<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended SEPTEMBER 30, 1998
Commission File No. 333-08871
MCII HOLDINGS (USA), INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0830781
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10 East Golf Road, Des Plaines, Illinois 60016
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 299-9900
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-- --
The number of shares outstanding of the registrant's Common Stock:
1,000 shares as of April 30, 1997.
REDUCED DISCLOSURE FORMAT
The registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
<PAGE> 2
INDEX
MCII HOLDINGS (USA), INC.
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Narrative Analysis
of the Results of Operations 10
Item 3. Quantitative and Qualitative
Disclosures About Market Risk Omitted
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities Omitted
Item 3. Defaults Upon Senior Securities Omitted
Item 4. Submission of Matters to a Vote
of Security Holders Omitted
Item 5. Other Information None
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
Some information included in this Report on Form 10-Q may constitute
forward-looking statements that involve a number of risks and uncertainties.
From time to time, information provided by MCII Holdings (USA), Inc. or
statements made by its employees may contain other forward-looking statements.
Factors that could cause actual results to differ materially from the
forward-looking statements include, but are not limited to: general economic
conditions including inflation, interest rate fluctuations, trade restrictions,
and general debt levels; competitive factors including price pressures,
technological developments, and products offered by competitors; inventory risks
due to changes in market demand or business strategies; and changes in effective
tax rates. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date made. MCII Holdings
(USA), Inc. undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events, or otherwise.
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MCII HOLDINGS (USA), INC.
(A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.)
UNAUDITED STATEMENT OF CONSOLIDATED INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- -----------------------------
(000 omitted) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Sales $ 180,207 $ 134,283 $ 661,917 $ 492,134
Finance income 1,175 1,020 4,216 3,596
--------- --------- --------- ---------
181,382 135,303 666,133 495,730
--------- --------- --------- ---------
Operating costs and expenses:
Cost of sales (exclusive of items shown separately below) 137,994 101,934 522,963 376,323
Depreciation and amortization 6,952 5,707 18,861 16,030
Interest expense, finance operations 679 651 2,089 1,902
Research and development expenses 2,709 1,273 7,948 4,768
Selling, general and administrative expenses 24,701 17,547 66,023 49,370
--------- --------- --------- ---------
173,035 127,112 617,884 448,393
--------- --------- --------- ---------
Operating Income 8,347 8,191 48,249 47,337
--------- --------- --------- ---------
Other income and (expense):
Interest (expense) (4,561) (4,808) (13,001) (16,151)
Gain on sale of investment 7,000 -- 7,000 --
Other income 2,198 1,751 7,396 3,252
--------- --------- --------- ---------
4,637 (3,057) 1,395 (12,899)
--------- --------- --------- ---------
Income before income taxes 12,984 5,134 49,644 34,438
Income taxes 6,578 380 21,975 12,516
--------- --------- --------- ---------
Net Income $ 6,406 $ 4,754 $ 27,669 $ 21,922
========= ========= ========= =========
</TABLE>
1
<PAGE> 4
MCII HOLDINGS (USA), INC.
(A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
September 30, December 31,
(000 omitted) 1998 1997
- -------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 47,540 $ 13,997
Trade and other accounts receivable 129,580 88,543
Receivables from affiliates 86,064 16,293
Current portion of notes receivable 5,831 6,625
Inventories 227,654 257,795
Deferred income taxes 14,976 14,430
Other current assets 5,167 7,591
--------- ---------
Total Current Assets 516,812 405,274
Property, plant, and equipment 91,298 106,845
Notes receivable 39,247 42,465
Investments in affiliates 20,124 15,253
Intangible assets 217,043 227,367
Other assets 16,156 23,469
--------- ---------
Total Assets $ 900,680 $ 820,673
========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ 57,263 $ 67,580
Accrued compensation and other benefits 11,430 12,380
Accrued warranties 10,086 10,020
Accrued income taxes 15,746 7,251
Self insurance reserves 5,873 5,610
Net liabilities of discontinued operations 4,218 2,229
Other current liabilities 53,986 25,111
Current portion of long-term debt 62,554 44,418
--------- ---------
Total Current Liabilities 221,156 174,599
Long-term debt 254,297 268,833
Pensions and other benefits 14,937 14,037
Other deferred items and self insurance reserves 21,413 24,370
Deferred income taxes 7,454 6,916
--------- ---------
Total Liabilities 519,257 488,755
========= =========
Commitments and contingent liabilities
Stockholder's Equity:
Common stock and additional capital 442,230 411,524
Accumulated deficit (31,340) (58,590)
Unfunded pension loss, net (703) (577)
Cumulative translation adjustments (28,764) (20,439)
--------- ---------
Total Stockholder's Equity 381,423 331,918
--------- ---------
Total Liabilities and Stockholder's Equity $ 900,680 $ 820,673
========= =========
</TABLE>
2
<PAGE> 5
MCII HOLDINGS (USA), INC.
(A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.)
UNAUDITED STATEMENT OF
CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
(000 omitted) 1998 1997
- -------------------------------------------------------------------------------------------------------
Cash Flows Provided (Used) By Operating Activities:
<S> <C> <C>
Net Income $ 27,669 $ 21,922
Adjustments to reconcile net income to net cash
provided (used) by operations:
Depreciation and amortization 18,568 16,030
Deferred income taxes (774) 8,172
Gain on sale of investment (7,000) --
Guaranteed residual sales 647 --
Gain on sale of property and notes receivable (349) (390)
Gain on equity investment 134 --
Other noncash items, net 10,162 (7,273)
Change in operating assets and liabilities (29,378) (43,283)
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 19,679 (4,822)
-------- --------
Cash Flows Provided (Used) By Investing Activities:
Capital expenditures (843) (27,263)
Investment in notes receivable (56,164) (29,834)
Collections of notes receivable 58,410 12,884
Proceeds from sale of notes receivable -- 19,721
Proceeds from sale of property and investments 8,040 --
Investment in unconsolidated affiliate (5,000) (10,250)
Discontinued operations, net changes 1,989 2,484
-------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 6,432 (32,258)
-------- --------
Cash Flows Provided (Used) By Financing Activities:
Net change in bank credit facilities (1,061) 81,482
Payment of long-term borrowings (74) (148)
Net receivable from affiliates 8,562 (33,524)
Contribution of capital -- 4,037
Dividends paid to parent company 5 (6,000)
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 7,432 45,847
-------- --------
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS -- (1,015)
-------- --------
NET INCREASE (DECREASE) IN CASH 33,543 7,752
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,997 9,403
-------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 47,540 $ 17,155
======== ========
</TABLE>
3
<PAGE> 6
MCII HOLDINGS (USA), INC.
(A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.)
RESTATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Unaudited Interim Financial Statements
This report updates MCII Holdings (USA), Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1997, in accordance with the instructions to Form
10-Q. It is presumed that the reader has read the Annual Report on Form 10-K.
The accompanying financial statements are unaudited, but have been prepared in
accordance with generally accepted accounting principles for interim financial
information and in accordance with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair
presentation have been included. The interim financial statements contained
herein do not include all of the footnotes and other information required by
generally accepted accounting principles for complete financial statements, as
provided at year-end.
The reader is reminded that the results of operations for interim periods are
not necessarily indicative of the results for the complete fiscal year.
Note 2 - Principles of Consolidation and Presentation
The Company is a wholly owned subsidiary of Consorcio G Grupo Dina, S.A. de C.V.
("Dina"), a Mexican Corporation. These unaudited financial statements present
the accounts of MCII Holdings (USA), Inc. and its subsidiaries (the "Company" or
"MCII Holdings"). The Company's principal operating subsidiaries are Motor Coach
Industries International, Inc. ("MCII"), Transportation Manufacturing
Operations, Inc. ("TMO"), Motor Coach Industries, Inc. ("MCI-U.S.), Motor Coach
Industries Limited ("MCI-Canada"), Hausman Bus Sales, Inc. ("HBSI"), Universal
Coach Parts, Inc. ("UCP"), and Dina Autobuses S.A. de C.V. ("Autobuses").
All significant intercompany balances and transactions have been eliminated on
consolidation. Prior period amounts include all reclassifications necessary to
conform to current presentations.
4
<PAGE> 7
Note 3 - Restated Financial Statements
During the Company's review of its third quarter financial statements, the
Company identified errors in the calculation of foreign exchange gains (losses)
resulting from converting the financial statements of Autobuses to U.S.
generally accepted accounting principles in its first and second quarter
reports. The Company is restating its financial report for the first and second
quarters as follows:
<TABLE>
<CAPTION>
Other Income Income Net Income
(000 omitted) and (Expense) Before Taxes (1)
<S> <C> <C> <C>
First Quarter 1998:
As reported $(5,483) $17,788 $10,023
Foreign exchange
Gain (loss) 2,949 2,949 2,949
------- ------- -------
As restated $(2,534) $20,737 $12,972
======= ======= =======
Second Quarter 1998:
As reported $(3,295) $13,336 $ 5,704
Foreign exchange
Gain (loss) 2,587 2,587 2,587
------- ------- -------
As restated $ (708) $15,923 $ 8,291
======= ======= =======
Six Months 1998:
As reported $(8,778) $31,124 $15,727
Foreign exchange
Gain (loss) 5,536 5,536 5,536
------- ------- -------
As restated $(3,242) $36,660 $21,263
======= ======= =======
</TABLE>
- --------------------
(1) Foreign exchange adjustment is without income tax affect due to Autobuses'
fully reserved deferred tax position.
5
<PAGE> 8
Note 4 - Revenues, Gross Profit and Operating Income, Supplementary Information
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Units:
MCII
New Coach Sales 271 260 1,170 895
Viaggio(R)1000(1) 42 40 110 120
Used Coaches 174 101 577 371
Autobuses
Mexican intercity coach sales 41 70 204 152
Mexican transit buses -- 5 209 8
Export coach sales (2) 43 88 99 180
Revenues (000's omitted):
MCII
Coach Manufacturing and Support $ 116,365 $ 66,846 $ 453,650 $ 292,939
Replacement Parts 47,714 45,475 144,639 146,141
--------- --------- --------- ---------
164,079 112,321 598,289 439,080
Autobuses 17,303 22,982 67,844 56,650
--------- --------- --------- ---------
$ 181,382 $ 135,303 $ 666,133 $ 495,730
========= ========= ========= =========
Gross Profit (000's omitted)(3):
MCII
Coach Manufacturing and Support $ 26,979 $ 17,228 $ 101,442 $ 70,594
Replacement Parts 10,654 7,336 26,343 27,697
--------- --------- --------- ---------
37,633 24,564 127,785 98,291
Autobuses 5,076 8,154 13,296 19,214
--------- --------- --------- ---------
$ 42,709 $ 32,718 $ 141,081 $ 117,505
========= ========= ========= =========
Operating Income (000's omitted):
MCII
Coach Manufacturing and Support $ 3,269 $ 1,582 $ 42,283 $ 23,850
Replacement Parts 6,701 3,888 14,197 15,777
--------- --------- --------- ---------
9,970 5,470 57,480 39,627
Autobuses (1,623) 2,721 (9,231) 7,710
--------- --------- --------- ---------
$ 8,347 $ 8,191 $ 48,249 $ 47,337
========= ========= ========= =========
</TABLE>
- ---------------------------------
(1) Represents sales of Viaggio(R) 1000 coaches, manufactured by
Autobuses and sold by the Company's wholly owned subsidiary, HBSI, to the
Company's customers in the U.S. and Canadian markets.
(2) These figures primarily represent sales of Viaggio(R) 1000 coaches
to the U.S.
(3) Revenues less cost of sales (exclusive of depreciation and
amortization).
6
<PAGE> 9
Note 5 - Comprehensive Income
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"),
which is effective for fiscal years beginning after December 15, 1997. SFAS No.
130 requires that comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements (although
for interim financial reporting footnote disclosure of comprehensive income is
acceptable). Comprehensive income includes net income and all other nonowner
changes in equity that are not reported in net income.
The Company adopted SFAS No. 130 in 1998. For the nine-month periods
ended September 30, 1998 and 1997, the Company's comprehensive income included
net income, foreign currency translation losses, and minimum pension liability
adjustments. The foreign currency translation losses totaled $8,325,000 and
$1,099,000 for the nine months ended September 30, 1998 and 1997, respectively.
The minimum pension liability losses totaled $126,000 and zero for the nine
months ended September 30, 1998 and 1997, respectively. Therefore, total
comprehensive income was $19,218,000 for the nine months ended September 30,
1998, compared with $20,823,000 for the same period of 1997.
Note 6 - Inventories
<TABLE>
<CAPTION>
Inventories consisted of the following:
September 30, December 31,
1998 1997
---- ----
(000 omitted)
<S> <C> <C>
Raw material $ 34,156 $ 48,938
Work in process 44,571 61,230
Finished goods 176,375 170,879
--------- ---------
255,102 281,047
Inventory reserves (27,448) (23,252)
--------- ---------
$ 227,654 $ 257,795
========= =========
</TABLE>
Note 7 - Debt
<TABLE>
<CAPTION>
Debt consisted of the following:
September 30, December 31,
1998 1997
---- ----
(000 omitted)
<S> <C> <C>
Term notes payable $ 125,000 $ 125,000
United States bank credit facility 154,000 135,000
Canadian bank credit facility -- 12,033
Bancomext export loan facility 2,373 6,496
Pre-export notes 34,729 34,203
Notes payable 749 519
--------- ---------
316,851 313,251
Less current portion (62,554) (44,418)
--------- ---------
$ 254,297 $ 268,833
========= =========
</TABLE>
7
<PAGE> 10
Note 8 - Cash Flow Effect of Change in Operating Assets and Liabilities
Change in operating assets and liabilities consisted of:
<TABLE>
<CAPTION>
Nine months ended
-----------------
September 30, September 30,
1998 1997
---- ----
(000 omitted)
Decrease (Increase) in Operating Assets:
<S> <C> <C>
Receivables $(45,133) $(13,828)
Inventories 22,689 (36,162)
Other operating assets 2,213 (16,149)
-------- --------
(20,231) (66,139)
-------- --------
Increase (Decrease) in Operating Liabilities:
Accounts payable (8,432) 19,233
Accrued income taxes 8,315 (8,884)
Other operating liabilities (9,030) 12,507
-------- --------
(9,147) 22,856
-------- --------
Net Cash Flow Effect $(29,378) $(43,283)
======== ========
</TABLE>
Note 9 - Related Party Transactions
MCII provides for allocable management and administrative expenses
incurred by Dina. In the first nine months of 1998 and 1997, the provision for
such expenses was $750,000 and $750,000, respectively.
During the first nine months of 1998 and 1997 MCII purchased components
and accrued for management fees from Dina, in the ordinary course of business,
of $3,300,000 and $3,000,000, respectively.
During the same period, Autobuses accrued for royalty, interest, and
other service charges and purchased components from Dina, in the ordinary course
of business, of $20,600,000 and $24,700,000, respectively, in goods and
services. This includes a royalty to Dina, which is accrued on sales as a
selling expense. In the first nine months of 1998 and 1997 this royalty was
$9,700,000 and $4,900,000, respectively. In the first nine months of 1998
interest income was $2,000,000, compared with interest expense of $4,000,000 in
1997. Autobuses had sales to Dina of $14,200,000 in the first nine months of
1998 and $12,300,000 in 1997.
At September 30, 1998, the Company had net receivables from affiliates
of $75,244,000, compared with $16,293,000 at December 31,1997. During the second
quarter of 1998, there was a conversion of related party payables of $37,499,000
into equity. This conversion was a non-cash transaction.
Also during the second quarter of 1998, the Company added $5,000,000 to
its investment in a nonconsolidated affiliate.
8
<PAGE> 11
Note 10 - Commitments and Contingent Liabilities
The Company's Canadian income tax returns for 1982 through 1992 are
currently under review by Revenue Canada. Authorities have proposed imputing
additional income related to transactions with a U.S. based subsidiary of the
Company. A formal reassessment has been issued by Revenue Canada on the 1985
return. A notice of objection has been filed by the Company for 1985. In the
event of an adverse judgment, the additional income taxes for 1982 through 1992
could amount to $23,000,000 plus interest of approximately $45,000,000 and, in
addition, the Company may be subject to potential reassessments for the years
subsequent to 1992 on the same basis which could result in additional income
taxes and interest. These amounts are all before recoveries of U.S. federal
income taxes which may be available to offset a portion of any additional taxes
paid to Canada as these years are still open for U.S. federal income tax
purposes. In accordance with SFAS No. 109, "Accounting for Income Taxes," a
portion of any ultimate liability owed as a result of this issue would be
treated as an adjustment of Dina's purchase price on acquiring the Company,
resulting in an increase of purchase goodwill. (If the ultimate liability were
$68,000,000, then approximately $43,000,000 would be a purchase accounting
adjustment.) Based on its review of current relevant information, including the
advice of outside counsel, the Company is of the opinion that Revenue Canada's
arguments are without merit and that any liability from this matter will not be
material to its financial condition or results of operations.
The Company has filed insurance claims for business interruption and
extra expense totaling approximately $15,000,000 related to flooding which
occurred in 1997. No revenue is recognized in relation to these claims until
payments are received. The Company received payments of $500,000 in the third
quarter of 1997 and $500,000 in the second quarter of 1998 against these claims.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Of FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
The Company is a leading designer, manufacturer and marketer of intercity
coaches and related replacement parts for the North American market. The Company
has achieved a strong market position through enhanced product design and
quality, a used coach business that supports trade-in activity and a significant
replacement parts and service business that supports coaches in the Company's
primary markets, as well as buses used in transit and school bus transportation.
COMPARISON OF THIRD QUARTER 1998 TO THIRD QUARTER 1997
General. Revenues for the quarter ended September 30, 1998 were $181.4
million, an increase of 34% from $135.3 million in 1997. MCII's coach sales were
up 74%, while Autobuses' sales decreased 25%.
The overall gross margin for the third quarter of 1998, defined as sales
less cost of sales (exclusive of depreciation and amortization) as a percentage
of sales decreased to 23.6% compared with 24.2% for the third quarter of 1997.
Gross margin as a percentage of sales increased for MCII's replacement parts (to
22.3% from 16.1%); MCII's coach gross margin decreased (to 23.2% from 25.8%);
and Autobuses declined (to 29.3% from 35.5%). Total gross margin of $42.7
million in 1998, compared with $32.7 million in 1997. The increase in dollar
amount was due mostly to increased sale volume at MCII coach and reduced costs
at MCII's replacement parts.
Operating income was $8.3 million in the third quarter of 1998 compared
with $8.2 million in 1997. Although MCII income increased $4.5 million (coach
improving $1.7 million and replacement parts increasing $2.8 million), this was
offset by a decrease of $4.3 million at Autobuses (largely due to higher selling
and marketing expenses to Dina).
Net income was $6.4 million in the third quarter of 1998, compared with
$4.8 million in the third quarter of 1997. This was essentially due to other
income of $9.2 million in 1998 compared with $1.8 million in 1997.
MCII. MCII's revenues for the third quarter of 1998 were $164.1 million,
an increase of 46% over $112.3 million in the third quarter of 1997. Coach
revenues increased 74% to $116.4 million. New coach sales were 271 units in the
third quarter of 1998 (featuring the new Renaissance(R) line of European-styled
super-luxury coaches introduced in late 1997), compared with 260 units in the
third quarter of 1997 and used coach sales were 174 units, compared with 101
units. Replacement parts' revenues increased 5% to $47.7 million.
Gross margin for the third quarter of 1998 increased to 22.9%, compared
with 21.9% in the same quarter of the prior year. Coach margins decreased to
23.2%, compared with 25.8% last year. However, coach gross margin in dollar
terms increased to $27.0 million in 1998, compared with $17.2 million in 1997,
due to higher sales volume and higher absorption levels and cost reduction
programs. Replacement parts margins increased to 22.3% compared with 16.1% in
1997 due to lower operating expenses.
Operating income was $10.0 million for the third quarter of 1998,
compared with $5.5 million in the third quarter of 1997. The improved third
quarter results were due to increased coach sales volume and improved profit
margins, which offset $1.4 million in higher research and development expenses
(related to development of the G coach which is being readied for introduction
in 1999).
10
<PAGE> 13
Autobuses. Autobuses' revenues in the third quarter of 1998 were $17.3
million, a decrease of $5.7 million, or 25%, from $23.0 million in the same
quarter of the prior year. Sales of Autobuses' Viaggios in the United States
were 40 units in 1998, compared with 40 units in 1997, while intercity coach
sales in Mexico declined to 41 units in 1998, compared with 70 units in 1997.
Gross margin for the third quarter of 1998 decreased to 29.3%, compared
with 35.5% in the third quarter of 1997, due to higher manufacturing costs.
There was an operating loss of $1.6 million for the third quarter of
1998, compared with operating income of $2.7 million in the third quarter of
1997. The third quarter 1998 decrease was due mainly to increased selling and
marketing expenses to Dina.
Interest Expense. In the third quarter of 1998, net interest expense was
$4.6 million, compared with $4.8 million in 1997.
Other Income. In the third quarter of 1998, other income was $9.2
million, compared with $1.8 million in 1997. MCII sold its 10% interest in
Mexicana de Autobuses S.A. de C.V. (MASA) for a gain of $7.0 million. MASA is a
Mexican coach manufacturing company and MCII's investment had been valued at
zero when MASA sought to reorganize under Mexican bankruptcy laws. Autobuses
reported foreign exchange gains of $2.0 million during the quarter, compared
with $0.6 million in 1997.
Income Taxes. The Company's effective income tax rates in the third
quarter of 1998 and 1997 were 50.7% and 7.4% respectively. The Company
experiences a generally high effective tax rate due to the amortization expense
of nondeductible goodwill in the United States and Canada. The increased
effective tax rate in 1998 was primarily due to losses in Mexico that are not
tax benefited.
COMPARISON OF NINE MONTHS 1998 TO NINE MONTHS 1997
General. Revenues for the nine months ended September 30, 1998 were
$666.1 million, an increase of 34% from $495.7 million in 1997. MCII's coach
sales increased 55% and Autobuses' sales increased 20%.
The overall gross margin for the nine months of 1998, defined as sales
less cost of sales (exclusive of depreciation and amortization), as a percentage
of sales decreased to 21.2% compared with 23.7% for the nine months of 1997.
Gross margin as a percentage of sales decreased in each business area, but was
most pronounced for Autobuses. Gross margin in dollar terms was $141.1 million
in the first nine months of 1998, compared with $117.5 million in 1997. The
dollar increase due to higher sales volume and higher absorption levels and cost
reduction programs.
Operating income was $48.2 million in the nine months of 1998 compared
with $47.3 million in 1997. The increase was primarily attributable to MCII
coaches, where operating income increased by $22.1 million. This increase was
largely offset by decreases of $19.7 million at Autobuses and $1.6 million at
replacement parts.
Net income was $27.7 million in 1998, compared with $21.9 million in the
nine months of 1997. Increases in pretax income ($15.2 million) were largely
offset by increases in income taxes ($9.5 million).
MCII. MCII's revenues for the nine months of 1998 were $598.3 million, an
increase of 36% over $439.1 million in the nine months of 1997. Coach revenues
increased 55% to $453.7 million as new coach sales were 1,170 units in the nine
months of 1998 (featuring the new Renaissance(R) line of European-styled
super-luxury coaches introduced in late 1997), compared with 895 units in the
nine months of 1997. Customer demand continuing to be strong in 1998 and the
year was free of the flood
11
<PAGE> 14
related problems that occurred in 1997. Replacement parts revenues decreased 1%
to $144.6 million.
Gross margin for the nine months of 1998 decreased to 21.4%, compared
with 22.4% in the nine months of the prior year. Coach margins decreased to
22.4%, compared with 24.1% last year due to a higher proportion of line-haul
fleet and used coach sales and more aggressive used coach pricing. Coach gross
margins of $101.4 million in 1998, compared with $70.6 million in 1997. The
dollar amount increase was due to higher sales volume and higher absorption
levels and cost reduction programs. Replacement parts margins decreased to
18.2%, compared with 19.0% due to higher operating costs.
Operating income was $57.5 million for the nine months of 1998, compared
with $39.6 million in the nine months of 1997.
Order backlog for the United States and Canada as of September 30, 1998
was 725 units, compared with 638 units at September 30, 1997.
Autobuses. Autobuses' revenues in the nine months of 1998 were $67.8
million, an increase of $11.2 million, or 20%, from $56.7 million in the nine
months of the prior year. This was caused by increased sales in Mexico where
intercity coach volume reached 204 units, compared with 152 units in 1997, and
transit bus sales were 209 units, compared with 8 units in 1997. Sales of
Autobuses' Viaggios in the United States were 108 units in 1998, compared with
120 units in 1997.
Gross margin for the nine months of 1998 decreased to 19.6%, compared
with 33.9% in the nine months of 1997. The large shift of product mix toward
transit buses had an adverse affect on gross margins and manufacturing costs
were higher.
There was an operating loss of $9.2 million for the nine months of 1998,
compared with operating income of $7.7 million in the nine months of 1997. The
nine months 1998 results were due mainly to a less profitable mix of products
sold and higher selling and marketing expenses to Dina ($4.8 million).
At September 30, 1998, Autobuses' backlog of intercity coaches was 413,
of which 28 were for the domestic Mexican market and 385 were for the export
market. At September 30, 1997, Autobuses' backlog of intercity coaches was 275,
of which 72 were for the domestic Mexican market and 203 were for the export
market.
Interest Expense. In the nine months of 1998, net interest expense was
$13.0 million, compared with $16.2 million in 1997. Autobuses had interest
income in 1998, principally from Dina, of $2.0 million, compared to interest
expense in 1997, principally to Dina, of $4.0 million.
Other Income. In the nine months of 1998, other income was $14.4
million, compared with $3.3 million in 1997. Autobuses reported foreign exchange
gains of $4.0 million during the nine months of 1998, compared with $0.1 million
in 1997. MCII sold its 10% interest in Mexicana de Autobuses S.A. de C.V. (MASA)
for a gain of $7.0 million. MASA is a Mexican coach manufacturing company and
MCII's investment had been valued at zero when MASA sought to reorganize under
Mexican bankruptcy laws.
Income Taxes. The Company's effective income tax rates in the nine months
of 1998 and 1997 were 44.3% and 36.3% respectively. The Company experiences a
generally high effective tax rate due to the amortization expense of
nondeductible goodwill in the United States and Canada. The increased effective
tax rate in 1998 was primarily due to losses in Mexico that are not tax
benefited.
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FINANCIAL CONDITION
Cash Flow Analysis
Cash provided by operating activities in the first nine months of 1998
was $19.7 million, compared with cash used by operating activities in 1997 of
$4.8 million. Working capital requirements were $29.4 million in 1998 as
increases in accounts receivable ($45.1 million due to higher sales) were only
partially offset by a vigorous inventory reduction program ($22.7 million).
Accounts payable declined ($8.4 million due to seasonally lower operating
levels), while income taxes payable increased ($8.3 million due to higher
earnings). Other operating liabilities declined by $9.0 million even after a
deposit of $10.2 million form New York City Transit Authority on 180 coaches to
be delivered in the last quarter of the year.
Cash provided by investing activities in 1998 ($6.4 million) compared
with cash used in 1997 of $32.3 million. Capital expenditures were minimal in
1998 (due to an absolute reduction in assets held for lease), while 1997
spending was driven by the completion of the E coach development project. In
addition, the zero valued investment in MASA shares was sold for $7.0 million
and investment in the unconsolidated affiliate was only $5.0 million in 1998
versus $10.3 million in 1997.
During the first nine months of 1998, borrowings under credit facilities
decreased $1.1 million, compared with increases of $81.5 million in 1997.
Debt
The Company's long-term debt (including current portion) at
September 30, 1998 was $316.9 million, an increase of $3.6 million from $313.2
million at the end of 1997. This included a current portion of $62.6 million,
which has increased by $18.1 million since the end of 1997.
Fourth Quarter 1998 and 1999 Cash Requirements (Amended)
During the fourth quarter of 1998 the Company is anticipating
significant cash outflows related primarily to the November principal and
interest payment of term notes payable ($25.0 million and $5.7 million,
respectively) and the December principal payment for the pre-export notes ($13
million). The Company, along with Dina, is evaluating various opportunities to
increase its liquidity to meet these cash outflows including, but not limited
to, factoring account receivable, inventory reduction programs, sales of
non-core business assets, delaying expenditures, and restructuring the Company's
existing credit facilities. The Company made the required payment of interest on
November 16, 1998, as required, and negotiated an amendment to the notes
extending the principal payment to November 24, 1998. The Company made the
required principal payment of $25.0 million on November 20, 1998. In regards to
1999, the Company is aggressively pursuing various alternatives including
working capital management and restructuring its credit facilities to provide
adequate liquidity.
Year 2000 Readiness Disclosure
In today's business environment, companies have developed a strong
technological interdependence with each other. As the Year 2000 draws near,
many businesses are increasingly concerned about how their business
applications, as well as those utilized by their business partners, will handle
the century date change. A summarized definition of the Year 2000 issue is the
inability of certain computer systems, software and embedded-technologies to
recognize or process dates beyond December 31, 1999. This problem may cause
significant disruptions in manufacturing, administrative and distribution
processes, as well as other computer supported activities.
The Company has developed a plan to ensure that its systems have the
ability to process transactions in the year 2000. The Company believes that it
has identified the applications which will need to be modified to properly
utilize dates beyond December 31, 1999. Both internal and external resources
will be utilized to reprogram and test software for Year 2000 compliance.
It is anticipated that the Year 2000 project will be completed no later
than July 1999. The estimated total cost of making the systems Year 2000
compliant is approximately $2.0 million. This cost will be expensed as incurred
except for the installation of new applications which are already Year 2000
compliant.
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Based on present information, the Company believes that it will be able
to achieve Year 2000 compliance through a combination of modifications to some
existing systems and the purchase of other systems that are already Year 2000
compliant. The Company believes that the expenses and capital expenditures
associated with achieving Year 2000 compliance will not have a material effect
on its financial results in either 1998 or 1999.
The Company is contacting business partners whose Year 2000
non-compliance could adversely affect the Company's operations, employees, or
customers. The Company believes the most likely worst case scenario would be
the failure of a material business partner to be Year 2000 compliant.
Therefore, the Company will continue to work with and monitor the progress of
its partners and formulate a contingency plan when the Company does not believe
the business partner will be compliant.
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PART II. - OTHER INFORMATION
ITEM 1. - LEGAL PROCEEDINGS
In April and May 1997, certain subsidiaries of the Company suffered
business interruption and other losses as a result of severe flooding that
occurred in the Pembina, North Dakota, and Winnipeg, Manitoba, Canada area.
MCI-U.S., MCI-Canada, and HBSI have submitted insurance claims totaling
approximately US$15 million.
In December 1997, Royal Insurance Company of Canada ("Royal") filed suit
in the Ontario Court of Justice in Toronto, Ontario, Canada, under docket number
97-CV-136219, naming MCII, MCI-Canada, and Frank Fair Industries Limited as
defendants ("Canadian Suit"). The Canadian Suit seeks a declaration that Royal
has no liability under its insurance policy for any of the flood losses
sustained by the aforementioned subsidiaries of the Company. Royal contends that
its policy does not provide coverage because the flooding occurred at a location
or locations that are not within the scope of the business interruption and
extra expense coverages under the policy. The Company's subsidiaries deny that
Royal's interpretation of the policy is correct, and have filed a statement of
defense and counterclaim against Royal in the Canadian Suit.
In June of 1998, MCI-U.S., MCI-Canada, MCII, and HBSI ("MCI Claimants")
filed suit in the District Court of Pembina County, Northeast Judicial District,
State of North Dakota, under docket number 98-C-86, naming Commonwealth
Insurance Company, Allianz Underwriters Insurance Company, National Surety
Corporation, and Royal Insurance Company of Canada as defendants ("North Dakota
Suit"). The North Dakota Suit seeks a declaration that the defendant insurance
carriers are liable to the MCI Claimants for the business interruption and extra
expense losses incurred as a result of the flooding, and that the defendants
have breached their respective policies by not having paid the full amount of
the MCI Claimants' claims. The defendants have not yet filed a responsive
pleading to the North Dakota Suit.
Notwithstanding the pendency of the Canadian Suit and the North Dakota
Suit, the involved insurance carriers are continuing to investigate the MCI
Claimants' claims under the applicable policies and the parties are engaging in
discussions in an effort to settle the claims. To date, Commonwealth Insurance
Company and Allianz Underwriters Insurance Company have each made partial
payments of $500,000 to the MCI Claimants, which payments are to be applied
against the amounts finally determined to be due the MCI Claimants under the
policies issued by those two carriers.
ITEM 6. - EXHIBITS AND REPORTS ON FORM
(a) Exhibits
None
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized.
MCII HOLDINGS (USA), INC.
(Registrant)
November 19, 1998 By /s/ Michael Graham
-------------------------
Michael Graham
Chief Accounting Officer
16
