Form 6-K STUDENT TRANSPORTATION For: Feb 15

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER

PURSUANT TO RULE 13a-16 OR 15(d)-16 OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of February, 2016

 

Commission File Number 001-35233

 

STUDENT TRANSPORTATION INC.

(Exact name of registrant as specified in its charter)

 

160 Saunders Road, Unit 6

Barrie, Ontario, Canada L4N 9A4

 

 

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F  [   ]  Form 40-F   [X]

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation ST Rule 101(b)(1): Not Applicable

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation ST Rule 101(b)(7): Not Applicable

 

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.     Yes  [   ]    No  [X]

 

If “Yes” marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-           .

 

 

 

 

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 hereunto duly authorized.

 

				STUDENT TRANSPORTATION INC.
Dated: February 15, 2016				By:		/s/ Patrick J. Walker
						Patrick J. Walker, Executive Vice President and Chief Financial Officer

 

 

 

 

 

 

 

 

 

INDEX TO EXHIBITS

 

These exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.

 

Exhibit Number	Description
99.1	Consolidated Financial Statements for the second quarter of fiscal year 2016 ended December 31, 2015
99.2	Management's Discussion and Analysis of Financial Condition and Results of Operations
99.3	Certification of Interim Filing - CEO
99.4	Certification of Interim Filing - CFO

 

 

 

EXHIBIT 99.1

 

 

 

 

 

 

 

 

Consolidated Financial Statements

Student Transportation Inc.

For the three and six months ended December 31, 2015 and 2014

 

 

 

 

 

Student Transportation Inc.

Consolidated Financial Statements

 

For the three and six months ended December 31, 2015 and 2014

 

 

 

 

 

 

Contents

 

 

Consolidated Balance Sheets	1
Consolidated Statements of Operations	2
Consolidated Statements of Comprehensive Income (Loss)	3
Consolidated Statements of Shareholders’ Equity	4
Consolidated Statements of Cash Flows	5
Notes to the Consolidated Financial Statements	6

 

 

 

 

 

 

 

Student Transportation Inc.

Consolidated Balance Sheets

(000’s of U.S. dollars)

 

		As at				As at
		December 31, 2015				June 30, 2015
Assets
Current assets:
Cash and cash equivalents		$	473			$	5,333
Accounts receivable, net of allowance for doubtful accounts of
$119 and $126 at December 31 and June 30, 2015, respectively			79,261				55,275
Inventory			4,239				4,148
Prepaid expenses			12,831				9,721
Other current assets			5,011				3,443
Total current assets			101,815				77,920
Investment in investee			1,801				1,776
Other assets			20,279				20,384
Property and equipment, net			242,874				231,296
Oil and gas interests, net			6,169				7,713
Other intangible assets, net			59,443				61,899
Goodwill			131,481				134,939
Total assets		$	563,862			$	535,927
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable		$	1,776			$	2,230
Accrued expenses and other current liabilities			46,529				67,396
Total current liabilities			48,305				69,626
Long-term debt			280,561				204,936
Asset retirement obligation			594				575
Deferred income tax liability			38,377				41,558
Class B Series Three common share liability			1,770				1,993
Other liabilities			18,695				17,432
Total liabilities			388,302				336,120
Shareholders' equity
Paid in Share Capital			519,321				517,560
Accumulated deficit			(340,919	)			(315,633	)
Accumulated other comprehensive loss			(2,842	)			(2,120	)
Total shareholders’ equity			175,560				199,807
Total liabilities and shareholders’ equity		$	563,862			$	535,927

 

See accompanying notes.

Student Transportation Inc.

Consolidated Statements of Operations

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

 

		Three months ended				Three months ended				Six months ended				Six months ended
		December 31, 2015				December 31, 2014				December 31, 2015				December 31, 2014
Revenues		$	167,380			$	157,451			$	260,763			$	245,983
Costs and expenses:
Cost of operations			121,913				116,576				206,997				195,494
General and administrative			14,976				13,824				29,171				27,127
Non-cash stock compensation			2,181				2,169				2,984				2,939
Acquisition expense			-				3				-				3
Depreciation and depletion expense			14,382				14,223				19,382				19,186
Amortization expense			790				813				1,578				1,634
Impairment of oil and gas assets			1,200				-				1,200				-
Total operating expenses			155,442				147,608				261,312				246,383
Income (loss) from operations			11,938				9,843				(549	)			(400	)
Interest expense			3,279				4,625				6,988				8,837
Foreign currency  loss (gain)			662				(169	)			726				104
Unrealized loss on foreign currency exchange contracts			-				160				-				442
Non-cash loss (gain) on US$ 6.25% Convertible Debentures conversion feature			1				(35	)			(5	)			(223	)
Other income, net			(559	)			(385	)			(1,681	)			(1,529	)
Income (loss) before income taxes and equity in net income of unconsolidated investment			8,555				5,647				(6,577	)			(8,031	)
Equity in net income of unconsolidated investment			30				-				25				-
Income tax expense (benefit)			3,052				2,110				(2,542	)			(2,813	)
Net income (loss)		$	5,533			$	3,537			$	(4,010	)		$	(5,218	)
Weighted average number of shares outstanding-basic			96,604,491				83,354,430				96,347,909				83,176,138
Weighted average number of shares outstanding-diluted			111,207,573				104,854,064				111,040,991				104,675,772
Basic and diluted net income (loss) per common share		$	0.06			$	0.04			$	(0.04	)		$	(0.06	)
Dividends declared per common share		US $	0.11			Cdn $	0.14			US $	0.22			Cdn $	0.28

 

See accompanying notes.

Student Transportation Inc.

Consolidated Statements of Comprehensive Income (Loss)

(000’s of U.S. Dollars)

 

		Three months ended				Three months ended				Six months ended				Six months ended
		December 31, 2015				December 31, 2014				December 31, 2015				December 31, 2014
Net income (loss) :		$	5,533			$	3,537			$	(4,010	)		$	(5,218	)
Other comprehensive income (loss) :
Unrealized gain (loss) on currency translation adjustments			926				972				(722	)			2,477
Other comprehensive income (loss):			926				972				(722	)			2,477
Comprehensive income (loss)		$	6,459			$	4,509			$	(4,732	)		$	(2,741	)

 

 

 

See accompanying notes.

 

 

 

 

 

 

Student Transportation Inc.

Consolidated Statements of Shareholders’ Equity

(000’s of U.S. Dollars)

 

		Share Capital
		Shares				Amount				Accumulated Other Comprehensive Loss				Accumulated Deficit				Shareholders' Equity
Balance at June 30, 2014			82,816,549			$	443,100			$	(7,122	)		$	(276,938	)		$	159,040
Net loss			-				-				-				(5,218	)			(5,218	)
Dividends			-				-				-				(20,632	)			(20,632	)
Common stock issuance			708,131				4,362				-				-				4,362
Other comprehensive income			-				-				2,477				-				2,477
Balance at December 31, 2014			83,524,680			$	447,462			$	(4,645	)		$	(302,788	)		$	140,029
Balance at June 30, 2015			96,141,516			$	517,560			$	(2,120	)		$	(315,633	)		$	199,807
Net loss			-				-				-				(4,010	)			(4,010	)
Dividends			-				-				-				(21,276	)			(21,276	)
Common stock issuance			737,157				2,972				-				-				2,972
Repurchase of common stock			(289,973	)			(1,211	)			-				-				(1,211	)
Other comprehensive loss			-				-				(722	)			-				(722	)
Balance at December 31, 2015			96,588,700			$	519,321			$	(2,842	)		$	(340,919	)		$	175,560

 

 

See accompanying notes.

 

Student Transportation Inc.

Consolidated Statements of Cash Flows

(000’s of U.S. Dollars)

 

		Three months ended				Three months ended				Six months ended				Six months ended
		December 31, 2015				December 31, 2014				December 31, 2015				December 31, 2014
Operating activities
Net income (loss)		$	5,533			$	3,537			$	(4,010	)		$	(5,218	)
Adjustments to reconcile net income (loss) to net cash provided by (used in)  operating activities:
Deferred income taxes			3,052				1,950				(2,542	)			(3,127	)
Unrealized loss on forward contracts			-				160				-				442
Non-cash loss (gain) on US$ 6.25% Convertible Debentures conversion feature			1				(35	)			(5	)			(223	)
Unrealized  foreign currency loss (gain)			501				100				293				(316	)
Amortization of deferred financing costs			381				470				726				940
Non-cash stock compensation			2,181				2,169				2,984				2,939
Equity in net income from unconsolidated  investment			(30	)			-				(25	)			-
Gain on disposal of fixed assets			(467	)			(588	)			(505	)			(892	)
Depreciation and depletion expense			14,382				14,223				19,382				19,186
Amortization expense			790				813				1,578				1,634
Impairment of oil and gas assets			1,200				-				1,200				-
Changes in current assets and liabilities:
Accounts receivable			(5,494	)			(13,385	)			(24,454	)			(26,773	)
Prepaid expenses, inventory and other current assets			(1,923	)			9,913				(5,833	)			(2,821	)
Accounts payable			240				1,026				(398	)			733
Accrued expenses and other current liabilities			(16,352	)			(12,751	)			(2,350	)			(1,828	)
Changes in other assets and liabilities			34				(68	)			1,065				(384	)
Net cash provided by (used in) operating activities			4,029				7,534				(12,894	)			(15,708	)
Investing activities
Business acquisitions, net of cash acquired			-				(391	)			-				(391	)
Payments on seller debt			-				-				-				(200	)
Purchases of property and equipment			(2,719	)			(6,233	)			(54,879	)			(25,592	)
Proceeds on sale of equipment			743				521				942				1,375
Net cash used in investing activities			(1,976	)			(6,103	)			(53,937	)			(24,808	)
Financing activities
Redemption  of Class B Series Two and Three common shares			(72	)			(628	)			(240	)			(878	)
Repurchase of common stock			(579	)			-				(1,211	)			-
Financing fees			(122	)			(63	)			(122	)			(559	)
Common stock dividends			(9,646	)			(8,430	)			(18,167	)			(17,001	)
Borrowings on credit facility			51,163				44,146				136,433				93,996
Payments on credit facility			(46,522	)			(33,183	)			(54,622	)			(41,383	)
Net cash (used in) provided by financing activities			(5,778	)			1,842				62,071				34,175
Effect of exchange rate changes on cash			(25	)			29				(100	)			9
Net (decrease) increase  in cash and cash equivalents			(3,750	)			3,302				(4,860	)			(6,332	)
Cash and cash equivalents at beginning of period			4,223				1,224				5,333				10,858
Cash and cash equivalents at end of period		$	473			$	4,526			$	473			$	4,526

 

See accompanying notes.

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the three and six months ended December 31, 2015

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

 

1. General

 

Student Transportation Inc. (“STI” or the “Company”) is a corporation established under the laws of the Province of Ontario. STI together with its indirect subsidiary Student Transportation of America ULC (“STA ULC” and together with STI the “Issuer”), completed an Initial Public Offering (the “IPS Offering”) on December 21, 2004 through the issuance of income participating securities (“IPSs”). Each IPS consisted of one common share of STI and Cdn $3.847 principal amount of 14% subordinated notes of STA ULC (the “Subordinated Notes”). On December 21, 2009, the Company redeemed the remaining Subordinated Notes, originally issued as a component of the IPSs, as the final step in the process of converting from the IPS structure to a traditional common share structure. STI owns 100% of the Class A common shares of Student Transportation of America Holdings, Inc. (“STA Holdings”). Management owns 100% of the Class B Series Three common shares (and with the previously outstanding Class B Series Two common shares, the “Class B” common shares) of STA Holdings pursuant to the grant of shares under the STA Holdings Equity Incentive Plan (“EIP”) (see Note 7). STI currently holds a 98.2% interest in STA Holdings, through its ownership of the Class A shares of STA Holdings. STI also owns 100% of the outstanding shares of Parkview Transit.

 

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

 

2. Basis of Presentation

 

These interim condensed consolidated financial statements have been prepared by management in accordance with United States generally accepted accounting principles (“US GAAP”) for interim financial reporting and as such, do not contain all the disclosures required by US GAAP for annual financial statements. As a result, these financial statements should be read in conjunction with the audited financial statements for the year ended June 30, 2015.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (including normal recurring adjustments) necessary to present fairly the Company’s financial position at December 31, 2015. The operating results for the interim period presented are not necessarily indicative of the operating results that may be expected for the full year. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

Seasonality

 

The Company’s operations are seasonal and follow the school calendars of the public and private schools it serves. The first three months of the fiscal year includes July and August, two months for which most schools are closed for summer break. Since schools are not in session, there is minimal school bus transportation revenue. Depreciation of fixed assets occurs in the months

 

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the three and six months ended December 31, 2015

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

 

2. Basis of Presentation (continued)

 

during which schools are in session, which is generally September through June. A full year’s worth of depreciation is recorded in these ten months to generally match the vehicles’ usage.

 

Recently Adopted Accounting Standards

 

In January 2014, the FASB issued ASU 2014-05, Service Concession Arrangements. This ASU applies to an operating entity of a service concession arrangement entered into with a public-sector entity grantor when the arrangement meets both of the following conditions: (i) the grantor controls or has the ability to modify or approve the services that the operating entity must provide with the infrastructure, to whom it must provide them and at what price and (ii) the grantor controls, through ownership, beneficial entitlement, or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement. This is effective for annual periods beginning after December 15, 2014 (including interim periods within those fiscal years) and should be applied on a modified retrospective basis to service concession arrangements in existence at the beginning of the fiscal year of adoption. The Company adopted this standard for the first quarter of fiscal 2016. The adoption of this standard did not have a material impact on our consolidated financial statements.

 

In April 2014, the FASB issued ASU 2014-08, an update modifying the criteria under which asset disposal activities qualify for presentation as a discontinued operation. The amendment restricts presentation as a discontinued operation to disposals that represent a strategic shift that has, or will

have a major effect on an entity's operations and financial results. The amendments in this update are to be applied prospectively to all disposals or classifications as held for sale of components of an entity. The Company adopted this standard for the first quarter of fiscal 2016. The adoption of this standard did not have a material impact on our consolidated financial statements

 

Recently Issued Accounting Standards

 

In April 2015, the FASB issued ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30)-Simplifying the Presentation of Debt Issuance Costs, which simplifies the presentation of debt issuance costs by requiring debt issuance costs to be presented as a deduction from the corresponding debt liability. The guidance is effective for the annual period ending after December 15, 2015 and for annual and interim periods thereafter, with early adoption permitted. The Company is in the process of evaluating the impact of this guidance on its consolidated financial statements.

 

In September 2015, FASB issued ASU 2015-16 Business Combinations-Simplifying the Accounting for Measurement-Period Adjustment. This ASU eliminates the requirement to retrospectively account for measurement-period adjustment resulting from business combinations. Instead, these adjustments will be recognized in the period the adjustment amount is determined.

 

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the three and six months ended December 31, 2015

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

 

2. Basis of Presentation (continued)

 

The Company is required to adopt this standard for the first quarter of fiscal 2017. The Company is currently evaluating the requirements of this ASU to determine the impact on our consolidated financial statements, but currently does not anticipate this standard having a significant impact.

 

In November 2015, FASB issued ASU 2015-17 Balance Sheet Classification of Deferred Taxes, which simplifies the presentation of deferred taxes by requiring that deferred tax assets and liabilities, along with any valuation allowance, be classified as non current on the balance sheet. The Company is required to adopt this standard for the first quarter of fiscal 2017. The adoption of this standard is not expected to not have a material impact on our consolidated financial statements.

 

In January 2016, FASB issued ASU 2016-01 Financial Instruments-Recognition and Measurement of Financial Assets and Financial Liabilities. This guidance requires all equity investments to be measured at fair value with changes in the fair value recognized through net income (except those accounted for under the equity method of accounting or those that result in consolidation of the investee). The guidance also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the guidance eliminates the need for the entity to disclose the method and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet and requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset. The Company is required to adopt this standard for the first quarter of fiscal 2018. The Company is currently evaluating the requirements of this ASU to determine the impact on our consolidated financial statements, but currently does not anticipate this standard having a significant impact.

 

3. Debt

 

Indebtedness of the Company includes the following:

 

		Amounts Outstanding at
		December 31, 2015								June 30, 2015
		Current				Long Term				Current				Long Term
Third Amended and Restated Credit Agreement
Revolving credit facility		$	-			$	131,822			$	-			$	50,421
Convertible Debentures			-				113,739				-				119,515
Senior Secured Notes			-				35,000				-				35,000
		$	-			$	280,561			$	-			$	204,936

 

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the three and six months ended December 31, 2015

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

 

3. Debt (continued)

 

The Company expects to be able to repay, renew or refinance its various loan facilitates and Convertible Debentures as they become due with other long term financing options.

 

The Company was in compliance with all debt covenants related to both the Third Amended and Restated Credit Agreement and the Senior Secured Notes at December 31, 2015.

 

4. Common Shares

 

The authorized share capital of the Company consists of an unlimited number of no par value common and preferred shares. At December 31, 2015 there are no preferred shares issued and outstanding.

 

Pursuant to its Dividend Reinvestment Plan (the “Plan”), the Company issued 737,157 and 708,131 common shares during the six months ended December 31, 2015 and 2014, respectively. The shares issued pursuant to the Plan represent non-cash dividends with values of $3.0 million

and $4.4 million, for the six months ended December 31, 2015 and 2014, respectively, which have been recorded as a non-cash financing activity in each period. The Plan was established to enable eligible shareholders of the Company to reinvest dividends paid on their common shares to acquire additional common shares of the Company. The common shares issued under the Plan are issued at a price based on the volume weighted average of the Canadian dollar closing price of the common shares for the five trading days immediately preceding the relevant dividend date, less a 3% discount and converted into U.S. dollars at the daily Bank of Canada noon exchange rate posted on the last trading day of such five day period.

 

The Company renewed its normal course issuer bid (“NCIB”) on October 21, 2015. Pursuant to the notice, the Company is permitted to acquire up to a maximum amount of Common Shares equal to 8,403,185 Common Shares in the twelve month period commencing October 26, 2015 and ending on October 26, 2016, subject to the Company’s senior debt agreement requirements. During the six months ended December 31, 2015, the Company repurchased a combined total of 289,973 shares with a value of $1.2 million, under both the previous and the renewed NCIB. The Company did not repurchase any shares during the six months ended December 31, 2014.

 

Common shares issued and outstanding are 96,588,700 at December 31, 2015.

 

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the three and six months ended December 31, 2015

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

 

4. Common Shares (continued)

 

The changes in accumulated other comprehensive loss for foreign currency translation is as follows:

 

		2015				2014
Balance at June 30,		$	(2,120	)		$	(7,122	)
Foreign currency translation			(722	)			2,477
Current period comprehensive (loss) income			(722	)			2,477
Balance at December 31,		$	(2,842	)		$	(4,645	)

 

There were no reclassifications out of accumulated other comprehensive loss.

 

5. Earnings (Loss) Per Share

 

The following table sets forth the basic and diluted weighted average share amounts:

 

		Three months ended				Three months ended				Six months ended				Six months ended
		December 31, 2015				December 31, 2014				December 31, 2015				December 31, 2014
Weighted-average shares outstanding-basic			96,604,491				83,354,430				96,437,909				83,176,138
Potential dilutive effect of shares to be issued
to settle the debentures			14,603,082				21,499,634				14,603,082				21,499,634
Weighted-average shares outstanding-diluted			111,207,573				104,854,064				111,040,991				104,675,772

 

The computations for basic and diluted income (loss) per common share are as follows:

 

		Three months ended				Three months ended				Six months ended				Six months ended
		December 31, 2015				December 31, 2014				December 31, 2015				December 31, 2014
Net income (loss) –basic		$	5,533			$	3,537			$	(4,010	)		$	(5,218	)
Add back: Interest expense on debentures (net of tax)			1,114				1,560				2,238				3,256
Net income (loss) used for diluted earnings per share			6,647				5,097				(1,772	)			(1,962	)
Basic income (loss) per share		$	0.06			$	0.04			$	(0.04	)		$	(0.06	)
Diluted income (loss) per share		$	0.06			$	0.04			$	(0.04	)		$	(0.06	)

 

The conversion of the convertible debentures is anti-dilutive for both the three and six months ended December 31, 2015 and 2014.

 

Potential dilution arising from the conversion of the convertible debentures for both the three and six months ended December 31, 2015 and 2014 were excluded from the weighted average diluted shares outstanding, as their effect was anti-dilutive.

 

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the three and six months ended December 31, 2015

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

 

6. Income Taxes

 

The effective income tax rate was 35.6% and 38.8% for the three and six months ended December 31, 2015. The effective income tax rate was 37.4% and 35.0% for the three and six months ended December 31, 2014. The decrease in the quarter over quarter effective tax rate for the three months ended December 31, 2015 was primarily due to the effect of various state tax law changes in the U.S. (i.e. state filing requirements) which resulted in a decrease in the Company’s overall state tax rate. The increase in the year over year effective tax rate for the six months ended December 31, 2015 was primarily due to the mix of the statutory Canadian and U.S. tax rates and the apportionment of the Company’s loss before income taxes resulting from the operations in each country. As of December 31, 2015, the gross amount of unrecognized tax benefit remained unchanged from the June 30, 2015 balance of $0.5 million.

 

7. Stock-Based Compensation

 

The shareholders of the Company approved the EIP adoption and the initial allotment of Class B common shares available for issuance under the EIP by STA Holdings in December 2005. In November 2008 and November 2012, additional Class B common share allotments for issuance under the EIP were also approved by shareholders. Historically, Class B Series Two common shares were issued pursuant to the EIP while the Company was under the IPS structure, with Class B Series Three common shares utilized for share grants subsequent to March 2010 as the Company converted out of the IPS structure with the redemption of the Subordinated Notes earlier in fiscal 2010. The Class B common shares are accounted for as a liability upon issuance, as a result of a put option they contain.

 

In May 2015, the Company redeemed all of the remaining Class B Series Two common shares by exchanging the outstanding Class B Series Two common shares for Class B Series Three common shares, based on the fair market value of each class of shares. The holders of the Class B Series Three common shares are entitled to receive dividends, as and when declared by the board of directors of STA Holdings, approximately equivalent to the dividends received by the holders of STI common shares. Pursuant to the liquidity provisions of the EIP, the holders of Class B Series Three common shares will have an option to “put” up to one third of the shares awarded each year back to the Company, starting one year immediately following the grant.

 

Class B common shares granted are fully vested on the grant date. These shares are classified as a liability and re-measured at fair value at the end of each reporting period. Changes in fair value and dividends on the Class B common shares are recorded as a component of other income, in the consolidated statement of operations. The Company recorded income of $0.8 million and $1.8 million for the three months and six months ended December 31, 2015, associated with the change in fair value on the Class B common shares. The Company recorded income of $0.2 million and $0.8 million for the three months and six months ended December 31, 2014, associated with the change in fair value on the Class B common shares. The Company recorded $0.2 million and $0.4 million in dividend payments for the three and six months ended December 31, 2015 and 2014,

 

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the three and six months ended December 31, 2015

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

 

7. Stock-Based Compensation (continued)

 

respectively, which are recorded as a component of other income, in the consolidated statement of operations.

 

The following tables summarize the Class B Series Three common shares granted, shares withheld for income tax withholdings at the election of the participants, shares redeemed and shares outstanding pursuant to the EIP:

 

		For the three months ended December 31, 2015
		Shares				Taxes				Total outstanding
Shares outstanding  at September 30, 2015			2,633,303				(982,147	)			1,651,156
Grants			536,634				(212,139	)			324,495
Redemptions			(18,321	)			-				(18,321	)
Shares outstanding  at December 31, 2015			3,151,616				(1,194,286	)			1,957,330

 

		For the six months ended December 31, 2015
		Shares				Taxes				Total outstanding
Shares outstanding  at June 30, 2015			2,493,603				(902,392	)			1,591,211
Grants			713,339				(291,894	)			421,445
Redemptions			(55,326	)			-				(55,326	)
Shares outstanding  at December 31, 2015			3,151,616				(1,194,286	)			1,957,330

 

The Company recognized $2.2 and $3.0 million in non-cash stock based compensation expense related to the above grants during the three and six months ended December 31, 2015, respectively, based on the estimated fair value of these shares on the grant date. Pursuant to the liquidity provision of the EIP plan, 18,321 and 55,326 shares were “put” back to the Company during the three months and six months ended December 31, 2015. The Company paid $0.1 and $0.2 million associated with these puts during the three and six months ended December 31, 2015. The fair value of the Class B Series Three common shares outstanding at December 31, 2015 represented a liability of $7.1 million, of which $5.3 million is recorded in other current liabilities and represents the current value of those shares eligible to be put in the next twelve months pursuant to the EIP plan. The remaining balance is recorded in Class B Series Three common share liability.

 

		For the three months ended December 31, 2014
		Shares				Taxes				Total outstanding
Shares outstanding  at September 30, 2014			2,149,032				(703,871	)			1,445,161
Grants			347,000				(119,986	)			227,014
Redemptions			(99,308	)			-				(99,308	)
Shares outstanding  at December 31, 2014			2,396,724				(823,857	)			1,572,867

 

 

 

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the three and six months ended December 31, 2015

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

 

7. Stock-Based Compensation (continued)

 

		For the six months ended December 31, 2014
		Shares				Taxes				Total outstanding
Shares outstanding  at June 30, 2014			2,071,993				(666,151	)			1,405,842
Grants			463,102				(157,706	)			305,396
Redemptions			(138,371	)			-				(138,371	)
Shares outstanding  at December 31, 2014			2,396,724				(823,857	)			1,572,867

 

The Company recognized $2.2 and $2.9 million in non-cash stock based compensation expense related to the above grants during the three and six months ended December 31, 2014, respectively, based on the estimated fair value of these shares on the grant date. Pursuant to the liquidity provision of the EIP plan, 99,308 and 138,371 shares were “put” back to the Company during the three months and six months ended December 31, 2014. The Company paid $0.6 and $0.9 million associated with these puts during the three and six months ended December 31, 2014. The fair value of the Class B Series Three common shares outstanding at December 31, 2014 represented a liability of $9.7 million, of which $7.2 million was recorded in other current liabilities and represented the current value of those shares eligible to be put in the next twelve months pursuant to the EIP plan. The remaining balance was recorded in Class B Series Three common share liability.

 

8. Financial Instruments

 

The Company’s financial assets and financial liabilities are as follow:

 

		As at				As at
		December 31, 2015				June 30, 2015
Cash		$	473			$	5,333
Accounts receivable		$	79,261			$	55,275
Accounts payable		$	1,776			$	2,230
Other accrued liabilities			41,220				62,040
Class B Series Three share liability			7,079				7,349
Long-term debt (including portion due within one year)			280,561				204,936
Conversion right on 6.25% Convertible Debentures			3				9
Other long term liabilities			18,692				17,423
		$	349,331			$	293,987

 

The carrying amounts of cash, accounts receivable, accounts payable, and other accrued liabilities approximate fair value because of the short-term maturity of these items. At December 31, 2015, the Company’s Cdn $6.25% Convertible Debentures had a carrying value of $54.2 million and a fair value of approximately $47.1 million. The remainder of the Company’s long-term debt, which

 

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the three and six months ended December 31, 2015

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

 

8. Financial Instruments (continued)

 

bears interest at both fixed and floating rates, has a carrying value that approximates fair value. The fair value of the Class B Series Three common share liability is based upon an amount equal to the weighted average trading price of the STI common shares for the 10 consecutive trading days immediately prior to the date of valuation. Other long term liabilities consist primarily of insurance reserves which are valued upon actuarial analysis.

 

The fair value of a financial instrument is the amount of consideration that could be agreed upon in an arm’s length transaction between knowledgeable willing parties who are under no compulsion to act. In certain circumstances, however, the initial fair value may be based upon other observable current market transactions in the same instrument, without modification or on a valuation technique using market-based inputs.

 

Fair value measurements are categorized using a fair value hierarchy that reflects the significance of inputs used in determining the fair values:

 

Level 1: Quoted prices in active markets for identical assets or liabilities.

 

Level 2: Quoted prices in active markets for similar assets or liabilities or valuation techniques where significant inputs are based on observable market data.

 

Level 3: Valuation techniques for which any significant input is not based on observable market data.

 

Each type of fair value is categorized based on the lowest level input that is significant to the fair value measurement in its entirety.

 

The fair values of the Company’s financial assets and liabilities measured on a recurring basis were categorized as follows:

 

As at December 31, 2015
		Level 1				Level 2				Level 3				Total
Interest rate swap			-			$	203				-			$	203
Class B Series Three common share liability			-				7,079				-				7,079
Conversion right on US$ 6.25% Convertible Debentures			-				-				3				3
		$	-			$	7,282			$	3			$	7,285

 

As at June 30, 2015
		Level 1				Level 2				Level 3				Total
Interest rate swap			-			$	337				-			$	337
Class B Series Three common share liability			-				7,349				-				7,349
Conversion right on US$ 6.25% Convertible Debentures			-				-				9				9
		$	-			$	7,686			$	9			$	7,695

 

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the three and six months ended December 31, 2015

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

 

8. Financial Instruments (continued)

 

The following tables summarize the changes in the Company’s level 3 financial instrument for the three and six months ended December 31, 2015 and 2014, respectively.

 

Conversion rights on US$ 6.25% Convertible Debentures
For the three months ended December 31,		2015				2014
Balance at September 30,		$	3			$	65
Total unrealized loss (gain):
Non-cash loss (gain) on conversion feature			1				(35	)
FX impact on conversion feature			(1	)			1
Balance at December 31,		$	3			$	31

 

The decrease in fair value of the conversion rights was driven largely by the change in the Company’s stock price volatility which decreased to 13.5% from 14.5% in the three months ended December 31, 2014.

 

Conversion rights on US$ 6.25% Convertible Debentures
For the six months ended December 31,		2015				2014
Balance at June 30,		$	9			$	236
Total unrealized gain:
Non-cash gain on conversion feature			(5	)			(223	)
FX impact on conversion feature			(1	)			18
Balance at December 31,		$	3			$	31

 

The decrease in fair value of the conversion rights was driven by an increase in the bond yield from 6.35% to 8.43% in the six months ended December 31, 2015. The decrease in fair value of the conversion rights was driven largely by the change in the Company’s stock price volatility which decreased to 13.5% from 17.0% in the six months ended December 31, 2014.

 

The Company uses a binomial model to fair value the conversion rights on the 6.25% Convertible Debentures which takes into account the Company’s stock price volatility, the bond yield and other market factors. This is considered a level 3 value due to the sensitivity of the model to movements in volatility which is not directly observable. The change in fair value of the conversion rights led to income of five thousand dollars and $0.2 million in the condensed consolidated statement of operations for the six months ended December 31, 2015 and 2014, respectively.

 

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the three and six months ended December 31, 2015

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

 

8. Financial Instruments (continued)

 

There were no transfers within the fair value hierarchy during the six months ended December 31, 2015.

 

The Company has exposure to interest rate risk, foreign currency exchange risk, credit risk and liquidity risk. The Company’s management has overall responsibility for the establishment of the Company’s risk management framework, with oversight provided by the Board of Directors.

 

Interest Rate Risk

 

The Company’s interest rate risk primarily arises from its variable rate borrowings under the senior credit facility, which bears a floating rate of interest. The Company manages its interest rate exposure by using a combination of fixed and variable rate debt as well as through an interest rate

swap that the Company has in place for a notional amount of $50.0 million of credit facility borrowings. The swap has not been designated as a hedge for accounting purposes therefore the changes in fair value of the interest rate swap are recorded in the condensed consolidated statement of operations. The Company recorded a non cash gain of $0.1 million and $0.2 million for the six months ended December 31, 2015 and 2014, respectively, in connection with the changes in fair value of the swap, which is included in the consolidated statement of operations as a component of

interest expense. The value of the interest rate swap represents a liability of $0.2 million as at December 31, 2015. The Company has secured fixed rate financing in the form of its Senior Secured Notes and its Convertible Debentures.

 

Foreign Currency Exchange Risk

 

The Cdn$ 6.25% Convertible Debentures due June 30, 2019 are denominated and payable, upon maturity, in Canadian dollars. The Company has not entered into any hedge arrangement with respect to the principal payment of the Cdn$ 6.25% Convertible Debentures upon maturity. The Company uses it cash flows from its Canadian operations to partially mitigate the exchange risk on the Cdn$ 6.25% Convertible Debenture interest payments.

 

The Company prepares its financial statements in U.S. dollars. The results of the Canadian operations are translated into U.S. dollars for financial statement reporting purposes. Changes in the Canadian dollar / U.S. dollar currency exchange rate from period to period will impact the translated U.S. dollar equivalent results of the Canadian operations. The Company recorded a loss of $0.7 million and a loss of $0.8 million in the three and six months ended December 31, 2015 on the translation of its monthly dividends into U.S. dollars. Both of these transactions are recorded in foreign currency loss (gain) in the consolidated statements of operations.

 

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the three and six months ended December 31, 2015

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

 

Credit Risk

 

The Company is exposed to credit risk in its cash and cash equivalents, accounts receivable and to the credit risk of its derivative financial instrument counterparties if they do not meet their obligations. The Company minimizes the credit risk of cash by depositing such with only reputable financial institutions with federally insured backing. The Company minimizes the credit risk of its derivative financial instruments by dealing only with reputable financial institutions and monitoring the credit risk of these financial institutions. As the Company does not utilize credit derivatives or similar instruments, the maximum exposure to credit risk is the full carrying value of the financial instrument or face value of open derivative financial instruments.

 

Receivables from the transportation segment are secured by the creditworthiness of local municipalities and agencies. The majority of the customers are local school districts that are funded through a combination of local taxes and funding from state/provincial and federal governments. The Company has historically had excellent collections experience with these customers and believes that these receivables are collectable. Receivables from the oil and gas segment are due from reputable general partners operating large partnerships in the oil and gas industry.

 

9. Impairment

 

On at least a quarterly basis, or as indicators of impairment are present, the Company performs an impairment analysis for its oil and gas assets (the “ceiling test”). Under US GAAP, the ceiling test requires the Company to use tax effected discount cash flows using a present value technique. The pricing assumption used in each ceiling test is defined as the twelve month average of realized prices for the current quarter end period. As both oil and natural gas prices have continued to decline over the last twelve to eighteen months (an indication of impairment) the results of current quarter end the ceiling test lead the Company to record an impairment charge of $1.2 million. Subsequent changes in the estimates of discounted cash flows and/or the pricing assumptions used in the ceiling test could result in further impairment in the future.

 

10. Segment Information

 

The Company has two reportable segments, a transportation segment and an oil and gas segment. The Company reassesses its reportable segments at least annually. The transportation segment provides school transportation and management services to public and private schools in both the United States and Canada.

 

The accounting policies of the segments are the same as those described in the basis of presentation. There are no inter-segment sales.

 

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the three and six months ended December 31, 2015

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

 

10. Segment Information (continued)

 

Reportable operating segments:

 

		For the three months ended				For the three months ended				For the six months ended				For the six months ended
		December 31, 2015				December 31, 2014				December 31, 2015				December 31, 2014
Revenue
Transportation		$	166,983			$	156,530			$	259,951			$	243,921
Oil and gas			397				921				812				2,062
		$	167,380			$	157,451			$	260,763			$	245,983
Operating (losses) earnings
Transportation		$	13,507			$	9,997			$	1,462			$	(423	)
Oil and gas			(1,569	)			(154	)			(2,011	)			23
			11,938				9,843				(549	)			(400	)
Unallocated expenses			3,353				4,196				6,003				7,631
Income tax expense (benefit)			3,052				2,110				(2,542	)			(2,813	)
Net income (loss)		$	5,533			$	3,537			$	(4,010	)		$	(5,218	)

 

		As at				As at
		December 31, 2015				June 30, 2015
Total Assets
Transportation		$	557,020			$	527,291
Oil and gas			6,842				8,636
		$	563,862			$	535,927

 

11. Related Party Transactions

 

The Company utilized a transportation equipment dealer, primarily to assist in procurement and disposal of the Company’s fleet under the direction of the Company’s CFO. The transportation equipment dealer also provided consulting services to the Company, assisting with fleet valuations in its acquisition efforts. The transportation equipment dealer was a company controlled by a family member of the Company’s Chairman and CEO. Beginning in fiscal year 2015, the fleet procurement and disposal services were provided for an annual fee including a retainer amount plus a commission per vehicle amount not to exceed $0.5 million per annum. Prior to fiscal year 2015, these services were provided on a non-contractual basis. The Company paid the transportation equipment dealer $0.5 million for the six months ended December 31, 2014. In April 2015, the Company terminated the agreement and began to perform these services directly with internal resources.

 

These transactions were measured at the exchange amount which is the amount of consideration established and agreed to by the related parties.

 

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the three and six months ended December 31, 2015

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

 

12. Commitments and Contingencies

 

During the six months ended December 31, 2015, the Company entered into additional operating leases with ten major financial institutions to lease approximately $72.1 million in growth and replacement school vehicles for the 2015-2016 school year. The term of these leases is six years at effective fixed rates in the range of 2.6% to 4.2%. Annual lease payments on these additional leases will approximate $10.0 million per year for the term of the leases.

 

Litigation

 

The Company is, from time to time, a party to litigation that arises in the normal course of its business operations. Although litigation is inherently unpredictable, the Company is not presently a party to any such litigation that the Company believes could reasonably be expected to have a material adverse effect on its business.

  

13. Additional Financial Information

 

Select additional financial information consists of the following:

 

Balance Sheet Information
		As at				As at
		December 31, 2015				June 30, 2015
Prepaid Expenses
Prepaid Insurance		$	8,964			$	7,098
Other			3,867				2,623
		$	12,831			$	9,721
Other Current Assets
Fuel Tax Receivable		$	3,507			$	1,799
Other			1,504				1,644
		$	5,011			$	3,443

 

Student Transportation Inc.

Notes to Consolidated Financial Statements

For the three and six months ended December 31, 2015

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

 

13. Additional Financial Information (continued)

 

		As at				As at
		December 31, 2015				June 30, 2015
Accrued Expenses and Accounts Payable
Accrued Accounts Payable		$	6,093			$	8,483
Dividends Payable			14,164				14,096
Insurance			9,542				9,111
Wages and Benefits			4,278				5,175
Class B Shares			5,309				5,356
Taxes Payable			1,187				1,259
Deferred Revenue			2,152				655
Accrued Fixed Assets			-				20,983
Interest Payable			11				6
Other			3,793				2,272
		$	46,529			$	67,396
Other liabilities
Insurance		$	17,767			$	16,756
Other			928				676
		$	18,695			$	17,432

 

14. Subsequent Events

 

On January 18, 2016, STA Holdings granted 305,919 Class B Series Three common shares pursuant to the EIP. The Company will recognize a non-cash stock based expense related to these grants during the quarter ended March 31, 2016.

 

Subsequent to the second quarter of fiscal 2016, a wholly-owned subsidiary of the Company purchased the remaining interest in a consulting and management services firm and acquired a second consulting services firm.  Combined, total consideration for both firms approximated $7.0 million, consisting of $6.0 million in cash and $1.0 million in common stock.  The Company had previously invested $1.7 million in March 2015, to acquire a non-controlling interest in the first consulting and management service firm. 

 

 

20

---

EXHIBIT 99.2

 

STUDENT TRANSPORTATION INC.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

 

The following Management’s Discussion and Analysis of the Financial Condition and Results of Operations of Student Transportation Inc., is supplemental to, and should be read in conjunction with the financial statements and footnotes for the period ended December 31, 2015. These financial statements can be found on SEDAR at www.sedar.com. As an SEC issuer (as defined under applicable Canadian securities laws), Student Transportation Inc.’s financial statements are prepared in accordance with United States generally accepted accounting principles (“US GAAP”). The information in this Management’s Discussion and Analysis of the Financial Condition and Results of Operations is effective February 15, 2016. Additional information about, and the Annual Information Form filed by, Student Transportation Inc., is also available on SEDAR at www.sedar.com.

 

All references to “$” or “US$” are to U.S. dollars and all references to “Cdn $” are to Canadian dollars. All references to the Company are to either Student Transportation Inc. or to STI and its subsidiaries, as the context requires. Unless the context requires otherwise, references to years are to the Company’s fiscal year ended June 30.

 

Forward-Looking Statements

 

Certain statements in this Management’s Discussion and Analysis (“MD&A”), including without limitation in the sections of this MD&A entitled “Results of Operations”, “Liquidity and Capital Resources” and “Subsequent Events” are “forward-looking statements” within the meaning of applicable securities laws, which reflect the expectations of management regarding the Company’s revenues, expense levels, seasonality, liquidity, profitability of new business acquired or secured through bids, borrowing availability, ability to renew or refinance various loan facilities as they become due, ability to execute the Company’s growth strategy and cash distributions, as well as their future growth, results of operations, performance and business prospects and opportunities. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “plans” or “continue” or similar expressions, and negative forms thereof, suggesting future outcomes or events.

 

These forward-looking statements reflect the Company’s current expectations regarding future events and operating performance and speak only as of the date of this Management Discussion and Analysis. Actual results may vary from the forward-looking statements. Specifically, forward-looking statements involve significant risks and uncertainties, should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not or the times at or by which such performance or results will be achieved. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the factors referred to and incorporated by reference under the heading “Risk Factors” such as an inability to control the Company’s operating expenses, significant capital expenditures, the Company’s ability to retain or renew its customer contracts, find suitable business for acquisition and identify conversion opportunities and win bid contracts on profitable terms, the Company’s consolidated indebtedness and restrictive covenants related thereto, the Company’s ability to make payments on its convertible debentures, the Company’s acquisition strategy, increased industry competition and consolidation, reliance on certain key personnel, the possibility that a greater number of employees will join unions, rising insurance costs, a lack of insurance coverage for certain losses, new governmental laws and regulations, environmental requirements, seasonality of the industry in which the Company operates, any inability to maintain letters of credit and performance bonds, the termination of certain of the Company’s contracts for reasons beyond management’s control, uncertain risks associated with the Company’s oil and gas operations, the Company’s status as a public company, foreign private issuer and emerging growth company status for U.S. federal securities law purposes, reduced spending by school districts and governmental agencies, terrorism attacks, man-made or natural disasters , cyber terrorism and data security breeches and risks related to the Company’s capital structure. Material factors and assumptions that were relied upon in making the forward-looking statements include contract and customer retention, current and future expense levels, availability of quality acquisition, bid and conversion opportunities, current borrowing availability and financial ratios, as well as current and historical results of operations and performance. Although the forward-looking statements contained in this Management Discussion and Analysis are based upon what the Company believes to be reasonable assumptions, investors cannot be assured that actual results will be consistent with these forward-looking statements, and the differences may be material. These forward-looking statements are made as of the date of this Management Discussion and Analysis and the Company assumes no obligation to update or revise them to reflect new events or circumstances, except as specifically required by applicable law.

 

General

 

Student Transportation Inc. (“STI” or the “Company”) is a corporation established under the laws of the Province of Ontario. STI, together with its indirect subsidiary Student Transportation of America ULC (“STA ULC” and together with STI, the “Issuer”), initially issued income participating securities (“IPSs”) pursuant to the Issuer’s initial public offering in December 2004 (the “IPS Offering”). Each IPS consisted of one common share of STI and Cdn $3.847 principal amount of 14% subordinated notes of STA ULC. On December 21, 2009, the Company redeemed the remaining 14% subordinated notes, originally issued as a component of the IPSs, as the final step in the process of converting from the IPS structure to a traditional common share structure.

 

STI owns 100% of the Class A common shares of Student Transportation of America Holdings, Inc. (“STA Holdings”). Management owns 100% of the Class B Series Three common shares (and with the previously outstanding Class B Series Two common shares “Class B common shares”) of STA Holdings pursuant to the grant of shares under the STA Holdings Equity Incentive Plan. STI currently holds a 98.2% interest in STA Holdings as at December 31, 2015, through its ownership of the Class A shares of STA Holdings. The Company also owns 100% of the outstanding shares of Parkview Transit Inc. (“Parkview Transit”). STA Holdings, through its wholly owned subsidiary, Student Transportation of America, Inc. (“STA, Inc.”), combined with Parkview Transit, is the third largest provider of school bus transportation services in North America.

 

On July 13, 2011, the Company filed a Form 40-F registration statement with the United States Securities and Exchange Commission (the “SEC”) and a listing application with the NASDAQ-OMX, both in connection with the Company’s initial US listing of its common stock on the NASDAQ Global Select Market.

 

On September 1, 2011 the NASDAQ-OMX formally approved the Company’s listing application, and on September 2, 2011, the SEC formally declared effective the Company’s Form 40-F registration statement. As such, the Company became a “foreign private issuer” under applicable U.S. federal securities laws. On September 6, 2011, the Company’s common shares commenced trading on the NASDAQ Global Select Market under the trading symbol STB. The Company’s common stock and convertible debentures continue to be listed on the Toronto Stock Exchange.

 

Convertible Debentures

 

On June 21, 2010, STI closed its offering of Cdn$ 6.75% convertible subordinated unsecured debentures (the “Cdn$ 6.75% Convertible Debentures”) due June 30, 2015, at a price of Cdn $1,000 per debenture, for total gross proceeds of $48.2 million (Cdn $50.0 million) (see “Liquidity and Capital Resource-Convertible Debentures”). The Company repaid the remaining Cdn$ 6.75% Convertible Debentures at June 30, 2015, as discussed below.

 

On June 7, 2011, the Company issued US$ 6.25% convertible subordinated unsecured debentures (the “US$ 6.25% Convertible Debentures”) due June 30, 2018, at a price of US $1,000 per debenture, for total gross proceeds of $60.0 million.

 

On November 12, 2013, the Company closed its offering of Cdn$ 6.25% convertible subordinated unsecured debentures due June 30, 2019 (the “Cdn$ 6.25% Convertible Debentures”), at a price of Cdn $1,000 per debenture, for total gross proceeds of $71.4 million (Cdn $75.0 million).

 

The Cdn$ 6.75% Convertible Debentures, which were repaid June 30, 2015, the US$ 6.25% Convertible Debentures and the Cdn$ 6.25% Convertible Debentures are collectively referred to as the “Convertible Debentures”. During fiscal year 2015, Cdn$ 0.1 million of the Company’s Cdn$ 6.75% Convertible Debentures were converted into 18,342 shares of common stock. The remaining Cdn$ 6.75% Convertible Debentures were repaid on June 30, 2015, as discussed above (see “Liquidity and Capital Resource-Convertible Debentures”). The net proceeds from the issuances of the Convertible Debentures were used to repay indebtedness under the senior credit facilities, which provided additional borrowing capacity, and for general corporate purposes.

 

Each outstanding Convertible Debenture is convertible into common shares of the Company at the option of the holder at any time prior to the close of business on the earlier of the business day immediately preceding the maturity date or, if called for redemption, on the business day immediately preceding the date fixed for redemption, at a conversion price of US $9.50 per common share (the “US$ 6.25% Convertible Debenture Conversion Price”) which is equivalent to 105.2632 common shares for each US $1,000 principal amount of US$ 6.25% Convertible Debentures and at a conversion price of Cdn $9.05 per common share (the “Cdn$ 6.25% Convertible Debenture Conversion Price”) which is equivalent to 110.4972 common shares for each Cdn $1,000 principal amount of Cdn$ 6.25% Convertible Debentures.

 

The US$ 6.25% Convertible Debentures were not redeemable prior to June 30, 2014. The Company has the right, at its option, to redeem the US$ 6.25% Convertible Debentures in whole or in part, from time to time, after July 1, 2014, but prior to June 30, 2016, on at least 30 days’ prior notice at a redemption price equal to par plus accrued and unpaid interest, provided that the weighted average trading price of the common shares on a recognized exchange for the 20 consecutive trading days ending five trading days prior to the date on which the redemption notice is given is at least 125% of the US$ 6.25% Convertible Debenture Conversion Price. After June 30, 2016 and prior to maturity, the Company will have the right, at its option, to redeem the US$ 6.25% Convertible Debentures in whole or in part, from time to time, on at least 30 days prior notice at a redemption price equal to par plus accrued and unpaid interest.

 

The Cdn$ 6.25% Convertible Debentures are not redeemable prior to June 30, 2017. The Company will have the right, at its option, to redeem the Cdn$ 6.25% Convertible Debentures in whole or in part, from time to time, on or after June 30, 2017 but prior to June 30, 2018, on at least 30 days prior notice at a redemption price equal to par plus accrued and unpaid interest, provided that the weighted average trading price of the common shares on a recognized exchange for the 20 consecutive trading days ending five trading days prior to the date on which the redemption notice is given is at least 125% of the Cdn$ 6.25% Convertible Debenture Conversion Price. After June 30, 2018 and prior to maturity the Company will have the right, at its option to redeem the Cdn$ 6.25% Convertible Debentures in whole or in part, from time to time, on at least 30 days prior notice at a redemption price equal to par plus accrued and unpaid interest.

 

The Company may at its option, subject to applicable regulatory approval, elect to satisfy its obligation to pay the outstanding principal amount of the Convertible Debentures in whole by issuing and delivering common shares for each US $1,000 principal amount of the US$ 6.25% Convertible Debentures and for each Cdn $1,000 principal amount of the Cdn$ 6.25% Convertible Debentures. The amount of common shares delivered is obtained by dividing each principal amount of Convertible Debentures by 95% of the current market price of the common shares on the date set for redemption or the maturity date.

 

The Company may elect, subject to applicable regulatory approval, to issue and deliver common stock of the Company to the indenture trustee under the Convertible Debenture indentures, to sell in the open market, to satisfy the Company’s obligation to pay interest on the Convertible Debentures on each interest payment date. The Convertible Debenture holders will receive a cash payment in satisfaction of the interest obligation equal to the interest payable from the sale of such common shares.

 

The Company must commence, within 30 days of a Change of Control (as defined in the Convertible Debentures indentures), an offer to purchase all of the Convertible Debentures then outstanding at a purchase price equal to 101% of the principal amount of the Convertible Debentures, plus accrued and unpaid interest thereon.

 

Dividend Reinvestment Plan

 

The Company established a dividend reinvestment plan (the “Plan”) in May 2009 to enable eligible shareholders of the Company to reinvest dividends on their common shares to acquire additional common shares of the Company. The common shares issued under the Plan are issued directly from the treasury of STI at a price based on the volume weighted average of the Canadian dollar closing price of the common shares for the five trading days immediately preceding the relevant dividend date, less a 3% discount and converted into U.S. dollars at the daily Bank of Canada noon exchange rate posted on the last trading day of such 5 trading day period. Pursuant to the Plan, the Company issued 737,157 common shares during the six months ended December 31, 2015, which represent non-cash dividends having a value of $3.0 million. The Plan can be amended, suspended or terminated at any time, but such action would have no retroactive effect that would prejudice the interests of any participants.

 

Equity Incentive Plan – Class B Shares

 

The shareholders of the Company approved the EIP adoption and the initial allotment of Class B common shares available for issuance under the EIP by STA Holdings in December 2005. In November 2008 and November 2012, additional Class B common share allotments for issuance under the EIP were also approved by shareholders. Historically, Class B Series Two common shares were issued pursuant to the EIP while the Company was under the IPS structure, with Class B Series Three common shares utilized for share grants subsequent to March 2010 as the Company converted out of the IPS structure with the redemption of the Subordinated Notes earlier in Fiscal 2010. The Class B common shares are accounted for as a liability upon issuance, as a result of a put option they contain.

 

In May 2015, the Company redeemed all of the remaining Class B Series Two common shares by exchanging the outstanding Class B Series Two common shares for Class B Series Three common shares, based on the fair market value of each class of shares. The holders of the Class B Series Three common shares are entitled to receive dividends, as and when declared by the board of directors of STA Holdings, equivalent to the dividends received by the holders of STI common shares. Pursuant to the liquidity provisions of the EIP, the holders of Class B Series Three common shares will have an option to “put” up to one third of the shares awarded each year back to the Company, starting one year immediately following the grant.

 

Class B common shares granted are fully vested on the grant date. These shares are classified as a liability upon issuance, as a result of the put option they contain and re-measured at fair value at the end of each reporting period. Changes in fair value and dividends on the Class B common shares are recorded as a component of other income, in the consolidated statement of operations. The Company recorded income of $1.8 million and $0.8 million for the six months ended December 31, 2015 and 2014, respectively, associated with the change in fair value on the Class B common shares, which are recorded as a component of other income, in the consolidated statement of operations. The Company recorded $0.4 million in dividend payments for both the six months ended December 31, 2015 and 2014, which are recorded as a component of other income, in the consolidated statement of operations.

 

During the six months ended December 31, 2015, STA Holdings granted 713,339 Class B Series Three common shares pursuant to the EIP. The Company recognized $3.0 million in non-cash stock-based compensation expense related to these grants during the six months ended December 31, 2015. In connection with these grants, 291,894 shares were withheld at the election of the participants to satisfy income tax withholdings. In addition, pursuant to the liquidity provision of the EIP plan, 55,326 Class B Series Three common shares were “put” back to the Company, having a fair value of $0.2 million during the six months ended December 31, 2015. The total number of Class B Series Three common shares outstanding as at December 31, 2015 was 1,957,330. The fair value of the Class B Series Three common shares outstanding at December 31, 2015 represented a liability of $7.1 million, of which $5.3 million was recorded in other current liabilities and represented the current value of those shares eligible to be put in the next twelve months pursuant to the EIP plan. The remaining balance was recorded in Class B Series Three common share liability.

 

During the six months ended December 31, 2014, STA Holdings granted 463,102 Class B Series Three common shares pursuant to the EIP. The Company recognized $2.9 million in non-cash stock-based compensation expense related to these grants during the six months ended December 31, 2014. In connection with these grants, 157,706 shares were withheld at the election of the participants to satisfy income tax withholdings. In addition, pursuant to the liquidity provision of the EIP plan, 138,371 Class B Series Three common shares were “put” back to the Company, having a fair value of $0.9 million during the six months ended December 31, 2014. The total number of Class B Series Three common shares outstanding as at December 31, 2014 was 1,572,867. The fair value of the Class B Series Three common shares outstanding at December 31, 2014 represented a liability of $9.7 million, of which $7.2 million was recorded in other current liabilities and represented the current value of those shares eligible to be put in the next twelve months pursuant to the EIP plan. The remaining balance was recorded in Class B Series Three common share liability.

 

STI Common Shares

 

The Company renewed its normal course issuer bid (“NCIB”) on October 21, 2015. Pursuant to the notice, the Company is permitted to acquire up to a maximum amount of Common Shares equal to 8,403,185 Common Shares in the twelve month period commencing October 26, 2015 and ending on October 26, 2016, subject to the Company’s senior debt agreement requirements. During the six months ended December 31, 2015, the Company repurchased a combined total of 289,973 shares with a value of $1.2 million, under both the previous and the renewed NCIB. The Company did not repurchase any shares during the six months ended December 31, 2014.

 

On March 6, 2015, the Company issued 11,983,000 common shares pursuant to a bought deal for total gross cash proceeds of $69.1 million (Cdn $86.3 million) (the “2015 Bought Deal”). The net proceeds of $66.7 million (Cdn $ 83.2 million) after commission and fees, were used to redeem the remaining $40.1 million in principal amount of Cdn$ 6.75% Convertible Debentures, with the balance used to pay down debt on the Company’s senior credit facility.

 

On May 8, 2015, the Board of Directors of the Company approved a change in the currency of the monthly dividend from Canadian dollars to U.S dollars, effective July 1, 2015, with the first U.S. dollar dividend payable August 17, 2015 to shareholders of record on July 31, 2015.

 

Results of Operations ($ in 000’s, except per share data)

 

As noted in the cautionary language concerning forward-looking disclosures under the heading “Forward-Looking Statements” in this management discussion and analysis, this section contains forward-looking statements, including with respect to the Company’s seasonality, fuel prices, currency and leasing alternatives. Such statements involve known and unknown risks, uncertainties and other factors outside of management’s control, including the risk factors set forth in this management discussion and analysis that could cause results to differ materially from those described or anticipated in the forward-looking statements.

 

		Three Months Ended December 31,								Six Months Ended December 31,
		2015				2014				2015				2014
Revenues		$	167,380			$	157,451			$	260,763			$	245,983
Costs and expenses
Cost of operations			121,913				116,576				206,997				195,494
General and administrative			14,976				13,824				29,171				27,127
Non-cash stock compensation			2,181				2,169				2,984				2,939
Acquisition expense			-				3				-				3
Depreciation and depletion expense			14,382				14,223				19,382				19,186
Amortization expense			790				813				1,578				1,634
Impairment of oil and gas assets			1,200				-				1,200				-
Total operating expenses			155,442				147,608				261,312				246,383
Income (loss) from operations			11,938				9,843				(549	)			(400	)
Interest expense			3,279				4,625				6,988				8,837
Foreign currency  loss (gain)			662				(169	)			726				104
Unrealized loss on foreign currency exchange contracts			-				160				-				442
Non-cash loss (gain) on US$ 6.25% Convertible
Debentures conversion feature			1				(35	)			(5	)			(223	)
Other income, net			(559	)			(385	)			(1,681	)			(1,529	)
Income (loss) before income taxes and equity in net income
of unconsolidated investment			8,555				5,647				(6,577	)			(8,031	)
Equity in net income of unconsolidated investment			30				-				25				-
Income tax expense (benefit)			3,052				2,110				(2,542	)			(2,813	)
Net  income (loss)		$	5,533			$	3,537			$	(4,010	)		$	(5,218	)
Basic and diluted net income(loss) per common share		$	0.06			$	0.04			$	(0.04	)		$	(0.06	)

 

 

Seasonality

 

The Company’s operations are seasonal and follow the school calendars of the public and private schools it serves. During the summer school break, revenue is derived primarily from summer camps and private charter services. Since schools are not in session, there is minimal school bus transportation revenue. Thus, the Company incurs operating losses during the first three months of the fiscal year, which encompass the summer school break. Depreciation of fixed assets occurs in the months during which schools are in session, which is generally September through June. A full year’s worth of depreciation is recorded in these ten months to correspond with the vehicles’ usage. In addition, the Company purchases a majority of its replacement capital expenditures, along with investment capital spending for new bids and contracts awarded for the upcoming school year in the same time period. These purchases have historically been funded by borrowings on the Company’s senior credit facility and through operating lease financings.

 

Recent Market Fuel Price Trends

 

There has been a significant decrease in market fuel prices over the last twelve to eighteen months in North America. The price of fuel in December 2015 was approximately $37 per barrel compared to approximately $53 per barrel in December 2014 and approximately $106 per barrel in June 2014. In connection with the fuel exposure under the school district contracts, approximately 60% of such contracts include some form of fuel mitigation in connection with market fuel price increases, with approximately half of that reflecting the outright purchase of fuel by school district customers, while we look to lock in an additional 20% of total fuel exposure with fixed price contracts. The final 20% of total fuel exposure is fully subject to market price variations.

 

The Company is exposed to changes in the market price of fuel on our school transportation contracts in the ordinary course of business. The Company continues to have fuel mitigation features in approximately 60% of its school transportation revenue contracts that provide some measure of protection against market fuel price increases, ranging from the outright purchase of fuel by school districts to fuel reimbursements associated with fuel price caps / collars and fuel escalators. So while the Company is still exposed to some price risk under some of these fuel mitigation features when market fuel prices increase, it also benefits to some extent with a decline in market fuel prices as well.

 

In addition to the contract mitigation features related to fuel in the revenue contracts, over the last several years the Company also endeavored to lock in an approximate 20% of its fuel exposure by entering into fixed price contracts with its fuel vendors on an annual basis, with the final approximate 20% of fuel exposure at risk and fully subject to market price fluctuations. The Company started to lock in the 20% of fuel exposure for fiscal 2016 in October through December 2014, when the price of fuel was approximately $60 per barrel. Those lock-ins under fixed price contracts have lowered the diesel price per gallon by approximately 21% and the propane price per gallon by approximately 25%, compared to fiscal 2015, for the portion of the Company’s fuel that was locked in. In August 2014, the Company entered into fixed price contracts with fuel vendors to cover the approximate 20% of fuel exposure for fiscal year 2015. As such, the fixed price contracts for fiscal year 2015 reflected lock-in prices from the August 2014 time period, prior to the substantial market fuel price declines experienced in the November 2014 and December 2014 time periods. The Company has benefited from the recent market fuel price declines on the final 20% of fuel exposure fully subject to market price fluctuations.

 

In connection with the annual fixed price contracts for approximately 20% of the fuel exposure the Company endeavors to lock in annually, based on the continued decline in market fuel prices through the current date discussed above, the Company has secured some fixed price contracts for fiscal year 2017. In August and November 2015 the Company locked in approximately 15% of fuel exposure for the 2017 fiscal year.

 

Foreign Currency Translation Impacts on Financial Reporting

 

The Company’s financial statements are reported in U.S. dollars, as the principal operations and cash flows of its subsidiaries are conducted in U.S. dollars. The Company’s reported results have been negatively impacted by the recent weakening of the Canadian dollar in connection with the translation of the Canadian operations into U.S. dollar. These negative impacts are purely financial statement reporting impacts and have no effect on the Company’s Canadian dollar operating results. The results of the Company’s Canadian operations (revenues and expenses) are translated into U.S. dollars using the average exchange rate during the period. The average Canadian dollar / U.S. dollar exchange rates for the six months ended December 31, 2015 and 2014 were 1.3218 and 1.1123, respectively. Revenue for the six months ended December 31, 2015 was negatively impacted by approximately $4.7 million as compared to the six months ended December 31, 2014 and operating loss was positively impacted by $0.2 million for the six months ended December 31, 2015 as compared to the six months ended December 31, 2014, related to the change in exchange rates between the Canadian dollar and the U.S. dollar.

 

Managed and Leased Fleet Business

 

The Company’s school transportation services have historically included managed services contracts. These transportation services are structured as management services contracts under which the Company manages the transportation for the school district and the school district continues to own the school bus fleet. In addition, since the fiscal year 2007 the Company has financed a portion of its growth and replacement school vehicles through operating leases. Such managed services contracts and leased vehicles require lower up front capital investment (as the school district maintains ownership of the managed fleet and the lessor maintains ownership of the leased fleet) and thus results in lower annual depreciation expense on an ongoing basis. While the current lease of vehicles is an attractive alternative to purchasing due to the low cost of financing, it effectively accelerates expense recognition as lease payments are expensed over the six year lease term to a residual value in the 25% to 30% range, as compared to purchased vehicles, which would be depreciated over a period of nine years to 11 years. Such accelerated expense recognition over the six year lease term results in an option value that benefits the Company upon the potential purchase of vehicles at the residual value at the end of the lease term or the sale of such vehicles at the end of the lease term. Currently, leased and managed buses account for approximately 29% and 5%, respectively, of the Company’s fleet. The Company intends to review leasing alternatives on an annual basis based on the economics of the lease financing.

 

During the fiscal year ended June 30, 2015, the Company entered into additional operating leases with seven major financial institutions to lease approximately $38.7 million in replacement school vehicles and $38.3 million in growth school vehicles for the 2014-2015 school year. The term of these leases is six years at effective fixed rates in the range of 2.7% to 4.4%. Annual lease payments on these additional leases will approximate $11.2 million per year for the term of the leases.

 

During the six months ended December 31, 2015, the Company entered into additional operating leases with ten major financial institutions to lease approximately $57.5 million in replacement school vehicles and $14.6 million in growth school vehicles for the 2015-2016 school year. The term of these leases is six years at effective fixed rates in the range of 2.6% to 4.2%. Annual lease payments on these additional leases will approximate $10.0 million per year for the term of the leases.

 

Oil and Gas Interests

 

In January 2008, the Company closed the acquisition (the “Canadex Acquisition”) of all of the outstanding stock of Canadex Resources Limited (“Canadex”). Canadex was a transportation and energy company consisting of two separate business segments. The transportation segment represented school bus operations in Ontario, while the energy division held non-operating positions in oil and gas investments in the United States. The interests in oil and gas properties are held through Canadex’s wholly owned subsidiary, Canadex Resources Inc. (“CRI”). CRI invests as a non-operator in properties for the exploration and upstream production of crude oil, natural gas and condensates. It holds junior participations in approximately 500 wells primarily in Texas and Oklahoma, with a few located in Louisiana and Kansas in the United States. Approximately 70% of these wells produce natural gas. CRI’s co-investments with a range of operators provide flexibility to exploit a variety of exploration and development opportunities. The financial statements reflect the Company’s proportionate interest in the oil and gas activities as a non-operator. Canadex, through a series of amalgamations subsequent to the Canadex Acquisition, was renamed Parkview Transit Inc., which is a direct subsidiary of the Company.

 

 

The Company’s oil and gas revenues, on an annual basis, are approximately one half of one percent of consolidated Company revenues. The recent decline in market fuel prices discussed above has impacted CRI’s operating results and has put downward pressure on the reserves estimates of CRI’s oil and gas wells. On at least a quarterly basis, or as indicators of impairment are present, the Company performs an impairment analysis for its oil and gas assets (the “ceiling test”). Under US GAAP, the ceiling test requires the Company to use tax effected discount cash flows using a present value technique. The pricing assumption used in each ceiling test is defined as the twelve month average of realized prices for the current quarter end period. As both oil and natural gas prices have continued to decline over the last twelve to eighteen months (an indication of impairment) the results of current quarter end the ceiling test lead the Company to record a non-cash impairment charge of $1.2 million. Subsequent changes in the estimates of discounted cash flows and/or the pricing assumptions used in the ceiling test could result in further impairment in the future.

 

Three months ended December 31, 2015 Compared to Three months ended December 31, 2014

 

The Company’s core business is school bus transportation. As a result of the Canadex Acquisition, the Company has two reportable segments, school bus transportation and an oil and gas portfolio. The oil and gas portfolio represents approximately one-half of one percent of the Company’s revenue on an annual basis.

 

The consolidated results for the second quarter of fiscal year 2016 include $0.4 million in oil and gas revenue, $0.4 million in related cost of operations, $0.4 million in depletion expense and a $1.2 million non-cash impairment charge on the oil and gas assets as a result of the continued decline in fuel market prices. The consolidated results for the second quarter of fiscal year 2015 include $0.9 million in oil and gas revenue, $0.7 million in related cost of operations, $0.1 million in general and administrative expense and $0.3 million in depletion expense. The revenue reduction for the second quarter of fiscal year 2016 compared to the first second of fiscal year 2015 was due to a reduction in both price and production, primarily related to the recent decline in fuel market prices.

 

The remaining discussion of the Company’s operating results through “Income from Operations” is related to the Company’s core school bus transportation segment. Discussion of items below “Income from Operations” reflects the consolidated results of the Company as these items are unallocated between the two reporting segments.

 

Revenues: Revenues for school bus transportation for the second quarter of fiscal year 2016 were $167.0 million compared to $156.54 million for the second quarter of fiscal year 2015, representing an increase of $10.5 million, or 6.7%. Revenue for the second quarter of fiscal year 2016 was negatively impacted by approximately $3.1 million related to the change in exchange rates between the Canadian dollar and the U.S. dollar from the second quarter of fiscal year 2015 to the second quarter of fiscal year 2016 in connection with the translation of the Company’s Canadian operations into U.S. dollars. In the first quarter of fiscal year 2016, the Company started operations on eleven new bid contracts (three of which were tuck-ins to existing locations) and continued operations in a bid contract which started in the third quarter of fiscal year 2015. The Company did not renew four contracts for the fiscal year 2016.

 

The new bid-in contracts for fiscal year 2016 and the bid in contract which started in the third quarter of fiscal year 2015, accounted for $11.3 million in new business growth in the second quarter of fiscal year 2016, which was partially offset by a $0.6 million revenue reduction resulting from the four contracts not renewed. The remaining $2.9 million increase in revenues resulted primarily from net increases in service requirements of existing contracts and contract rate increases.

 

Cost of Operations: Cost of operations for school bus transportation for the second quarter of fiscal year 2016 was $121.5 million as compared to $115.8 million for the second quarter of fiscal year 2015, representing an increase of $5.7 million or 4.9%. The new bid-in contracts for fiscal year 2016 along with the bid in contract started in the third quarter of fiscal year 2015, accounted for $7.8 million of the total increase in cost of operations which was partially offset by a $0.6 million reduction resulting from the four contracts not renewed. The remaining $1.5 million decrease in cost of operations, net of new business and contracts not renewed for the second quarter of fiscal year 2016, resulted primarily from an decrease in fuel expense, maintenance costs and fringe benefits, partially offset by an increase in salaries and wages and operating costs. Fuel expense, net of new business for the second quarter of fiscal year 2016, decreased $3.3 million, primarily related to lower market prices. As a percentage of revenue, fuel decreased to 4.9% in the second quarter of fiscal year 2016 from 7.0% in the second quarter of fiscal year 2015. Maintenance expense, net of new business for the second quarter of fiscal year 2016, decreased $0.8 million due primarily to lower net parts and tire expense. Maintenance expense decreased as a percentage of revenue to 4.0% in the second quarter of fiscal year 2016 from 4.5% in the second quarter of fiscal year 2015. Fringe benefits, net of new business for the second quarter of fiscal year 2016, decreased $0.1 million due mostly to favorable claims experience in workers compensation. Fringe benefits as a percentage of revenue remained the same at 7.9% for both the second quarter of fiscal year 2016 and the second quarter of fiscal year 2015. Salaries and wages, net of new business for the second quarter of fiscal year 2016, increased by $1.1 million related to higher driver wages, maintenance wages and safety wages. As a percentage of revenue, driver wages increased to 35.1% in the second quarter of fiscal year 2016 from 34.7% in the second quarter of fiscal year 2015. Maintenance wages increased to 3.8% from 3.6%, and safety wages increased to 0.9% from 0.7% both in the second quarter of fiscal year 2016 compared to the second quarter of fiscal year 2015. Operating expenses, net of new business for the second quarter of fiscal year 2016, increased $1.6 million due primarily to an additional year of vehicle leasing costs.

 

General and Administrative Expense: General and administrative expense for school bus transportation for the second quarter of fiscal year 2016 was $14.9 million compared to $13.8 million for the second quarter of fiscal year 2015, an increase of $1.1 million or 8.0%. As a percentage of revenue, total general and administrative expense increased to 8.9% of revenue in the second quarter of fiscal year 2016 from 8.8% in the second quarter of fiscal year 2015. The increase in general and administrative expenses is primarily due to the bid- in contracts completed during first three months of fiscal year 2016 along with the bid in contract started in the third quarter of fiscal 2015, as well as increased administrative compensation costs.

 

Non-cash Stock Compensation: Non-cash stock compensation expense for school bus transportation for the second quarter of fiscal year 2016 was $2.2 million. The non-cash compensation expense was related to the issuance of 536,634 Class B Series Three common shares of STA Holdings in the second quarter of fiscal year 2016. Non-cash stock compensation expense for the second quarter of fiscal year 2015 was $2.2 million. The non-cash compensation expense was related to the issuance of 347,000 Class B Series Three common shares of STA Holdings in the second quarter of fiscal year 2015.

 

Depreciation Expense: Depreciation expense for school bus transportation for the second quarter of fiscal year 2016 was $14.0 million compared to $13.9 million for the second quarter of fiscal year 2015. As a percentage of revenue, depreciation expense decreased to 8.4% for the second quarter of fiscal year 2016 from 8.9% for the second quarter of fiscal year 2015.

 

Amortization Expense: Amortization expense for school bus transportation was $0.8 million for both the second quarter of fiscal year 2016 and the second quarter of fiscal year 2015. As a percentage of revenue, amortization expense remained the same at 0.5% for both the second quarter of fiscal year 2016 and the second quarter of fiscal year 2015.

 

Income from Operations: Income from operations for school bus transportation was $13.5 million for the second quarter of fiscal year 2016 compared to $10.0 million for the second quarter of fiscal year 2015. The increase in income from operations of $3.5 million resulted from the operating line items discussed above and reflects a net negative impact of $0.3 million in exchange rates between the Canadian dollar and the US dollar from the second quarter of fiscal year 2015 compared to the second quarter of fiscal year 2016 in connection with the translation of the Company’s Canadian operations into US dollars.

 

Interest Expense: Interest expense for the second quarter of fiscal year 2016 was $3.3 million compared to $4.6 million for the second quarter of fiscal year 2015. The decrease in interest expense of $1.3 million was due to a decrease in both the average debt outstanding and in the weighted average interest rate, for the second quarter of fiscal year 2016, compared to the second quarter of fiscal year 2015.

 

Foreign Currency Loss: Foreign currency loss for the second quarter of fiscal year 2016 totaled $0.6 million compared to a gain $0.2 million for the second quarter of fiscal year 2015. The increase in the foreign currency loss of $0.8 million results primarily from the losses realized upon the translation of the Company’s dividends into US dollars for the second quarter of fiscal year 2016.

 

Unrealized Loss on Foreign Currency Exchange Contracts: The Company liquidated the outstanding foreign currency exchange contracts in the fourth quarter of fiscal 2015 in connection with the change in currency of the dividend payment to U.S. dollars. The unrealized loss on foreign currency exchange contracts was $0.2 million for the second quarter of fiscal year 2015.

 

Non-cash Loss (Gain) on US$ 6.25% Convertible Debentures Conversion Feature: Non-cash loss on the US$ 6.25% Convertible Debentures conversion feature was one thousand dollars for the second quarter of fiscal year 2016 compared to a non-cash gain of thirty five thousand dollars in the second quarter of fiscal year 2015. The decrease in the gain of thirty six thousand dollars was related to the change in fair value of the embedded conversion feature derivative associated with STI’s issuance of the U.S. dollar denominated US$ 6.25% Convertible Debentures. The conversion feature on STI’s US$ 6.25% Convertible Debentures provides that the U.S. dollar denominated debentures can be converted at a U.S. dollar denominated strike price into common shares of the Issuer, a Canadian functional currency entity. Therefore, the conversion feature represents an embedded derivative that must be bifurcated and accounted for separately. The embedded conversion feature is recorded at fair value in other liabilities at each reporting period end with changes in fair value included in the consolidated statement of operations.

 

Other Income, Net: Other income for the second quarter of fiscal 2016 totaled $0.6 million compared to $0.4 million for the second quarter of fiscal 2015. An increase in other income of $0.2 million was primarily due to an increase of $0.6 million associated with the change in fair value on the Class B common shares partially offset by an increase in unrealized losses on foreign currency translations for the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015.

 

Income before Income Taxes and Equity in Net Income of Unconsolidated Investment: Income before income taxes and Equity in Net Income of Unconsolidated Investment was $8.6 million for the second quarter of fiscal year 2016 compared to $5.6 million for the second quarter of fiscal year 2015. The increase in the income of $3.0 million resulted primarily from, an increase in the income from operations of the school bus transportation segment of $3.5 million, a decrease in interest expense of $1.3 million, a decrease in unrealized losses on foreign currency exchange contracts of $0.2 million and an increase in other income of $0.2 million, partially offset by an increase in the operating loss from the Company’s oil and gas portfolio of $1.4 million and an increase in the foreign currency loss of $0.8 million.

 

Equity in Net Income of Unconsolidated Investment: The Equity in Net Loss of unconsolidated investments of thirty thousand dollars represents the Company’s share of the earnings of a consulting and management services firm, an investment which the Company completed in the third quarter of fiscal year 2015 (see “Liquidity and Capital Resource-Acquisitions and Investments”).

 

Net Income: Net Income for the Company for the second quarter of fiscal year 2016 totaled $5.5 million, which included an income tax expense of $3.0 million. Net income for the second quarter of fiscal year 2015 amounted to $3.5 million, which included an income tax expense of $2.1 million. The effective tax rates for the second quarter of fiscal year 2016 and the second quarter of fiscal year 2015 were 35.6% and 37.4%, respectively. The decrease in the quarter over quarter effective tax rate was primarily due to the effect of various state tax law changes in the U.S. (i.e.: state filing requirements) which resulted in a decrease in the Company’s overall state tax rate. Basic and diluted net income per common share was $0.06 for the second quarter of fiscal year 2016 compared to $0.04 for the second quarter of fiscal year 2015.

 

Six months ended December 31, 2015 Compared to Six months ended December 31, 2014

 

The Company’s core business is school bus transportation. As a result of the Canadex Acquisition, the Company has two reportable segments, school bus transportation and an oil and gas portfolio. The oil and gas portfolio represents approximately one-half of one percent of the Company’s revenue on an annual basis.

 

The consolidated results for the first six months of fiscal year 2016 include $0.8 million in oil and gas revenue, $0.9 million in related cost of operations, $0.1 million in general and administrative expense, $0.6 million in depletion expense and a $1.2 million non-cash impairment charge on the oil and gas assets as a result of the continued decline in fuel market prices. The consolidated results for the first six months of fiscal year 2015 include $2.1 million in oil and gas revenue, $1.4 million in related cost of operations, $0.1 million in general and administrative expense and $0.6 million in depletion expense. The revenue reduction for the first six months of fiscal year 2016 compared to the first six months of fiscal year 2015 was due to a reduction in both price and production, primarily related to the recent decline in fuel market prices.

 

The remaining discussion of the Company’s operating results through “Income from Operations” is related to the Company’s core school bus transportation segment. Discussion of items below “Income from Operations” reflects the consolidated results of the Company as these items are unallocated between the two reporting segments.

 

Revenues: Revenues for school bus transportation for the first six months of fiscal year 2016 were $260.0 million compared to $243.9 million for the first six months of fiscal year 2015, representing an increase of $16.1 million, or 6.6%. Revenue for the first six months of fiscal year 2016 was negatively impacted by approximately $4.7 million related to the change in exchange rates between the Canadian dollar and the U.S. dollar from the first six months of fiscal year 2015 to the first six months of fiscal year 2016 in connection with the translation of the Company’s Canadian operations into U.S. dollars. In the first six months of fiscal year 2016, the Company started operations on eleven new bid contracts (three of which were tuck-ins to existing locations) and continued operations in a bid contract which started in the third quarter of fiscal year 2015. The Company did not renew four contracts for the fiscal year 2016.

 

The new bid-in contracts for fiscal year 2016 and the bid in contract which started in the third quarter of fiscal year 2015, accounted for $18.1 million in new business growth in the first six months of fiscal year 2016, which was partially offset by a $1.0 million revenue reduction resulting from the four contracts not renewed. The remaining $3.7 million increase in revenues resulted primarily from net increases in service requirements of existing contracts and contract rate increases.

 

Cost of Operations: Cost of operations for school bus transportation for the first six months of fiscal year 2016 was $206.1 million as compared to $194.1 million for the first six months of fiscal year 2015, representing an increase of $12.0 million or 6.2%. The new bid-in contracts for fiscal year 2016 along with the bid in contract started in the third quarter of fiscal year 2015, accounted for $12.9 million of the total increase in cost of operations which was partially offset by a $0.9 million reduction resulting from the four contracts not renewed. Although the net new business described above accounts for the entire change in the cost of operations year over year, there are increases in operating costs, insurance costs, fringe benefits, and salaries and wages which are completely offset by decreases in fuel expense and maintenance costs. Operating expenses, net of new business for the first six months of fiscal year 2016, increased $2.6 million due primarily to an additional year of vehicle leasing costs. Insurance costs, net of new business for the first six months of fiscal year 2016, increased $2.2 million primarily due to unfavorable liability insurance claims development. As a percentage of revenue, insurance costs increased to 4.6% from 3.6% in the first six months of fiscal year 2016 compared to the first six months of fiscal year 2015. Fringe benefits, net of new business for the first six months of fiscal year 2016, increased $1.0 million due mostly to unfavorable claims experience in workers compensation and higher medical insurance costs. Fringe benefits increased as a percentage of revenue to 9.4% in the first six months of fiscal year 2016 from 9.0% in the first six months of fiscal year 2015. Salaries and wages, net of new business for the first six months of fiscal year 2016, increased by $1.0 million related to higher maintenance and safety wages, which were offset by a decrease in driver wages. As a percentage of revenue, maintenance wages increased to 4.8% from 4.5%, and safety wages increased to 1.1% from 0.9% both in the first six months of fiscal year 2016 compared to the first six months of fiscal year 2015. As a percentage of revenue, driver wages increased to 35.8% in the first six months of fiscal year 2016 from 35.7% in the first six months of fiscal year 2015. Maintenance expense, net of new business for the first six months of fiscal year 2016, decreased $1.6 million due primarily to lower net parts and tire expense. Fuel expense, net of new business for the first six months of fiscal year 2016, decreased $5.2 million, primarily related to lower market prices. As a percentage of revenue, fuel decreased to 5.4% in the first six months of fiscal year 2016 from 7.5% in the first six months of fiscal year 2015. Maintenance expense decreased as a percentage of revenue to 5.0% in the first six months of fiscal year 2016 from 5.6% in the first six months of fiscal year 2015.

 

General and Administrative Expense: General and administrative expense for school bus transportation for the first six months of fiscal year 2016 was $29.1 million compared to $27.0 million for the first six months of fiscal year 2015, an increase of $2.1 million or 7.8%. As a percentage of revenue, total general and administrative expense increased to 11.2% of revenue in the first six months of fiscal year 2016 from 11.1% in the first six months of fiscal year 2015. The increase in general and administrative expenses is primarily due to the bid- in contracts completed during first three months of fiscal year 2016 along with the bid in contract started in the third quarter of fiscal 2015, as well as increased administrative compensation.

 

Non-cash Stock Compensation: Non-cash stock compensation expense for school bus transportation for the first six months of fiscal year 2015 was $3.0 million. The non-cash compensation expense was related to the issuance of 713,339 Class B Series Three common shares of STA Holdings in the first six months of fiscal year 2016. Non-cash stock compensation expense for the first six months of fiscal year 2015 was $2.9 million. The non-cash compensation expense was related to the issuance of 463,102 Class B Series Three common shares of STA Holdings in the first six months of fiscal year 2015.

 

Depreciation Expense: Depreciation expense for school bus transportation for the first six months of fiscal year 2016 was $18.7 million compared to $18.6 million for the first six months of fiscal year 2015. As a percentage of revenue, depreciation expense decreased to 7.2% for the first six months of fiscal year 2016 from 7.6% for the first six months of fiscal year 2015.

 

Amortization Expense: Amortization expense for school bus transportation was $1.6 million for both the first six months of fiscal year 2016 and the first six months of fiscal year 2015. As a percentage of revenue, amortization expense decreased to 0.6% for the first six months of fiscal year 2016 from 0.7% for the first six months of fiscal year 2015.

Income (Loss) from Operations: Income from operations for school bus transportation was $1.5 million for the first six months of fiscal year 2016 compared to a loss from operations of $0.4 million for the first six months of fiscal year 2015. The increase in the income from operations of $1.9 million resulted from the operating line items discussed above and reflects a net positive impact of $0.2 million in exchange rates between the Canadian dollar and the US dollar from the first six months of fiscal year 2015 compared to the first six months of fiscal year 2016 in connection with the translation of the Company’s Canadian operations into US dollars.

 

Interest Expense: Interest expense for the first six months of fiscal year 2016 was $7.0 million compared to $8.8 million for the first six months of fiscal year 2015. The decrease in interest expense of $1.8 million was due to a decrease in both the average debt outstanding and in the weighted average interest rate, for the first six months of fiscal year 2016, compared to the first six months of fiscal year 2015.

 

Foreign Currency Loss: Foreign currency loss for the first six months of fiscal year 2016 totaled $0.7 million compared to a foreign currency loss of $0.1 million for the first six months of fiscal year 2015. The increase in the foreign currency loss of $0.6 million results primarily from the losses realized upon the translation of the Company’s dividends in US dollars for the first six months of fiscal year 2016.

 

Unrealized Loss on Foreign Currency Exchange Contracts: The Company liquidated the outstanding foreign currency exchange contracts in the fourth quarter of fiscal 2015 in connection with the change in currency of the dividend payment to U.S. dollars. The unrealized loss on foreign currency exchange contracts was $0.4 million for the first six months of fiscal year 2015.

 

Non-cash Gain on US$ 6.25% Convertible Debentures Conversion Feature: Non-cash gain on the US$ 6.25% Convertible Debentures conversion feature was five thousand dollars for the first six months of fiscal year 2016 compared to a non-cash gain of $0.2 million dollars in the first six months of fiscal year 2015. The decrease in the gain of $0.2 million was related to the change in fair value of the embedded conversion feature derivative associated with STI’s issuance of the U.S. dollar denominated US$ 6.25% Convertible Debentures. The conversion feature on STI’s US$ 6.25% Convertible Debentures provides that the U.S. dollar denominated debentures can be converted at a U.S. dollar denominated strike price into common shares of the Issuer, a Canadian functional currency entity. Therefore, the conversion feature represents an embedded derivative that must be bifurcated and accounted for separately. The embedded conversion feature is recorded at fair value in other liabilities at each reporting period end with changes in fair value included in the consolidated statement of operations.

 

Other Income, Net: Other income totaled $1.7 million for the first six months of fiscal 2016 compared to other income of $1.5 million for first six months of fiscal 2015. The increase in other income of $0.2 million was a result of an increase of $1.1 million associated with the change in fair value on the Class B common shares offset by a lower gain on sale of assets combined with a decrease in unrealized gains on foreign currency translations for the first six months of fiscal 2016 compared to the first six months of fiscal 2015.

 

Loss before Income Taxes and Equity in Net Income of Unconsolidated Investment: Loss before income taxes and Equity in Net Income of Unconsolidated Investment was $6.6 million for the first six months of fiscal year 2016 compared to $8.0 million for the first six months of fiscal year 2015. The decrease in the loss of $1.4 million resulted primarily from, a decrease in interest expense of $1.8 million, an increase in the income from operations of the school bus transportation segment of $1.9 million, a decrease in unrealized losses on foreign currency exchange contracts of $0.4 million and an increase in other income of $0.2 million, partially offset by increase in the operating loss from the Company’s oil and gas portfolio of $2.1 million, an increase in the foreign currency loss of $0.6 million and a decrease in the non-cash gain on the US$ 6.25% Convertible Debenture Conversion Feature of $0.2 million.

 

Equity in Net Income of Unconsolidated Investment: The Equity in Net Income of unconsolidated investments of twenty five thousand dollars represents the Company’s share of the earnings of a consulting and management services firm, an investment which the Company completed in the third quarter of fiscal year 2015 (see “Liquidity and Capital Resource-Acquisitions and Investments”).

 

Net Loss: Net loss for the Company for the first six months of fiscal year 2016 totaled $4.0 million, which included an income tax benefit of $2.5 million. Net loss for the first six months of fiscal year 2015 amounted to $5.2 million, which included an income tax benefit of $2.8 million. The effective tax rates for the first six months of fiscal year 2016 and the first six months of fiscal year 2015 were 38.8% and 35.0%, respectively. The increase in the effective tax rate quarter over quarter was due primarily mix of the statutory Canadian and U.S. tax rates and the apportionment of the Company’s loss before income taxes resulting from the operations in each country. Basic and diluted net loss per common share was $0.04 for the first six months of fiscal year 2016 compared to a net loss per common share of $0.06 for the first six months of fiscal year 2015.

 

Liquidity and Capital Resources

 

As noted in the cautionary language concerning forward-looking disclosures under the heading “Forward-Looking Statements” in this management discussion and analysis, this section contains forward-looking statements, including with respect to the Company’s ability to renew or refinance its various loan facilities as they become due. Such statements involve known and unknown risks, uncertainties and other factors outside of management’s control, including the risk factors set forth in this management discussion and analysis that could cause results to differ materially from those described or anticipated in the forward-looking statements.

 

General

 

School bus transportation revenue has historically been seasonal, based on the school calendar and holiday schedule. During the summer school break, revenue is derived primarily from summer camps and private charter services. As schools are not in session, there is no school bus transportation revenue during this period. The operations of the Company historically generate negative cash flow in the first quarter of the fiscal year reflecting the seasonality of the school bus transportation industry during the school summer break combined with a majority of replacement capital expenditures along with investment capital spending for new bids and contracts awarded for the upcoming school year occurring in the same time period. Replacement capital expenditures have historically been funded by a combination of borrowings on the Company’s senior credit facility and through operating lease financings. Investment capital spending for new bid and contract awards has historically been funded with proceeds from debt and equity financings along with operating lease financing and cash flow from operations. As the Company incurs operating losses during the first three months of the fiscal year, distributions are funded with non-operating cash flows for the first interim quarter of the fiscal year. The subsequent quarters of the fiscal year typically generate excess cash, as schools are in session and the majority of replacement capital expenditures and investment capital spending having occurred in the first quarter. Due to this seasonality, the Company views available cash flow on an annualized basis. The Company has historically funded its distributions with cash from operations on an annual basis.

 

During the six months ended December 31, 2015, net cash used by operations totaled $12.9 million, which reflects a $33.0 million use of cash for net working capital. Net cash taxes paid during the six months ended December 31, 2015 amounted to $0.3 million, which includes refunds of prior year’s tax payments. The Company’s investing activities for the six months ended December 31, 2015 resulted in a use of cash of $53.9 million. Included in these investing activities were, (i) capital expenditures related to the new bid contracts for fiscal year 2016 of $48.1 million (which includes $0.3 million for oil & gas investments in new wells), (ii) $6.8 million in capital expenditures related to replacement capital spending, and (iii) $0.9 million in proceeds from sale of equipment. The Company’s financing activities for the six months ended December 31, 2015 represented a source of cash of $62.1 million. Included in these financing activities were (i) $136.4 million in credit agreement borrowings and $54.6 million in credit agreement repayments, (ii) $18.2 million in dividend payments made, (iii) $0.2 million in payments to repurchase Class B common shares, (iv) $1.2 million in payments to repurchase common stock and (v) $0.1 million in financing fees.

 

Loan Facilities

 

On August 19, 2014, the Company amended its Third Amended and Restated Credit Agreement (as amended the “Credit Agreement”). The amendment increased commitments to $225.0 million from the previous commitments of $165.0 million, extended the $100.0 million accordion feature and extended the maturity date of the Credit Agreement to August 19, 2019, or if earlier, 90 days prior to the maturity of the Senior Secured Notes, as defined below. The increase in the size of the facility resulted from the addition of two new lenders to the bank group and certain existing lenders increasing their commitments. The current commitments at December 31, 2015 include a US $180.0 million loan facility and a Cdn$45.0 million loan facility, both of which are available to fund working capital requirements and to fund acquisitions and investment requirements for new revenue and bid-in contracts

 

Borrowings under the Credit Agreement may be Base Rate Loans or Eurodollar Loans, as defined in the Credit Agreement. Base Rate Loans bear interest at the base rate, as defined in the Credit Agreement (3.50% at December 31, 2015), plus the applicable margin, which ranges from 0.50% to 1.25% depending on STA Holdings’ senior leverage ratio on the pricing date. Eurodollar Loans bear interest at the adjusted LIBOR rate, as defined in the Credit Agreement (0.60670% at December 31, 2015), plus the applicable margin, which ranges from 1.75% to 2.50% depending on STA Holdings’ senior leverage ratio on the pricing date.

 

On November 10, 2011, the Company rolled over and extended the maturity of the $35 million Senior Secured Notes (as defined below) for a five year term. The Senior Secured Notes now reflect a fixed coupon of 4.246% and a maturity date of November 10, 2016. In December 2006, the Company initially issued the senior secured notes (the “Senior Secured Notes”) under a note purchase agreement (the “Note Purchase Agreement”) with two Canadian insurance companies. The Senior Secured Notes consisted of $35.0 million of five year, fixed rate senior secured notes at an original coupon of 5.941%. The Senior Secured Notes rank pari passu with borrowings under the Credit Agreement.

 

Borrowings under the Credit Agreement are collateralized by the unencumbered assets of Parkview Transit, STA Holdings and its subsidiaries, and certain shares of the capital stock of STA Holdings and the capital stock of each of its subsidiaries. In addition, payment and performance of the obligations under the Credit Agreement are guaranteed by each of STA Holdings’ subsidiaries and by Parkview Transit. Borrowings under the Senior Secured Notes are collateralized by the unencumbered assets of STA Holdings and its U.S. subsidiaries, and certain shares of the capital stock of STA Holdings and the capital stock of each of its U.S. subsidiaries. In addition, payment and performance of the obligations under the Senior Secured Notes are guaranteed by each of STA Holdings’ U.S. subsidiaries.

 

At December 31, 2015, debt outstanding under the Credit Agreement and Senior Secured Notes totaled $131.8 million and $35.0 million, respectively. At December 31, 2015, the Company had approximately $90.1 million in borrowing availability under the loan facilities, subject to continued covenant compliance, of the Credit Agreement (excluding the $100.0 million accordion feature in additional commitments the Company may request under the Credit Agreement). In addition, at December 31, 2015, outstanding debt included approximately $113.7 million in Convertible Debentures. The Credit Agreement currently has a five year term with a maturity date of August 19, 2019 or if earlier, 90 days prior to the maturity of the Senior Secured Notes. The Note Purchase Agreement has a five year term with a maturity date of November 10, 2016.

 

Convertible Debentures

 

During the fiscal years ended June 30, 2010, 2011 and 2014, STI closed the Convertible Debentures offerings and on December 21, 2009, the Company redeemed for cash all of the outstanding 14% subordinated notes of STA ULC as discussed above under the heading “General”.

 

The Cdn$ 6.75% Convertible Debentures had a five year term, were denominated in Canadian dollars, and were due and payable on June 30, 2015. During fiscal year 2015, Cdn $0.1 million of the Company’s Cdn$ 6.75% Convertible Debentures were converted into 18,342 shares of common stock. On June 30, 2015, the Company repaid upon maturity the remaining Cdn $49.9 million in principal amount of Cdn$ 6.75% Convertible Debentures for US$ 40.1 million in cash. The US$ 6.25% Convertible Debentures have a seven year term, are denominated in U.S. dollars, are due and payable on June 30, 2018, and are callable by the Company beginning in July 2014 if certain conditions noted above, are met. The Company did not redeem and none of the holders have converted any of the US$ 6.25% Convertible Debentures as of December 31. 2015. The Cdn$ 6.25% Convertible Debentures have a five and a half year term, are denominated in Canadian dollars, are due and payable on June 30, 2019, and are callable by the Company beginning in July 2017, if certain conditions noted above, are met. None of the holders have converted any of the Cdn$ 6.25% Convertible Debentures as of December 31, 2015.

 

The functional currency of STI is the Canadian dollar. The Cdn$ 6.75% Convertible Debentures were and the Cdn$ 6.25% Convertible Debentures of STI are denominated in Canadian dollars. As the functional currency of STI is the Canadian dollar, exchange gains or losses related to the Cdn$ 6.75% Convertible Debentures and the Cdn$ 6.25% Convertible Debentures on the translation of the STI financial statements into U.S. dollars, the reporting currency, are deferred as a separate component of shareholders’ equity. The US$ 6.25% Convertible Debentures of STI are denominated in U.S. dollars. As the functional currency of STI is the Canadian dollar, unrealized gains or losses on re-measurement of the US$ 6.25% Convertible Debentures into Canadian dollars are considered transaction gains and losses, at the STI level, and are included in the consolidated statement of operations. On April 1, 2013, the Company put in place an intercompany loan associated with the payments of proceeds on the US$ 6.25% Convertible Debentures by STI to STA Holdings. This intercompany loan is denominated in U.S. dollars, bears interest at a rate of 6.25% per annum and has a set maturity date of June 30, 2018. As such, this intercompany loan is considered a short-term intercompany loan (as the loan is for a definite term), and unrealized gains or losses on re-measurement of the STI intercompany loan receivable are considered transaction gains or losses as STI’s functional currency is the Canadian dollar and are included in the consolidated statement of operations. The re-measurement gains and losses resulting from this intercompany loan offset re-measurement gains and losses resulting from the US$ 6.25% Convertible Debentures in the consolidated statement of operations.

 

The Company expects to be able to repay, renew or refinance its various loan facilities and Convertible Debentures as they become due with other long term financing options (see “Forward-Looking Statements”).

 

Leasing Arrangements

 

During the fiscal year ended June 30, 2015, the Company entered into additional operating leases with seven major financial institutions to lease approximately $38.7 million in replacement school vehicles and $38.3 million in growth school vehicles for the 2014-2015 school year. The term of these leases is six years at effective fixed rates in the range of 2.7% to 4.4%. Annual lease payments on these additional leases will approximate $11.2 million per year for the term of the leases.

 

During the six months ended December 31, 2015, the Company entered into additional operating leases with ten major financial institutions to lease approximately $57.5 million in replacement school vehicles and $14.6 million in growth school vehicles for the upcoming 2015-2016 school year. The term of these leases is six years at effective fixed rates in the range of 2.6% to 4.2%. Annual lease payments on these additional leases will approximate $10.0 million per year for the term of the leases.

 

Acquisitions and Investments

 

On December 5, 2014 the Company acquired certain assets and a contract of Dalton Bus Lines in Ontario, Canada, for approximately $0.4 million. Earnings of the acquired company were included in the Company’s results of operations from the acquisition date.

 

On March 11, 2015 a wholly-owned subsidiary of the Company made a non-controlling investment in a consulting and management services firm for cash consideration of $1.7 million. The Company has accounted for this investment under the equity method, in accordance with ASC- 323, Investments-Equity Method and Joint Ventures (see “Subsequent Events”).

 

The Company intends to selectively acquire contracts through new bids and conversions and to pursue additional acquisitions to the extent that it is able to finance these from operating cash flows, available financing under our Credit Facility and the potential additional issuance of common shares and debt securities (see “Forward-Looking Statements”).

 

Fuel Prices

 

The Company operates a fleet of approximately 13,300 vehicles as at December 31, 2015 and consumes substantial amounts of fuel for its operations. While the Company currently has fuel mitigation features in approximately 60% of its contracts that provide some measure of fuel protection against price increases, ranging from reimbursement by the school district to outright purchase of fuel by school districts, there is no assurance that it will be able to adequately protect itself from increases in such costs other than those contractually obligated. The Company is still exposed to some market price fluctuations under some of these fuel mitigation features. As noted above, the Company also endeavors to lock in an additional 20% of its fuel exposure with fixed rate contracts, while the final 20% of fuel exposure is fully subject to market price variations. The Company, for fiscal year 2015, entered into fixed price contracts, in August of that fiscal year with fuel suppliers to cover the approximately 20% of its fuel exposure, prior to the decline in market prices that occurred in the October through December period of fiscal year 2015. For fiscal year 2016, the Company entered into fixed price contracts with fuel vendors starting in October 2014 (the period of fiscal 2015 when market prices started to decline), for the approximately 20% of its fuel exposure locked in for fiscal year 2016. In August and November 2015, the Company locked in approximately 15% of its fuel exposure for fiscal year 2017.

 

Segment Information ($ in 000’s)

 

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

 

 

 

		For the three months ended				For the three months ended				For the six months ended				For the six months ended
		December 31, 2015				December 31, 2014				December 31, 2015				December 31, 2014
Revenue
Transportation		$	166,983			$	156,530			$	259,951			$	243,921
Oil and gas			397				921				812				2,062
		$	167,380			$	157,451			$	260,763			$	245,983
Operating (losses) earnings
Transportation		$	13,507			$	9,997			$	1,462				(423	)
Oil and gas			(1,569	)			(154	)			(2,011	)			23
			11,938				9,843				(549	)			(400	)
Unallocated expenses			3,353				4,196				6,003				7,631
Income tax expense (benefit)			3,052				2,110				(2,542	)			(2,813	)
Net income (loss)		$	5,533			$	3,537			$	(4,010	)		$	(5,218	)

 

 

		As at				As at
		December 31, 2015				June 30, 2015
Total Assets
Transportation		$	557,020			$	527,291
Oil and gas			6,842				8,636
		$	563,862			$	535,927

 

 

Commitments and Contractual Obligations

 

Commitments and contractual obligations primarily include obligations associated with outstanding indebtedness and lease obligations. The following table shows contractual obligations and commitments related to the outstanding indebtedness as of December 31, 2015 and the related payment by period due.

 

Maturities of long-term debt are as follows ($ in 000’s):

 

				Third
				Amended								Senior
				Credit				Convertible				Secured
				Facility				Debentures				Notes				Total
Year ending June 30,
2016 (1/1/16-6/30/16)				$	-			$	-			$	-			$	-
2017					-				-				35,000				35,000
2018					-				59,548				-				59,548
2019					131,822				54,191				-				186,013
2020					-				-				-				-
thereafter					-				-				-				-
				$	131,822			$	113,739			$	35,000			$	280,561

 

 

The maturity date of the Credit Agreement was extended by amendment in August 2014 to August 19, 2019 or if earlier, 90 days prior to the maturity of the Senior Secured Notes.

 

The following table represents future minimum rental payments and operating lease payments under non-cancelable operating leases as at December 31, 2015 ($ in 000’s):

 

		Operating				Vehicle
		Leases				Leases				Total
Year ending June 30,
2016 (1/1/16-6/30/16)		$	7,504			$	22,813			$	30,317
2017			11,154				35,225				46,379
2018			8,606				32,030				40,636
2019			6,396				27,746				34,142
2020			3,061				21,538				24,599
2021 and thereafter			3,426				10,599				14,025
Total minimum payments		$	40,147			$	149,951			$	190,098

 

If the operating leases for vehicles were treated as capital leases, the senior debt and total debt would approximate $321.0 million and $435.0 million, respectively as at December 31, 2015. Further, the senior debt to EBITDA ratio (as defined in the Credit Agreement and adjusted for capitalization of vehicle leases) would increase 1.4:1, and the total debt to EBITDA ratio would increase 1.0:1.

 

Outstanding Share Data

 

As at December 31, 2015, the Company had 96,588,700 issued and outstanding common shares, US $60.0 million principal amount of US$ 6.25% Convertible Debentures convertible into approximately 6.3 million common shares and Cdn $75.0 million principal amount of Cdn$ 6.25% Convertible Debentures convertible into approximately 8.3 million common shares. There are no preferred shares issued and outstanding. (see “Liquidity and Capital Resource-Convertible Debentures”).

 

Quantitative and Qualitative Disclosures About Market Risk

 

As noted in the cautionary language concerning forward-looking disclosures under the heading “Forward-Looking Statements” in this management discussion and analysis, this section contains forward-looking statements, including with respect to the Company’s anticipated dividends. Such statements involve known and unknown risks, uncertainties and other factors outside of management’s control, including the risk factors set forth in this management discussion and analysis that could cause results to differ materially from those described or anticipated in the forward-looking statements.

 

In the normal course of business, the Company is exposed to market risks arising from adverse changes in interest rates and the Cdn$/US$ foreign currency exchange rate. Market risk is defined for these purposes as the potential change in the fair market value of financial assets and liabilities resulting from an adverse movement in these rates. Except for the changes in the Cdn$/US$ foreign currency exchange rate during the first six months of fiscal year 2016, there have been no other material changes to the Company’s exposure to the above-mentioned market risks during the first six months of fiscal year 2016.

 

As at December 31, 2015, the Company’s material variable rate borrowings included the outstanding borrowings under the Credit Agreement. As at December 31, 2015, the Company had $131.8 million in outstanding indebtedness under the Credit Agreement. The Company has an interest rate swap in place for a notional amount of $50.0 million to swap the variable rate to a fixed rate for $50.0 million in borrowings under the Credit Agreement. (see “Liquidity and Capital Resource-Convertible Debentures”). A 100 basis point change in interest rates, applied to these net borrowings as at December 31, 2015 would result in approximately a $0.8 million annual change in interest expense and a corresponding change in cash flow.

 

The Cdn$ 6.25% Convertible Debentures due June 30, 2019 are denominated and payable, upon maturity, in Canadian dollars. The Company has not entered into any hedge arrangement with respect to the payment of the Cdn$ 6.25% Convertible Debentures upon maturity. The Company uses its cash flows from its Canadian operations to partially mitigate the exchange risk on the Convertible Debenture interest payments.

 

The Company is also exposed to changes in the market price of fuel in the ordinary course of business. As a partial mitigation of the impact of fuel price volatility on the Company’s results, approximately 60% of the Company’s revenue contracts have some form of mitigation against fuel price increase, ranging from reimbursement by the school district to outright purchase of fuel by school districts. The Company is still exposed to some market price fluctuations under some of these fuel mitigation features. The Company, for fiscal year 2015, entered into fixed price contracts, in August of that fiscal year with fuel suppliers to cover the approximately 20% of its fuel exposure, prior to the decline in market prices that occurred in the October through December period of fiscal year 2015. For fiscal year 2016, the Company entered into fixed price contracts with fuel vendors starting in October 2014 (the period of fiscal 2015 when market prices started to decline), for the approximately 20% of its fuel exposure locked in for fiscal year 2016. In August and November 2015, the Company locked in approximately 15% of its fuel exposure for fiscal year 2017.

 

Summary of Quarterly Results ($ in 000’s, except per share data)

 

		3rd Qtr				4th Qtr				1st Qtr				2nd Qtr				3nd Qtr				4th Qtr				1st Qtr				2nd Qtr
		2014				2014				2015				2015				2015				2015				2016				2016
Revenues		$	138,263			$	142,567			$	88,532			$	157,451			$	156,314			$	152,454			$	93,383			$	167,380
Net income (loss)		$	2,600			$	4,707			$	(8,755	)		$	3,537			$	1,893			$	6,480			$	(9,543	)		$	5,533
Net income (loss) per share		$	0.03			$	0.06			$	(0.11	)		$	0.04			$	0.02			$	0.07			$	(0.10	)		$	0.06

 

 

Seasonality

 

School bus transportation revenue has historically been seasonal, based on the school calendar and holiday schedule. During the summer school break, revenue is derived primarily from summer camps and private charter services. As schools are not in session, there is minimal school bus transportation revenue during this period. Thus, the Company incurs operating losses during the first three months of the fiscal year, which encompass the summer school break. Depreciation of fixed assets occurs in the months during which schools are in session, which is generally September through June. A full year’s worth of depreciation is recorded in these ten months to correspond to the vehicle’s usage.

 

Internal Controls over Financial Reporting

 

We have evaluated our internal controls over financial reporting and determined that no changes were made in the Company’s internal controls over financial reporting during the six months ended December 31, 2015, that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. Management is, however, continually monitoring and seeking to improve the Company’s infrastructure and controls.

 

Transactions with Related Parties

 

The Company utilized a transportation equipment dealer, primarily to assist in procurement and disposal of the Company’s fleet under the direction of the Company’s CFO. The transportation equipment dealer also provided consulting services to the Company, assisting with fleet valuations in its acquisition efforts. The transportation equipment dealer was a company controlled by a family member of the Company’s Chairman and CEO. Beginning in fiscal year 2015, the fleet procurement and disposal services were provided for an annual fee including a retainer amount plus a commission per vehicle amount not to exceed $0.5 million per annum. Prior to fiscal year 2015, these services were provided on a non-contractual basis. The Company paid the transportation equipment dealer $0.5 million for the six months ended December 31, 2014. In April 2015, the Company terminated the agreement and began to perform these services directly with internal resources.

 

These transactions were measured at the exchange amount which is the amount of consideration established and agreed to by the related parties.

 

Subsequent Events

 

As noted in the cautionary language concerning forward-looking disclosures under the heading “Forward-Looking Statements” in this management discussion and analysis, this section contains forward-looking statements, including with respect to the Company’s EIP and lease payments. Such statements involve known and unknown risks, uncertainties and other factors outside of management’s control, including the risk factors set forth in this management discussion and analysis that could cause results to differ materially from those described or anticipated in the forward-looking statements.

 

 

On January 18, 2016, STA Holdings granted 305,919 Class B Series Three common shares pursuant to the EIP. The Company will recognize a non-cash stock based expense related to these grants during the quarter ended March 31, 2016.

 

Subsequent to the second quarter of fiscal 2016, a wholly-owned subsidiary of the Company purchased the remaining interest in a consulting and management services firm and acquired a second consulting services firm.  Combined, total consideration for both firms approximated $7.0 million, consisting of $6.0 million in cash and $1.0 million in common stock.  The Company had previously invested $1.7 million in March 2015, to acquire a non-controlling interest in the first consulting and management service firm. 

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Some of the estimates and assumptions management is required to make relate to matters that are inherently uncertain as they may pertain to future events. Management bases these estimates on historical experience and on various other assumptions that it believes to be reasonable and appropriate. Actual results may differ significantly from these estimates. The following is a description of our accounting policies that we believe require subjective and complex judgments, and could potentially have a material effect on reported financial condition and results of operations.

 

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

 

When assessing goodwill impairment, the Company may at its option perform a qualitative assessment to first assess whether the fair value of a reporting unit is less than its carrying value. If the Company does not choose to perform a qualitative assessment, a two step impairment test is required. The Company first compares the fair value of the reporting unit with its carrying value, including goodwill. If the carrying value exceeds the fair value, the carrying value is then compared to the implied fair value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss will be recognized in the statement of earnings in an amount equal to the difference and the implied fair value of goodwill becomes the new carrying value of goodwill for that reporting unit which is then used in future impairment tests.

 

When assessing the impairment for trade names, if the carrying value exceeds the fair value, an impairment loss will be recognized in the statement of earnings in an amount equal to the excess.

 

Fair values are derived by using discounted cash flow analyses which requires, among other factors, estimates of the amount and timing of projected cash flows and the appropriate discount rate.

 

Other identifiable intangible assets consist of contract rights and covenants not to compete. Contract rights, which include customer relationships, are amortized on a straight-line basis over an estimated useful life of 20 to 23 years. The useful life for contract rights was determined based on third party valuation reports prepared for the Company. The valuations took into account the average length of the contracts, the expected renewal periods and assumptions regarding future renewals based upon historical customers lives. Covenants not to compete are amortized on a straight-line basis over an estimated useful life of two to five years.

 

Impairment of Long-Lived Assets. Management continually evaluates whether events or circumstances have occurred that indicate that the remaining estimated useful lives of property and equipment, contract rights and covenants not to compete may warrant revision or that the remaining balances may not be recoverable. Events or circumstances that would trigger testing for impairment include, but are not limited to, the loss of a significant school district customer contract, a significant increase in the Company’s expense levels absent a corresponding increase in revenue that causes operating or cash flow losses or projected operating or cash flow losses, significant adverse changes in legal factors or the business climate in which the Company operates that could affect the value of long-lived assets, or the expectation that a long-lived asset will be sold or otherwise disposed of at a loss before the end of its previously estimated useful life. If this review indicates that the assets will not be recoverable, as determined based on the undiscounted future cash flows from the use of the assets, the carrying value of the assets will be reduced to their estimated fair value.

Insurance Reserves. The Company’s insurance reserves reflect the estimated deductible amounts the Company is responsible for under the workers’ compensation and vehicle liability insurance programs. Our insurance expense for these items is largely dependent on our claims experience and our ability to control such claims, the actuarial development of claims to their select ultimate, in addition to third party premiums/expenses associated with this coverage. We have recorded estimated insurance reserves for the anticipated losses on open claims under the workers’ compensation and vehicle liability programs based upon actuarial analysis prepared by an independent third party actuary. Although the estimates of these accrued liabilities are based on the factors mentioned above, it is possible that future cash flows and results of operations could be materially affected by changes in our assumptions or changes in claims experience and development.

 

Stock Based Compensation. The Company accounts for stock-based compensation and other stock-based payments using the fair value method. Under the fair value method, the fair value of the stock based compensation and other stock-based payments are estimated at the grant date and the total fair value is amortized over the vesting schedule of the awards as compensation expense. The Class B common shares issued by STA Holdings are fully vested on the grant date, and, as such, the Company recognizes compensation expense when the shares are issued. These shares are accounted for as a liability upon issuance and re-measured at fair value on a quarterly basis. Changes in fair value are recorded in the Consolidated Statement of Operations.

 

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

 

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

 

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

 

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

 

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

 

The functional currency of STI, STA ULC and the Company’s Canadian operations is the Canadian dollar. The functional currency of the Company’s operations in the United States is the U.S. dollar. The Company’s financial statements are reported in U.S. dollars, as the principal operations and cash flows of its subsidiaries are conducted in U.S. dollars. As a result, the assets and liabilities of the Company, STA ULC and the Company’s Canadian operations are translated into U.S. dollars using the exchange rate in effect at the period end and revenues and expenses are translated at the average rate during the period. Exchange gains or losses on translation are deferred as a separate component of shareholders’ equity. The Cdn$ 6.75% Convertible Debentures were and the Cdn$ 6.25% Convertible Debentures of STI are denominated in Canadian dollars. As the functional currency of STI is the Canadian dollar, exchange gains or losses related to the Cdn$ 6.75% Convertible Debentures and the Cdn$ 6.25% Convertible Debentures on the translation of the STI financial statements into U.S. dollars, the reporting currency, are deferred as a separate component of shareholders’ equity. The US$ 6.25% Convertible Debentures of STI are denominated in U.S. dollars. As the functional currency of STI is the Canadian dollar, unrealized gains or losses on re-measurement of the US$ 6.25% Convertible Debentures into Canadian dollars are considered transaction gains and losses, at the STI level, and are included in the consolidated statement of operations.

 

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

 

Oil and Gas Reserve Estimates. Estimates of oil and gas reserves in the consolidated financial statements are prepared through reserve engineering, which is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The process relies on interpretations of available geographical, geophysical, engineering and production data. The accuracy of a reserve estimate is a function of the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions and the judgment of the persons preparing the estimate.

 

The Company’s reserve information is based on estimates prepared by independent oil and gas industry consultants. Estimates prepared by others may be different than these estimates. Because these estimates depend on many assumptions such as projected future rates of production, estimated commodity price forecasts and the timing of future expenditures, all of which may differ from actual results, reserve estimates may be different from the quantities of oil and gas that are ultimately recovered. In addition, the results of drilling, testing and production after the date of an estimate may justify revisions to the estimate.

 

The present value of future net oil and gas revenues should not be assumed to be the current market value of the Company’s estimated oil and gas reserves. Actual future prices, costs and reserves may be materially higher or lower than the prices, costs and reserves used for the future net revenue calculations. Reserve estimates can have a significant impact on earnings, as they are a key component in the calculation of oil and gas depreciation and depletion.

 

A downward revision in the reserve estimate could result in a higher depreciation and depletion charge to earnings. In addition, if the net capitalized costs are determined to be in excess of the calculated ceiling, which is based largely on reserve estimates, the excess must be written off as an expense charged against earnings.

 

Asset Retirement Obligations. The asset retirement obligation provision recorded in the consolidated financial statements is based on estimates of total costs for future restoration and abandonment of oil and natural gas wells and facilities, as well as estimates of when these costs will occur. The estimates are based on the Company’s net ownership interest in the wells. Estimating these future costs requires management to make estimates and judgments that are subject to future revisions based on numerous factors, including changing technology and political and regulatory environments.

 

 

Risk Factors

 

A discussion of general and specific risk factors that could affect our financial performance is found under the heading “Risk Factors” in our “Annual Information Form” for the fiscal year ended June 30, 2015, which is available on SEDAR at www.sedar.com and which section is incorporated herein by reference.

 

 

 

 

 

 

 

 

 

 

 

26

EXHIBIT 99.3

FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE

I, Denis J. Gallagher, Chief Executive Officer of Student Transportation Inc., certify the following:

1.

Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Student Transportation Inc. (the “issuer”) for the interim period ended December 31, 2015

2.

No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3.

Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4.

Responsibility: The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

5.

Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a)

designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

                                                    (i)               material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

                                                   (ii)               information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

(b)

designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

5.1

Control framework: The control framework the issuer’s other certifying officer and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework (2013 COSO Framework) published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2

ICFR-material weakness relating to design: N/A

5.3

Limitation on scope of design: N/A

6.

Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on October 1, 2015 and ended on December 31, 2015 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

Date: February 15, 2016

“Denis J. Gallagher”                  
Title: Chief Executive Officer

 

EXHIBIT 99.4

FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE

I, Patrick J. Walker, Chief Financial Officer of Student Transportation Inc., certify the following:

1.

Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Student Transportation Inc. (the “issuer”) for the interim period ended December 31, 2015.

2.

No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

3.

Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

4.

Responsibility: The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

5.

Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings

(a)

designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that

                                                    (i)               material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

                                                   (ii)               information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

(b)

designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

5.1

Control framework: The control framework the issuer’s other certifying officer and I used to design the issuer’s ICFR is the Internal Control – Integrated Framework (2013 COSO Framework) published by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

5.2

ICFR-material weakness relating to design: N/A

5.3

Limitation on scope of design: N/A

6.

Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on October 1, 2015 and ended on December 31, 2015 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

Date: February 15, 2016

“Patrick J. Walker”                  
Title: Chief Financial Officer

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