UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
|_| TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from ______________ to ________________
Commission file number - 000-22813
MOTO GUZZI CORPORATION
----------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3853272
--------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
445 Park Avenue, New York, New York 10022
---------------------------------------------------
(Address of principal executive offices - Zip code)
Registrant's telephone number, including area code: (212) 644-4441
Former name, former address and former fiscal year, if changed since last
report.
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes |_| No |X|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by checkmark whether the registrant has filed all documents and reports
required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes |_| No |_|
<PAGE>
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, as of the latest practicable
date.
Common stock, par value $.01 per share, 5,599,092 shares outstanding as of June
15, 2000.
2
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Part I - Financial Information...............................................4
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS..............................5
ASSETS.......................................................................5
LIABILITIES..................................................................6
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS..............................7
COMPREHENSIVE INCOME/(LOSS)..................................................8
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW.....................9
1. Basis of Presentation.................................................11
2. Execution and Delivery of Share Purchase Agreement....................11
3. Issuance of Series B Preferred Stock..................................14
4. Purchase of outstanding securities of MGI Motorcycle GmbH.............16
5. Liquidity and going concern...........................................16
6. Accumulated Other Comprehensive Income................................16
Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................18
Liquidity and Financial Resources...........................................19
Operations..................................................................19
Investment activities.......................................................20
Financing Activities........................................................20
Future Liquidity Needs......................................................20
Potential Effects of the European Common Currency on the Company's
Business....................................................................21
Part II - Other Information ...............................................23
Item 1. Legal Proceedings ..................................................23
Item 2. Changes in Securities ..............................................23
Item 3. Defaults Upon Senior Securities ....................................24
Item 4. Submission of Matters to a Vote of Security Holders ................25
Item 5. Other Information ..................................................25
Item 6. Exhibits and Reports on Form 8-K ...................................25
SIGNATURES..................................................................26
3
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MOTO GUZZI CORPORATION AND SUBSIDIARIES
Part I - Financial Information
4
<PAGE>
MOTO GUZZI CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2000
Mar. 31 Mar. 31 Dec. 31
2000 2000 1999
ASSETS US$'000 Lit. m Lit. m
Cash and cash equivalents 1,607 Lit. 3,251 Lit. 2,391
Receivables 13,334 26,974 28,433
Trade, less allowance of Lit. 2,388
(1999 - Lit. 2,350) 8,498 17,192 19,189
Receivables from related parties 3,135 6,342 6,846
Other receivables 1,701 3,440 2,398
Inventories 17,128 34,650 34,451
Raw materials, components and
work-in-process 9,921 20,070 20,073
Finished products 7,207 14,580 14,378
Prepaid expenses 243 492 266
------- ------- -------
TOTAL CURRENT ASSETS 32,312 65,367 65,541
------- ------- -------
Property, plant and equipment 6,814 13,784 14,638
At cost 22,106 44,719 44,713
Less allowances for depreciation (15,292) (30,935) (30,075)
Goodwill net of amortization of Lit. 222
(1999 - Lit. 208) 20 40 54
Investments in and advances to MGI
Motorcycle GmbH 1,174 2,376 491
Other assets 229 463 344
------- ------- -------
TOTAL ASSETS 40,549 Lit.82,030 Lit.81,068
======= ======= =======
Note: The balance sheet as at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles.
See Notes to Consolidated Financial Statements
5
<PAGE>
MOTO GUZZI CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2000
Mar. 31 Mar. 31 Dec. 31
2000 2000 1999
LIABILITIES US$'000 Lit. m Lit. m
Advances from banks $ 11,537 Lit.23,339 Lit. 29,957
Current portion of long-term debt 5,617 11,364 11,496
Loans due to related parties -- -- 3,254
Accounts payable 12,412 25,110 32,212
Amounts due to related and affiliated
parties 107 217 80
Accrued expenses and other payables 3,226 6,524 6,904
-------- -------- --------
TOTAL CURRENT LIABILITIES 32,899 66,554 83,903
-------- -------- --------
Long-term debt, less current portion 974 1,970 2,027
Termination indemnities 3,905 7,900 7,973
Advances for redeemable preferred stock
subscription -- -- 2,405
Redeemable preferred stock 12,142 24,563 --
SHAREHOLDERS' DEFICIT (9,371) (18,957) (15,240)
Convertible preferred stock, par value
$0.01 per share:
Authorized 4,750,000 shares;
123,500 out of 160,000 Series B shares
outstanding 1 2 --
Common stock, par value $0.01 per share:
Authorised 20,250,000 shares;
5,599,092 (1998 - 3,327,139) shares
outstanding 49 100 100
Additional paid-in capital 19,886 40,229 39,834
Accumulated other comprehensive income (158) (319) 133
Accumulated deficit (29,149) (58,969) (55,307)
-------- -------- --------
LIABILITIES & SHAREHOLDERS' DEFICIT $ 40,549 Lit. 82,030 Lit. 81,068
======== ======== ========
Note: The balance sheet as at December 31, 1999 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by generally accepted accounting principles.
See Notes to Consolidated Financial Statements
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MOTO GUZZI CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
March 31, 2000 and 1999
<TABLE>
<CAPTION>
Mar. 31 Mar. 31 Mar. 31
2000 2000 1999
US $'000 Lire m. Lire m.
<S> <C> <C> <C>
Net sales $ 9,924 Lit. 20,076 Lit. 17,573
Cost of sales (9,020) (18,247) (17,449)
----------- ----------- -----------
904 1,829 124
Selling, general and administrative expenses (1,913) (3,869) (3,921)
Research and development (165) (333) (466)
----------- ----------- -----------
Operating loss (1,174) (2,373) (4,263)
Interest expense (599) (1,212) (1,064)
Other income, net 90 183 62
----------- ----------- -----------
Loss before income taxes (1,683) (3,402) (5,265)
Income taxes (45) (92) (40)
----------- ----------- -----------
Net loss (1,728) (3,494) (5,305)
Preferred stock dividends (83) (168) --
----------- ----------- -----------
Loss attributable to common shareholders $ (1,811) Lit. (3,662) Lit. (5,305)
=========== =========== ===========
LOSS PER SHARE: US $ Lire Lire
Basic $ (0.32) Lit. (655) Lit. (1,333)
=========== =========== ===========
Diluted $ (0.32) Lit. (655) Lit. (1,333)
=========== =========== ===========
Weighted average number of common shares
outstanding during the period
Basic 5,589,092 5,589,092 3,978,433
=========== =========== ===========
Diluted 5,688,858 5,688,858 4,190,530
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements
7
<PAGE>
MOTO GUZZI CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME/(LOSS)
March 31, 2000
<TABLE>
<CAPTION>
Common Stock Class B Preferred Stock Additional
Shares Amount Shares Amount Paid-In Capital
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
At January 1, 1999 5,589,092 100 -- -- 39,834
Net loss Lit.m -- -- -- -- --
Translation adjustment -- -- -- -- --
Issuance of Series B Preferred Stock -- -- 123,500 2 23,980
Reclassification for redemption of preferred stock -- -- -- -- (23,982)
Accretion expense for preferred stock redemption
and related exchange movements -- -- -- -- --
Issuance of shares for MGI purchase 10,000 -- -- -- 91
Amortization of non-cash finance charges -- -- -- -- 306
----------------------------------------------------------------
At March 31, 2000 Lit.m 5,599,092 100 123,500 2 40,229
================================================================
At March 31, 2000 $'000 49 -- 19,886
====== =========================
<CAPTION>
Accumulated Comprehensive
Other SHARE- Income/(Loss)
Comprehensive Accumulated HOLDERS -------------
Income Deficit EQUITY
----------------------------------------------------
<S> <C> <C> <C> <C>
At January 1, 1999 Lit.m 133 (55,307) (15,240)
Net loss -- (3,662) (3,662) (3,662)
Translation adjustment 129 -- 129 129
Issuance of Series B Preferred Stock -- -- 23,982 --
Reclassification for redemption of preferred stock -- -- (23,982) --
Accretion expense for preferred stock redemption
and related exchange movements (581) -- (581) (581)
Issuance of shares for MGI purchase -- -- 91 --
Amortization of non-cash finance charges -- -- (306) --
----------------------------------------------------
At March 31, 2000 Lit.m (319) (58,969) (18,957) (4,114)
=====================================
At March 31, 2000 $'000 (158) (29,149) (9,371) (2,034)
=====================================
</TABLE>
See Notes to Consolidated Financial Statement
8
<PAGE>
MOTO GUZZI CORPORATION AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
March 31, 2000 and 1999
Mar. 31 Mar. 31 Mar. 31
2000 2000 1999
US$'000 Lit. m Lit. m
Net loss $(1,811) (3,662) (5,305)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 548 1,108 987
Gain (loss) on sales of operating assets (6) (13) 2
Termination indemnities, net (36) (73) 192
Amortization of warrant issued for finance
expense 151 306 --
Other operating activities 29 59 (667)
Changes in operating assets and liabilities:
Trade and other receivables 526 1,065 (5,484)
Related party receivables (219) (444) (2,182)
Inventories 91 185 1,131
Prepaid expenses (105) (212) (190)
Accounts payable and accrued expenses (3,739) (7,565) (4,126)
Related party payables 25 51 (1,174)
------- ------- -------
Net cash used by operating activities (4,546) (9,195) (16,816)
------- ------- -------
Investing activities:
Investment in MGI Motorcycle GmbH (543) (1,099) --
Purchases of property, plant and equipment (201) (406) (900)
------- ------- -------
Net cash used by investing activities (744) (1,505) (900)
------- ------- -------
Financing activities
Decrease/(increase) in advances from banks (3,311) (6,699) 4,422
Proceeds from merger with NAAC -- -- 16,006
Proceeds from issuance of preferred stock 9,060 18,329 --
Principal payments of long-term debt (64) (130) (167)
------- ------- -------
Net cash provided by financing activities 5,685 11,500 20,261
------- ------- -------
Increase/(decrease) in cash 395 800 2,545
Exchange movement on opening cash 30 60 17
Cash, beginning of period 1,182 2,391 217
------- ------- -------
Cash, end of period $ 1,607 3,251 2,779
======= ======= =======
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Supplemental information on non-cash activities
Advances to the Company in an aggregate amount of $1.25 million (Lit. 2,479
million) by Wheatley Partners, LP and Wheatley Foreign Partners, LP (each of
which is an affiliate of Barry Fingerhut, a Director of the Company) and William
Spier, a Director of the Company, and a US$ 1.6 million (Lit. 3,174 million)
loan due to OAM, respectively, were applied to subscribe to the Series B
preferred stock on February 25, 2000 - See Notes to financial statements.
The Company also issued 10,000 shares with a fair value of Lit. 91 million to as
part of the purchase consideration in connection with its purchase of the 75% of
MGI Motorcycle GmbH that it did not already own and Lit. 794 million of
receivables have been reclassified as "Investments and advances to MGI
Motorcycle GmbH".
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<PAGE>
1. Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted. For a summary of the Registrant's accounting principles, and other
footnote information, reference is made to the Form 10-K, dated April 26, 2000.
All adjustments necessary for the fair presentation of the results of operations
for the interim periods covered by this report have been included. All of such
adjustments are of a normal and recurring nature. The results of operations for
the three months ended March 31, 2000 are not necessarily indicative of the
operating results for the full year.
The Company was originally incorporated in Delaware on August 9, 1995 under the
name of North Atlantic Acquisition Corp. to serve as a vehicle to effect a
merger, exchange of capital stock, asset acquisition or other business
combination with an operating business. On August 27, 1997 the Company
consummated an initial public offering consisting of 800,000 Units and 150,000
shares of Class B Common Stock, with each Unit consisting of one share of Class
A Common Stock and one warrant to purchase shares of Class A Common Stock, which
resulted in net proceeds to the Company of approximately $8,000,000.
On August 18, 1998, the Company and TRG entered into a definitive agreement and
plan of merger and reorganization, as amended (the "Merger Agreement"), pursuant
to which Moto Guzzi Corp. merged with and into the Company, with the Company as
the surviving corporation (the "Merger"). Prior to the Merger, TRG and its
majority-owned subsidiary, OAM, together owned all the outstanding common stock
of Moto Guzzi Corp.
The Merger, which occurred on March 5, 1999, was treated as a reverse
acquisition of the Company. The results of operations and cash flows prior to
the date of the merger are those of Moto Guzzi Corp. As the Company had no
operating activities prior to the Merger, the Merger was not considered as a
business combination as defined by APB16 and no pro forma information is shown.
Following the Merger, the Company adopted the December 31 financial reporting
year of Moto Guzzi Corp. and financial statements are prepared using the
accounting principles of Moto Guzzi Corp.
The primary financial statements are shown in Italian lire because all of the
Company's material operating entities are based and operate in Italy.
Translation of lire amounts into U.S. Dollar amounts is included solely for the
convenience of the readers of the financial statements and has been made at the
rate of Lire 2,023 to U.S. $1, the approximate exchange rate at March 31, 2000.
It should not be construed that the assets and liabilities, expressed in U.S.
dollar equivalents, can actually be realized in or extinguished by U.S. dollars
at that or any other rate.
2. Execution and Delivery of Share Purchase Agreement
Preliminary Share Sale and Purchase Agreement
On April 14, 2000, the Company entered into a Preliminary Share Sale and
Purchase Agreement (the "Share Purchase Agreement") with Aprilia S.p.A.
("Aprilia") providing for the sale of the Company's four operating subsidiaries:
(i) Motto Guzzi, S.p.A., (ii) MGI Motorcycle GmbH, (iii) Moto Guzzi North
America Inc., and (iv) Moto Guzzi France S.a.r.l. (the "Subsidiaries").
The sale price for the shares of the Subsidiaries is Lit. 71.5 billion
(approximately $34.0 million) plus or minus the amount by which the
subsidiaries' net worth at April 30, 2000 is more or less than its net
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worth at December 31, 1999 (which we anticipate will increase the sale price by
approximately Lit.14.5 billion (approximately $6.9 million)). In addition,
Aprilia will satisfy debts of the Subsidiaries to the Company totaling
approximately Lit.2.0 billion (approximately $1.0 million) and cause OAM to be
released from a Lit.4 billion (approximately $1.9 million) guarantee of
obligations of the Subsidiaries.
Aprilia will pay Lit 10.5 billion (approximately $5.0 million) of the sale
proceeds (approximately $40.9 million) into an escrow account, instead of paying
it directly to the Company. Aprilia will be able to use the escrow fund to
satisfy any claims it may have that the Company's representations and warranties
in the sale agreement were not correct. The sum held in escrow in excess of
Lit.2 billion (approximately $1.0 million) plus the amount of any claims which
have been made against the escrow fund, will be released to us on the first
anniversary of the closing of the sale of the Subsidiaries, and the balance of
the escrow fund, to the extent it is not subject to claims, will be released to
the Company on the seventh anniversary of the closing.
The closing of the sale of the Subsidiaries will take place promptly after the
Company's stockholders approve the sale and a change of the Company's corporate
name to eliminate the words "Moto Guzzi." The Share Purchase Agreement will
automatically terminate if these stockholder approvals are not obtained by
August 31, 2000.
Under the Share Purchase Agreement, the Company also agreed that beginning May
2, 2000 Aprilia would oversee the management of the four Subsidiaries. To
facilitate this, the Company put two Aprilia designees on the board of directors
of each of the Subsidiaries beginning May 2, 2000. Aprilia is required to lend
the Subsidiaries any funds they need, and cannot otherwise obtain, between May
2, 2000 and the time the sale is completed or the sale agreement is terminated.
The loans will have to be repaid if the sale agreement is terminated. If Aprilia
makes loans to the Subsidiaries, the Company has to give Aprilia security
interests in up to 25% of the equity and quota of each of the Subsidiaries as
security for the obligation to repay the loans. During the period Aprilia is
overseeing the operations of the Subsidiaries, it must cause the Subsidiaries to
conduct their operations in the ordinary course.
The Share Purchase Agreement contains a condition that OAM, S.p.A. (the holder
of approximately 61% of the issued and outstanding shares of Class A common
stock) agree to vote its capital stock for the sale, and by letter to Aprilia
dated April 14, 2000, OAM agreed to vote its shares for the sale. In the letter,
OAM also agreed, among other things, to cause us to take such actions as may be
required to change the Company's name to remove the words "Moto Guzzi."
In the letter, OAM also agreed (i) to transfer, by April 30, 2000, any
industrial and intellectual properties in its possession regarding the
manufacturing of and marketing of motorcycles and their parts, (ii) not to
compete with Aprilia in the manufacturing and marketing of motorcycles for five
years, (iii) to guarantee the Company's ability to fulfill its obligations under
the sale agreement for one year following the closing of the sale, and (iv) to
provide any necessary financing the Company needs prior to April 30, 2000.
In order to induce OAM to deliver its letter to Aprilia, the Company agreed with
OAM and TRG by letter dated April 14, 2000 that, among other things, it would
pay IMI's fees in connection with the sale. The April 14th letter was amended on
June 8, 2000 to provide that the Company will, as promptly as practicable after
the closing of the sale, but in no event later than 90 days following the
closing, hold a meeting of stockholders to consider and vote upon a proposal to
liquidate all of the Company's assets and dissolve the Company. Because OAM owns
61% of the Class A common stock, it can approve the liquidation even if no other
stockholders vote in favor of it. Conversely, the
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<PAGE>
liquidation will not be approved unless OAM votes in favor of it. Although OAM
and TRG insisted that the Company agree to submit a liquidation proposal to its
stockholders, OAM is not committed to vote its shares of Class A common stock
for the liquidation proposal. During the period between the closing of the sale
and the stockholder meeting relating to the liquidation proposal, the Company
may seek to find other companies in which to invest proceeds from the sale. If
it does, the Company may propose the acquisition of, or an investment in,
another company as an alternative to liquidation at the stockholder meeting.
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<PAGE>
3. Issuance of Series B Preferred Stock
On February 25, 2000, the Company issued 123,500 shares of a new Series B
Preferred Stock to Fineco, S.A., and affiliates of Fineco, TRG, OAM, the
majority stockholder of the Company, and Wheatley Partners, LP and Wheatley
Foreign Partners, LP (each of which is an affiliate of Barry Fingerhut, a
Director of the Company), and William Spier, a Director of the Company, for $100
per share (an aggregate price of $12,350,000). Fineco and its affiliates
purchased 60,000 shares and TRG purchased 35,000 shares, for cash. Wheatley
Partners, LP, Wheatley Foreign Partners, LP, and Mr. William Spier received a
total of 12,500 shares in satisfaction of advances they had made to the Company
in August 1999 and 16,000 shares were issued to OAM in partial satisfaction of
outstanding loans due to it.
The holders of the Series B Preferred Stock are entitled to receive dividends at
the rate of $7 per share per year before any dividends may be paid with regard
to the Class A Common Stock, and to receive distribution of $100 per share in
liquidation of the Company before any liquidation distributions are made with
regard to the Class A Common Stock. The Company is required to redeem the Series
B Preferred Stock for $100 per share plus accrued dividends on December 28,
2001. Holders of Series B Preferred Stock do not have voting rights, except that
they must approve issuance of securities which would affect the Series B
Preferred Stock and the incurrence of debt, other than refinancing of existing
debt or lines of credit used by the Company to finance its day-to-day
operations.
Each share of Series B Preferred Stock is convertible into Class A Common Stock
at a conversion price of $5.00, based upon the liquidation preference of the
Series B Preferred Stock ($100, plus accrued dividends, per share), meaning each
share of Series B Preferred Stock is convertible into approximately 20 shares of
Class A Common Stock.
There are several events which, among other things, will reduce the conversion
price of the Series B Preferred Stock from $5 per share of Class A Common Stock
(20 shares of Class A Common Stock for each share of Series B Preferred Stock)
to $2 per share (50 shares of Class A Common Stock for each share of Series B
Preferred Stock) and will require the Company immediately to redeem the Series B
preferred stock for $100 per share, plus accrued and unpaid dividends. One of
these events is stockholder approval of a sale of all or substantially all the
Company's assets. Because the sale to Aprilia will be a sale of substantially
all of the Company's assets, stockholder approval of the sale will reduce the
conversion price of the Series B Preferred Stock and require the Company to
redeem it. The Company is going to try to redeem the Series B Preferred Stock
before, or very shortly after, it can be converted at the reduced rate. However,
the Company may not be able to prevent conversion of the Series B preferred
stock at the reduced rate. If all the Series B Preferred Stock were converted
into Class A Common Stock at the reduced rate, that would more than double the
outstanding Class A Common Stock and would dilute the per share interest of the
existing Class A common stockholders in the proceeds of the sale of the
Subsidiaries by approximately 25%, even though the Company would be retaining
the $12.35 million of those proceeds which the Company would otherwise have to
use to redeem the Series B Preferred Stock. We are currently asking the holders
of our Series B Preferred Stock to agree not to convert their Series B shares in
exchange for our agreement to complete the redemption of our Series B Preferred
Stock no later than September 30, 2000.
Even if the stockholders do not approve the sale of the Subsidiaries, the
Company may have to redeem the Series B preferred stock shortly, and in any
event by December 31, 2001. Among the events which would require the Company to
redeem the Series B Preferred Stock before December 31, 2001 (and would reduce
the conversion price to $2 per share) is a default by the Company or the
Subsidiaries in obligations totaling more than $250,000. It is possible that the
Subsidiaries' current or future delinquencies in paying their trade debt would
be such a default. The Company is also in
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<PAGE>
violation of financial ratio requirements in the Company's Lit. 10 billion
(approximately $4.8 million) credit agreement with Centrobanca S.p.A. Indeed, it
is possible that, because of delinquent trade debt and violations of the credit
agreement with Centrobanca, the Company was required to redeem the Series B
Preferred Stock when it was issued. However, the Company has obtained
acknowledgement from Fineco, S.A., the holder of approximately 48% of the Series
B Preferred Stock that delinquent trade debt and certain violations of our
credit agreement with Centrobanca S.p.A. existing when the Company issued the
Series B shares is not an event that required the Company to redeem the Series B
preferred stock or reduced its conversion price). Nonetheless, if Centrobanca
were to declare the Company's obligations under that credit agreement to be due,
the Company probably would be required to redeem the Series B Preferred Stock.
If the Company became required to redeem the Series B Preferred Stock, but did
not sell the Subsidiaries, the Company would not have the funds with which to
meet that requirement. If the holders of the Series B Preferred Stock were to
convert their shares into Class A Common Stock at the reduced conversion price,
the existing holders of Class A Common Stock would suffer substantial dilution
of their interest in the Company.
The Company received Lit. 18,329 million in cash, net of Lit. 516 million of
expenses in respect of the issuance of the Series B Preferred Stock and also
recorded Lit. 2,479 million in respect of the William Spier and Wheatley
advances and Lit. 3,174 million in respect of the OAM loan for a total of Lit.
23,982 million.
If the sale is not consummated, the Company believes that lack of liquidity,
particularly following a seasonal liquidity low-point expected in the third
quarter, would likely mean that it would be in default of the terms of the
preferred stock before the end of the year. A failure to consummate the sale
would also likely cause the Company's lenders, including Centrobanca (See Note
5), to review the Company's credit lines which could result in Centrobanca
declaring the Company to be in default under the its credit agreement with them
and require the Company to redeem the Series B Preferred Stock.
Accordingly, the Company has reclassified the Series B Preferred Stock outside
of shareholders equity and has booked accretion expense in the three months
ended March 31, 2000 of Lit. 581 million in respect of amortization of costs
(estimated based on redeeming the preferred stock on July 31, 2000, the earliest
possible date for completion of the sale and the redemption of the Series B
Preferred Stock) and exchange differences which arise as the Company's
obligation is denominated in U.S. Dollars.
In connection with issuance of the Series B Preferred Stock, the Company agreed
to issue 300,000 shares of Class A Common Stock to TRG for a purchase price of
$.01 per share, in consideration of TRG's participation in the Series B
Preferred Stock financing and their successful efforts to get Fineco, S.A. to
subscribe for Series B shares.
Additionally, in connection with Fineco's purchase of the Series B shares the
Company paid a commission of $180,000 to Andrea delle Valle, a director of TRG,
and paid $80,000 to Investec Ernst, where Mark Segall, a director of TRG, is an
executive officer.
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<PAGE>
4. Purchase of outstanding securities of MGI Motorcycle GmbH
In March 1999, the Company acquired for DM 100,000 in cash (Lit. 99 million)
plus 10,000 shares of its common stock with an estimated fair value of Lit. 91
million, the 75% of the outstanding securities of MGI Motorcycle GmbH ("MGI")
which it did not already own. The Company had previously acquired a 25%
shareholding in 1996 when MGI Motorcycle GmbH was formed as the exclusive
importer of Moto Guzzi motorcycles in Germany, replacing the former exclusive
importer for Germany. The Company also made a cash infusion of DM 900,000 (Lit.
891 million) into MGI in March 2000. Further trade and other balances due from
MGI of Lit. 794 million were also converted into long-term advances so as to
give MGI the capital base required to expand operations in Germany.
MGI Motorcycle GmbH has not been consolidated as at March 31, 2000 and is shown
in the balance sheet at cost less the Company's share of losses through March
31, 2000. MGI Motorcycle GmbH will be consolidated from the start of the second
quarter of 2000. The effects of the acquisition, net of elimination of sales and
purchases by the Company to MGI, were not material to the Company.
5. Liquidity and going concern
The Company has suffered recurring losses from operations and negative cash
flows during the last three years. As described above, on February 25, 2000, the
Company raised $9.2 million net (Lit. 18.3 billion at such date) by way of issue
of Series B preferred stock.
Moto Guzzi is also not in compliance with certain covenants related to a Lit.
10,000 million credit facility which facility has been classified as a current
liability in the consolidated balance sheet. The Company disclosed this matter
to the lender at the end of 1998. The lender has not declared the loan in
default and negotiations with the lender to define revised terms of this loan
have not been concluded. There can be no assurance that such negotiations will
conclude on terms satisfactory to the Company.
Arrears of payment to suppliers, which reached approximately Lit. 15 billion in
January 2000, prior to the above financing, have also affected component supply
and production in the first quarter of 2000 and thus limited the Company's
ability to generate cash from operations. The financing raised in February
enabled the Company to significantly reduce arrears to suppliers and is expected
to enable the Company to operate at least through July 2000. Due to seasonal
factors and continuing losses, the Company may again have difficulties in
meeting current payables to suppliers after August 2000, if it does not obtain
further financing or the sale of the Subsidiaries described in Note 2 is not
consummated. There can be no assurance that the sale of the Subsidiaries will
occur or that the Company will be able to raise alternative finance on
satisfactory terms, or at all. Accordingly, there is substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might be necessary should the Company be unable
to continue as a going concern.
6. Accumulated Other Comprehensive Income
In 1997, the Financial Accounting Standards Board (the "FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income", which establishes standards for reporting comprehensive income and its
components in annual and interim financial statements. In the Company's case
comprehensive income includes net income, translation difference from the
conversion of balance sheets of non-Italian entities and accretion expense and
related
16
<PAGE>
exchange differences related to the potential redemption of its Series B
preferred stock. The Company has chosen to disclose comprehensive income in the
Consolidated Statements of Stockholders' Equity.
Changes in components of accumulated other comprehensive income in the three
months to March 31, 2000 are as follows.
Accretion
expense and Accumulated
Cumulative related other
translation exchange comprehensive
difference movements income
----------- ----------- ----------
Balance January 1, 2000 133 - 133
Movement for period 129 (581) (452)
----------- ----------- ----------
Balance March 31, 2000 262 (581) (319)
=========== =========== ==========
17
<PAGE>
MOTO GUZZI CORPORATION AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Significant material events with respect to the Company that impact the Company
and the discussion set forth below is subject to and qualified by the
information set forth below in the Notes to the Interim Financial Statements
under Note 2 - Execution and Delivery of Share Purchase Agreement and Note 3 -
Issuance of Series B Preferred Stock.
Results of Operations for the 3 Months Ended March 31, 2000 compared to 1999
<TABLE>
<CAPTION>
Mar. 31, 2000 Mar. 31, 1999
------------- -------------
Lit.m Lit.m
<S> <C> <C> <C> <C>
Net sales 20,076 100.0% 17,573 100.0%
Cost of sales (18,247) (90.9%) (17,449) (99.3%)
------------- -------------
1,829 9.1% 124 0.7%
Selling, general and administrative expenses (3,869) (19.3%) (3,921) (22.3%)
Research & development (333) (1.7%) (466) (2.7%)
------------- -------------
(2,373) (11.8%) (4,263) (24.3%)
Interest expense (1,212) (6.0%) (1,064) (6.1%)
Other income, net 183 0.9% 62 0.4%
------------- -------------
Loss before income taxes (3,402) (16.9%) (5,265) (30.0%)
Income tax expense (92) (0.5%) (40) (0.2%)
------------- -------------
Net loss (3,494) (17.4%) (5,305) (30.2%)
Preferred Stock dividends (168) (0.8%) -- --
------------- -------------
Net loss attributable to common stockholders (3,662) (18.2%) (5,305) (30.2%)
============= =============
</TABLE>
18
<PAGE>
Net sales for the three months ended March 31, 2000 increased by Lit. 2.5
billion or 14.2% to Lit. 20.1 billion from Lit. 17.6 billion for the comparative
period in 1999, principally due to a more favorable sales mix and to an increase
of 3.0% in unit sales to 1,254 in 2000 from 1,218 in 1998. The favorable effect
of sales mix was principally derived from sales of the Company's V-11 Sport
model, which was introduced in Europe in September 1999 and in the U.S. in
February 2000.
Gross margins increased to Lit. 1.8 billion or 9.1% as an incidence of net sales
in 2000 from Lit. 0.1 billion or 0.7% in 1999. The increase is principally due
to price increases of 3-6% made from the beginning of 2000 and to the more
favorable product mix.
Sales and gross margin in the first quarter of both 2000 were also significantly
affected by disruption in the supply of components due to liquidity
difficulties. Seasonal demand for the Company's products is typically highest
from March to May and the Company was not able to meet demand in either 2000 or
1999 in this period.
Selling, general and administrative expenses decreased by 1.3% to Lit. 3.9
billion in 2000 compared to 1999. Expenses at Moto Guzzi North America Inc.
increased by Lit. 0.5 billion or 76.9% due to expense related to a more
aggressive approach in advertising products and motivating sales. Italy and
corporate costs decreased Lit 0.6 billion or 20.2% reflecting reduced
administrative personnel and a strict control of costs.
Research and development expenditure was limited due to financial constraints to
Lit. 0.3 billion.
Interest expense increased from Lit. 1.1 billion in 1999 to Lit. 1.2 billion in
2000 principally as a result of a Lit. 0.3 billion non cash charge for
amortization of a warrant to purchase shares issued in 1999 in respect of
ongoing parent company financing which offset lower cash interest from lower
levels of advances from banks in 2000 compared to 1999.
As a result of the above factors, net loss for the three months ended March 31,
2000 decreased to Lit. 3.7 billion for compared to Lit. 5.3 billion for the
three months ended March 31, 1999.
Liquidity and Financial Resources
Operations
Cash outflows from operations in 2000 were Lit. 9.2 billion compared to Lit.
16.8 billion in 1998 period. These cash outflows related to losses from
operations, adjusted for non-cash items, of Lit. 2.3 billion and working capital
movements contributed a net negative Lit. 6.9 billion. The most significant
working capital movement was Lit. 7.6 billion reduction in trade and other
payables as the Company applied funds received from the issuance of Series B
preferred stock to pay supplier arrears and restore component supply.
Receivables increased Lit. 0.6 billion due to increased net sales in the last
quarter of 2000 compared to 1999 offsetting improved collections by the Company.
Inventories decreased Lit. 0.2 billion principally due to management attention
to contain inventory levels given scarce liquidity, which efforts more than
offset a seasonal tendency for increased inventory in preparation for seasonally
higher production levels.
19
<PAGE>
Investment activities
The investment in MGI Motorcycle GmbH "MGI" reflects the acquisition of the
outstanding 75% of this Company and a contemporaneous capital injection made
into MGI. MGI will be consolidated from the second quarter of 2000.
Capital expenditures principally related to maintenance and replacement capital
expenditures. Capital expenditure had been curtailed due to the Company's lack
of liquidity.
Financing Activities
The decrease in advances from banks principally reflects reduced advances
against trade receivables and temporary reduction of overdraft facilities funded
by the proceeds of the issuance of Series B preferred stock.
Cash from the Issuance of Series B Preferred Stock of Lit. 18.3 billion reflects
the approximately U.S. $ 9.2 million of cash raised, net of expenses, as
described in Note 3 to the Interim financial statements.
Future Liquidity Needs
The discussion set forth below is subject to and qualified by the information
set out in Note 2 to the Interim Financial Statements "Execution and Delivery of
Share Purchase Agreement".
If the Company were to implement its strategic plan to substantially increase
production and sales, it would be required to make total investments in research
and product development of some Lit. 50 billion (approximately $25 million) in
the five year period from 2000 through 2004. The plan also contemplates
investments of Lit. 20 billion (approximately $10 million) in production plant
and machinery and information systems. Much of the production machinery at Moto
Guzzi's facility is aged and in need of extensive modification, improvement or
replacement. Moto Guzzi believes that the existing plant at Mandello del Lario,
Italy has a potential production capacity that will be sufficient for its needs
for at least the next three/four years and is not actively seeking any other
alternatives at the present time. Moto Guzzi will have to make significant
investments in the existing plant in order that it can operate competitively.
Such required modernization may result in production interruptions.
The Company expects that, over the next four years, significant further capital
will be required to complete the planned overhaul. While anticipated increases
in sales during the period, if realized, would provide a significant portion of
the needed capital, anticipated internally generated cash and currently
available bank financing, in the aggregate, will not be sufficient to enable the
Company to increase production and sales rapidly enough to generate the
remaining needed capital. Moreover, in the five years ended December 31, 1999,
Moto Guzzi has not generated cash from operations.
In February 1998 Moto Guzzi obtained a Lit. 10,000 million 10 year credit
facility, drawn down in April 1998, with principal repayments commencing from
the third year. The terms of the loan included covenants relating to the share
capital and equity (according to local Italian accounting principles) of Moto
Guzzi S.p.A as at December 31, 1998. Due to the losses in 1998 and delays in
closing the merger and further losses in 1999, Moto Guzzi is not in compliance
with these covenants, the consequence of which is that the lender can request
immediate repayment of the loan. The loan has been a current liability in the
balance sheet from December 31, 1998. The Company has advised
20
<PAGE>
the lender of the non-compliance. No assurance can be given that negotiations
with the lender will successfully conclude on terms satisfactory to the Company.
In August, 1999, certain directors and their affiliates advanced $1.25 million
(approximately Lit. 2.3 billion) to meet working capital obligations at such
date. The Company has experienced cash flow shortages in September 1999 through
February 2000 and had accumulated arrearages to suppliers of approximately Lit.
15.0 billion by February 2000. This amount includes approximately Lit. 5.0
billion of supplier payments for which the company habitually has enjoyed
extended credit terms beyond due payment dates, but for which no formal
arrangements for such extended credit terms exist. As described in Note 3 to the
Interim Financial Statements, the Company raised $9.2 million (Lit. 18.3
billion) in February 2000 to enable it to maintain operations.
As described in Note 2 to the Interim Financial Statements, on April 14, 200 the
Company entered into a Share Purchase Agreement under which, if consummated, it
will sell all of its operating subsidiaries to Aprilia S.p.A. The Share Purchase
Agreement is subject to a number of material conditions, including approval of
shareholders, and there can be no assurance that the sale will be consummated.
If it fails to be consummated such failure is likely to have a material adverse
effect on the Company. Accordingly, there is substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might be necessary should the Company be unable
to continue as a going concern.
Potential Effects of the European Common Currency on the Company's Business
The Company's business is substantially located in and operates in Italy. On
January 1, 1999, Italy was admitted as one of 11 European countries in to
participate in the adoption of the new European common currency, the Euro.
The Euro is expected to have significant effects on the Company's business.
Among many potential economic factors, the proposed common currency is expected
to increase competition within the common currency zone. Because the adoption of
the Euro will require competitive businesses located in different participating
countries to price their products in a single currency, the historical ability
of such companies to increase or reduce prices without affecting operating
results in their home country's currency will be largely eliminated.
The uniform currency will also likely result in the establishment of new
Euro-based pricing points, e.g., Euro 9,999 or Euro 19,999. These new pricing
points may differ from the current prices charged for such products, which could
be advantageous or disadvantageous to a company, depending upon whether the
Euro-based price point is higher or lower than the prices charged before the
pricing policies and model specifications to most competitively deal with the
new pricing points. The Company will have to re-evaluate its pricing policies
and model specifications to most competitively deal with the new pricing points.
The Company also expects that the introduction of the Euro will increase
consolidation within industries and industry sectors, as currency translation
risks and competitive opportunities diminish within the common currency zone.
National regulatory barriers are also likely to fall as participating countries
harmonize their rules to promote intra-member commerce and cross-border
information exchange.
The combination of pricing transparency and consolidation is likely to increase
competition within the common currency zone generally. To the extent that
competitors of the Company participate in
21
<PAGE>
the expected consolidation, the Company may in the future face competitors which
are even larger and better capitalized than the competitors it faces now.
Additionally, interest rates are likely to stabilize across the common currency
zone. Interest rates in Italy have fallen since 1997, partly in response to
anticipation of the introduction of the Euro.
The Company has not yet fully evaluated the ramifications of the Euro because
national European currencies continue to function as more dominant benchmarks
for pricing and commercial transactions with customers and suppliers in the
first months of the phasing in of the Euro. Adoption of the Euro is taking place
over a two-year transition phase in which both the Lire and the Euro are valid
currencies for business transaction in Italy.
The Company also makes significant export sales outside the common currency zone
and the prices of certain commodities used in its manufacturing processes may be
affected by the value of the Euro. The implementation of the Euro within the
common currency zone could have unanticipated consequences on the economies of
participant countries which could affect demand for the Company's products.
The European Common Currency could have a significant effect on the Company's
accounting systems which could require significant modification or replacement.
Management believes that the Company's businesses do not have unique or
custom-tailored requirements for accounting systems and that it could rapidly
and inexpensively change to "off-the-shelf" systems at an appropriate time if
existing systems prove not to be adequate. The Company is not able to evaluate
these matters or the effects on international financial and payment systems with
which it interacts at the present time. The Company will address these issues in
the current year and in 2001 as further guidelines and information become
available. Adoption of the Euro will also lead to the Company reporting its
results in that currency instead of the Italian Lire from the fiscal year ended
December 31, 2002, and thereafter.
22
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On February 25, 2000, the Company issued 123,500 shares of a new Series B
Preferred Stock to Fineco, and affiliates of Fineco, TRG, OAM, the majority
stockholder of the Company, and Wheatley Partners, LP and Wheatley Foreign
Partners, LP (each of which is an affiliate of Barry Fingerhut, a Director of
the Company), and William Spier, a Director of the Company, for $100 per share
(an aggregate price of $12,350,000). Fineco and its affiliates purchased 60,000
shares and TRG purchased 35,000 shares, for cash. Wheatley Partners, LP,
Wheatley Foreign Partners, LP, and Mr. William Spier received a total of 12,500
shares in satisfaction of advances they had made to the Company in August 1999
and 16,000 shares were issued to OAM in partial satisfaction of outstanding
loans due to it.
The holders of the Series B Preferred Stock are entitled to receive dividends at
the rate of $7 per share per year before any dividends may be paid with regard
to the Class A Common Stock, and to receive distribution of $100 per share in
liquidation of the Company before any liquidation distributions are made with
regard to the Class A Common Stock. The Company is required to redeem the Series
B Preferred Stock for $100 per share plus accrued dividends on December 28,
2001. Holders of Series B Preferred Stock do not have voting rights, except that
they must approve issuance of securities which would affect the Series B
Preferred Stock and the incurrence of debt, other than refinancing of existing
debt or lines of credit used by the Company to finance its day-to-day
operations.
Each share of Series B Preferred Stock is convertible into Class A Common Stock
at a conversion price of $5.00, based upon the liquidation preference of the
Series B Preferred Stock ($100, plus accrued dividends, per share), meaning each
share of Series B Preferred Stock is convertible into approximately 20 shares of
Class A Common Stock.
There are several events which, among other things, will reduce the conversion
price of the Series B Preferred Stock from $5 per share of Class A Common Stock
(20 shares of Class A Common Stock for each share of Series B Preferred Stock)
to $2 per share (50 shares of Class A Common Stock for each share of Series B
Preferred Stock) and will require the Company immediately to redeem the Series B
preferred stock for $100 per share, plus accrued and unpaid dividends. One of
these events is stockholder approval of a sale of all or substantially all the
Company's assets. Because the sale of the subsidiaries to Aprilia will be a sale
of substantially all of the Company's assets, stockholder approval of the sale
will reduce the conversion price of the Series B Preferred Stock and require the
Company to redeem it. The Company is going to try to redeem the Series B
Preferred Stock before, or very shortly after, it can be converted at the
reduced rate. However, the Company may not be able to prevent conversion of the
Series B preferred stock at the reduced rate. If all the Series B Preferred
Stock were converted into Class A Common Stock at the reduced rate, that would
more than double the outstanding Class A Common Stock and would dilute the per
share interest of the existing Class A common stockholders in the proceeds of
the sale of the Subsidiaries by approximately 25%, even though the Company would
be retaining the $12.35 million of those proceeds which the Company would
otherwise have to use to redeem the Series B Preferred Stock. We are currently
asking the holders of our Series B Preferred Stock to agree not to convert their
Series B shares in exchange for our agreement to complete the redemption of our
Series B Preferred Stock no later than September 30, 2000.
23
<PAGE>
Even if the stockholders do not approve the sale of the Subsidiaries, the
Company may have to redeem the Series B Preferred Stock shortly, and in any
event by December 31, 2001. Among the events which would require the Company to
redeem the Series B Preferred Stock before December 31, 2001 (and would reduce
the conversion price to $2 per share) is a default by the Company or the
Subsidiaries in obligations totaling more than $250,000. It is possible that the
Subsidiaries' current or future delinquencies in paying their trade debt would
be such a default. The Company is also in violation of financial ratio
requirements in the Company's Lit. 10 billion (approximately $4.8 million)
credit agreement with Centrobanca S.p.A. Indeed, it is possible that, because of
delinquent trade debt and violations of the credit agreement with Centrobanca,
the Company was required to redeem the Series B Preferred Stock when it was
issued. However, the Company has obtained acknowledgement from Fineco, S.A., the
holder of approximately 48% of the Series B Preferred Stock that delinquent
trade debt and certain violations of our credit agreement with Centrobanca
S.p.A. existing when the Company issued the Series B shares is not an event that
required the Company to redeem the Series B Preferred Stock or reduced its
conversion price). Nonetheless, if Centrobanca were to declare the Company's
obligations under that credit agreement to be due, the Company probably would be
required to redeem the Series B Preferred Stock. If the Company became required
to redeem the Series B Preferred Stock, but did not sell the Subsidiaries, the
Company would not have the funds with which to meet that requirement. If the
holders of the Series B Preferred Stock were to convert their shares into Class
A Common Stock at the reduced conversion price, the existing holders of Class A
Common Stock would suffer substantial dilution of their interest in the Company.
If the sale is not consummated, the Company believes that lack of liquidity,
particularly following a seasonal liquidity low-point expected in the third
quarter, would likely mean that it would be in default of the terms of the
Series B Preferred Stock before the end of the year. A failure to consummate the
sale would also likely cause the Company's lenders, including Centrobanca (See
Note 5 to the financial statements), to review the Company's credit lines which
could result in Centrobanca declaring the Company to be in default under its
credit agreement with them and require the Company to redeem the Series B
Preferred Stock.
Accordingly, the Company has reclassified the Series B Preferred Stock outside
of shareholders equity and has booked accretion expense in the three months
ended March 31, 2000 of Lit. 581 million in respect of amortization of costs
(estimated based on redeeming the preferred stock on July 31, 2000, the earliest
possible date for completion of the sale and a redemption of the Series B
Preferred Stock) and exchange differences which arise as the Company's
obligation is denominated in U.S. Dollars.
In connection with issuance of the Series B Preferred Stock, the Company agreed
to issue 300,000 shares of Class A Common Stock to TRG for a purchase price of
$.01 per share, in consideration of TRG's participation in the Series B
Preferred Stock financing and their successful efforts to get Fineco, S.A. to
subscribe for Series B shares.
Additionally, in connection with Fineco's purchase of the Series B shares the
Company paid a commission of $180,000 to Andrea delle Valle, a director of TRG,
and paid $80,000 to Investec Ernst, where Mark Segall, a director of TRG, is an
executive officer.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
24
<PAGE>
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Current Report on Form 8-K dated February 25, 2000 relating to the issuance of
$12.35 million of Series B Preferred Stock.
Exhibit 27 -- Financial Data Schedule
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MOTO GUZZI CORPORATION
June 15, 2000 /s/ Mark S. Hauser
--------------------
Mark S. Hauser
Executive Chairman
June 15, 2000 /s/ Nick Speyer
----------------------
Nick Speyer
Chief Financial officer
26
