UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-10841

GREYHOUND LINES, INC.

(972) 789-7000
(Registrant’s telephone number, including area code)

None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

As of August 6, 2004, the registrant had 587 shares of Common Stock, $0.01 par value, outstanding, all of which are held by the registrant’s parent company.

(1)		This Form 10-Q is also being filed by the co-registrants specified under the caption “Co-Registrants,” each of which is a wholly-owned subsidiary of Greyhound Lines, Inc. and each of which has met the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q for filing Form 10-Q in a reduced disclosure format.
(2)		This registrant meets the conditions set forth in General Instructions H(1)(a) and (b) of Form 10-Q and is therefore filing this form in a reduced disclosure format.

Co-Registrants

This Form 10-Q is also being filed by the following entities. Except as set forth below, each entity has the same principal executive offices, zip code and telephone number as that set forth for Greyhound Lines, Inc. on the cover of this report:

As of June 30, 2004, Atlantic Greyhound Lines of Virginia, Inc. had 150 shares of common stock outstanding (at a par value of $50.00 per share); GLI Holding Company had 1,000 shares of common stock outstanding (at a par value of $0.01 per share); Greyhound de Mexico, S.A. de C.V. had 10,000 shares of common stock outstanding (at a par value of $0.10 Mexican currency per share); Sistema Internacional de Transporte de Autobuses, Inc. had 1,000 shares of common stock outstanding (at a par value of $0.01 per share); Texas, New Mexico & Oklahoma Coaches, Inc. had 1,000 shares of common stock outstanding (at a par value of $0.01 per share); T.N.M. & O. Tours, Inc. had 1,000 shares of common stock outstanding (at a par value of $1.00 per share); and Vermont Transit Co., Inc. had 505 shares of common stock outstanding (no par value). Each of the above named co-registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period such co-registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days.

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GREYHOUND LINES, INC. AND SUBSIDIARIES

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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GREYHOUND LINES, INC. AND SUBSIDIARIES

The accompanying notes are an integral part of these statements.

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GREYHOUND LINES, INC. AND SUBSIDIARIES

The accompanying notes are an integral part of these statements.

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GREYHOUND LINES, INC. AND SUBSIDIARIES

The accompanying notes are an integral part of these statements.

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GREYHOUND LINES, INC. AND SUBSIDIARIES

1. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

The accompanying interim consolidated financial statements of Greyhound Lines, Inc. and Subsidiaries (“Greyhound” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim reporting and accordingly, do not include all of the disclosures required for annual financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. All such adjustments are of a normal, recurring nature. Additionally, certain reclassifications have been made to the prior period statements to conform them to the current period presentation. Due to the seasonality of the Company’s operations, operating results for the three and six months ended June 30, 2004 and 2003 and cash flows for the six months ended June 30, 2004 and 2003 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2004. For further information, see the Company’s consolidated financial statements, including the accounting policies and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.

On March 16, 1999, the Company’s stockholders approved the Agreement and Plan of Merger with Laidlaw Inc. pursuant to which the Company became a wholly-owned subsidiary of Laidlaw Inc. (the “Merger”). The consolidated financial statements of the Company do not reflect any purchase accounting adjustments relating to the Merger.

On June 28, 2001, Laidlaw Inc. and certain of its affiliates filed voluntary petitions for reorganization under the U.S. Bankruptcy Code and the Canada Companies’ Creditors Arrangement Act. Neither Greyhound nor any of its subsidiaries were included in, or made party to, these reorganization filings and proceedings.

In June 2003, Laidlaw Inc. emerged from the court-supervised reorganization process and, in accordance with the Plan of Reorganization, Laidlaw Inc. completed an internal corporate restructuring, in which Laidlaw International, Inc. acquired all of the assets of Laidlaw Inc., a Canadian corporation. Additionally, pursuant to the Plan, Laidlaw International, Inc. domesticated into the United States as a Delaware corporation. Laidlaw International, Inc. and its predecessor Laidlaw Inc. are referred to as “Laidlaw”. The consolidated financial statements of the Company do not reflect any fresh start accounting adjustments relating to the reorganization of Laidlaw.

2. OTHER COMPREHENSIVE INCOME

The Company includes unrealized gains and losses on available-for-sale securities and changes in minimum pension liabilities in other comprehensive income. For the three months ended June 30, 2004 and 2003, comprehensive loss was $4.5 million and $12.7 million, respectively. Additionally, for the six months ended June 30, 2004 and 2003, comprehensive loss was $25.6 million and $40.3 million, respectively. The difference between net loss and other comprehensive loss in 2004 and 2003 is due to unrealized gains and losses on available-for-sale securities.

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GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2004
(Unaudited)

3. INDEBTEDNESS

Revolving Credit Facility

On July 6, 2004, the Company amended its revolving credit facility (“Revolving Credit Facility”) to extend the maturity date two years to October 24, 2006, reset certain financial covenants, modify rates of interest on borrowings and provide for a prepayment premium should the Company terminate the facility before October 24, 2006. Additionally, the amendment allows the Company to elect to extend the maturity date an additional year, to October 24, 2007, provided that the Company meets certain terms and conditions.

Under the amended Revolving Credit Facility, borrowings after the quarterly period ending September 30, 2004, are available at a rate, determined by reference to a leverage ratio calculated quarterly, equal to Wells Fargo Bank’s prime rate plus 0.375% to 2.25% or LIBOR plus 2.375% to 4.25%. Prior to the quarterly period ending September 30, 2004, borrowings remain available at a rate equal to Wells Fargo Bank’s prime rate plus 1.5% or LIBOR plus 3.5%. Letter of credit fees are 3.5% per annum. A 1% prepayment premium is payable should the Company terminate the facility before October 25, 2005, if terminated between October 25, 2005 and October 23, 2006 the premium is 0.5%, and if after October 23, 2006 there is no premium. At June 30, 2004, letters of credit or borrowings are available under the Revolving Credit Facility based upon the total of 80% of the appraised wholesale value of bus collateral, plus 65% of the quick sale value of certain real property collateral, minus $20 million, (which at June 30, 2004, aggregated to $108.2 million) subject to a maximum of $125 million, inclusive of a $70 million letter of credit sub-facility. As of June 30, 2004, the Company had no outstanding borrowings under its Revolving Credit Facility, issued letters of credit of $62.2 million and availability of $46.0 million.

Additionally, the amendment requires the Company to maintain a minimum cash flow to interest expense ratio, maximum indebtedness to cash flow ratio and minimum cash flow at levels that are the same as, or more restrictive than, previous levels. The new covenant levels were set at 15% to 20% less than the levels projected in financial forecasts delivered to the agent bank by the Company. As of June 30, 2004, the Company was in compliance with all such covenants. As a result of the extension of the maturity date and recent business improvements that have allowed the Company to meet its financial covenants, management believes that there is no longer a going concern risk in the near term. However, substantial needs for capital expenditures and debt service requirements in the future mandate that the Company continue to significantly improve operations and financial results. Additionally, unforeseen events or changes in assumptions may occur and result in material differences between the Company’s future financial results or forecasts and the current financial forecast, and those differences could result in management concluding in the future that the Company may not be able to continue as a going concern based upon the new information.

4. LEASE COMMITMENTS

The Company generally uses lease financing as the principal source of bus financing in order to achieve the lowest net cost of bus financing. These leases typically have terms of seven years and contain specific residual values and residual value guarantees. Most of the leases qualify as operating leases for accounting purposes and, as such, only the monthly lease payment is recorded in the consolidated statements of operations and the liability and value of the underlying buses are not recorded on the consolidated statements of financial position.

In June 2004, the Company entered into two seven-year operating leases covering 20 buses. The leases have an aggregate residual value at lease expiration of $2.9 million of which the Company has guaranteed $1.7 million. As required under Financial Accounting Standards Board Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”, the Company recorded a liability in an insignificant amount for the estimated fair value of the residual value guarantee imbedded in these leases.

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GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2004
(Unaudited)

5. PENSION PLANS

The Company has nine defined benefit pension plans. The largest plan (the “ATU Plan”) covers approximately 13,500 current and former employees, fewer than 900 of whom are active employees of the Company. The following table provides the components of net periodic pension cost for the three and six months ended June 30, 2004 and 2003 (in thousands):

Plan Contributions and Potential Funding Requirements

Laidlaw, collectively with all of its wholly-owned U.S. subsidiaries, including Greyhound (the “Laidlaw Group”), is party to an agreement with the Pension Benefit Guaranty Corporation regarding the funding levels of the Company’s pension plans (the “PBGC Agreement”). Under the PBGC Agreement 3.8 million shares of common stock of Laidlaw were issued to a trust formed for the benefit of the pension plans (the “Pension Plan Trust”). The trustee of the Pension Plan Trust is to sell the stock at Laidlaw’s direction, but in no event later than the end of 2004, with all net proceeds from the stock sales being contributed directly to the pension plans. If the net proceeds from the stock sales exceed $50 million, the excess amount may be credited against any future required minimum funding obligations. If the net proceeds from the stock sales are less than $50 million, the Laidlaw Group will be required to contribute the amount of the shortfall in cash to the pension plans at the end of 2004. Additionally, on June 30, 2004, the Laidlaw Group contributed $50 million in cash to the pension plans in accordance with the terms of the PBGC Agreement. This contribution and the transfers will be in addition to the minimum funding obligations to the pension plans, if any, required under current regulations.

The $50 million cash contribution on June 30, 2004 has been designated by Laidlaw as a capital contribution to the Company and, accordingly, the Company recorded a $50 million increase in additional paid in capital and a $50 million reduction in pension obligations. At June 30, 2004, all 3.8 million shares of Laidlaw common stock remained in the Pension Plan Trust and no dividends had been received from Laidlaw on these shares. Based upon the closing price of the Laidlaw stock on the New York Stock Exchange on August 10, 2004, the shares had an aggregate market value of $54.5 million.

In addition to the cash contributions to the pension plans pursuant to the PBGC Agreement described above, in 2004, the Company expects to contribute $3.0 million to all plans other than the ATU Plan, for which there is no funding requirement in 2004. During the six months ended June 30, 2004, the Company contributed $0.6 million to the plans.

The ATU Plan represents approximately 90% of the total obligations of the pension plans. Based upon current regulations and plan asset values at June 30, 2004, and assuming annual investment returns exceed 3% and that the contributions required under the PBGC Agreement are made in accordance with the timing specified in the PBGC Agreement, the Company does not anticipate any significant additional minimum funding requirements for the ATU Plan until 2007. However, there is no assurance that the ATU Plan will be able to earn the assumed rate of return, that new regulations may not result in changes in the prescribed actuarial mortality table and discount rates, or that there will be market driven changes in the discount rates, any of which could result in the Company being required to make contributions in the future that differ significantly from the current estimates.

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GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2004
(Unaudited)

6. SALES OF BUSINESSES

During the quarter ended June 30, 2004, the Company sold the operations and selected assets of Rockford Coach Lines, L.L.C. (“Rockford”) for cash of $1.5 million, and recorded a corresponding charge of $0.8 million. Additionally, the Company sold its ownership interest in a courier company in Houston, Texas for cash of $0.1 million resulting in an insignificant gain and a reduction in goodwill of approximately $0.1 million.

7. CONTINGENCIES

Environmental Matters

The Company’s operations are subject to numerous environmental laws, regulations and guidelines adopted by various governmental authorities in the jurisdictions in which the Company operates. Liabilities are recorded when environmental liabilities are either known or considered probable and can be reasonably estimated. On an ongoing basis, management assesses and evaluates environmental risk and, when necessary, conducts appropriate corrective measures. The Company provides for environmental liabilities using its best estimates. Actual environmental liabilities could differ significantly from these estimates.

Legal Proceedings

The Company is a defendant in various lawsuits arising in the ordinary course of business, primarily cases involving personal injury and property damage claims and employment related claims. Based on the Company’s assessment of known claims and the historical claims payout pattern and discussions with internal and outside legal counsel and risk management personnel, management believes that there is no proceeding either threatened or pending against the Company relating to such claims arising out of the ordinary course of business that, if resolved against the Company, would have a materially adverse effect upon the Company’s consolidated financial position or results of operations.

Insurance Coverage

The U.S. Department of Transportation (“DOT”) has authorized the Company to self-insure its automobile liability exposure for interstate passenger service up to a maximum level of $5.0 million per occurrence. To maintain self-insurance authority, the Company is required to provide periodic financial information and claims reports, maintain a satisfactory safety rating by the DOT, a tangible net worth of $10.0 million and a trust fund, initially set at $15 million, to provide security for payment of claims. At December 31, 2002, and continuing to date, the Company’s tangible net worth has fallen below the minimum required by the DOT to maintain self-insurance authority. On July 25, 2003, the DOT granted a waiver of the tangible net worth requirement through December 31, 2004 and, as a condition of the waiver, the Company was required to increase the self-insurance trust fund by $2.7 million. On May 4, 2004, the DOT issued a ruling reaffirming both the Company’s self-insurance authority and the temporary waiver of the tangible net worth requirement through December 31, 2004. The new ruling requires that the trust be evaluated quarterly and funded to the greater of $17.7 million or 110% of the estimated unpaid liability for self-insured claims. As a result, during the second quarter of 2004, the Company made additional contributions to the self-insurance trust fund in the amount of $13.6 million and during the third quarter of 2004, the Company will be required to make an additional contribution to the self-insurance trust fund of $2.7 million. The Company’s self-insurance authority will continue to be subject to periodic review by the DOT.

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GREYHOUND LINES, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (Continued)
June 30, 2004
(Unaudited)

7. CONTINGENCIES (Continued)

Insurance coverage and related administrative expenses are key components of the Company’s cost structure. Additionally, the Company is required by the DOT, some states and some of its insurance carriers to maintain collateral deposits or provide other security pursuant to its insurance program. At June 30, 2004, the Company maintained $40.0 million of collateral deposits (including the DOT trust fund) and had issued $53.7 million of letters of credit in support of these programs. The loss or further modification of self-insurance authority from the DOT or a decision by the Company’s insurers to modify the Company’s program substantially, by either increasing cost, reducing availability or increasing collateral, could have a material adverse effect on the Company’s liquidity, financial condition and results of operations.

Union Contracts

The International Association of Machinists and Aerospace Workers (the “IAM”) represents approximately 400 of the Company’s employees. The largest collective bargaining agreements, representing approximately 300 mechanics at 18 maintenance facilities located throughout the United States, expire on October 1, 2004. The Company and the IAM have begun negotiations on a new bargaining agreement. If the members of the IAM were to engage in a strike or other work stoppage the Company could experience a significant disruption of operations that could have a material adverse effect on the business, financial condition and results of operations of the Company.

8. RELATED PARTY TRANSACTIONS

Included in accounts receivable on the Company’s Interim Consolidated Statements of Financial Position at June 30, 2004 and December 31, 2003, are amounts due from Laidlaw or one of Laidlaw’s subsidiaries of $5.8 million and $3.6 million, respectively. Included in accounts payable at June 30, 2004 and December 31, 2003, are amounts due to Laidlaw or one of Laidlaw’s subsidiaries of $1.1 million and $1.1 million, respectively.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Overview

Greyhound is the only nationwide provider of scheduled intercity bus transportation services in the United States. The Company operates as one business segment with the primary business consisting of scheduled passenger service, package express service and food service at certain terminals. At June 30, 2004, the Company’s operations included a nationwide network of terminal and maintenance facilities utilizing a fleet of approximately 2,800 buses. At June 30, 2004, the Company used a network of approximately 1,700 sales locations, offering the customer the ability to travel to more than 2,600 destinations in North America.

The Company’s business is seasonal in nature and generally follows the travel industry as a whole, with peaks during the summer months and the Thanksgiving and Christmas holiday periods. As a result, the Company’s operating cash flows are also seasonal with a disproportionate amount of the Company’s annual operating cash flows being generated during the peak travel periods. The day of the week on which certain holidays occur, the length of certain holiday periods, and the date on which certain holidays occur within the fiscal quarter, may also affect the Company’s quarterly results of operations.

The following discussion and analysis presents factors that affected the Company’s consolidated results of operations for the three and six months ended June 30, 2004 and the Company’s consolidated financial position at June 30, 2004. The following information should be read in conjunction with the Consolidated Financial Statements and Notes included in this Form 10-Q as well as the Company’s Form 10-K for the year ended December 31, 2003.

Overview of the Second Quarter

The business continued to improve during the second quarter because of the Company’s continued actions to improve operating results and to a lesser extent because of lower revenue and passenger miles in the prior year due to the war in Iraq and increased terror alert levels over the Easter and Memorial Day holidays. Additionally, the Company amended its Revolving Credit Facility, thus mitigating the going concern risk, signed a new collective bargaining agreement with the Amalgamated Transit Union, Local 1700 and continued its focus on cost reduction opportunities. For the quarter ended June 30, 2004, revenue improved by $3.5 million or 1.5%, expenses declined by $2.8 million or 1.1% and, accordingly, the Company generated an operating profit of $2.4 million, compared to an operating loss of $3.9 million as of June 30, 2003, an improvement of $6.3 million. For the six months ended June 30, 2004, revenue improved by $5.9 million or 1.3%, expenses declined by $7.6 million or 1.6% and the Company’s operating loss declined from $26.3 million as of June 30, 2003, to $12.9 million as of June 30, 2004, an improvement of $13.4 million.

During the second quarter of 2004, the Company continued to take actions to improve revenue per bus mile by increasing ticket prices, shifting the mix of passengers toward higher yielding short-and medium-haul travel and reducing bus miles. In April, the Company implemented further across the board price increases and although this action caused a decline in passengers and passenger miles, the declines were principally in the low yielding long-and very long-haul trip distances, and the price increases more than offset the effects of the decline in passengers and passenger miles. Concurrently, the Company continued its efforts to aggressively reduce bus miles to respond to the reduction in passengers and passenger miles. As a result of the reduction in bus miles and the improvement in passenger revenue, revenue per mile improved significantly for the three and six months ended June 30, 2004.

Since approximately 76% of the Company’s wages are variable with bus and passenger miles, the reduction in bus miles resulted in a significant decrease in expenses. In addition, costs declined as a result of the closure of one of the Company’s telephone information centers, the continued effects of the 2003 reductions in force, and other cost decreases resulting from lower business volumes and resource needs. However, significant increases in fuel, pension and insurance costs offset a substantial portion of the savings and remain challenging issues going forward.

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On July 6, 2004, the Company amended its revolving credit facility (the “Revolving Credit Facility”) to extend the maturity date two years to October 24, 2006, reset certain financial covenants, modify rates of interest on borrowings and provide for a prepayment premium should the Company terminate the facility before October 24, 2006. Additionally, the amendment allows the Company to elect to extend the maturity date an additional year, to October 24, 2007, provided that the Company meets certain terms and conditions. As of June 30, 2004, the Company was in compliance with all of its debt covenants and the Company’s current forecasts indicate that it will meet its debt covenants through the remainder of the agreement. As a result of the extension of the maturity date and recent business improvements that have allowed the Company to meet its financial covenants, management believes that there is no longer a going concern risk in the near term. However, substantial needs for capital expenditures and debt service requirements in the future mandate that the Company continue to significantly improve operations and financial results. Additionally, unforeseen events or changes in assumptions may occur and result in material differences between the Company’s future financial results or forecasts and the current financial forecast, and those differences could result in management concluding in the future that the Company may not be able to continue as a going concern based upon the new information.

Additionally, in July, the Company announced the first phase of its long-range strategy for the passenger business. In general, the strategy is to more efficiently serve areas where customer demand is greatest through a smaller, simpler network of routes that is short-and medium-haul focused, but that can still provide affordable service to long-haul passengers. The initial implementation will be in the Northern region of the United States, roughly between Chicago and Seattle, and will include the elimination of approximately 10 million miles, 260 sales locations and modifications of other routes to provide a better service pattern for customers. In addition, approximately 150 jobs will be eliminated. The Company will implement the strategy in phases beginning on August 18, 2004, and continuing over the next two to three years.

In summary, during the quarter management continued making improvements to stabilize the Company in the short-term and also began planning for implementation of its long-term strategy. The Company will continue this dual focus as substantial needs for capital expenditures and debt service requirements mandate that the Company continue to significantly improve operations and financial results.

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Results of Operations

The following table sets forth the Company’s results of operations as a percentage of total operating revenue for the three and six months ended June 30, 2004 and 2003:

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The following table sets forth certain operating data for the Company for the three and six months ended June 30, 2004 and 2003. Certain statistics have been adjusted and restated from those previously published to provide consistent comparisons.