<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended JUNE 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.
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INDEX
MCII HOLDINGS (USA), INC.
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Item 2. Management's Narrative Analysis
of the Results of Operations 9
Item 3. Quantitative and Qualitative
Disclosures About Market Risk Omitted
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 13
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 13
Signatures 14
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 Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
(000 omitted) 1998 1997 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Sales $259,383 $ 184,566 $481,710 $ 357,851
Finance income 1,816 1,224 3,041 2,576
---------- ----------- ---------- -----------
261,199 185,790 484,751 360,427
---------- ----------- ---------- -----------
Operating costs and expenses:
Cost of sales (exclusive of items shown separately below) 210,680 138,461 384,969 274,389
Depreciation and amortization 6,096 5,424 11,909 10,323
Interest expense, finance operations 733 637 1,410 1,251
Research and development expenses 3,376 1,695 5,239 3,495
Selling, general and administrative expenses 23,683 17,072 41,322 31,823
---------- ------------ ---------- -----------
244,568 163,289 444,849 321,281
---------- ------------ ---------- -----------
Operating Income 16,631 22,501 39,902 39,146
---------- ------------ ---------- -----------
Other income and (expense):
Interest (expense) (3,748) (6,391) (8,440) (11,343)
Other income 453 681 (338) 1,501
----------- ------------ ---------- -----------
(3,295) (5,710) (8,778) (9,842)
----------- ------------ ---------- -----------
Income before income taxes 13,336 16,791 31,124 29,304
Income taxes 7,632 7,362 15,397 12,136
----------- ----------- ---------- -----------
Net Income $ 5,704 $ 9,429 $ 15,727 $ 17,168
=========== =========== ========== ===========
</TABLE>
1
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MCII HOLDINGS (USA), INC.
(A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, December 31,
(000 omitted) 1998 1997
- --------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 26,940 $ 13,997
Trade and other accounts receivable 134,904 88,543
Receivables from affiliates 93,058 16,293
Current portion of notes receivable 6,132 6,625
Inventories 222,872 257,795
Deferred income taxes 9,862 14,430
Other current assets 7,829 7,591
------------ ------------
Total Current Assets 501,597 405,274
Property, plant, and equipment 106,737 106,845
Notes receivable 44,545 42,465
Investments in affiliates 20,145 15,253
Intangible assets 221,498 227,367
Other assets 13,521 23,469
------------ ------------
Total Assets $ 908,043 $ 820,673
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ 86,408 $ 67,580
Accrued compensation and other benefits 11,837 12,380
Accrued warranties 11,241 10,020
Accrued income taxes 9,350 7,251
Self insurance reserves 5,665 5,610
Net liabilities of discontinued operations 3,375 2,229
Other current liabilities 37,778 25,111
Current portion of long-term debt 66,495 44,418
------------ ------------
Total Current Liabilities 232,149 174,599
Long-term debt 252,501 268,833
Pensions and other benefits 14,610 14,037
Other deferred items and self insurance reserves 22,079 24,370
Deferred income taxes 6,686 6,916
------------ ------------
Total Liabilities 528,025 488,755
------------ ------------
Commitments and contingent liabilities
Stockholder's Equity:
Common stock and additional capital 444,996 411,524
Accumulated deficit (40,692) (58,590)
Unfunded pension loss, net (703) (577)
Cumulative translation adjustments (23,583) (20,439)
------------ ------------
Total Stockholder's Equity 380,018 331,918
------------ ------------
Total Liabilities and Stockholder's Equity $ 908,043 $ 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>
Six Months Ended June 30,
---------------------------
(000 omitted) 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows Provided (Used) By Operating Activities:
Net Income $ 15,727 $ 17,168
Adjustments to reconcile net income to net cash
provided (used) by operations:
Depreciation and amortization 11,909 10,323
Deferred income taxes 3,410 7,903
Guaranteed residual sales (20) -
Gain on sale of property and notes receivable (3) (386)
Gain (loss) on equity investment (139) -
Other noncash items, net (6,584) (4,680)
Change in operating assets and liabilities 20,619 (34,554)
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 44,919 (4,226)
----------- -----------
Cash Flows Provided (Used) By Investing Activities:
Capital expenditures (7,838) (14,015)
Change in notes receivable 1,587 (16,895)
Proceeds from sale of notes receivable - 2,518
Proceeds from sale of property and investments 603
Investment in unconsolidated affiliate (4,750) -
Discontinued operations, net changes 1,146 2,832
----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (9,252) (25,560)
----------- -----------
Cash Flows Provided (Used) By Financing Activities:
Net change in bank credit facilities 5,819 74,726
Payment of long-term borrowings (74) (148)
Net receivable from affiliates (28,469) (14,079)
Dividends paid to parent company - (1,963)
----------- -----------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (22,724) 58,536
----------- -----------
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS - (1,018)
----------- -----------
NET INCREASE (DECREASE) IN CASH 12,943 27,732
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,997 9,403
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 26,940 $ 37,135
=========== ===========
</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 - Revenues, Gross Profit and Operating Income, Supplementary Information
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Units:
MCII
New Coach Sales 478 309 899 635
Viaggio(R) 1000(1) 48 45 68 80
Used Coaches 252 142 403 270
Autobuses
Mexican intercity coach sales 98 74 163 82
Mexican transit buses - 3 209 3
Export coach sales (2) 27 55 56 92
Revenues (000's omitted):
MCII
Coach Manufacturing and Support $ 185,704 $115,655 $ 337,285 $226,093
Replacement Parts 48,203 49,860 96,925 100,666
--------- --------- --------- --------
233,907 165,515 434,210 326,759
Autobuses 27,292 20,275 50,541 33,668
--------- --------- --------- --------
$ 261,199 $185,790 $ 484,751 $360,427
========= ========= ========= ========
Gross Profit (000's omitted)(3):
MCII
Coach Manufacturing and Support $ 39,447 $ 29,561 $ 74,463 $ 53,366
Replacement Parts 6,329 10,885 15,689 20,361
--------- --------- --------- --------
45,776 40,446 90,152 73,727
Autobuses 4,010 6,246 8,220 11,060
--------- --------- --------- --------
$ 49,786 $ 46,692 $ 98,372 $ 84,787
========= ========= ========= ========
Operating Income (000's omitted):
MCII
Coach Manufacturing and Support $ 20,735 $ 13,313 $ 40,014 $ 22,268
Replacement Parts 2,080 7,004 7,496 11,889
--------- --------- --------- --------
22,815 20,317 47,510 34,157
Autobuses (6,184) 2,184 (7,608) 4,989
--------- --------- --------- --------
$ 16,631 $ 22,501 $ 39,902 $ 39,146
========= ========= ========= ========
</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).
5
<PAGE> 8
Note 4 - 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 six-month periods ended
June 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 $3,144,000 and $1,102,000 for
the six months ended June 30, 1998 and 1997, respectively. The minimum pension
liability losses totaled $126,000 and zero for the six months ended June 30,
1998 and 1997, respectively. Therefore, total comprehensive income was
$12,457,000 for the six months ended June 30, 1998, compared with $16,066,000
for the same period of 1997.
Note 5 - Inventories
Inventories consisted of the following:
<TABLE>
June 30, December 31,
1998 1997
----------- ------------
(000 omitted)
<S> <C> <C>
Raw material $ 38,387 $ 48,938
Work in process 36,670 61,230
Finished goods 172,652 170,879
----------- ------------
247,709 281,047
Inventory reserves (24,837) (23,252)
----------- ------------
$ 222,872 $ 257,795
=========== ============
Note 6 - Debt
Debt consisted of the following:
June 30, December 31,
1998 1997
--------- ------------
(000 omitted)
Term notes payable $ 125,000 $ 125,000
United States bank credit facility 143,000 135,000
Canadian bank credit facility 9,204 12,033
Bancomext export loan facility 6,036 6,496
Pre-export notes 34,551 34,203
Notes payable 1,205 519
--------- ---------
318,996 313,251
Less current portion (66,495) (44,418)
--------- ---------
$ 252,501 $ 268,833
========= =========
</TABLE>
6
<PAGE> 9
Note 7 - Cash Flow Effect of Change in Operating Assets and Liabilities
Change in operating assets and liabilities consisted of:
<TABLE>
<CAPTION>
Six months ended
----------------------
<S> <C> <C>
June 30, June 30,
1998 1997
---------- ----------
(000 omitted)
Decrease (Increase) in Operating Assets:
Receivables $ (46,442) $ (26,949)
Inventories 35,197 (27,313)
Other operating assets 449 (6,599)
---------- ----------
(10,796) (60,861)
---------- ----------
Increase (Decrease) in Operating Liabilities:
Accounts payable 18,828 16,057
Accrued income taxes 2,099 (1,375)
Other operating liabilities 10,488 11,625
---------- ----------
31,415 26,307
---------- ----------
Net Cash Flow Effect $ 20,619 $ (34,554)
========== ==========
</TABLE>
Note 8 - Related Party Transactions
MCII provides for allocable management and administrative expenses
incurred by Dina. In the first six months of 1998 and 1997, the provision for
such expenses was $500,000 and $1,500,000, respectively.
During the first six months of 1998 and 1997 MCII purchased components
and accrued for management fees from Dina, in the ordinary course of business
of $6,300,000 and $6,200,000, 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 $13,800,000 and
$17,600,000, respectively, in goods and services. This includes a royalty to
Dina which is accrued on sales as a selling expense. In the first six months of
1998 and 1997 this royalty was $7,245,000 and $2,148,000, respectively. In the
first six months of 1998 interest income was $5,400,000, compared with interest
expense of $1,100,000 in 1997.
At June 30, 1998, the Company had net receivables from affiliates of
$93,058,000, 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 $4,750,000
to its investment in a subsidiary nonconsolidated affiliate.
7
<PAGE> 10
Note 9 - 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 $24,000,000 plus interest of approximately $46,000,000 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
$70,000,000, then approximately $45,000,000 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.
8
<PAGE> 11
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 SECOND QUARTER 1998 TO SECOND QUARTER 1997
General. Revenues for the quarter ended June 30, 1998 were $261.2
million, an increase of 41% from $185.8 million in 1997. MCII's coach sales
were up 61% and Autobuses' sales increased 35%.
The overall gross margin for the second quarter of 1998, defined as
sales less cost of sales (exclusive of depreciation and amortization), as a
percentage of sales decreased to 19.1% compared with 25.1% for the second
quarter of 1997. Gross margin as a percentage of sales decreased in all
operating areas. However, total gross margin of $49.8 million was recorded in
1998, compare with $46.7 million in 1997. The increase in dollar amount was due
to increased sales volume at MCII coach.
Operating income was $16.6 million in the second quarter of 1998
compared with $22.5 million in 1997. Although MCII coach income increased $7.4
million, this was more than offset by decreases of $8.4 million at Autobuses
(largely due to higher royalty expenses to Dina) and $4.9 million at replacement
parts (mainly due to higher operating costs).
Net income was $5.7 million in the second quarter of 1998, compared
with $9.4 million in the second quarter of 1997. This was essentially due to
lower operating income.
MCII. MCII's revenues for the second quarter of 1998 were $233.9
million, an increase of 41% over $165.5 million in the second quarter of 1997.
Coach revenues increased 61% to $185.7 million as new coach sales were 478 units
in the second quarter of 1998, compared with 309 units in the second quarter of
1997 which was restricted by flooding conditions along the Red River.
Replacement parts' revenues decreased 3% to $48.2 million due to lower demand
from transit customers, who have been retiring older units from service.
Gross margin for the second quarter of 1998 decreased to 19.6%,
compared with 24.4% in the same quarter of the prior year. Coach margins
decreased to 21.2%, compared with 25.6% last year due to a higher proportion of
line-haul fleet sales and more aggressive used coach pricing. However, coach
gross margin in dollar terms increased to $39.4 million in 1998, compared with
$29.6 million in 1997 due to higher sales volume. Replacement parts margins
decreased to 13.1%, compared with 21.8% in 1997 due to higher operating
expenses.
Operating income was $22.8 million for the second quarter of 1998,
compared with $20.3 million in the second quarter of 1997. The improved second
quarter results were due to increased coach sales volume.
Autobuses. Autobuses' revenues in the second quarter of 1998 were
$27.3 million, an increase of $7.0 million, or 35%, from $20.3 million in the
same quarter of the prior year. This was caused by an increased unit sales in
Mexico and an improved mix of higher priced products. Sales of Autobuses'
Viaggios in the United States were 48 units in 1998, compared with 45 units in
1997.
9
<PAGE> 12
Gross margin for the second quarter of 1998 decreased to 14.7%,
compared with 30.8% in the second quarter of 1997, due to higher manufacturing
costs.
There was an operating loss of $6.2 million for the second quarter of
1998, compared with operating income of $2.2 million in the second quarter of
1997. The second quarter 1998 decrease was due mainly to increased royalty
expenses to Dina and higher research and development expenses.
Interest Expense. In the second quarter of 1998, net interest expense
was $3.7 million, compared with $6.4 million in 1997. Autobuses had interest
income in 1998, principally from Dina, of $1.6 million, compared to interest
expense in 1997, principally to Dina, of $2.1 million.
Income Taxes. The Company's effective income tax rates in the second
quarter of 1998 and 1997 were 57.2% and 43.8% 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 FIRST HALF 1998 TO FIRST HALF 1997
General. Revenues for the six months ended June 30, 1998 were $484.8
million, an increase of 34% from $360.4 million in 1997. MCII's coach sales
increased 49% and Autobuses' sales increased 50%.
The overall gross margin for the first half of 1998, defined as sales
less cost of sales (exclusive of depreciation and amortization), as a percentage
of sales decreased to 20.3% compared with 23.5% for the first half of 1997.
Gross margin as a percentage of sales decreased in each business area, but were
most pronounced for Autobuses. Gross margin in dollar terms was $98.4 million in
the first six months of 1998, compared with $84.8 million in 1997. The dollar
increase was due to high MCII coach sales.
Operating income was $39.9 million in the first half of 1998 compared
with $39.1 million in 1997. The increase was primarily attributable to MCII
coaches, where operating income increased by $17.7 million. This increase was
partially offset by decreases of $12.6 million at Autobuses and $4.4 million at
replacement parts.
Net income was $15.7 million in 1998, compared with $17.2 million in
the first half of 1997. Increases in pretax income ($1.8 million) were more
than offset by increases in income taxes ($3.3 million).
MCII. MCII's revenues for the first half of 1998 were $434.2 million,
an increase of 33% over $326.8 million in the first half of 1997. Coach
revenues increased 49% to $337.3 million as new coach sales were 899 units in
the first half of 1998, compared with 635 units in the first half of 1997 with
customer demand continuing to be strong and 1998 being free of the flood related
problems that occurred in 1997. Replacement parts revenues decreased 4% to
$96.9 million due to decreased demand from municipal transit bus operators.
Gross margin for the first half of 1998 decreased to 20.8%, compared
with 22.6% in the first half of the prior year. Coach margins decreased to
22.1%, compared with 23.6% last year due to a higher proportion of line-haul
fleet sales and more aggressive used coach pricing. Coach gross margins of
$74.5 million in 1998, compared with $53.4 million in 1997. The dollar amount
increase was due to higher sales volume. Replacement parts margins decreased to
16.2%, compared with 20.2% due to higher operating costs.
Operating income was $47.5 million for the first half of 1998, compared
with $34.2 million in the first half of 1997. The improved first half results
were due to increased coach sales volume.
10
<PAGE> 13
Order backlog for the United States and Canada as of June 30, 1998 was
733 units, compared with 642 units at June 30, 1997.
Autobuses. Autobuses' revenues in the first half of 1998 were $50.5
million, an increase of $16.9 million, or 50%, from $33.7 million in the first
half of the prior year. This was caused by increased sales in Mexico where
intercity coach volume reached 163 units, compared with 82 units in 1997, and
transit bus sales were 209 units, compared with 3 units in 1997. Sales of
Autobuses' Viaggios in the United States were 68 units in 1998, compared with 80
units in 1997.
Gross margin for the first half of 1998 decreased to 16.3%, compared
with 32.9% in the first half 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 $7.6 million for the first half of 1998,
compared with operating income of $5.0 million in the first half of 1997. The
first half 1998 results were due mainly to a less profitable mix of products
sold, higher royalty expenses to Dina ($5.1 million), and increased research and
development expenses ($1.5 million).
At June 30, 1998, Autobuses' backlog of intercity coaches was 311, of
which 147 were for the domestic Mexican market and 164 were for the export
market. At June 30, 1997, Autobuses' backlog of intercity coaches was 483, of
which 198 were for the domestic Mexican market and 285 were for the export
market.
Interest Expense. In the first half of 1998, net interest expense was
$8.4 million, compared with $11.3 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 $3.1 million.
Income Taxes. The Company's effective income tax rates in the first
half of 1998 and 1997 were 49.5% and 41.4% 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.
FINANCIAL CONDITION
Cash Flow Analysis
Cash provided by operating activities in the first six months of 1998
was $44.9 million, compared with cash used by operating activities in 1997 of
$4.2 million. Working capital requirements were favorable in 1998 as increases
in accounts receivable (due to higher sales) were more than offset by a vigorous
inventory reduction program, higher accounts payable (due to higher operating
levels), and increased other operating liabilities (related to a deposit of
$10.2 million form New York City Transit Authority on 180 coaches to be
delivered in the second half of the year).
Cash used for investing activities in 1998 ($9.3 million) was down from
1997 ($25.6 million) due to a net reduction in notes receivable in 1998 ($1.6
million), compared with a substantial increase in 1997 ($16.9 million).
During the first six months of 1998, borrowings under credit
facilities increased $5.8 million, compared with increases of $74.7 million in
1997. The reduced usage was due to improved working capital management.
11
<PAGE> 14
Debt
The Company's long-term debt (including current portion) at June 30,
1998 was $319.0 million, an increase of $5.8 million from $313.2 million at the
end of 1997. This included a current portion of $66.5 million, which has
increased by $22.1 million since the end of 1997.
Fourth Quarter 1998 Cash Requirements
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 ($31 million) 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
believes that it has adequate means to sufficiently meet its cash flow
requirements for the remainder of the year and the longer term.
Year 2000 Compliance
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.
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. However, no assurance can be given that these efforts will be
successful. The Company is also in the process of responding to customer
surveys and evaluating whether significant suppliers and customers are 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.
12
<PAGE> 15
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 they are in the
process of filing their 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 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
13
<PAGE> 16
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)
August 19, 1998 By /s/ Michael Graham
------------------------
Michael Graham
Chief Accounting Officer
14
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