from auction sales of vehicles and offers to purchase or sale
of
assets of certain of the Company’s operations the Company has taken impairment
losses of $5.7 million in 2006, to write down these assets to their estimated
fair value. This loss has been included in depreciation and amortization on
the
Consolidated Statement of Operations.
Accumulated
depreciation of assets under capital leases was $2,659,832 and $3,450,138 as
of
June 30, 2007, and June 30, 2008, respectively.
6.
Accounts
Payable, Accrued Expenses and Other Liabilities
Accounts
payable, accrued expenses and other liabilities consist of the
following:
On
May 15, 2007the Company issued the Notes with an original issue
discount
of $2,775,000, which is being amortized over the term of the Notes.
The
net proceeds of the Notes were used to repay existing indebtedness
and for
certain other corporate purposes.
Annual
interest on the Notes is equal to the applicable LIBOR rate plus a margin of
7.25%. The applicable LIBOR rate on June 30, 2008 was 2.68%. Interest payments
that are required semiannually through their maturity date on April 15, 2012
commenced on October 15, 2007. Effective as of May 15, 2007, we entered into
the
Swap to reduce our exposure to interest rate fluctuations on the Notes.
(see
Note
2)
In
connection with the issuance of the Notes, the Company incurred $6.8 million
of
transaction costs that are being amortized on a straight-line basis over the
term of the financing.
The
indenture governing the Notes provides for optional redemption and contains
covenants typical of such arrangements including incurrence of additional
indebtedness.
The
Notes
are unconditionally guaranteed on a senior secured basis by each of the
Company’s existing and future domestic subsidiaries that are not unrestricted
domestic subsidiaries, other than certain immaterial subsidiaries. The Notes
and
the guarantees rank senior in right of payment to all of the Company’s
subordinated indebtedness and equal in right of payment with all of the
Company’s other senior indebtedness.
The
Notes
and the guarantees are secured by a first priority lien on all but one of the
Company’s and the Company’s guarantor subsidiaries’ owned real properties and
hereafter acquired real properties and on substantially all of the Company’s and
the Company’s guarantor subsidiaries’ owned motor vehicles, other than those
constituting excluded assets, and by a second priority lien on those of the
Company’s assets and the assets of the Company’s guarantor subsidiaries which
secure the Company’s and their obligations under the Company’s amended revolving
credit facility (the “Amended and Restated Credit Facility”) on a first priority
basis.
On
July13, 2007 an exchange offer was completed and the Notes were registered with
the
SEC.
(b)
Concurrently
with the issuance of the Notes, the Company and substantially all
of its
subsidiaries also amended and restated its existing senior credit
facility
with Wachovia to provide up to $35.0 million of borrowing availability
under a revolving credit facility, subject to customary borrowing
conditions, plus a $10.0 million letter of credit facility. The Amended
and Restated Credit Facility is secured by a first priority lien
on
substantially all of the Company’s and its subsidiaries’ assets, other
than collateral securing the Notes on a first priority basis, and
by a
second priority lien on the real property securing the Notes on a
first
priority basis. In addition, the term of the credit facility was
extended
to December 31, 2011. The Amended and Restated Credit Facility contains
certain financial covenants, including a minimum last twelve month
(“LTM”)
EBITDA covenant of $26.0 million, which will only be tested if excess
availability falls below certain levels. The Company’s LTM EBITDA was
$18.3 million as of June 30, 2008, however the Company has maintained
an
availability over the required threshold and therefore was not subject
to
the test for the periods ended June 30, 2008 or through September26,2008. The Amended and Restated Credit Facility also contains customary
events of default.
F-13
The
borrowing capacity under the Amended and Restated Credit Facility is based
upon
85% of the net amount of eligible accounts receivable less reserves. Loans
under
the facility bear interest at the prime rate which was 5% at June 30, 2008.
Letters of credit are subject to a fee of 1% per annum payable monthly in
arrears and any amounts paid by lenders for letters of credit will bear the
same
rate as loans under our revolving facility. The Company paid a closing fee
of
$400,000 which is being amortized over the term of the financing and is required
to pay a servicing fee of $10,000 per month, plus a monthly fee of 0.5% on
any
unused portion of its Amended and Restated Credit Facility.
At
June30, 2008, the Company’s debt under its $35.0 million Amended and Restated Credit
Facility was approximately $6.0 million, and it had $13.2 million of borrowing
availability after $6.8 million of reserves, based on the Company’s borrowing
base calculations.
Our
obligation under the Swap is secured by the collateral securing our Amended
and
Restated Credit Facility and in connection there with total reserves of
approximately $6.8 million, $6.7 million, $7.4 million and $7.8 million for
June
2008, July 2008, August 2008 and September 2008, respectively, were established
against our borrowing base. In February 2008, our senior credit facility
was
amended to change the calculation of the borrowing base for the purpose of
the
calculation of excess availability, solely in relation to testing the EBITDA
covenant, to exclude the first $5.0 million of reserves established in
connection with our Swap. This change is effective until February 15, 2009.
Until August 28, 2008, excess availability was required to be at least $5.0
million at all times during the period from July 1 to August 31 of any year,
and
$8.0 million for the balance of the fiscal year. As of August 28, 2008 the
senior credit facility was amended to extend the period where excess
availability required is $5.0 million from August 31 of any year to September
15
of any year. As of September 25, 2008, the senior credit facility was further
amended such that the excess availability requirement is as follows: (i)
$5,000,000 at all times during the period from July 1, 2008 to September15,2008, (ii) $8,000,000 at all times during the period from September 16,2008 to September 30, 2008, (iii) $4,500,000 at all times during the period
from October 1, 2008 to July 31, 2009, (iv) $4,000,000 at all times during
the
period from August 1, 2009 to September 15, 2009, (v) $4,500,000 at all times
during the period from September 16, 2009 to November 1, 2009,
(vi) $8,000,000 at all times during the period from November 2, 2009
to June 30, 2010, (vii) $5,000,000 at all times during the period from July
1 to September 15 of any year (commencing in 2010), and (viii) $8,000,000
at all times during the period from September 16 of any year (commencing
in
2010) through June 30 of the immediately following year. Based upon these
amendments, the Company did not need to test the EBITDA covenant through
September 26, 2008. If this reserve increases it may have an adverse effect
on
the Company’s liquidity, whereby the Company might have to pursue additional
funding alternatives including the sale of certain assets or operations to
satisfy our liquidity requirements.
LTM
EBITDA was $18.3 million as of June 30, 2008 and we expect LTM EBITDA
to
be below $26.0 million for the next twelve months. If our excess
availability for the purpose of testing the EBITDA covenant (see
Note 2)
falls below certain levels, this will generate a default under our
Amended
and Restated Credit Facility and under certain circumstances cause
a cross
default under the Notes. Although the Company believes that it would
be
able to receive a waiver of this default from Wachovia, there can
be no
assurance that this is the case or what the cost to the Company might
be.
If the Company would not be able to receive a waiver, then the amount
of
the Amended and Restated Credit Facility would be reclassified to
a
short-term liability.
Aggregate
yearly maturities of long-term debt based upon payment terms as of June 30,2008, are as follows:
2009
$
766,232
2010
732,446
2011
273,095
2012
191,442,939
2013
62,570
Thereafter
94,848
Subtotal
193,372,130
Less:
unamortized original issue discount
2,140,041
$
191,232,089
F-14
8.
Obligations
Under Capital Leases
Assets
under these leases aggregated $10,360,898. Payment terms range from 60 to
72 months, with skip payments in July, August and September each year, with
interest added to the debt in the same months.
Future
annual lease payments under capital lease obligations as of June 30, 2008
are as follows:
2009
$
1,600,811
2010
195,825
2011
101,978
Total
1,898,614
Amount
representing interest
173,078
Present
value of future minimum lease payments
1,725,536
Current
portion of capital lease obligations
1,463,690
Capital
lease obligations, net of current portion
$
261,846
Aggregate
maturities under capital lease obligations based upon payment terms as of
June 30, 2008 are as follows:
2009
$
1,463,690
2010
166,809
2011
95,037
Total
$
1,725,536
9.
Income
Taxes
The
benefit from (provision for) income taxes consists of the
following:
The
Company had available, at June 30, 2008, net operating loss ("NOL") carry
forwards for regular federal tax purposes of approximately $184 million (after
the reduction described below) which expire during the years 2012 through 2027.
As described in Note 3, on December 24, 2003, the Company's plan of
reorganization became effective and the Company emerged from bankruptcy
protection. As a result of the reorganization, for federal and state income
tax
purposes, approximately $92.8 million of indebtedness was considered
cancelled. The cancellation and related transactions resulted in a reduction
of
its available net operating loss carry forwards of approximately
$39.3 million, capital loss carry forwards of approximately
$1.8 million and tax basis of its depreciable assets of $15.1 million
and non-depreciable assets of $22.4 million. Further, should a change in
ownership, as defined in Section 382 of the Internal Revenue Code occur,
the Company's ability to utilize its remaining NOL in future years could be
significantly limited.
10.
Related
Party Transactions
Upon
the
effectiveness of the Company’s plan of reorganization on December 24, 2003,
AETG and AETC entered into a management services agreement, with
GSCP, Inc., an affiliate of GSC, a principal stockholder of the AETG. Under
the agreement, GSCP, Inc. agrees to advise and consult with our Board of
Directors and management on certain business, operational and financial matters
and provides other advisory services. The agreement provides that AETG and
AETC
will pay to GSCP, Inc. an annual fee of $500,000 for such services. The
management services agreement terminates when GSC ceases to own any shares
of
common stock. The Company incurred advisory costs of $400,000 for the years
ended June 30, 2006 and 2007 and $500,000 for the year ended June 30,2008.
On
February 10, 2004, the Company entered into a management agreement with
Atlantic Transit II Corp. ("ATC") and Atlantic School Bus Corp. ("ASBC"),
subsidiaries of AETG. Under the agreement, the Company provided certain
administrative services on behalf of ATC and ASBC. The agreement provided that
ASBC will pay the Company a monthly fee of $30 per route vehicle. For the years
ended June 30, 2006, 2007 and 2008the company earned $56,520, $4,710 and
$0, respectively. The assets of ASBC were sold in July of 2006 and this
agreement has been terminated.
In
connection with the Company entering into a Accounts Receivable Purchase and
Sale Agreement with Wachovia, as amended, the President and Chief Executive
Officer of the Company provided a personal guarantee in full support of the
agreement, as required by Wachovia, for which he received guarantee fees
totaling $175,000.
The
amended receivable agreement terminated on
May15, 2007, when the Company amended and restated its existing senior credit
facility with Wachovia.
AETC
incurred a $50,000 fee for the year ended June 30, 2007 in connection with
the
guarantee issued by an affiliate for a surety bond.
F-16
11.
Equity
In
May
2008, we issued 87,030 common shares, representing 8.4% of our then outstanding
common shares, pursuant to the timely exercise of warrants which had been issued
in connection with our previously outstanding 12% Senior Secured Notes due
2008
and Senior Secured Floating Rate Notes due 2008, and received aggregate proceeds
of $870.30 as exercise price of such warrants. In July 2008, we issued 20,362
common shares pursuant to the exercise of warrants which had been issued in
connection with our previously outstanding third priority senior secured notes,
and received aggregate proceeds of $203.62 as exercise price of such
warrants.
12.
Commitments
and Contingencies Leases
Minimum
rental commitments as of June 30, 2008 for non-cancelable equipment and
real property operating leases are as follows:
Total
rental charges amounted to $16,009,791, $22,884,222, and $23,379,357 for the
years ended June 30, 2006, 2007 and 2008, respectively.
In
May
2007, the Company bought out $12.1 million of vehicle operating leases.
Litigation
The
Company is a defendant with respect to various claims involving accidents and
other issues arising in the normal conduct of its business. Management and
counsel believe the ultimate resolution of these matters will not have a
material impact on the financial position or results of operations of AETC.
There are various claims, which are insured under an automobile insurance policy
issued by Reliance National Indemnity Company ("Reliance") for the period
February 28, 1997 through December 31, 1998. Reliance is insolvent and
as such the New York Public Motor Vehicle Liability Fund is required to provide
coverage on claims arising in New York in lieu of Reliance. In May 2002,
the New York State Insurance Department Liquidation Bureau notified the Company
that this fund is financially strained and will be unable to provide defense
or
indemnification for claims, which arose during the Reliance policy period.
The
Company has commenced an action against the Superintendent of Insurance of
New
York to compel him to provide coverage, however, any related claims will be
settled under the liabilities subject to compromise as a result of the
reorganization.
Environmental
The
Company is aware that certain properties and facilities it owns or operates
may
be subject to environmental remediation in the future due to the potential
impact of asbestos contaminating material and offsite issues such as leaking
underground storage tanks or previous or current industrial operations. In
addition, the Company has received notices of violations and potential
violations related to certain environmental matters. The Company hired an
environmental consultant, who completed Phase I Environmental Site Assessments
on approximately seven of the Company's properties. Based upon the reports
of
the environmental consultant, the Company believes that any penalty or
remediation cost would not be material. In addition, the Company has recently
settled two environmental claims for immaterial amounts. As a result, management
and counsel do not believe that the penalties, if any, will be material.
Outstanding
Letters of Credit
Letters
of credit totaling approximately $9.3 million related to the collateralization
of self insurance deductibles, worker's compensation insurance and automobile
liability insurance loss funds and vehicle leases were outstanding as of
June 30, 2007 and 2008, respectively.
F-17
Performance
Security
AETC's
transportation contracts generally provide for performance security in one
or
more of the following forms: performance bonds, letters of credit or cash
retainages.
In
most
instances, AETC has opted to satisfy its security performance requirements
by
posting performance bonds. At June 30, 2007 and 2008 AETC has provided
performance bonds aggregating approximately $33.9 million and $32.1
million, respectively.
Employment
Agreements
At
June30, 2008, AETC has employment agreements with certain executives that require
base salary payments of $803,565 and $317,253 in fiscal years 2009 and 2010,
respectively.
Under
an
employment agreement dated April 18, 2007 with an executive, that executive
receives in the event of a specified change of control of AETG or the Company,
a
cash exit bonus equal to 1.5% to 3.0% of the fair market value of the Company’s
common shares on a fully diluted basis as of the date of such change of control.
The exit bonus remains due and payable in the event a change in control occurs
after the executive leaves the Company. There was no exit bonus accrued as
of
June 30, 2008.
The
same
executive received a performance bonus of $500,000 for 2006, in connection
with
the new New York City Department of Education (the “DOE”) extension
agreement.
Under
an
employment agreement dated April 18, 2007 with another executive, that executive
receives in the event of a specified change of control of AETG or the Company,
a
cash exit bonus equal to 1.5% to 3.0% of the
fair
market value of the Company’s common shares on a fully diluted basis as of
the
date
of such change of control. The exit bonus remains due and payable in the event
a
change in control occurs after the executive leaves the Company. There was
no
exit bonus accrued as of June 30, 2008.
The
same
executive received a performance bonus of $40,000 for 2006, in connection with
the new DOE extension agreement.
The
Chairman of the Company has entered into an agreement with the major shareholder
of AETG whereby that executive will receive a bonus that will be paid by that
shareholder based upon the value that shareholder receives as a result of the
sale of the Company.
13.
Retirement
Plans
AETC
sponsors a tax qualified 401(k) plan whereby eligible employees can invest
up to
15% of base earnings subject to a specified maximum among several investment
alternatives. An employer matching contribution up to a maximum of 2.5% of
the
employee's compensation is also invested. AETC's contributions were
approximately $384,000, $385,000 and $404,000 for the years ended June 30,2006, 2007 and 2008, respectively.
AETC
has
a qualified Profit Sharing Plan for eligible employees (primarily drivers,
mechanics and escorts not covered by union deferred compensation plans). AETC's
contributions are based upon hours worked. Participants are not allowed to
make
deferred contributions. AETC's contributions were approximately $84,000, $82,000
and $79,000 for the years ended June 30, 2006, 2007 and 2008,
respectively.
The
Company contributed to the pension plans of various unions covering drivers,
mechanics and other workers as part of related union agreements. Such
contributions were approximately $6,924,000, $7,371,000 and $7,753,000 for
the
years ended June 30, 2006, 2007 and 2008, respectively.
14.
Major
Customer and Concentration of Credit Risk
For
the
years ended June 30, 2006, 2007 and 2008, revenues derived from the DOE
were the following:
As
of
June 30, 2007 and June 30, 2008, AETC had accounts receivable from the DOE
of $22,439,826 and $19,362,393, respectively.
At
June 30, 2007 and 2008, substantially all cash and cash equivalents were on
deposit with one major financial institution. Deposits held with banks may
exceed the amounts of insurance provided on such deposits.
Approximately
81% of the Company's employees are subject to 31 collective bargaining
agreements that either will have or will expire over the next five
years.
15.
Sales
and Leaseback Transactions
On
July 6, 2005, 201 West Sotello Realty Inc., a subsidiary of the Company,
completed the sale and leaseback of its owned real property located in Los
Angeles, California. The sale and lease back was pursuant to the Agreement
and Escrow Instructions for Purchase of Real Estate (the “Agreement and Escrow
Instructions”) with S.R. Partners (the “Buyer”). Pursuant to the Agreement
and Escrow Instructions, 201 West Sotello Realty Inc. sold to the Buyer its
owned real property located in Los Angeles, California for a gross purchase
price of $5,000,000. In connection with the sale of the property, Atlantic
Express of L.A. Inc., a subsidiary of the Company, agreed to leaseback the
premises from the Buyer for a term of approximately ten years. The triple
net lease called for a monthly payment of $39,583 with annual increments of
2.5%. Atlantic Express of L.A. Inc. is responsible for all real property
taxes and certain insurance costs under the lease. The
gain
on this transaction was $737,268 and is being amortized over the leaseback
period on a straight-line basis.
On
January 11, 2006, Midway Leasing, Inc. (“Midway”), a subsidiary of the
Company, completed the sale and leaseback of its owned real property located
in
Staten Island, New York. Pursuant to the Contract of Sale, Midway sold to the
purchaser its owned real property in Staten Island, New York for a gross
purchase price of $4,200,000. In connection with the sale of the real
property, the Company agreed to leaseback the premises from the purchaser for
a
term of 10 years. The lease calls for monthly payments of $29,750 with
annual increases of 2.0%. The Company will be responsible for all real property
taxes, certain insurance costs and utilities. The Company incurred a loss
on the sale of approximately $0.9 million.
16.
Sale
of Business
On
July27, 2006, T-NT Bus Service, Inc., a subsidiary of the Company (“T-NT”),
completed the sale of substantially all of its assets for a gross purchase
price
of $12.6 million. In addition, Domenic Gatto, the Company’s Chief Executive
Officer and President received $100,000 as consideration for entering into
a
five year non-competition agreement. The Company recognized a gain on the sale
of these assets of approximately $5.6 million, net for the year ended June30,2007, which is included in gain from discontinued operations. Revenues from
T-NT
were 2.3% of total revenue and income (loss) before taxes represented 1.0%
for
the year ended June 30, 2006. Due to immateriality, these operations were not
presented as discontinued operations for the year.
17.
Insurance
Collateral Requirements
In
December 2006, one of the Company’s insurance carriers released approximately
$10.0 million in excess collateral based upon retrospective adjustments for
various years. Approximately $5.2 million was a credit issued to the Company
and
$4.8 million was a reduction in a letter of credit held by the insurance
company. This letter of credit was collateralized by restricted cash which
became available for working capital. The transaction had no effect on the
Company’s consolidated statements of operations and has no impact on future
insurance expense.
In
December 2007, one of the Company’s insurance carriers issued us approximately
$9.0 million in credits, representing retrospective adjustments for various
years, by offsetting approximately $2.2 million of current premiums due in
January 2008, returning funds of $6.0 million and adding $0.8 million to our
cash collateral account. In addition, the insurance company did not renew a
$0.7
million letter of credit held as collateral. This letter of credit was
collateralized by restricted cash which became available for working capital.
The transaction had no effect on the Company’s consolidated statements of
operations and has no impact on future insurance expense.
F-19
18.
Segment
Information
The
operating segments reported below are segments of the Company for which separate
financial information is available and for which operating results as measured
by income from operations are evaluated regularly by executive management in
deciding how to allocate resources and in assessing performance. The accounting
policies of the business segments are the same as those described in the Summary
of Significant Accounting Policies (see Note 1).
The
Company operates in two reportable segments: School Bus Operations and
Paratransit and Transit Operations, both of which are conducted throughout
the
U.S.
School
Bus Operations provide services for the transportation of open enrollment
students through the use of standard school buses, and the transportation of
physically or mentally challenged students through the use of an assortment
of
vehicles, including standard school buses, passenger vans and lift-gate
vehicles, which are capable of accommodating wheelchair-bound
students.
Paratransit
and Transit Operations provide paratransit service in New York for physically
and mentally challenged persons who are unable to use standard public
transportation. The remainder of our paratransit and transit operations revenue
comes from fixed route transit, express commuter line and charter and tour
bus
services.
The
summarized segment information (excluding discontinued operations), as of and
for the years ended June 30, 2006, 2007 and 2008 are as
follows:
Loss
before benefit from income taxes and discontinued
operations
$
(29,549
)
$
(23,017
)
$
(34,394
)
19. Supplemental
Financial Information
AETC
has no independent assets or operations, the guarantees of the Notes are full
and unconditional and joint and several, and any subsidiaries of AETC other
than
the subsidiary guarantors are minor, in accordance with Rule 3-10 of
Regulation S-X.
(1) Deductions
from allowances represent losses or expenses for which the respective allowances
were created. In the case of the allowances for doubtful accounts, such
deductions are reduced by recoveries of amounts previously written
off.
(2) Adjustments
associated with the Company's assessment of the deferred tax assets.
F-21
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, on September 26, 2008.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed by each of the following persons on behalf of the Registrant and in
the
capacities indicated on September 26, 2008.
