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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-Q/A  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period
ended February 29, 2004 Commission file number 000-13109 LAIDLAW INTERNATIONAL, INC.  DELAWARE
    
    
    
    98-0390488(State or other jurisdiction
    
    
    
    (I.R.S. Employerof incorporation or organization)
    
    
    
    Identification No.)
 55 Shuman Boulevard, Suite 400Naperville, 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 þ NO o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES o NO þ 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 þ NO o As of March 31, 2004, there were 103,806,110 shares of common stock, par
value $0.01 per share, outstanding.




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LAIDLAW INTERNATIONAL, INC. Explanatory Note This Amendment No. 1 on Form 10-Q/A for the quarter ended February 29, 2004 is
being filed to amend and restate the items described below contained in our
Quarterly Report on Form 10-Q for such period originally filed with the U.S.
Securities and Exchange Commission on April 12, 2004. As part of our year-end processes and procedures to determine the Companys
annual tax provision, management identified a $6.6 million increase in our Canadian
deferred tax assets and a corresponding tax benefit to reflect a change in the
Ontario, Canada provincial tax rates. As the rate changes became effective in
the Companys second fiscal quarter, the $6.6 million tax benefit should have
been reflected as a reduction of our second quarter tax expense. However, the
adjustment was not reflected in the Companys originally reported second
quarter results because our quarterly processes did not include procedures to
verify enacted tax rates and adjust the rate used to value our deferred tax
assets for any changes that might have occurred. Managements quarterly controls and
procedures have been strengthened to require verification of
applicable tax rates and adjust, if needed,
our effective tax rate for tax changes enacted during such period by taxing
authorities in which the Company conducts business. No change in the Companys
annual process was required as management believes we have disclosure
controls and procedures which operate at a reasonable level on an
annual basis. This Amendment No. 1 amends  
    
    Part I, Item 1, Financial Statements to restate our unaudited
consolidated financial statements and the related notes, as more fully
described in Note 1 to our restated unaudited consolidated financial
statements contained in this Amendment No. 1;
    
    Part I, Item 2, Managements Discussion and Analysis of Financial
Condition and Results of Operations, to take into account the effects
to the restatement; and
    
    Part I, Item 4, Controls and Procedures to reflect the matters
discussed above. This Amendment No. 1 sets forth the complete text of each item of the Form 10-Q
listed above as amended, and includes as Exhibits 31 and 32 new certifications
by our chief executive officer and chief financial officer. This Amendment No.
1 does not reflect events occurring after the filing of our original Form 10-Q
on April 12, 2004, or modify or update the disclosures presented in the
original Form 10-Q filed on April 12, 2004, except to reflect the restatement
as described above. Accordingly, this Amendment No. 1 should be read in
conjunction with our filings made subsequent to the filing of the original Form
10-Q on April 12, 2004, including any amendments to those filings. Additional
disclosure regarding the restatement is included in Note 1 to the restated
unaudited consolidated financial statements included in Part I, Item 1 of this
Amendment No. 1 on Form 10-Q/A. 2




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Page No.PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements:Consolidated Balance Sheets as of February 29, 2004 (Unaudited) and August 31,2003
    
    
    4Consolidated Statements of Operations for the Three Month and Six Month PeriodsEnded February 29, 2004 and February 28, 2003 (Unaudited)
    
    
    6Consolidated Statements of Comprehensive Income (Loss) for the Three Month andSix Month Periods Ended February 29, 2004 and February 28, 2003 (Unaudited)
    
    
    7Consolidated Statements of Cash Flows for the Three Month and Six Month PeriodsEnded February 29, 2004 and February 28, 2003 (Unaudited)
    
    
    8Notes to Consolidated Financial Statements (Unaudited)
    
    
    9Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    27Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    38Item 4.
    
    Controls and Procedures
    
    
    38PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    40Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    41Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    41SIGNATURES
    
    
    42Principal Executive Officer's Certification Pursuant to Section 302Principal Financial Officer's Certification Pursuant to Section 302Certification Purusant to Section 906
  3




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PART I.  FINANCIAL INFORMATION 
 Item 1. Financial Statements 
 LAIDLAW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
($ in millions) February 29,
    
    
    August 31,2004
    
    
    2003(unaudited)(restated)ASSETSCurrent assetsCash and cash equivalents
    
    $
    93.1
    
    
    $
    100.3Restricted cash and cash equivalents
    
    
    64.8
    
    
    
    39.4Short-term deposits and marketable securities
    
    
    12.8
    
    
    
    42.0Accounts receivable
    
    
    715.4
    
    
    
    569.8Parts and supplies
    
    
    50.2
    
    
    
    50.2Deferred income tax assets
    
    
    77.3
    
    
    
    86.2Other current assets
    
    
    66.4
    
    
    
    60.1Total current assets
    
    
    1,080.0
    
    
    
    948.0Long-term investments
    
    
    572.9
    
    
    
    553.5Property and equipmentLand
    
    
    187.2
    
    
    
    184.3Buildings
    
    
    161.7
    
    
    
    151.1Vehicles
    
    
    1,309.7
    
    
    
    1,228.4Other
    
    
    161.9
    
    
    
    153.61,820.5
    
    
    
    1,717.4Less: Accumulated depreciation
    
    
    180.6
    
    
    
    47.61,639.9
    
    
    
    1,669.8Other assetsGoodwill
    
    
    183.1
    
    
    
    183.1Contracts and customer relationships
    
    
    208.9
    
    
    
    216.9Deferred income tax assets
    
    
    205.0
    
    
    
    203.2Deferred charges and other assets
    
    
    75.5
    
    
    
    78.2672.5
    
    
    
    681.4Total assets
    
    $
    3,965.3
    
    
    $
    3,852.7
 The accompanying notes are an integral part of these statements. 4




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##### Table of Contents



LAIDLAW INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
($ in millions) February 29,
    
    
    August 31,2004
    
    
    2003(unaudited)(restated)LIABILITIESCurrent liabilitiesAccounts payable
    
    $
    123.8
    
    
    $
    119.4Accrued liabilities
    
    
    489.4
    
    
    
    506.0Current portion of long-term debt
    
    
    48.5
    
    
    
    69.4Total current liabilities
    
    
    661.7
    
    
    
    694.8Long-term debt
    
    
    1,185.4
    
    
    
    1,145.1Pension liability
    
    
    226.2
    
    
    
    225.7Other long-term liabilities
    
    
    555.4
    
    
    
    496.8Total liabilities
    
    
    2,628.7
    
    
    
    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
    
    
    1,359.1
    
    
    
    1,358.3Common shares held in trust; 3,777,419 issued
    
    
    (50.0
    )
    
    
    (50.0
    )Accumulated other comprehensive income (loss)
    
    
    6.6
    
    
    
    (9.1
    )Retained earnings (deficit)
    
    
    19.9
    
    
    
    (9.9
    )Total shareholders equity
    
    
    1,336.6
    
    
    
    1,290.3Total liabilities and shareholders equity
    
    $
    3,965.3
    
    
    $
    3,852.7
 The accompanying notes are an integral part of these statements. 5




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LAIDLAW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
($ in millions except per share amounts)
(unaudited) Predecessor
    
    
    
    
    
    
    
    
    PredecessorCompany
    
    
    
    
    
    
    
    
    CompanyThree
    
    
    
    Three
    
    
    
    Six
    
    
    
    SixMonths
    
    
    
    Months
    
    
    
    Months
    
    
    
    MonthsEnded
    
    
    
    Ended
    
    
    
    Ended
    
    
    
    EndedFebruary
    
    
    
    February
    
    
    
    February
    
    
    
    February29, 2004
    
    
    
    28, 2003
    
    
    
    29, 2004
    
    
    
    28, 2003(restated)
    
    
    
    
    
    
    
    
    (restated)Revenue
    
    $
    1,162.5
    
    
    
    $
    1,120.7
    
    
    
    $
    2,372.8
    
    
    
    $
    2,282.9Compensation expense
    
    
    679.1
    
    
    
    
    651.7
    
    
    
    
    1,364.1
    
    
    
    
    1,309.8Accident claims and professional liability expenses
    
    
    77.5
    
    
    
    
    73.4
    
    
    
    
    167.1
    
    
    
    
    170.0Vehicle related costs
    
    
    68.8
    
    
    
    
    67.1
    
    
    
    
    138.7
    
    
    
    
    133.6Occupancy costs
    
    
    51.3
    
    
    
    
    52.6
    
    
    
    
    101.2
    
    
    
    
    101.2Fuel
    
    
    45.3
    
    
    
    
    43.5
    
    
    
    
    89.7
    
    
    
    
    87.0Depreciation
    
    
    69.1
    
    
    
    
    75.4
    
    
    
    
    145.2
    
    
    
    
    151.6Amortization
    
    
    4.6
    
    
    
    
    0.3
    
    
    
    
    9.2
    
    
    
    
    0.5Other operating expenses
    
    
    125.4
    
    
    
    
    122.6
    
    
    
    
    246.7
    
    
    
    
    239.4Operating income
    
    
    41.4
    
    
    
    
    34.1
    
    
    
    
    110.9
    
    
    
    
    89.8Interest expense
    
    
    (34.6
    )
    
    
    
    (6.5
    )
    
    
    
    (67.3
    )
    
    
    
    (13.0
    )Other expenses, net
    
    
    (4.5
    )
    
    
    
    (9.9
    )
    
    
    
    (3.6
    )
    
    
    
    (16.6
    )Income before income taxes and cumulative
effect of a change in accounting principle
    
    
    2.3
    
    
    
    
    17.7
    
    
    
    
    40.0
    
    
    
    
    60.2Income tax benefit (expense)
    
    
    4.9
    
    
    
    
    (1.5
    )
    
    
    
    (10.2
    )
    
    
    
    (3.0
    )Income before cumulative effect of a change in
accounting principle
    
    
    7.2
    
    
    
    
    16.2
    
    
    
    
    29.8
    
    
    
    
    57.2Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,205.4
    )Net income (loss)
    
    $
    7.2
    
    
    
    $
    16.2
    
    
    
    $
    29.8
    
    
    
    $
    (2,148.2
    )Basic earnings (loss) per shareIncome before cumulative effect of a change in
accounting principle
    
    $
    0.07
    
    
    
    $
    0.05
    
    
    
    $
    0.30
    
    
    
    $
    0.18Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.77
    )Net income (loss)
    
    $
    0.07
    
    
    
    $
    0.05
    
    
    
    $
    0.30
    
    
    
    $
    (6.59
    )Diluted earnings (loss) per share
Income before cumulative effect of a change in
accounting principle
    
    $
    0.07
    
    
    
    $
    0.05
    
    
    
    
    0.29
    
    
    
    $
    0.18Cumulative effect of a change in accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6.77
    )Net income (loss)
    
    $
    0.07
    
    
    
    $
    0.05
    
    
    
    $
    0.29
    
    
    
    $
    (6.59
    )
 The accompanying notes are an integral part of these statements. 6




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LAIDLAW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
($ in millions)
(unaudited) Predecessor
    
    
    
    
    
    
    
    
    PredecessorCompany
    
    
    
    
    
    
    
    
    CompanyThree
    
    
    
    Three
    
    
    
    Six
    
    
    
    SixMonths
    
    
    
    Months
    
    
    
    Months
    
    
    
    MonthsEnded
    
    
    
    Ended
    
    
    
    Ended
    
    
    
    EndedFebruary 29,
    
    
    
    February 28,
    
    
    
    February 29,
    
    
    
    February 28,2004
    
    
    
    2003
    
    
    
    2004
    
    
    
    2003(restated)
    
    
    
    
    
    
    
    
    (restated)Net income (loss)
    
    $
    7.2
    
    
    
    $
    16.2
    
    
    
    $
    29.8
    
    
    
    $
    (2,148.2
    )Net change in unrealized gains on securities
    
    
    2.8
    
    
    
    
    2.0
    
    
    
    
    4.8
    
    
    
    
    3.5Foreign currency translation adjustments
    
    
    (12.2
    )
    
    
    
    17.9
    
    
    
    
    10.9
    
    
    
    
    16.5Minimum pension liability adjustment
    
    
    
    
    
    
    
    (176.4
    )
    
    
    
    
    
    
    
    
    (176.4
    )Comprehensive income (loss)
    
    $
    (2.2
    )
    
    
    $
    (140.3
    )
    
    
    $
    45.5
    
    
    
    $
    (2,304.6
    )
 The accompanying notes are an integral part of these statements. 7




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LAIDLAW INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in millions)
(unaudited) Predecessor
    
    
    
    
    
    
    
    
    PredecessorCompany
    
    
    
    
    
    
    
    
    CompanyThree
    
    
    
    Three
    
    
    
    Six
    
    
    
    SixMonths
    
    
    
    Months
    
    
    
    Months
    
    
    
    MonthsEnded
    
    
    
    Ended
    
    
    
    Ended
    
    
    
    EndedFebruary
    
    
    
    February
    
    
    
    February
    
    
    
    February29, 2004
    
    
    
    29, 2003
    
    
    
    29, 2004
    
    
    
    29, 2003(restated)
    
    
    
    
    
    
    
    
    (restated)Operating activitiesNet income (loss)
    
    $
    7.2
    
    
    
    $
    16.2
    
    
    
    $
    29.8
    
    
    
    $
    (2,148.2
    )Items not affecting cash:Cumulative effect of a change in
accounting principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,205.4Depreciation and amortization
    
    
    73.7
    
    
    
    
    75.7
    
    
    
    
    154.4
    
    
    
    
    152.1Deferred income taxes
    
    
    (5.9
    )
    
    
    
    
    
    
    
    
    8.2
    
    
    
    
    Other items
    
    
    1.4
    
    
    
    
    (5.3
    )
    
    
    
    5.5
    
    
    
    
    (7.0
    )Increase in claims liability and
professional liability insurance accruals
    
    
    28.7
    
    
    
    
    20.0
    
    
    
    
    34.5
    
    
    
    
    48.7Cash provided by (used in) financing other working
capital items
    
    
    41.7
    
    
    
    
    (12.5
    )
    
    
    
    (138.4
    )
    
    
    
    (153.9
    )Decrease (increase) in restricted cash and
cash equivalents
    
    
    (0.6
    )
    
    
    
    (21.9
    )
    
    
    
    0.6
    
    
    
    
    (33.0
    )Net cash provided by operating activities
    
    $
    146.2
    
    
    
    $
    72.2
    
    
    
    $
    94.6
    
    
    
    $
    64.1Investing activitiesPurchase of property, equipment and other assets,
net of proceeds from sale
    
    $
    (65.8
    )
    
    
    $
    (36.9
    )
    
    
    $
    (105.1
    )
    
    
    $
    (104.5
    )Expended on acquisitions
    
    
    (1.3
    )
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    
    (3.2
    )Net increase in investments
    
    
    (0.4
    )
    
    
    
    (25.3
    )
    
    
    
    (8.1
    )
    
    
    
    (34.3
    )Net cash used in investing activities
    
    $
    (67.5
    )
    
    
    $
    (62.2
    )
    
    
    $
    (114.5
    )
    
    
    $
    (142.0
    )Financing activitiesNet increase (decrease) in long-term debt
and other long-term liabilities
    
    $
    (60.7
    )
    
    
    $
    12.4
    
    
    
    $
    12.7
    
    
    
    $
    15.0Net cash provided by (used in) financing activities
    
    $
    (60.7
    )
    
    
    $
    12.4
    
    
    
    $
    12.7
    
    
    
    $
    15.0Net increase (decrease) in cash and cash
equivalents
    
    $
    18.0
    
    
    
    $
    22.4
    
    
    
    $
    (7.2
    )
    
    
    $
    (62.9
    )Cash and cash equivalents  beginning of period*
    
    
    75.1
    
    
    
    
    258.2
    
    
    
    
    100.3
    
    
    
    
    343.5Cash and cash equivalents  end of period*
    
    $
    93.1
    
    
    
    $
    280.6
    
    
    
    $
    93.1
    
    
    
    $
    280.6
 *These amounts represent the unrestricted cash and cash equivalents The accompanying notes are an integral part of these statements. 8




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LAIDLAW INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED FEBRUARY 29, 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 also provides
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 six month periods ended February 29,
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. The basic earnings (loss) per share figures are calculated using the weighted
average number of shares outstanding during the respective periods (100.0
million for the three and six month periods ended February 29, 2004 and 325.9
million for the Predecessor Company in the three month and six month periods
ended February 28, 2003). The diluted earnings per share for the three and six
month periods ended February 29, 2004 of 103.8 million, assumes the sale on the
open market of the Companys common shares held in trust. 9




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Certain prior period amounts have been reclassified to conform to the current
period presentation. Restatement On November 10, 2004 the Company announced the need to restate deferred tax
expense for our second fiscal quarter of 2004. As part of our year-end
processes and procedures to determine the Companys annual tax
provision, management identified a $6.6 million increase in our Canadian deferred tax assets and a
corresponding tax benefit to reflect a change in the Ontario, Canada provincial
tax rates. As the rate changes became effective in the Companys second fiscal
quarter, the $6.6 million tax benefit should have been reflected as a reduction
of our second quarter tax expense. However, the adjustment was not reflected
in the Companys originally reported second quarter results because our
quarterly processes did not include procedures to verify enacted tax rates and
adjust the rate used to value our deferred tax assets for any changes that
might have occurred. Managements quarterly controls and procedures have been modified
to include steps to verify and adjust, if needed, our effective tax rate for
tax changes enacted during such period by taxing authorities in
jurisdictions in which the
Company conducts business. No change in the Companys annual process was
required as management believes we have disclosure controls and
procedures which operate at a reasonable assurance level on an annual
basis. To properly reflect this adjustment in the second fiscal quarter of
2004, management has restated the Companys unaudited consolidated financial
statements contained in its Quarterly Report on Form 10-Q for such period
originally filed with the U.S. Securities and Exchange Commission on April 12,
2004. The effect of this restatement is reflected in the restated unaudited
consolidated financial statements contained in this Form 10-Q/A and is detailed
below. Amounts as originally reported and as restated on the Consolidated Balance
Sheets are as follows: ($ in millions)
    
    February 29, 2004Aspreviously
    
    
    
    Asreported
    
    
    
    RestatedDeferred income tax assets
    
    $
    198.4
    
    
    
    $
    205.0Retained earnings (deficit)
    
    $
    13.3
    
    
    
    $
    19.9Total shareholders equity
    
    $
    1,330.0
    
    
    
    $
    1,336.6
 Amounts as originally reported and as restated on the Consolidated Statements
of Operations are as follows: Three
    
    
    SixMonths Ended
    
    
    Months Ended($ in millions except per share amounts)
    
    February 29, 2004
    
    
    February 29, 2004As
    
    
    
    
    
    
    
    
    Aspreviously
    
    
    
    As
    
    
    
    previously
    
    
    
    Asreported
    
    
    
    Restated
    
    
    
    reported
    
    
    
    RestatedIncome tax benefit (expense)
    
    $
    (1.7
    )
    
    
    $
    4.9
    
    
    
    $
    (16.8
    )
    
    
    $
    (10.2
    )Net income
    
    $
    0.6
    
    
    
    $
    7.2
    
    
    
    $
    23.2
    
    
    
    $
    29.8Basic earnings per share
    
    $
    0.01
    
    
    
    $
    0.07
    
    
    
    $
    0.23
    
    
    
    $
    0.30Diluted earnings per share
    
    $
    0.01
    
    
    
    $
    0.07
    
    
    
    $
    0.23
    
    
    
    $
    0.29
 Note 2  Accounts receivable and revenue Trade accounts receivable as of February 29, 2004 are net of $589.4 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 Businesses) and net of an
allowance for doubtful accounts of $6.4 million (August 31,
2003  $5.6
million) in the Companys other three reportable segments. 10




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##### Table of Contents



Note 3  Intangible assets The contracts and customer relationships are net of $13.5 million of
accumulated amortization at February 29, 2004 (August 31, 2003  $4.5 million). Included in deferred charges and other assets are radio frequency licenses
totalling $12.0 million at February 29, 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%. 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. 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 six
month period ended February 29, 2004, the Company recorded an expense of
approximately $0.8 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- On September 10, 2003, the Company issued 57,375 non-qualified
stock options to non-employee directors with a strike price of $10.33 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. Stock options and tandem stock appreciation rights During the six month
period ended February 29, 2004, the Company issued 366,000 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 which 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 in terms of voting and dividend rights but is restricted from
transferring the shares. 11




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##### Table of Contents



Deferred Shares During the six month period ended February 29, 2004, the
Company issued 781,400 deferred shares to key management employees that vest
ratably over a four-year period. Due to forfeitures, 773,250 deferred shares
remain outstanding at February 29, 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  Material contingencies Ability of Greyhound Lines to continue as a going concern Based upon the current financial forecast for Greyhound Lines, Inc. (Greyhound
Lines) management is unable to predict with reasonable assurance whether
Greyhound Lines will remain in compliance with all of the terms of its
revolving credit facility (the Greyhound Facility). Additionally, there is
less than one year until the October 24, 2004, expiration of the Greyhound
Facility. Greyhound Lines intends to enter into discussions to extend the
maturity and to modify certain of the other terms of the agreement. As of
February 29, 2004, Greyhound Lines was in compliance with all covenants under
the Greyhound Facility and had $5.0 million of cash borrowings, issued letters
of credit of $56.6 million and availability of $56.8 million. However,
Greyhound Lines may not be able to access such availability if an event of
default exists. In addition, if an event of default occurs and is continuing,
the lenders may seek to enforce remedies under the Greyhound Facility,
including terminating the commitment to make loans or issue letters of credit,
holding cash collateral for payment of Greyhound Lines obligations under the
Greyhound Facility and selling the collateral. Furthermore, an event of
default under the Greyhound Facility may result in cross-defaults under other
debt instruments of Greyhound Lines and its subsidiaries. Although Greyhound Lines has been successful in obtaining necessary extensions
and modifications to the Greyhound Facility in the past, there can be no
assurances that they will obtain them in the future or that the cost of any
future extensions, modifications or other changes in the terms of the Greyhound
Facility would not have a material effect on Greyhound Lines or the Company.
In the event that the parties are unable to agree on an extension of the
facility beyond its current maturity date, and that modifications suitable to
the parties are not obtained, Greyhound Lines will be required to seek a
replacement for the Greyhound Facility from other financing sources. Should
alternate sources of financing not be available, then Greyhound Lines may not
be able to satisfy its obligations as they become due and may not be able to
continue as a going concern. If the going concern basis on which Greyhound
Lines consolidated financial statements were prepared was not appropriate for
those consolidated financial statements, then significant adjustments would
need to be made to the carrying value of the assets and liabilities, the
reported revenue and expenses and balance sheet classifications used by
Greyhound Lines. Accordingly, if such changes were made to Greyhound Lines
consolidated financial statements, significant adjustments would be required to
the Companys consolidated financial statements. Compliance by the Company with the financial and other covenants in its senior
secured credit facility is generally not dependent on the financial results or
financial condition of Greyhound Lines, as Greyhound Lines performance has
been excluded for purposes of determining compliance with such provisions.
Moreover, consistent with the intent to exclude events solely related to
Greyhound Lines, the Companys senior secured credit facility specifies that a
default by Greyhound Lines under the Greyhound Facility or a bankruptcy filing
by Greyhound Lines would not be an event of default under the Companys senior
secured credit facility. In addition, in January 2004, the Company amended its
senior secured credit facility to clarify that an event of default is not
triggered under the Companys controlled group liabilities under ERISA with 12




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##### Table of Contents



respect to Greyhound Lines pension plans in the context of a Greyhound Lines
bankruptcy filing. Should Greyhound Lines be unable to continue as a going concern, the Company
may be required to honor certain of Greyhound Lines lease commitments and
pension obligations. The Companys management believes that any required
expenditures with respect to such liabilities would not materially impact the
Companys financial condition. 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, management
believes 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, if resolved against the Company, would 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 that the outcome of any of these investigations
would not have a materially adverse effect upon the Companys consolidated
financial position or results of operations. 13




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##### Table of Contents



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. Organized strikes and work stoppages by unionized employees The Company is party to collective bargaining agreements that cover the
majority of its employees with the largest agreement between Greyhound Lines
and the Amalgamated Transit Union (ATU). The ATU agreement covers the drivers
and maintenance employees of Greyhound Lines and had an expiration date of
January 31, 2004. During January 2004, Greyhound Lines and the ATU tentatively
agreed to a new bargaining agreement. This agreement was submitted to the
membership of the ATU for ratification and on March 26, 2004, the members of
the ATU ratified the new agreement, which expires on January 31, 2007. Note 7  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. 14




---



##### Table of Contents



Note 8  Segmented information The Company has five reportable segments: Education services, Public Transit
services, Greyhound, Healthcare Transportation services and Emergency
Management services. Revenues and operating income before depreciation and
amortization of the segments for the three and six month periods ended February
29, 2004 and February 28, 2003 are as follows: Predecessor
    
    
    
    
    
    
    
    PredecessorCompany
    
    
    
    
    
    
    
    CompanyThree Months
    
    
    Three Months
    
    
    Six Months
    
    
    Six MonthsEnded
    
    
    Ended
    
    
    Ended
    
    
    Ended($ in millions)
    
    February 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,2004
    
    
    2003
    
    
    2004
    
    
    2003Education servicesRevenue
    
    $
    394.8
    
    
    
    $
    400.8
    
    
    
    $
    850.5
    
    
    
    $
    857.0Operating income before
depreciation and amortization
    
    
    75.7
    
    
    
    
    79.3
    
    
    
    
    185.2
    
    
    
    
    185.9Public Transit servicesRevenue
    
    $
    72.5
    
    
    
    $
    68.6
    
    
    
    $
    144.6
    
    
    
    $
    139.2Operating income (loss) before
depreciation and amortization
    
    
    (4.8
    )
    
    
    
    1.8
    
    
    
    
    (4.3
    )
    
    
    
    1.7GreyhoundRevenue
    
    $
    294.3
    
    
    
    $
    281.7
    
    
    
    $
    581.4
    
    
    
    $
    556.1Operating income before
depreciation and amortization
    
    
    12.1
    
    
    
    
    3.9
    
    
    
    
    22.7
    
    
    
    
    2.4Healthcare Transportation servicesRevenue
    
    $
    262.4
    
    
    
    $
    252.0
    
    
    
    $
    524.4
    
    
    
    $
    499.5Operating income before
depreciation and amortization
    
    
    22.4
    
    
    
    
    18.2
    
    
    
    
    41.4
    
    
    
    
    37.3Emergency Management servicesRevenue
    
    $
    138.5
    
    
    
    $
    117.6
    
    
    
    $
    271.9
    
    
    
    $
    231.1Operating income before
depreciation and amortization
    
    
    9.7
    
    
    
    
    6.6
    
    
    
    
    20.3
    
    
    
    
    14.6Consolidated TotalRevenue
    
    $
    1,162.5
    
    
    
    $
    1,120.7
    
    
    
    $
    2,372.8
    
    
    
    $
    2,282.9Operating income before depreciation
and amortization
    
    
    115.1
    
    
    
    
    109.8
    
    
    
    
    265.3
    
    
    
    
    241.9Depreciation and amortization expense
    
    
    73.7
    
    
    
    
    75.7
    
    
    
    
    154.4
    
    
    
    
    152.1Operating income
    
    
    41.4
    
    
    
    
    34.1
    
    
    
    
    110.9
    
    
    
    
    89.8Interest expense
    
    
    (34.6
    )
    
    
    
    (6.5
    )
    
    
    
    (67.3
    )
    
    
    
    (13.0
    )Other expenses, net
    
    
    (4.5
    )
    
    
    
    (9.9
    )
    
    
    
    (3.6
    )
    
    
    
    (16.6
    )Income tax benefit (expense)
    
    
    4.9
    
    
    
    
    (1.5
    )
    
    
    
    (10.2
    )
    
    
    
    (3.0
    )Income before cumulative effect of a
change in accounting principle
    
    $
    7.2
    
    
    
    $
    16.2
    
    
    
    $
    29.8
    
    
    
    $
    57.2
 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 have not changed
materially since August 31, 2003. 15




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##### Table of Contents



Note 9  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 OperationsThree Months Ended February 29, 2004Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsRevenue
    
    $
    929.5
    
    
    $
    233.0
    
    
    $
    1,162.5Compensation expense
    
    
    575.8
    
    
    
    103.3
    
    
    
    679.1Accident claims and professional
liability expenses
    
    
    58.4
    
    
    
    19.1
    
    
    
    77.5Vehicle related costs
    
    
    35.6
    
    
    
    33.2
    
    
    
    68.8Occupancy costs
    
    
    31.5
    
    
    
    19.8
    
    
    
    51.3Fuel
    
    
    30.7
    
    
    
    14.6
    
    
    
    45.3Depreciation
    
    
    58.5
    
    
    
    10.6
    
    
    
    69.1Amortization
    
    
    4.6
    
    
    
    
    
    
    
    4.6Other operating expenses
    
    
    89.8
    
    
    
    35.6
    
    
    
    125.4Operating income (loss)
    
    
    44.6
    
    
    
    (3.2
    )
    
    
    41.4Interest expense
    
    
    (26.4
    )
    
    
    (8.2
    )
    
    
    (34.6
    )Other expenses, net
    
    
    (3.9
    )
    
    
    (0.6
    )
    
    
    (4.5
    )Income (loss) before income taxes
    
    
    14.3
    
    
    
    (12.0
    )
    
    
    2.3Income tax benefit (expense)
    
    
    (0.3
    )
    
    
    5.2
    
    
    
    4.9Net income (loss)
    
    $
    14.0
    
    
    $
    (6.8
    )
    
    $
    7.2
  Condensed Consolidated Statement of OperationsSix Months Ended February 29, 2004Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsRevenue
    
    $
    1,909.6
    
    
    $
    463.2
    
    
    $
    2,372.8Compensation expense
    
    
    1,159.6
    
    
    
    204.5
    
    
    
    1,364.1Accident claims and professional
liability expenses
    
    
    131.4
    
    
    
    35.7
    
    
    
    167.1Vehicle related costs
    
    
    71.1
    
    
    
    67.6
    
    
    
    138.7Occupancy costs
    
    
    61.6
    
    
    
    39.6
    
    
    
    101.2Fuel
    
    
    61.6
    
    
    
    28.1
    
    
    
    89.7Depreciation
    
    
    124.1
    
    
    
    21.1
    
    
    
    145.2Amortization
    
    
    9.2
    
    
    
    
    
    
    
    9.2Other operating expenses
    
    
    175.2
    
    
    
    71.5
    
    
    
    246.7Operating income (loss)
    
    
    115.8
    
    
    
    (4.9
    )
    
    
    110.9Interest expense
    
    
    (51.7
    )
    
    
    (15.6
    )
    
    
    (67.3
    )Other expenses, net
    
    
    (3.4
    )
    
    
    (0.2
    )
    
    
    (3.6
    )Income (loss) before income taxes
    
    
    60.7
    
    
    
    (20.7
    )
    
    
    40.0Income tax benefit (expense)
    
    
    (18.9
    )
    
    
    8.7
    
    
    
    (10.2
    )Net income (loss)
    
    $
    41.8
    
    
    $
    (12.0
    )
    
    $
    29.8
 16




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##### Table of Contents



Predecessor CompanyCondensed Consolidated Statement of OperationsThree Months Ended February 28, 2003Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsRevenue
    
    $
    888.7
    
    
    $
    232.0
    
    
    $
    1,120.7Compensation expense
    
    
    542.6
    
    
    
    109.1
    
    
    
    651.7Accident claims and professional
liability expenses
    
    
    53.5
    
    
    
    19.9
    
    
    
    73.4Vehicle related costs
    
    
    33.0
    
    
    
    34.1
    
    
    
    67.1Occupancy costs
    
    
    32.6
    
    
    
    20.0
    
    
    
    52.6Fuel
    
    
    28.8
    
    
    
    14.7
    
    
    
    43.5Depreciation
    
    
    63.7
    
    
    
    11.7
    
    
    
    75.4Amortization
    
    
    0.3
    
    
    
    
    
    
    
    0.3Other operating expenses
    
    
    84.7
    
    
    
    37.9
    
    
    
    122.6Operating income (loss)
    
    
    49.5
    
    
    
    (15.4
    )
    
    
    34.1Interest expense
    
    
    (0.1
    )
    
    
    (6.4
    )
    
    
    (6.5
    )Other income (expense), net
    
    
    (10.5
    )
    
    
    0.6
    
    
    
    (9.9
    )Income (loss) before income taxes
    
    
    38.9
    
    
    
    (21.2
    )
    
    
    17.7Income tax expense
    
    
    (1.2
    )
    
    
    (0.3
    )
    
    
    (1.5
    )Net income (loss)
    
    $
    37.7
    
    
    $
    (21.5
    )
    
    $
    (16.2
    )
  Predecessor CompanyCondensed Consolidated Statement of OperationsSix Months Ended February 28, 2003Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsRevenue
    
    $
    1,824.6
    
    
    $
    458.3
    
    
    $
    2,282.9Compensation expense
    
    
    1,092.8
    
    
    
    217.0
    
    
    
    1,309.8Accident claims and professional
liability expenses
    
    
    134.1
    
    
    
    35.9
    
    
    
    170.0Vehicle related costs
    
    
    68.0
    
    
    
    65.6
    
    
    
    133.6Occupancy costs
    
    
    62.1
    
    
    
    39.1
    
    
    
    101.2Fuel
    
    
    58.1
    
    
    
    28.9
    
    
    
    87.0Depreciation
    
    
    127.7
    
    
    
    23.9
    
    
    
    151.6Amortization
    
    
    0.5
    
    
    
    
    
    
    
    0.5Other operating expenses
    
    
    164.7
    
    
    
    74.7
    
    
    
    239.4Operating income (loss)
    
    
    116.6
    
    
    
    (26.8
    )
    
    
    89.8Interest expense
    
    
    (1.5
    )
    
    
    (11.5
    )
    
    
    (13.0
    )Other income (expense), net
    
    
    (17.2
    )
    
    
    0.6
    
    
    
    (16.6
    )Income (loss) before income
taxes and cumulative effect of a
change in accounting principle
    
    
    97.9
    
    
    
    (37.7
    )
    
    
    60.2Income tax expense
    
    
    (2.3
    )
    
    
    (0.7
    )
    
    
    (3.0
    )Income (loss) from operations
before cumulative effect of a
change in accounting principle
    
    $
    95.6
    
    
    $
    (38.4
    )
    
    $
    57.2Cumulative effect of a change in
accounting principle
    
    
    (1,775.9
    )
    
    
    (429.5
    )
    
    
    (2,205.4
    )Net loss
    
    $
    (1,680.3
    )
    
    $
    (467.9
    )
    
    $
    (2,148.2
    )
 17




---



##### Table of Contents



Condensed Consolidated Statement of Cash FlowsThree Months Ended February 29, 2004Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsNet cash provided by operating activities
    
    $
    127.4
    
    
    $
    18.8
    
    
    $
    146.2Cash flows from investing activities:Purchase of property, equipment and other assets,
net of proceeds from sale
    
    $
    (57.7
    )
    
    $
    (8.1
    )
    
    $
    (65.8
    )Expended on acquisitions
    
    
    (1.3
    )
    
    
    
    
    
    
    (1.3
    )Net (increase) decrease in investments
    
    
    (1.1
    )
    
    
    0.7
    
    
    
    (0.4
    )Net cash used in investing activities
    
    $
    (60.1
    )
    
    $
    (7.4
    )
    
    $
    (67.5
    )Cash flows from financing activities:Net decrease in long-term debt and other long-term
liabilities
    
    $
    (49.0
    )
    
    $
    (11.7
    )
    
    $
    (60.7
    )Net cash used in financing activities
    
    $
    (49.0
    )
    
    $
    (11.7
    )
    
    $
    (60.7
    )Net increase (decrease) in cash and cash
equivalents
    
    $
    18.3
    
    
    $
    (0.3
    )
    
    $
    18.0Cash and cash equivalents at:Beginning of period
    
    
    55.5
    
    
    
    19.6
    
    
    
    75.1End of period
    
    $
    73.8
    
    
    $
    19.3
    
    
    $
    93.1
  Condensed Consolidated Statement of Cash FlowsSix Months Ended February 29, 2004Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsNet cash provided by operating activities
    
    $
    77.6
    
    
    $
    17.0
    
    
    $
    94.6Cash flows from investing activities:Purchase of property, equipment and other assets,
net of proceeds from sale
    
    $
    (90.5
    )
    
    $
    (14.6
    )
    
    $
    (105.1
    )Expended on acquisitions
    
    
    (1.3
    )
    
    
    
    
    
    
    (1.3
    )Net increase in investments
    
    
    (7.1
    )
    
    
    (1.0
    )
    
    
    (8.1
    )Net cash used in investing activities
    
    $
    (98.9
    )
    
    $
    (15.6
    )
    
    $
    (114.5
    )Cash flows from financing activities:Net increase (decrease) in long-term debt and
other long-term liabilities
    
    $
    40.0
    
    
    $
    (27.3
    )
    
    $
    12.7Net cash provided by (used in) financing activities
    
    $
    40.0
    
    
    $
    (27.3
    )
    
    $
    12.7Net increase (decrease) in cash and cash
equivalents
    
    $
    18.7
    
    
    $
    (25.9
    )
    
    $
    (7.2
    )Cash and cash equivalents at:Beginning of period
    
    
    55.1
    
    
    
    45.2
    
    
    
    100.3End of period
    
    $
    73.8
    
    
    $
    19.3
    
    
    $
    93.1
 18




---



##### Table of Contents



Predecessor CompanyCondensed Consolidated Statement of Cash FlowsThree Months Ended February 28, 2003Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsNet cash provided by (used in) operating activities
    
    $
    93.7
    
    
    $
    (21.5
    )
    
    $
    72.2Cash flows from investing activities:Purchase of property, equipment and other assets,
net of proceeds from sale
    
    $
    (38.8
    )
    
    $
    1.9
    
    
    $
    (36.9
    )Net (increase) decrease in investments
    
    
    (25.5
    )
    
    
    0.2
    
    
    
    (25.3
    )Net cash provided by (used in) investing activities
    
    $
    (64.3
    )
    
    $
    2.1
    
    
    $
    (62.2
    )Cash flows from financing activities:Net increase (decrease) in long-term debt and
other non-current liabilities
    
    $
    (3.2
    )
    
    $
    15.6
    
    
    $
    12.4Net cash provided by (used in) financing activities
    
    $
    (3.2
    )
    
    $
    15.6
    
    
    $
    12.4Net increase (decrease) in cash and cash
equivalents
    
    $
    26.2
    
    
    $
    (3.8
    )
    
    $
    22.4Cash and cash equivalents at:Beginning of period
    
    
    240.6
    
    
    
    17.6
    
    
    
    258.2End of period
    
    $
    266.8
    
    
    $
    13.8
    
    
    $
    280.6
  Predecessor CompanyCondensed Consolidated Statement of Cash FlowsSix Months Ended February 28, 2003Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsNet cash provided by operating activities
    
    $
    60.0
    
    
    $
    4.1
    
    
    $
    64.1Cash flows from investing activities:Purchase of property, equipment and other assets,
net of proceeds from sale
    
    $
    (73.8
    )
    
    $
    (30.7
    )
    
    $
    (104.5
    )Expended on acquisitions
    
    
    (3.2
    )
    
    
    
    
    
    
    (3.2
    )Net increase in investments
    
    
    (33.5
    )
    
    
    (0.8
    )
    
    
    (34.3
    )Net cash used in investing activities
    
    $
    (110.5
    )
    
    $
    (31.5
    )
    
    $
    (142.0
    )Cash flows from financing activities:Net increase (decrease) in long-term debt and
other non-current liabilities
    
    $
    (6.5
    )
    
    $
    21.5
    
    
    $
    15.0Net cash provided by (used in) financing activities
    
    $
    (6.5
    )
    
    $
    21.5
    
    
    $
    15.0Net decrease in cash and cash equivalents
    
    $
    (57.0
    )
    
    $
    (5.9
    )
    
    $
    (62.9
    )Cash and cash equivalents at:Beginning of period
    
    
    323.8
    
    
    
    19.7
    
    
    
    343.5End of period
    
    $
    266.8
    
    
    $
    13.8
    
    
    $
    280.6
 19




---



##### Table of Contents



Condensed Consolidated Balance SheetFebruary 29, 2004Restricted
    
    Unrestricted
    
    Consolidated($ millions)
    
    Subsidiaries
    
    Subsidiaries
    
    TotalsCurrent assetsCash and cash equivalents
    
    $
    73.8
    
    
    $
    19.3
    
    
    $
    93.1Restricted cash and cash equivalents
    
    
    64.8
    
    
    
    
    
    
    
    64.8Short-term deposits and marketable securities
    
    
    12.8
    
    
    
    
    
    
    
    12.8Accounts receivable
    
    
    677.8
    
    
    
    37.6
    
    
    
    715.4Parts and supplies
    
    
    38.9
    
    
    
    11.3
    
    
    
    50.2Deferred income tax assets
    
    
    63.2
    
    
    
    14.1
    
    
    
    77.3Other current assets
    
    
    52.3
    
    
    
    14.1
    
    
    
    66.4Total current assets
    
    
    983.6
    
    
    
    96.4
    
    
    
    1,080.0Long-term investments
    
    
    532.4
    
    
    
    40.5
    
    
    
    572.9Property and equipment
    
    
    1,268.3
    
    
    
    371.6
    
    
    
    1,639.9Goodwill
    
    
    183.1
    
    
    
    
    
    
    
    183.1Contracts and customer relationships
    
    
    208.9
    
    
    
    
    
    
    
    208.9Deferred income tax assets
    
    
    87.1
    
    
    
    117.9
    
    
    
    205.0Deferred charges and other assets
    
    
    65.6
    
    
    
    9.9
    
    
    
    75.5Total assets
    
    $
    3,329.0
    
    
    $
    636.3
    
    
    $
    3,965.3Current liabilitiesAccounts payable
    
    $
    98.9
    
    
    $
    24.9
    
    
    $
    123.8Accrued liabilities
    
    
    367.9
    
    
    
    121.5
    
    
    
    489.4Current portion of long-term debt
    
    
    34.8
    
    
    
    13.7
    
    
    
    48.5Total current liabilities
    
    
    501.6
    
    
    
    160.1
    
    
    
    661.7Long-term debt
    
    
    1,056.4
    
    
    
    129.0
    
    
    
    1,185.4Pension liability
    
    
    3.5
    
    
    
    222.7
    
    
    
    226.2Other long-term liabilities
    
    
    465.3
    
    
    
    90.1
    
    
    
    555.4Total liabilities
    
    
    2,026.8
    
    
    
    601.9
    
    
    
    2,628.7Shareholders equity
    
    
    1,302.2
    
    
    
    34.4
    
    
    
    1,336.6Total liabilities and shareholders equity
    
    $
    3,329.0
    
    
    $
    636.3
    
    
    $
    3,965.3
 20




---



##### Table of Contents



Condensed Consolidated Balance SheetAs of August 31, 2003Restricted
    
    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
 21




---



##### Table of Contents



Note 10  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 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 February 29, 2004 Parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalsRevenue
    
    $
    
    
    
    $
    822.9
    
    
    $
    339.6
    
    
    $
    
    
    
    $
    1,162.5Operating, selling, general and
administrative expenses
    
    
    0.5
    
    
    
    731.3
    
    
    
    315.6
    
    
    
    
    
    
    
    1,047.4Depreciation and amortization expense
    
    
    
    
    
    
    55.2
    
    
    
    18.5
    
    
    
    
    
    
    
    73.7Intercompany management fees (income)
    
    
    
    
    
    
    (2.0
    )
    
    
    2.0
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    (0.5
    )
    
    
    38.4
    
    
    
    3.5
    
    
    
    
    
    
    
    41.4Interest expense
    
    
    (24.1
    )
    
    
    (2.8
    )
    
    
    (7.7
    )
    
    
    
    
    
    
    (34.6
    )Intercompany interest income (expense)
    
    
    (1.1
    )
    
    
    1.7
    
    
    
    (0.6
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    (4.2
    )
    
    
    0.3
    
    
    
    (0.6
    )
    
    
    
    
    
    
    (4.5
    )Equity in earnings (loss) of
intercompany investments
    
    
    17.4
    
    
    
    (6.1
    )
    
    
    
    
    
    
    (11.3
    )
    
    
    Income (loss) before income taxes
    
    
    (12.5
    )
    
    
    31.5
    
    
    
    (5.4
    )
    
    
    (11.3
    )
    
    
    2.3Income tax benfit (expense)
    
    
    13.1
    
    
    
    (17.2
    )
    
    
    9.0
    
    
    
    
    
    
    
    4.9Net income (loss)
    
    $
    0.6
    
    
    $
    14.3
    
    
    $
    3.6
    
    
    $
    (11.3
    )
    
    $
    7.2
  Condensed Consolidated Statement of Operations
Six months ended February 29, 2004 Parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalsRevenue
    
    $
    
    
    
    $
    1,695.4
    
    
    $
    677.4
    
    
    $
    
    
    
    $
    2,372.8Operating, selling, general and
administrative expenses
    
    
    0.5
    
    
    
    1,474.6
    
    
    
    632.4
    
    
    
    
    
    
    
    2,107.5Depreciation and amortization expense
    
    
    
    
    
    
    115.4
    
    
    
    39.0
    
    
    
    
    
    
    
    154.4Intercompany management fees (income)
    
    
    
    
    
    
    (2.8
    )
    
    
    2.8
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    (0.5
    )
    
    
    108.2
    
    
    
    3.2
    
    
    
    
    
    
    
    110.9Interest expense
    
    
    (49.5
    )
    
    
    (3.2
    )
    
    
    (14.6
    )
    
    
    
    
    
    
    (67.3
    )Intercompany interest income (expense)
    
    
    (1.6
    )
    
    
    2.8
    
    
    
    (1.2
    )
    
    
    
    
    
    
    Other income (expenses), net
    
    
    (3.9
    )
    
    
    0.6
    
    
    
    (0.3
    )
    
    
    
    
    
    
    (3.6
    )Equity in earnings (loss) of
intercompany investments
    
    
    55.4
    
    
    
    (12.0
    )
    
    
    
    
    
    
    (43.4
    )
    
    
    Income (loss) before income taxes
    
    
    (0.1
    )
    
    
    96.4
    
    
    
    (12.9
    )
    
    
    (43.4
    )
    
    
    40.0Income tax recovery (expense)
    
    
    23.3
    
    
    
    (45.5
    )
    
    
    12.0
    
    
    
    
    
    
    
    (10.2
    )Net income (loss)
    
    $
    23.2
    
    
    $
    50.9
    
    
    $
    (0.9
    )
    
    $
    (43.4
    )
    
    $
    29.8
 22




---



##### Table of Contents



Predecessor Company
Condensed Consolidated Statement of Operations
Three months ended February 28, 2003 Parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalsRevenue
    
    $
    
    
    
    $
    801.6
    
    
    $
    319.1
    
    
    $
    
    
    
    $
    1,120.7Operating, selling, general and
administrative expenses
    
    
    6.1
    
    
    
    700.4
    
    
    
    304.4
    
    
    
    
    
    
    
    1,010.9Depreciation and amortization expense
    
    
    
    
    
    
    54.6
    
    
    
    21.1
    
    
    
    
    
    
    
    75.7Intercompany management fees (income)
    
    
    (12.4
    )
    
    
    9.1
    
    
    
    3.3
    
    
    
    
    
    
    
    Operating income (loss), net
    
    
    6.3
    
    
    
    37.5
    
    
    
    (9.7
    )
    
    
    
    
    
    
    34.1Interest expense
    
    
    
    
    
    
    (1.2
    )
    
    
    (5.3
    )
    
    
    
    
    
    
    (6.5
    )Intercompany interest income (expense)
    
    
    
    
    
    
    0.5
    
    
    
    (0.5
    )
    
    
    
    
    
    
    Other income (expense)
    
    
    (8.3
    )
    
    
    (1.7
    )
    
    
    0.1
    
    
    
    
    
    
    
    (9.9
    )Equity in earnings (loss) of
intercompany investments
    
    
    18.3
    
    
    
    (15.6
    )
    
    
    
    
    
    
    (2.7
    )
    
    
    Income (loss) before income taxes
    
    
    16.3
    
    
    
    19.5
    
    
    
    (15.4
    )
    
    
    (2.7
    )
    
    
    17.7Income tax expense
    
    
    (0.1
    )
    
    
    (0.8
    )
    
    
    (0.6
    )
    
    
    
    
    
    
    (1.5
    )Net income (loss)
    
    $
    16.2
    
    
    $
    18.7
    
    
    $
    (16.0
    )
    
    $
    (2.7
    )
    
    $
    16.2
 Predecessor Company
Condensed Consolidated Statement of Operations
Six months ended February 28, 2003 Parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalsRevenue
    
    $
    
    
    
    $
    1,647.5
    
    
    $
    635.4
    
    
    $
    
    
    
    $
    2,282.9Operating, selling, general and
administrative expenses
    
    
    9.1
    
    
    
    1,409.7
    
    
    
    622.2
    
    
    
    
    
    
    
    2,041.0Depreciation and amortization expense
    
    
    0.1
    
    
    
    109.7
    
    
    
    42.3
    
    
    
    
    
    
    
    152.1Intercompany management fees (income)
    
    
    (31.6
    )
    
    
    24.6
    
    
    
    7.0
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    22.4
    
    
    
    103.5
    
    
    
    (36.1
    )
    
    
    
    
    
    
    89.8Interest expense
    
    
    
    
    
    
    (2.6
    )
    
    
    (10.4
    )
    
    
    
    
    
    
    (13.0
    )Intercompany interest income (expense)
    
    
    
    
    
    
    1.1
    
    
    
    (1.1
    )
    
    
    
    
    
    
    Other income (expense), net
    
    
    (13.6
    )
    
    
    (3.7
    )
    
    
    0.7
    
    
    
    
    
    
    
    (16.6
    )Equity in earnings (loss) of
intercompany investments
    
    
    48.7
    
    
    
    (32.5
    )
    
    
    
    
    
    
    (16.2
    )
    
    
    Income (loss) before income taxes
    
    
    57.5
    
    
    
    65.8
    
    
    
    (46.9
    )
    
    
    (16.2
    )
    
    
    60.2Income tax expense
    
    
    (0.3
    )
    
    
    (1.5
    )
    
    
    (1.2
    )
    
    
    
    
    
    
    (3.0
    )Income (loss) before cumulative
effect of a change in accounting
principle
    
    
    57.2
    
    
    
    64.3
    
    
    
    (48.1
    )
    
    
    (16.2
    )
    
    
    57.2Cumulative 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)
    
    $
    (2,148.2
    )
    
    $
    (2,033.2
    )
    
    $
    (585.5
    )
    
    $
    2,618.7
    
    
    $
    (2,148.2
    ) 23




---



##### Table of Contents



Condensed Consolidated Statement of Cash Flows
Three months ended February 29, 2004 Parent
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    TotalsNet cash provided by (used in) operating activities
    
    $
    (42.7
    )
    
    $
    117.0
    
    
    $
    71.9
    
    
    $
    146.2Cash flows from investing activities:Purchases of property, equipment and other assets, net of proceeds from sale
    
    $
    
    
    
    $
    (43.0
    )
    
    $
    (22.8
    )
    
    $
    (65.8
    )Expended on acquisitions
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    (1.3
    )Net decrease (increase) in investments
    
    
    (0.9
    )
    
    
    30.1
    
    
    
    (29.6
    )
    
    
    (0.4
    )Net cash used in investing activities
    
    $
    (0.9
    )
    
    $
    (12.9
    )
    
    $
    (53.7
    )
    
    $
    (67.5
    )Cash flows from financing activities:Net increase (decrease) in long-term debt and other long-term liabilities
    
    $
    (40.1
    )
    
    $
    0.9
    
    
    $
    (21.5
    )
    
    $
    (60.7
    )Increase (decrease) in intercompany advances
    
    
    103.5
    
    
    
    (111.7
    )
    
    
    8.2
    
    
    
    Net cash provided by (used in) financing activities
    
    $
    63.4
    
    
    $
    (110.8
    )
    
    $
    (13.3
    )
    
    $
    (60.7
    )Net increase (decrease) in cash and cash equivalents
    
    $
    19.8
    
    
    $
    (6.7
    )
    
    $
    4.9
    
    
    $
    18.0Cash and cash equivalents at:Beginning of period
    
    
    18.9
    
    
    
    27.7
    
    
    
    28.5
    
    
    
    75.1End of period
    
    $
    38.7
    
    
    $
    21.0
    
    
    $
    33.4
    
    
    $
    93.1
  Condensed Consolidated Statement of Cash Flows
Six months ended February 29, 2004 Parent
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    TotalsNet cash provided by (used in) operating activities
    
    $
    (61.6
    )
    
    $
    35.2
    
    
    $
    121.0
    
    
    $
    94.6Cash flows from investing activities:Purchases of property, equipment and other
assets, net of proceeds from sale
    
    $
    
    
    
    $
    (56.7
    )
    
    $
    (48.4
    )
    
    $
    (105.1
    )Expended on acquisitions
    
    
    
    
    
    
    
    
    
    
    (1.3
    )
    
    
    (1.3
    )Net decrease (increase) in investments
    
    
    0.7
    
    
    
    31.3
    
    
    
    (40.1
    )
    
    
    (8.1
    )Net cash used in investing activities
    
    $
    0.7
    
    
    $
    (25.4
    )
    
    $
    (89.8
    )
    
    $
    (114.5
    )Cash flows from financing activities:Net increase (decrease) in long-term debt and
other long-term liabilities
    
    $
    43.7
    
    
    $
    (2.7
    )
    
    $
    (28.3
    )
    
    $
    12.7Increase (decrease) in intercompany advances
    
    
    15.1
    
    
    
    10.1
    
    
    
    (25.2
    )
    
    
    Net cash provided by (used in) financing activities
    
    $
    58.8
    
    
    $
    7.4
    
    
    $
    (53.5
    )
    
    $
    12.7Net increase (decrease) in cash and cash equivalents
    
    $
    (2.1
    )
    
    $
    17.2
    
    
    $
    (22.3
    )
    
    $
    (7.2
    )Cash and cash equivalents at:Beginning of period
    
    
    40.8
    
    
    
    3.8
    
    
    
    55.7
    
    
    
    100.3End of period
    
    $
    38.7
    
    
    $
    21.0
    
    
    $
    33.4
    
    
    $
    93.1
 24




---



##### Table of Contents



Predecessor Company
Condensed Consolidated Statement of Cash Flows
Three months ended February 28, 2003 Parent
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    TotalsNet cash provided by operating activities
    
    $
    15.3
    
    
    $
    53.0
    
    
    $
    3.9
    
    
    $
    72.2Cash flows from investing activities:Purchases of property, equipment and other
assets, net of proceeds from sale
    
    $
    
    
    
    $
    (33.5
    )
    
    $
    (3.4
    )
    
    $
    (36.9
    )Net decrease (increase) in investments
    
    
    0.3
    
    
    
    (10.0
    )
    
    
    (15.6
    )
    
    
    (25.3
    )Net cash provided by (used in) investing activities
    
    $
    0.3
    
    
    $
    (43.5
    )
    
    $
    (19.0
    )
    
    $
    (62.2
    )Cash flows from financing activities:Net increase (decrease) in long-term debt and
other long-term liabilities
    
    $
    
    
    
    $
    (3.7
    )
    
    $
    16.1
    
    
    $
    12.4Net cash provided by (used in) financing activities
    
    $
    
    
    
    $
    (3.7
    )
    
    $
    16.1
    
    
    $
    12.4Net increase in cash and cash equivalents
    
    $
    15.6
    
    
    $
    5.8
    
    
    $
    1.0
    
    
    $
    22.4Cash and cash equivalents at:Beginning of period
    
    
    17.8
    
    
    
    210.6
    
    
    
    29.8
    
    
    
    258.2End of period
    
    $
    33.4
    
    
    $
    216.4
    
    
    $
    30.8
    
    
    $
    280.6
  Predecessor Company
Condensed Consolidated Statement of Cash Flows
Six months ended February 28, 2003 Parent
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    TotalsNet cash provided by operating activities
    
    $
    20.7
    
    
    $
    10.9
    
    
    $
    32.5
    
    
    $
    64.1Cash flows from investing activities:Purchases of property, equipment and other
assets, net of proceeds from sale
    
    $
    
    
    
    $
    (57.9
    )
    
    $
    (46.6
    )
    
    $
    (104.5
    )Expended on acquisitions
    
    
    
    
    
    
    (3.2
    )
    
    
    
    
    
    
    (3.2
    )Net decrease (increase) in investments
    
    
    0.7
    
    
    
    (19.5
    )
    
    
    (15.5
    )
    
    
    (34.3
    )Net cash provided by (used in) investing activities
    
    $
    0.7
    
    
    $
    (80.6
    )
    
    $
    (62.1
    )
    
    $
    (142.0
    )Cash flows from financing activities:Net increase (decrease) in long-term debt and
other long-term liabilities
    
    $
    
    
    
    $
    (5.2
    )
    
    $
    20.2
    
    
    $
    15.0Net cash provided by (used in) financing activities
    
    $
    
    
    
    $
    (5.2
    )
    
    $
    20.2
    
    
    $
    15.0Net increase (decrease) in cash and cash equivalents
    
    $
    21.4
    
    
    $
    (74.9
    )
    
    $
    (9.4
    )
    
    $
    (62.9
    )Cash and cash equivalents at:Beginning of period
    
    
    12.0
    
    
    
    291.3
    
    
    
    40.2
    
    
    
    343.5End of period
    
    $
    33.4
    
    
    $
    216.4
    
    
    $
    30.8
    
    
    $
    280.6
 25




---



##### Table of Contents



Condensed Consolidated Balance Sheet
As of February 29, 2004 Parent
    
    
    
    
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalsCurrent assetsIntercompany receivables (payables)
    
    $
    40.3
    
    
    $
    805.9
    
    
    $
    233.8
    
    
    $
    
    
    
    $
    1,080.0and investments
    
    
    2,156.2
    
    
    
    5.2
    
    
    
    26.6
    
    
    
    (2,188.0
    )
    
    
    Long-term investments
    
    
    109.7
    
    
    
    97.3
    
    
    
    365.9
    
    
    
    
    
    
    
    572.9Property and equipment
    
    
    
    
    
    
    966.4
    
    
    
    673.5
    
    
    
    
    
    
    
    1,639.9Goodwill
    
    
    
    
    
    
    183.1
    
    
    
    
    
    
    
    
    
    
    
    183.1Contracts and customer relationships
    
    
    
    
    
    
    208.1
    
    
    
    0.8
    
    
    
    
    
    
    
    208.9Long-term deferred income tax assets
    
    
    61.9
    
    
    
    
    
    
    
    187.9
    
    
    
    (44.8
    )
    
    
    205.0Deferred charges and other assets
    
    
    45.3
    
    
    
    20.2
    
    
    
    10.0
    
    
    
    
    
    
    
    75.5$
    2,413.4
    
    
    $
    2,286.2
    
    
    $
    1,498.5
    
    
    $
    (2,232.8
    )
    
    $
    3,965.3Current liabilities
    
    $
    39.9
    
    
    $
    275.9
    
    
    $
    345.9
    
    
    $
    
    
    
    $
    661.7Non-current liabilities
    
    
    1,043.5
    
    
    
    182.5
    
    
    
    785.8
    
    
    
    (44.8
    )
    
    
    1,967.0Shareholders equity
    
    
    1,330.0
    
    
    
    1,827.8
    
    
    
    366.8
    
    
    
    (2,188.0
    )
    
    
    1,336.6$
    2,413.4
    
    
    $
    2,286.2
    
    
    $
    1,498.5
    
    
    $
    (2,232.8
    )
    
    $
    3,965.3
  Condensed Consolidated Balance Sheet
As of August 31, 2003 Parent
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consolidated($ millions)
    
    Company
    
    Guarantors
    
    Non-Guarantors
    
    Eliminations
    
    TotalsCurrent assetsIntercompany receivables and
    
    $
    44.0
    
    
    $
    662.7
    
    
    $
    241.3
    
    
    $
    
    
    
    $
    948.0investments
    
    
    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
 26




---



##### 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 six month
periods ended February 29, 2004 as compared to the three and six month periods
ended February 28, 2003 and the Companys consolidated financial position at
February 29, 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.

We operate in five reportable segments: Education services, Public Transit
services, Greyhound, Healthcare Transportation services and Emergency
Management services. See Note 8  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 9  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.

27



---



##### Table of Contents



Three and six month periods ended February 29, 2004 compared with the
Predecessor Company three and six month periods ended February 28, 2003 results
of operations Predecessor of RevenueThree Months Ended
    
    
    Six MonthsFebruary 29,
    
    
    February 28,
    
    
    February 29,
    
    
    February 28,2004
    
    
    2003
    
    
    2004
    
    
    2003Revenue
    
    
    100.0
    %
    
    
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    
    100.0
    %Compensation expense
    
    
    58.4
    
    
    
    
    
    58.2
    
    
    
    57.5
    
    
    
    
    57.4Accident claims and
professional liability
expenses
    
    
    6.7
    
    
    
    
    
    6.6
    
    
    
    7.0
    
    
    
    
    7.4Vehicle related costs
    
    
    5.9
    
    
    
    
    
    6.0
    
    
    
    5.8
    
    
    
    
    5.9Occupancy costs
    
    
    4.4
    
    
    
    
    
    4.7
    
    
    
    4.3
    
    
    
    
    4.4Fuel
    
    
    3.9
    
    
    
    
    
    3.9
    
    
    
    3.8
    
    
    
    
    3.8Depreciation
    
    
    5.9
    
    
    
    
    
    6.7
    
    
    
    6.1
    
    
    
    
    6.7Amortization
    
    
    0.4
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    
    Other operating expenses
    
    
    10.8
    
    
    
    
    
    10.9
    
    
    
    10.4
    
    
    
    
    10.5Operating income
    
    
    3.6
    
    
    
    
    
    3.0
    
    
    
    4.7
    
    
    
    
    3.9Interest expense
    
    
    (3.0
    )
    
    
    

    (0.6
    )
    
    
    (2.8
    )
    
    
    
    (0.6
    )Other expense, net
    
    
    (0.4
    )
    
    
    
    
    (0.8
    )
    
    
    (0.2
    )
    
    
    
    (0.7
    )Income before income taxes
and cumulative effect of a
change in accounting
principle
    
    
    0.2
    
    
    
    
    
    1.6
    
    
    
    1.7
    
    
    
    
    2.6Income tax benefit (expense)
    
    
    0.4
    
    
    
    
    
    (0.2
    )
    
    
    (0.4
    )
    
    
    
    (0.1
    )Income before cumulative
effect of a change in
accounting principle
    
    
    0.6
    
    
    
    
    
    1.4
    
    
    
    1.3
    
    
    
    
    2.5Cumulative effect of a
change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (96.6
    )Net income (loss)
    
    
    0.6
    %
    
    
    
    
    1.4
    %
    
    
    1.3
    %
    
    
    
    (94.1
    )%
 28




---



##### 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
    
    
    Six Months endedFebruary 29,
    
    February 28,
    
    
    February 29,
    
    February 28,2004
    
    2003
    
    
    2004
    
    2003Education services
    
    $
    394.8
    
    
    $
    400.8
    
    
    
    $
    850.5
    
    
    $
    857.0Public Transit services
    
    
    72.5
    
    
    
    68.6
    
    
    
    
    144.6
    
    
    
    139.2Greyhound
    
    
    294.3
    
    
    
    281.7
    
    
    
    
    581.4
    
    
    
    556.1Healthcare Transportation services
    
    
    262.4
    
    
    
    252.0
    
    
    
    
    524.4
    
    
    
    499.5Emergency Management services
    
    
    138.5
    
    
    
    117.6
    
    
    
    
    271.9
    
    
    
    231.1Total
    
    $
    1,162.5
    
    
    $
    1,120.7
    
    
    
    $
    2,372.8
    
    
    $
    2,282.9Restricted Subsidiaries
    
    $
    929.5
    
    
    $
    888.7
    
    
    
    $
    1,909.6
    
    
    $
    1,824.6Unrestricted subsidiaries
    
    
    233.0
    
    
    
    232.0
    
    
    
    
    463.2
    
    
    
    458.3Total
    
    $
    1,162.5
    
    
    $
    1,120.7
    
    
    
    $
    2,372.8
    
    
    $
    2,282.9
 Revenue in the Education services segment decreased by 1.5% and 0.8% during the
three and six months ended February 29, 2004, respectively. The effect of lost
business ($28 million and $57 million during the three and six months ended
February 29, 2004, respectively, of which approximately half was due to the
loss of the City of Boston contract) and lost operating days due to weather ($6
million in the three and six months ended February 29, 2004) was only partially
offset by new contracts, price increases and the strengthening of the Canadian
currency relative to the U.S. dollar. It is anticipated that approximately $5
million of the weather related revenue losses will be recovered in the fourth
quarter. Revenue would have declined 3.2% and 2.4% during the three and six
months ended February 29, 2004, respectively, had there been no change in the
exchange rate. The 5.7% and 3.9% increase in revenue during the three and six months ended
February 29, 2004, respectively, in the Public Transit services segment is
primarily attributable to additional routes and services. The 4.5% increase in revenue during the three and six months ended February 29,
2004, 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 1.2% and 1.4% during the three and six months
ended February 29, 2004, respectively. The 4.1% and 5.0% increase in revenue during the three and six months ended
February 29, 2004, respectively, in the Healthcare Transportation services
segment is primarily due to an increase in transports. The nearly 18% increase in revenue in the Emergency Management services segment
during the three and six months ended February 29, 2004, is primarily
attributable to an increase in the number of patient visits from both new and
existing contracts. 29




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The increase in the Restricted Subsidiaries revenue during the three and six
months ended February 29, 2004, is primarily a result of the increase in
revenue in the Healthcare Transportation services and Emergency Management
services segments discussed above. The Unrestricted Subsidiaries revenue was up slightly during the three and six
months ended February 29, 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 is the same as
operating income before depreciation and amortization as reported for each of
our segments in Note 8  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 used in operating activities, the GAAP measures management believes to
be most directly comparable to EBITDA: Three Months ended
    
    
    Six Months endedFebruary 29,
    
    February 28,
    
    
    February 29,
    
    February 28,2004
    
    2003
    
    
    2004
    
    2003EBITDA
    
    $
    115.1
    
    
    $
    109.8
    
    
    
    $
    265.3
    
    
    $
    241.9Depreciation and amortization
    
    
    (73.7
    )
    
    
    (75.7
    )
    
    
    
    (154.4
    )
    
    
    (152.1
    )Interest expense
    
    
    (34.6
    )
    
    
    (6.5
    )
    
    
    
    (67.3
    )
    
    
    (13.0
    )Other expenses, net
    
    
    (4.5
    )
    
    
    (9.9
    )
    
    
    
    (3.6
    )
    
    
    (16.6
    )Income tax benefit (expense)
    
    
    4.9
    
    
    
    (1.5
    )
    
    
    
    (10.2
    )
    
    
    (3.0
    )Income before cumulative
effect of a change in
accounting principle
    
    
    7.2
    
    
    
    16.2
    
    
    
    
    29.8
    
    
    
    57.2Cumulative effect of a
change in accounting
principle
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,205.4
    )Net income (loss)
    
    $
    7.2
    
    
    $
    16.2
    
    
    
    $
    29.8
    
    
    $
    (2,148.2
    )
 30




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Three Months ended
    
    
    Six Months endedFebruary 29,
    
    February 28,
    
    
    February 29,
    
    February 28,2004
    
    2003
    
    
    2004
    
    2003EBITDA
    
    $
    115.1
    
    
    $
    109.8
    
    
    
    $
    265.3
    
    
    $
    241.9Cash paid for interest
    
    
    (39.2
    )
    
    
    (1.9
    )
    
    
    
    (59.4
    )
    
    
    (13.2
    )Cash received (paid) for income taxes
    
    
    10.1
    
    
    
    (0.6
    )
    
    
    
    11.2
    
    
    
    (1.6
    )Increase in claims liabilities and
professional liability reserves
    
    
    28.7
    
    
    
    20.0
    
    
    
    
    34.5
    
    
    
    48.7Cash provided by (used in) financing
other working capital items
    
    
    33.3
    
    
    
    (26.8
    )
    
    
    
    (156.3
    )
    
    
    (170.6
    )Increase in restricted cash and cash
equivalents
    
    
    (0.6
    )
    
    
    (21.9
    )
    
    
    
    0.6
    
    
    
    (33.0
    )Other
    
    
    (1.2
    )
    
    
    (6.4
    )
    
    
    
    (1.3
    )
    
    
    (8.1
    )Net cash provided by operating
activities
    
    $
    146.2
    
    
    $
    72.2
    
    
    
    $
    94.6
    
    
    $
    64.1Net cash used in investing activities
    
    $
    (67.5
    )
    
    $
    (62.2
    )
    
    
    $
    (114.5
    )
    
    $
    (142.0
    )Net cash provided by (used In)
financing activities
    
    $
    (60.7
    )
    
    $
    12.4
    
    
    
    $
    12.7
    
    
    $
    15.0
 EBITDA by segment and by Restricted Subsidiaries and Unrestricted Subsidiaries
is as follows ($ in millions): EBITDAThree Months ended
    
Six Months endedFebruary 29,
    
    February 28,
    
    
    February 29,
    
    February 28,2004
    
    2003
    
    
    2004
    
    2003Education services
    
    $
    75.7
    
    
    $
    79.3
    
    
    
    $
    185.2
    
    
    $
    185.9Public Transit services
    
    
    (4.8
    )
    
    
    1.8
    
    
    
    
    (4.3
    )
    
    
    1.7Greyhound
    
    
    12.1
    
    
    
    3.9
    
    
    
    
    22.7
    
    
    
    2.4Healthcare Transportation services
    
    
    22.4
    
    
    
    18.2
    
    
    
    
    41.4
    
    
    
    37.3Emergency Management services
    
    
    9.7
    
    
    
    6.6
    
    
    
    
    20.3
    
    
    
    14.6Total
    
    $
    115.1
    
    
    $
    109.8
    
    
    
    $
    265.3
    
    
    $
    241.9Restricted Subsidiaries
    
    $
    107.7
    
    
    $
    113.5
    
    
    
    $
    249.1
    
    
    $
    244.8Unrestricted Subsidiaries
    
    
    7.4
    
    
    
    (3.7
    )
    
    
    
    16.2
    
    
    
    (2.9
    )Total
    
    $
    115.1
    
    
    $
    109.8
    
    
    
    $
    265.3
    
    
    $
    241.9
 In the three and six months ended February 29, 2004, EBITDA in the Education
services segment was $3.6 million and $0.7 million lower than the three and six
months ended February 28, 2003, respectively, due to the reduced revenue from
lost operating days due to weather, offset somewhat by the favorable Canadian
exchange rate and, during the six-month period ended February 29, 2004, lower
accident claims costs. It is anticipated that substantially all of the EBITDA
lost due to weather related issues will be recovered in the fourth quarter. In the three and six months ended February 29, 2004, EBITDA in the Public
Transit services segment was $6.6 million and $6.0 million, respectively, lower
than the same periods in 2003 as increased accident claims costs and driver
wages more than offset increased revenue. In the three and six months ended February 29, 2004, EBITDA in the Greyhound
segment was $8.2 million and $20.3 million, respectively, better than the three
and six months ended February 28, 2003. The improvement in Greyhounds EBITDA
is primarily due to managements continued 31




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focus on improving revenue per mile and reducing operating costs. Increased
revenue combined with a reduction in miles operated and reductions in workforce
were the primary contributors to this increase. In the three and six months ended February 29, 2004, EBITDA in the Healthcare
Transportation services segment was $4.2 million and $4.1 million,
respectively, higher than 2003 principally due to lower insurance costs in the
second quarter. Increased revenue during the year has been largely offset by
an increase in compensation expense. The $3.1 million and $5.7 million increase in the Emergency Management Services
segment EBITDA during the three and six month periods ended February 29, 2004,
respectively, is primarily attributable the contribution associated with
increased revenues. In the three months ended February 29, 2004, EBITDA in the Restricted
Subsidiaries was $5.8 million lower than the three months ended February 28,
2003 primarily due to the adverse results in the Education Services and Public
Transit Services segments. During the six months ended February 29, 2004,
EBITDA in the Restricted Subsidiaries increased $4.3 million compared to the
six months ended February 28, 2003, as the improvements in the Healthcare
Transportation services and Emergency Management services segments exceeded the
declines in the Education services and Public Transit services segments. In the three and six months ended February 29, 2004, EBITDA in the Unrestricted
Subsidiaries was $11.1 million and $19.1 million, respectively, higher than the
three and six months ended February 28, 2003 due to improved revenue per mile
and reduced operating costs. Depreciation expense Depreciation expense for the three and six months ended February 29, 2004
decreased $6.3 million and $6.4 million, respectively, over the three and six
months ended February 28, 2003, reflecting a $5.2 million and $3.6 million,
respectively, decrease in depreciation for the Restricted Subsidiaries and a
$1.1 million and $2.8 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 six months ended February 29, 2004,
increased $4.3 million and $8.7 million, respectively, compared to the same
periods in 2003. Amortization is primarily related to customer contracts
capitalized under fresh start accounting. All of the amortization expense was
recorded by the Restricted Subsidiaries. Interest expense In the three and six months ended February 29, 2004, interest expense increased
$28.1 million and $54.3 million, respectively, compared to the three and six
months ended February 28, 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 six months ended February 28, 2003. Interest expense for the
Unrestricted Subsidiaries increased $1.8 million and $4.1 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. 32




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Other expenses, net Other expenses, net was $4.5 million and $3.6 million in the three and six
months ended February 29, 2004, respectively and 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 $9.9 million and $16.6 million of other expenses, net in the three and six
months ended February 28, 2003, respectively, was mostly due to financing,
accounting, legal and consulting services incurred by the Predecessor Company
during the reorganization process. This was partially offset by $12.5 million
of income related to the settlement of certain bondholder actions. Income tax expense Income tax benefit for the three months ended February 29, 2004 was $4.9
million and income tax expense for the six months ended February 29, 2004 was
$10.2 million. During the three and six month periods ended February 29, 2004,
the Company recorded a one-time benefit of $6.6 million due to a change in a
Canadian tax rate. In addition to this one-time benefit, the three and six
month periods ended February 29, 2004, include $1.0 million and $2.0 million,
respectively, of cash taxes payable and the balance reflects the utilization of
deferred tax assets. Income tax expense in the three and six month periods ended February 28, 2003
was $1.5 million and $3.0 million, 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. 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 six months ended February 29, 2004, cash provided by operating
activities was $94.6 million compared to $64.1 million in the six months ended
February 28, 2003. The increase in cash provided by operating activities in
the current year is principally due to an increase in the prior year period in
restricted cash and cash equivalents. Net expenditures for the purchase of capital assets for normal replacement
requirements and increases in service was $105.1 million in the six months
ended February 29, 2004, relatively unchanged from $104.5 million for the six
months ended February 28, 2003. The Company utilizes a senior secured revolving credit facility (the
Revolver) due June 2008, to finance current operating needs. As of February
29, 2004, $60.0 million was drawn on the Revolver for cash borrowings, $23.2
million for the issuance of letters of credit and $71.3 million was reserved
for guarantee obligations on Greyhound Lines vehicle leases. As of March 31,
2004, the Company had repaid all drawn cash borrowings and had issued new
letters of credit totaling $18.4 million, leaving total availability of $62
million under the most restrictive covenant. Greyhound Lines utilizes its own
revolving line of credit (the Greyhound Facility). As of February 29, 2004,
Greyhound Lines had $5.0 million of cash borrowings under the Greyhound
Facility, issued letters of credit of $56.6 million and had availability of
$56.8 million. However, Greyhound Lines may not be able to access any
availability under the Greyhound Facility if an event of default or default
exists under the respective facility. See Note 6  Material 33




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##### Table of Contents



contingencies of Notes to Consolidated Financial Statements in this Report for
additional information regarding the Greyhound Facility. 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. 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 February 29, 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. 34




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##### Table of Contents



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 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 35




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##### Table of Contents



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 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 6  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 6  Material contingencies of Notes to Consolidated
Financial Statements in this Report for a description of the Companys material
contingencies. 36




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##### Table of Contents



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 continue as a going concern; market factors, including
competitive pressures and changes in pricing policies; changes in
interpretations of existing legislation or the adoption of new legislation;
loss of major customers; the significant restrictive covenants in the senior
secured credit facility; 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. For further risks,
uncertainties and contingencies relating to the Company, see 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 of Form S-4 (File No. 333-112309)
and in the Companys other filings from time to time with the Securities and
Exchange Commission. 37




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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 On November 10, 2004 we announced the need to restate deferred tax expense for
our second fiscal quarter of 2004. As part of our year-end processes and
procedures to determine the Companys annual tax provision,
management identified
a $6.6 million increase in our Canadian deferred tax assets and a corresponding
tax benefit to reflect a change in the Ontario, Canada provincial tax rates.
As the rate changes became effective in our second fiscal quarter, the $6.6
million tax benefit should have been reflected as a reduction of our second
quarter tax expense. However, the adjustment was not reflected in our
originally reported second quarter results because our quarterly processes did
not include procedures to verify enacted tax rates and adjust the rate used to
value our deferred tax assets for any changes that might have occurred. Management determined that the internal control deficiency that resulted in
this restatement represents a material weakness, as defined by the Public
Company Accounting Oversight Boards Auditing Standard No.2. The Public
Company Accounting Oversight Board has defined material weakness as a
significant deficiency or combination of significant deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. Managements
conclusion is that the noted control deficiency surrounding the calculation of
the quarterly tax provision constitutes a material weakness, since, if not
corrected, would more than likely result in a material misstatement in future
quarterly financial statements if further tax rate changes are passed by a
taxing authority in a jurisdiction in which we conduct business. Management
has also concluded that this material weakness only relates to the quarterly
controls and procedures; the annual controls and procedures provide for the
verification and adjustment, if needed, of the effective tax rates used by us. Going forward, managements quarterly controls and procedures have been
strengthened to require verification of applicable tax rates and adjust, if
needed, our effective tax rate for tax changes enacted during such period by
taxing authorities in the jurisdictions in which we conduct business. No
change in our annual process is required as management believes we have
disclosure controls and procedures which operate at a reasonable assurance
level on an annual basis. To reflect the adjustment described above, management has decided to amend our
unaudited consolidated financial statements contained in our Quarterly Reports
on Form 10-Q for the quarter ended February 29, 2004. Management and the audit
committee of our board of directors discussed with our independent auditors,
PricewaterhouseCoopers LLP, who 38




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concurred with managements decision to amend such Quarterly Reports on Form
10-Q. On November 9, 2004, management and the audit committee of our board of
directors concluded that our unaudited consolidated financial statements
contained in our Quarterly Report on Form 10-Q for the quarter ended February
29, 2004 should no longer be relied upon because of the error described above
in such financial statements. As required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as
amended, management carried out an evaluation under the supervision and with
the participation of the Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures that were in effect as of the end of the quarters covered by the
subject Quarterly Reports on Form 10-Q. Based on the material weakness
described above, our Chief Executive Officer and Chief Financial Officer each
concluded that our disclosure controls and procedures were not effective at a
reasonable assurance level as of February 29, 2004. However, in light of the
implementation of the new corrective measures described above, our Chief
Executive Officer and Chief Financial Officer believe, as of the date of this
report, management has taken appropriate action to strengthen our internal
controls over financial reporting relating to the quarterly tax calculation
process and has remediated this material weakness. Except as stated above, there have been no other changes in our internal
controls over financial reporting during our most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting. 39




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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-Q for the
quarter ended November 30, 2003 for a description of certain legal proceedings
presently pending. There are no material new cases to report against the
Company or its subsidiaries 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, 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 were both settled shortly before trial was scheduled to
commence in March of this year. As previously disclosed, as a result of the
bankruptcy courts subordination of these claims against the debtors, Laidlaw,
Inc. and Laidlaw International, Inc. no longer participate in the cases and
were not involved in the settlement of the cases. The Company now considers
the Companys involvement in these cases to be closed and does not intend to
report further on these matters. General Litigation and Other Disputes Reference is made to the description in Item 3. Legal Proceedings under the
caption General Litigation and Other Proceedings in the Companys Form 10-K
for the year ended August 31, 2003, of proceedings affecting Sistema
Internacional de Transporte de Autobuses, Inc. (SITA) and Golden State
Transportation. The bankruptcy court in the Golden State case approved the
settlement and authorized Golden State to conclude the criminal proceedings by
pleading guilty, which it has done. As previously disclosed, none of the
Company, SITA or Greyhound Lines were a defendant in these actions. The
Company now considers Greyhound Lines involvement in these cases to be closed
and does not intend to report further on these matters. 40




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Item 4. Submission of Matters to a Vote of Security Holders The Companys annual stockholders meeting was held on February 10, 2004. At
the meeting, the following proposal was voted on: Proposal:Election of three Directors for a term of three years. The following persons were elected to the Companys Board of Directors by the
number of votes shown: Number of VotesAuthorityFor
    
    WithheldJohn F. Chlebowski
    
    
    80,003,552
    
    
    
    7,117,767James F. Dickerson, Jr.
    
    
    80,001,064
    
    
    
    7,120,255Maria A. Sastre
    
    
    79,969,324
    
    
    
    7,151,995
 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits  10.1
    
    Amendment No. 3 to Credit Agreement, dated as of January 28,
2004, among Laidlaw International, Inc., certain of its subsidiaries
and the financial institutions named herein (incorporated by
reference to exhibit 10.18 to the Companys Registration Statement
on Form S-4 (Reg. No. 333-112309)).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 February 29, 2004 Current Report on Form 8-K, dated January 13, 2004, furnished to the
Securities and Exchange Commission and relating to the Companys press
release announcing its financial results for the quarter ended November
30, 2003 and the date of its annual shareholder meeting. Current Report on Form 8-K, dated January 27, 2004, filed with the
Securities and Exchange Commission and relating to the Companys press
release announcing it has applied to list its common stock on the New
York Stock Exchange. Current Report on Form 8-K, dated February 2, 2004, filed with the
Securities and Exchange Commission and relating to the Companys press
release announcing that its wholly-owned subsidiary, Greyhound Lines,
Inc., has reached a tentative agreement with the Amalgamated Transit
Union National Local 1700 for a new collective bargaining agreement. 41




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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:  November 15, 2004

    Douglas A. CartySenior Vice President and Chief Financial Officer

Duly Authorized Officer and Principal Financial 

Officer 42