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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 2004 Commission file number 000-13109 LAIDLAW INTERNATIONAL, INC.  DELAWARE
(State or other jurisdiction of
incorporation or organization)
    
    98-0390488
(I.R.S. Employer
Identification No.)
 55 Shuman Boulevard, Suite 400
Naperville, Illinois, 60563
(Address of principal executive offices) Registrants telephone number, including area code (630) 848-3000 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 [X] NO
[   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES
[   ] NO [X] APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES [X] NO [   ] As of June 30, 2004, there were 103,806,110 shares of common stock, par
value $0.01 per share, outstanding.




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LAIDLAW INTERNATIONAL, INC. Page No.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Consolidated Balance Sheets as of May 31, 2004 (Unaudited) and August 31, 2003
    
    
    2Consolidated Statements of Operations for the Three Months and Nine Months Ended May 31, 2004 and 2003 (Unaudited)
    
    
    4Consolidated Statements of Comprehensive Income (Loss) for the Three Months and Nine Months Ended May 31, 2004 and 2003 (Unaudited)
    
    
    5Consolidated Statements of Cash Flows for the Three Months and Nine Months Ended May 31, 2004 and 2003 (Unaudited)
    
    
    6Notes to Consolidated Financial Statements (Unaudited)
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    25Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    35PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    36Item 6. Exhibits and Reports on Form 8-K
    
    
    37SIGNATURES
    
    
    38Indemnification AgreementAmendment No.1 to Loan and Security AgreementCertificationsCertficationsCertification
 1




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PART I.  FINANCIAL INFORMATION 
 Item 1. Financial Statements LAIDLAW INTERNATIONAL, INC. 
 CONSOLIDATED BALANCE SHEETS
 ($ in millions)
 May 31,
    
    August 31,2004
    
    2003(unaudited)ASSETSCurrent assetsCash and cash equivalents
    
    $
    161.3
    
    
    $
    100.3Restricted cash and cash equivalents
    
    
    74.3
    
    
    
    39.4Short-term deposits and marketable securities
    
    
    10.3
    
    
    
    42.0Accounts receivable
    
    
    720.3
    
    
    
    569.8Parts and supplies
    
    
    51.5
    
    
    
    50.2Deferred income tax assets
    
    
    75.3
    
    
    
    86.2Other current assets
    
    
    54.2
    
    
    
    60.1Total current assets
    
    
    1,147.2
    
    
    
    948.0Long-term investments
    
    
    552.5
    
    
    
    553.5Property and equipmentLand
    
    
    184.0
    
    
    
    184.3Buildings
    
    
    161.4
    
    
    
    151.1Vehicles
    
    
    1,339.8
    
    
    
    1,228.4Other
    
    
    174.0
    
    
    
    153.61,859.2
    
    
    
    1,717.4Less: Accumulated depreciation
    
    
    253.5
    
    
    
    47.61,605.7
    
    
    
    1,669.8Other assetsGoodwill
    
    
    183.1
    
    
    
    183.1Contracts and customer relationships
    
    
    205.3
    
    
    
    216.9Deferred income tax assets
    
    
    177.8
    
    
    
    203.2Deferred charges and other assets
    
    
    72.1
    
    
    
    78.2638.3
    
    
    
    681.4Total assets
    
    $
    3,943.7
    
    
    $
    3,852.7
 The accompanying notes are an integral part of these statements. 2




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LAIDLAW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
($ in millions) May 31,
    
    August 31,2004
    
    2003(unaudited)LIABILITIESCurrent liabilitiesAccounts payable
    
    $
    128.9
    
    
    $
    119.4Accrued liabilities
    
    
    518.8
    
    
    
    506.0Current portion of long-term debt
    
    
    37.8
    
    
    
    69.4Total current liabilities
    
    
    685.5
    
    
    
    694.8Long-term debt
    
    
    1,121.5
    
    
    
    1,145.1Pension liability
    
    
    226.7
    
    
    
    225.7Other long-term liabilities
    
    
    557.8
    
    
    
    496.8Total liabilities
    
    
    2,591.5
    
    
    
    2,562.4SHAREHOLDERS EQUITYCommon shares; $0.01 par value per share;
issued and outstanding 103,806,110
(August 31, 2003 - 103,777,422)
    
    
    1.0
    
    
    
    1.0Additional paid in capital
    
    
    1,359.8
    
    
    
    1,358.3Common shares held in trust; 3,777,419 issued
    
    
    (50.0
    )
    
    
    (50.0
    )Accumulated other comprehensive loss
    
    
    (6.5
    )
    
    
    (9.1
    )Retained earnings (deficit)
    
    
    47.9
    
    
    
    (9.9
    )Total shareholders equity
    
    
    1,352.2
    
    
    
    1,290.3Total liabilities and shareholders equity
    
    $
    3,943.7
    
    
    $
    3,852.7
 The accompanying notes are an integral part of these statements. 3




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LAIDLAW INTERNATIONAL, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 ($ in millions except
per share amounts)

(unaudited)
 Predecessor
    
    
    
    
    
    PredecessorCompany
    
    
    
    
    
    CompanyThree
    
    Three
    
    Nine
    
    NineMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    EndedMay 31,
    
    May 31,
    
    May 31,
    
    May 31,2004
    
    2003
    
    2004
    
    2003Revenue
    
    $
    1,239.6
    
    
    $
    1,202.8
    
    
    $
    3,612.4
    
    
    $
    3,485.7Compensation expense
    
    
    706.5
    
    
    
    691.3
    
    
    
    2,070.6
    
    
    
    2,001.1Accident claims and professional liability expenses
    
    
    78.1
    
    
    
    71.4
    
    
    
    245.2
    
    
    
    241.4Vehicle related costs
    
    
    68.7
    
    
    
    68.8
    
    
    
    207.4
    
    
    
    202.4Occupancy costs
    
    
    50.0
    
    
    
    49.2
    
    
    
    151.2
    
    
    
    150.4Fuel
    
    
    50.1
    
    
    
    46.4
    
    
    
    139.8
    
    
    
    133.4Depreciation
    
    
    70.1
    
    
    
    76.8
    
    
    
    215.3
    
    
    
    228.4Amortization
    
    
    4.6
    
    
    
    0.4
    
    
    
    13.8
    
    
    
    0.9Other operating expenses
    
    
    122.0
    
    
    
    124.8
    
    
    
    368.7
    
    
    
    364.2Operating income
    
    
    89.5
    
    
    
    73.7
    
    
    
    200.4
    
    
    
    163.5Interest expense
    
    
    (31.4
    )
    
    
    (6.6
    )
    
    
    (98.7
    )
    
    
    (19.6
    )Other expenses, net
    
    
    (0.1
    )
    
    
    (3.4
    )
    
    
    (3.7
    )
    
    
    (20.0
    )Income before income taxes and cumulative
effect of a change in accounting principle
    
    
    58.0
    
    
    
    63.7
    
    
    
    98.0
    
    
    
    123.9Income tax expense
    
    
    (23.4
    )
    
    
    (1.5
    )
    
    
    (40.2
    )
    
    
    (4.5
    )Income before cumulative effect of a change in
accounting principle
    
    
    34.6
    
    
    
    62.2
    
    
    
    57.8
    
    
    
    119.4Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,205.4
    )Net income (loss)
    
    $
    34.6
    
    
    $
    62.2
    
    
    $
    57.8
    
    
    $
    (2,086.0
    )Basic earnings (loss) per shareIncome before cumulative effect of a change in
accounting principle
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    0.58
    
    
    $
    0.37Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.77
    )Net income (loss)
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    0.58
    
    
    $
    (6.40
    )Diluted earnings (loss) per shareIncome before cumulative effect of a change in
accounting principle
    
    $
    0.33
    
    
    $
    0.19
    
    
    
    0.56
    
    
    $
    0.37Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.77
    )Net income (loss)
    
    $
    0.33
    
    
    $
    0.19
    
    
    $
    0.56
    
    
    $
    (6.40
    )
 The accompanying notes are an integral part of these statements. 4




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LAIDLAW INTERNATIONAL, INC. 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 ($ in millions)
(unaudited)
 Predecessor
    
    
    
    
    
    PredecessorCompany
    
    
    
    
    
    CompanyThree
    
    Three
    
    Nine
    
    NineMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    EndedMay 31,
    
    May 31,
    
    May 31,
    
    May 31,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    34.6
    
    
    $
    62.2
    
    
    $
    57.8
    
    
    $
    (2,086.0
    )Net change in unrealized gains (losses)
on securities
    
    
    (6.3
    )
    
    
    5.7
    
    
    
    (1.5
    )
    
    
    9.2Foreign currency translation adjustments
    
    
    (6.8
    )
    
    
    29.7
    
    
    
    4.1
    
    
    
    46.2Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (176.4
    )Comprehensive income (loss)
    
    $
    21.5
    
    
    $
    97.6
    
    
    $
    60.4
    
    
    $
    (2,207.0
    )
 The accompanying notes are an integral part of these statements. 5




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LAIDLAW INTERNATIONAL, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 ($ in millions)
(unaudited)
 Predecessor
    
    
    
    
    
    PredecessorCompany
    
    
    
    
    
    CompanyThree
    
    Three
    
    Nine
    
    NineMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    EndedMay 31,
    
    May 31,
    
    May 31,
    
    May 31,2004
    
    2003
    
    2004
    
    2003Operating activitiesNet income (loss)
    
    $
    34.6
    
    
    $
    62.2
    
    
    $
    57.8
    
    
    $
    (2,086.0
    )Non-cash items included in net income (loss):Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,205.4Depreciation and amortization
    
    
    74.7
    
    
    
    77.2
    
    
    
    229.1
    
    
    
    229.3Deferred income taxes
    
    
    25.3
    
    
    
    
    
    
    
    40.1
    
    
    
    Other items
    
    
    (0.8
    )
    
    
    (1.1
    )
    
    
    4.7
    
    
    
    (8.1
    )Increase in claims liability and
professional liability insurance accruals
    
    
    12.7
    
    
    
    7.4
    
    
    
    47.2
    
    
    
    56.1Cash provided by (used in) financing other working
capital items
    
    
    36.6
    
    
    
    20.1
    
    
    
    (101.8
    )
    
    
    (133.8
    )Decrease in restricted cash and cash equivalents
    
    
    3.5
    
    
    
    33.9
    
    
    
    4.1
    
    
    
    0.9Net cash provided by operating activities
    
    $
    186.6
    
    
    $
    199.7
    
    
    $
    281.2
    
    
    $
    263.8Investing activitiesPurchase of property, equipment and other assets,
net of proceeds from sale
    
    $
    (45.7
    )
    
    $
    (104.2
    )
    
    $
    (150.8
    )
    
    $
    (208.7
    )Expended on acquisitions
    
    
    
    
    
    
    (1.4
    )
    
    
    (1.3
    )
    
    
    (4.6
    )Net increase in investments
    
    
    (2.5
    )
    
    
    (3.0
    )
    
    
    (10.6
    )
    
    
    (37.3
    )Net cash used in investing activities
    
    $
    (48.2
    )
    
    $
    (108.6
    )
    
    $
    (162.7
    )
    
    $
    (250.6
    )Financing activitiesNet increase (decrease) in long-term debt
    
    $
    (71.8
    )
    
    $
    21.2
    
    
    $
    (55.2
    )
    
    $
    34.4Net increase (decrease) in other long-term liabilities
    
    
    1.6
    
    
    
    (2.6
    )
    
    
    (2.3
    )
    
    
    (0.8
    )Net cash provided by (used in) financing activities
    
    $
    (70.2
    )
    
    $
    18.6
    
    
    $
    (57.5
    )
    
    $
    33.6Net increase in cash and cash equivalents
    
    $
    68.2
    
    
    $
    109.7
    
    
    $
    61.0
    
    
    $
    46.8Cash and cash equivalents  beginning of period*
    
    
    93.1
    
    
    
    280.6
    
    
    
    100.3
    
    
    
    343.5Cash and cash equivalents  end of period*
    
    $
    161.3
    
    
    $
    390.3
    
    
    $
    161.3
    
    
    $
    390.3
 *These amounts represent the unrestricted cash and cash equivalents The accompanying notes are an integral part of these statements. 6




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LAIDLAW INTERNATIONAL, INC. 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE THREE AND NINE MONTH PERIODS ENDED MAY 31, 2004
 Note 1  Corporate overview and basis of presentation Corporate overview Laidlaw International, Inc. (the Company) operates in five reportable
business segments: education services, public transit services, Greyhound,
healthcare transportation services and emergency management services. The
education services segment provides school bus transportation, including
scheduled home-to-school, extra-curricular and charter and transit school bus
services, throughout the United States and Canada. The public transit services
segment provides fixed-route municipal bus service and paratransit bus
transportation for riders with disabilities. Greyhound, a national provider of
inter-city bus transportation in the United States and Canada, provides
scheduled passenger service, package delivery service, charter bus service and,
in certain terminals, food service. The healthcare transportation service
segment provides critical care transportation services, non-emergency ambulance
and transfer services and emergency response services in the United States.
The emergency management services segment provides outsourced emergency
department physician services throughout the United States. Basis of presentation The accompanying interim consolidated financial statements of the Company have
been prepared in accordance with accounting principles generally accepted in
the United States for interim reporting and accordingly, do not include all of
the disclosures required for annual financial statements. In the opinion of
management, all adjustments considered necessary for fair presentation have
been included. All such adjustments are of a normal, recurring nature.
Operating results for the three month and nine month periods ended May 31, 2004
are not necessarily indicative of the results that may be expected for the full
year ending August 31, 2004. For further information, see the Companys
consolidated financial statements, including the accounting policies and notes
thereto, included in the Companys Annual Report on Form 10-K for the fiscal
year ended August 31, 2003. On June 1, 2003, the Company adopted fresh start accounting pursuant to the
guidance provided by the American Institute of Certified Public Accountants
Statement of Position 90-7 Financial Reporting by Entities in Reorganization
under the Bankruptcy Code. In accordance with the principles of fresh start
accounting, the Company adjusted its assets and liabilities to their estimated
fair values as of June 1, 2003. Due to the changes in the financial structure
of the Company following its emergence from bankruptcy in June 2003, and the
application of fresh start accounting, the consolidated financial statements of
the Company issued subsequent to May 31, 2003 are not comparable with the
consolidated financial statements issued by the predecessor company (the
Predecessor Company) prior to June 1, 2003. A black line has been drawn on
the accompanying Consolidated Financial Statements to separate and distinguish
between the Company and the Predecessor Company. Certain prior period amounts have been reclassified to conform to the current
period presentation. Note 2  Accounts receivable and revenue Trade accounts receivable as of May 31, 2004 are net of $596.9 million (August
31, 2003  $527.9 million) of allowances for uncompensated care and contractual
allowances in the Companys
Healthcare Transportation and Emergency Management business segments (the
Healthcare 7




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Businesses) and net of an allowance for doubtful accounts of $6.3
million (August 31, 2003  $5.6 million) in the Companys other three
reportable segments. Note 3  Intangible assets The contracts and customer relationships are net of $18.1 million of
accumulated amortization at May 31, 2004 (August 31, 2003  $4.5 million). Included in deferred charges and other assets are radio frequency licenses
totalling $12.0 million at May 31, 2004 (August 31, 2003  $12.0 million). The
licenses are considered to be assets with indefinite lives and as such, are not
amortized. Note 4  Long-term debt and interest rate swap In December 2003, the Company modified the terms of its $625.0 million loan
maturing in June 2009 (the Term B Facility). The interest rate charged on
the loan was reduced by 1.25%, to LIBOR plus 3.75% from LIBOR plus 5.0%.
Additionally, the LIBOR floor or minimum LIBOR rate was reduced 0.25% to 1.75%
from the previous floor of 2.0%. The Company also entered into an interest
rate swap agreement (Swap) that effectively converted $110 million of Term B
Facility floating rate debt to fixed rate debt with an interest rate of 6.8%.
The Swap was entered into because the Company is required, under the Term B
Facility, to have a fixed interest rate on a portion of the underlying debt.
The Swap is considered a cash flow hedge and expires in September 2006. In July 2004, Greyhound Lines, Inc. (Greyhound Lines) amended its revolving
credit facility (the Greyhound Facility) to extend the maturity date two
years to October 24, 2006, reset certain financial covenants, modify rates of
interest on borrowings and letter of credit fees and provide for a prepayment
premium should Greyhound Lines terminate the facility before October 24, 2006.
Additionally, the amendment allows Greyhound Lines to elect to extend the
maturity date an additional year, to October 24, 2007, provided that Greyhound
Lines meets certain terms and conditions. Under the amended Greyhound
Facility, borrowings after the quarterly period
ending September 30, 2004 are available at a rate, determined by reference to
a leverage ratio calculated quarterly, equal to Wells Fargo Banks prime rate
plus 0.375% to 2.25% or LIBOR plus 2.375% to 4.25%. Letter of credit fees are
based upon the then applicable LIBOR margin. Prior to the quarterly period
ending September, 30, 2004, borrowings remain available at a rate equal to
Wells Fargo Banks prime rate plus 1.5% or LIBOR plus 3.5%, and letter of
credit fees at 3.5% per annum. A 1% prepayment premium is payable should
Greyhound Lines terminate the facility before October 25, 2005; if terminated
between October 25, 2005 and October 23, 2006 the premium is 0.5%, and if after
October 23, 2006 there is no premium. Additionally, the amendment requires Greyhound Lines to maintain a minimum cash
flow to interest expense ratio, maximum indebtedness to cash flow ratio and
minimum cash flow at levels that are the same as, or more restrictive than,
previous levels. The new covenant levels were set at 15% to 20% less than the
levels projected in financial forecasts delivered to the agent by Greyhound
Lines. As a result of the extension of the maturity date and recent business
improvements that have allowed Greyhound Lines to meet its financial covenants,
management believes that there is no longer a going concern risk in the near
term. However, substantial needs for capital expenditures and debt service
requirements in the future mandate that Greyhound Lines continue to
significantly improve operations and financial results. Additionally,
unforeseen events or changes in assumptions may occur and result in material
differences between Greyhound Lines future financial results or forecasts and
the current financial forecast, and those differences could result in
management concluding in the future
that Greyhound Lines may not be able to continue as a going concern based upon
the new information. 8




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Note 5  Stock awards and options Pursuant to the Companys 2003 Equity and Performance Incentive Plan the
Company issued stock based compensation to various employees and non-employee
directors. These grants to employees represent the long-term incentive portion
of the Companys overall compensation plan for management. During the nine
month period ended May 31, 2004, the Company recorded an expense of
approximately $1.4 million related to these plans. The Company accounts for
these grants pursuant to Statement of Financial Accounting Standards (SFAS)
123 Accounting for Stock-Based Compensation. A summary of stock based
compensation issued during the current fiscal year is as follows: Stock options- During the nine month period ended May 31, 2004, the Company
issued 57,375 non-qualified stock options to non-employee directors with a
strike price of $10.33 per share and 60,000 shares of non-qualified stock
options to a key management employee at a strike price of $14.45. The grant
prices were equal to the fair market value of the Companys stock at the date
of grant. The stock options have a ten-year life and vest ratably over three
years. Stock options and tandem stock appreciation rights- During the nine month
period ended May 31, 2004, the Company issued 369,000 non-qualified stock
options to key management employees with a strike price of between $13.00 and
$14.60 per share, which was equal to the fair market value of the Companys
stock at the date of grant. The stock options have a ten-year life and vest
ratably over three years. In tandem with the stock option grant each
participant received a stock appreciation right that allows the participant to
receive, upon exercise of the right, the difference between the option strike
price and fair market value of the Companys stock on the exercise date. The
Company can choose whether to deliver Company common stock or cash to the
participant upon exercise of the stock appreciation right. Any exercise of a
tandem stock appreciation right will automatically cancel the underlying stock
option and any exercise of the stock option will automatically cancel the
tandem stock appreciation right. Restricted Shares- On September 10, 2003, the Company issued 28,688 shares of
restricted common stock to non-employee directors that vest at the end of a
three-year period. During the vesting period the participant has the rights of
a shareholder with respect to voting and dividend rights but is restricted from
transferring the shares. Deferred Shares- During the nine month period ended May 31, 2004, the Company
issued 830,300 deferred shares to key management employees that vest ratably
over a four-year period. Due to forfeitures, 817,550 deferred shares remain
outstanding at May 31, 2004. On each vesting date the employee will receive
common stock of the Company equal in number to the deferred shares that have
vested. Upon delivery of the Company common stock an equal number of deferred
shares are terminated. The participant has no voting rights with the deferred
shares. Note 6  Pension plans The Company, collectively with all of its wholly-owned U.S. subsidiaries,
including Greyhound (the Laidlaw Group), is party to an agreement with the
Pension Benefit Guaranty Corporation regarding the funding levels of the
Companys pension plans (the PBGC Agreement). Under
the PBGC Agreement, 3.8
million shares of the Companys common stock were issued to a trust formed for
the benefit of the pension plans (the Pension Plan Trust). The trustee of the
Pension Plan Trust is to sell the stock at the Companys direction, but in no
event later than the
end of 2004, with all net proceeds from the stock sales being contributed
directly to the pension plans. If the net proceeds from the stock sales exceed
$50 million, the excess amount may be credited against any future required
minimum funding obligations. If the net proceeds from the 9




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##### Table of Contents



stock sales are less
than $50 million, the Laidlaw Group will be required to contribute the amount
of the shortfall in cash to the pension plans at the end of 2004. Further, the
Laidlaw Group must contribute an additional $50 million in cash to the pension
plans by June 30, 2004. These contributions and transfers will be in addition
to the minimum funding obligations to the pension plans, if any, required under
current regulations. At May 31, 2004, all 3.8 million shares of Laidlaw common stock remained in the
Pension Plan Trust. Based upon the closing price of the Laidlaw stock on the
New York Stock Exchange on June 30, 2004, the shares had an aggregate market
value of $49.0 million. In addition to the cash contributions to the pension plans pursuant to the PBGC
Agreement described above, the Company expects to contribute $8 million to all
plans other than the ATU Plan, for which there is no funding requirement in
2004. During the three months and nine months ended May 31, 2004, the Company
contributed $2 million and $6 million, respectively, to the plans. The components of net periodic benefit cost for the Companys pension plans
were as follows: Predecessor
    
    
    
    
    
    PredecessorCompany
    
    
    
    
    
    CompanyThree
    
    Three
    
    Nine
    
    NineMonths
    
    Months
    
    Months
    
    MonthsEnded
    
    Ended
    
    Ended
    
    EndedMay 31,
    
    May 31,
    
    May 31,
    
    May 31,($ in millions)
    
    2004
    
    2003
    
    2004
    
    2003Components of net pension benefit costService cost
    
    $
    1.4
    
    
    $
    1.6
    
    
    $
    4.2
    
    
    $
    4.8Interest cost
    
    
    13.6
    
    
    
    13.8
    
    
    
    40.8
    
    
    
    41.5Expected return on plan assets
    
    
    (12.8
    )
    
    
    (12.5
    )
    
    
    (38.3
    )
    
    
    (37.5
    )Amortization
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.7Net pension benefit cost
    
    $
    2.2
    
    
    $
    3.1
    
    
    $
    6.7
    
    
    $
    9.5
 Note 7  Material contingencies 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. 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 previous tax
filings. 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 the historical claims payout pattern and discussion with
internal and outside legal counsel and risk management personnel, 10




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##### Table of Contents



management
believes at this time that there is no proceeding either threatened or pending
against the Company relating to such claims arising out of the ordinary course
of business that will have a materially adverse effect upon the Companys
consolidated financial position or results of operations. For additional
information on the Companys legal proceedings, refer to Item 1, Part II of
this Form 10-Q. Healthcare Businesses Issues 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. Management believes at this time that the outcome of any of these
investigations will not have a materially adverse effect upon the Companys
consolidated financial position or results of operations. Contingent bonuses The Company and two of its subsidiaries, American Medical Response, Inc.
(AMR) and EmCare Holdings, Inc. (EmCare) are parties to an employment
agreement effective October 1, 2002 with William A. Sanger under which Mr.
Sanger serves as President and Chief Executive Officer of AMR and Chief
Executive Officer of EmCare. Pursuant to the agreement, Mr. Sanger is entitled
to a bonus payment upon a sale, or an initial public offering, of the stock of
AMR and/or EmCare. This bonus is also payable if Mr. Sanger remains employed on
October 1, 2007 and neither a sale nor initial public offering has occurred.
With respect to AMR, the bonus is equal to 5% of the enterprise value of AMR in
excess of $410 million at the time of the event that entitles Mr. Sanger to the
payment. With respect to EmCare, the bonus is equal to 5% of the enterprise
value of EmCare in excess of $125 million at the time of the event that
entitles Mr. Sanger to the payment. EmCare is party to an employment agreement effective April 1, 2003 with Don S.
Harvey under which Mr. Harvey serves as President and Chief Operating Officer
of EmCare. Pursuant to the agreement, Mr. Harvey is entitled to a bonus payment
upon a sale, or an initial public offering, of the stock of EmCare provided Mr.
Harvey remains employed under the agreement upon the occurrence of such event.
The bonus is equal to 2% of the enterprise value of EmCare in excess of $125
million at the time of the event that entitles Mr. Harvey to the payment. Note 8  Cumulative effect of a change in accounting principle Effective September 1, 2002, the Predecessor Company adopted SFAS 142 and, as a
result, the Predecessor Company ceased to amortize goodwill. SFAS 142 requires
that goodwill be reviewed for impairment upon adoption of SFAS 142 and at least
annually thereafter. Under SFAS 142, goodwill impairment is deemed to exist if
the carrying amount of a reporting unit exceeds its estimated fair value and
the carrying amount of the goodwill exceeds its estimated fair value. To
determine estimated fair value of the reporting units, the Predecessor Company
utilized independent valuations of the underlying businesses. During the three months ended November 30, 2002, the Predecessor Company
completed the impairment assessment as required by SFAS 142 and determined that
a significant portion of its goodwill was impaired as of September 1, 2002. As
a result, the Predecessor Company recorded a non-cash charge of $2,205.4
million as a cumulative effect of a change in accounting principle. 11




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##### Table of Contents



Note 9  Earnings per share The basic earnings (loss) per share figures are calculated using the weighted
average number of shares outstanding during the respective periods. The
diluted earnings per share for the three and nine month periods ended May 31,
2004 assumes the sale on the open market of the Companys common shares held in
trust and the dilutive effect of the Companys stock based compensation. Predecessor
    
    
    
    
    
    PredecessorCompany
    
    
    
    
    
    CompanyThree Months
    
    Three Months
    
    Nine Months
    
    Nine MonthsEnded
    
    Ended
    
    Ended
    
    Ended(in millions except per share amounts)
    
    May 31, 2004
    
    May 31, 2003
    
    May 31, 2004
    
    May 31, 2003Earnings before cumulative effect of a change in
accounting principle
    
    $
    34.6
    
    
    $
    62.2
    
    
    $
    57.8
    
    
    $
    119.4Cumulative effect of a change In accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,205.4
    )Net earnings (loss) available to common shareholders
    
    $
    34.6
    
    
    $
    62.2
    
    
    $
    57.8
    
    
    $
    (2,086.0
    )Weighted average number of common shares outstandingBasic
    
    
    100.0
    
    
    
    325.9
    
    
    
    100.0
    
    
    
    325.9Shares held in pension plan trust
    
    
    3.8
    
    
    
    
    
    
    
    3.8
    
    
    
    Stock based compensation
    
    
    0.1
    
    
    
    
    
    
    
    0.1
    
    
    
    Diluted
    
    
    103.9
    
    
    
    325.9
    
    
    
    103.9
    
    
    
    325.9Net earnings (loss) per common shareBasicEarnings before cumulative effect of a change
in accounting principle
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    0.58
    
    
    $
    0.37Cumulative effect of a change In accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.77
    )Net earnings (loss) available to common
shareholders
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    0.58
    
    
    $
    (6.40
    )DilutedEarnings before cumulative effect of a change
in accounting principle
    
    $
    0.33
    
    
    $
    0.19
    
    
    $
    0.56
    
    
    $
    0.37Cumulative effect of a change In accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.77
    )Net earnings (loss) available to common
shareholders
    
    $
    0.33
    
    
    $
    0.19
    
    
    $
    0.56
    
    
    $
    (6.40
    )
 Options to purchase 429,000 shares of common stock were excluded from the
computation of dilutive earnings per share for the three months and nine months
ended May 31, 2004 because their effects were antidilutive. 12




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##### Table of Contents



Note 10  Segmented information The Company has five reportable segments: Education services, Public Transit
services, Greyhound, Healthcare Transportation services and Emergency
Management services. Revenues and EBITDA (operating income before depreciation
and amortization) of the segments for the three and nine months ended May 31,
2004 and 2003 are as follows: Predecessor
    
    
    
    
    
    PredecessorCompany
    
    
    
    
    
    CompanyThree Months
    
    Three Months
    
    Nine Months
    
    Nine MonthsEnded
    
    Ended
    
    Ended
    
    Ended($ in millions)
    
    May 31, 2004
    
    May 31, 2003
    
    May 31, 2004
    
    May 31, 2003Education servicesRevenue
    
    $
    459.7
    
    
    $
    457.9
    
    
    $
    1,310.2
    
    
    $
    1,314.8EBITDA
    
    
    120.8
    
    
    
    116.1
    
    
    
    306.0
    
    
    
    302.0Public Transit servicesRevenue
    
    $
    78.7
    
    
    $
    72.8
    
    
    $
    223.3
    
    
    $
    212.1EBITDA
    
    
    1.5
    
    
    
    5.6
    
    
    
    (2.8
    )
    
    
    7.3GreyhoundRevenue
    
    $
    299.7
    
    
    $
    291.4
    
    
    $
    881.1
    
    
    $
    847.5EBITDA
    
    
    15.6
    
    
    
    3.4
    
    
    
    38.3
    
    
    
    5.8Healthcare Transportation servicesRevenue
    
    $
    265.6
    
    
    $
    259.8
    
    
    $
    790.0
    
    
    $
    759.3EBITDA
    
    
    22.1
    
    
    
    18.6
    
    
    
    63.5
    
    
    
    55.8Emergency Management servicesRevenue
    
    $
    135.9
    
    
    $
    120.9
    
    
    $
    407.8
    
    
    $
    352.0EBITDA
    
    
    4.2
    
    
    
    7.2
    
    
    
    24.5
    
    
    
    21.9Consolidated TotalRevenue
    
    $
    1,239.6
    
    
    $
    1,202.8
    
    
    $
    3,612.4
    
    
    $
    3,485.7EBITDA
    
    
    164.2
    
    
    
    150.9
    
    
    
    429.5
    
    
    
    392.8Depreciation and amortization expense
    
    
    (74.7
    )
    
    
    (77.2
    )
    
    
    (229.1
    )
    
    
    (229.3
    )Operating income
    
    
    89.5
    
    
    
    73.7
    
    
    
    200.4
    
    
    
    163.5Interest expense
    
    
    (31.4
    )
    
    
    (6.6
    )
    
    
    (98.7
    )
    
    
    (19.6
    )Other expenses, net
    
    
    (0.1
    )
     
    
    (3.4
    )
    
    
    (3.7
    )
    
    
    (20.0
    )Income tax expense
    
    
    (23.4
    )
    
    
    (1.5
    )
    
    
    (40.2
    )
    
    
    (4.5
    )Income before cumulative effect of a
change in accounting principle
    
    $
    34.6
    
    
    $
    62.2
    
    
    $
    57.8
    
    
    $
    119.4
 The Companys goodwill balance of $183.1 million (August 31, 2003 - $183.1
million) is composed of goodwill from the Education services segment. Total identifiable assets for each of the reportable segments has not changed
materially since August 31, 2003. 13




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##### Table of Contents



Note 11  Condensed financial statements of restricted subsidiaries Pursuant to the terms of the Companys $406.0 million Senior Notes, the Company
is required to segregate the consolidated results of operations between the
subsidiaries of the Company that are not a party to the agreement, which are
comprised of the U.S. based businesses in the Greyhound segment (the
Unrestricted Subsidiaries), and the Company and its remaining subsidiaries
(the Restricted Subsidiaries). Condensed Consolidated Statement of Operations
Three Months Ended May 31, 2004 Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsRevenue
    
    $
    997.3
    
    
    $
    242.3
    
    
    $
    1,239.6Compensation expense
    
    
    601.3
    
    
    
    105.2
    
    
    
    706.5Accident claims and professional
liability expenses
    
    
    59.3
    
    
    
    18.8
    
    
    
    78.1Vehicle related costs
    
    
    35.5
    
    
    
    33.2
    
    
    
    68.7Occupancy costs
    
    
    30.4
    
    
    
    19.6
    
    
    
    50.0Fuel
    
    
    33.5
    
    
    
    16.6
    
    
    
    50.1Depreciation
    
    
    59.4
    
    
    
    10.7
    
    
    
    70.1Amortization
    
    
    4.5
    
    
    
    0.1
    
    
    
    4.6Other operating expenses
    
    
    85.4
    
    
    
    36.6
    
    
    
    122.0Operating income
    
    
    88.0
    
    
    
    1.5
    
    
    
    89.5Interest expense
    
    
    (22.9
    )
    
    
    (8.5
    )
    
    
    (31.4
    )Other income (expenses), net
    
    
    (0.2
    )
    
    
    0.1
    
    
    
    (0.1
    )Income (loss) before income taxes
    
    
    64.9
    
    
    
    (6.9
    )
    
    
    58.0Income tax recovery (expense)
    
    
    (26.0
    )
    
    
    2.6
    
    
    
    (23.4
    )Net income (loss)
    
    $
    38.9
    
    
    $
    (4.3
    )
    
    $
    34.6
 Condensed Consolidated Statement of Operations
Nine Months Ended May 31, 2004 Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsRevenue
    
    $
    2,906.9
    
    
    $
    705.5
    
    
    $
    3,612.4Compensation expense
    
    
    1,760.9
    
    
    
    309.7
    
    
    
    2,070.6Accident claims and professional
liability expenses
    
    
    190.7
    
    
    
    54.5
    
    
    
    245.2Vehicle related costs
    
    
    106.6
    
    
    
    100.8
    
    
    
    207.4Occupancy costs
    
    
    92.0
    
    
    
    59.2
    
    
    
    151.2Fuel
    
    
    95.1
    
    
    
    44.7
    
    
    
    139.8Depreciation
    
    
    183.5
    
    
    
    31.8
    
    
    
    215.3Amortization
    
    
    13.7
    
    
    
    0.1
    
    
    
    13.8Other operating expenses
    
    
    260.6
    
    
    
    108.1
    
    
    
    368.7Operating income (loss)
    
    
    203.8
    
    
    
    (3.4
    )
    
    
    200.4Interest expense
    
    
    (74.6
    )
    
    
    (24.1
    )
    
    
    (98.7
    )Other expenses, net
    
    
    (3.6
    )
    
    
    (0.1
    )
    
    
    (3.7
    )Income (loss) before income taxes
    
    
    125.6
    
    
    
    (27.6
    )
    
    
    98.0Income tax recovery (expense)
    
    
    (51.5
    )
    
    
    11.3
    
    
    
    (40.2
    )Net income (loss)
    
    $
    74.1
    
    
    $
    (16.3
    )
    
    $
    57.8
 14




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##### Table of Contents



Predecessor Company
Condensed Consolidated Statement of Operations
Three Months Ended May 31, 2003 Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsRevenue
    
    $
    961.6
    
    
    $
    241.2
    
    
    $
    1,202.8Compensation expense
    
    
    577.2
    
    
    
    114.1
    
    
    
    691.3Accident claims and professional
liability expenses
    
    
    50.5
    
    
    
    20.9
    
    
    
    71.4Vehicle related costs
    
    
    35.8
    
    
    
    33.0
    
    
    
    68.8Occupancy costs
    
    
    29.2
    
    
    
    20.0
    
    
    
    49.2Fuel
    
    
    30.7
    
    
    
    15.7
    
    
    
    46.4Depreciation
    
    
    64.7
    
    
    
    12.1
    
    
    
    76.8Amortization
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.4Other operating expenses
    
    
    85.3
    
    
    
    39.5
    
    
    
    124.8Operating income (loss)
    
    
    87.9
    
    
    
    (14.2
    )
    
    
    73.7Interest expense
    
    
    (1.1
    )
    
    
    (5.5
    )
    
    
    (6.6
    )Other income (expense), net
    
    
    (3.9
    )
    
    
    0.5
    
    
    
    (3.4
    )Income (loss) before income taxes
    
    
    82.9
    
    
    
    (19.2
    )
    
    
    63.7Income tax expense
    
    
    (1.1
    )
    
    
    (0.4
    )
    
    
    (1.5
    )Net income (loss)
    
    $
    81.8
    
    
    $
    (19.6
    )
    
    $
    62.2
 Predecessor Company
Condensed Consolidated Statement of Operations
Nine Months Ended May 31, 2003 Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsRevenue
    
    $
    2,786.2
    
    
    $
    699.5
    
    
    $
    3,485.7Compensation expense
    
    
    1,670.0
    
    
    
    331.1
    
    
    
    2,001.1Accident claims and professional
liability expenses
    
    
    190.4
    
    
    
    51.0
    
    
    
    241.4Vehicle related costs
    
    
    103.8
    
    
    
    98.6
    
    
    
    202.4Occupancy costs
    
    
    91.3
    
    
    
    59.1
    
    
    
    150.4Fuel
    
    
    88.8
    
    
    
    44.6
    
    
    
    133.4Depreciation
    
    
    192.4
    
    
    
    36.0
    
    
    
    228.4Amortization
    
    
    0.8
    
    
    
    0.1
    
    
    
    0.9Other operating expenses
    
    
    250.0
    
    
    
    114.2
    
    
    
    364.2Operating income (loss)
    
    
    198.7
    
    
    
    (35.2
    )
    
    
    163.5Interest expense
    
    
    (3.8
    )
    
    
    (15.8
    )
    
    
    (19.6
    )Other expense, net
    
    
    (20.0
    )
    
    
    
    
    
    
    (20.0
    )Income (loss) before income
taxes and cumulative effect of a
change in accounting principle
    
    
    174.9
    
    
    
    (51.0
    )
    
    
    123.9Income tax expense
    
    
    (3.4
    )
    
    
    (1.1
    )
    
    
    (4.5
    )Income (loss) from operations
before cumulative effect of a
change in accounting principle
    
    $
    171.5
    
    
    $
    (52.1
    )
    
    $
    119.4Cumulative effect of a change in
accounting principle
    
    
    (1,775.9
    )
    
    
    (429.5
    )
    
    
    (2,205.4
    )Net loss
    
    $
    (1,604.4
    )
    
    $
    (481.6
    )
    
    $
    (2,086.0
    )
 15




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##### Table of Contents



Condensed Consolidated Statement of Cash Flows
Three Months Ended May 31, 2004 Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsNet cash provided by operating activities
    
    $
    171.4
    
    
    $
    15.2
    
    
    $
    186.6Cash flows from investing activities:Purchase of property, equipment and
other assets, net of proceeds from sale
    
    $
    (40.6
    )
    
    $
    (5.1
    )
    
    $
    (45.7
    )Net (increase) decrease in investments
    
    
    0.5
    
    
    
    (3.0
    )
    
    
    (2.5
    )Net cash used in investing activities
    
    $
    (40.1
    )
    
    $
    (8.1
    )
    
    $
    (48.2
    )Cash flows from financing activities:Net decrease in long-term debt
    
    $
    (70.7
    )
    
    $
    (1.1
    )
    
    $
    (71.8
    )Net increase in non-current liabilities
    
    
    1.2
    
    
    
    0.4
    
    
    
    1.6Net cash used in financing activities
    
    $
    (69.5
    )
    
    $
    (0.7
    )
    
    $
    (70.2
    )Net increase in cash and cash equivalentsCash and cash equivalents at:
    
    $
    61.8
    
    
    $
    6.4
    
    
    $
    68.2Beginning of period
    
    
    73.8
    
    
    
    19.3
    
    
    
    93.1End of period
    
    $
    135.6
    
    
    $
    25.7
    
    
    $
    161.3
 Condensed Consolidated Statement of Cash Flows
Nine Months Ended May 31, 2004 Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsNet cash provided by operating activities
    
    $
    249.0
    
    
    $
    32.2
    
    
    $
    281.2Cash flows from investing activities:Purchase of property, equipment and
other assets, net of proceeds from sale
    
    $
    (131.1
    )
    
    $
    (19.7
    )
    
    $
    (150.8
    )Expended on acquisitions
    
    
    (1.3
    )
    
    
    
    
    
    
    (1.3
    )Net increase in investments
    
    
    (6.6
    )
    
    
    (4.0
    )
    
    
    (10.6
    )Net cash used in investing activities
    
    $
    (139.0
    )
    
    $
    (23.7
    )
    
    $
    (162.7
    )Cash flows from financing activities:Net decrease in long-term debt
    
    $
    (27.7
    )
    
    $
    (27.5
    )
    
    $
    (55.2
    )Net decrease in non-current liabilities
    
    
    (1.8
    )
    
    
    (0.5
    )
    
    
    (2.3
    )Net cash used in financing activities
    
    $
    (29.5
    )
    
    $
    (28.0
    )
    
    $
    (57.5
    )Net increase (decrease) in cash and cash
equivalentsCash and cash equivalents at:
    
    $
    80.5
    
    
    $
    (19.5
    )
    
    $
    61.0Beginning of period
    
    
    55.1
    
    
    
    45.2
    
    
    
    100.3End of period
    
    $
    135.6
    
    
    $
    25.7
    
    
    $
    161.3
 16




---



##### Table of Contents



Predecessor Company
Condensed Consolidated Statement of Cash Flows
Three Months Ended May 31, 2003 Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsNet cash provided by (used in) operating activities
    
    $
    209.4
    
    
    $
    (9.7
    )
    
    $
    199.7Cash flows from investing activities:Purchase of property, equipment and other assets,
net of proceeds from sale
    
    $
    (92.3
    )
    
    $
    (11.9
    )
    
    $
    (104.2
    )Expended on acquisitions
    
    
    (1.4
    )
    
    
    
    
    
    
    (1.4
    )Net (increase) decrease in investments
    
    
    (3.4
    )
    
    
    0.4
    
    
    
    (3.0
    )Net cash used in investing activities
    
    $
    (97.1
    )
    
    $
    (11.5
    )
    
    $
    (108.6
    )Cash flows from financing activities:Net increase (decrease) in long-term debt
    
    $
    (1.9
    )
    
    $
    23.1
    
    
    $
    21.2Net increase (decrease) in non-current liabilities
    
    
    (2.8
    )
    
    
    0.2
    
    
    
    (2.6
    )Net cash provided by (used in) financing activities
    
    $
    (4.7
    )
    
    $
    23.3
    
    
    $
    18.6Net increase in cash and cash equivalentsCash and cash equivalents at:
    
    $
    107.6
    
    
    $
    2.1
    
    
    $
    109.7Beginning of period
    
    
    266.8
    
    
    
    13.8
    
    
    
    280.6End of period
    
    $
    374.4
    
    
    $
    15.9
    
    
    $
    390.3
 Predecessor Company
Condensed Consolidated Statement of Cash Flows
Nine Months Ended May 31, 2003 Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsNet cash provided by (used in) operating activities
    
    $
    269.4
    
    
    $
    (5.6
    )
    
    $
    263.8Cash flows from investing activities:Purchase of property, equipment and other assets,
net of proceeds from sale
    
    $
    (166.1
    )
    
    $
    (42.6
    )
    
    $
    (208.7
    )Expended on acquisitions
    
    
    (4.6
    )
    
    
    
    
    
    
    (4.6
    )Net increase in investments
    
    
    (36.9
    )
    
    
    (0.4
    )
    
    
    (37.3
    )Net cash used in investing activities
    
    $
    (207.6
    )
    
    $
    (43.0
    )
    
    $
    (250.6
    )Cash flows from financing activities:Net increase (decrease) in long-term debt
    
    $
    (8.9
    )
    
    $
    43.3
    
    
    $
    34.4Net increase (decrease) in non-current liabilities
    
    
    (2.3
    )
    
    
    1.5
    
    
    
    (0.8
    )Net cash provided by (used in) financing activities
    
    $
    (11.2
    )
    
    $
    44.8
    
    
    $
    33.6Net increase (decrease) in cash and cash
equivalents
    
    $
    50.6
    
    
    $
    (3.8
    )
    
    $
    46.8Cash and cash equivalents at:Beginning of period
    
    
    323.8
    
    
    
    19.7
    
    
    
    343.5End of period
    
    $
    374.4
    
    
    $
    15.9
    
    
    $
    390.3
 17




---



##### Table of Contents



Condensed Consolidated Balance Sheet
May 31, 2004 Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsCurrent assetsCash and cash equivalents
    
    $
    135.6
    
    
    $
    25.7
    
    
    $
    161.3Restricted cash and cash equivalents
    
    
    74.3
    
    
    
    
    
    
    
    74.3Short-term deposits and marketable securities
    
    
    10.3
    
    
    
    
    
    
    
    10.3Accounts receivable
    
    
    682.9
    
    
    
    37.4
    
    
    
    720.3Parts and supplies
    
    
    40.4
    
    
    
    11.1
    
    
    
    51.5Deferred income tax assets
    
    
    58.8
    
    
    
    16.5
    
    
    
    75.3Other current assets
    
    
    37.8
    
    
    
    16.4
    
    
    
    54.2Total current assets
    
    
    1,040.1
    
    
    
    107.1
    
    
    
    1,147.2Long-term investments
    
    
    509.1
    
    
    
    43.4
    
    
    
    552.5Property and equipment
    
    
    1,245.3
    
    
    
    360.4
    
    
    
    1,605.7Goodwill
    
    
    183.1
    
    
    
    
    
    
    
    183.1Contracts and customer relationships
    
    
    205.3
    
    
    
    
    
    
    
    205.3Deferred income tax assets
    
    
    59.3
    
    
    
    118.5
    
    
    
    177.8Deferred charges and other assets
    
    
    63.2
    
    
    
    8.9
    
    
    
    72.1Total assets
    
    $
    3,305.4
    
    
    $
    638.3
    
    
    $
    3,943.7Current liabilitiesAccounts payable
    
    $
    101.3
    
    
    $
    27.6
    
    
    $
    128.9Accrued liabilities
    
    
    392.9
    
    
    
    125.9
    
    
    
    518.8Current portion of long-term debt
    
    
    34.2
    
    
    
    3.6
    
    
    
    37.8Total current liabilities
    
    
    528.4
    
    
    
    157.1
    
    
    
    685.5Long-term debt
    
    
    986.3
    
    
    
    135.2
    
    
    
    1,121.5Pension liability
    
    
    2.6
    
    
    
    224.1
    
    
    
    226.7Other long-term liabilities
    
    
    466.1
    
    
    
    91.7
    
    
    
    557.8Total liabilities
    
    
    1,983.4
    
    
    
    608.1
    
    
    
    2,591.5Shareholders equity
    
    
    1,322.0
    
    
    
    30.2
    
    
    
    1,352.2Total liabilities and shareholders equity
    
    $
    3,305.4
    
    
    $
    638.3
    
    
    $
    3,943.7
 18




---



##### Table of Contents



Condensed Consolidated Balance Sheet
As of August 31, 2003 Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsCurrent assetsCash and cash equivalents
    
    $
    55.1
    
    
    $
    45.2
    
    
    $
    100.3Restricted cash and cash equivalents
    
    
    39.4
    
    
    
    
    
    
    
    39.4Short-term deposits and marketable securities
    
    
    42.0
    
    
    
    
    
    
    
    42.0Accounts receivable
    
    
    528.8
    
    
    
    41.0
    
    
    
    569.8Parts and supplies
    
    
    38.2
    
    
    
    12.0
    
    
    
    50.2Deferred income tax assets
    
    
    76.1
    
    
    
    10.1
    
    
    
    86.2Other current assets
    
    
    50.1
    
    
    
    10.0
    
    
    
    60.1Total current assets
    
    
    829.7
    
    
    
    118.3
    
    
    
    948.0Long-term investments
    
    
    514.1
    
    
    
    39.4
    
    
    
    553.5Property and equipment
    
    
    1,291.2
    
    
    
    378.6
    
    
    
    1,669.8Goodwill
    
    
    183.1
    
    
    
    
    
    
    
    183.1Contracts and customer relationships
    
    
    216.9
    
    
    
    
    
    
    
    216.9Deferred income tax assets
    
    
    88.3
    
    
    
    114.9
    
    
    
    203.2Deferred charges and other assets
    
    
    66.9
    
    
    
    11.3
    
    
    
    78.2Total assets
    
    $
    3,190.2
    
    
    $
    662.5
    
    
    $
    3,852.7Current liabilitiesAccounts payable
    
    $
    87.7
    
    
    $
    31.7
    
    
    $
    119.4Accrued liabilities
    
    
    397.3
    
    
    
    108.7
    
    
    
    506.0Current portion of long-term debt
    
    
    35.7
    
    
    
    33.7
    
    
    
    69.4Total current liabilities
    
    
    520.7
    
    
    
    174.1
    
    
    
    694.8Long-term debt
    
    
    1,012.5
    
    
    
    132.6
    
    
    
    1,145.1Pension liability
    
    
    4.9
    
    
    
    220.8
    
    
    
    225.7Other long-term liabilities
    
    
    408.2
    
    
    
    88.6
    
    
    
    496.8Total liabilities
    
    
    1,946.3
    
    
    
    616.1
    
    
    
    2,562.4Shareholders equity
    
    
    1,243.9
    
    
    
    46.4
    
    
    
    1,290.3Total liabilities and shareholders equity
    
    $
    3,190.2
    
    
    $
    662.5
    
    
    $
    3,852.7
 19




---



##### Table of Contents



Note 12  Guarantors of Senior Notes The Companys $406.0 million Senior Notes are guaranteed by the Companys
subsidiaries, except for the Unrestricted Subsidiaries, the Companys Canadian
subsidiaries and any of the Companys insurance subsidiaries. The condensed
consolidated financial statements for the guarantors, the non-guarantors and
the parent company (reported as the Company and as the Predecessor Company for
historical purposes) are as follows: Condensed Consolidated Statement of Operations
Three months ended May 31, 2004 Parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalsRevenue
    
    $
    0.0
    
    
    $
    891.7
    
    
    $
    347.9
    
    
    $
    
    
    
    $
    1,239.6Operating, selling, general and
administrative expenses
    
    
    0.4
    
    
    
    761.3
    
    
    
    313.7
    
    
    
    
    
    
    
    1,075.4Depreciation and amortization expense
    
    
    0.0
    
    
    
    55.1
    
    
    
    19.6
    
    
    
    
    
    
    
    74.7Intercompany management fees (income)
    
    
    0.0
    
    
    
    (1.6
    )
    
    
    1.6
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    (0.4
    )
    
    
    76.9
    
    
    
    13.0
    
    
    
    
    
    
    
    89.5Interest expense
    
    
    (22.2
    )
    
    
    (1.3
    )
    
    
    (7.9
    )
    
    
    
    
    
    
    (31.4
    )Intercompany interest income (expense)
    
    
    4.0
    
    
    
    (3.4
    )
    
    
    (0.6
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    (0.4
    )
    
    
    0.2
    
    
    
    0.1
    
    
    
    
    
    
    
    (0.1
    )Equity in earnings (loss) of
intercompany investments
    
    
    46.3
    
    
    
    (4.3
    )
    
    
    
    
    
    
    (42.0
    )
    
    
    Income (loss) before income taxes
    
    
    27.3
    
    
    
    68.1
    
    
    
    4.6
    
    
    
    (42.0
    )
    
    
    58.0Income tax recovery (expense)
    
    
    7.3
    
    
    
    (28.7
    )
    
    
    (2.0
    )
    
    
    
    
    
    
    (23.4
    )Net income (loss)
    
    $
    34.6
    
    
    $
    39.4
    
    
    $
    2.6
    
    
    $
    (42.0
    )
    
    $
    34.6
 Condensed Consolidated Statement of Operations
Nine months ended May 31, 2004 Parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalsRevenue
    
    $
    0.0
    
    
    $
    2,587.1
    
    
    $
    1,025.3
    
    
    $
    
    
    
    $
    3,612.4Operating, selling, general and
administrative expenses
    
    
    0.9
    
    
    
    2,235.9
    
    
    
    946.1
    
    
    
    
    
    
    
    3,182.9Depreciation and amortization expense
    
    
    0.0
    
    
    
    170.5
    
    
    
    58.6
    
    
    
    
    
    
    
    229.1Intercompany management fees (income)
    
    
    0.0
    
    
    
    (4.4
    )
    
    
    4.4
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    (0.9
    )
    
    
    185.1
    
    
    
    16.2
    
    
    
    
    
    
    
    200.4Interest expense
    
    
    (71.7
    )
    
    
    (4.5
    )
    
    
    (22.5
    )
    
    
    
    
    
    
    (98.7
    )Intercompany interest income (expense)
    
    
    2.4
    
    
    
    (0.6
    )
    
    
    (1.8
    )
    
    
    
    
    
    
    Other income (expenses), net
    
    
    (4.3
    )
    
    
    0.8
    
    
    
    (0.2
    )
    
    
    
    
    
    
    (3.7
    )Equity in earnings (loss) of
intercompany investments
    
    
    101.7
    
    
    
    (16.3
    )
    
    
    
    
    
    
    (85.4
    )
    
    
    Income (loss) before income taxes
    
    
    27.2
    
    
    
    164.5
    
    
    
    (8.3
    )
    
    
    (85.4
    )
    
    
    98.0Income tax recovery (expense)
    
    
    30.6
    
    
    
    (74.2
    )
    
    
    3.4
    
    
    
    
    
    
    
    (40.2
    )Net income (loss)
    
    $
    57.8
    
    
    $
    90.3
    
    
    $
    (4.9
    )
    
    $
    (85.4
    )
    
    $
    57.8
 20




---



##### Table of Contents



Predecessor Company
Condensed Consolidated Statement of Operations
Three months ended May 31, 2003 Parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalsRevenue
    
    $
    
    
    
    $
    868.8
    
    
    $
    334.0
    
    
    $
    
    
    
    $
    1,202.8Operating, selling, general and
administrative expenses
    
    
    2.0
    
    
    
    737.2
    
    
    
    312.7
    
    
    
    
    
    
    
    1,051.9Depreciation and amortization expense
    
    
    
    
    
    
    55.3
    
    
    
    21.9
    
    
    
    
    
    
    
    77.2Intercompany management fees (income)
    
    
    5.9
    
    
    
    (7.1
    )
    
    
    1.2
    
    
    
    
    
    
    
    Operating income (loss), net
    
    
    (7.9
    )
    
    
    83.4
    
    
    
    (1.8
    )
    
    
    
    
    
    
    73.7Interest expense
    
    
    
    
    
    
    (1.1
    )
    
    
    (5.5
    )
    
    
    
    
    
    
    (6.6
    )Intercompany interest income (expense)
    
    
    
    
    
    
    0.5
    
    
    
    (0.5
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    (2.8
    )
    
    
    (1.4
    )
    
    
    0.8
    
    
    
    
    
    
    
    (3.4
    )Equity in earnings (loss) of
intercompany investments
    
    
    73.0
    
    
    
    (19.6
    )
    
    
    
    
    
    
    (53.4
    )
    
    
    Income (loss) before income taxes
    
    
    62.3
    
    
    
    61.8
    
    
    
    (7.0
    )
    
    
    (53.4
    )
    
    
    63.7Income tax expense
    
    
    (0.1
    )
    
    
    (0.6
    )
    
    
    (0.8
    )
    
    
    
    
    
    
    (1.5
    )Net income (loss)
    
    $
    62.2
    
    
    $
    61.2
    
    
    $
    (7.8
    )
    
    $
    (53.4
    )
    
    $
    62.2
 Predecessor Company
Condensed Consolidated Statement of Operations
Nine months ended May 31, 2003 Parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalsRevenue
    
    $
    
    
    
    $
    2,516.3
    
    
    $
    969.4
    
    
    $
    
    
    
    $
    3,485.7Operating, selling, general and
administrative expenses
    
    
    11.1
    
    
    
    2,146.9
    
    
    
    934.9
    
    
    
    
    
    
    
    3,092.9Depreciation and amortization expense
    
    
    0.1
    
    
    
    165.0
    
    
    
    64.2
    
    
    
    
    
    
    
    229.3Intercompany management fees (income)
    
    
    (25.7
    )
    
    
    17.5
    
    
    
    8.2
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    14.5
    
    
    
    186.9
    
    
    
    (37.9
    )
    
    
    
    
    
    
    163.5Interest expense
    
    
    
    
    
    
    (3.7
    )
    
    
    (15.9
    )
    
    
    
    
    
    
    (19.6
    )Intercompany interest income (expense)
    
    
    
    
    
    
    1.6
    
    
    
    (1.6
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    (16.4
    )
    
    
    (5.1
    )
    
    
    1.5
    
    
    
    
    
    
    
    (20.0
    )Equity in earnings (loss) of
intercompany investments
    
    
    121.7
    
    
    
    (52.1
    )
    
    
    
    
    
    
    (69.6
    )
    
    
    Income (loss) before income taxes
    
    
    119.8
    
    
    
    127.6
    
    
    
    (53.9
    )
    
    
    (69.6
    )
    
    
    123.9Income tax expense
    
    
    (0.4
    )
    
    
    (2.1
    )
    
    
    (2.0
    )
    
    
    
    
    
    
    (4.5
    )Income (loss) before cumulative
effect of a change in accounting
principle
    
    
    119.4
    
    
    
    125.5
    
    
    
    (55.9
    )
    
    
    (69.6
    )
    
    
    119.4Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    (1,668.0
    )
    
    
    (537.4
    )
    
    
    
    
    
    
    (2,205.4
    )Equity in loss from cumulative effect
of a change in accounting principle
of intercompany investments
    
    
    (2,205.4
    )
    
    
    (429.5
    )
    
    
    
    
    
    
    2,634.9
    
    
    
    Net income (loss)
    
    $
    (2,086.0
    )
    
    $
    (1,972.0
    )
    
    $
    (593.3
    )
    
    $
    2,565.3
    
    
    $
    (2,086.0
    )
 21




---



##### Table of Contents



Condensed Consolidated Statement of Cash Flows
Three months ended May 31, 2004 Parent
    
    
    
    
    
    Non-
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Guarantors
    
    TotalsNet cash provided by (used in) operating activities
    
    $
    9.6
    
    
    $
    121.0
    
    
    $
    55.9
    
    
    $
    186.6Cash flows from investing activities:Purchases of property, equipment and other assets, net of proceeds from sale
    
    $
    
    
    
    $
    (34.3
    )
    
    $
    (11.4
    )
    
    $
    (45.7
    )Net decrease (increase) in investments
    
    
    
    
    
    
    39.2
    
    
    
    (41.7
    )
    
    
    (2.5
    )Net cash provided by (used in) investing activities
    
    $
    
    
    
    $
    4.9
    
    
    $
    (53.1
    )
    
    $
    (48.2
    )Cash flows from financing activities:Net decrease in long-term debt
    
    $
    (66.1
    )
    
    $
    (3.9
    )
    
    $
    (1.8
    )
    
    $
    (71.8
    )Net increase in non-current liabilities
    
    
    0.1
    
    
    
    1.0
    
    
    
    0.5
    
    
    
    1.6Increase (decrease) in intercompany advances
    
    
    105.7
    
    
    
    (122.6
    )
    
    
    16.9
    
    
    
    Net cash provided by (used in) financing activities
    
    $
    39.7
    
    
    $
    (125.5
    )
    
    $
    15.6
    
    
    $
    (70.2
    )Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at:
    
    $
    49.3
    
    
    $
    0.5
    
    
    $
    18.4
    
    
    $
    68.2Beginning of period
    
    
    38.7
    
    
    
    21.0
    
    
    
    33.4
    
    
    
    93.1End of period
    
    $
    88.0
    
    
    $
    21.5
    
    
    $
    51.8
    
    
    $
    161.3
 Condensed Consolidated Statement of Cash Flows
Nine months ended May 31, 2004 Parent
    
    
    
    
    
    Non-
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Guarantors
    
    TotalsNet cash provided by (used in) operating activities
    
    $
    (52.0
    )
    
    $
    156.3
    
    
    $
    176.9
    
    
    $
    281.2Cash flows from investing activities:Purchases of property, equipment and other
assets, net of proceeds from sale
    
    $
    
    
    
    $
    (91.0
    )
    
    $
    (59.8
    )
    
    $
    (150.8
    )Expended on acquisitions
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    (1.3
    )Net decrease (increase) in investments
    
    
    0.7
    
    
    
    70.5
    
    
    
    (81.8
    )
    
    
    (10.6
    )Net cash provided by (used in) investing activities
    
    $
    0.7
    
    
    $
    (20.5
    )
    
    $
    (142.9
    )
    
    $
    (162.7
    )Cash flows from financing activities:Net decrease in long-term debt
    
    $
    (18.4
    )
    
    $
    (7.9
    )
    
    $
    (28.9
    )
    
    $
    (55.2
    )Net increase (decrease) in non-current liabilities
    
    
    (3.9
    )
    
    
    2.3
    
    
    
    (0.7
    )
    
    
    (2.3
    )Increase (decrease) in intercompany advances
    
    
    120.8
    
    
    
    (112.5
    )
    
    
    (8.3
    )
    
    
    Net cash provided by (used in) financing activities
    
    $
    98.5
    
    
    $
    (118.1
    )
    
    $
    (37.9
    )
    
    $
    (57.5
    )Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at:
    
    $
    47.2
    
    
    $
    17.7
    
    
    $
    (3.9
    )
    
    $
    61.0Beginning of period
    
    
    40.8
    
    
    
    3.8
    
    
    
    55.7
    
    
    
    100.3End of period
    
    $
    88.0
    
    
    $
    21.5
    
    
    $
    51.8
    
    
    $
    161.3
 22




---



##### Table of Contents



Predecessor Company
Condensed Consolidated Statement of Cash Flows
Three months ended May 31, 2003 Parent
    
    
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    TotalsNet cash provided by (used in) operating activities
    
    $
    (3.0
    )
    
    $
    189.3
    
    
    $
    13.4
    
    
    $
    199.7Cash flows from investing activities:Purchases of property, equipment and other
assets, net of proceeds from sale
    
    $
    (1.3
    )
    
    $
    (67.4
    )
    
    $
    (35.5
    )
    
    $
    (104.2
    )Expended on acquisitions
    
    
    
    
    
    
    (1.4
    )
    
    
    
    
    
    
    (1.4
    )Net decrease (increase) in investments
    
    
    0.1
    
    
    
    9.5
    
    
    
    (12.6
    )
    
    
    (3.0
    )Net cash used in investing activities
    
    $
    (1.2
    )
    
    $
    (59.3
    )
    
    $
    (48.1
    )
    
    $
    (108.6
    )Cash flows from financing activities:Net increase (decrease) in long-term debt
    
    $
    
    
    
    $
    (2.1
    )
    
    $
    23.3
    
    
    $
    21.2Net decrease in non-current liabilities
    
    
    
    
    
    
    (0.9
    )
    
    
    (1.7
    )
    
    
    (2.6
    )Net cash provided by (used in) financing activities
    
    $
    
    
    
    $
    (3.0
    )
    
    $
    21.6
    
    
    $
    18.6Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at:
    
    $
    (4.2
    )
    
    $
    127.0
    
    
    $
    (13.1
    )
    
    $
    109.7Beginning of period
    
    
    33.4
    
    
    
    216.4
    
    
    
    30.8
    
    
    
    280.6End of period
    
    $
    29.2
    
    
    $
    343.4
    
    
    $
    17.7
    
    
    $
    390.3
 Predecessor Company
Condensed Consolidated Statement of Cash Flows
Nine months ended May 31, 2003 Parent
    
    
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    TotalsNet cash provided by operating activities
    
    $
    17.7
    
    
    $
    200.2
    
    
    $
    45.9
    
    
    $
    263.8Cash flows from investing activities:Purchases of property, equipment and other
assets, net of proceeds from sale
    
    $
    (1.3
    )
    
    $
    (125.3
    )
    
    $
    (82.1
    )
    
    $
    (208.7
    )Expended on acquisitions
    
    
    
    
    
    
    (4.6
    )
    
    
    
    
    
    
    (4.6
    )Net decrease (increase) in investments
    
    
    0.8
    
    
    
    (10.0
    )
    
    
    (28.1
    )
    
    
    (37.3
    )Net cash used in investing activities
    
    $
    (0.5
    )
    
    $
    (139.9
    )
    
    $
    (110.2
    )
    
    $
    (250.6
    )Cash flows from financing activities:Net increase (decrease) in long-term debt
    
    $
    
    
    
    $
    (7.6
    )
    
    $
    42.0
    
    
    $
    34.4Net decrease in non-current liabilities
    
    
    
    
    
    
    (0.6
    )
    
    
    (0.2
    )
    
    
    (0.8
    )Net cash provided by (used in) financing activities
    
    $
    
    
    
    $
    (8.2
    )
    
    $
    41.8
    
    
    $
    33.6Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at:
    
    $
    17.2
    
    
    $
    52.1
    
    
    $
    (22.5
    )
    
    $
    46.8Beginning of period
    
    
    12.0
    
    
    
    291.3
    
    
    
    40.2
    
    
    
    343.5End of period
    
    $
    29.2
    
    
    $
    343.4
    
    
    $
    17.7
    
    
    $
    390.3
 23




---



##### Table of Contents



Condensed Consolidated Balance Sheet
As of May 31, 2004 Parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalsCurrent assets
    
    $
    91.0
    
    
    $
    788.4
    
    
    $
    267.8
    
    
    $
    
    
    
    $
    1,147.2Intercompany receivables (payables)
and investments
    
    
    2,121.6
    
    
    
    87.5
    
    
    
    6.6
    
    
    
    (2,215.7
    )
    
    
    Long-term investments
    
    
    109.6
    
    
    
    57.9
    
    
    
    385.0
    
    
    
    
    
    
    
    552.5Property and equipment
    
    
    
    
    
    
    950.6
    
    
    
    655.1
    
    
    
    
    
    
    
    1,605.7Goodwill
    
    
    
    
    
    
    183.1
    
    
    
    
    
    
    
    
    
    
    
    183.1Contracts and customer relationships
    
    
    
    
    
    
    204.6
    
    
    
    0.7
    
    
    
    
    
    
    
    205.3Long-term deferred income tax assets
    
    
    15.0
    
    
    
    
    
    
    
    179.5
    
    
    
    (16.7
    )
    
    
    177.8Deferred charges and other assets
    
    
    43.1
    
    
    
    20.1
    
    
    
    8.9
    
    
    
    
    
    
    
    72.1$
    2,380.3
    
    
    $
    2,292.2
    
    
    $
    1,503.6
    
    
    $
    (2,232.4
    )
    
    $
    3,943.7Current liabilities
    
    $
    51.2
    
    
    $
    275.7
    
    
    $
    358.6
    
    
    $
    
    
    
    $
    685.5Non-current liabilities
    
    
    976.1
    
    
    
    151.7
    
    
    
    794.9
    
    
    
    (16.7
    )
    
    
    1,906.0Shareholders equity
    
    
    1,353.0
    
    
    
    1,864.8
    
    
    
    350.1
    
    
    
    (2,215.7
    )
    
    
    1,352.2$
    2,380.3
    
    
    $
    2,292.2
    
    
    $
    1,503.6
    
    
    $
    (2,232.4
    )
    
    $
    3,943.7
 Condensed Consolidated Balance Sheet
As of August 31, 2003 Parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalsCurrent assets
    
    $
    44.0
    
    
    $
    662.7
    
    
    $
    241.3
    
    
    $
    
    
    
    $
    948.0Intercompany receivables (payables)
and investments
    
    
    2,083.4
    
    
    
    25.9
    
    
    
    18.8
    
    
    
    (2,128.1
    )
    
    
    Long-term investments
    
    
    110.3
    
    
    
    129.0
    
    
    
    314.2
    
    
    
    
    
    
    
    553.5Property and equipment
    
    
    
    
    
    
    1,015.7
    
    
    
    654.1
    
    
    
    
    
    
    
    1,669.8Goodwill
    
    
    
    
    
    
    183.1
    
    
    
    
    
    
    
    
    
    
    
    183.1Contracts and customer relationships
    
    
    
    
    
    
    216.8
    
    
    
    0.1
    
    
    
    
    
    
    
    216.9Long-term deferred income tax assets
    
    
    49.1
    
    
    
    
    
    
    
    183.9
    
    
    
    (29.8
    )
    
    
    203.2Deferred charges and other assets
    
    
    46.5
    
    
    
    20.2
    
    
    
    11.5
    
    
    
    
    
    
    
    78.2$
    2,333.3
    
    
    $
    2,253.4
    
    
    $
    1,423.9
    
    
    $
    (2,157.9
    )
    
    $
    3,852.7Current liabilities
    
    $
    44.1
    
    
    $
    296.7
    
    
    $
    354.0
    
    
    $
    
    
    
    $
    694.8Non-current liabilities
    
    
    998.9
    
    
    
    180.6
    
    
    
    717.9
    
    
    
    (29.8
    )
    
    
    1,867.6Shareholders equity
    
    
    1,290.3
    
    
    
    1,776.1
    
    
    
    352.0
    
    
    
    (2,128.1
    )
    
    
    1,290.3$
    2,333.3
    
    
    $
    2,253.4
    
    
    $
    1,423.9
    
    
    $
    (2,157.9
    )
    
    $
    3,852.7
 24




---



##### Table of Contents



ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS General Corporate overview The following discussion and analysis presents factors which affected the
Companys consolidated results of operations for the three and nine month
periods ended May 31, 2004 as compared to the three and nine month periods
ended May 31, 2003 and the Companys consolidated financial position at May 31,
2004. The following information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included in this Form 10-Q
and in the Companys Form 10-K for the year ended August 31, 2003. As used in
this Report, all references to the Company, we, us, our and similar
references are to Laidlaw International, Inc. We operate in five reportable segments: Education services, Public Transit
services, Greyhound, Healthcare Transportation services and Emergency
Management services. See Note 10  Segmented Information of Notes to
Consolidated Financial Statements in this Report. Pursuant to the terms of the Companys $406.0 million Senior Notes, the Company
is required to segregate the consolidated results of operations between the
Restricted and Unrestricted Subsidiaries as defined in Note 11  Condensed
financial statements of restricted subsidiaries of the Notes to the
Consolidated Financial Statements included in this Report. Results of Operations As discussed in Note 1  Corporate overview and basis of presentation of the
Notes to the Consolidated Financial Statements included in this Report, we
adopted fresh start accounting effective June 1, 2003 and our results of
operations and cash flows have been separated as pre-June 1 and post-May 31,
2003 due to a change in basis of accounting in the underlying assets and
liabilities. For purposes of the following discussion, we refer to our results
prior to June 1, 2003 as results for the Predecessor Company and we refer to
our results after May 31, 2003 as results for the Company. However, for the
reasons described in Note 1 and due to other non-recurring adjustments, the
Predecessor Companys financial statements for the periods prior to our
emergence from bankruptcy may not be comparable to the Companys financial
statements. Readers should, therefore, review this material with caution and
not rely on the information concerning the Predecessor Company as being
indicative of our future results or providing an accurate comparison of
financial performance. 25




---



##### Table of Contents



Three and nine month periods ended May 31, 2004 compared with the Predecessor
Company three and nine month periods ended May 31, 2003 results of operations Percentage of RevenueThree Months ended
    
    Nine Months endedMay 31,
    
    May 31,2004
    
    2003
    
    2004
    
    2003Revenue
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Compensation expense
    
    
    57.0
    
    
    
    57.5
    
    
    
    57.3
    
    
    
    57.4Accident claims and
professional liability
expenses
    
    
    6.3
    
    
    
    5.9
    
    
    
    6.8
    
    
    
    6.9Vehicle related costs
    
    
    5.6
    
    
    
    5.7
    
    
    
    5.7
    
    
    
    5.8Occupancy costs
    
    
    4.0
    
    
    
    4.1
    
    
    
    4.2
    
    
    
    4.3Fuel
    
    
    4.0
    
    
    
    3.9
    
    
    
    3.9
    
    
    
    3.8Depreciation
    
    
    5.7
    
    
    
    6.4
    
    
    
    6.0
    
    
    
    6.6Amortization
    
    
    0.4
    
    
    
    
    
    
    
    0.4
    
    
    
    Other operating expenses
    
    
    9.8
    
    
    
    10.4
    
    
    
    10.2
    
    
    
    10.5Operating income
    
    
    7.2
    
    
    
    6.1
    
    
    
    5.5
    
    
    
    4.7Interest expense
    
    
    (2.5
    )
    
    
    (0.5
    )
    
    
    (2.7
    )
    
    
    (0.6
    )Other expense, net
    
    
    
    
    
    
    (0.3
    )
    
    
    (0.1
    )
    
    
    (0.6
    )Income before income
taxes and cumulative
effect of a change in
accounting principle
    
    
    4.7
    
    
    
    5.3
    
    
    
    2.7
    
    
    
    3.5Income tax expense
    
    
    (1.9
    )
    
    
    (0.1
    )
    
    
    (1.1
    )
    
    
    (0.1
    )Income before
cumulative effect of a
change in accounting
principle
    
    
    2.8
    
    
    
    5.2
    
    
    
    1.6
    
    
    
    3.4Cumulative effect of a
change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (63.2
    )Net income (loss)
    
    
    2.8
    %
    
    
    5.2
    %
    
    
    1.6
    %
    
    
    (59.8
    )%
 26




---



##### Table of Contents



Revenue The sources of revenue by business segment and by Restricted Subsidiaries and
Unrestricted Subsidiaries are as follows ($ in millions): RevenueThree Months ended
    
    Nine Months endedMay 31,
    
    May 31,2004
    
    2003
    
    2004
    
    2003Education services
    
    $
    459.7
    
    
    $
    457.9
    
    
    $
    1,310.2
    
    
    $
    1,314.8Public Transit services
    
    
    78.7
    
    
    
    72.8
    
    
    
    223.3
    
    
    
    212.1Greyhound
    
    
    299.7
    
    
    
    291.4
    
    
    
    881.1
    
    
    
    847.5Healthcare Transportation services
    
    
    265.6
    
    
    
    259.8
    
    
    
    790.0
    
    
    
    759.3Emergency Management services
    
    
    135.9
    
    
    
    120.9
    
    
    
    407.8
    
    
    
    352.0Total
    
    $
    1,239.6
    
    
    $
    1,202.8
    
    
    $
    3,612.4
    
    
    $
    3,485.7Restricted Subsidiaries
    
    $
    997.3
    
    
    $
    961.6
    
    
    $
    2,906.9
    
    
    $
    2,786.2Unrestricted Subsidiaries
    
    
    242.3
    
    
    
    241.2
    
    
    
    705.5
    
    
    
    699.5Total
    
    $
    1,239.6
    
    
    $
    1,202.8
    
    
    $
    3,612.4
    
    
    $
    3,485.7
 Revenue in the Education services segment was relatively constant over the same
three and nine month periods ended May 31, 2004 and 2003, respectively. A
slight increase of 0.4% was realized over the three month period and a slight
decrease of 0.3% was realized on a year-to-date basis. The effect of lost
business ($31 million and $88 million during the three and nine months ended
May 31, 2004, respectively, of which approximately half was due to the loss of
the City of Boston contract) was largely offset by new contracts, price
increases and the strengthening of the Canadian currency relative to the U.S.
dollar. The effect of the increase in the Canadian currency increased
revenues 0.8% and 1.4%, respectively, during the three and nine months ended
May 31, 2004. The 8.1% and 5.3% increase in revenue during the three and nine months ended
May 31, 2004, respectively, in the Public Transit services segment is primarily
due to the addition of routes and services. The 2.8% and 4.0% increases in revenue during the three and nine months ended
May 31, 2004, respectively, in the Greyhound segment is principally due to a
favorable foreign currency exchange rate and, to a lesser extent, an increase
in tour and charter revenue due to new contracts. Had there been no change in
the exchange rate, revenue would have increased 1.5% and 1.4% during the three
and nine months ended May 31, 2004, respectively. The 2.2% and 4.0% increase in revenue during the three and nine months ended
May 31, 2004, respectively, in the Healthcare Transportation services segment
is primarily due to an increase in ambulance transports which more than offset
a decline in wheelchair transports. The 12.4% and 15.9% increases in revenue in the Emergency Management services
segment during the three and nine months ended May 31, 2004, respectively, is
primarily attributable to an increase in the number of patient visits from new
contracts. 27




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##### Table of Contents



The increase in the Restricted Subsidiaries revenue during the three and nine
months ended May 31, 2004, is primarily a result of the increase in revenue in
the Public Transit services, Healthcare Transportation services and Emergency
Management services segments discussed above. The Unrestricted Subsidiaries revenue was up slightly during the three and nine
months ended May 31, 2004, primarily due to an increase in tour and charter
revenue due to new contracts. EBITDA EBITDA is presented solely as a supplemental disclosure with respect to
liquidity because management believes it provides useful information regarding
our ability to service or incur debt. EBITDA is not calculated the same way by
all companies. We define EBITDA as income from continuing operations before
interest, income taxes, depreciation, amortization, other expenses, net and
cumulative effect of a change in accounting principles. EBITDA, as reported
here, is the same as reported for each of our segments in Note 10  Segmented
information of Notes to Consolidated Financial Statements included in this
Report. EBITDA is not intended to represent cash flow for the period, is not
presented as an alternative to operating income as an indicator of operating
performance, should not be considered in isolation or as a substitute for
measures of performance prepared in accordance with generally accepted
accounting principles (GAAP) and is not indicative of operating income or
cash flow from operations as determined under GAAP. The following is a reconciliation of our EBITDA to the net income (loss) and
net cash provided by operating activities, the GAAP measures management
believes to be most directly comparable to EBITDA: Three Months ended May 31,
    
    Nine Months ended May 31,2004
    
    2003
    
    2004
    
    2003EBITDA
    
    $
    164.2
    
    
    $
    150.9
    
    
    $
    429.5
    
    
    $
    392.8Depreciation and amortization
    
    
    (74.7
    )
    
    
    (77.2
    )
    
    
    (229.1
    )
    
    
    (229.3
    )Interest expense
    
    
    (31.4
    )
    
    
    (6.6
    )
    
    
    (98.7
    )
    
    
    (19.6
    )Other expenses, net
    
    
    (0.1
    )
    
    
    (3.4
    )
    
    
    (3.7
    )
    
    
    (20.0
    )Income tax expense
    
    
    (23.4
    )
    
    
    (1.5
    )
    
    
    (40.2
    )
    
    
    (4.5
    )Income before cumulative
effect of a change in
accounting principle
    
    
    34.6
    
    
    
    62.2
    
    
    
    57.8
    
    
    
    119.4Cumulative effect of a
change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,205.4
    )Net income (loss)
    
    $
    34.6
    
    
    $
    62.2
    
    
    $
    57.8
    
    
    $
    (2,086.0
    )
 28




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Three Months ended May 31,
    
    Nine Months ended May 31,2004
    
    2003
    
    2004
    
    2003EBITDA
    
    $
    164.2
    
    
    $
    150.9
    
    
    $
    429.5
    
    
    $
    392.8Cash paid for interest
    
    
    (20.6
    )
    
    
    (11.7
    )
    
    
    (80.0
    )
    
    
    (25.0
    )Cash received (paid) for income taxes
    
    
    (0.5
    )
    
    
    6.0
    
    
    
    10.7
    
    
    
    4.4Increase in claims liabilities and
professional liability reserves
    
    
    12.7
    
    
    
    7.4
    
    
    
    47.2
    
    
    
    56.1Cash provided by (used in) financing
other working capital items
    
    
    27.3
    
    
    
    25.8
    
    
    
    (130.3
    )
    
    
    (137.7
    )Decrease in restricted cash and cash
equivalents
    
    
    3.5
    
    
    
    33.9
    
    
    
    4.1
    
    
    
    0.9Other
    
    
    
    
    
    
    (12.6
    )
    
    
    
    
    
    
    (27.7
    )Net cash provided by operating
activities
    
    $
    186.6
    
    
    $
    199.7
    
    
    $
    281.2
    
    
    $
    263.8Net cash used in investing activities
    
    $
    (48.2
    )
    
    $
    (108.6
    )
    
    $
    (162.7
    )
    
    $
    (250.6
    )Net cash provided by (used In)
financing activities
    
    $
    (70.2
    )
    
    $
    18.6
    
    
    $
    (57.5
    )
    
    $
    33.6
 EBITDA by segment and by Restricted Subsidiaries and Unrestricted Subsidiaries
is as follows ($ in millions): EBITDAThree Months ended May 31,
    
    Nine Months ended May 31,2004
    
    2003
    
    2004
    
    2003Education services
    
    $
    120.8
    
    
    $
    116.1
    
    
    $
    306.0
    
    
    $
    302.0Public Transit services
    
    
    1.5
    
    
    
    5.6
    
    
    
    (2.8
    )
    
    
    7.3Greyhound
    
    
    15.6
    
    
    
    3.4
    
    
    
    38.3
    
    
    
    5.8Healthcare Transportation services
    
    
    22.1
    
    
    
    18.6
    
    
    
    63.5
    
    
    
    55.8Emergency Management services
    
    
    4.2
    
    
    
    7.2
    
    
    
    24.5
    
    
    
    21.9Total
    
    $
    164.2
    
    
    $
    150.9
    
    
    $
    429.5
    
    
    $
    392.8Restricted Subsidiaries
    
    $
    151.9
    
    
    $
    152.9
    
    
    $
    401.0
    
    
    $
    391.9Unrestricted Subsidiaries
    
    
    12.3
    
    
    
    (2.0
    )
    
    
    28.5
    
    
    
    0.9Total
    
    $
    164.2
    
    
    $
    150.9
    
    
    $
    429.5
    
    
    $
    392.8
 In the three and nine months ended May 31, 2004, EBITDA in the Education
services segment was $4.7 million and $4.0 million higher than the
corresponding periods last year. The improvement in EBITDA was due to a
favorable Canadian exchange rate and lower accident claims costs, offset
somewhat by an increase in fuel prices. In the three and nine months ended May 31, 2004, EBITDA in the Public Transit
services segment was $4.1 million and $10.1 million, respectively, lower than
the same periods in 2003 due to increased accident claims costs as compared to
the unusually low level experienced in the comparative periods. In the three and nine months ended May 31, 2004, EBITDA in the Greyhound
segment was $12.2 million and $32.5 million, respectively, better than the
three and nine months ended May 31, 2003. The improvement in Greyhounds
EBITDA is primarily due to managements continued focus on improving revenue
per mile and reducing operating costs. Increased revenue combined with a
reduction in miles operated and a reduction in workforce were the primary
contributors to this increase. 29




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In the three and nine months ended May 31, 2004, EBITDA in the Healthcare
Transportation services segment was $3.5 million and $7.7 million,
respectively, higher than 2003 principally due to improved accident and
insurance claims costs as the increases in revenues were largely offset by
increased compensation expenses. The Emergency Management Services segment EBITDA decreased $3.0 million during
the three months ended May 31, 2004, and increased $2.6 million, for the nine
month period ended May 31, 2004. Increased compensation costs, due to
increased patient visits and long-term incentive plan costs, exceeded revenue
growth during the three month period and trailed revenue growth for the nine
month period. In the three months ended May 31, 2004, EBITDA for the Restricted Subsidiaries
was $1.0 million lower than the three months ended May 31, 2003 primarily due
to a decline in the results of the Public Transit and Emergency Management
services segments, mostly offset by improved results in the Education services
and Healthcare Transportation services segments. For the nine months ended May
31, 2004, EBITDA was $9.1 higher, primarily due to the improved results in the
Education services, Healthcare Transportation services and Emergency Management
services segments partially offset by the decline in the results of the Public
Transit Services segment. In the three and nine months ended May 31, 2004, EBITDA in the Unrestricted
Subsidiaries was $14.3 million and $27.6 million, respectively, higher than the
three and nine months ended May 31, 2003 due to improved revenue per mile and
reduced operating costs. Depreciation expense Depreciation expense for the three and nine months ended May 31, 2004 decreased
$6.7 million and $13.1 million, respectively, over the three and nine months
ended May 31, 2003, reflecting a $5.3 million and $8.9 million, respectively,
decrease in depreciation for the Restricted Subsidiaries and a $1.4 million and
$4.2 million, respectively, decrease in depreciation for the Unrestricted
Subsidiaries. The decline in the Restricted Subsidiaries is principally due to
a slight increase in the estimated useful lives of certain model school buses,
while the decline in the Unrestricted Subsidiaries is principally due to the
revaluation of property and equipment that occurred under fresh start
accounting. Amortization expense Amortization expense for the three and nine months ended May 31, 2004,
increased $4.2 million and $12.9 million, respectively, compared to the same
periods in 2003. Amortization is primarily related to customer contracts
capitalized under fresh start accounting. Virtually all of the amortization
expense was recorded by the Restricted Subsidiaries. Interest expense In the three and nine months ended May 31, 2004, interest expense increased
$24.8 million and $79.1 million, respectively, compared to the three and nine
months ended May 31, 2003. The increase is primarily due to interest incurred
on long-term debt associated with our senior secured credit facility and the
senior notes. No interest expense was incurred on pre-petition debt for the
three and nine months ended May 31, 2003. Interest expense for the
Unrestricted Subsidiaries increased $3.0 million and $8.3 million,
respectively, reflecting a higher effective interest rate on borrowings as a
result of discounts on long-term debt recorded as fair value adjustments at
fresh start. 30




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Other expenses, net Other expenses, net was $0.1 million and $3.7 million in the three and nine
months ended May 31, 2004, respectively. The nine month total was primarily
related to legal fees to defend former directors and officers of the
Predecessor Company from shareholder and creditor lawsuits that originated
prior to the Companys emergence from bankruptcy. The $3.4 million and $20.0 million of other expenses, net in the three and nine
months ended May 31, 2003, respectively, was mostly due to financing,
accounting, legal and consulting services incurred by the Predecessor Company
during the reorganization process. For the nine month period this was
partially offset by $12.5 million of income related to the settlement of
certain bondholder actions. Income tax expense Income tax expense for the three and nine months ended May 31, 2004 was $23.4
million and $40.2 million, respectively, compared to $1.5 million and $4.5
million in the three and nine months ended May 31, 2003, respectively. Tax
expense in the prior period only represented estimated cash taxes as the
Predecessor Company had established a full valuation allowance against its net
deferred tax assets. Of the $40.2 million provided in the nine months ended
May 31, 2004, $3.0 million represents cash taxes payable and the balance
reflects the utilization of deferred tax assets. Cumulative effect of a change in accounting principle Effective September 1, 2002, we adopted SFAS 142 and, as a result, recorded a
non-cash charge of $2,205.4 million on September 1, 2002 as a cumulative effect
of a change in accounting principle. Liquidity and capital resources For the nine months ended May 31, 2004, cash provided by operating activities
was $281.2 million compared to $263.8 million in the nine months ended May 31,
2003. The increase was principally due to the increase in operating income.
Net expenditures for the purchase of capital assets for normal replacement
requirements and increases in service was $150.8 million in the nine months
ended May 31, 2004 compared to $208.7 million for the nine months ended May 31,
2003. The decline in capital expenditures was principally due to reduced bus
purchases in the Education services and Greyhound segments. The Company utilizes a senior secured revolving credit facility (the
Revolver) due June 2008, to finance current operating needs. Under the
Revolver, as of May 31, 2004, there were no cash borrowings, $47.6 million for
the issuance of letters of credit and $67.9 million was reserved for guarantee
obligations on Greyhound Lines vehicle leases, leaving total availability of
$60.2 million under the most restrictive covenant. Greyhound Lines utilizes
its own revolving line of credit (the Greyhound Facility). As of May 31,
2004, Greyhound Lines had no cash borrowings under the Greyhound Facility, had
issued letters of credit of $62.2 million and had availability of $46.9
million. The Company requires significant cash flows to finance capital expenditures and
to meet its debt service and other continuing obligations. Although we will
continue to be substantially leveraged, we believe that borrowings under our
Revolver, together with existing cash and cash flow from operations, will be
sufficient to fund our anticipated capital expenditures and working capital
requirements for the foreseeable future, including payment obligations under
our debt agreements and other commitments. 31




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Under the terms of the Companys various debt agreements the Company is
required to meet certain financial covenants including a fixed charge coverage
ratio, leverage ratio, interest coverage ratio, net tangible asset ratio and
maximum senior secured leverage ratio as well as certain non-financial
covenants. As of May 31, 2004, the Company was in compliance with all such
covenants. 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 our most
critical accounting policies, which are those that require managements most
difficult, subjective and complex judgments, requiring 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 We are self-insured up to certain limits for costs associated with workers
compensation claims, vehicle accidents, professional liability claims and
general business liabilities. Reserves are established for estimates of the
loss that we will ultimately incur on claims that have been reported but not
paid and claims that have been incurred but not reported. These reserves are
based upon actuarial valuations that are prepared quarterly by our outside
actuaries. The actuarial valuations 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 and ultimate
court awards. Historical experience and recent trends in the historical
experience are the most significant factors in the determination of these
reserves. We believe the use of actuarial methods to account for these reserves
provides a consistent and effective way to measure these subjective accruals.
However, given the magnitude of the claims involved and the length of time
until the ultimate cost is known, the use of any estimation technique in this
area is inherently sensitive. Accordingly, our recorded reserves could differ
from our ultimate costs related to these claims due to changes in our accident
reporting, claims payment and settlement practices or claims reserve practices,
as well as differences between assumed and future cost increases. Revenue Recognition in the Healthcare Services Businesses A significant portion of the revenue in our healthcare services businesses is
derived from Medicare, Medicaid and private insurance payors that receive
discounts from our standard charges (referred to as contractual allowances).
Additionally, we are also subject to significant collection risk for services
provided to uninsured patients or for the deductible or co-pay portion of
services for insured patients (referred to as uncompensated care). We record
our healthcare services revenue net of an estimated provision for the
contractual allowances and uncompensated care. 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 determined medically necessary, or
insufficient supporting information was provided. In addition, multiple payors
with different requirements can be involved with each claim. Management utilizes sophisticated information systems and financial models to
estimate the provisions for contractual allowances and uncompensated care. The
estimate for contractual allowances is determined on a payor-specific basis and
is predominantly based on prior collection experience, adjusted as needed for
known changes in reimbursement rates and 32




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##### Table of Contents



recent changes in payor mix and patient acuity factors. The estimate for
uncompensated care is principally based on historical collection rates,
write-off percentages and accounts receivable agings. These estimates are
continually analyzed and updated by management by monitoring reimbursement rate
trends from governmental and private insurance payors, recent trends in
collections from self-pay patients, the ultimate cash collection patterns from
all payors, accounts receivable aging trends, operating statistics and ratios,
and the overall trends in accounts receivable write-offs. The evaluation of these factors, as well as the interpretation of governmental
regulations and private insurance contract provisions, involves complex,
subjective judgments. As a result of the inherent complexity of these
calculations, our actual revenues and net income, and our accounts receivable,
could vary from the amounts reported. Income Tax Valuation Allowance We have significant net deferred tax assets resulting from net operating
losses, or NOL, and interest deduction carry forwards and other deductible
temporary differences that will reduce taxable income in future periods.
Statement of Financial Accounting Standards No. 109 Accounting for Income
Taxes requires that a valuation allowance be established when it is more
likely than not that all or a portion of net deferred tax assets will not be
realized. A review of all available positive and negative evidence needs to be
considered, including expected reversals of significant deductible temporary
differences, a companys recent financial performance, the market environment
in which a company operates, tax planning strategies and the length of NOL and
interest deduction carryforward period. Furthermore, the weight given to the
potential effect of negative and positive evidence should be commensurate with
the extent to which it can be objectively verified. Due to the highly leveraged
capital structure (and related interest expense) and uncertainty surrounding
the level of debt we would carry post-emergence, management of the Predecessor
Company concluded that it was appropriate to record a full valuation allowance
against its net deferred income tax assets. Pursuant to the plan of
reorganization, the level of debt we carried upon emergence from bankruptcy was
reduced by approximately $2.6 billion. As a result, management concluded that
it was more likely than not that $313.6 million of deferred tax assets would
not be realized and, as part of our fresh start adjustment at June 1, 2003, we
recorded a valuation allowance for that amount. Certain future events may
result in the reduction of the valuation allowance. Up to $313.6 million of
such reduction would reduce goodwill and other intangibles in existence at
fresh start and thereafter, would be reported as an addition to share premium. Pension Our obligation and expense for pension benefits are determined using actuarial
methods that are 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 increases as determined by
management. The pension plan rate assumptions are shown in Note 11  Pension
plans of Notes to the Consolidated Financial Statements in the Companys Form
10-K for the year ended August 31, 2003. We determine the discount rate based
upon yields available on quality long-term corporate bonds (generally by
reference to the Moodys Aa bond index and similar U.S. and Canadian bond
indices). The expected return on plan assets is based on plan-specific
historical long-term portfolio performance, asset allocations and investment
strategies and the views of the plans investment advisors. Our rate of
increase in future compensation levels is based primarily on labor contracts
currently in effect with our employees under collective bargaining agreements
and expected future pay rate increases for other employees. In addition, our
actuarial consultants also use factors to estimate such items as retirement age
and mortality tables, which are primarily based upon historical plan
experience. The assumptions and factors we use 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 33




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##### Table of Contents



obligation or expense recorded by us. During fiscal 2002 and 2003, we
experienced a reduction in interest rates and deterioration in plan returns. If
this trend continues, we may have to fund amounts to the pension plans in
future years in addition to the funding discussed in Note 11  Pension plans
of Notes to the Consolidated Financial Statements in the Companys Form 10-K
for the year ended August 31, 2003, whereby we have committed to make
substantial cash contributions to the Greyhound Lines Plans, in addition to
contributions required under applicable law. Contingencies As discussed in Note 7  Material contingencies of Notes to Consolidated
Financial Statements in this Report, management is unable to make a reasonable
estimate of the liabilities that may result from the final resolution of
certain contingencies disclosed. Further assessments of the potential liability
will be made as additional information becomes available. Management currently
does not believe that these matters will have a material adverse affect on our
consolidated financial position. It is possible, however, that results of
operations could be materially affected by changes in managements assumptions
relating to these matters or the actual final resolution of these proceedings. Commitments and Contingencies Reference is made to Note 22  Commitments and contingencies of Notes to the
Consolidated Financial Statements in the Companys Form 10-K for the year ended
August 31, 2003 for a description of the Companys material commitments.
Reference is made to Note 7  Material contingencies of Notes to Consolidated
Financial Statements in this Report for a description of the Companys material
contingencies. Forward looking statements Certain statements contained in this report, including statements regarding the
status of 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; Greyhound
Lines ability to achieve its forecasted results;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 significant restrictive covenants in the
Companys and its subsidiaries various credit facilities;
the potential for asset dispositions; 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; the ability to implement
initiatives designed to increase operating efficiencies and improve results;
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. The Company
undertakes no obligation to publicly update forward-looking statements, whether
as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures the Company
makes on related subjects included in Note Regarding
Forward-Looking Statements and Item 7 Managements Discussion and Analysis of
Financial Condition and Results of Operations - Risk Factors in the Companys
Form 10-K for the year ended August 31, 2003, Risk Factors in the Companys
Amendment No. 1 to its Registration Statement on Form S-4 and in the Companys
Registration Statement on Form S-3 and as may be detailed in the Companys
other filings from time to time with the Securities and Exchange Commission. 34




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##### Table of Contents



LAIDLAW INTERNATIONAL, INC. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in market risk from the disclosures
provided in Item 7A. Quantitative and Qualitative Disclosures About Market
Risk as set forth in the Companys 2003 Form 10-K for the year ended August
31, 2003 except as follows: In December 2003, the Company modified the terms of its $625.0 million loan
maturing in June 2009 (the Term B Facility). The interest rate charged on
the loan was reduced by 1.25%, to LIBOR plus 3.75% from LIBOR plus 5.0%.
Additionally, the LIBOR floor or minimum LIBOR rate was reduced 0.25% to 1.75%
from the previous floor of 2.0%. Additionally, the Company entered into an
interest rate swap agreement (Swap) that effectively converted $110 million
of Term B Facility floating rate debt to fixed rate debt with an interest rate
of 6.8%. The Swap was entered into because the Company is required under the
Term B Facility to have a fixed interest rate on a portion of the underlying
debt. The Swap is considered a cash flow hedge and expires in September 2006. 
 Item 4. Controls and Procedures The Company maintains 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. As of the end of the
period covered by this quarterly report, an evaluation was carried out under
the supervision and with the participation of the Companys management,
including its Chief Executive Officer and Chief Financial Officer, of the
effectiveness of its disclosure controls and procedures. Based on that
evaluation, the Companys Chief Executive Officer and Chief Financial Officer
have concluded that the Companys disclosure controls and procedures are
effective. During the most recent fiscal quarter, there have not been any changes in the
Companys internal controls over financial reporting or in other factors that
have materially affected, or are reasonably likely to materially affect, the
Companys internal controls over financial reporting. 35




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##### Table of Contents



LAIDLAW INTERNATIONAL, INC. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings Reference is made to Part I, Item 3 of the Companys Form 10-K for the year
ended August 31, 2003 and Part II, Item 1 of the Companys Form 10-Qs for the
quarters ended November 30, 2003 and February 29, 2004 for a description of
certain legal proceedings presently pending. As previously reported,
the Company or its subsidiaries continually undergo investigations by
certain governmental agencies regarding compliance with Medicare
fraud and abuse statutes. There are no material new matters
to report against the Company or its subsidiaries except as set forth below,
and there have been no material changes in the previously reported proceedings,
except as set forth below: Proceedings Prior to or During Bankruptcy of Laidlaw, Inc. Reference is made to the description in Item 3. Legal Proceedings under the
caption Proceedings Prior to or During Bankruptcy of Laidlaw, Inc. in the
Companys Form 10-K for the year ended August 31, 2003, and Part II, Item 1 of
the Companys Form 10-Q for the quarter ended February 29, 2004, of proceedings
in the cases captioned In Re Laidlaw Stockholders Litigation and In Re
Safety-Kleen Corp. Securities Litigation. These cases involved actions against
Laidlaw Inc. and individual defendants who were former officers and directors
of the Company. These cases had been settled shortly before trial was
originally scheduled to commence in March, 2004, but the settlements have not
yet been finalized and, if the matters are not settled, jury selection in these
cases is currently set to begin July 6, 2004. As previously disclosed, as a
result of the bankruptcy courts subordination of these claims against the
debtors, Laidlaw, Inc. and Laidlaw International, Inc. are no longer parties to
these cases and the Companys cash obligation in these cases is limited to the
unfunded portion of the D&O Claim Treatment Letter described in Item 3. Legal
Proceedings under the caption Proceedings Prior to or During Bankruptcy of
Laidlaw, Inc. in the Companys Form 10-K for the year ended August 31, 2003. General Litigation and Other Disputes Reference is made to the description in Item 3. Legal Proceedings under the
caption General Litigation and Other Disputes in the Companys Form 10-K for
the year ended August 31, 2003, of proceedings with the U.S. Department of
Justice begun in June, 1999 regarding the billing processes of Regional
Emergency Services, a subsidiary of AMR, and of Florida Hospital Waterman, as
well as a subpoena duces tecum received from the Office of the Inspector
General regarding Huguley and Metroplex Hospitals and Regional Emergency
Services contracts in Texas, Georgia and Colorado. As previously disclosed,
the claims in the Waterman matter and the claims in Texas have been resolved
pursuant to a potential settlement for an aggregate of $20 million, to which
AMR will contribute a total of $5 million. The settlement has been negotiated,
but the documentation has not yet been signed by all the parties. Reference is made to the description in Item 3. Legal Proceedings under the
caption General Litigation and Other Disputes in the Companys Form 10-K for
the year ended August 31, 2003, of subpoenas received from August 1998 until
August 2000 by American Medical Response West, a subsidiary of AMR, related to
billing matters for emergency transports and specialized services. Although
settlement documents have not been finalized, AMR West has reached a tentative
settlement to pay $3.5 million and enter into a Corporate Integrity Agreement
relating to these matters. 36




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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits  10.1
    
    Indemnification agreement between Laidlaw International, Inc.
and its Directors and Officers.10.2
    
    Amendment Number One to Amended and Restated Loan and
Security Agreement among Greyhound Lines, Inc., as borrower, the
Financial Institutions named as lenders, and Wells Fargo Foothill,
Inc, as Agent dated as of July 6, 2004.31.1
    
    Principal Executive Officers Certifications Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Principal Financial Officers Certifications Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification Pursuant to 18 U.S.C. § 1350 (Section 906 of
Sarbanes-Oxley Act of 2002)  (b)
    
    Reports on Form 8-K during the quarter ended May 31, 2004Current Report on Form 8-K, dated March 26, 2004, filed with the
Securities and Exchange Commission and reporting under Item 5, Other
Events, the Companys press release announcing that its wholly-owned
subsidiary, Greyhound Lines, Inc issued a press release announcing it has
reached an agreement with the Amalgamated Transit Union National Local
1700 for a new collective bargaining agreement. 37




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. LAIDLAW INTERNATIONAL, INC.By:
    /s/ Douglas A. CartyDate:  July 12, 2004
    
    Douglas A. CartySenior Vice President and Chief Financial
Officer
Duly Authorized Officer and Principal
Financial Officer 38