SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 40-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2002 Commission File Number 0-13109
LAIDLAW INC.
(Exact name of registrant as specified in its charter)
CANADA Not Applicable
(Province or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3221 NORTH SERVICE ROAD L7R 3Y8
BURLINGTON, ONTARIO (Postal Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (905) 336-1800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Shares
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: Common Shares
For annual reports, indicate by check mark the information filed with this Form.
[X] Annual information form [X] Audited annual financial statements
At May 16, 2003, there were 325,927,870 Common Shares issued and outstanding.
Indicate by check mark whether the Registrant by filing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act
of 1934 (the "Exchange Act"). Yes No X
--- ---
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No X
--- ---
ANNUAL INFORMATION FORM
OF
LAIDLAW INC.
FOR THE COMPANY'S FISCAL YEAR ENDED AUGUST 31, 2002
JANUARY 10, 2003
Page 1 of 14
LAIDLAW INC.
UNLESS OTHERWISE INDICATED, ALL AMOUNTS IN THIS ANNUAL INFORMATION FORM
ARE EXPRESSED IN UNITED STATES DOLLARS.
ITEM 2 - NAME, INCORPORATION AND SUBSIDIARIES OF THE ISSUER
Laidlaw Inc. (the "Company") was continued under the Canada Business
Corporations Act by Articles of Continuance dated March 16, 1979. On September
1, 1994, Laidlaw Inc. amalgamated with its subsidiary, SCD Transport Ltd.; on
September 1, 1996, it amalgamated with its subsidiary, Laidlaw Waste Corporation
Ltd.; and on July 28, 1997, it amalgamated with 3367444 Canada Inc., in each
case pursuant to Articles of Amalgamation under the Act. The articles of Laidlaw
Inc. and the various amendments thereto which were in effect on September 1,
1994 were restated in the Articles of Amalgamation which became effective on
September 1, 1994 and on September 1, 1996, and were subsequently amended by the
Articles of Amalgamation which became effective on July 28, 1997 to reflect
conversion upon such amalgamation of the former voting Class A Shares and Class
B Non-Voting Shares of the Company into voting Common Shares, on the basis of
1.15 Common Shares for each former Class A Share and 1 Common Share for each
former Class B Non-Voting Share, and to set out the rights, privileges,
restrictions and conditions attaching to the new Common Shares. The principal
and head office of the Company is located at 3221 North Service Road,
Burlington, Ontario L7R 3Y8.
The Company owns or controls through its subsidiaries 100% of the
voting and non-voting shares of its subsidiaries set forth in Exhibit 1 appended
hereto (unless otherwise indicated therein).
ITEMS 3 AND 4 - BUSINESS OF THE ISSUER
The Company provides contract bus services, consisting of school bus
transportation throughout the United States and Canada and municipal and
paratransit bus transportation within the United States. The Company's Greyhound
segment provides inter-city and tourism bus transportation throughout North
America. The Company's healthcare services segment provides healthcare
transportation services and emergency management services in the United States.
In February 1997, the Company acquired all of the outstanding shares of
common stock of American Medical Response Inc. ("AMR") in a transaction valued
at approximately $1.25 billion. AMR is a leading provider of emergency and
non-emergency ambulance services in the United States. In September 1997, the
Company acquired all of the outstanding shares of EmCare Holdings Inc. in a
transaction valued at approximately $400 million. EmCare is a leading provider
of emergency management services to hospital-based emergency departments. In the
first quarter of fiscal 2000, the Company announced its plan to divest its U.S.
healthcare operations. During the fourth quarter of fiscal 2001, the Company
concluded that the previously announced disposal of the healthcare businesses
was no longer in the best interests of its stakeholders. As a result, the
Company intends to operate the healthcare services businesses with a view
towards maximizing long-term value.
Page 2 of 14
Effective May 15, 1997, the Company merged its hazardous waste services
business into Rollins Environmental Services, Inc. which was renamed Laidlaw
Environmental Services, Inc. The consideration received in this transaction
consisted of: (i) $400 million in cash or assumption of debt, (ii) 120 million
common shares of Laidlaw Environmental Services, Inc. and (iii) a $350 million
12 Year Convertible Pay-in-Kind Debenture. In April 1998, pursuant to an
exchange offer for cash and stock, the Company's subsidiary, Laidlaw
Environmental Services, Inc., acquired all of the outstanding shares of
Safety-Kleen Corp. in a transaction valued at approximately $2.2 billion. As a
result of the transaction, the Company's ownership of Laidlaw Environmental
Services, Inc., which was renamed Safety-Kleen Corp., was reduced to
approximately 35% from approximately 67% prior to the transaction. In August
1999, the Company sold to Safety-Kleen the $350 million Safety-Kleen Convertible
Pay-in-Kind Debenture for $200 million in cash and 11.321 million common shares
of Safety-Kleen, resulting in the Company's ownership in Safety-Kleen becoming
43.6%. In June 2000, Safety-Kleen announced that it and 73 of its subsidiaries
had filed voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court for the District of
Delaware. Information regarding the Company's investment in Safety-Kleen Corp.
is set forth in Note 12 of the Notes to Consolidated Financial Statements
attached as Exhibit 2.
In March 1999, the Company acquired all of the outstanding shares of
common stock of Greyhound Lines, Inc. in a transaction valued at approximately
$800 million. Greyhound is the only nation wide provider of scheduled inter-city
bus transportation services in the United States.
On May 18, 2000, the Company announced that it would not be in
compliance with financial covenants contained in its syndicated bank facility
after May 31, 2000 and declared an interest payment moratorium on all advances
under the syndicated bank facility and on certain debentures issued by the
Company in the aggregate principal amount of $2.044 billion. On June 28, 2001,
Laidlaw Inc. and five of its direct and indirect subsidiaries filed voluntary
petitions for relief under chapter 11 of the United States Bankruptcy Code in
the United States Bankruptcy Court for the Western District of New York. In
addition, the Company and one of its subsidiaries commenced Canadian insolvency
proceedings under the Canada Companies' Creditors Arrangement Act in the Ontario
Superior Court of Justice in Toronto, Ontario. None of the Company's operating
subsidiaries was included in the filings. The Company is reorganizing its
affairs under the protection of the U.S. Bankruptcy Code and the Canada
Companies' Creditors Arrangement Act and has proposed a plan of reorganization.
The plan of reorganization must be voted upon by the Company's stakeholders and
approved by the U.S. Bankruptcy Court and the Ontario Superior Court. A plan of
reorganization sets forth the means for satisfying claims against and interests
in the Company.
For each of the years in the three-year period ended August 31, 2002,
the percentages of the Company's revenue from its business segments were as
follows:
Year Ended August 31 2002 2001 2000
-------------------- ---- ---- ----
Contract Bus Services 40.4% 40.2% 40.5%
Greyhound 27.6% 28.4% 28.0%
Healthcare Services 32.0% 31.4% 31.5%
Page 3 of 14
Financial information concerning the Company's business segments is set
forth in Note 21 of the Notes to Consolidated Financial Statements attached as
Exhibit 2.
In the last three fiscal years, the percentage of revenue generated by
United States operations has been 92.3%, 92.2% and 92.0%.
All statistical and financial information under Items 2 and 3 of this
report is given as of August 31, 2002, unless the context otherwise indicates.
CONTRACT BUS SERVICES
The Company operates school buses and special education vehicles,
primarily under the name Laidlaw Transit, in the United States and Canada.
The Company is the largest school bus operator in North America. It has
contracts with 63 school boards and districts in Canada and with 1,064 in the
United States, as well as various other educational institutions, providing
transportation for approximately two million students each day. In Canada,
contracts are generally negotiated and renewed annually. In the United States,
contracts generally extend for three to five years, with options on the part of
the boards to extend the contracts or to solicit new bids. Rates are usually
established on a per-diem basis and vary with the number of buses and pupils and
the length of each route. The Company also uses its school bus fleet for charter
purposes.
The Company also provides services to municipal transit customers
through 134 contracts in the United States and Canada. The Company is the
largest operator of paratransit services in the United States providing access
to transportation for mobility-impaired individuals.
EMPLOYEES AND PROPERTIES
The Company employs approximately 46,200 people to provide education
passenger services. Approximately 2,650 of these are executive, supervisory,
clerical and sales personnel. Of the remainder, approximately 41,550 are part
time and approximately 48% are members of collective bargaining groups.
Management believes that its relations with its employees are excellent.
The Company operates school buses and special education vehicles from
560 locations of which 148 are owned and the balance are leased or operated
under contract. The Company believes that its facilities are adequate to service
its present business and the expansion of existing operations. To provide these
services the Company operates approximately 41,500 school buses and special
education vehicles, approximately 255 other revenue vehicles and approximately
710 service vehicles.
The Company employs approximately 6,570 people to provide municipal and
paratransit bus transportation services. Approximately 1,010 of these are
executive, supervisory, clerical
Page 4 of 14
and sales personnel. Of the remainder, approximately 930 are part-time and
approximately 33% are members of collective bargaining groups.
Municipal and paratransit bus transportation services are operated from 84
facilities, of which four are owned and the balance are leased or supplied by
the customer. To provide these services, the Company operates approximately
2,610 paratransit vehicles, 1,010 fixed route transit vehicles and approximately
310 other revenue and service vehicles.
COMPETITION
Although the Company is the largest school bus and special education
vehicle operator in North America, it competes with both the few large companies
in these industries and with the substantial number of smaller locally owned
operators. Moreover, most school districts operate their own school bus systems
and most municipalities operate their own transit systems. In acquiring new
school bus contracts and in maintaining its business, the Company experiences
competition primarily in the areas of pricing and service.
SEASONALITY
The Company's school bus operations historically experience a
significant decline in revenue and operating income in the fourth fiscal quarter
because of school summer vacations.
REGULATION
School busing is not subject to licensing requirements in the United
States. United States regulations require all drivers of school buses to have
commercial driver's licenses. In Canada, licenses to carry passengers are
granted by provincial boards upon proof of public convenience and necessity. The
provincial boards exercise control over the issuance, extension and transfer of
licenses and regulate the general conduct of a licensee's business. Various
states, provinces and school boards set standards for insurance, qualification
of drivers and safety equipment.
GREYHOUND
The Company acquired Greyhound Lines, Inc. during fiscal 1999 and had
previously acquired Greyhound Canada Transportation Corp. in October 1997
(collectively, "Greyhound"). Greyhound is the only nationwide provider of
scheduled inter-city bus transportation services in the United States. Greyhound
serves the value-oriented customer by offering scheduled passenger service which
connects rural and urban markets throughout the United States and Canada.
Greyhound also provides package express service, charter bus service and, in
many terminals, food service. In addition, the Company provides scheduled
services under private contract and package tours to major tourist regions in
the United States and Canada.
EMPLOYEES AND PROPERTIES
The Company employs approximately 17,110 people to provide Greyhound's
services, of which approximately 3,200 are executive, supervisory, clerical and
sales personnel. Of the remainder approximately 2,860 are part-time and
approximately 7,880 are members of collective bargaining groups. In the U.S.,
the Amalgamated Transit Union (the "ATU") represents
Page 5 of 14
approximately 4,900 of Greyhound's employees including drivers, some telephone
information agents and terminal workers and certain of Greyhound's mechanics.
The largest ATU agreement, which covers the drivers and mechanics, expires on
January 31, 2004.
The Company provides scheduled inter-city bus transportation services
from approximately 2,400 locations throughout the United States and Canada.
Approximately 1,800 of these locations are operated by agents for the Company,
206 are owned by the Company and the balance are leased by the Company. The
Company believes that its facilities are adequate to service its present
business and modest expansion of existing operations. To provide these services,
the Company operates approximately 3,935 highway coaches and approximately 695
taxis and service and other vehicles.
COMPETITION
The transportation industry is highly competitive. Greyhound's primary
sources of competition for passengers are automobile travel, which is the most
significant form of competition, low cost air travel from both regional and
national air lines and in certain markets, regional bus companies and trains.
Price, destination choices and convenient schedules are the ways in which
Greyhound meets this competitive challenge.
SEASONALITY
Greyhound's business is seasonal in nature and generally follows the
pattern of the travel industry as a whole with peaks during the summer months
and the Thanksgiving and Christmas holiday periods. As a result, Greyhound's
cash flows are also seasonal with a disproportionate amount of annual cash flows
being generated during the peak travel periods.
TRADEMARKS
The Company owns the Greyhound name and trademarks and the "image of
the running dog" trademarks worldwide. The Company believes that this name and
the trademarks have substantial consumer awareness.
REGULATION
In the United States, Greyhound as a motor carrier engaged in
inter-state as well as intra-state transportation of passengers and express
shipments is and must remain registered with the Department of Transportation
(the "DOT"). The DOT regulates safety, driver qualifications, vehicle standards,
maintenance of records, insurance and vehicle noise and emission standards. In
Canada, franchises to carry passengers are granted by provincial boards upon
proof of public convenience and necessity. The provincial boards exercise
control over the issuance, extension and transfer of licenses and regulate the
general conduct of a licensee's business in such areas as tariffs, insurance,
time tables, qualification of drivers and safety equipment.
In the United States, Greyhound is also regulated by the DOT's Surface
Transportation Board (the "STB"). The STB must grant advance approval for the
Company to pool operations
Page 6 of 14
or revenues with another passenger carrier and must authorize any merger with or
its acquisition or control of another motor carrier of passengers.
In the United States, the Company is also subject to regulation under the
Americans with Disabilities Act. Beginning in October 2000, all new
"over-the-road" buses received by the Company for its fixed route operations
must be equipped with wheelchair lifts.
Additionally, by October 2006, one-half of the Company's fleet involved
in fixed route operations must be lift equipped. By October 2012, the fleet must
be entirely lift equipped. Since October 2001, until the fleet is fully
equipped, fixed route bus operators have been required to provide an accessible
bus to any disabled passenger who provides at least 48 hours notice. Consistent
with a settlement agreement between Greyhound and the U.S. Department of Justice
and the previously announced "Access Greyhound" program, Greyhound began
providing accessible buses on at least 48 hours notice in the spring of 2000.
Since in October 2001, larger charter/tour operators have been required to
provide an accessible bus to any disabled passenger who provides at least 48
hours notice.
HEALTHCARE SERVICES
The Company provides healthcare transportation services, primarily
under the name American Medical Response, and emergency management services,
primarily under the EmCare name.
HEALTHCARE TRANSPORTATION SERVICES - American Medical Response
The Company is the largest provider of healthcare transportation
services in the United States, operating from locations in 37 states. These
services consist of critical care transportation services, non-emergency
ambulance and transfer services and emergency response services. The Company
provides approximately 3.7 million transports annually. The Company has
approximately 150 agreements with municipal or county public safety agencies to
provide performance-based contracts for 9-1-1 response and over 4,000
contractual agreements with healthcare facilities. It also provides joint
training, shared staffing and stationing arrangements and contracted
dispatching. The Company also provides comprehensive on site medical care and
transport services for all types of special events.
EMERGENCY MANAGEMENT SERVICES - EmCare
The Company also provides emergency management services to hospital
based emergency departments. The Company recruits physicians, as well as
specially trained physician extenders, evaluates their credentials, and arranges
for the provision of their services to hospital based emergency departments and
free standing treatment centers. The Company also assists in such operational
areas as staff co-ordination, quality assurance, departmental accreditation,
billing, recordkeeping, third party payment, risk management services and other
administrative services. The Company has approximately 250 contracts for the
management of
Page 7 of 14
emergency departments and provides emergency services in 39 states to
approximately 4.1 million patients annually.
EMPLOYEES AND PROPERTIES
The Company employs approximately 21,440 people to provide emergency
healthcare services. Approximately 3,840 of these are executive, supervisory,
clerical and sales personnel and approximately 1,600 are physicians. Of the
remainder, approximately 5,450 are part time and approximately 58% are members
of collective bargaining groups. Management believes that its relations with its
employees are excellent.
The Company provides healthcare transportation services utilizing
approximately 4,365 ambulances and other operating vehicles.
COMPETITION
The Company is the largest provider of healthcare transportation
services in the United States. It competes with both the few large companies in
these industries and with the substantial number of smaller locally owned
operators. Moreover many municipal, fire and paramedic departments and hospitals
operate their own ambulance systems. In acquiring new healthcare transportation
contracts and in maintaining its business, the Company experiences competition
primarily in the areas of pricing and service.
Emergency management services are also subject to vigorous competition.
Competition for these services is generally based upon cost, the ability to make
available physicians capable of providing high quality care, and the reputation
of the Company among hospitals and physicians. Competition is also based upon
the proper utilization of the emergency department, as well as the ability to
integrate the emergency department with other hospital departments and to
provide value added services.
REGULATION
Paramedics and emergency medical technicians must be state certified to
transport patients and to perform emergency care services. Certification
requires completion of significant training programs. Both paramedics and
emergency medical technicians are also required to complete continuing education
programs to maintain their certifications. Medical protocols, which paramedics
and emergency medical technicians are required to follow, are developed by local
physician advisory boards.
Healthcare transportation is affected by regulations covering
licensing, rates, health, safety, insurance and other matters. Most emergency or
9-1-1 contracts are granted exclusive supplier status through the issuance of a
certificate of need or a public service agreement. Some municipalities divide
requirements into service zones. Exclusive supplier status agreements are linked
to service level measurements regarding response times and performance. Some
municipalities also govern or set rates that may be charged for the ambulance
services.
Page 8 of 14
Business corporations are generally prohibited under certain state laws
from practicing medicine, exercising control over the medical decisions of
physicians or engaging in certain practices with physicians, such as fee
splitting. The Company believes that its emergency management business has
complied with these laws because it only performs non-medical administrative
services, does not represent that it offers medical services, and does not
exercise influence or control over the practice of medicine by the physicians
under contract with it.
A substantial majority of the Company's revenues are attributable to
payments received from third party payors including Medicare, Medicaid and
private insurers. The Company is subject to various regulatory requirements in
connection with its participation in the Medicare and Medicaid programs. The
United States federal Centers for Medicare and Medicaid Services (formerly
Healthcare Financing Administration) has implemented rules which have revised
the policy on Medicare coverage of ambulance services focusing on the medical
necessity for the particular ambulance services. In certain circumstances,
physicians' certification must be obtained.
A new fee schedule for Medicare reimbursement of ambulance services became
effective on April 1, 2002.
The Company, like other Medicare and Medicaid providers, is subject to
governmental audits of its Medicare and Medicaid reimbursement claims.
Accordingly, retroactive revenue adjustments from these programs could occur.
The Company is also subject to the Medicare and Medicaid fraud and abuse laws
which prohibit any bribe, kick-back or rebate in return for the referral of
Medicare or Medicaid patients. Violations of these prohibitions may result in
civil and criminal penalties and exclusion from participation in the Medicare
and Medicaid programs. The Company believes that it is in substantial compliance
with these laws.
OTHER
ITEM 5 - SELECTED CONSOLIDATED FINANCIAL INFORMATION
Cash dividends of 24.4(cent) per First Preference Share Series G were
paid on May 15, 1987, and were paid at the rate of 25(cent) per First Preference
Share Series G on the 15th day of August, November, February and May in each
year thereafter, to and including February 15, 2000. Since the Company declared
an interest payment moratorium on all advances under its syndicated bank
facility and on certain Company debentures, no dividends have been declared or
paid on the company's First Preference Share Series G or Common Shares.
Page 9 of 14
SELECTED FINANCIAL INFORMATION
The Company's Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in Canada ("Canadian GAAP"). These
consolidated financial statements conform, in all material respects, with
accounting principles generally accepted in the United States ("U.S. GAAP"),
except as indicated in Note 23 of Notes to Consolidated Financial Statements.
Year Ended August 31 (U.S.$ millions except
per share amounts) 2002 2001 2000 1999 1998
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INCOME STATEMENT DATA UNDER CANADIAN GAAP
Revenue $4,432.1 $4,418.3 $4,273.1 $3,712.5 $3,305.4
Income from operating segments before depreciation and
amortization and goodwill impairment losses 421.0 383.4 385.9 525.1 651.0
Depreciation and amortization 303.4 328.3 326.4 317.3 280.9
Goodwill impairment losses 194.7 1,105.1 - 1,234.0 -
Income (loss) from operating segments (77.1) (1,050.0) 59.5 (1,026.2) 370.1
Income (loss) from continuing operations before goodwill
impairment losses, other financing related expenses and
unusual income tax charge 115.0 (160.7) (488.1) 103.9 239.1
Income (loss) from continuing operations (124.4) (1,329.6) (589.6) (1,151.1) 239.1
Income (loss) from discontinued operations - 730.7 (1,647.8) 32.4 106.9
Net income (loss) (124.4) (598.9) (2,237.4) (1,118.7) 346.0
Earnings (loss) per share from continuing operations before
goodwill impairment losses, other financing related
expenses and unusual income tax charge 0.35 (0.49) (1.49) 0.31 0.72
Earnings (loss) per share from continuing operations (0.38) (4.08) (1.80) (3.49) 0.72
Earnings (loss) per share from discontinued operations - 2.24 (5.04) 0.10 0.33
Earnings (loss) per share (0.38) (1.84) (6.84) (3.39) 1.05
Dividends per Common Share - - 0.095 0.186 0.180
Average number of Common Shares (millions) 325.9 325.9 327.0 330.2 329.8
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APPROXIMATE AMOUNTS UNDER U.S. GAAP
Income (loss) from continuing operations $14.9 $(246.5) $(637.6) $(177.1) $239.1
Income (loss) from discontinued operations - 1,672.4 (1,615.5) (941.6) 106.9
Net income (loss) 14.9 1,425.9 (2,253.1) (1,118.7) 346.0
Earnings (loss) per share from continuing operations 0.05 (0.76) (1.95) (0.54) 0.72
Earnings (loss) per share from discontinued operations - 5.13 (4.94) (2.85) 0.33
Earnings (loss) per share 0.05 4.37 (6.89) (3.39) 1.05
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BALANCE SHEET DATA (AT END OF YEAR) UNDER CANADIAN GAAP
Working capital $490.2 $488.3 $(3,161.6) $392.9 $285.7
Property and equipment, net 1,677.7 1,680.7 1,683.1 1,635.7 1,192.7
Total assets 4,091.1 4,209.8 5,187.9 5,683.7 6,184.6
Long-term debt 204.4 248.6 227.3 3,115.5 2,293.7
Liabilities subject to compromise 3,977.1 3,978.5 - - -
Shareholders' equity (deficiency) (1,107.0) (980.5) (377.0) 1,913.1 3,089.9
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The following table sets forth, for the periods and dates indicated, certain
information concerning the Canadian dollar exchange rate for translating United
States dollars based on the noon buying rate in New York City for cable
transfers payable in foreign currencies as certified for customs purposes by the
Federal Reserve Bank of New York.
Year Ended August 31 2002 2001 2000 1999 1998
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High CDN.$1.6049 Cdn.$1.5784 Cdn.$1.4977 Cdn.$1.5432 Cdn.$1.5745
Low 1.5190 1.4895 1.4440 1.4578 1.3824
Average 1.5731 1.5267 1.4704 1.5087 1.4410
End of year 1.5585 1.5478 1.4720 1.4965 1.5745
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On January 10, 2003, the noon buying rate in New York City for the U.S. dollar,
as reported by the Federal Reserve Bank of New York, was Cdn. $1.5502.
Page 10 of 14
Reference is also made to Note 24 of Notes to Consolidated Financial
Statements attached as Exhibit 2.
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS
Attached as Exhibit 3.
ITEM 7 - MARKET FOR SECURITIES
The Company's Common Shares and First Preference Shares Series G were
suspended from trading on The Toronto Stock Exchange effective June 13, 2002.
The Company's Common Shares and the Laidlaw One, Inc. 5 3/4% Exchangeable Notes
due 2000 were delisted from the New York Stock Exchange effective February 20,
2001.
ITEM 8 - DIRECTORS AND OFFICERS
Each director is elected annually and holds office until the next
annual meeting and until his successor is duly elected, unless his office is
earlier vacated in accordance with the by-laws of the Company. On January 11,
2002, the Company received an order from the Ontario Superior Court of Justice
relieving the Company from any obligation to call its next annual meeting of
shareholders until further order of the court. The members of the Company's
board of directors, as of the date of the order, remain in office.
Peter N.T. Widdrington, 72, has been Chairman of the Board since 1990
and a director of the Company since 1986. From December 1995 to June 1999, he
was Chief Executive Officer of Cuddy International Corporation, a poultry
producer.
John R. Grainger, 53, has been a director of the Company since August
1997. He has been President and Chief Executive Officer of the Company's
Contract Bus Services segment since November 2001. He was President and Chief
Executive Officer of the Company from December 1999 until September 2002. Prior
thereto, he was Executive Vice President and Chief Operating Officer of the
Company since September 1997.
Stephen F. Cooper, 56, has been a director and Vice-Chairman and Chief
Restructuring Officer of the Company since July 2000. Since September 2002, he
has been executive managing director of Kroll Zolfo Cooper, a corporate advisory
and restructuring firm, and for more than five years prior thereto, he was
managing Partner of Zolfo Cooper, LLC, a business advisory and interim
management firm.
William P. Cooper, 63, has been a director of the Company since 1983.
For more than five years, he has been President and Chief Executive Officer of
Cooper Construction Limited, a construction company.
Jack P. Edwards, 57, has been a director of the Company since January
1996. He is a management consultant. From March 2001 until May 2002, he was
President and Chief Executive Officer of American Medical Response, Inc., the
Company's healthcare transportation services provider. Prior thereto, he was
President and Chief Executive Officer of Worldpoint Logistics, Inc., a
transportation logistics company, since October 1998. Prior thereto, he was
President and Chief Executive Officer of Danzas Corporation, a worldwide
transportation company, since June 1994.
Page 11 of 14
William A. Farlinger, 73, has been a director of the Company since
January 1994. He has been Chairman of Ontario Power Generation Inc., one of the
successor companies to Ontario Hydro, a public utility, since November 1995.
Donald M. Green, 70, has been a director of the Company since 1980.
Since August 1999 he has been President and Chief Executive Officer of
Greenfleet Ltd., a private investment company. For more than five years prior
thereto, he was Chairman of ACD Tridon Inc., an international automotive parts
manufacturing company.
Martha O. Hesse, 60, has been a director of the Company since January
1996. For more than five years, she has been President of Hesse Gas Company, a
natural gas marketing company.
Wilfred G. Lewitt, 70, has been a director of the Company since
January 1998. Since 1996, he has been Chairman of MDS Inc., a health and life
sciences company, and was its Chairman and Chief Executive Officer from 1970 to
1996.
Gordon R. Ritchie, 58, has been a director of the Company since January
1994. Since July 1999 he has been Chairman, Public Affairs of Hill and Knowlton
Canada Limited, a consulting company. For more than five years prior thereto, he
was Chief Executive Officer of Strategico Inc., a consulting company.
Stella M. Thompson, 57, has been a director of the Company since July
1994. She has been a Principal of Governance West Inc., a consulting company,
since 1996.
K.E. Benson (President and Chief Executive Officer) resides in
Naperville, Illinois; D. M. Green, W.R. Bishop (Vice-President, Controller) and
Geoff Mann (Vice-President, Treasurer) reside in Burlington, Ontario; P.N.T.
Widdrington (Chairman of the Board) resides in London, Ontario; W. A. Farlinger
and W. G. Lewitt reside in Toronto, Ontario; S. M. Thompson resides in Calgary,
Alberta; G. R. Ritchie resides in Ottawa, Ontario; I.R. Cairns (Senior
Vice-President and General Counsel and Secretary) resides in Ancaster, Ontario;
W.P. Cooper resides in Oakville, Ontario; J. P. Edwards resides in Issaquah,
Washington; D.A. Carty (Senior Vice-President and Chief Financial Officer)
resides in Rye, New York; M. O. Hesse resides in Winnemuca, Nevada; J.R.
Grainger resides in Elmhurst, Illinois and Stephen F. Cooper (Vice-Chairman,
Chief Restructuring Officer) resides in New York, New York. The directors and
officers as a group own less than 1% of the outstanding Common Shares of the
Company.
BOARD COMMITTEES
The Company has an Audit Committee which is composed of Messrs.
Farlinger, Green, Lewitt and Ritchie. The function of the Audit Committee is to
review the annual financial statements of the Company prior to their approval by
the Directors, to review all interim financial statements and all financial
statements included in any prospectus and to review all periodic reports to be
filed with securities regulatory authorities.
The Company also has an Executive Committee which is composed of
Messrs. Grainger, Lewitt and Widdrington and Ms. Hesse. The Executive Committee
may exercise all of the powers of the Board of Directors, except as restricted
by the Board of Directors and the by-laws and articles of the Company.
The Company also has a Compliance and Ethics Committee which is
composed of Messrs. W. Cooper and Widdrington and Ms. Hesse and Thompson; a
Human Resource and Compensation Committee which is composed of Messrs. W.
Cooper, and Widdrington and Ms. Thompson; and a Nominating and Corporate
Governance Committee which is composed of Messrs W. Cooper, Green and
Widdrington and Ms. Hesse.
Page 12 of 14
ITEM 9 - ADDITIONAL INFORMATION
(1) The Company shall provide to any person, upon request to the Secretary
of the Company at the address shown in Item 1 above:
(a) when the securities of the Company are in the course of a
distribution pursuant to a short form prospectus or a
preliminary short form prospectus has been filed in respect of
a distribution of its securities,
i) One copy of the annual information form ("AIF") of
the Company, together with one copy of any document,
or the pertinent pages of any document, incorporated
by reference in the AIF,
ii) One copy of the comparative financial statements of
the Company for its most recently completed financial
year for which financial statements have been filed
together with the accompanying report of the auditor
and one copy of any interim financial statements of
the Company that have been filed subsequent to the
financial statements for its most recently completed
financial year,
iii) One copy of the information circular of the Company
in respect of its most recent annual meeting of
shareholders that involved the election of directors
or one copy of any annual filing prepared in lieu of
that information circular, as appropriate, and
iv) One copy of any other documents that are incorporated
by reference into the preliminary short form
prospectus or the short form prospectus and are not
required to be provided under (i) to (iii) above; or
(b) at any other time, one copy of any other documents referred to
in (1)(a)(i), (ii) and (iii) above, provided that the Company
may require the payment of a reasonable charge if the request
is made by a person who is not a security holder of the
Company.
(2) Additional information including directors' and officers' remuneration
and indebtedness, principal holders of the Company's securities,
options to purchase securities and interests of insiders in material
transactions, where applicable, is contained in the Company's
information circular for its most recent annual meeting of shareholders
that involved the election of directors, or in its most recent Annual
Filing on Form 28 and additional financial information is provided in
the Company's comparative financial statements for its most recently
completed financial year.
Page 13 of 14
LAIDLAW INC.
By:
------------------------- -------------------------------
Kevin E. Benson Wayne R. Bishop
President and Vice-President, Controller
Chief Executive Officer
Page 14 of 14
EXHIBIT 1
SUBSIDIARIES OF LAIDLAW INC.
The following list sets forth subsidiaries of Laidlaw Inc. (a Canada
corporation) and the jurisdiction in which each subsidiary is organized. Parent
subsidiary relations are indicated by indentations. Unless otherwise indicated,
100% of the voting securities of each subsidiary is owned by the indicated
parent of such subsidiary.
JURISDICTION IN
NAME WHICH ORGANIZED
---- ---------------
Laidlaw Investments Ltd. Ontario
Laidlaw Transportation, Inc. Delaware
Laidlaw Transit Holdings, Inc. Delaware
Laidlaw Transit, Inc. Delaware
Allied Bus Sales, Inc. Indiana
Chatham Coach Lines, Inc. Delaware
Laidlaw Transit Management Company, Inc. Pennsylvania
S.C. Food Services (U.S.A.), Inc. Delaware
S.C. Food Services (GA), Inc. Delaware
Laidlaw Transit Services, Inc. Delaware
SuTran, Inc. South Dakota
Van Tran of Tucson, Inc. Arizona
Safe Ride Services, Inc. Arizona
Laidlaw Transportation Holdings One, Inc. Delaware
American Medical Response, Inc. Delaware
[subsidiaries on separate page] -----------
EmCare Holdings Inc. Delaware
EmCare, Inc. Delaware
Spectrum Emergency Care of Delaware, Inc. Delaware
Laidlaw Transportation Holdings, Inc. Delaware
Greyhound Lines, Inc. Delaware
[subsidiaries on separate page] -----------
Hotard Coaches, Inc. Louisiana
Gray Line of New Orleans, Inc. (50%) Louisiana
Mississippi Coast Limousine, Inc. Mississippi
Interstate Leasing, Inc. Mississippi
Concorde Adjusters, Inc. Delaware
Laidlaw One, Inc. Delaware
Laidlaw Transportation Management, Inc. Ohio
National Insurance and Indemnity Corporation Vermont
Laidlaw USA, Inc. New York
Laidlaw International Finance Corporation Ireland
American National Insurance Corporation Barbados
First Transportation Indemnity Ltd. Barbados
FTI Management Ltd. Barbados
3288382 Canada Inc. Canada
E - 1
Greyhound Canada Transportation Corp. Ontario
A-1 Bus Line Pick-Up Ltd. British Columbia
Gray Coach Travel Inc. Ontario
1153931 Ontario Limited Ontario
Greyhound Courier Express Ltd. British Columbia
3554384 Canada Inc. Canada
3765105 Canada Inc. Canada
1327172 Ontario Limited Ontario
Voyageur Corp. Canada
Marguerite Tours Ltd. British Columbia
The Gray Line of Victoria Ltd. Canada
British Double Decker Tours Ltd. British Columbia
Victoria Tours Limited British Columbia
Northland Bus Lines Ltd. British Columbia
518841 Alberta Inc. Alberta
367756 Alberta Inc. Alberta
The Victoria Trolley Company Ltd. British Columbia
Gray Line of Vancouver Holdings Ltd. Canada
Gray Line Vacations Ltd. British Columbia
Laidlaw Transit Ltd. Ontario
Autobus Transco (1988) Inc. Quebec
Capital Bus Sales (1988) Limited Ontario
Manhattan Equipment Supply Company Limited Ontario
331001 Alberta Ltd. Alberta
Barrel Taxi Ltd. Alberta
Checker Cabs (Edmonton) Inc. Alberta
J.I. DeNure (Chatham) Limtied Ontario
Penetang-Midland Coach Lines Limited Ontario
N.N. Lee K. Investments Ltd. Alberta
C. Seeley's Bus Lines Ltd. Ontario
S.C. Food Services (Canada) Inc. Ontario
Scott's Hospitality Limited England
[GREYHOUND LINES, INC.]
Atlantic Greyhound Lines of Virginia, Inc. Virginia
Greyhound de Mexico, S.A. de C.V. (99 %) Mexico
Greyhound Xpress Delivery, L.L.C. Delaware
LSX Delivery, L.L.C. Delaware
Peoria Rockford Bus Lines, L.L.C. Delaware
Wilmington Union Bus Station Corporation North Carolina
GLI Holding Company Delaware
ASI Associates, Inc. Hawaii
Carolina Coach Company Virginia
Seashore Transportation Company North Carolina
On Time Delivery Service, Inc. Minnesota
Peoria Rockford Bus Lines, L.L.C. Delaware
Texas, New Mexico, & Oklahoma Coaches, Inc. Texas
T.N.M. & O Tours, Inc. Texas
Valley Garage Company Texas
Valley Transit Co., Inc. Texas
Vermont Transit Co., Inc. Vermont
Sistema Internacional de Transporte de Autobuses, Inc. Delaware
E - 2
[AMERICAN MEDICAL RESPONSE, INC.]
Hank's Acquisition Corp. Alabama
Fountain Ambulance Service, Inc. Alabama
MedLife Emergency Medical Services, Inc. Alabama
Florida Emergency Partners, Inc. Texas
American Medical Response Northwest, Inc. Oregon
American Medical Response West California
Metropolitan Ambulance Service, Inc. California
American Medical Response of Inland Empire California
Desert Valley Medical Transport, Inc. California
Golden Gate Associates California
San Francisco Ambulance Service, Inc. California
Springs Ambulance Service, Inc. California
American Medical Response of Colorado, Inc. Delaware
International Life Support, Inc. Hawaii
Medevac MidAmerica, Inc. Missouri
Medevac Medical Response, Inc. Missouri
American Medical Response of Oklahoma, Inc. Delaware
American Medical Response of Texas, Inc. Delaware
Kutz Ambulance Service, Inc. Wisconsin
American Medical Response Holdings, Inc. Delaware
American Medical Response Management, Inc. Delaware
Regional Emergency Services LP Florida
Mobile Medic Ambulance Service, Inc. Delaware
Metro Ambulance Service, Inc. Delaware
Metro Ambulance Service (Rural), Inc. Delaware
Medic One Ambulance Service, Inc. Delaware
American Medical Response of South Carolina, Inc. Delaware
American Medical Response of North Carolina, Inc. Delaware
American Medical Response of Georgia, Inc. Delaware
Troup County Emergency Medical Services, Inc. Georgia
Randle Eastern Ambulance Service, Inc. Florida
Medi-Car Systems, Inc. Florida
Medi-Car Ambulance Service, Inc. Florida
American Medical Response of Tennessee, Inc. Delaware
Physicians & Surgeons Ambulance Service, Inc. Ohio
American Medical Response of Illinois, Inc. Delaware
Midwest Ambulance Management Co. Delaware
Paramed, Inc. Michigan
Mercy Ambulance of Evansville, Inc. Indiana
Tidewater Ambulance Service, Inc. Virginia
American Medical Response of Connecticut, Incorporated Connecticut
American Medical Response of Massachusetts, Inc. Massachusetts
American Medical Response Mid-Atlantic, Inc. Pennsylvania
American Medical Response Delaware Valley L.L.C . Delaware
Ambulance Acquisition, Inc. Delaware
Metro Ambulance Service, Inc. Georgia
Broward Ambulance, Inc. Delaware
Atlantic Ambulance Services Acquisition, Inc. Delaware
Atlantic/Key West Ambulance, Inc. Delaware
E - 3
Atlantic/Palm Beach Ambulance, Inc. Delaware
Seminole County Ambulance, Inc. Delaware
LifeFleet Southeast, Inc. Florida
American Medical Pathways, Inc. Delaware
Provida Care, LLC Texas
Adam Transportation Service, Inc. New York
Associated Ambulance Service, Inc. New York
Park Ambulance Service Inc. New York
Five Counties Ambulance Service, Inc. New York
Sunrise Handicap Transport Corp. New York
Laidlaw Medical Transportation, Inc. Delaware
Mercy, Inc. Nevada
American Investment Enterprises, Inc. Nevada
LifeCare Ambulance Service, Inc. Illinois
TEK, Inc. Illinois
Mercy Life Care California
Hemet Valley Ambulance Service, Inc. California
American Medical Response of Southern California California
Medic One of Cobb, Inc. Georgia
Puckett Ambulance Services, Inc. Georgia
Gieger Transfer Service, Inc. Mississippi
January 9, 2003
E - 4
PRICEWATERHOUSECOOPERS [LOGO]
PricewaterhouseCoopers LLP
Chartered Accountants
Mississauga Executive Centre
One Robert Speck Parkway, Suite 1100
Mississauga, Ontario
Auditors' Report Canada L4Z 3M3
Telephone +1 905 949 7400
Facsimile +1 905 949 7415
TO THE SHAREHOLDERS OF LAIDLAW INC.
We have audited the consolidated balance sheets of LAIDLAW INC. as at August 31,
2002 and 2001 and the consolidated statements of operations and deficit and cash
flows for each of the three years in the period ended August 31, 2002. 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.
Except as explained in the following paragraph, we conducted our audits in
accordance with generally accepted auditing standards in Canada and the United
States. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
The loss from discontinued operations in the consolidated statement of
operations for the year ended August 31, 2000 includes the Company's share of
net earnings of Safety-Kleen Corp. (Safety-Kleen) for the three months ended
November 30, 1999 and a write- off of the Company's investment in Safety-Kleen,
as described in Note 12. On July 9, 2001, Safety-Kleen issued consolidated
financial statements for the year ended August 31, 2000 and restated financial
statements for prior years. As discussed in Note 12, the Company has not been
able to accurately determine the impact, if any, that these restated
Safety-Kleen financial statements would have on the Company's previously
reported results for the year ended August 31, 2000. Accordingly, we were not
able to determine the reduction, if any, which might be necessary in the loss
from discontinued operations in 2000 and the corresponding increase in the
deficit as at August 31, 1999. Any such adjustment would have no impact on the
deficit as at August 31, 2000.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at August 31, 2002
and August 31, 2001 and the results of its operations and its cash flows for the
years then ended in accordance with accounting principles generally accepted in
Canada.
Also in our opinion, except for the effect of adjustments, if any, which we
might have determined to be necessary, had we been able to satisfy ourselves
concerning the amount of the increase in the deficit at the beginning of the
year and the corresponding reduction in the loss from discontinued operations
for the year, the consolidated statements of operations and deficit and cash
flows for the year ended August 31, 2000 present fairly, in all material
respects, the results of the Company's operations and cash flows for the year
ended August 31, 2000 in accordance with accounting principles generally
accepted in Canada.
/s/ PricewaterhouseCoopers LLP
Mississauga, Canada PricewaterhouseCoopers LLP
December 17, 2002 Chartered Accountants
COMMENTS BY AUDITORS FOR U.S. READERS ON CANADA-U.S. REPORTING DIFFERENCE
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when the consolidated
financial statements are affected by conditions and events that cast substantial
doubt on the Company's ability to continue as a going concern, such as those
described in Note 1 to the consolidated financial statements. Our report to the
shareholders, dated December 17, 2002, is expressed in accordance with Canadian
reporting standards, which do not permit references to such matters, events and
conditions in the auditors' report when these are adequately disclosed in the
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Mississauga, Canada PricewaterhouseCoopers LLP
December 17, 2002 Chartered Accountants
PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP
and the other member firms of PricewaterhouseCoopers International Limited, each
of which is a separate and independent legal entity.
(CDN. GAAP)
LAIDLAW INC.
(DEBTOR-IN-POSSESSION AS OF JUNE 28, 2001 - NOTE 1)
CONSOLIDATED BALANCE SHEETS
AUGUST 31 (U.S. $ MILLIONS) 2002 2001
-------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $343.5 $281.2
Restricted cash and cash equivalents (Note 3) 75.8 37.2
Short-term deposits and marketable securities
- at cost which approximates market value (Note 3) 16.1 42.4
Trade accounts receivable 490.4 509.7
Other receivables 54.9 62.6
Income taxes recoverable 29.2 20.1
Parts and supplies 50.4 54.4
Other current assets 64.0 70.3
-------- --------
TOTAL CURRENT ASSETS 1,124.3 1,077.9
======== ========
LONG-TERM INVESTMENTS (Note 4) 413.3 339.6
-------- --------
PROPERTY AND EQUIPMENT (Note 5) 1,677.7 1,680.7
-------- --------
OTHER ASSETS
Goodwill (net of accumulated amortization and impairments of
$2,939.7; August 31, 2001 - $2,718.2) 813.1 1,034.8
Pension asset (Note 6) 43.1 45.2
Deferred charges 19.6 31.6
-------- --------
875.8 1,111.6
-------- --------
TOTAL ASSETS $4,091.1 $4,209.8
======== ========
The accompanying notes are an integral part of these statements.
2
LAIDLAW INC.
(DEBTOR-IN-POSSESSION AS OF JUNE 28, 2001 - NOTE 1)
CONSOLIDATED BALANCE SHEETS
AUGUST 31 (U.S. $ MILLIONS) 2002 2001
----------------------------------------------------------------------------------------------------
LIABILITIES
LIABILITIES NOT SUBJECT TO COMPROMISE
CURRENT LIABILITIES
Accounts payable $ 109.7 $ 127.1
Accrued liabilities (Note 7) 504.1 430.9
Current portion of long-term debt (Note 8) 20.3 31.6
---------- ----------
TOTAL CURRENT LIABILITIES 634.1 589.6
LONG-TERM DEBT (Note 8) 204.4 248.6
OTHER LONG-TERM LIABILITIES (Note 9) 382.5 373.6
LIABILITIES SUBJECT TO COMPROMISE (Note 10) 3,977.1 3,978.5
COMMITMENTS AND CONTINGENCIES (Notes 1, 12 and 20)
---------- ----------
TOTAL LIABILITIES 5,198.1 5,190.3
---------- ----------
SHAREHOLDERS' DEFICIENCY
Preference Shares (Note 11) 7.9 7.9
Common Shares; issued and outstanding 325,927,870
(August 31, 2001 - 325,927,870) (Note 11) 2,222.6 2,222.6
Cumulative foreign currency translation adjustments (171.4) (169.3)
Deficit (3,166.1) (3,041.7)
---------- ----------
TOTAL SHAREHOLDERS' DEFICIENCY (1,107.0) (980.5)
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIENCY $ 4,091.1 $ 4,209.8
========== ==========
The accompanying notes are an integral part of these statements.
3
LAIDLAW INC.
(DEBTOR-IN-POSSESSION AS OF JUNE 28, 2001 - NOTE 1)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED AUGUST 31 (U.S. $ MILLIONS EXCEPT PER SHARE AMOUNTS) 2002 2001 2000
----------------------------------------------------------------------------------------------------------------
REVENUE $4,432.1 $4,418.3 $4,273.1
------------------------------------------
Operating expenses 3,551.8 3,574.2 3,424.8
Selling, general and administrative expenses 459.3 460.7 462.4
Depreciation expense 270.6 261.1 255.8
Amortization expense 32.8 67.2 70.6
Goodwill impairment losses (Note 13) 194.7 1,105.1 -
------------------------------------------
INCOME (LOSS) FROM OPERATING SEGMENTS (77.1) (1,050.0) 59.5
Interest expense (Note 10) (27.7) (270.9) (275.1)
Other financing related expenses (Note 14) (44.7) (63.8) (101.5)
Other income (loss) 15.3 9.3 (10.7)
------------------------------------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (134.2) (1,375.4) (327.8)
Income tax recovery (expense) (Note 15) 9.8 45.8 (261.8)
------------------------------------------
LOSS FROM CONTINUING OPERATIONS (124.4) (1,329.6) (589.6)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (Note 12) - 730.7 (1,647.8)
------------------------------------------
NET LOSS ($124.4) ($598.9) ($2,237.4)
==========================================
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE (Note 16)
Continuing operations ($0.38) ($4.08) ($1.80)
Discontinued operations - 2.24 (5.04)
------------------------------------------
Net loss ($0.38) ($1.84) ($6.84)
==========================================
The accompanying notes are an integral part of these statements.
4
LAIDLAW INC.
(DEBTOR-IN-POSSESSION AS OF JUNE 28, 2001 - NOTE 1)
CONSOLIDATED STATEMENTS OF DEFICIT
YEAR ENDED AUGUST 31 (U.S. $ MILLIONS EXCEPT PER SHARE AMOUNTS) 2002 2001 2000
------------------------------------------------------------------------------------------------------------
DEFICIT - BEGINNING OF YEAR ($3,041.7) ($2,442.5) ($173.3)
Net loss (124.4) (598.9) (2,237.4)
Dividends - Preference Shares - (0.3) (0.4)
- Common Shares - - (31.4)
-------------------------------------------
DEFICIT - END OF YEAR ($3,166.1) ($3,041.7) ($2,442.5)
===========================================
DIVIDENDS PER SHARE
(Cdn.$) - Preference Shares $ - $0.82 $1.00
- Common Shares - - 0.14
(U.S.$ equivalent)
- Preference Shares $ - $0.540 $0.680
- Common Shares - - 0.095
The accompanying notes are an integral part of these statements.
5
LAIDLAW INC.
(DEBTOR-IN-POSSESSION AS OF JUNE 28, 2001 - NOTE 1)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED AUGUST 31 (U.S. $ MILLIONS) 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN):
Operating activities $433.8 $447.7 $208.4
Investing activities (275.7) (281.5) (336.3)
Financing activities (95.8) 7.0 177.7
---------------------------------------------
62.3 173.2 49.8
CASH AND CASH EQUIVALENTS* - BEGINNING OF YEAR 281.2 108.0 58.2
---------------------------------------------
CASH AND CASH EQUIVALENTS* - END OF YEAR $343.5 $281.2 $108.0
=============================================
OPERATING ACTIVITIES
Net loss ($124.4) ($598.9) ($2,237.4)
Add (deduct) items not affecting cash:
Depreciation and amortization 303.4 328.3 326.4
Other financing related expenses (Note 14) 44.7 63.8 101.5
Future income taxes - - 255.2
Loss (income) from discontinued operations - (730.7) 1,647.8
Goodwill impairment losses (Note 13) 194.7 1,105.1 -
Loss (gain) on sale of assets (Note 18) (4.2) 6.6 -
Increase (decrease) in accrued interest (0.5) 246.2 76.5
Increase in claims liability and professional liability
insurance accruals 61.6 126.9 51.7
Other (10.4) (6.2) 12.9
Cash provided by (used in financing) other working capital
items (Note 17) 46.2 (43.2) 35.0
Decrease (increase) in restricted cash and cash equivalents
(Note 3) (38.6) 8.2 (45.4)
Cash used for acquisition accruals - - (5.6)
Cash used in discontinued operations (Note 12) - - (2.9)
Cash portion of other financing related expenses (Note 14) (38.7) (58.4) (7.3)
---------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $433.8 $447.7 $208.4
=============================================
* Represents the unrestricted cash and cash equivalents of the Company - Refer
to Note 3
The accompanying notes are an integral part of these statements.
6
LAIDLAW INC.
(DEBTOR-IN-POSSESSION AS OF JUNE 28, 2001 - NOTE 1)
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED AUGUST 31 (U.S. $ MILLIONS) 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property and equipment ($283.3) ($267.3) ($369.0)
Proceeds from sale of property and equipment 45.5 21.8 136.6
Purchases of other assets (1.4) (8.8) (5.9)
Expended on acquisitions (Note 19) (3.6) (2.0) (67.5)
Net increase in investments (37.1) (45.5) (32.9)
Proceeds from sale of assets (Note 18) 4.2 20.3 2.4
---------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES ($275.7) ($281.5) ($336.3)
=============================================
FINANCING ACTIVITIES
Proceeds from issue of long-term debt $172.2 $342.2 $932.6
Repayments of long-term and other non-current liabilities (268.0) (335.2) (699.0)
Repurchase of shares for cancellation (Note 11) - - (26.1)
Proceeds from share issues (Note 11) - - 1.9
Dividends - - (31.6)
Repurchase of preference shares for redemption - - (0.1)
---------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ($95.8) $7.0 $177.7
=============================================
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid (received) during the year for:
Interest $31.9 $30.4 $217.1
---------------------------------------------
Income taxes ($10.4) ($51.0) ($21.2)
---------------------------------------------
The accompanying notes are an integral part of these statements.
7
LAIDLAW INC.
(DEBTOR-IN-POSSESSION AS OF JUNE 28, 2001)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED AUGUST 31, 2002
NOTE 1 - VOLUNTARY PETITION FOR REORGANIZATION, BASIS OF PRESENTATION AND
ABILITY TO CONTINUE OPERATIONS
Voluntary petition for reorganization
On June 28, 2001, Laidlaw Inc. (the "Company") and five of its direct and
indirect subsidiaries (collectively, the "Debtors") filed voluntary petitions
for relief under chapter 11 of the United States Bankruptcy Code, 11 U.S.C.
101-1330 (the "Bankruptcy Code"), in the United States Bankruptcy Court for the
Western District of New York (the "Bankruptcy Court"). The other Debtors
include: Laidlaw USA, Inc. ("Laidlaw USA"), Laidlaw Investments Ltd. ("LIL"),
Laidlaw International Finance Corporation ("LIFC"), Laidlaw One, Inc. ("Laidlaw
One"), and Laidlaw Transportation, Inc. ("LTI"). In addition, the Company and
LIL have commenced Canadian insolvency proceedings under the Canada Companies'
Creditors Arrangement Act ("CCAA") in the Ontario Superior Court of Justice in
Toronto, Ontario (the "Canadian Court"). None of the Company's operating
subsidiaries was included in the filings.
The Debtors remain in possession of their respective properties and are managing
their businesses as debtors-in-possession. Pursuant to the Bankruptcy Code and
the CCAA, however, the Debtors may not engage in transactions outside the
ordinary course of business without the approval of the Bankruptcy Court and the
Canadian Court.
The Company is reorganizing its affairs under the protection of the Bankruptcy
Code and the CCAA and has proposed a plan of reorganization for itself and the
other Debtors. The plan of reorganization must be voted upon by the Company's
stakeholders and approved by the Bankruptcy Court and the Canadian Court. A plan
of reorganization sets forth the means for satisfying claims against and
interests in the Company and the other Debtors, including the liabilities
subject to compromise (See Note 10). Generally, prepetition liabilities are
subject to settlement or compromise under such a plan of reorganization.
Basis of presentation and ability to continue operations
The consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in Canada ("Canadian
GAAP") and all figures are presented in U.S. dollars, as the majority of the
Company's operating assets are located in the United States. Except as indicated
in Note 23, the consolidated financial statements conform, in all material
respects, with accounting principles generally accepted in the United States
("U.S. GAAP").
These consolidated financial statements have been prepared on a "going concern"
basis, which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of operations. The
appropriateness of the "going concern" assumption is dependent upon, among other
things, a successful completion of the proposed reorganization as contemplated
by the plan of reorganization, future profitable operations and the ability to
generate sufficient cash from operations and obtain financing arrangements to
meet obligations. If the "going concern" basis were not appropriate for these
consolidated financial statements,
8
significant adjustments would need to be made to the carrying value of the
assets and liabilities, the reported revenue and expenses and the balance sheet
classifications used.
If the Company successfully completes the proposed reorganization, the Company
will be required to adopt "fresh start" accounting. This accounting would
require that assets and liabilities be recorded at fair value, based on values
determined in connection with the restructuring. Certain reported asset and
liability balances do not yet give effect to the adjustments that may result
from the adoption of "fresh-start" accounting and as a result, would change
materially.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies followed in the preparation of
these consolidated financial statements is as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
all of its subsidiary companies. All significant intercompany transactions are
eliminated. The purchase method of accounting for business combinations has been
used.
REVENUE RECOGNITION
Contract Bus Services and Greyhound
Revenue is recognized at the time services are provided. Revenue collected on
contracts and tickets in advance is deferred and taken into income as the
services are provided.
Healthcare Services
Revenue is recognized at the time of service and is recorded at amounts
estimated to be recoverable, based upon recent experience, under reimbursement
arrangements with third-party payors, including Medicare, Medicaid, private
insurers, managed care organizations and hospitals, or directly from patients.
The Company derives approximately 39% of its collections in the healthcare
services segment from Medicare and Medicaid, 7% from contracted hospitals, 44%
from private insurers, including prepaid health plans and other sources, and 10%
directly from patients.
Healthcare reimbursement is complex and may involve lengthy delays. Third-party
payors are continuing their efforts to control expenditures for healthcare and
may disallow, in whole or in part, claims for reimbursement based on
determinations that certain amounts are not reimbursable under plan coverage,
were for services provided that were not medically necessary, or insufficient
supporting information was provided.
As a result, there is a reasonable possibility that recorded estimates could
change materially and that retroactive adjustments may change the amounts
realized from third-party payors. Such adjustments are recorded in future
periods as adjustments become known.
9
FUTURE INCOME TAXES
The Company accounts for income taxes using the liability method. Under this
method, future income tax assets and liabilities are recognized based on
differences between the bases of assets and liabilities used for financial
statement and income tax purposes, using substantively enacted tax rates. Future
income tax assets are recognized only to the extent that management determines
that it is more likely than not that the future income tax assets will be
realized. The effect of changes in income tax rates on future income tax assets
and liabilities is recognized in the period that the change occurs.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include short-term investments that are part of the
Company's cash management portfolio. These investments are highly liquid and
have original maturities of three months or less.
PARTS AND SUPPLIES
Parts and supplies are valued at the lower of cost, determined on a first-in,
first-out basis and replacement cost.
LONG-TERM INVESTMENTS
Investments in shares of companies over which the Company has significant
influence are accounted for by the equity method. Equity earnings are recorded
to the extent that any increase in the carrying value is determined to be
realizable. The Company's investment in Safety-Kleen Corp. ("Safety-Kleen") was
written off during fiscal 2000 and no equity earnings were recorded after
November 30, 1999 (See Note 12). Other long-term investments are carried at
cost.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation of property and
equipment is provided substantially on a straight-line basis over their
estimated useful lives which are as follows:
Buildings - 20 to 40 years
Vehicles - 5 to 18 years, and
Other - 3 to 10 years.
The Company periodically reviews the carrying values of its property and
equipment to determine whether such values are recoverable from future estimated
cash flows from operations. The amount of any impairment is charged against
income.
GOODWILL AND DEFERRED CHARGES
Goodwill is amortized on a straight-line basis over 40 years. The Company
reviews the value assigned to goodwill to determine if it has been permanently
impaired in value when facts and
10
circumstances indicate that an impairment may have occurred. The measurement
of impairment is based on the ability to recover the unamortized balance of
goodwill from the estimated fair value of the underlying business determined
from independent valuations. The amount of any impairment is charged against
income.
In July 2001, the accounting bodies in both Canada and the United States changed
the accounting rules with respect to the amortization of goodwill and other
intangibles. Goodwill and intangible assets with indefinite useful lives will no
longer be amortized, but instead will be tested for impairment at least annually
based on their fair value. The new pronouncements become applicable to the
Company effective September 1, 2002.
Deferred charges are amortized on a straight-line basis over a two to five-year
period depending on the nature of the deferred costs.
DEFINED BENEFIT PENSION PLANS
The costs of pension benefits are actuarially determined using the projected
benefit method pro-rated on service and management's best estimate of expected
plan investment performance, salary escalation, retirement ages of employees and
mortality tables. For the purpose of calculating the expected return on plan
assets, those assets are valued at a market-related value. The net actuarial
gain or loss in excess of 10 percent of the greater of the benefit obligation
and the market-related value of plan assets is amortized over the average
remaining service period of active employees.
FOREIGN CURRENCY TRANSLATION
The Company's operations are all of a self-sustaining nature. Assets and
liabilities are translated to U.S. dollars at the exchange rate in effect at the
balance sheet date and revenue and expenses at weighted monthly average exchange
rates for the year. Translation gains and losses are included in the cumulative
foreign currency translation adjustment balance in Shareholders' Deficiency.
CLAIMS LIABILITIES AND PROFESSIONAL LIABILITY RESERVES
The Company discounts the claims liabilities and professional liability reserves
of the Company's insurance programs.
Investment income earned on the investments of the wholly owned insurance
subsidiaries has been offset against the costs related to the Company's
self-insurance program and are included as part of "operating expenses" in the
Consolidated Statements of Operations. The accretion of imputed interest from
the discounting of the reserves is also included as part of the costs related to
the Company's self-insurance program.
FINANCIAL INSTRUMENTS
The Company's accounts receivable, other receivables, accounts payable, accrued
liabilities, liabilities subject to compromise, other long-term liabilities and
long-term debt constitute
11
financial instruments. The carrying value of these financial instruments, other
than long-term debt (See Note 8) and liabilities subject to compromise (See Note
10), approximates their fair value. Concentration of credit risks in accounts
receivable is limited, due to the large number of customers comprising the
Company's customer base throughout North America. A significant component of the
Company's revenue is derived from Medicare and Medicaid. Given that these are
government programs, the credit risk for these customers is considered low. The
Company performs ongoing credit evaluations of its other customers but does not
require collateral to support customer accounts receivable. The Company
establishes an allowance for doubtful accounts based on the credit risk
applicable to particular customers, historical trends and other relevant
information.
The Company may use derivative financial instruments for purposes other than
trading to minimize the risk and costs associated with financing and operating
activities. Contracts that effectively meet risk reduction and correlation
criteria are recorded using hedge accounting. There are no derivative financial
instruments used in fiscal 2002 or fiscal 2001 (see Note 14).
USE OF ESTIMATES
The preparation of financial statements in accordance with generally accepted
accounting principles requires the Company to make estimates and assumptions
that affect reported amounts of assets, liabilities, revenue and expenses, and
disclosure of contingencies. Future events could alter such estimates (See also
Note 9, 12 and 20).
In addition to the use of estimates in the recording of healthcare services
revenue as described above, the Company uses third-party actuaries and
assumptions of future events, including future settlement costs, in estimating
the claims liability reserves. As a result, there is a reasonable possibility
that the recorded claims liabilities could change materially.
COMPARATIVE FIGURES
Certain figures as at August 31, 2001 and for the years ended August 31, 2001
and 2000 have been reclassified to conform to the current period's presentation.
NOTE 3 - RESTRICTED CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Restricted cash and cash equivalents of $75.8 million (August 31, 2001 - $37.2
million) and short-term deposits and marketable securities of $16.1 million
(August 31, 2001 - $42.4 million) are assets of the Company's wholly owned
insurance subsidiaries and are used to support the current portion of claims
liabilities under the Company's self-insurance program. If these amounts are
withdrawn from the subsidiaries, they will have to be replaced by other suitable
financial assurances. Given the recent financial position of the Company,
management has concluded that such cash and cash equivalents and short-term
deposits and marketable securities of the insurance subsidiaries are restricted.
12
NOTE 4 - LONG-TERM INVESTMENTS
August 31, ($ millions) 2002 2001
----------------------------------------------------------------------------
Investments of insurance subsidiaries $249.2 $213.6
Other restricted investments 142.7 104.5
Other 21.4 21.5
----------------------------------------------------------------------------
$413.3 $339.6
============================================================================
The investments of the insurance subsidiaries are used to support the Company's
self insurance program. The investments are comprised principally of government
securities and investment grade debt securities. If these amounts are withdrawn
from the subsidiaries, they will have to be replaced by other suitable financial
assurances and are, therefore, considered restricted.
The majority of the other restricted investments relate to collateral deposits
required by the entities issuing the Company's bid and performance bonds. The
collateral is required given the Company's financial position and status as a
debtor-in-possession.
At August 31, 2002, the fair value of the long-term investments amounted to
approximately $418 million (August 31, 2001 - $345 million).
NOTE 5 - PROPERTY AND EQUIPMENT
August 31, ($ millions) 2002 2001
----------------------------------------------------------------------------------------------------------------
ACCUMULATED Accumulated
COST DEPRECIATION NET Cost Depreciation Net
----------------------------------------------------------------------------------------------------------------
Land $162.2 $ - $162.2 $159.3 $ - $159.3
Buildings 284.3 109.5 174.8 268.8 89.1 179.7
Vehicles 2,128.3 953.0 1,175.3 2,054.0 876.7 1,177.3
Other 417.2 251.8 165.4 389.6 225.2 164.4
----------------------------------------------------------------------------------------------------------------
$2,992.0 $1,314.3 $1,677.7 $2,871.7 $1,191.0 $1,680.7
================================================================================================================
NOTE 6 - PENSION PLANS
Subsidiaries of the Company sponsor 13 (August 31, 2001 - 13) defined benefit
pension plans. Four plans relate to Greyhound Canada Transportation Corp. and
cover employees represented by The Canadian Auto Workers and the Amalgamated
Transit Union ("ATU") and all non-unionized employees meeting certain
eligibility requirements. A fifth plan is a multi-employer pension plan,
instituted in 1992, to cover certain union mechanics of Greyhound Lines, Inc.
("Greyhound") represented by the International Association of Machinists and
Aerospace Workers. The remaining eight plans are the following single employer
pension plans maintained in the United States by Greyhound (the "Greyhound U.S.
Plans"):
- Greyhound Lines, Inc. Salaried Employees Defined Benefit Plan ("Greyhound
Salaried Plan");
- Greyhound Lines, Inc. Amalgamated Transit Union Local 1700 Council
Retirement & Disability Plan ("ATU Plan");
- Texas, New Mexico and Oklahoma Coaches, Inc. Employees Retirement Plan;
- Vermont Transit Co. Inc. Employees Defined Benefit Pension Plan ("Vermont
Transit Plan");
13
- Carolina Coach Company Pension Plan;
- Carolina Coach Company International Association of Machinist Pension Plan;
- Carolina Coach Company Amalgamated Transit Union Pension Plan; and
- Carolina Coach Company Supplemental Executive Retirement Plan.
The ATU Plan covers approximately 14,000 current and former employees hired
before November 1, 1983 by Greyhound, fewer than 1,000 of whom are active
employees. The ATU Plan provides retirement benefits to the covered employees
based upon a percentage of average final earnings, reduced pro rata for service
of less than 15 years. Under the terms of the collective bargaining agreement,
participants in this plan accrue benefits as long as no contributions are due
from the Company. During fiscal 2002, the ATU Plan actuary advised the Company
and the union that the decline in the financial markets had made it likely that
contributions to the ATU Plan would be required for the plan in calendar 2003.
The Company and union met and agreed to freeze service and wage accruals
effective March 15, 2002. The ATU Plan actuary continues to advise that
contributions will be required. The Company and the union will meet to discuss
the continuation of the freeze. In the event the Company and the union are
unable to negotiate a method for avoiding contributions in 2003, or for years
after 2003, or the Company is otherwise required to make a contribution, any
such contributions could have a material adverse effect on the financial
condition of Greyhound and, as a result, the Company. The Greyhound Salaried
Plan covered salaried employees of Greyhound through May 7, 1990, when the plan
was curtailed. The Vermont Transit Plan covered substantially all employees at
Vermont Transit Company through June 30, 2000, when the plan was curtailed. The
other five Greyhound U.S. Plans cover salaried and hourly personnel of other
Greyhound subsidiaries. Except as described below, it is the Company's policy to
fund the minimum required contribution under existing laws.
Potential Pension Plan Funding Requirements
For financial reporting and investment planning purposes, the Company currently
uses an actuarial mortality table that closely matches the actual experience
related to the existing participant population. For funding purposes, United
States pension law mandates the use of a prescribed actuarial mortality table
and discount rates that differ from those used by the Company for financial
reporting and investment planning purposes. The ATU Plan represents
approximately 75% of the total plan assets and benefit obligation as at August
31, 2002. Based upon the application of the actuarial mortality table, discount
rates and funding calculations prescribed by current regulations, and further
assuming a continuation of the freeze of wage and service accruals and that the
ATU Plan assets can obtain annual investment returns of 7.5%, estimated Company
contributions to the ATU Plan, based on the Company's policy of funding the
minimum contributions required by law, will total $187 million through 2007.
Lowering the assumed investment return on ATU plan assets to 5% results in
estimated contributions through 2007 of $205 million, while a 10% return results
in estimated contributions through 2007 of $169 million. Nevertheless, there is
no assurance that the ATU Plan will be able to earn the assumed rate of return,
new regulations may result in changes in the prescribed actuarial mortality
table or discount rates and there may be market driven changes in the discount
rates, which would result in the Company being required to make contributions in
the future that differ significantly from the estimates above.
Further, in connection with its bankruptcy reorganization, the Company and the
Pension Benefit Guaranty Corporation ("PBGC"), a United States government agency
that administers the mandatory termination insurance program for defined benefit
pension plans under the Employee Retirement Income Security Act ("ERISA"), have
agreed orally to the principal economic terms
14
relating to claims asserted by the PBGC against the Debtors regarding the
funding levels of the Greyhound U.S. Plans (the "PBGC Agreement"). Under the
PBGC Agreement, upon the consummation of the proposed plan of reorganization,
the Company and its subsidiaries will contribute $50 million in cash to the
Greyhound U.S. Plans and the Company will transfer shares of its
post-reorganization common stock equal in value to $50 million to a trust formed
for the benefit of such plans (the "Pension Plan Trust").
The PBGC Agreement provides that the PBGC will be granted a first priority lien
on the common stock held in the Pension Plan Trust. All proceeds of stock sales
will be contributed directly to the Greyhound U.S. Plans. The PBGC will have
non-voting participation in these sale decisions. If the proceeds from the sales
of common stock exceed $50 million, the excess amount may be credited against
the next-due minimum funding obligations of the Company and its subsidiaries,
but will not reduce the June 2004 required contribution under the PBGC
Agreement. If the proceeds from the sales of common stock do not aggregate $50
million, the Company and its subsidiaries will be required to contribute the
amount of the shortfall in cash to the Greyhound U.S. Plans at the end of 2004.
Further, the Company and its subsidiaries will contribute an additional $50
million in cash to the Greyhound U.S. Plans in June 2004. These contributions
and transfers will be in addition to the contributions to the Greyhound U.S.
Plans, if any, required under the minimum funding requirements of ERISA. The
PBGC also will receive a second priority lien on the assets of the Company's
operating subsidiaries (other than Greyhound).
15
August 31, ($ millions) 2002 2001
---------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $828.6 $828.5
Service cost 6.6 8.3
Interest cost 59.1 59.6
Plan participants' contributions 0.2 0.2
Plan amendments (8.0) -
Actuarial loss 3.4 18.2
Benefits paid (83.6) (83.5)
Foreign exchange (0.9) (2.7)
---------------------------------------------------------------------------------------------
Benefit obligation at end of year $805.4 $828.6
---------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $838.8 $893.7
Actual return on plan assets (10.7) 22.8
Employer contributions 4.3 6.9
Plan participants' contributions 1.7 1.7
Benefits paid (83.6) (83.5)
Foreign exchange (1.1) (2.8)
---------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $749.4 $838.8
---------------------------------------------------------------------------------------------
Funded status ($56.0) $10.2
Unrecognized transition asset (10.1) (12.0)
Unrecognized prior service costs (8.2) (0.2)
Unrecognized net loss 112.2 41.2
---------------------------------------------------------------------------------------------
Prepaid benefit cost $37.9 $39.2
---------------------------------------------------------------------------------------------
August 31, ($ millions) 2002 2001
---------------------------------------------------------------------------------------------
ALLOCATED ON THE BALANCE SHEET AS FOLLOWS:
Pension asset $43.1 $45.2
Other long-term liabilities (5.2) (6.0)
---------------------------------------------------------------------------------------------
$37.9 $39.2
---------------------------------------------------------------------------------------------
Nine of the Company's pension plans (August 31, 2001 - seven) have projected and
accumulated benefit obligations in excess of plan assets, for which the
projected benefit obligation, accumulated benefit obligation and fair value of
plan assets are $687.3 million, $685.3 million and $618.7 million, respectively
as of August 31, 2002 ($68.9 million, $67.2 million and $61.5 million,
respectively as at August 31, 2001). The ATU Plan is one of the nine plans that
at August 31, 2002 have projected and accumulated benefit obligations in excess
of plan assets. At August 31, 2001, the ATU Plan had assets in excess of
projected and accumulated benefit obligations.
Assets of the various plans consist primarily of government-backed securities,
corporate equity securities, guaranteed insurance contracts, annuities and
corporate debt obligations.
16
In determining the benefit obligations and service costs for the Company's
defined benefit pension plans, the following assumptions were used:
August 31, ($ millions) 2002 2001 2000
------------------------------------------------------------------------------------------------------------
WEIGHTED-AVERAGE ASSUMPTIONS FOR END OF YEAR DISCLOSURE:
Discount rate 7.2% 7.4% 7.7%
Rate of salary progression 3.9% 3.9% 4.0%
Expected long-term rate of return on plan assets 7.3% 7.9% 7.7%
------------------------------------------------------------------------------------------------------------
August 31, ($ millions) 2002 2001 2000
------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC PENSION
(INCOME) COSTS:
Service cost $6.6 $8.3 $8.7
Interest cost 59.1 59.6 58.7
Expected return on assets (58.7) (61.9) (66.9)
Amortization of actuarial gain and transition asset (0.6) (1.5) (0.9)
------------------------------------------------------------------------------------------------------------
Net periodic pension (income) cost $6.4 $4.5 ($0.4)
------------------------------------------------------------------------------------------------------------
NOTE 7 - ACCRUED LIABILITIES
August 31, ($ millions) 2002 2001
------------------------------------------------------------------------------------------------------------
Accrued wages and benefits $112.0 $107.9
Current portion of claims liabilities (Note 9) 185.2 130.5
Accrued vacation pay 43.9 33.8
Other 163.0 158.7
------------------------------------------------------------------------------------------------------------
$504.1 $430.9
------------------------------------------------------------------------------------------------------------
NOTE 8 - LONG-TERM DEBT
WEIGHTED AVERAGE
INTEREST RATE
August 31, ($ millions) Maturity 2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------------------
DEBT PAYABLE WITHIN ONE YEAR
Notes and other 9.2% 9.2% $20.3 $31.6
-------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT
Notes and other 2004-2033 10.8% 9.9% $204.4 $248.6
-------------------------------------------------------------------------------------------------------------------------
Total debt $224.7 $280.2
-------------------------------------------------------------------------------------------------------------------------
Fair value of all long-term debt $211.1 $266.7
-------------------------------------------------------------------------------------------------------------------------
Long-term debt of $224.7 million at August 31, 2002 includes $47.2 million of
secured debt incurred to finance vehicles, facilities and other equipment. The
balance of $177.5 million is unsecured debt.
17
Repayment schedule
The aggregate amount of minimum payments required on long-term debt in each of
the years indicated is as follows: ($ millions)
Year ending August 31, 2003 $20.3
2004 15.5
2005 13.0
2006 12.8
2007 157.7
thereafter 5.4
--------------------------------------------------------------------
$224.7
--------------------------------------------------------------------
Debtor-in-possession facility
To ensure sufficient liquidity to meet ongoing operating needs, the Company
obtained debtor-in-possession ("DIP") financing from General Electric Capital
(the "DIP Facility"). The DIP Facility is guaranteed by certain of the Company's
direct and indirect subsidiaries located in the United States and Canada (other
than Greyhound and its subsidiaries and joint ventures)(collectively, the
"Guarantors"). The term of the DIP Facility will expire on the earliest of (a)
August 8, 2003, (b) the prepayment in full of all amounts outstanding under the
DIP Facility and the termination of the lenders' commitments thereunder and (c)
the effective date of the approved plan of reorganization.
The maximum aggregate borrowing available under the DIP Facility is $200.0
million. The total borrowing available to LIFC, Laidlaw Transportation
Management, Inc., LTI, Laidlaw One and Laidlaw USA (the "US Borrowers") is
$180.0 million (the "U.S. DIP Facility"), including a letter of credit
sub-facility of $100.0 million (the "US LC DIP Sub-Facility"). The maximum
borrowing available to the Company and LIL (the "Canadian Borrowers") is $20.0
million (the "Canadian DIP Facility"), including a letter of credit sub-facility
of $10.0 million (the "Canadian LC DIP Sub-Facility"). The total maximum usage
of the U.S. LC DIP Sub-Facility and the Canadian LC DIP Sub-Facility is not to
exceed $100.0 million at any time.
The amount of credit available to the Borrowers under the DIP Facility is based
on the Borrowers' last twelve-months earnings before interest, taxes,
depreciation and amortization ("EBITDA"). Further, certain non-core operating
entities are subject to maximum availability limits based on their respective
EBITDA performance. The Borrowers may use the proceeds of loans made under the
DIP Facility for working capital and other general corporate purposes of the
Borrowers.
Borrowings under each facility bear interest at the Borrowers' option, at rates
per annum equal to either (1) a one, two or three month reserve adjusted LIBOR
plus 2.0% or (2) a floating rate equal to the index rate plus 0.5%. The
Borrowers pay letter of credit fees to each administrative agent under each
facility equal to 2.0% per annum of the face amount of the letters of credit.
Other fees consist of (1) an unused facility fee equal to 0.5% per annum on the
average unused daily balance of each facility and (2) a prepayment premium in
the amount of 1.0% of the aggregate commitments under each facility if
prepayment is the result of any Borrower defaults, voluntary termination (with
the exception of emergence from the Reorganization Cases) or
18
refinancing of any part of such facility with another financing prior to August
8, 2003. Finally, the Borrowers and the Guarantors also paid a $2.0 million fee
to the agents during fiscal 2001. To secure the Borrowers' obligations under
each facility, the Borrowers granted a first priority lien on all of the
existing and after-acquired assets of the Borrowers. To secure the Guarantors'
obligations under the DIP Facility, the Guarantors granted a security interest
in all of the assets of the Guarantors, subject to certain exceptions contained
in the DIP Facility documentation.
As of August 31, 2002, the Company had no borrowings under the DIP Facility, but
issued letters of credit of $25.5 million and had $174.5 million of
availability.
The Company was in default as of August 31, 2002 of several financial covenants
contained in the DIP facility. The defaults relate to the failure by several of
the Company's operating entities to meet minimum EBITDA thresholds for the
period ended August 31, 2002. In addition, several operating entities did not
meet the capital expenditure requirements specified under the DIP Facility for
the fiscal quarter ended August 31, 2002. The Company received a waiver under
the DIP facility with respect to these defaults and expects to obtain future
waivers. There is no assurance such waivers will be obtained.
The Greyhound Facility
In October 2000, Greyhound entered into a revolving credit facility, expiring
October 24, 2004, with Foothill Capital Corporation to fund working capital
needs and for general corporate purposes (the "Greyhound Facility"). Greyhound
was extended a revolving line of credit in an amount of $125.0 million including
a sub-facility of $50.0 million for letters of credit. Borrowings initially bore
interest at a rate equal to Wells Fargo Bank's prime rate plus 0.5% per annum or
LIBOR plus 2.0% as selected by Greyhound. After December 31, 2000, the interest
rates were subject to quarterly adjustment based upon Greyhound's ratio of debt
to EBITDA, as defined in the agreement, for the four previous quarters. Letters
of credit fees are based on the applicable LIBOR margins. The Greyhound Facility
is secured by liens on substantially all of the assets of Greyhound and the
stock and assets of certain of its subsidiaries and is subject to certain
affirmative and negative operating and financial covenants. As of August 31,
2002, Greyhound was in compliance with all such covenants, including
restrictions on the redemption or retirement of certain subordinated
indebtedness or equity interest, payment of dividends and transactions with
affiliates, including the Company.
Based upon Greyhound's fiscal 2003 operating budget, management anticipates
remaining in compliance with these covenants, although only by a small margin
during fiscal 2003. Management is closely monitoring this situation and intends
to request covenant amendments should it appear likely such amendments will be
necessary in order to remain in compliance with the covenants, although, there
is no assurance that such amendments will be granted.
As of August 31, 2002, the Company had no borrowings under the Greyhound
Facility, but issued letters of credit of $26.8 million and had availability of
$98.2 million.
NOTE 9 - OTHER LONG-TERM LIABILITIES
August 31, ($ millions) 2002 2001
-----------------------------------------------------------------------
Claims liabilities $258.9 $245.5
Professional liability 48.9 34.2
Other 74.7 93.9
-----------------------------------------------------------------------
$382.5 $373.6
=======================================================================
19
Claims liabilities
The Company's $444.1 million of claims liabilities as at August 31, 2002
(current liabilities of $185.2 million and non-current liabilities of $258.9
million) (August 31, 2001 - $376.0 million) represent claim reserves under the
Company's insurance programs. The total claims liabilities represent
non-discounted reserves of $508.2 million (August 31, 2001 - $423.1 million)
discounted at 5.5% (August 31, 2001 - 5.5%). Generally, the Company retains
liability for auto, general and workers' compensation claims, where permitted,
for the first $5 million of any one occurrence. For fiscal 2001, the Company
purchased third-party aggregate stop loss insurance to limit the Company's
exposure to losses between $3 million and $5 million and third-party insurance
for losses in excess of $5 million. Effective September 1, 2001, the Company did
not continue with the stop loss insurance coverage for losses between $3 million
and $5 million per occurrence. As a result, for claims incurred on September 1,
2001 and onwards, the Company's exposure is generally for the first $5 million
of any one occurrence with third-party insurance to minimize exposure on losses
in excess of $5 million. These insurance arrangements are utilized to limit
maximum loss, provide greater diversification of risk and minimize exposure to
loss. The current portion of these liabilities represents the payments expected
to be made during the next 12 months.
Professional liability
The Company's $51.9 million (current liabilities of $3.0 million and non-current
liabilities of $48.9 million) of professional liability reserves as at August
31, 2002 (August 31, 2001 - $34.2 million) represent reserves for the Company's
professional liability insurance programs. The total professional liability
reserves represent non-discounted reserves of $59.1 million (August 31, 2001 -
$40.3 million) discounted at 6.0% (August 31, 2001 - 6.0%).
Professional liability insurance for up to a limit of $1 million per occurrence
is provided to the majority of physicians who are employed or contracted by
companies under service agreements with the Company. Although the majority of
the professional liability insurance available for physicians is provided in
this manner, the contracted physicians may obtain their own professional
liability insurance directly or through the contracting hospital with the
Company's consent.
Prior to January 1, 2002, the Company procured such insurance coverage for
professional liability claims on a claims-made basis. A previous insurance
program with PHICO Insurance Company (the "PHICO Policies" and "PHICO"), which
expired on January 1, 2001, provided an aggregate self-insurance retention for
the first $27.0 million of claims incurred and reported during the period
October 1, 1997 to January 1, 2001. The self-insurance retention amounts were
completely paid as at August 31, 2002. In December 2000, the Company purchased
an extended reported policy ("ERP") for the PHICO Policies covering claims
reported after January 1, 2001, but incurred during the coverage period of the
PHICO Policies, for a premium of $18.0 million. The ERP has an aggregate limit
of $40.0 million. For calendar 2001, the Company purchased insurance which
provides up to $10.0 million of coverage on a first year, claims-made basis.
Effective January 1, 2002, the Company self-insured professional liability
claims for claims incurred during calendar 2001 and reported on or after January
1, 2002 and for claims occurring on or after January 1, 2002.
20
On February 1, 2002, PHICO was placed into liquidation by the Insurance
Commissioner of the Commonwealth of Pennsylvania. The PHICO Liquidation Order
will impact pending professional liability claims covered under the PHICO
Policies and both pending claims under the ERP and claims not yet reported under
the ERP. Those claims pending under the PHICO Policies will be eligible for
coverage under individual state guaranty funds, subject to various limitations
and exclusions based upon net worth of the insured and the presence of other
applicable insurance. The amount of coverage available under each state guaranty
fund will vary according to the limits and specific provisions of those funds.
Those claims falling within the coverage of the ERP will also be eligible for
coverage under the individual state guaranty funds, although the guaranty fund
provisions may apply differently to claims under the ERP. Some state guaranty
funds may deny coverage for any claims under the ERP brought after March 2,
2002. The Company is pursuing various options in an attempt to maximize
insurance coverage for ERP claims, including litigation as necessary.
The Company has an estimated $91.0 million in reported claims and incurred but
not reported claims ("IBNR") based on reported claim reserves, development
factors and actuarial analysis of IBNR related to the PHICO Policies and the
ERP. Of this amount, it is estimated that $27.2 million of claim costs as at
August 31, 2002 ($22.0 million when discounted at 6%) (August 31, 2001 - $17.0
million when discounted at 6%) may likely exceed or be excluded from specific
state fund guaranty limits or exceed the ERP's $40.0 million aggregate limit and
would be borne by the Company. As at August 31, 2002, the Company has fully
provided for its estimated liability.
NOTE 10 - LIABILITIES SUBJECT TO COMPROMISE
The principal categories of claims classified as liabilities subject to
compromise under reorganization proceedings are identified below. All amounts
below may be subject to future adjustment depending on Bankruptcy Court action,
further developments with respect to disputed claims, or other events, including
the reconciliation of claims filed with the Bankruptcy Court to amounts included
in the Company's records. Additional prepetition claims may arise from the
rejection of additional executory contracts or unexpired leases by the Company.
Under a confirmed plan or plans of reorganization, all prepetition claims may be
paid and discharged at amounts substantially less than their allowed amounts.
On a consolidated basis, recorded liabilities subject to compromise under the
reorganization proceedings consisted of the following:
August 31, ($ in millions) 2002 2001
-----------------------------------------------------------------------------
Accrued liabilities $11.3 $12.7
Safety-Kleen Guarantees (Notes 12 and 25) 77.3 77.3
Derivative liabilities (Note 14) 89.5 89.5
Safety-Kleen settlement (Notes 12 and 25) 225.0 225.0
Accrued interest payable 370.7 370.7
Facility (as defined in Note 14) 1,163.3 1,163.3
Debentures (as defined in Note 14) 2,040.0 2,040.0
-----------------------------------------------------------------------------
$3,977.1 $3,978.5
=============================================================================
As a result of the Debtors' chapter 11 filing, principal and interest payments
may not be made on pre-petition debt of the Debtors without Bankruptcy Court
approval or until a reorganization plan or plans defining the repayment terms,
has been confirmed. The total interest on pre-petition debt
21
that was not paid or accrued during fiscal 2002 was $274.2 million ($324.5
million since June 29, 2001). The Bankruptcy Code generally disallows the
payment of interest that accrues post-petition with respect to unsecured or
under-secured claims.
The Debtors are parties to litigation matters and claims that are incurred in
the normal course of its operations. Generally, litigation related to "claims",
as defined by the Bankruptcy Code, is stayed. The outcome of the bankruptcy
process on these matters cannot be predicted with certainty.
In addition to items for which liabilities subject to compromise have been
reflected in these consolidated financial statements, proofs of claim in the
amount of approximately $150 million have been filed against the Debtors and
will need to be addressed in proceedings before the Bankruptcy Court and the
Canadian Court. The Company continues to review the proofs of claim and has
filed or will file appropriate objections to the claims in the Bankruptcy and
Canadian Courts. As of November 30, 2002, the Company believes it has identified
approximately $94 million, which relate to obligations of the operating
subsidiaries of the Company and $43 million of such claims which are duplicative
or without merit.
NOTE 11 - CAPITAL STOCK
If the plan of reorganization (See Note 1) is approved, all outstanding Common
Shares, options to acquire Common Shares and Preference Shares will be
cancelled.
(a) AUTHORIZED
An unlimited number of Common Shares.
An unlimited number of First, Second, Third and Fourth Preference
Shares, each of which is issuable in series, are authorized. Unlimited
numbers are designated as First Preference Shares Series E, Convertible
First Preference Shares Series F and Convertible First Preference
Shares Series G.
(b) ISSUED AND FULLY PAID PREFERENCE SHARES
August 31, ($ in millions except per share amounts) 2002 2001 2000
----------------------------------------------------------------------------------------------------------
5% Cumulative Convertible First Preference Shares Series G; issued at
Cdn. $20 per share, redeemable at the Company's discretion, at Cdn.
$20 per share; issued and outstanding 528,770 (August 31, 2001 -
528,770; August 31, 2000 - 528,770) $7.9 $7.9 $7.9
----------------------------------------------------------------------------------------------------------
(c) MATERIAL CHANGES IN ALL CLASSES OF CAPITAL STOCK SINCE
SEPTEMBER 1, 1999
During fiscal 2000, the Company purchased 4,710,900 Common Shares for
cancellation at a total cost of $26.1 million.
(d) STOCK OPTION AND STOCK PURCHASE PLANS
The Company has two existing employee stock option plans, a directors'
stock option plan and employee stock purchase plans. Due to the
Company's voluntary petition for
22
reorganization, no options have been granted or exercised during
fiscal 2002 or fiscal 2001. For more information on these plans, see
Note 26.
NOTE 12 - DISCONTINUED OPERATIONS
HEALTHCARE BUSINESSES
During fiscal 2001, the Company concluded that the previously announced disposal
of the healthcare businesses was no longer in the best interests of its
stakeholders. The healthcare services businesses were therefore reinstated as
continuing operations in fiscal 2001 and earlier years were reclassified.
As a result of recontinuing the healthcare services businesses in fiscal 2001,
the Company reversed the remaining provision for loss on sale of discontinued
operations. This reversal reduced net loss by $985.9 million ($3.02 per share)
in fiscal 2001.
During fiscal 2000, while the healthcare businesses were considered discontinued
operations, the Company recorded a provision for loss on sale of $987.8 million
($3.02 per share).
Upon recontinuance of the healthcare services businesses in fiscal 2001, the
Company evaluated the healthcare services assets for impairment. The resulting
impairment of goodwill is summarized in Note 13.
SAFETY-KLEEN CORP.
The Company owns 44% of the common shares of Safety-Kleen. On June 9, 2000,
Safety-Kleen announced that it and 73 of its U.S. subsidiaries filed voluntary
petitions for Chapter 11 relief in the United States Bankruptcy Court for the
District of Delaware.
During fiscal 2002, the Company abandoned its investment in Safety-Kleen. As a
result the operations for Safety-Kleen have been reported as discontinued
operations and previously reported financial statements have been reclassified.
The summarized statements of operations for Safety-Kleen are as follows:
Year ended August 31, ($ millions) 2002 2001 2000
------------------------------------------------------------------------------
Equity in earnings $ - $ - $10.8
Investment impairment and other losses - (255.2) (670.8)
------------------------------------------------------------------------------
$ - ($255.2) ($660.0)
==============================================================================
During fiscal 2000, the Company recorded provisions for (i) investment
impairment charges totalling $603.8 million to reduce the investment in
Safety-Kleen to a nominal amount, (ii) $61.6 million owing under a guarantee by
the Company of a Safety-Kleen note and (iii) $5.4 million for other amounts
owing from Safety-Kleen.
During fiscal 2001, pursuant to a resolution in fiscal 2002 of various disputes
between the Company and Safety-Kleen, the Company recorded provisions for (i) a
$225.0 million claim in favor of Safety-Kleen as a general unsecured claim in
Class 6 of the Company's plan of reorganization, (ii) $15.7 million related to
guarantees of certain industrial revenue bonds, (iii) $7.8 million related to
23
insurance matters, (iv) $6.0 million related to guarantees of performance bonds
and (v) $0.7 million related to certain other litigation matters. These items
are described further in Note 25.
Contingencies related to Safety-Kleen
For information on guarantees and other contingencies related to Safety-Kleen,
see Note 25.
Restated financial statements of Safety-Kleen
On July 9, 2001, Safety-Kleen issued consolidated financial statements for the
year ended August 31, 2000 and restated consolidated financial statements for
the years ended August 31, 1997 through August 31, 1999 and, on September 26,
2001, issued interim consolidated financial statements for the nine months ended
May 31, 2001, including financial information for the first, second and third
quarters of fiscal 2001. Safety-Kleen reported that it had not restated any
quarterly financial results for periods prior to fiscal 2001.
Management of the Company has not been provided access to all of the supporting
information for Safety-Kleen's restated consolidated financial statements. As a
result, the Company has not been able to assess the basis upon which
Safety-Kleen restated its financial statements. In addition, given the Company's
varying ownership percentages of Safety-Kleen throughout fiscal 2000, 1999, 1998
and 1997, the Company is unable to determine what impact, if any, that
Safety-Kleen's restatement may have on the Company's previously reported results
for fiscal years ended August 31, 2000 and prior years.
Because the Company wrote off the value of its investment in Safety-Kleen during
fiscal 2000, Safety-Kleen's restated consolidated financial statements and its
reported fiscal 2000 results would not result in any adjustments to the
Company's previously reported consolidated balance sheet as of August 31, 2000
nor to any consolidated balance sheets reported for any period ending subsequent
to August 31, 2000. However, given the Safety-Kleen restatement and assuming the
accuracy thereof, a portion of the losses associated with the impairment of the
Company's investment in Safety-Kleen that were recorded as part of the $660.0
million loss relating to Safety-Kleen, reflected in the Company's consolidated
statement of operations for the fiscal year ended August 31, 2000, may be
properly allocable to earlier fiscal periods.
Given the Company's varying ownership percentages in Safety-Kleen and the lack
of access to all of the supporting information for Safety-Kleen's restatements,
the Company is only able to estimate the effect of Safety-Kleen's restatements
on the Company's statements of operations. These estimated ranges are as follows
($ millions):
Safety-Kleen's The Company's estimated
The Company's ownership reported range of potential
Year ended percentage in Safety-Kleen adjustments: adjustments:
August 31, during the period Income (loss) Income (loss)
------------------------------------------------------------------------------------------------------------------
Pre-2000 35.3% to 100.0% ($588.1) ($217.6) to ($262.3)
2000 43.5% to 43.6% N/A 217.6* to 262.3*
Total for all years
------------------------------------------------------------------------------------------------------------------
35.3% to 100.0% ($588.1) $ - to $ -
==================================================================================================================
* The estimated range of adjustments recorded prior to the second quarter of
fiscal 2000 would decrease the reported investment impairment loss in
fiscal 2000.
24
While the Company has not restated its previously reported consolidated
financial results and has recorded no equity income or loss with respect to its
investment in Safety-Kleen since November 30, 1999, if Safety-Kleen reports or
provides the Company with the required quarterly financial information for the
restated fiscal periods and if Safety-Kleen enables the Company to assess the
supporting information for its restatements, the Company may be required to
restate its consolidated financial statements for the fiscal years ended August
31, 2000 and prior years.
NOTE 13 - GOODWILL IMPAIRMENT LOSSES
Fiscal 2002 goodwill impairment losses
During fiscal 2002, the Company incurred a goodwill impairment charge of $194.7
million ($123.5 million in the Greyhound business, $58.0 million in the
healthcare services segment and $13.2 million in the contract bus services
segment). The goodwill impairment in the Greyhound business was due to a
significant decline in the market value of the business due to the effect of
September 11, 2001, the unrelated October 3, 2001 incident involving a Greyhound
passenger and general economic conditions. The goodwill impairments in the
healthcare and contract bus services segments were due to further reductions in
expected future performance.
Fiscal 2001 goodwill impairment losses
During fiscal 2001, the Company incurred a goodwill impairment charge of
$1,105.1 million. The Company reviewed the value assigned to goodwill, because
the following factors indicated that a permanent impairment in value existed at
all of the reported segments: (i) a significant decrease in the market value of
the businesses primarily due to the Company's June 28, 2001 voluntary petition
for reorganization (See Note 1) and/or (ii) continued depressed operating
results over the last few years. The goodwill impairment was calculated based on
independent valuations of the underlying businesses.
The $1,105.1 million goodwill impairment charge is comprised of a $128.5 million
charge in the contract bus services business, a $372.1 million charge in the
Greyhound business and a $604.5 million charge in the healthcare services
business.
NOTE 14 - OTHER FINANCING RELATED EXPENSES
The Company has incurred the following pre-tax charges as a result of (i) events
of default under the Company's $1.425 billion syndicated bank facility (the
"Facility"), (ii) events of default on certain Company debentures totaling $2.04
billion (the "Debentures") and (iii) the voluntary petition for reorganization
as described in Note 1:
Year Ended August 31, ($ millions) 2002 2001 2000
-----------------------------------------------------------------------------
Net hedging losses on interest rate swaps $ - $ - $71.7
Deferred financing costs - - 15.3
Interest earned on cash accumulated during
Chapter 11 and CCAA (1.4) (0.2) -
Professional fees and other costs 46.1 64.0 14.5
-----------------------------------------------------------------------------
$44.7 $63.8 $101.5
=============================================================================
25
Prior to fiscal 2000, the Company had entered into interest rate swap contracts
and interest rate options (collectively, the "Swaps") to lower funding costs and
alter interest rate exposures. As a result of violations of the covenants under
the Facility and the Debentures and the interest payment moratorium, the
counterparties terminated all Swap contracts. In addition, the Swaps were no
longer effective hedges, as the various debentures that they were hedging had
become current obligations. Therefore, the market value of the Swaps as of the
termination date of the Swap contracts of $89.5 million, net of deferred swap
premiums of $17.8 million, was accrued and expensed during the year ended August
31, 2000.
Deferred financing costs totaling $15.3 million relating to the Debentures,
which previously were being amortized over the life of the related debt
instruments, were expensed during the year ended August 31, 2000.
Professional fees and other costs include financing, accounting, legal and
consulting services incurred by the Company during the ongoing negotiations with
the Facility members and Debenture holders and relating to the voluntary
petition for reorganization. None of these services were provided by the
Company's independent auditors.
Upon the successful completion of the proposed reorganization, the Company
expects to pay completion fees, which may be approximately $15 million. The
Company has not accrued for these fees.
NOTE 15 - INCOME TAXES
Income (loss) from continuing operations before income taxes and provision for
(recovery of) income taxes by geographic area are as follows:
Year Ended August 31, ($ millions) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES
United States and foreign
Before goodwill impairment losses and other financing
related expenses $31.9 $0.8 ($43.3)
Goodwill impairment losses (194.7) (1,010.0) -
Other financing related expenses (15.1) (58.9) (11.3)
--------------------------------------------------------------------------------------------------------------
(177.9) (1,068.1) (54.6)
--------------------------------------------------------------------------------------------------------------
Canada
Before goodwill impairment losses and other financing
related expenses 73.3 (207.3) (183.0)
Goodwill impairment losses - (95.1) -
Other financing related expenses (29.6) (4.9) (90.2)
--------------------------------------------------------------------------------------------------------------
43.7 (307.3) (273.2)
--------------------------------------------------------------------------------------------------------------
Total
Before goodwill impairment losses and other financing
related expenses 105.2 (206.5) (226.3)
Goodwill impairment losses (194.7) (1,105.1) -
Other financing related expenses (44.7) (63.8) (101.5)
--------------------------------------------------------------------------------------------------------------
($134.2) ($1,375.4) ($327.8)
==============================================================================================================
26
Year Ended August 31, ($ millions) 2002 2001 2000
-------------------------------------------------------------------------------------------------------------------------
PROVISION FOR (RECOVERY OF) CURRENT INCOME TAXES
United States and foreign
Canada ($10.8) ($48.3) $5.9
-------------------------------------------------------------------------------------------------------------------------
1.0 2.5 0.7
-------------------------------------------------------------------------------------------------------------------------
Total ($9.8) ($45.8) $6.6
-------------------------------------------------------------------------------------------------------------------------
PROVISION FOR FUTURE INCOME TAXES
United States and foreign $- $ - $161.3
Canada - - 93.9
-------------------------------------------------------------------------------------------------------------------------
$- $ - $255.2
-------------------------------------------------------------------------------------------------------------------------
TOTAL PROVISION FOR (RECOVERY OF) INCOME TAXES
United States and foreign ($10.8) ($48.3) $167.2
Canada 1.0 2.5 94.6
-------------------------------------------------------------------------------------------------------------------------
($9.8) ($45.8) $261.8
=========================================================================================================================
The Company's effective income tax rates on income from continuing operations
before goodwill impairment losses and other financing related expenses are as
follows:
2002 2001 2000
Year Ended August 31, ($ millions) $ % % %
----------------------------------------------------------------------------------------------------------------------------
Combined basic Canadian Federal and
Provincial income taxes $41.5 39.4% (42.8)% (44.2)%
Effect of lower taxes applicable to U.S. and
foreign income (3.7) (3.5) 6.4 (20.3)
Permanent differences 12.3 11.7 10.3 17.1
Unrecognized current year benefit - - 33.2 55.6
Foreign loss carryback realized (13.2) (12.5) (29.1) -
Valuation reserve adjustments (47.3) (45.0) - 107.8
Other 0.6 0.6 (0.2) (0.3)
----------------------------------------------------------------------------------------------------------------------------
Effective income taxes ($9.8) (9.3)% (22.2)% 115.7%
============================================================================================================================
The net future income tax assets and liabilities contain the following temporary
differences:
August 31, ($ millions) 2002 2001
----------------------------------------------------------------------------------------------------------------------
Future income tax assets:
Net operating loss carryforwards $393.1 $387.3
Interest deduction carryforwards 268.0 290.1
Accruals not yet deducted and other items 331.9 287.9
----------------------------------------------------------------------------------------------------------------------
Future income tax assets 993.0 965.3
Future income tax liabilities:
Difference in property and equipment and goodwill basis
141.7 133.7
----------------------------------------------------------------------------------------------------------------------
Net future income tax asset before valuation reserve 851.3 831.6
Valuation reserve (851.3) (831.6)
----------------------------------------------------------------------------------------------------------------------
Total $ - $ -
======================================================================================================================
27
During fiscal 2001, the Company recovered foreign taxes previously paid of $60.0
million.
The Company has net operating loss carryforwards of approximately $1.125 billion
that, depending upon the jurisdiction, expire between the years 2003 and 2022.
Net operating loss carryforwards of approximately $680 million, which expire
between 2003 and 2009 and capital loss carryforwards of approximately $122
million, with no limitation on expiration, are associated with its Canadian
incorporated entities. Net operating loss carryforwards of approximately $445
million are associated with its United States incorporated entities and expire
between 2010 and 2022. If the plan of reorganization (See Note 1) is approved,
it is projected that a significant portion of the net operating loss
carryforwards and all of the capital loss carryforwards will be reduced as a
result of the forgiveness of debt, resulting in no anticipated cash taxes. In
addition, the Company has $706 million of deferred interest expense for income
tax purposes, with no limitation on expiration.
During fiscal 2000, the Company believed it was no longer more likely than not
that it would realize these benefits and accordingly, increased the valuation
reserves by $243.9 million to fully provide for the net future income tax
assets. In addition, a future income tax asset of $21.5 million relating to the
Company's investment in Safety-Kleen was charged as a tax expense.
NOTE 16 - EARNINGS (LOSS) PER SHARE
The earnings (loss) per share figures are calculated using the weighted average
number of shares outstanding during the respective fiscal years. Assumed
exercise of the employee and directors' stock options would not be dilutive in
any of the respective fiscal years.
Under the proposed plan of reorganization, the existing common shares, preferred
shares and stock options will be cancelled and new common stock will be issued
to the Debtors' creditors who have prepetition amounts owing. The plan of
reorganization has yet to be confirmed by the courts.
Information required to calculate the basic or primary earnings per share is as
follows:
Year Ended August 31,
($ millions except per share amounts) 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations ($124.4) ($1,329.6) ($589.6)
Preference share dividends - (0.3) (0.4)
-----------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations available to common shareholders
(124.4) (1,329.9) (590.0)
Income (loss) from discontinued operations (Note 12) - 730.7 (1,647.8)
-----------------------------------------------------------------------------------------------------------------------------
Net loss available to common shareholders ($124.4) ($599.2) ($2,237.8)
-----------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares outstanding (millions) 325.9 325.9 327.0
-----------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share
Continuing operations ($0.38) ($4.08) ($1.80)
Discontinued operations - 2.24 (5.04)
-----------------------------------------------------------------------------------------------------------------------------
Net loss ($0.38) ($1.84) ($6.84)
-----------------------------------------------------------------------------------------------------------------------------
28
NOTE 17 - STATEMENT OF CASH FLOWS
Year Ended August 31, ($ millions) 2002 2001 2000
----------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED IN) FINANCING
OTHER WORKING CAPITAL ITEMS COMPRISES:
Trade and other accounts receivable $31.7 $22.5 $44.5
Income taxes recoverable (7.6) (3.7) 5.1
Parts and supplies (0.9) (1.8) (7.5)
Other current assets 21.2 (15.4) 0.6
Accounts payable and accrued liabilities 1.8 (44.8) (7.7)
----------------------------------------------------------------------------------------------------------------
$46.2 ($43.2) $35.0
================================================================================================================
During fiscal 2002, the Company purchased $31.3 million worth of vehicles that
were financed by debt (2001 - $24.1 million, 2000 - $17.6 million).
NOTE 18 - SALE OF ASSETS
During fiscal 2002, the Company received $4.2 million for various notes
receivable previously written off. These transactions resulted in a pre-tax gain
of $4.2 million, which was included in other income (loss).
During fiscal 2001, the Company sold its investment in a food services business
for $18.9 million and sold another investment for $1.4 million. These
transactions resulted in a pre-tax loss of $6.6 million, which was included in
other income (loss).
During fiscal 2000, the Company received $2.4 million as compensation for the
expropriation of its Canadian ambulance transportation licenses. This
transaction resulted in no net pre-tax gain or loss.
NOTE 19 - ACQUISITIONS
During fiscal 2002, the Company purchased seven contract bus services
businesses.
During fiscal 2001, the Company purchased one contract bus services business and
two Greyhound businesses. During fiscal 2000, the Company purchased six contract
bus services businesses, three Greyhound businesses and seven healthcare
services businesses.
These acquisitions have been accounted for as purchases, and accordingly, these
financial statements include the results of operations of the acquired
businesses from the dates of acquisition.
29
The expenditures are summarized as follows:
Year Ended August 31, ($ millions) 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------
Assets acquired, at fair value
Property and equipment $2.6 $1.8 $33.8
Goodwill - 1.5 60.8
Long-term investments and other assets 1.4 (1.7) 0.8
-----------------------------------------------------------------------------------------------------------------
4.0 1.6 95.4
Liabilities assumed
Other long-term liabilities (0.2) (0.4) (12.5)
Long-term debt - - (17.1)
-----------------------------------------------------------------------------------------------------------------
3.8 1.2 65.8
Working capital (0.2) 0.8 1.7
-----------------------------------------------------------------------------------------------------------------
Cash expended on acquisitions $3.6 $2.0 $67.5
=================================================================================================================
Details of the businesses acquired during the year ended August 31, 2001 are as
follows: ($ millions)
Contract Bus
Services Greyhound Total
--------------------------------------------------------------------------------------------------------------------
Assets acquired, at fair value
Property and equipment $ - $1.8 $1.8
Goodwill 0.1 1.4 1.5
Long-term investments and other assets - (1.7) (1.7)
--------------------------------------------------------------------------------------------------------------------
0.1 1.5 1.6
Liabilities assumed
Other long-term liabilities - (0.4) (0.4)
Long-term debt - - -
--------------------------------------------------------------------------------------------------------------------
0.1 1.1 1.2
Working capital - 0.8 0.8
--------------------------------------------------------------------------------------------------------------------
Cash expended on acquisitions $0.1 $1.9 $2.0
====================================================================================================================
Details of the businesses acquired during the year ended August 31, 2000 are as
follows: ($ millions)
Contract Bus Healthcare
Services Greyhound Services Total
---------------------------------------------------------------------------------------------------------------------------------
Assets acquired, at fair value
Property and equipment $13.5 $20.1 $0.2 $33.8
Goodwill 11.1 28.9 20.8 60.8
Long-term investments and other assets 0.7 0.1 - 0.8
---------------------------------------------------------------------------------------------------------------------------------
25.3 49.1 21.0 95.4
Liabilities assumed
Other long-term liabilities (3.8) (2.6) (6.1) (12.5)
Long-term debt (0.3) (16.3) (0.5) (17.1)
---------------------------------------------------------------------------------------------------------------------------------
21.2 30.2 14.4 65.8
Working capital (0.1) 2.3 (0.5) 1.7
---------------------------------------------------------------------------------------------------------------------------------
Cash expended on acquisitions $21.1 $32.5 $13.9 $67.5
=================================================================================================================================
30
NOTE 20 - COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
Rental expense incurred under operating leases was $148.3 million, $127.6
million and $138.2 million in fiscal 2002, fiscal 2001 and fiscal 2000,
respectively.
The Company leases some of the vehicles used in its operations. These vehicles
generally provide for the lessee to pay taxes, maintenance, insurance and
certain other operating costs. The leases on most of the vehicles contain
certain purchase provisions or residual value guarantees and have lease terms of
typically seven years. Of those leases that contain residual value guarantees,
the aggregate residual value at lease expiration is $140.2 million (August 31,
2001 - $125.2 million), of which the Company has guaranteed $87.6 million
(August 31, 2001 - $78.0 million). The table of future minimum operating lease
payments that follows excludes any payment related to the residual value
guarantee, which may be due upon termination of the lease. The Company has the
right to exercise a purchase option with respect to the leased vehicles or the
vehicles can be sold to a third party. To date, the Company has never incurred
any liability as a result of the residual value guarantee.
Rentals payable under operating leases for premises, vehicles and equipment are
as follows ($ millions):
Year ending August 31, 2003 $131.4
2004 105.8
2005 87.1
2006 57.0
2007 37.8
thereafter 58.7
-----------------------------------------------------------------------------
$477.8
=============================================================================
Corporate guarantees
Refer to Note 25 for corporate guarantees relating to Safety-Kleen.
Letters of credit
At August 31, 2002, the Company had $124.1 million (August 31, 2001 - $91.4
million) in outstanding letters of credit. A total of $52.3 million of these
letters of credit have been issued under the DIP and Greyhound Facilities with
substantially all of the balance being issued under the Facility.
Environmental matters
The Company's operations are subject to numerous environmental laws, regulations
and guidelines adopted by various governmental authorities in the jurisdictions
in which the Company operates. Liabilities are recorded when environmental
liabilities are either known or considered probable and can be reasonably
estimated. On an ongoing basis, management assesses and evaluates environmental
risk and, when necessary, conducts appropriate corrective measures.
31
The Company provides for environmental liabilities using its best estimates.
Actual environmental liabilities could differ significantly from these
estimates.
Income tax matters
The respective tax authorities, in the normal course, audit the Company's tax
filings of previous fiscal years. It is not possible at this time to predict the
final outcome of these audits or to establish a reasonable estimate of possible
additional taxes owing, if any.
Legal proceedings
The Company is a defendant in various lawsuits arising in the ordinary course of
business, primarily cases involving personal injury and property damage claims
and employment related claims. Based on the Company's assessment of known claims
and its historical claims payout pattern and discussion with internal and
outside legal counsel and risk management personnel, management believes that
there is no proceeding either threatened or pending against the Company relating
to such personal injury and/or property damage claims arising out of the
ordinary course of business that, if resolved against the Company, would have a
materially adverse effect upon the Company's consolidated financial position or
results of operations.
As described in Note 1, the Debtors filed a voluntary petition for
reorganization under the Bankruptcy Code on June 28, 2001. Management of the
Company continues to operate the business of the Debtors as a
debtor-in-possession. In this proceeding, the Debtors intend to propose and seek
confirmation of a plan or plans of reorganization. Pursuant to the automatic
stay provision of the respective Bankruptcy Codes, virtually all pending
prepetition litigation against the Debtors is currently stayed.
The Company is a party to securities litigation commenced by shareholders of the
Company and of Safety-Kleen and by bondholders of the Company and Safety-Kleen.
As a result of the Company's voluntary petitions for relief under the protection
of the Bankruptcy Code and the CCAA, these actions are stayed with respect to
the Company. A settlement of securities litigation commenced by bondholders of
the Company has been approved by the Bankruptcy Court and the Canadian Court; if
the settlement receives the other required judicial approvals and is implemented
on the current terms, the plaintiff bondholder classes would receive $42.875
million and the estate of the Company would receive $12.5 million. Pursuant to
an order of the Bankruptcy Court, the other securities claims are subordinated
and will receive no distributions under the plan of reorganization. See Note 27
for additional details with respect to the various securities litigation cases.
A complaint was filed in the United States District Court for the Southern
District of Mississippi against the Company and others. The complaint alleges
causes of action for breach of contract, tortious breach of contract, breach of
fiduciary duty, breach of duty of good faith and fair dealing, breach of duty of
confidential relations, usurpation of corporate opportunity, negligent
misrepresentation, fraudulent misrepresentation, violation of federal antitrust
statutes, tortious interference with contractual relations, tortious
interference with prospective contractual relations, tortious interference with
prospective business relationships, fraud and abuse of superior bargaining
power. This case alleges that plaintiff and Laidlaw Osco Holdings, Inc. (now
Safety-Kleen Osco Holdings, Inc.) agreed to form a corporation to own and
develop a hazardous waste treatment facility in Mississippi.
32
On November 6, 2000, a complaint was filed in the United States District Court
for the Southern District of Mississippi against the Company and others. The
complaint alleges causes of action for breach of contract, tortious breach of
contract, breach of fiduciary duty, breach of duty of good faith and fair
dealing, breach of duty of confidential relations, negligent misrepresentation,
fraudulent misrepresentation, violation of federal and state antitrust statutes,
tortious interference with prospective business relationships, fraud, and abuse
of superior bargaining power. This case alleges that plaintiff was injured as a
result of the Company's 1994 acquisition of United States Pollution Control,
Inc., a company that was developing a hazardous waste project in Mississippi in
a joint venture with the plaintiff. On June 14, 2001, the court entered an order
consolidating this action with the action detailed above. Although the claims
against the Company have been stayed, plaintiffs have filed proofs of claims in
the Company's bankruptcy case and have moved the Bankruptcy Court to modify the
automatic stay to allow them to pursue their claims against the Company.
On December 13, 2002 the Bankruptcy Court issued an order disallowing in their
entirety and expunged in all respects these two complaints filed in the United
States District Court for the Southern District of Mississippi.
Healthcare Services Issues
A substantial majority of the Company's healthcare services revenue is
attributable to payments received from third-party payors including Medicare,
Medicaid and private insurers. The Company is subject to various regulatory
requirements in connection with its participation in the Medicare and Medicaid
programs. The Center for Medicare and Medicaid Services has enacted rules that
will revise the policy on Medicare coverage of ambulance services focusing on
the medical necessity for the particular ambulance services. Rule changes in
this area will impact the business of the Company. The Company has implemented a
plan which it believes will mitigate potential adverse effects of rule changes
on its business.
The Company, like other Medicare and Medicaid providers, is subject to
government audits of its Medicare and Medicaid reimbursement claims.
Accordingly, retroactive revenue adjustments from these programs could occur.
The Company is also subject to the Medicare and Medicaid fraud and abuse laws,
which prohibit any bribe, kick-back or rebate in return for the referral of
Medicare or Medicaid patients. Violations of these prohibitions may result in
civil and criminal penalties and exclusion from participation in the Medicare
and Medicaid programs. The Company has implemented policies and procedures that
it believes will assure that it is in substantial compliance with these laws and
has accrued provisions, as appropriate, for settlement of prior claims.
The Company is currently undergoing investigations by certain government
agencies regarding compliance with Medicare fraud and abuse statutes. The
Company is cooperating with the government agencies conducting these
investigations and is providing requested information to the governmental
agencies. These reviews are covering periods prior to the Company's acquisition
of the operations of certain businesses, as well as for periods after
acquisition. Management believes that the remedies existing under specific
purchase agreements and accruals established in the consolidated financial
statements are sufficient.
Fuel purchase commitments
Historically, fuel costs represent approximately 3% to 5% of revenue. Due to the
significance of fuel expenses, particularly diesel fuel, to the operations of
the Company and the historical
33
volatility of fuel prices, the Company has initiated a program to minimize the
fluctuations in the price of its diesel fuel purchases. The intent of the
program is to mitigate the impact of fuel price changes on the Company's
operating margins and overall profitability by entering into forward supply
contracts ("FSCs") with certain vendors. The Company enters into FSCs for
roughly one third of the Company's total annual fuel purchases. The FSCs
generally stipulate set bulk delivery volumes at prearranged prices for a set
period. The volumes agreed to be purchased by the Company are well below the
forecasted total bulk fuel needs for the given location. Therefore, the risk of
being forced to purchase fuel through the FSCs that is not required by the
Company is minimal. Also, to the extent that the Company enters FSCs for
portions of its total fuel needs, it may not realize the benefit of decreases in
fuel prices. Conversely, to the extent that the Company does not enter into FSCs
for portions of its total fuel needs, it may be adversely affected by increases
in fuel prices.
NOTE 21 - SEGMENTED INFORMATION
The Company has three reportable segments: contract bus services, Greyhound and
healthcare services. The contract bus services segment consists of two operating
units. One unit provides school bus transportation throughout Canada and the
United States. The other unit provides municipal transit and paratransit bus
transportation within the United States. The Greyhound segment provides
inter-city and tourism bus transportation throughout North America. The
healthcare services segment consists of two operating units. One unit provides
healthcare transportation services in the United States and the other provides
emergency management services in the United States.
The Company evaluates performance and allocates resources based on income from
operations before depreciation and amortization. The accounting policies of the
reportable segments are the same as those described in Note 2. The Company's
reportable segments are business units that offer different services and are
each managed separately.
34
SERVICES
Year Ended August 31, ($ millions) 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------------
CONTRACT BUS SERVICES
--------------------------------------------------------------------------------------------------------------------------
Revenue $1,789.2 $1,774.2 $1,728.1
Income from operations before depreciation and amortization*
Depreciation and amortization 257.8 141.4 303.8
Income (loss) from operations* 186.6 189.8 187.1
Total identifiable assets 71.2 (48.4) 116.7
Capital expenditures 1,859.5 1,814.3 1,909.9
- sustenance and expansion (net)
- acquisitions 152.2 154.6 190.7
3.6 0.1 21.1
--------------------------------------------------------------------------------------------------------------------------
GREYHOUND
--------------------------------------------------------------------------------------------------------------------------
Revenue $1,223.7 $1,254.8 $1,197.8
Income (loss) from operations before depreciation and
amortization** (69.9) (286.7) 93.2
Depreciation and amortization 58.1 63.8 61.2
Income (loss) from operations** (128.0) (350.5) 32.0
Total identifiable assets 731.8 863.8 1,216.1
Capital expenditures
- sustenance and expansion (net) 62.6 85.3 33.3
- acquisitions - 1.9 32.5
--------------------------------------------------------------------------------------------------------------------------
HEALTHCARE SERVICES
--------------------------------------------------------------------------------------------------------------------------
Revenue $1,419.2 $1,389.3 $ 1,347.2
Income (loss) from operations before depreciation and
amortization*** 38.4 (576.4) (11.1)
Depreciation and amortization 58.7 74.7 78.1
Loss from operations*** (20.3) (651.1) (89.2)
Total identifiable assets 944.1 938.1 1,588.7
Capital expenditures
- sustenance and expansion (net) 55.5 38.4 36.0
- acquisitions - - 13.9
==========================================================================================================================
* Including a goodwill impairment charge of $13.2 in 2002 ($128.5 in 2001 and
$NIL in 2000) (Note 13)
** Including a goodwill impairment charge of $123.5 in 2002 ($372.1 in 2001 and
$NIL in 2000) (Note 13)
*** Including a goodwill impairment charge of $58.0 in 2002 ($604.5 in 2001 and
$NIL in 2000) (Note 13)
GEOGRAPHIC
Year Ended August 31, ($ millions) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------
UNITED STATES
------------------------------------------------------------------------------------------------------------------------------
Revenue $4,089.9 $4,073.7 $3,930.1
Income (loss) from operations before depreciation and
amortization* 173.0 (683.8) 321.0
Income (loss) from operations* (98.3) (978.8) 27.1
Total long-lived assets** 2,154.3 2,397.9 3,447.0
------------------------------------------------------------------------------------------------------------------------------
CANADA
------------------------------------------------------------------------------------------------------------------------------
Revenue $342.2 $344.6 $343.0
Income (loss) from operations before depreciation and
amortization*** 53.3 (37.9) 64.9
Income (loss) from operations*** 21.2 (71.2) 32.4
Total long-lived assets** 336.5 317.6 441.6
==============================================================================================================================
* Including goodwill impairment charges of $194.7 in 2002 ($1,010.0 in 2001
and $NIL in 2000) (Note 13)
** Long-lived assets represents property, equipment and goodwill
*** Including goodwill impairment charges of $NIL in 2002 ($95.1 in 2001 and
$NIL in 2000) (Note 13)
35
CONSOLIDATED
Year Ended August 31, ($ millions) 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------
Revenue $4,432.1 $4,418.3 $4,273.1
------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations before depreciation and
amortization* 226.3 (721.7) 385.9
Depreciation and amortization expense 303.4 328.3 326.4
------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations* (77.1) (1,050.0) 59.5
Interest expense net of other income (loss) (12.4) (261.6) (285.8)
Other financing related expenses (44.7) (63.8) (101.5)
Income tax recovery (expense) 9.8 45.8 (261.8)
------------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations ($124.4) ($1,329.6) ($589.6)
------------------------------------------------------------------------------------------------------------------------------
Total identifiable assets of segments $3,535.4 $3,616.2 $4,714.7
Corporate assets 555.7 593.6 473.2
------------------------------------------------------------------------------------------------------------------------------
Total assets $4,091.1 $4,209.8 $5,187.9
------------------------------------------------------------------------------------------------------------------------------
Capital expenditures
- sustenance and expansion (net) $270.5 $278.4 $255.9
- acquisitions 3.6 2.0 67.5
==============================================================================================================================
*Including goodwill impairment charges of $194.7 in 2002 ($1,105.1 in 2001; $NIL
in 2000) (Note 13)
NOTE 22 - CONDENSED COMBINED FINANCIAL STATEMENTS OF ENTITIES IN REORGANIZATION
PROCEEDINGS
CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2002
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION CONSOLIDATED
($ millions) PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS
-----------------------------------------------------------------------------------------------------------------------------
Revenue $ - $4,432.1 $ - $4,432.1
Operating expenses 12.2 4,497.0 - 4,509.2
Intercompany charges (income) (68.3) 68.3 - -
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) from operating
segments 56.1 (133.2) - (77.1)
Interest expense, net of other income 7.8 (20.2) - (12.4)
Intercompany interest income (expense) 240.4 (240.4) - -
Other financing related expenses (29.7) (15.0) - (44.7)
Equity loss of intercompany investments (288.3) - 288.3 -
-----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (13.7) (408.8) 288.3 (134.2)
Income tax recovery (expense) 10.1 (0.3) - 9.8
Intercompany transfer of income tax
losses (120.8) 120.8 - -
-----------------------------------------------------------------------------------------------------------------------------
Net income (loss) ($124.4) ($288.3) $288.3 ($124.4)
=============================================================================================================================
36
CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
AS OF AUGUST 31, 2002
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION CONSOLIDATED
($ millions) PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS
-------------------------------------------------------------------------------------------------------------------------
ASSETS:
Current assets $80.2 $1,044.1 $ - $1,124.3
Intercompany receivables and
investments 3,341.7 - (3,341.7) -
Long-term investments 11.7 401.6 - 413.3
Property and equipment 3.8 1,673.9 - 1,677.7
Goodwill - 813.1 - 813.1
Other assets - 62.7 - 62.7
-------------------------------------------------------------------------------------------------------------------------
$3,437.4 $3,995.4 ($3,341.7) $4,091.1
-------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities $12.1 $622.0 $ - $634.1
Intercompany payables - 897.5 (897.5) -
Non-current liabilities 11.8 575.1 - 586.9
Liabilities subject to compromise 3,977.1 - - 3,977.1
SHAREHOLDERS' (DEFICIENCY) EQUITY
(563.6) 1,900.8 (2,444.2) (1,107.0)
-------------------------------------------------------------------------------------------------------------------------
$3,437.4 $3,995.4 ($3,341.7) $4,091.1
=========================================================================================================================
CONDENSED COMBINED CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED AUGUST 31, 2002
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION CONSOLIDATED
($ millions) PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS
--------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $49.5 $384.3 $ - $433.8
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (0.1) (283.2) - (283.3)
Proceeds from sale of property
and equipment - 45.5 - 45.5
Proceeds from sale of assets 1.2 3.0 - 4.2
Net increase in investments - (37.1) - (37.1)
Increase in intercompany investment (40.0) - 40.0 -
Other investing activities - (5.0) - (5.0)
--------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in)
investing activities (38.9) (276.8) 40.0 (275.7)
--------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net repayments of long-term debt - (95.8) - (95.8)
Proceeds from share issues - 40.0 (40.0) -
--------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities - (55.8) (40.0) (95.8)
--------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 10.6 51.7 - 62.3
Cash and cash equivalents at:
Beginning of year 41.9 239.3 - 281.2
--------------------------------------------------------------------------------------------------------------------------------
End of year $52.5 $291.0 $ - $343.5
================================================================================================================================
37
CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED AUGUST 31, 2001
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION CONSOLIDATED
($ millions) PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS
------------------------------------------------------------------------------------------------------------------------------
Revenue $ - $4,418.3 $ - $4,418.3
Operating expenses 10.0 5,458.3 - 5,468.3
Intercompany charges (income) (55.2) 55.2 - -
------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operating
segments 45.2 (1,095.2) - (1,050.0)
Interest expense, net of other income (loss) (227.8) (33.8) - (261.6)
Intercompany interest income
(expense) 482.7 (482.7) - -
Other financing related expenses (48.1) (15.7) - (63.8)
Impairment in value of
intercompany investments - (644.2) 644.2 -
Equity loss of intercompany investments (650.7) - 650.7 -
------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing
operations before income taxes (398.7) (2,271.6) 1,294.9 (1,375.4)
Income tax recovery (expense) 55.0 (9.2) - 45.8
------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (343.7) (2,280.8) 1,294.9 (1,329.6)
Income (loss) from discontinued operations (255.2) 985.9 - 730.7
------------------------------------------------------------------------------------------------------------------------------
Net income (loss) ($598.9) ($1,294.9) $1,294.9 ($598.9)
==============================================================================================================================
CONDENSED COMBINED CONSOLIDATED BALANCE SHEET
AS OF AUGUST 31, 2001
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION CONSOLIDATED
($ millions) PROCEEDINGS PROCEEDINGS ELIMINATIONS TOTALS
------------------------------------------------------------------------------------------------------------------------------
ASSETS:
Current assets $68.1 $1,009.8 $ - $1,077.9
Intercompany receivables and
investments 3,485.8 - (3,485.8) -
Long-term investments 13.8 325.8 - 339.6
Property and equipment 4.0 1,676.7 - 1,680.7
Goodwill - 1,034.8 - 1,034.8
Other assets - 76.8 - 76.8
------------------------------------------------------------------------------------------------------------------------------
$3,571.7 $4,123.9 ($3,485.8) $4,209.8
------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Current liabilities $10.2 $579.4 $ - $589.6
Intercompany payables - 4,311.8 (4,311.8) -
Non-current liabilities 19.2 603.0 - 622.2
Liabilities subject to compromise 3,978.5 - - 3,978.5
SHAREHOLDERS' (DEFICIENCY) EQUITY
(436.2) (1,370.3) 826.0 (980.5)
------------------------------------------------------------------------------------------------------------------------------
$3,571.7 $4,123.9 ($3,485.8) $4,209.8
==============================================================================================================================
38
CONDENSED COMBINED CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED AUGUST 31, 2001
ENTITIES IN ENTITIES NOT IN
REORGANIZATION REORGANIZATION CONSOLIDATED
($ millions) PROCEEDINGS PROCEEDINGS TOTALS
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $85.6 $362.1 $447.7
-------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment - (267.3) (267.3)
Proceeds from sale of property and equipment - 21.8 21.8
Proceeds from sale of assets 1.4 18.9 20.3
Net decrease (increase) in investments 3.1 (48.6) (45.5)
Other investing activities - (10.8) (10.8)
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 4.5 (286.0) (281.5)
-------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from issue of long-term debt - 7.0 7.0
Change in intercompany accounts (770.8) 770.8 -
-------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (770.8) 777.8 7.0
-------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents (680.7) 853.9 173.2
Cash and cash equivalents at:
Beginning of year 722.6 (614.6) 108.0
-------------------------------------------------------------------------------------------------------------------------
End of year $41.9 $239.3 $281.2
=========================================================================================================================
39
NOTE 23 - CANADIAN AND UNITED STATES ACCOUNTING PRINCIPLES
These consolidated financial statements have been prepared in accordance with
Canadian GAAP and conform in all material respects with U.S. GAAP, except as
follows:
(1) CONSOLIDATED FINANCIAL STATEMENTS
Year Ended August 31, ($ millions) 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------------------
Net loss in accordance with Canadian GAAP ($124.4) ($598.9) ($2,237.4)
Effects of differences in accounting for:
Costs of start-up activities (a) 4.1 3.3 4.6
Reversal of impairment charges under Canadian GAAP (b) 194.7 1,105.1 -
Additional goodwill amortization (b) (59.5) (25.3) (25.3)
Change in income (loss) from discontinued operations (c) - 941.7 32.3
----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before cumulative effect of a
change in accounting principle 14.9 1,425.9 (2,225.8)
Cumulative effect of adopting SOP 98-5 as of
September 1, 1999 (a) - - (27.3)
----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) in accordance with U.S. GAAP 14.9 1,425.9 (2,253.1)
----------------------------------------------------------------------------------------------------------------------------------
Other Comprehensive income (loss), net of tax (d):
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during
the period (net of NIL in taxes; 2001 - NIL; 2000 - NIL) 3.7 0.2 (4.6)
Less: reclassification adjustments for losses
included in net income (net of $NIL in taxes;
2001 - $1.0; 2000 - NIL) - 6.0 1.0
---------------- ---------------- ----------------
3.7 6.2 (3.6)
Foreign currency translation adjustments arising
during the period (taxes - NIL; 2001 - NIL; 2000 - NIL) (2.1) (4.3) 3.4
Unfunded accumulated pension obligation adjustment
(taxes - NIL; 2001 - NIL; 2000 - NIL) (91.9) - -
----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) (90.3) 1.9 (0.2)
----------------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) ($75.4) $1,427.8 ($2,253.3)
----------------------------------------------------------------------------------------------------------------------------------
Basic and diluted net income (loss) per share $0.05 $4.37 ($6.89)
==================================================================================================================================
In fiscal 2000, the impact on basic and diluted net income (loss) per common
share of the cumulative effect of the change in accounting for the costs of
start-up activities was a loss of $0.08 per share.
40
The amounts in the consolidated balance sheets that materially differ from those
reported under Canadian GAAP are as follows: ($ in millions)
AUGUST 31, 2002 August 31, 2001
-------------------------------- ------------------------------------
CANADIAN U.S. Canadian U.S.
GAAP GAAP GAAP GAAP
----------------------------------------------------------------------------------------------------------------------------
ASSETS:
Other current assets (a) $64.0 $56.3 $70.3 $62.6
Long-term investments (d) 413.3 417.9 339.6 340.5
Goodwill (b) 813.1 2,976.8 1,034.8 3,063.3
Pension asset (d) 43.1 10.8 45.2 45.2
Deferred charges (a) 19.6 12.0 31.6 19.9
LIABILITIES AND SHAREHOLDERS'
DEFICIENCY:
Other long-term liabilities (d) 382.5 442.1 373.6 373.6
Cumulative foreign currency
translation adjustments (d) (171.4) - (169.3) -
Deficit (a and b) (3,166.1) (1,017.7) (3,041.7) (1,032.6)
Accumulated other comprehensive
loss (d) - (258.7) - (168.4)
----------------------------------------------------------------------------------------------------------------------------
(a) Reporting on the costs of start-up activities
In April 1998, the AICPA issued Statement of Position 98-5, "Accounting for the
Costs of Start-Up Activities", ("SOP 98-5"), effective for periods beginning
after December 15, 1998. SOP 98-5 requires that costs of start-up activities be
expensed as incurred. Start-up activities are defined as those one-time
activities related to opening a new facility, introducing a new product or
service, conducting business with a new class of customer or beneficiary,
initiating a new process in an existing facility, or commencing a new operation.
Activities related to mergers or acquisitions are not considered start-up
activities and, therefore, SOP 98-5 does not change the accounting for such
items for U.S. GAAP reporting purposes. During fiscal 2000, under U.S. GAAP, the
Company would have been required to expense $27.3 million in unamortized costs
of start-up activities as a change in accounting principle. The $4.1 million
(2001 - $3.3 million; 2000 - $4.6 million) represents the amortization of
deferred start-up activities, which would not be required under U.S. GAAP,
reduced by start-up activity costs capitalized under Canadian GAAP during the
respective fiscal years.
(b) Goodwill impairment
During fiscal 2001, the Company changed its method of measuring goodwill
impairment for Canadian GAAP. The method of impairment is now based on the
estimated fair value of goodwill determined from independent valuations of the
underlying business. The current U.S. GAAP and the Company's former method of
measuring goodwill impairment is based on the ability to recover the unamortized
balance of goodwill from expected future operating cash flows on an undiscounted
basis.
The effect of the difference in policy between Canadian GAAP and U.S. GAAP was
to produce during fiscal 2001 a goodwill impairment charge under Canadian GAAP
and reduce the amount of goodwill for fiscal 2001 by $1,105.1 million and during
fiscal 2002, a goodwill impairment charge under Canadian GAAP and reduce the
amount of goodwill by $194.7 million (See Note 13). Under U.S. GAAP, the above
mentioned impairment charges do not exist. In addition, during fiscal 1999, the
Canadian GAAP policy produced an additional $974.0 million goodwill impairment
charge in addition to the goodwill
41
impairment charge taken for U.S. GAAP. As a result of the reduced goodwill
impairment charges, additional goodwill amortization totalling $59.5 million
(2001 - $25.3 million; 2000 - $25.3 million), has been recorded.
(c) Loss from discontinued operations
As discussed in Note 12, the healthcare services businesses had been classified
as discontinued operations. Any U.S. GAAP adjustments, noted above in (a) and
(b) that directly affect the healthcare services businesses while they have been
classified as discontinued operations, inversely affects the loss from
discontinued operations in the consolidated statement of operations. As a
result, under U.S. GAAP, the income from discontinued operations increased by
$941.7 million in fiscal 2001 (2000 - $32.3 million reduced loss from
discontinued operations).
(d) Comprehensive income
U.S. GAAP requires that a comprehensive income statement be prepared.
Comprehensive income is defined as: "the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non-owner sources. It includes all changes in equity during a period,
except those resulting from investments by owners and distributions to owners."
The comprehensive income statement reconciles the reported net income (loss) to
the comprehensive income (loss) amount.
Under U.S. GAAP, SFAS No. 87, "Employers Accounting for Pensions", required the
Company to record an increase in the additional minimum pension liability. Also,
under U.S. GAAP, available-for-sale securities are to be reported at their fair
values, with unrealized gains or losses reported in a separate component of
shareholders' equity along with the cumulative foreign currency translation
adjustments and the SFAS No. 87, pension adjustment. This separate component
would be reported under the caption "Accumulated other comprehensive loss".
The Company is required to record an additional minimum pension liability when
the pension plans accumulated benefit obligation exceeds the plans' assets by
more than the amounts previously accrued for as pension costs. Under U.S. GAAP,
these charges are recorded as a reduction to shareholders' equity, as a
component of accumulated other comprehensive loss. During the year, after
obtaining the most recent actuarial valuation, performed as of May 31, 2002, the
Company recorded an increase in the minimum liability of $91.9 million.
Subsequent to the most recent actuarial valuation, there has been a further
decline in the value of plan assets. The Company believes that if plan assets
remain at recent levels and interest rates remain unchanged, it will be required
to further increase the minimum pension liability. Although the exact amount of
the additional charge to shareholders' equity is not known at this time, it
could exceed $100 million.
Accumulated other comprehensive loss is comprised of the following: ($ in
millions)
------------------------------------------------------------------------------------------------------------------------------
UNREALIZED ACCUMULATED OTHER
GAIN (LOSS) FOREIGN CURRENCY PENSION COMPREHENSIVE
ON SECURITIES ITEMS ADJUSTMENT LOSS
------------------------------------------------------------------------------------------------------------------------------
Year ended
August 31, 2002 2001 2000 2002 2001 2000 2002 2001 2000 2002 2001 2000
------------------------------------------------------------------------------------------------------------------------------
Beginning balance $0.9 ($5.3) ($1.7) ($169.3) ($165.0) ($168.4) $ - $ - $- ($168.4) ($170.3) ($170.1)
Current period 3.7 6.2 (3.6) (2.1) (4.3) 3.4 (91.9) - - (90.3) 1.9 (0.2)
change
------------------------------------------------------------------------------------------------------------------------------
Ending balance $4.6 $0.9 ($5.3) ($171.4) ($169.3) ($165.0) ($91.9) $ - $- ($258.7) ($168.4) ($170.3)
==============================================================================================================================
42
(2) STOCK-BASED COMPENSATION
Effective January 1, 1996, Financial Accounting Standards Board Statement No.
123, "Accounting for Stock-Based Compensation" ("SFAS 123") encourages, but does
not require, companies to include in compensation costs the fair-value of stock
options granted. The Company has decided not to adopt the fair-value method
because the approval of the plan of reorganization (see Note 1) will result in
the cancellation of all outstanding options. A company that does not adopt this
new method must disclose pro forma net income and earnings per share giving
effect to the method of compensation cost described in SFAS 123.
No stock options were granted by the Company during fiscal 2002 and fiscal 2001.
During fiscal 2000, the total value of 5,585,500 stock options that were
granted, net of terminated options, was $2.7 million.
Stock options granted by the Company in fiscal 2000, (i) were granted at prices
equal to the value of stock on the grant date, (ii) vest in 25% installments on
each of November 1, 2000; May 1, 2001; May 1, 2002; and May 1, 2003; and (iii)
expire 10 years subsequent to the grant date.
The fair value of the options granted during fiscal 2000 was estimated using the
Black-Scholes option-pricing model with the assumptions of a dividend yield of
0%, an expected volatility of 201%, a risk-free interest rate of 6.27%, and an
expected life of three years.
Under SFAS 123, the cost of stock compensation expense for the year ended August
31, 2002 would be $2.9 million (2001 - $4.3 million; 2000 - $4.2 million). The
unrecognized value of $2.3 million would be charged to operations in future
years according to the vesting terms of the options. The resulting U.S. GAAP pro
forma net income and earnings per share for the year ended August 31, 2002,
under SFAS 123, are $12.0 million and $0.04, respectively (2001 - net income of
$1,421.6 million and earnings per share of $4.36; 2000 - a net loss of $2,257.3
million and a loss per share of $6.90)
The effects of applying SFAS 123 in this pro forma disclosure are not indicative
of future amounts. The Company's adoption of SFAS 123 for pro forma disclosure
purposes does not apply to awards prior to fiscal 1996.
(3) RECENT ACCOUNTING DEVELOPMENTS
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires that goodwill
and intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." The Company is required to
adopt the provisions of SFAS No. 142 effective September 1, 2002.
The Company's existing goodwill and intangible assets will continue to be
amortized prior to the adoption of SFAS No. 142. Upon adoption of SFAS No. 142,
the Company will be required to reassess the useful lives and residual values of
all recorded intangible assets. Additionally, the Company will be required to
test goodwill and intangible assets with an indefinite life in accordance with
the provisions of SFAS 142. Any impairment loss will be measured as of the date
of adoption and recognized as the cumulative effect of a change in accounting
principle for U.S. GAAP reporting.
43
As of September 1, 2002, under U.S. GAAP, the Company's unamortized goodwill of
approximately $2,976.8 million, will be subject to the transition provisions of
SFAS No 142. The composition of this goodwill by business segment is as follows:
contract bus services - $656.7 million ($557.7 million in the school bus
transportation unit and $99.0 million in the municipal transit and paratransit
bus transportation unit), Greyhound - $482.9 million and healthcare services -
$1,837.2 million ($1,328.7 million in the healthcare transportation services
unit and $508.5 million in the emergency management services unit). Amortization
expense, under U.S. GAAP, related to goodwill was $87.1 million, $85.4 million
and $86.8 million for the years ended August 31, 2002; 2001 and 2000,
respectively. The Company believes it will incur a write-down of substantially
all of the goodwill in its Greyhound and healthcare services segments and the
municipal transit and paratransit bus transportation unit of its contract bus
services segment and a portion of the goodwill in the school bus transportation
unit of its contract bus services segment upon the adoption of SFAS No. 142.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 will require, upon adoption, that the Company
recognize as a component of asset cost, the fair value of a liability for an
asset retirement obligation in the period in which it is incurred if a
reasonable estimate of fair value can be made. Under this statement, the
liability is discounted and accretion expense is recognized using the
credit-adjusted risk-free interest rate in effect when the liability was
initially recognized. SFAS No. 143 is effective for financial statements issued
for fiscal years beginning after June 15, 2002. The Company will be required to
adopt SFAS No. 143 on September 1, 2002. The Company does not anticipate any
impact from the initial adoption of SFAS No. 143.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement supersedes FASB Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of "and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions" for the disposal of a segment of a business
(as previously defined in that opinion). SFAS No. 144 is effective for
consolidated financial statements issued for fiscal years beginning after
December 15, 2001. The Company will be required to adopt SFAS No. 144 on
September 1, 2002. The new rules change the criteria for classifying an asset as
held-for-sale. The standard also broadens the scope of businesses to be disposed
of that qualify for reporting as discontinued operations, and changes the timing
of recognizing losses on such operations. The Company does not anticipate any
impact from the initial adoption of SFAS No. 144.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force ("EITF") issue No. 94-3 - "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including certain costs incurred in a restructuring)". SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost was recognized at the date of the entity's commitment
to the exit plan. SFAS 146 is effective for exit plans initiated after December
31, 2002.
44
NOTE 24 - QUARTERLY FINANCIAL INFORMATION (unaudited)
--------------------------------------------------------------------------------------------------------------------------------
($ millions except per share amounts) 1st 2nd 3rd 4th Total
--------------------------------------------------------------------------------------------------------------------------------
Revenue
- 2002 $1,161.8 $1,105.6 $1,187.3 $977.4 $4,432.1
- 2001 1,168.8 1,105.3 1,188.0 956.2 4,418.3
Income (loss) from operating segments
- 2002 (59.3) 38.7 2.3 (58.8) (77.1)
- 2001 84.9 23.1 73.6 (1,231.6) (1,050.0)
Income (loss) from continuing operations
- 2002 (79.9) 18.8 (17.0) (46.3) (124.4)
- 2001 (18.8) (73.8) (23.3) (1,213.7) (1,329.6)
Income (loss) from discontinued operations (Note 12)
- 2002 - - - - -
- 2001 3.1 (0.5) (0.7) 728.8 730.7
Net income (loss)
- 2002 (79.9) 18.8 (17.0) (46.3) (124.4)
- 2001 (15.7) (74.3) (24.0) (484.9) (598.9)
Earnings (loss) per share (Note 16)
Continuing operations
- 2002 ($0.25) $0.06 ($0.05) ($0.14) ($0.38)
- 2001 (0.06) (0.23) (0.07) (3.72) (4.08)
Discontinued operations
- 2002 - - - - -
- 2001 0.01 - - 2.23 2.24
Net earnings (loss)
- 2002 (0.25) 0.06 (0.05) (0.14) (0.38)
- 2001 (0.05) (0.23) (0.07) (1.49) (1.84)
================================================================================================================================
The Company establishes reserves for automobile liability, general liability,
professional liability and worker's compensation claims that have been reported
but not paid and claims that have been incurred but not reported. These reserves
are developed using actuarial principles and assumptions which consider a number
of factors, including historical claim payment patterns and changes in case
reserves, the assumed rate of increase in healthcare costs and property damage
repairs, ultimate court awards and discount rate. During the fourth quarters of
fiscal 2002 and fiscal 2001, the Company recorded significant charges relating
to claims liability and professional liability reserves (totaling approximately
$65 million and $113 million, respectively) in addition to projected amounts.
The reserves were increased based on the fiscal year end actuarial reports.
These reports differed significantly from the mid-year actuarial reports,
because of changes to a number of the assumptions noted above.
NOTE 25 - FURTHER INFORMATION REGARDING SAFETY-KLEEN
Fiscal 2001 loss relating to Safety-Kleen
The Company owns 44% of the common shares of Safety-Kleen. On June 9, 2000,
Safety-Kleen announced that it and 73 of its U.S. subsidiaries filed voluntary
petitions for chapter 11 relief in the United States Bankruptcy Court for the
District of Delaware.
During fiscal 2001, the Company recorded provisions for (i) a $225.0 million
claim in favor of Safety-Kleen as a general unsecured claim in Class 6 of the
Company's plan of reorganization, (ii) $15.7 million related to guarantees of
certain industrial revenue bonds, (iii) $7.8 million related to insurance
matters, (iv) $6.0 million related to guarantees of performance bonds and (v)
$0.7 million related to certain other litigation matters. Items (i), (ii) and
(v) are included in liabilities subject to compromise. These items are described
further in the following paragraphs.
45
(i) Following Safety-Kleen's filing for petition for chapter 11 relief, the
Debtors asserted various claims against Safety-Kleen, and Safety-Kleen and
various Safety-Kleen constituencies, including certain current directors of
Safety-Kleen (the "Safety-Kleen Directors") and Toronto Dominion (Texas), Inc.
("TD-Texas"), as administrative agent for the secured lenders of Safety-Kleen,
asserted various claims against the Debtors. In November 2001, the bankruptcy
court hearing Safety-Kleen's chapter 11 proceedings and the Bankruptcy Court
held a joint conference and determined that mediation would occur for the claims
between the Debtors and the various Safety-Kleen constituencies. Certain claims
asserted by the former corporate secretary and general counsel (Mr. Taylor) of
Safety-Kleen and certain of its predecessors and by the former chief financial
officer (Mr. Humphreys) of Safety-Kleen were not included in the mediation.
The mediation proceedings were held in April 2002 and, on July 18, 2002, the
parties to the mediation announced that they had reached a resolution. Upon
approval of the Bankruptcy Court, the Canadian Court and the bankruptcy court
hearing Safety-Kleen's chapter 11 cases and upon fulfillment of certain
contingencies, the Company has agreed to withdraw with prejudice its claim of up
to $6.5 billion in Safety-Kleen's bankruptcy proceedings, the Company will allow
a claim of $225.0 million as a general unsecured claim in Class 6 under its plan
of reorganization in favor of Safety-Kleen and the other claims asserted against
the Company by Safety-Kleen, the Safety-Kleen Directors and the Safety-Kleen
secured lender group will be deemed withdrawn with prejudice. In addition, as
part of this compromise and settlement, claims against Safety-Kleen by certain
current and former Company officers and directors for indemnity and contribution
will be deemed withdrawn with prejudice.
On August 16, 2002, the bankruptcy court hearing Safety-Kleen's chapter 11
proceeding approved the settlement. On August 30, 2002, the Bankruptcy Court
approved the settlement. On September 11, 2002, the Canadian Court approved the
settlement. As part of the compromise and settlement, the Company will be
released from its indemnification obligations relating to the Marine Shale
Processors and Mercier, Quebec facilities. As a condition to the allowance of
the general unsecured claim in favor of Safety-Kleen, Safety-Kleen will cause
the claim of the South Carolina Department of Health and Environmental Control
("DHEC") against the Company be withdrawn with prejudice. Safety-Kleen announced
a settlement with DHEC in mid October 2002. Releases satisfactory to the parties
will be exchanged, and there will be no admission of liability by any party to
the agreement or any person providing releases under the agreement. As a result,
the Company provided $225.0 million in fiscal 2001 to reflect this settlement
and the claim allowed to Safety-Kleen and for the termination of the Company's
claims for indemnification, contribution or subrogation from Safety-Kleen and
the Safety-Kleen Directors, as well as the termination of claims against the
Company by Safety-Kleen, the Safety-Kleen Directors and the Safety-Kleen secured
lender group, including the claims brought by TD-Texas.
(ii) In addition, the Company guaranteed two industrial revenue bonds of
Safety-Kleen. These bonds are partially secured by the assets of the
Safety-Kleen facilities to which these bonds relate. The Company received a
demand for payment of liabilities under an indenture dated as of May 1, 1993
between the Industrial Development Board of the Metropolitan Government of
Nashville and Davidson County and The Bank of New York as successor to
Nationsbank of Tennessee, N.A. and under an indenture dated as of August 1, 1995
between Tooele County, Utah and U.S. Bank. In connection with the Safety-Kleen
settlement described above, the Company no longer has indemnification or set-off
rights against Safety-Kleen with respect to these obligations. The Company
provided $15.7 million for this matter in 2001, which is reflected as a
liability subject to compromise. The amount is comprised of amounts owing by
Safety-Kleen with respect to these bonds in excess of the security in place.
46
(iii) Prior to September 1, 2000, the Company provided to Safety-Kleen and
certain of its affiliates, financial and management services, including the
provision of general liability and workers' compensation insurance. These
service arrangements were provided on an arm's-length basis on terms comparable
to those available in transactions with unaffiliated parties. Because of the
Safety-Kleen settlement described above, the Company remains obligated for the
provision of general liability and workers' compensation insurance provided
prior to September 1, 2000. As a result, the Company provided $7.8 million
relating to this matter during fiscal 2001.
(iv) In connection with a guaranty given by the Company with respect to certain
surety bonds issued by American International Group, Inc. ("AIG") on behalf of
Safety-Kleen (the "AIG Bonds"), the Company provided, during fiscal 2001, for a
liability of $6.0 million. The surety bond was called because Safety-Kleen did
not meet its obligations under the contract relating to the bond. The $6.0
million represents the amount estimated as necessary to complete the contract.
The Company has provided $5.0 million in cash to AIG to secure its guaranty
obligations concerning the AIG Bonds.
(v) On April 23, 2001, an action was filed by Union Pacific Corporation ("UPC")
in the United States District Court for the Eastern District of Texas against
the Company. UPC sought declaratory judgment that it had no obligation to
indemnify the Company for claims brought against the Company and seeking return
of $0.7 million paid to the Company in connection with their joint
representation. UPC filed a motion with the Bankruptcy Court on August 9, 2001
seeking relief from the automatic stay to allow its action to proceed in the
Texas court. In January 2002, the Company advised the Bankruptcy Court that it
reached an agreement with UPC that UPC had an Allowed Claim in the Company's
estate in the amount of approximately $0.7 million. The Company provided for the
full amount during fiscal 2001.
Other guarantee
On May 15, 1997, the Company had entered into a guarantee agreement in favor of
Westinghouse Electric Corporation (the "Westinghouse Guarantee") wherein the
Company guaranteed payment of a promissory note in the amount of $60.0 million
payable by Safety-Kleen to Westinghouse Electric Corporation. Westinghouse
Electric Corporation subsequently assigned its interest in the note and
guarantee to third parties. Safety-Kleen failed to make payment of interest due
on the note on May 30, 2000. The third parties, by notices dated March 13, 2000
and June 7, 2000 demanded that the Company immediately pay in full the principal
amount of the note of $60.0 million plus any unpaid interest. The third parties
filed a complaint demanding judgment against the Company in the amount of $60.0
million. Judgment was entered in favor of the third parties on August 8, 2000.
The Company has fully provided for the judgment by recording a liability
totaling $61.6 million (including $1.6 million of unpaid interest as of May 30,
2000) during fiscal 2000, which is included in liabilities subject to
compromise. Subject to the approval of the Bankruptcy Court and the Canadian
Court, the Company has agreed to resolve this matter by allowing a claim of
$71.4 million (comprised of the $61.6 million described above plus $9.8 million
of interest accrued and expensed to June 28, 2001) as a general unsecured claim
in Class 6 under its plan of reorganization in favor of the holder of the note.
47
NOTE 26 - FURTHER INFORMATION ON STOCK OPTION AND STOCK PURCHASE PLANS
(a) EMPLOYEE STOCK OPTIONS PLANS
At August 31, 2002, a total of 13,483,241 aggregate options to purchase
Common Shares were outstanding under the 1991 and 1998 Employee Stock
Option Plans. Of these options; 1,146,393 vested and became exercisable
on October 1, 2000 and terminate, subject to conditions of services, on
September 30, 2005. Another 5,051,198 options vest in 25% installments
on each of November 1, 2000; May 1, 2001; May 1, 2002; and May 1, 2003.
These options vest immediately upon a change of control of the Company
and are for a term of ten years. All other options granted under these
two plans are for a term of ten years from the date of grant and become
exercisable with respect to 20% of the total number of shares subject
to the option, one year after the date of grant, and with respect to an
additional 20% at the end of each twelve month period thereafter on a
cumulative basis during the succeeding four years. The plans provide
for the granting of stock options to certain senior employees and
officers of the Company at the discretion of the Board of Directors.
All options are subject to certain conditions of service and, in
certain circumstances, a non-competition agreement.
The following sets out information with respect to the employee stock
option plans:
Year Ended August 31, 2002 2001 2000
------------------------------------------------------------------------------------------------------------------
Options outstanding at beginning of year 14,408,118 15,126,168 11,009,525
Options granted during the year - - 5,819,500
Options terminated during the year (924,877) (718,050) (1,694,607)
Options exercised during the year - - (8,250)
------------------------------------------------------------------------------------------------------------------
Options outstanding at end of year 13,483,241 14,408,118 15,126,168
------------------------------------------------------------------------------------------------------------------
Options exercisable at end of year 11,443,066 9,765,418 5,225,924
------------------------------------------------------------------------------------------------------------------
Options available for future grants at end of year 4,595,859 3,670,982 2,952,932
------------------------------------------------------------------------------------------------------------------
Total exercise price of options outstanding at
end of year ($ millions) $76.5 $82.2 $90.0
-------------------------------------------------------------------------------------------------------------------
Option price ranges:
-------------------------------------------------------------------------------------------------------------------
Options granted: CDN$ - - -
US$ - - $0.875
Options terminated: CDN$ $14.30-$19.90 $12.25-$19.90 $8.50-$22.75
US$ $0.875-$15.25 $0.875-$15.25 $0.875-$15.25
Options exercised: CDN$ - - -
US$ - - $2.84
Options outstanding at year end: CDN$ $7.625-$20.30 $7.625-$20.30 $7.625-$20.30
US$ $0.875-$15.25 $0.875-$15.25 $0.875-$15.25
-------------------------------------------------------------------------------------------------------------------
During fiscal 2002, no Common Shares (2001 - NIL; 2000 - 8,250) were
issued under the plans.
If the plan of reorganization (as described in Note 1) is approved, all
outstanding options will be cancelled.
48
(b) DIRECTORS' STOCK OPTION PLAN
At August 31, 2002; 297,000 Common Shares were reserved for issuance on
the exercise of options granted under the directors' stock option plan.
All options under this plan are for a term of ten years from the date
of the grant and become exercisable with respect to 20% of the total
number of shares subject to the option on each of the five successive
anniversaries of the date of the grant. Options are subject to certain
conditions of service.
During fiscal 2002, no options to purchase Common Shares were granted
(2001 - NIL; 2000 - NIL) and no options were terminated (2001 - NIL;
2000 - 1,000).
At August 31, 2002, the aggregate options outstanding entitled
non-executive directors to purchase 180,000 (August 31, 2001 - 180,000;
August 31, 2000 - 180,000) Common Shares at prices ranging from Cdn.
$14.30 to $19.90 per share and U.S. $8.00 per share.
During fiscal 2002, no Common Shares were issued under the plan (2001 -
NIL; 2000 - NIL).
If the plan of reorganization (as described in Note 1) is approved, all
outstanding options will be cancelled.
(c) EMPLOYEE STOCK PURCHASE PLANS
During fiscal 1999, the Company established the Employee Stock Purchase
Plans (the "Plans"). The Plans are available to all non-unionized
hourly and salaried employees of the Company, and its subsidiaries
meeting certain eligibility requirements. Each eligible employee, who
enrolled in the Plans, could elect to withhold from 1% to 10% of his or
her salary or hourly earnings to a maximum $10,000 ($10,000 CDN for
Canadian employees) in any six month stock purchase period. The
accumulated payroll deductions are used to purchase Common Shares of
the Company at a price equal to 85% of the lower of the fair market
value of the Common Shares on the first and last days of the stock
purchase period. Contributions have been suspended with effect from
January 1, 2000.
During fiscal 2002, no Common Shares (2001 - no Common Shares; 2000 -
420,865 Common Shares for proceeds of $1.9 million) were issued under
the Plans.
NOTE 27 - FURTHER INFORMATION ON LITIGATION
Securities Litigation - Shareholder actions
As a result of the Company's voluntary petitions for relief under the protection
of the Bankruptcy Code and the CCAA, the actions described below are stayed with
respect to the Company.
Three actions, filed against the Company and others, are pending in the United
States District Court for the District of South Carolina. These cases have been
consolidated. Plaintiffs seek to represent a class of purchasers of common stock
of the Company for the period of October 15, 1997 through March 13, 2000. Claims
are asserted against the Company under Section 10(b) of the United States
Securities Exchange Act of 1934 (the "Exchange Act") and SEC rule 10b-5
49
based on the Company's incorporation and/or consolidation of the financial
results of Safety-Kleen in the reported consolidated financial results of the
Company. Plaintiffs have withdrawn their initial consolidated complaint in this
matter. On May 21, 2001, plaintiffs filed a second amended consolidated
complaint. The amended complaint repeats the allegations of the withdrawn
complaint and adds allegations that the Company's financial statements had
accounting irregularities including financial statement information relating to
American Medical Response, Inc., a subsidiary of the Company. The court denied
motions to dismiss filed by other defendants after the Company filed its
voluntary petition for reorganization.
On September 18, 2000, the Company was added as a defendant in a consolidated
amended securities fraud class action complaint that had previously been pending
in the United States District Court for the District of South Carolina against
Safety-Kleen and others. Safety-Kleen, which is in a chapter 11 reorganization
proceeding, was dismissed as a defendant. In the currently active complaint,
plaintiffs allege that, during the class period, the defendants disseminated to
the investing public false and misleading financial statements and press
releases concerning the financial statements and results of operations of LESI
and Safety-Kleen. Plaintiffs further allege that the proxy statement, prospectus
and registration statement pursuant to which LESI and Old Safety-Kleen were
merged contained false and misleading financial information. Plaintiffs assert
claims under Section 10(b) and 20(a) of the Exchange Act and SEC rule 10b-5 on
behalf of all classes and under Section 14(a) of the Exchange Act and Sections
11, 12(a)(2) and 15 of the United States Securities Act of 1933 (the "Securities
Act") on behalf of the so-called "merger class". The only claims asserted
against the Company prior to its voluntary bankruptcy filings were under Section
20(a) of the Exchange Act and Section 15 of the Securities Act. The Company and
other defendants moved to dismiss this action. On May 15, 2001, the court
entered an order denying the motions to dismiss all defendants except one. The
Company answered the consolidated amended complaint on June 22, 2001, denying
any liability. A further amended complaint was filed after the Company filed its
voluntary petition for reorganization. On June 18, 2002, the court certified the
plaintiffs in this case as representatives of two classes: (1) a class
consisting of persons who purchased either (a) common stock of LESI between July
9, 1997 through July 1, 1998; or (b) Safety-Kleen common stock between July 1,
1998 through March 6, 2000 and suffered damages; and (2) a "merger class" of
persons who exchanged Old Safety-Kleen common stock for LESI common stock in the
merger of LESI and Old Safety-Kleen completed on May 18, 1998. On July 5, 2002,
some defendants filed an appeal seeking review of that certification decision.
On August 9, 2002, the appellate court denied leave to appeal the certification
decision.
A consolidated amended class action complaint for violations of federal
securities laws was filed in the United States District Court for the District
of South Carolina against parties other than the Company. Plaintiffs in this
case sought to amend the complaint to add the Company and additional parties as
defendants. Plaintiffs sought to represent a class of all persons who were
former shareholders of Rollins Environmental Services, Inc. and who received or
should have received the proxy statement with respect to the May 13, 1997
Special Meeting of Stockholders convened to vote on the acquisition of LESI. In
this complaint, the plaintiffs alleged that the defendants caused to be
disseminated a proxy statement that contained misrepresentations and omissions
of a materially false and misleading nature. Claims were asserted against the
Company under Sections 14(a) and 20(a) of the Exchange Act. The Company moved to
dismiss the claims asserted against it. The court granted the Company's motion
to dismiss on June 7, 2001. Motions to dismiss certain of the other defendants
were denied. On June 11, 2001, plaintiffs filed a motion seeking leave to file
an amended complaint that asserts a common law claim for negligent
misrepresentation against the Company. The court granted the motion after the
Company's voluntary petition for reorganization, then subsequently vacated its
order granting the motion with respect to the Company. An amended complaint was
filed after the
50
Company filed its voluntary petition for reorganization. On June 14, 2002, the
court granted a motion to dismiss the state law claims asserted against
PricewaterhouseCoopers LLP (US) and PricewaterhouseCoopers LLP (Canada). In July
2002, plaintiffs filed a motion for reconsideration of the court's dismissal;
the court denied the motion for reconsideration.
Certain of the defendants in the above referenced actions asserted claims for
indemnification against the Company. As a result of the Safety-Kleen settlement
(see Note 12), claims of the seven Safety-Kleen Directors will be withdrawn with
prejudice. The Safety-Kleen settlement would not affect the claims of Messrs.
Humphreys and Taylor.
Securities Litigation - Bondholder actions
As a result of the Company's voluntary petitions for relief under the protection
of the Bankruptcy Code and the CCAA, the actions described below are stayed with
respect to the Company.
On September 24, 2000, a complaint was filed in the United States District Court
for the Southern District of New York against the Company and others. In
response to a motion to dismiss filed by certain defendants, plaintiffs filed an
amended complaint on March 15, 2001 adding a defendant, and seeking to represent
a class of all persons and entities that purchased certain of the Debentures of
the Company (issued September 24, 1997; April 23, 1998 and August 6, 1999)
during the period September 24, 1997 through and including May 12, 2000 and
suffered damages. Plaintiffs assert claims under Sections 11, 12 and 15 of the
Securities Act and the common law of South Carolina, alleging that the
registration statement and prospectus for the Debentures contained misleading
statements with respect to the Company's financial condition and the relative
priority of the Debentures. In addition, plaintiffs contend that the Company's
financial statements were materially false due to the inclusion of financial
information from Safety-Kleen. The Company filed a motion with the Judiciary
Panel on Multi-district Litigation (the "JPML") to transfer the above action
currently pending in the Southern District of New York to the District of South
Carolina. On April 19, 2001, the JPML granted this motion and the action was
transferred to the District of South Carolina.
A securities fraud class action complaint has been filed in the United States
District Court for the District of South Carolina on August 14, 2000 against the
Company and others. Plaintiffs in this case seek to represent a class of all
persons who purchased certain of the Debentures during the period from October
15, 1997 through and including March 13, 2000. On May 11, 2001, plaintiffs filed
an amended complaint, including an additional defendant. Plaintiffs allege that,
during the class period, defendants disseminated to the investing public false
and misleading financial statements and press releases concerning the relative
priority of the Debentures and the Company's publicly reported financial
condition and future prospects based on the Company's incorporation and/or
consolidation of the financial results of Safety-Kleen in the reported
consolidated financial results of the Company and its failure to disclose that
the billing practices of certain of its healthcare businesses did not comply
with applicable governmental regulations. Claims are asserted against the
Company and others under Section 10(b) of the Exchange Act and SEC rule 10b-5
promulgated thereunder.
The above two actions were consolidated by order of the South Carolina federal
court dated June 20, 2001. In addition to the Company, the defendants include
certain current and former officers and directors of the Company, the
underwriters for the Company's bonds, PricewaterhouseCoopers LLP (Canada), the
Company's auditors, and PricewaterhouseCoopers LLP (US), Safety-Kleen's former
auditors. The federal court in South Carolina ordered mediation of the claims
brought in the consolidated action. The Bankruptcy Court approved the
51
Company's continued participation in the mediation. On January 9, 2002, the
Company announced that it had reached an agreement in principle with all parties
to settle the above two actions. The proposed settlement of the class action
litigation provides for a release of all claims that the plaintiffs have and may
have against the Company and the other defendants. The other defendants,
including the Company, will also release certain claims. On July 29, 2002, the
Company announced the execution of the definitive settlement agreement. On
August 30, 2002, the Bankruptcy Court approved the Company's participation in
the settlement. On September 11, 2002, the Canadian Court approved the Company's
participation in the settlement. On December 17, 2002, the settlement was
approved by the federal court in South Carolina. Certain aspects of the
settlement are subject to the following conditions: (i) the entry of an order by
the Canadian Court relating to insurance payments; and (ii) confirmation of a
satisfactory plan of reorganization for the Company.
On December 12, 2000, a securities fraud class action complaint was filed in the
United States District Court for the Southern District of New York against the
Company and others. On January 17, 2001, plaintiff filed an amended complaint to
add others as defendants. The complaint alleged that defendants disseminated to
the investing public false and misleading financial statements and press
releases concerning the Company's obligations with respect to the 1992
Indenture, the Facility and the 1997 Indenture. On April 18, 2001, plaintiff
filed a motion to dismiss this case as to the Company and others without
prejudice and as to certain of the current directors of the Company with
prejudice. The Company filed a response, seeking to have the claims against them
dismissed with prejudice. On June 19, 2001, the court dismissed the case with
prejudice as to all remaining defendants. On July 2, 2001, plaintiff filed a
motion for reconsideration or clarification of that decision. On August 13,
2001, the court denied the motion to reconsider and confirmed the dismissal with
prejudice. Plaintiff has filed an appeal. An agreement in principle to settle
this action has been reached, and the settlement is expected to be finalized in
the context of the settlement of the bondholder actions discussed above.
Concurrently with the proposed settlement, an agreement in principle was reached
to settle a class action by the Company's bondholders against Citibank, N.A.,
the indenture trustee for the Debentures, subject to court approval.
If the settlement of the bondholder actions described above is implemented on
the current terms, the plaintiff bondholder classes would receive $42.875
million, and the estate of the Company would receive $12.5 million.
A consolidated class action complaint was filed in federal court in South
Carolina on January 23, 2001. This amended complaint consolidates allegations
originally brought by plaintiffs in the South Carolina District Court action and
in the Delaware District Court, both against the Company and others. Plaintiffs
in this case seek to represent a class of all persons who purchased certain
bonds issued by Safety-Kleen or its predecessor, LESI, from April 17, 1998
through March 6, 2000. Plaintiffs allege that the defendants controlled the
functions of Safety-Kleen, including the content and dissemination of its
financial statements and public filings, which plaintiffs contend to be false
and misleading. Claims asserted against the Company under Sections 10 and 20 of
the Exchange Act, SEC rule 10b-5 and Section 15 of the Securities Act. On March
12, 2001, the Company filed a motion to dismiss the consolidated class action
complaint. After the Company filed for bankruptcy protection, the court entered
an order dismissing all claims against all defendants based on the Securities
Act. On June 14, 2002, the court granted plaintiffs' motion for reconsideration
in part and allowed the assertion of claims under Section 11(a) of the
Securities Act on behalf of "after-market purchasers" of the bonds.
52
A complaint for violation of California Corporate Securities Law of 1968 and for
common law fraud and negligent misrepresentation was filed on March 5, 2001 in
the Superior Court of the State of California, County of Sacramento against the
Company and others. Plaintiffs in this case seek to represent a class of
purchasers or acquirers of certain bonds issued by the California Pollution
Control Financing Authority on July 1, 1997 secured by an indenture agreement
with LESI and its successor Safety-Kleen in their initial offering on July 1,
1997 and retained through March 6, 2000. The action alleges that defendants made
written or oral communications containing false statements or omissions about
LESI's and Safety-Kleen's business, finances and future prospects in connection
with the offer for sale of those bonds and that plaintiffs bought and retained
the bonds in reliance on said statements and were injured thereby. The Company
was not served with this complaint until the day after it filed its voluntary
petition for reorganization. Subsequent to the Company's filing, certain of the
other defendants filed motions to dismiss the action on the grounds that the
California court lacked personal jurisdiction over them, and the California
court granted the motion and dismissed the action as to those defendants on
October 26, 2001. Plaintiffs have filed an appeal from that dismissal.
53
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(ALL DOLLAR AMOUNTS ARE STATED IN UNITED STATES DOLLARS)
--------------------------------------------------------------------------------
The following discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and accompanying footnotes. The
Company's management is responsible for presentation and preparation of the
consolidated financial statements and accompanying footnotes and this management
discussion and analysis ("MD&A"). The Company's Board of Directors is
responsible for reviewing and approving the financial information contained in
any filing, including the MD&A, and overseeing management's responsibilities for
the presentation and preparation of financial information, maintenance of
internal controls, management and control of major risk areas and assessment of
significant and related party transactions.
GENERAL
Voluntary petitions for reorganization
On June 28, 2001, Laidlaw Inc. (the "Company") and five of its direct and
indirect subsidiaries (collectively, the "Debtors") filed voluntary petitions
for relief under chapter 11 of the United States Bankruptcy Code, 11 U.S.C.
101-1330 (the "Bankruptcy Code"), in the United States Bankruptcy Court for the
Western District of New York (the "Bankruptcy Court"). The other Debtors
include: Laidlaw USA, Inc. ("Laidlaw USA"), Laidlaw Investments Ltd. ("LIL")
Laidlaw International Finance Corporation ("LIFC"), Laidlaw One, Inc. ("Laidlaw
One") and Laidlaw Transportation, Inc. ("LTI"). In addition, the Company and LIL
have commenced Canadian insolvency proceedings under the Canada Companies'
Creditors Arrangement Act ("CCAA") in the Ontario Superior Court of Justice in
Toronto, Ontario (the "Canadian Court"). None of the Company's operating
subsidiaries was included in the filings.
The Debtors remain in possession of their respective properties and are managing
their businesses as debtors-in-possession. Pursuant to the Bankruptcy Code and
the CCAA, however, the Debtors may not engage in transactions outside the
ordinary course of business without the approval of the Bankruptcy Court and the
Canadian Court.
The Company is reorganizing its affairs under the protection of the Bankruptcy
Code and the CCAA and has proposed a plan of reorganization for itself and the
other Debtors. The plan of reorganization must be voted upon by the Company's
stakeholders and approved by the Bankruptcy Court and the Canadian Court. A plan
of reorganization sets forth the means for satisfying claims against and
interests in the Company and the other Debtors, including the liabilities
subject to compromise. Generally, prepetition liabilities are subject to
settlement or compromise under such a plan of reorganization.
Ability to continue operations
The consolidated financial statements have been prepared on a "going concern"
basis, which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of operations. The
appropriateness of the "going concern" assumption is dependent upon, among other
things, a successful completion of the proposed reorganization as contemplated
by the plan of reorganization, future profitable operations and the ability to
generate sufficient cash from operations and obtain financing arrangements to
meet obligations. If the "going concern" basis were not appropriate for these
consolidated financial statements, then
54
significant adjustments would need to be made to the carrying value of the
assets and liabilities, the reported revenue and expenses and the balance sheet
classifications used.
In addition, if the Company successfully completes the proposed reorganization,
the Company will be required to adopt "fresh start" accounting. This accounting
would require that assets and liabilities be recorded at fair value, based on
values determined in connection with the restructuring. As a result, the
reported amounts in the consolidated financial statements would materially
change, because they do not give effect to the adjustments to the carrying
values of assets and liabilities that would ultimately result from the adoption
of "fresh start" accounting.
Goodwill impairment losses
During fiscal 2001, the Company changed is method of measuring goodwill
impairment for Canadian GAAP. The method of impairment is now based on the
estimated fair value of goodwill determined from independent valuations of the
underlying businesses. The Company's former method of measuring goodwill
impairment was based on the ability to recover the unamortized balance of
goodwill from expected future operating cash flows on an undiscounted basis.
During fiscal 2002, the Company incurred goodwill impairment charges totaling
$194.7 million ($123.5 million in the Greyhound business, $58.0 million in the
healthcare services segment and $13.2 million in the contract bus services
segment).
CONSOLIDATED STATEMENTS OF OPERATIONS
Items in the consolidated statements of operations for the three years ended
August 31, 2002 as a percentage of total revenue and the percentage changes in
dollar amounts of the items compared to the previous year are as follows:
PERCENTAGE OF REVENUE PERCENTAGE INCREASE (DECREASE)
--------------------------------------------------------------------------------------------------------------------------------
Year Ended August 31,
---------------------------------------------------------------------------------- YEAR 2002 Year 2001 Year 2000
2002 2001 2000 OVER 2001 Over 2000 Over 1999
--------------------------------------------------------------------------------------------------------------------------------
REVENUE 100.0% 100.0% 100.0% 0.3% 3.4% 15.1%
----------------------------------------------------------------------------------
Operating expenses 80.1 80.9 80.2 (0.6) 4.4 20.5
Selling, general and
administrative expenses 10.4 10.4 10.8 (0.3) (0.4) 34.2
----------------------------------------------------------------------------------
INCOME FROM OPERATIONS
BEFORE DEPRECIATION AND
AMORTIZATION EXPENSES AND
GOODWILL IMPAIRMENT LOSSES 9.5% 8.7% 9.0% 9.8 (0.6) (26.5)
================================================================================================================================
REVENUE
The sources of revenue and changes by business segment are as follows: ($ in
millions)
Year Ended August 31, 2002 2001 2000
--------------------------------------------------------------------------------------------------------------------
Contract bus services $1,789.2 40.4% $1,774.2 40.2% $1,728.1 40.5%
Greyhound 1,223.7 27.6 1,254.8 28.4 1,197.8 28.0
Healthcare services 1,419.2 32.0 1,389.3 31.4 1,347.2 31.5
--------------------------------------------------------------------------------------------------------------------
$4,432.1 100.0% $4,418.3 100.0% $4,273.1 100.0%
====================================================================================================================
55
For each of the periods described below, management's estimates of the
components of changes in the Company's consolidated revenue are as follows:
PERCENTAGE INCREASE (DECREASE)
-----------------------------------------------------------------------------------------------------------------------
YEAR 2002 Year 2001 Year 2000
OVER 2001 Over 2000 Over 1999
-----------------------------------------------------------------------------------------------------------------------
INCREASE IN REVENUE AS A RESULT OF ACQUISITIONS
Contract bus services - % 0.3% 0.4%
Greyhound - 0.5 13.6
Healthcare services - 0.1 0.8
-----------------------------------------------------------------------------------------------------------------------
Subtotal - 0.9 14.8
-----------------------------------------------------------------------------------------------------------------------
FOREIGN EXCHANGE RATE CHANGES
Contract bus services (0.1) (0.1) 0.1
Greyhound (0.1) (0.2) 0.1
Healthcare services - - -
-----------------------------------------------------------------------------------------------------------------------
Subtotal (0.2) (0.3) 0.2
-----------------------------------------------------------------------------------------------------------------------
OTHER, PRIMARILY THROUGH PRICE AND VOLUME CHANGES
Contract bus services 0.4 0.9 1.8
Greyhound (0.6) 1.1 1.8
Healthcare services 0.7 0.8 (3.5)
-----------------------------------------------------------------------------------------------------------------------
Subtotal 0.5 2.8 0.1
-----------------------------------------------------------------------------------------------------------------------
Total 0.3% 3.4% 15.1%
-----------------------------------------------------------------------------------------------------------------------
For each of the periods described below, management's estimates of the
components of changes in the Company's consolidated revenue are as follows:
PERCENTAGE INCREASE (DECREASE)
-------------------------------------------------------------------------------------------------------------------------
YEAR 2002 Year 2001 Year 2000
OVER 2001 Over 2000 Over 1999
-------------------------------------------------------------------------------------------------------------------------
CONTRACT BUS SERVICES
Increase in revenue as a result of acquisitions - % 0.8% 0.9%
Foreign exchange rate changes (0.2) (0.3) 0.2
Other, primarily through price and volume changes 1.0 2.2 4.2
-----------------------------------------------------
Total 0.8% 2.7% 5.3%
-----------------------------------------------------
GREYHOUND
Increase in revenue as a result of acquisitions 0.2% 1.5% 81.5%
Foreign exchange rate changes (0.5) (0.6) 0.7
Other, primarily through price and volume changes (2.2) 3.9 10.6
-----------------------------------------------------
Total (2.5)% 4.8% 92.8%
-----------------------------------------------------
HEALTHCARE SERVICES
Increase in revenue as a result of acquisitions - % 0.4% 2.0%
Foreign exchange rate changes - - -
Other, primarily through price and volume changes 2.2 2.7 (9.1)
-----------------------------------------------------
Total 2.2% 3.1% (7.1)%
=====================================================
56
Increased revenue in the contract bus services segment is primarily attributable
to price and volume growth. Contract price increases and additional routes more
than offset contracts lost. Contracts lost during the year include contracts in
Anchorage, Alaska; Indianapolis, Indiana and the voluntary exit from the
contract in Baltimore, Maryland. The current period was also affected by a
weakening of the Canadian dollar against the U.S. dollar.
The decrease in revenue in the Greyhound segment is primarily attributable to a
decline in passengers partially offset by price increases over the same period
last year. The decline in passengers was due to reduced ridership and travel
service cancellations because of the impact of September 11, 2001, the unrelated
October 3, 2001 incident involving a Greyhound passenger, lower fuel costs
(resulting in more people utilizing their automobiles rather than the services
of Greyhound) and the general economic downturn. The increase in price was due
to a significant increase in the average trip length. The increase in trip
length was a result of some airline passengers preferring to travel by bus
rather than taking an airplane after September 11, 2001. The current year was
also affected by a weakening of the Canadian dollar against the U.S. dollar.
The increase in revenue in the healthcare services segment is primarily due to
an increase in revenue per transport in the ambulance services business, the
renegotiation of a significant ambulance service contract and the sale of
previously written off emergency management services receivables. These
increases were partially offset by a reduction of the number of transports
provided in the ambulance services business.
Acquisitions by segment and the approximate aggregate annualized revenue
acquired as at the dates of acquisition are as follows: ($ in millions)
NUMBER OF ACQUISITIONS
----------------------------------------------------------------------------------------------------------------
Year Ended August 31, 2002 2001 2000
----------------------------------------------------------------------------------------------------------------
Contract bus services 7 1 6
Greyhound - 2 3
Healthcare services - - 7
----------------------------------------------
7 3 16
==============================================
ANNUALIZED REVENUE (APPROXIMATE)
----------------------------------------------------------------------------------------------------------------
Year Ended August 31, 2002 2001 2000
----------------------------------------------------------------------------------------------------------------
Contract bus services $3.5 $0.1 $14.5
Greyhound - 3.0 37.0
Healthcare services - - 28.0
----------------------------------------------
$3.5 $3.1 $79.5
===============================================
For each of the periods described below, revenue and growth in revenue from
geographic components are as follows: ($ in millions)
REVENUE PERCENTAGE INCREASE (DECREASE)
------------------------------------------------------------------------------------------------------------
Year Ended August 31
--------------------------------------------------------------------- YEAR 2002 Year 2001 Year 2000
2002 2001 2000 OVER 2001 Over 2000 Over 1999
------------------------------------------------------------------------------------------------------------
United States $4,089.9 92.3% $4,073.7 92.2% $3,930.1 92.0% 0.4% 3.7% 15.3%
Canada 342.2 7.7 344.6 7.8 343.0 8.0 (0.7) 0.5 12.4
---------------------------------------------------------------------
$4,432.1 100.0% $4,418.3 100.0% $4,273.1 100.0% 0.3 3.4 15.1
======================================================================
In the United States, the growth in revenue for fiscal 2002 was primarily
attributable to price and volume growth in the contract bus and healthcare
services segments. In Canada, the decrease in
57
revenue for fiscal 2002 was due to the weakening of the Canadian dollar against
the U.S. dollar partially offset by price and volume growth in the contract bus
and Greyhound segments. In both the United States and Canada, the growth in
revenue for fiscal 2001 was primarily attributable to price and volume growth.
For fiscal 2000, in both the United States and Canada, the growth in revenue was
primarily attributable to acquisitions.
INCOME FROM OPERATIONS BEFORE DEPRECIATION AND AMORTIZATION EXPENSES AND
GOODWILL IMPAIRMENTS AND THE COST OF OPERATIONS AND OPERATING PROFIT MARGINS
BEFORE DEPRECIATION AND AMORTIZATION EXPENSES AND GOODWILL IMPAIRMENTS
Income from operations before depreciation and amortization expenses and
goodwill impairments from segment components are as follows: ($ in millions)
INCOME FROM OPERATIONS BEFORE DEPRECIATION AND
AMORTIZATION EXPENSES AND GOODWILL IMPAIRMENTS GROWTH RATES
-----------------------------------------------------------------------------------------------------
Year Ended August 31
-------------------------------------------------------------- YEAR 2002 Year 2001 Year 2000
2002 2001 2000 OVER 2001 Over 2000 Over 1999
-----------------------------------------------------------------------------------------------------
Contract bus services $271.0 64.4% $269.9 70.4% $303.8 78.7% 0.4% (11.2)% (13.7)%
Greyhound 53.6 12.7 85.4 22.2 93.2 24.2 (37.2) (8.4) 3.7
Healthcare services 96.4 22.9 28.1 7.4 (11.1) (2.9) 243.1 N/M N/M
--------------------------------------------------------------
$421.0 100.0% $383.4 100.0% $385.9 100.0% 9.8 (0.6) (26.5)
==============================================================
Wages for operating personnel, equipment operating costs (including fuel and
maintenance), ticket selling costs, insurance for personnel and property damage
and third party liability insurance represent the major components of the cost
of operations. Operating costs as a percentage of revenue were 90.5%, compared
with 91.3% in 2001 and 91.0% in 2000.
The decrease in operating costs as a percentage of revenue in fiscal 2002 was
the net result of reductions in accident claims costs (reductions in the
healthcare services segment and the education services unit of contract bus
services offset partially by increases in the Greyhound segment and the
municipal transit and paratransit unit of contract bus services), reductions in
fuel costs in both the contract bus services and Greyhound business segments and
lower provisions for both Medicaid and Medicare reimbursement claims and for
estimated exposure on professional liability insurance in the healthcare
services business segment. In addition, improvements in revenue per transport in
the healthcare services business resulted in a reduction in operating costs as a
percentage of revenue. These improvements were partially offset by increases in
wages and benefits in all three business segments, increased security costs and
the write-off of an investment in the Greyhound business segment and increased
professional liability costs in the healthcare services segment. In addition,
reduced ridership volumes in the Greyhound business segment also partially
offset the above-noted reductions in operating costs as a percentage of revenue.
The overall slight increase in operating costs as a percentage of revenue in
fiscal 2001 was the net result of some significant increases in accident claims
and energy (fuel and utility) costs together with provisions for Medicare and
Medicaid reimbursement claims and a provision for estimated exposure on
professional liability insurance. These cost increases were substantially offset
by revenue growth from price and volume increases without a proportionate
increase in operating costs, the benefit realized on an operating lease
arrangement at a significant facility in the Greyhound segment and from other
cost reductions. Accident claims and professional liability accruals increased
by $126.9 million during fiscal 2001. The majority of the increase related to
changes in estimates as to the ultimate cost of accidents, which occurred prior
to fiscal 2001. These changes in estimates are expensed during the year in which
the estimates change and they impacted each of the Company's three business
segments. These estimates were developed by
58
an independent third party actuary using actuarial principles and assumptions.
As a result of significant increases in court awards and out-of-pocket
settlements combined with double-digit healthcare cost inflation, the Company's
actuary's projections increased significantly during each of the past two years.
Energy costs, consisting of both fuel and utility costs, rose due to prevailing
economic conditions. While fuel price increases were experienced throughout the
operations, utility cost increases primarily impacted operations on the West
Coast of the United States. Increased costs were partially offset in the
Greyhound segment as a result of an increase in ticket prices to mitigate the
increased fuel costs and from an increase in passenger volume. In addition,
during fiscal 2001, the Company established a provision of $19.5 million for the
settlement of government audits of the Company's Medicare and Medicaid
reimbursement claims and provided $17.0 million for the estimated exposure on
the Company's professional liability insurance with PHICO Insurance Company
("PHICO") relating to the emergency management services business. PHICO was
placed into liquidation by the Insurance Commissioner of the Commonwealth of
Pennsylvania on February 1, 2002, leaving the Company exposed for amounts not
covered by the insurance guarantee funds provided by the respective states where
the professional liability claims originated. (Refer to Note 9 of the Notes to
the Consolidated Financial Statements). Partially offsetting these cost
increases were revenue price increases throughout the Company and improved cash
collection efforts at the healthcare services segment's billing operations.
For each of the periods described below, the operating profit margins before
depreciation and amortization expenses and goodwill impairments, of the
individual segments and consolidated margins are as follows:
Year Ended August 31, 2002 2001 2000
-------------------------------------------------------------------------------------------------------------------
Contract bus services 15.1% 15.2% 17.6%
Greyhound 4.4 6.8 7.8
Healthcare services 6.8 2.0 (0.8)
Consolidated 9.5 8.7 9.0
-------------------------------------------------------------------------------------------------------------------
In fiscal 2002, the operating profit margin before depreciation and amortization
expenses and goodwill impairment charges in the contract bus services segment
was 15.1% compared to 15.2% in 2001. The increases in wages and benefits
experienced throughout the segment, increased accident claims costs at the
municipal transit and paratransit operations and other costs more than offset
price increases, reduced fuel prices and reduced accident claims costs in the
education services operations.
In fiscal 2001, the operating profit margin, before depreciation and
amortization expenses and goodwill impairment charges, in contract bus services
was 15.2% compared to 17.6% in 2000. The decrease in the operating margin was
primarily due to an increase in accident claims and energy costs. Energy costs,
consisting of both fuel and utility costs, have risen due to prevailing economic
conditions. While fuel price increases were experienced throughout the segment,
utility cost increases primarily impacted operations in the West Coast of the
United States. In addition, the segment experienced an increase in driver
related costs to remain competitive in a tight labor market and experienced an
increase in health and welfare benefits due to premium increases.
In fiscal 2002, the operating profit margin before depreciation and amortization
expenses and goodwill impairment charges in the Greyhound segment was 4.4%
compared to 6.8% in 2001. The decrease in the operating margin was primarily
attributable to reduced ridership, an increase in the proportion of revenue
derived from long haul ticket sales, increased accident claims costs, increased
security costs and the write-off of the Golden State Transportation investment.
The decrease in overall ridership is because of the impact of September 11,
2001, the unrelated October 3, 2001 incident involving a Greyhound passenger,
lower fuel prices and the general
59
economic downturn. The increase in proportion of revenue derived from long haul
ticket sales is the result of some airline passengers preferring to travel by
bus rather than taking an airplane after September 11, 2001. Security costs have
also increased in response to the September 11 and October 3, 2001 incidents.
In fiscal 2001, the operating profit margin, before depreciation and
amortization expenses and goodwill impairment charges, at Greyhound decreased to
6.8% from 7.8% in 2000. The decrease in the operating margin was primarily due
to an increase in accident claims and fuel costs. Fuel prices rose because of
prevailing economic conditions. The increase in fuel costs in the Greyhound
operations were more than offset by increases in ticket prices, but reduced
operating margins as a result. In addition, the segment experienced, increased
pension costs due to a combination of lower returns being experienced on the
pension investment portfolio and a lower discount rate being used on the pension
liabilities as well as an increase in health and welfare benefits due to premium
increases. Partially offsetting the cost increases was a settlement received
relating to the Port Authority Bus Terminal of New York license agreement.
Greyhound paid a license fee to the Port Authority for use of the space;
however, Greyhound disputed the amount charged. Greyhound accrued for the
license fee based upon the agreement, but only paid to the Port Authority what
was considered to be fair market value. During fiscal 2001, Greyhound settled
with the Port Authority for the periods June 1999 through March 31, 2001 and
recorded a reduction in license fees of approximately $7.5 million.
In fiscal 2002, the operating profit margin before depreciation and amortization
expenses and goodwill impairment charges in the healthcare services segment was
6.8% compared to 2.0% for 2001. The increase in operating margin is due to
reduced accident claims costs, an increase in revenue per transport as a result
of an improvement in cash collections and a reduction in the two significant
charges taken during fiscal 2001. In fiscal 2001, a provision of $19.5 million
was recorded by the ambulance unit for the settlement of government audits of
the unit's Medicare and Medicaid reimbursement claims and a provision of $17.0
million was recorded by the emergency management services unit for the estimated
exposure at that time on the Company's professional liability with PHICO (see
below for further discussion). In fiscal 2002, an additional provision of $3.5
million was recorded by the Company's ambulance unit for settlement of
government audits of the unit's Medicare and Medicaid reimbursement claims and
an additional $5.0 million provision was recorded for the estimated exposure on
the Company's professional liability insurance with PHICO. These items were
partially offset by an increase in paramedic and physician wages to remain
competitive in a labor market experiencing low unemployment rates and increased
professional liability costs in the emergency management services business.
In fiscal 2001, the operating profit margin, before depreciation and
amortization expenses and goodwill impairment charges, in healthcare services
increased to 2.0% from (0.8%) in 2000. The increase was primarily due to an
increase in revenue as a result of an improvement in cash collections on
accounts receivable due to increased collection efforts at the unit's billing
operations. In addition, cash collections per transport improved because the
segment's ambulance operations have not experienced billing operations
consolidations and closings, which, in prior years, negatively affected cash
collections. Partially offsetting this increase was a provision of $19.5 million
recorded by the ambulance unit for the settlement of government audits of the
unit's Medicare and Medicaid reimbursement claims and a provision of $17.0
million recorded by the emergency management services unit for an amount
regarding the estimated exposure on the Company's professional liability
insurance with PHICO. PHICO was placed into liquidation by the Insurance
Commissioner of the Commonwealth of Pennsylvania on February 1, 2002, leaving
the Company exposed for amounts not covered by the insurance guarantee funds
provided by the respective states the professional liability claims originated
60
(Refer to Note 9 of the Notes to the Consolidated Financial Statements). Also,
the segment continued to experience an increase in accident claims costs and in
paramedic and physician wages to remain competitive in a labor market
experiencing low unemployment rates.
DEPRECIATION EXPENSE
Depreciation expense for fiscal 2002 increased slightly to $270.6 million from
$261.1 million. The increase was due to the equipment purchases (largely
vehicles) during fiscal 2002 that are more expensive than the original cost of
the equipment being retired. As a result, depreciation expense increased.
Depreciation expense for fiscal 2001 increased nominally to $261.1 million from
$255.8 million. The increase was due to the equipment purchases (largely
vehicles) during fiscal 2001 that were more expensive than the original cost of
the equipment being retired.
AMORTIZATION EXPENSE
Amortization expense for fiscal 2002 decreased to $32.8 million from $67.2
million. The decrease was a result of the goodwill impairment charges totaling
$1,105.1 million taken in the fourth quarter of fiscal 2001 and the $194.7
million goodwill impairment charges taken during fiscal 2002.
Amortization expense for fiscal 2001 decreased slightly to $67.2 million from
$70.6 million in fiscal 2000.
GOODWILL IMPAIRMENT LOSSES
During fiscal 2001, the Company changed its method of measuring goodwill
impairment. This change results in a more onerous test for including goodwill as
an asset and more closely approximates the goodwill impairment standards that
have recently been established under the accounting rules and are applicable to
the Company effective September 1, 2002.
The effect of the change in policy produced a goodwill impairment charge to
operations and reduced the carrying amount of goodwill for fiscal 2002 by $194.7
million and fiscal 2001 by $1,105.1 million (under the previous Company policy
no goodwill impairment charges would have occurred). The change in policy
resulted in no goodwill impairment charge in fiscal 2000.
Fiscal 2002 goodwill impairment losses
During fiscal 2002, the Company incurred goodwill impairment charges totaling
$194.7 million ($123.5 million in the Greyhound segment, $58.0 million in the
healthcare services segment and $13.2 million in the contract bus services
segment). The Company reviewed the value assigned to goodwill at these segments,
because of a significant decrease in the market value of the businesses as a
result of continued depressed operating results over the last few years and the
expected future performance in these segments. The Greyhound operations were
also negatively affected by September 11, 2001, the unrelated October 3, 2001
incident involving a Greyhound passenger and general negative economic
conditions. These factors indicated that
61
a permanent impairment in value existed at the respective operations. The
goodwill impairments were calculated based on independent valuations of the
underlying businesses.
Fiscal 2001 goodwill impairment losses
During fiscal 2001, the Company incurred a goodwill impairment charge of
$1,105.1 million. The Company reviewed the value assigned to goodwill, because
the following factors indicated that a permanent impairment in value existed at
all of the reported segments: (i) a significant decrease in the market value of
the businesses primarily due to the Company's June 28, 2001 voluntary petition
for reorganization (See Note 1 of the Notes to the Consolidated Financial
Statements) and (ii) continued depressed operating results over the last few
years. The goodwill impairment was calculated based on independent valuations of
the underlying businesses.
The $1,105.1 million goodwill impairment charge was comprised of a $128.5
million charge in the contract bus services business, a $372.1 million charge in
the Greyhound operations, and a $604.5 million charge in the healthcare services
business.
SEASONALITY
Contract bus services historically experiences a significant decline in revenue
and operating income in the fourth fiscal quarter due to school summer
vacations. This impact is moderated somewhat by Greyhound. Greyhound experiences
its most profitable operating results in the fourth fiscal quarter and during
the holiday seasons. The healthcare services segment revenue is quite consistent
throughout the year. Adverse winter weather may moderately affect all of the
Company's operations during the Company's second fiscal quarter. See also Note
24 of Notes to Consolidated Financial Statements.
INTEREST EXPENSE
In fiscal 2002, interest expense decreased by 89.8% to $27.7 million from $270.9
million in 2001. No interest expense was accrued on pre-petition debt of the
Debtors for fiscal 2002 and after June 28, 2001 for fiscal 2001. The total
interest on pre-petition debt that was not accrued during the year was
approximately $274.2 million (2001 - $50.3 million). Including this interest,
total interest expense for fiscal 2002 would have been approximately $301.9
million (2001 - approximately $321.2 million), representing a 6.0% decrease from
the prior period. The majority of this decrease was due to a decrease in the
cost of borrowing as a result of prevailing interest rates.
In fiscal 2001, interest expense decreased by 1.5% to $270.9 million from $275.1
million in 2000. No interest expense was accrued on prepetition debt after June
28, 2001. The total interest on prepetition debt that was not accrued during the
period June 29, 2001 to August 31, 2001 was approximately $50.3 million.
Including this interest, total interest expense for fiscal 2001 would have been
approximately $321.2 million, representing a 16.8% increase from fiscal 2000.
The majority of this increase was due to an increase in the cost of borrowing as
a result of the Company's financial condition.
62
OTHER FINANCING RELATED EXPENSES
The Company has incurred the following pre-tax charges as a result of (i) events
of default under the Company's $1.425 billion syndicated bank facility (the
"Facility"), (ii) events of default on certain Company debentures totaling $2.04
billion (the "Debentures") and (iii) the voluntary petition for reorganization
as described in Note 1 of Notes to the Consolidated Financial Statements:
Year Ended August 31, ($ millions) 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------
Net hedging losses on interest rate swaps $ - $ - $71.7
Deferred financing costs - - 15.3
Interest earned on cash accumulated during
Chapter 11 and CCAA (1.4) (0.2) -
Professional fees and other costs 46.1 64.0 14.5
-----------------------------------------------------------------------------------------------------------------------
$44.7 $63.8 $101.5
=======================================================================================================================
Prior to fiscal 2000, the Company had entered into interest rate swap contracts
and interest rate options (collectively, the "Swaps") to lower funding costs and
alter interest rate exposures. As a result of violations of the covenants under
the Facility and the Debentures and the interest payment moratorium, the
counterparties terminated all Swap contracts. In addition, the Swaps were no
longer effective hedges, as the various debentures that they were hedging had
become current obligations. Therefore, the market value of the Swaps as of the
termination date of the Swap contracts of $89.5 million, net of deferred swap
premiums of $17.8 million, was accrued and expensed during the year ended August
31, 2000.
Deferred financing costs totaling $15.3 million relating to the Debentures,
which previously were being amortized over the life of the related debt
instruments, were expensed during the year ended August 31, 2000.
Professional fees and other costs include financing, accounting, legal and
consulting services incurred by the Company during the ongoing negotiations with
the Facility members and Debenture holders and related to the voluntary petition
for reorganization. None of these services were provided by the Company's
independent auditors.
Upon successful completion of the proposed reorganization, the Company expects
to pay completion fees, which may be approximately $15 million. The Company has
not accrued for these fees.
OTHER INCOME (LOSS)
In fiscal 2002, other income (loss) increased to $15.3 million from $9.3 million
in fiscal 2001. The prior year included a $6.6 million loss realized on the sale
of certain investments and $9.5 million of refund interest recorded as part of
Irish tax refunds. Excluding these items, the prior year income of $6.4 million
increased to $15.3 million because of $4.2 million received for various notes
receivable previously written off and the reversal of $6.0 million in
contingency accruals no longer required. Partially offsetting these amounts were
lower returns experienced on the Company's investment portfolio.
In fiscal 2001, other income (loss) increased to income of $9.3 million from a
loss of $10.7 million. The prior year included a $23.5 million loss provision
taken against certain long-term
63
investments of the Company. Before this loss provision, the prior year other
income of $12.8 million decreased to $9.3 million because of a $6.6 million loss
realized on the sale of investments and due to lower returns experienced on the
Company's investment portfolio. These decreases were partially offset by $9.5
million of refund interest recorded during fiscal 2001 as part of Irish tax
refunds.
INCOME TAX EXPENSE
During fiscal 2002, the Company reduced reserves previously set up regarding
U.S. Internal Revenue Service ("IRS") audits. The IRS filed an amended claim in
the Company's restructuring proceedings that was less than the previous claim
filed. Based on the amended claim, it is expected that, after taking refunds of
taxes into account, no cash taxes will be owing.
During fiscal 2001, the Company recorded $60.0 million in income tax refunds
previously not recognized relating to its Irish subsidiary. The refunds are a
result of intercompany loan losses taken in that subsidiary.
During the year ended August 31, 2000, management believed that it was no longer
likely that it would realize future income tax assets totaling $243.9 million
and consequently, wrote this amount off as an income tax expense. In addition, a
future income tax asset of $21.5 million relating to the Company's investment in
Safety-Kleen was charged as a tax expense.
LOSS FROM CONTINUING OPERATIONS
In fiscal 2002, the income (loss) from continuing operations, before the
goodwill impairment losses and other financing related expenses was income of
$115.0 million or $0.35 per share compared with a loss of $160.7 million or
$0.49 per share for the year ended August 31, 2001.
In fiscal 2001, the loss from continuing operations, before the goodwill
impairment losses and other financing related expenses was a loss of $160.7
million or $0.49 per share compared with a loss of $488.1 million or $1.49 per
share for the year ended August 31, 2000.
During fiscal 2002, goodwill impairment charges totaling $194.7 million ($0.60
per share) (2001 - $1,105.1 million or $3.39 per share; 2000 - NIL) were
recorded as a result of indications of permanent impairment.
Other financing related expenses in fiscal 2002 totaling $44.7 million ($0.13
per share) (2001 - $63.8 million or $0.20 per share; 2000 - $101.5 million or
$0.31 per share) were incurred during the period as a result of events of
default in the Facility and the Debentures and the voluntary petition for
reorganization.
In total, the loss from continuing operations was a loss of $124.4 million or
$0.38 per share in 2002, a loss of $1,329.6 million or $4.08 per share in 2001,
and a loss of $589.6 million or $1.80 per share in 2000.
The weighted average number of Common Shares outstanding during 2002 remained
unchanged at 325.9 million.
64
The weighted average number of Common Shares outstanding during 2001 decreased
to 325.9 million shares from 327.0 million shares in 2000. The decrease is a
result of the 4.7 million Common Shares purchased by the Company for
cancellation during fiscal 2000.
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
Income (loss) from discontinued operations was $NIL in fiscal 2002, income of
$730.7 million or $2.24 per share in fiscal 2001 and a loss of $1,647.8 million
or $5.04 per share in fiscal 2000. Healthcare businesses
During fiscal 2001 the Company concluded that the previously announced disposal
of the healthcare businesses were no longer in the best interests of it's
stakeholders. The healthcare services businesses were therefore reinstated as
continuing operations in fiscal 2001 and earlier years were reclassified.
During fiscal 2000, the Company recorded a provision for loss on sale of
discontinued operations totalling $987.8 million ($3.02 per share). As a result
of recontinuing the healthcare services businesses in fiscal 2001, the Company
reversed the remaining provision for loss on sale of discontinued operations.
This reversal reduced net loss by $985.9 million ($3.02 per share) in fiscal
2001.
The provision for loss on sale of discontinued operations recorded in fiscal
2000 has been adjusted to reflect the actual operating results for each of those
years after restatement for application of the fiscal 2001 change in policy for
determining goodwill impairment.
Upon recontinuance of the healthcare services businesses in fiscal 2001, the
Company evaluated the healthcare services assets for impairment. The resulting
impairment of goodwill is summarized in Note 13 of Notes to Consolidated
Financial Statements.
Safety-Kleen Corp.
The Company owns 44% of the common shares of Safety-Kleen. On June 9, 2000,
Safety-Kleen announced that it and 73 of its U.S. subsidiaries filed voluntary
petitions for Chapter 11 relief in the United States Bankruptcy Court for the
District of Delaware.
During fiscal 2002, the Company abandoned its investment in Safety-Kleen. As a
result the operations for Safety-Kleen have been reported as discontinued
operations and previously reported financial statements have been reclassified.
The summarized statements of operations for Safety-Kleen are as follows:
Year ended August 31, ($ millions) 2002 2001 2000
---------------------------------------------------------------------------------------------------------------------
Equity in earnings $ - $ - $10.8
Investment impairment and other losses - (255.2) (670.8)
---------------------------------------------------------------------------------------------------------------------
$ - ($255.2) ($660.0)
=====================================================================================================================
During fiscal 2000, the Company recorded provisions for (i) investment
impairment charges totalling $603.8 million to reduce the investment in
Safety-Kleen to a nominal amount, (ii) $61.6 million owing under a guarantee by
the Company of a Safety-Kleen note and (iii) $5.4 million for other amounts
owing from Safety-Kleen.
65
During fiscal 2001, pursuant to a resolution in fiscal 2002 of various disputes
between the Company and Safety-Kleen, the Company recorded provisions for (i) a
$225.0 million claim in favor of Safety-Kleen as a general unsecured claim in
Class 6 of the Company's plan of reorganization, (ii) $15.7 million related to
guarantees of certain industrial revenue bonds, (iii) $7.8 million related to
insurance matters, (iv) $6.0 million related to guarantees of performance bonds
and (v) $0.7 million related to certain other litigation matters. These items
are described further in Note 25 of Notes to Consolidated Financial Statements.
Restated financial statements of Safety-Kleen Corp.
On July 9, 2001, Safety-Kleen issued consolidated financial statements for the
year ended August 31, 2000 and restated consolidated financial statements for
the years ended August 31, 1997 through August 31, 1999 and, on September 26,
2001, issued interim consolidated financial statements for the nine months ended
May 31, 2001, including financial information for the first, second and third
quarters of fiscal 2001. Safety-Kleen reported that it had not restated any
quarterly financial results for periods prior to fiscal 2001.
Management of the Company has not been provided access to all of the supporting
information for Safety-Kleen's restated consolidated financial statements. As a
result, the Company has not been able to assess the basis upon which
Safety-Kleen restated its financial statements. In addition, given the Company's
varying ownership percentages of Safety-Kleen throughout fiscal 2000, 1999, 1998
and 1997, the Company is unable to determine what impact, if any, that
Safety-Kleen's restatement may have on the Company's previously reported results
for fiscal years ended August 31, 2000 and prior years.
Because the Company wrote off the value of its investment in Safety-Kleen during
fiscal 2000, Safety-Kleen's restated consolidated financial statements and its
reported fiscal 2000 results would not result in any adjustments to the
Company's previously reported consolidated balance sheet as of August 31, 2000
nor to any consolidated balance sheets reported for any period ending subsequent
to August 31, 2000. However, given the Safety-Kleen restatement and assuming the
accuracy thereof, a portion of the losses associated with the impairment of the
Company's investment in Safety-Kleen that were recorded as part of the $660.0
million loss relating to Safety-Kleen, reflected in the Company's consolidated
statement of operations for the fiscal year ended August 31, 2000, may be
properly allocable to earlier fiscal periods.
Given the Company's varying ownership percentages in Safety-Kleen and the lack
of access to all of the supporting information for Safety-Kleen's restatements,
the Company is only able to estimate the effect of Safety-Kleen's restatements
on the Company's statements of operations. These estimated ranges are as follows
($ millions):
Safety-Kleen's The Company's estimated
The Company's ownership reported range of potential
Year ended percentage in Safety-Kleen adjustments: adjustments:
August 31, during the period Income (loss) Income (loss)
---------------------------------------------------------------------------------------------------------------------
Pre-2000 35.3% to 100.0% ($588.1) ($217.6) to ($262.3)
2000 43.5% to 43.6% N/A 217.6* to 262.3*
---------------------------------------------------------------------------------------------------------------------
Total for all years 35.3% to 100.0% ($588.1) $ - to $ -
=====================================================================================================================
* The estimated range of adjustments recorded prior to the second quarter
of fiscal 2000 would decrease the reported investment impairment loss
in fiscal 2000.
While the Company has not restated its previously reported consolidated
financial results and has recorded no equity income or loss with respect to its
investment in Safety-Kleen since
66
November 30, 1999, if Safety-Kleen reports or provides the Company with the
required quarterly financial information for the restated fiscal periods and if
Safety-Kleen enables the Company to assess the supporting information for its
restatements, the Company may be required to restate its consolidated financial
statements for the fiscal years ended August 31, 2000 and prior years.
NET LOSS AND LOSS PER SHARE
In total, a net loss of $124.4 million or $0.38 per share was incurred in the
year ended August 31, 2002, compared to a loss of $598.9 million or $1.84 per
share in fiscal 2001 and a loss of $2,237.4 million, or $6.84 per share, in
fiscal 2000.
The Company's consolidated financial statements have been prepared in accordance
with Canadian GAAP, which conform in all material respects with U.S. GAAP,
except as disclosed in Note 23 of Notes to Consolidated Financial Statements.
FINANCIAL CONDITION
The Company's capital consisted of: ($ in millions)
August 31, 2002 2001 2000
----------------------------------------------------------------------------------------------------------------------------
Long-term debt (including the current
portion) $224.7 6.5% $280.2 7.7% $3,627.7 81.0%
Provision for loss on sale of
discontinued operations - - - - 986.1 22.0
Other long-term liabilities 382.5 11.0 373.6 10.2 242.5 5.4
Liabilities subject to compromise 3,977.1 114.4 3,978.5 108.9 - -
Shareholders' deficiency (1,107.0) (31.9) (980.5) (26.8) (377.0) (8.4)
-----------------------------------------------------------------------------------
$3,477.3 100.0% $3,651.8 100.0% $4,479.3 100.0%
============================================================================================================================
Voluntary petitions for reorganization
On June 28, 2001, the Debtors filed voluntary petitions for relief under chapter
11 of the Bankruptcy Code in the Bankruptcy Court. The Debtors include the
Company and five of its direct and indirect subsidiaries: Laidlaw USA, LIL,
LIFC, Laidlaw One, and LTI. In addition, the Company and LIL have commenced
Canadian insolvency proceedings under the CCAA in the Canadian Court. None of
the Company's operating subsidiaries was included in the filings.
The Debtors remain in possession of their respective properties and are managing
their businesses as debtors-in-possession. Pursuant to the Bankruptcy Code and
the CCAA, however, the Debtors may not engage in transactions outside the
ordinary course of business without the approval of the Bankruptcy Court and the
Canadian Court.
The Company is reorganizing its affairs under the protection of the Bankruptcy
Code and the CCAA and has proposed a plan of reorganization for itself and the
other Debtors. The plan of reorganization must be voted upon by the Company's
stakeholders and approved by the Bankruptcy Court and the Canadian Court. A plan
of reorganization sets forth the means for satisfying claims against and
interests in the Company and the other Debtors, including the liabilities
subject to compromise. Generally, prepetition liabilities are subject to
settlement or compromise under such a plan of reorganization.
67
The $55.5 million decrease in long-term debt is primarily a result of repayments
under the Greyhound Lines, Inc. ("Greyhound") facility.
Shareholders' deficiency increased by $126.5 million primarily as a result of
the net loss of $124.4 million.
In fiscal 2002, capital expenditures of $239.2 million and acquisition
expenditures of $3.6 million were financed from operating cash flows. In
addition, the Company incurred $31.3 million of additional debt for the purchase
of property and equipment.
In fiscal 2001, the $3,347.5 million decrease in long-term debt is primarily a
result of certain amounts being reclassified during fiscal 2001. Subsequent to
the voluntary petition for reorganization, as of June 28, 2001, the long-term
debt relating to the Debtors was classified as "liabilities subject to
compromise".
In fiscal 2001, the $131.1 million increase in other long-term liabilities is
primarily due to the increase in claims liabilities as a result of increased
accident claims costs being experienced. During fiscal 2001, shareholders'
deficiency increased by $603.5 million primarily as a result of the net loss of
$598.9 million.
In fiscal 2001, capital expenditures of $254.3 million and acquisition
expenditures of $2.0 million were financed from operating cash flows. In
addition, the Company incurred $24.1 million of additional debt (as previously
described) for the purchase of property and equipment.
LIQUIDITY
Cash provided by operating activities was $433.8 million, $447.7 million and
$208.4 million in fiscal 2002, fiscal 2001 and fiscal 2000, respectively. The
slight decrease in fiscal 2002 from fiscal 2001 is primarily due to the $38.6
million increase in restricted cash and cash equivalents, partially offset by
improved operating cash flows.
Cash and cash equivalents, which can be liquidated readily were $343.5 million,
$281.2 million and $108.0 million at August 31, 2002; August 31, 2001 and August
31, 2000, respectively.
In 2002, trade accounts receivable decreased $19.3 million to $490.4 million.
The average number of days sales outstanding decreased to 40 days from 42 days
in 2001 primarily due to improved cash collections at the Company's healthcare
services segment.
In 2001, trade accounts receivable decreased $21.4 million to $509.7 million.
The average number of days sales outstanding decreased to 42 days from 45 days
in 2000 primarily due to improved cash collections at the Company's healthcare
services segment.
Potential Pension Plan Funding Requirements
For financial reporting and investment planning purposes, the Company currently
uses an actuarial mortality table that closely matches the actual experience
related to the existing participant population. For funding purposes, United
States pension law mandates the use of a prescribed actuarial mortality table
and discount rates that differ from those used by the Company for financial
reporting and investment planning purposes. The ATU Plan represents
approximately 75% of the total plan assets and benefit obligation as at August
31, 2002. Based
68
upon the application of the actuarial mortality table, discount rates and
funding calculations prescribed by current regulations, and further assuming a
continuation of the freeze of wage and service accruals and that the ATU Plan
assets can obtain annual investment returns of 7.5%, estimated Company
contributions to the ATU Plan, based on the Company's policy of funding the
minimum contributions required by law, will total $187 million through 2007.
Lowering the assumed investment return on ATU plan assets to 5% results in
estimated contributions through 2007 of $205 million, while a 10% return results
in estimated contributions through 2007 of $169 million. Nevertheless, there is
no assurance that the ATU Plan will be able to earn the assumed rate of return,
that new regulations may result in changes in the prescribed actuarial mortality
table or discount rates, or that there will be market driven changes in the
discount rates, which would result in the Company being required to make
contributions in the future that differ significantly from the estimates above.
Further, in connection with its bankruptcy reorganization, the Company and the
Pension Benefit Guaranty Corporation ("PBGC"), a United States government agency
that administers the mandatory termination insurance program for defined benefit
pension plans under the Employee Retirement Income Security Act ("ERISA"), have
agreed orally to the principal economic terms relating to claims asserted by the
PBGC against the Debtors regarding the funding levels of the Greyhound U.S.
Plans (the "PBGC Agreement"). Under the PBGC Agreement, upon the consummation of
the proposed plan of reorganization, the Company and its subsidiaries will
contribute $50 million in cash to the Greyhound U.S. Plans and the Company will
transfer shares of its post-reorganization common stock equal in value to $50
million to a trust formed for the benefit of such plans (the "Pension Plan
Trust").
The PBGC Agreement provides that the PBGC will be granted a first priority lien
on the common stock held in the Pension Plan Trust. All proceeds of stock sales
will be contributed directly to the Greyhound U.S. Plans. The PBGC will have
non-voting participation in these sale decisions. If the proceeds from the sales
of common stock exceed $50 million, the excess amount may be credited against
the next-due minimum funding obligations of the Company and its subsidiaries,
but will not reduce the June 2004 required contribution under the PBGC
Agreement. If the proceeds from the sales of common stock do not aggregate $50
million, the Company and its subsidiaries will be required to contribute the
amount of the shortfall in cash to the Greyhound U.S. Plans at the end of 2004.
Further, the Company and its subsidiaries will contribute an additional $50
million in cash to the Greyhound U.S. Plans in June 2004. These contributions
and transfers will be in addition to the contributions to the Greyhound U.S.
Plans, if any, required under the minimum funding requirements of ERISA. The
PBGC also will receive a second priority lien on the assets of the Company's
operating subsidiaries (other than Greyhound).
Debtor-in-possession facility
To ensure sufficient liquidity to meet ongoing operating needs, the Company
obtained debtor-in-possession ("DIP") financing from General Electric Capital
(the "DIP Facility"). The DIP Facility is guaranteed by certain of the Company's
direct and indirect subsidiaries located in the United States and Canada (other
than Greyhound and its subsidiaries and joint ventures)(collectively, the
"Guarantors"). The term of the DIP Facility will expire on the earliest of (a)
August 8, 2003, (b) the prepayment in full of all amounts outstanding under the
DIP Facility and the termination of the lenders' commitments thereunder and (c)
the effective date of the approved plan of reorganization.
The maximum aggregate borrowing available under the DIP Facility is $200.0
million. The total borrowing available to LIFC, Laidlaw Transportation
Management, Inc., LTI, Laidlaw One
69
and Laidlaw USA (the "US Borrowers") is $180.0 million (the "U.S. DIP
Facility"), including a letter of credit sub-facility of $100.0 million (the "US
LC DIP Sub-Facility"). The maximum borrowing available to the Company and LIL
(the "Canadian Borrowers") is $20.0 million (the "Canadian DIP Facility"),
including a letter of credit sub-facility of $10.0 million (the "Canadian LC DIP
Sub-Facility"). The total maximum usage of the U.S. LC DIP Sub-Facility and the
Canadian LC DIP Sub-Facility is not to exceed $100.0 million at any time.
The amount of credit available to the Borrowers under the DIP Facility is based
on the Borrowers' last twelve-months earnings before interest, taxes,
depreciation and amortization ("EBITDA"). Further, certain non-core operating
entities are subject to maximum availability limits based on their respective
EBITDA performance. The Borrowers may use the proceeds of loans made under the
DIP Facility for working capital and other general corporate purposes of the
Borrowers.
Borrowings under each facility bear interest at the Borrowers' option, at rates
per annum equal to either (1) a one, two or three month reserve adjusted LIBOR
plus 2.0% or (2) a floating rate equal to the index rate plus 0.5%. The
Borrowers pay letter of credit fees to each administrative agent under each
facility equal to 2.0% per annum of the face amount of the letters of credit.
Other fees consist of (1) an unused facility fee equal to 0.5% per annum on the
average unused daily balance of each facility and (2) a prepayment premium in
the amount of 1.0% of the aggregate commitments under each facility if
prepayment is the result of any Borrower defaults, voluntary termination (with
the exception of emergence from the Reorganization Cases) or refinancing of any
part of such facility with another financing prior to August 8, 2003. Finally,
the Borrowers and the Guarantors also paid a $2.0 million fee to the agents
during fiscal 2001.
To secure the Borrowers' obligations under each facility, the Borrowers granted
a first priority lien on all of the existing and after-acquired assets of the
Borrowers. To secure the Guarantors' obligations under the DIP Facility, the
Guarantors granted a security interest in all of the assets of the Guarantors,
subject to certain exceptions contained in the DIP Facility documentation.
As of August 31, 2002, the Company had no borrowings under the DIP Facility, but
issued letters of credit of $25.5 million and had $174.5 million of
availability.
The Company was in default as of August 31, 2002 of several financial covenants
contained in the DIP facility. The defaults relate to the failure by several of
the Company's operating entities to meet minimum EBITDA thresholds for the
period ended August 31, 2002. In addition, several operating entities did not
meet the capital expenditure requirements specified under the DIP Facility for
the fiscal quarter ended August 31, 2002. The Company received a waiver under
the DIP facility with respect to these defaults and expects to obtain future
waivers. There is no assurance such waivers will be obtained.
The Greyhound Facility
In October 2000, Greyhound entered into a revolving credit facility, expiring
October 24, 2004, with Foothill Capital Corporation to fund working capital
needs and for general corporate purposes (the "Greyhound Facility"). Greyhound
was extended a revolving line of credit in an amount of $125.0 million including
a sub-facility of $50.0 million for letters of credit. Borrowings initially bore
interest at a rate equal to Wells Fargo Bank's prime rate plus 0.5% per annum or
LIBOR plus 2.0% as selected by Greyhound. After December 31, 2000, the interest
rates were subject to quarterly adjustment based upon Greyhound Parties' ratio
of debt to EBITDA, as defined in the agreement, for the four previous quarters.
Letters of credit fees are based on the
70
applicable LIBOR margin. The Greyhound Facility is secured by liens on
substantially all of the assets of Greyhound and the stock and assets of certain
of its subsidiaries and is subject to certain affirmative and negative operating
and financial covenants. As of August 31, 2002, Greyhound was in compliance with
all such covenants, including restrictions on the redemption or retirement of
certain subordinated indebtedness or equity interest, payment of dividends and
transactions with affiliates, including the Company.
Based upon Greyhound's fiscal 2003 operating budget, management anticipates
remaining in compliance with these covenants, although only by a small margin
during fiscal 2003. Management is closely monitoring this situation and intends
to request covenant amendments should it appear likely such amendments will be
necessary in order to remain in compliance with the covenants, although, there
is no assurance that such amendments will be granted.
As of August 31, 2002, the Company had no borrowings under the Greyhound
Facility, but issued letters of credit of $26.8 million and had availability of
$98.2 million.
CAPITAL EXPENDITURES AND CAPITAL RESOURCES
Net expenditures for the purchase of capital assets for normal replacement
requirements and increases in services, were $270.5 million (including $31.3
million of purchases of capital assets financed by notes payable, operating
leases and/or capital leases), $278.4 million (including $24.1 million of
purchases of capital assets financed by notes payable, operating leases and/or
capital leases) and $255.9 million (including $17.6 million of purchases of
capital assets financed by notes payable, operating leases and/or capital leases
in fiscal 2002, fiscal 2001 and fiscal 2000, respectively.
Capital expenditures for the purchase of capital assets during fiscal 2003 are
expected to be approximately $280 million. The expenditures represent normal
replacement and upgrading requirements and purchases of additional capital
assets necessary for planned increases in services.
Historically, the Greyhound business segment has used operating lease financing
as a significant source of financing for vehicle purchases. For further
information, see Note 20 of Notes to the Consolidated Financial Statements for
the fiscal year ended August 31, 2002.
Expenditures on the acquisition of businesses for continuing operations
(including long-term debt assumed) were $3.6 million, $2.0 million and $84.6
million in fiscal 2002, fiscal 2001 and fiscal 2000, respectively.
Historically, acquisitions have generally been financed initially with
revolving/term bank loans and replaced later with longer term public issues of
debt or equity. Acquisitions in fiscal 2002 and 2001 have been financed by the
operating cash flows of the Company.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements requires management to make estimates
and assumptions relating to the reporting of results of operations, financial
condition and related disclosure of contingent assets and liabilities at the
date of the financial statements. Actual results may differ from those estimates
under different assumptions or conditions. The following are the Company's most
critical accounting policies, which are those that require management's
71
most difficult, subjective and complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain and
may change in subsequent periods.
Claims liability and professional liability reserves
The Company establishes reserves for automobile liability, general liability,
professional liability and worker's compensation claims that have been reported
but not paid and claims that have been incurred but not reported. These reserves
are developed using actuarial principles and assumptions which consider a number
of factors, including historical claim payment patterns and changes in case
reserves, the assumed rate of increase in healthcare costs and property damage
repairs, ultimate court awards and the discount rate. The amount of these
reserves could differ from the Company's ultimate liability related to these
claims due to changes in the Company's accident reporting, claims payment and
settlement practices or claims reserve practices, as well as differences between
assumed and future cost increases and discount rates.
Revenue recognition in the healthcare services segment
Revenue is recognized at the time of service and is recorded at amounts
estimated to be recoverable, based upon recent experience, under reimbursement
arrangements with third-party payors, including Medicare, Medicaid, private
insurers, managed care organizations and hospitals or directly from patients.
The Company derives approximately 39% of its collections in the healthcare
services segment from Medicare and Medicaid, 7% from contracted hospitals, 44%
from private insurers, including prepaid health plans and other sources, and 10%
directly from patients.
Healthcare reimbursement is complex and may involve lengthy delays. Third-party
payors are continuing their efforts to control expenditures for healthcare and
may disallow, in whole or in part, claims for reimbursement based on
determinations that certain amounts are not reimbursable under plan coverage,
were for services provided that were not medically necessary, or insufficient
supporting information was provided.
As a result, there is a reasonable possibility that recorded estimates could
change materially and that retroactive adjustments may change the amounts
realized from third-party payors. Such adjustments are recorded in future
periods as adjustments become known.
Pension
The determination of the Company's obligation and expense for pension benefits
is dependent on the selection of certain assumptions and factors. These include
assumptions about the discount rate, the expected return on plan assets and the
rate of future compensation increase as determined by management. In addition,
the Company's actuarial consultants also use factors to estimate such items as
retirement age and mortality tables. The assumptions and factors used by the
Company may differ materially from actual results due to changing market
conditions, earlier or later retirement ages or longer or shorter life spans of
participants. These differences may result in a significant impact to the amount
of pension obligation or expense recorded by the Company. During fiscal 2002,
the Company has experienced a reduction in
72
interest rates and a deterioration in plan returns. If this trend continues, the
Company may have to fund the pension plans in future years through actual cash
contributions.
In addition, as discussed above under "Liquidity - Potential Pension Plan
Funding Requirements", the Company has agreed orally with the PBGC to the
principal economic terms relating to claims asserted by the PBCG against the
Debtors regarding the funding levels of the Greyhound U.S. Plans. Under the PBGC
Agreement, the Company has committed to make substantial cash contributions to
the Greyhound U.S. Plans, in addition to contributions required under applicable
law.
Contingencies
As discussed in Notes 20 and 27 of the Notes to Consolidated Financial
Statements, management is unable to make a reasonable estimate of the
liabilities that may result from the final resolution of certain litigation
matters disclosed. Further assessments of the potential liability will be made
as additional information becomes available. Management currently does not
believe that these proceedings will have a material adverse affect on the
Company's consolidated financial position. It is possible, however, that results
of operations could be materially affected by changes in management's
assumptions relating to these proceedings or the actual final resolution of
these proceedings.
RISK FACTORS IN THE COMPANY
The Company is exposed to a variety of financial, operating and market risks.
Some of these risks are within the Company's control, others are not. For
controllable risks, the Company applies specific risk management strategies to
reduce the likelihood of loss. The following are the risk factors in the Company
not already disclosed elsewhere in this report.
Accident claims costs
As discussed above under the "Critical accounting polices", the Company
experiences significant costs from accident and professional liability claims
and uses estimates and assumptions when providing for the ultimate costs of
these incidents. The ultimate costs could materially affect the Company's
financial condition and results of operations.
The Company has in place procedures to manage the risk. The first is a
comprehensive safety program throughout the Company, which has as its goal to
reduce the number of accidents as much as practically possible. Although recent
accident claims costs increased because of increased medical costs, ultimate
settlement amounts and court awards, and increased severity of accidents
experienced, the accident frequency as a percentage of revenue has actually
declined over the last number of years. Once an accident has occurred, the
Company has procedures and settlement practices in place to manage and minimize
the ultimate cost to the Company.
Healthcare revenue
In August 1997, the U.S. Federal Government passed the Balanced Budget
Act of 1997 (the "Act"), which provides for certain changes to the Medicare
reimbursement system. These changes
73
include, among other things, the requirement for the development and
implementation of a prospective fee schedule for reimbursement of ambulance
services. Prior to these changes, ambulance services were reimbursed from
Medicare on a reasonable charge basis.
The Act mandates that this fee schedule be developed through a negotiated
rulemaking process and must consider (i) data from the industry and other
organizations involved in the delivery of ambulance services, (ii) mechanisms to
control increases in expenditures for ambulance services, (iii) appropriate
regional and operational differences, (iv) adjustments to payment rates to
account for inflation and other relevant factors, and (v) the phase-in of
payment rates under the fee schedule in an efficient and fair manner.
The Act also required that beginning January 1, 2001, ambulance service
providers accept assignment whereby the Company receives payment directly from
Medicare and accepts such amount along with the co-pay and deductible paid by
the patient as payment in full. Further, the Act stipulates that third-parties
may elect to no longer provide payments for cost sharing for co-insurance, or
co-payments, for dual qualified (Medicare and Medicaid) beneficiaries.
In January 1999, the Center for Medicare and Medicaid Services, formerly named
the Health Care Financing Administration, announced its intention to form a
negotiated rule making committee to create the new fee schedule for Medicare
reimbursement of ambulance services. That committee convened in February 1999.
The fee schedule and the mandatory acceptance of assignment was implemented on
April 1, 2002. In addition, revisions to the physician certification
requirements for coverage of non-emergency ambulance services were also
implemented.
The Company has implemented a plan that it believes will mitigate the potential
adverse impact from these changes. The plan includes renegotiation of "9-1-1"
contracts, adjusting rates and seeking alternative relief from the federal and
local governments.
As a result, estimating the revenue from healthcare services is subject to
significant uncertainties and subsequent adjustments to the recorded revenue
could be material.
Potential loss of customers
The Debtors' commencement of the chapter 11 case could adversely affect the
Company's relationships with its customers and has already with certain
customers. Because of the concern regarding the Company's ability to perform its
obligations under its contracts, the Company's existing customers may terminate
such contracts. Further, several of the Company's subsidiaries are parties to
agreements that permit the customer to cancel its agreement with the subsidiary
upon the filing for bankruptcy by the subsidiary's parent company. Consequently,
certain contracts of the Company's subsidiaries may be terminated because the
Company is a party to the chapter 11 case. Moreover, in the local county
ambulatory services business, the local county may terminate the contract upon
such bankruptcy filing of any affiliates and fulfill the Company's obligations
itself through the use of the Company's equipment. In addition, initiation of
new customer relationships may be hampered by the chapter 11 case.
Performance bonds
The Company's school busing business is highly dependent on the Company's
ability to obtain performance bond coverages sufficient to meet bid requirements
imposed by potential
74
customers. The Company's ability to obtain adequate bonding coverages has been
adversely affected by the Company's poor financial position and lack of
liquidity. Furthermore, many school boards are requiring higher dollar-value
performance bonds from their service providers. There can be no assurance that,
going forward, the Company will obtain access to adequate bonding capacity. If
adequate bonding capacity is not available or if the terms of such bonding are
too onerous, there would be a material adverse effect on the Company.
Increasing competitive and external pressures
Contract bus services - The segment competes with several large companies and a
substantial number of smaller locally owned operations in the contract bus
services business segment. Moreover, most school districts operate their own
school bus systems. In acquiring new school bus contracts and maintaining
existing business, competition primarily exists in the areas of pricing and
service.
Greyhound - The inter-city transportation industry is highly competitive.
Greyhound's primary sources of competition for passengers are automobile travel,
low cost air travel from both regional and national airlines, and, in certain
markets, regional bus companies and trains. Airlines have increased their
penetration in intermediate-haul markets (450 to 1,000 miles), which has
resulted in the bus industry, in general, reducing prices in these markets in
order to compete. Additionally, airline discount programs have attracted certain
long-haul passengers away from Greyhound. However, these lower airline fares
usually contain restrictions and require advance purchase. Typically,
Greyhound's customers decide to travel only a short time before their trip and
purchase their tickets on the day of travel. Greyhound's everyday low pricing
strategy results in "walk-up" fares substantially below comparable airline
fares. In instances where Greyhound's fares exceed an airline discount fare,
Greyhound believes the airline fares typically are more restrictive and less
readily available than travel provided by Greyhound. However, Greyhound has also
instituted numerous advance purchase programs, in order to attract the price
sensitive customer. Price, destination choices and convenient schedules are the
ways in which Greyhound meets this competitive challenge.
The automobile is the most significant form of competition to Greyhound. The
out-of-pocket costs of operating an automobile are generally less expensive than
bus travel, particularly for multiple persons traveling in a single car.
Although the Greyhound travel services business benefited for a brief period
after September 11, 2001 as a result of airline passengers seeking alternative
forms of transportation, the unrelated October 2001 incident involving a
Greyhound passenger adversely affected these operations. The impact to date of
these events has been numerous cancellations and a significant decrease in new
bookings. Security expenses have also increased significantly in response to
these events. Continued declines in Greyhound's bookings and other Greyhound
operations, combined with increased security expenses related to these events,
could have a material adverse effect on the Company's financial condition or
results of operations.
Healthcare services - Through its ambulance business unit, the Company competes
with several large companies and a substantial number of smaller locally owned
operators in the healthcare transportation services industry. Moreover, many
municipal, fire and paramedic departments and hospitals operate their own
ambulance systems. In acquiring new healthcare transportation contracts and
maintaining its business, the Company experiences competition primarily in the
areas of pricing and service.
75
Emergency management services is also subject to vigorous competition.
Competition for these services is generally based upon cost, the ability to make
available physicians capable of providing high quality care and the reputation
of the Company's emergency department business unit among hospitals and
physicians. Competition is also based upon the proper utilization of the
emergency department, as well as the ability to integrate the emergency
department with other hospital departments and to provide value added services.
There can be no assurance that the Company will be able to compete successfully
against these sources of competition or other competitive or external factors.
Retention of key personnel
The Company's success depends upon its ability to recruit and retain key
personnel. The Company could experience difficulty in retaining its current key
personnel or in attracting and retaining necessary additional key personnel. Low
unemployment in certain market areas can make the recruiting, training, and
retention of full-time and part-time personnel more difficult and costly,
including the cost of overtime wages. The Company's internal growth will further
increase the demand on its resources and require the addition of new personnel.
The Company has entered into employment agreements with certain of its executive
officers and certain other key personnel. However, failure to retain or replace
key personnel may have an adverse effect on the Company's business.
Fuel price fluctuations
Historically, fuel costs represent approximately 3% to 5% of revenue. Due to the
significance of fuel expenses, particularly diesel fuel, to the operations of
the Company and the historical volatility of fuel prices, the Company has
initiated a program to minimize the fluctuations in the price of its diesel fuel
purchases. The intent of the program is to mitigate the impact of fuel price
changes on the Company's operating margins and overall profitability by entering
into forward supply contracts ("FSCs") with certain vendors. The Company enters
into FSCs for roughly one third of the Company's total annual fuel purchases.
The FSCs generally stipulate set bulk delivery volumes at prearranged prices for
a set period. The volumes agreed to be purchased by the Company are well below
the forecasted total bulk fuel needs for the given location. Therefore, the risk
of being forced to purchase fuel through the FSCs that is not required by the
Company is minimal. Also, to the extent that the Company enters FSCs for
portions of its total fuel needs, it may not realize the benefit of decreases in
fuel prices. Conversely, to the extent that the Company does not enter into FSCs
for portions of its total fuel needs, it may be adversely affected by increases
in fuel prices.
Given the ticket based revenue stream of the Greyhound segment, fuel price
increases at the U.S. operations of the Greyhound segment, limited by what the
market can bear, can be passed on to the passenger through increased fares. The
majority of the Canadian operations of the Greyhound segment operates in a
regulated market and ticket price increases must be first approved by government
agencies. The other operations, that have fuel requirements, operate with a
contractual based revenue stream. Fuel price increases take a longer time to be
passed on to the customer, in most cases upon renewal of the contract.
76
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements contained in this report, including statements regarding the
status of financing arrangements, the status and outcomes of restructuring
discussions and proceedings, future operating results and market opportunities,
possible asset dispositions and other statements, that are not historical facts
are forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Such statements involve certain risks,
uncertainties and assumptions that include, but are not limited to; the
negotiating positions of various constituencies and the results of negotiations
regarding restructuring plans; the Company's ability to continue as a going
concern; market factors, including competitive pressures and changes in pricing
policies; changes in interpretations of existing legislation or the adoption of
new legislation; loss of major customers; the ability to continue to satisfy
bonding requirements for existing or new customers; volatility in energy costs;
the costs and risks associated with litigation; costs related to accident and
other claims; potential pension plan funding requirements; and general economic
conditions. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual outcomes may vary
materially from those indicated. In addition, the Company's financial statements
may be subject to adjustment in light of the restated financial statements of
Safety-Kleen.
LEGAL PROCEEDINGS
See Notes 12, 20, 25 and 27 of Notes to Consolidated Financial Statements.
77
Controls and Procedures
-----------------------
"We maintain a set of disclosure controls and procedures designed to
ensure that information required to be disclosed by the Company in reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Within the 90-day period
prior to the filing of this report, an evaluation was carried out under the
supervision and with the participation of the Company's management, including
the Chief Executive Officer and Chief Financial Officer, of the effectiveness of
our disclosure controls and procedures. Based on that evaluation, the CEO and
CFO have concluded that the Company's disclosure controls and procedures are
effective.
Subsequent to the date of their evaluation, there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls."
Exhibits
--------
99.1 Certification in accordance with Section 906 of the Sarbanes-Oxley Act of
2002.
Undertaking
-----------
Registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when requested to do so by the Commission staff, information
relating to: the securities registered pursuant to Form 40-F; the securities in
relation to which the obligation to file an annual report on Form 40-F arises;
or transactions in said securities.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the Registrant certifies that
it meets all of the requirements for filing on Form 40-F and has duly cause this
annual report to be signed on its behalf by the undersigned, thereto duly
authorized.
LAIDLAW INC.
By: /s/ Ivan R. Cairns
------------------------------------
Dated: May 19, 2003 Ivan R. Cairns
Senior Vice-President and General Counsel
CERTIFICATIONS
I, Kevin E. Benson, certify that:
1. I have reviewed this annual report on Form 40-F of Laidlaw Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 19, 2003 /s/ Kevin E. Benson
-------------- --------------------------------------------
Kevin E. Benson
President and Chief Executive Officer
CERTIFICATIONS
I, Douglas A. Carty, certify that:
1. I have reviewed this annual report on Form 40-F of Laidlaw Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 19, 2003 /s/ Douglas A. Carty
------------ -----------------------------------------------------
Douglas A. Carty
Senior Vice-President and Chief Financial Officer