<PAGE>
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 MARCH 31, 1999
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
(incorporation or organization) Identification No.)
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, 1999.
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>
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 11
Item 3. Quantitative and Qualitative
Disclosures About Market Risk Omitted
PART II. OTHER INFORMATION
Item 1. Legal Proceedings None
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
</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>
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 March 31,
-----------------------------
(000 omitted) 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenues:
Sales $ 242,440 $ 222,327
Finance income 708 1,225
------------- -------------
243,148 223,552
------------- -------------
Operating costs and expenses:
Cost of sales (exclusive of items shown separately below) 185,266 174,289
Interest expense, finance operations 690 677
Depreciation and amortization 6,453 5,813
Research and development expenses 3,314 1,863
Selling, general and administrative expenses 25,010 17,639
------------- -------------
220,733 200,281
------------- -------------
Operating Income 22,415 23,271
------------- -------------
Other income and (expense):
Interest (expense) (12,346) (4,692)
Foreign currency translation gain (loss) (1,691) 1,782
Other income (1,839) 376
------------- -------------
(15,876) (2,534)
------------- -------------
Income before income taxes 6,539 20,737
Income taxes 8,605 7,765
------------- -------------
Net Income (Loss) $ (2,066) $ 12,972
------------- -------------
------------- -------------
</TABLE>
The accompanying footnotes are an integral part of the statements.
1
<PAGE>
MCII HOLDINGS (USA), INC.
(A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.)
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
March 31, December 31,
(000 omitted) 1999 1998
- --------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 32,924 $ 24,103
Trade and other accounts receivable 151,345 122,508
Current portion of notes receivable 11,428 10,548
Inventories 231,615 226,272
Deferred income taxes 19,684 21,488
Other current assets 6,595 6,089
------------- -------------
Total Current Assets 453,591 411,008
Property, plant, and equipment 93,904 104,530
Notes receivable 29,627 35,400
Investments in affiliates 23,238 23,116
Intangible assets 215,023 215,589
Other assets 19,306 16,511
------------- -------------
Total Assets $ 834,689 $ 806,154
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ 92,648 $ 82,420
Accrued compensation and other benefits 12,586 13,343
Accrued warranties 13,094 13,960
Accrued income taxes 29,353 32,390
Self insurance reserves 6,240 6,365
Net liabilities of discontinued operations 5,082 4,416
Other current liabilities 49,841 31,132
Current portion of long-term debt 195,796 192,742
------------- -------------
Total Current Liabilities 404,640 376,768
Long-term debt 281,723 281,723
Pensions and other benefits 19,900 15,787
Other deferred items and self insurance reserves 18,564 19,059
Deferred income taxes 6,677 6,522
------------- -------------
Total Liabilities 731,504 699,859
------------- -------------
Commitments and contingent liabilities
Stockholder's Equity:
Common stock and additional capital 160,031 159,500
Accumulated deficit (26,011) (23,945)
Accumulated other comprehensive income (30,835) (29,260)
------------- -------------
Total Stockholder's Equity 103,185 106,295
------------- -------------
Total Liabilities and Stockholder's Equity $ 834,689 $ 806,154
------------- -------------
------------- -------------
</TABLE>
The accompanying footnotes are an integral part of the statements.
2
<PAGE>
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>
Three Months Ended March 31,
------------------------------
(000 omitted) 1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows Provided (Used) By Operating Activities:
Net Income $ (2,066) $ 12,972
Adjustments to reconcile net income to net cash
provided (used) by operations:
Depreciation and amortization 6,453 5,813
Deferred income taxes 1,078 5,192
Gain on sale of property and notes receivable 423 (3)
Other noncash items, net 5,690 991
Change in operating assets and liabilities, net (9,585) 5,542
------------- -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 1,993 30,507
------------- -------------
Cash Flows Provided (Used) By Investing Activities:
Capital expenditures (3,229) (6,506)
Proceeds from sale of property and investments 8,677 603
Investment in notes receivable (7,674) (15,119)
Collections of notes receivable 1,058 14,594
Proceeds from sale of notes receivable 8,749 -
Discontinued operations, net changes 666 1,289
------------- -------------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 8,247 (5,139)
------------- -------------
Cash Flows Provided (Used) By Financing Activities:
Net change in long-term borrowings 1,581 20,157
Related party receivables/payables - (33,545)
Dividends paid to parent company (3,000) -
------------- -------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (1,419) (13,388)
------------- -------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS - (331)
------------- -------------
NET INCREASE (DECREASE) IN CASH 8,821 11,649
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 24,103 13,997
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 32,924 $ 25,646
------------- -------------
------------- -------------
</TABLE>
The accompanying footnotes are an integral part of the statements.
3
<PAGE>
MCII HOLDINGS (USA), INC.
(A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.)
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, 1998, 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"), Dina Autobuses
S.A. de C.V. ("Autobuses"), and Mexicana de Manufacturas, S.A. de C.V.
("Mexicana").
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>
Note 3 - Financial Restructuring
As of December 31, 1998, Transportation Manufacturing Operations, Inc.
("TMO") a principal subsidiary of the Company, had a $170 million US
revolving credit agreement ("the Senior Credit Facility") with a nine-bank
syndicate to finance working capital and other general corporate needs. This
credit facility expires on October 1, 1999, and the lenders have indicated
that they are not willing to extend the maturity of this agreement. In
addition, during 1998, the Company was required to reduce existing long-term
debt obligations by $50 million, consisting of a $25 million principal
payment on TMO's Senior Term Notes due 2002, a $12 million reduction in its
Canadian bank credit facility, and a $13 million principal payment on the
Pre-Export Notes due 1999.
As a result of the debt reductions during 1998 and the additional debt
obligations and working capital requirements for 1999, the Company does not
expect to generate sufficient cash flow from operations to fund both short
term requirements and meet the required expiration of the Senior Credit
Facility.
On March 18, 1999, the Company engaged CIBC Oppenheimer Corp. and its
affiliates ("CIBC Oppenheimer") to act as the Company's lead bank agent,
financial advisor, initial purchaser, placement agent, and underwriter to
undertake a financial restructuring of the debt obligations of the Company
and its parent company.
On April 19, 1999, TMO executed an agreement with CIBC Oppenhiemer for
the issuance of $40 million of Senior Subordinated Increasing Rate Notes
("IRNs"), due December 31, 1999, (subject to extension to March 31, 2000).
This bridge financing will be used by TMO to meet short-term working capital
requirements while the financial restructuring process is underway.
In addition to the bridge financing, the Company, in association with
CIBC Oppenheimer, has developed a financial restructuring plan to refinance
all of the material debt obligations of the parent, the Company, and their
respective subsidiaries.
On May 14, 1999, Consorcio G Grupo Dina, S.A. de C.V. ("Grupo Dina")
commenced a tender offer and consent solicitation relating to all of
approximately $206,500,000 aggregate principal amount of outstanding Senior
Secured Discount Notes due 2002 (the "Discount Notes") issued by Grupo Dina
and the Company. Grupo Dina also is commencing a tender offer and consent
solicitation relating to all of the $35,000,000 aggregate principal amount
of outstanding Senior Secured Guaranteed Notes due 2000 (the "Guaranteed
Notes") issued by its wholly-owned subsidiary, Dina Trucks (USA), L.L.C., and
guaranteed by Grupo Dina and Dina Camiones, S.A. de C.V.
Grupo Dina and MCII Holdings have deferred making its required interest
payment of $12,390,000 on May 15, 1999 on the Discount Notes. Although this
is a technical default of the Discount Notes, they have 30 days to cure this
default.
In connection with the tender offers, Grupo Dina is soliciting consents
to (a) defer payment of interest on the Discount Notes until the earlier of
July 15, 1999 or settlement of the tender offer and (b) adopt amendments to
the indentures under which the Discount Notes and Guaranteed Notes were
issued to eliminate substantially all restrictive covenants and certain event
of default provisions.
The consideration for each Discount Note and Guaranteed Note tendered
and accepted for payment will be (a) $980 per $1,000 of Notes, plus (b) a
consent payment of $20 per $1,000 of Notes, plus (c) accrued interest through
the settlement date. The consent payment will be paid only for tendered Notes
for which consents have been validly delivered and not revoked prior to
May 26, 1999, unless extended. The tender offers will terminate on June 14,
1999, unless extended.
The tender offers are part of the overall plan to recapitalize and
restructure substantially all of the indebtedness of Grupo Dina and its
subsidiaries through a series of dependent transactions, including
(a) an approximate $150 million investment by Joseph Littlejohn & Levy,
Fund III in the Company, or in one or more of the Company's subsidiaries or
affiliates, in exchange for an equity interest in excess of 50% in such
entity, (b) the Company's Transportation Manufacturing Operations, Inc.
("TMO") subsidiary entering into a new senior credit facility in an
approximate amount of $300 million and (c) TMO issuing approximately
$200 million of senior subordinated notes. In addition to the debt
repurchased pursuant to the tender offers, TMO would repay substantially all
of its outstanding indebtedness including, but not limited to, the IRN's, the
existing US and Canadian revolving credit facilities and the 9.02% Senior
Term Notes due 2002. Finally, it is contemplated that the Company would
transfer its Dina Autobuses, S.A. de C.V. subsidiary to TMO. Each of the
foregoing transactions is conditioned upon the closing of the others and
numerous other conditions precedent, including satisfactory completion of
applicable due diligence investigations. The Company expects to complete the
new financing and refinancing prior to the October 1, 1999 maturity of the
existing senior credit facilities.
While there is no assurance that the financial restructuring plan will
be completed successfully at this time, the Company is continuing to work
with CIBC Oppenheimer to execute this plan. In the event that the financial
restructuring cannot be completed prior to the October 1, 1999 maturity, the
Company is also exploring alternatives to generate additional cash flow
including, but not limited to, selling substantial Company assets and seeking
strategic equity investors.
Note 4 - Senior Secured Discount Notes due 2002
Effective December 31, 1998, the Company recognized its liability for
principal and interest payments with respect to this debt obligation due to
substantial doubt about the parent company's ability to service the debt.
Consequently, the Company recorded debt of $206,500,000 and accrued interest
payable of $2,919,000 as of December 31, 1998 and adjusted stockholder's
equity accordingly.
At March 31, 1999, the Company recorded additional interest expense of
$6,373,000 in respect to this debt. This interest expense does not qualify
for any tax benefit and the net income effect was an expense of $6,373,000.
5
<PAGE>
Note 5 - Debt
Debt consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(000 omitted)
<S> <C> <C>
United States bank credit facility $ 153,000 $ 137,000
Canadian bank credit facility - -
Bancomext export loan facility 16,303 8,594
Pre-export notes, due 1999 - 22,000
9.02% Senior Notes, due 2002 100,000 100,000
Senior Secured Discount Notes, due 2002 206,500 206,500
Notes payable 1,716 371
---------- -----------
477,519 474,465
Less current portion (195,796) (192,742)
---------- -----------
$ 281,723 $ 281,723
---------- -----------
---------- -----------
</TABLE>
On April 19, 1999, TMO executed an agreement with CIBC Oppenheimer for
the issuance of $40 million of IRNs, due December 31, 1999, (subject to
extension to March 31, 2000). The IRNs will bear an increasing rate of
interest, commencing with a rate that will be the greater of I) LIBOR plus
6.50% or ii) 11.625%, and increasing by 25 basis points (0.25%) every 30 days
that the IRNs are outstanding to a maximum rate of 18%. As a condition of the
consent of the existing lenders, interest above 15% must be paid in kind. The
IRNs will rank senior to all existing subordinated debt and rank subordinate to
all existing senior debt of TMO. The agreement provides TMO with the option
to redeem the IRNs, in whole, but not in part, at any time prior to maturity
at fixed redemption prices. TMO must also redeem the IRNs at a fixed
redemption price upon a change in control of TMO or any of its parent
companies. TMO has the option to extend the maturity date of the IRNs to
March 31, 2000, at the maximum interest rate of 18% (with interest above 15%
paid in kind). However, as additional consideration for the extension, TMO
would be required to issue to the existing noteholders, an additional $4
million aggregate principal amount of IRNs ("Extension IRNs"). The IRNs are
subject to certain affirmative and negative covenants customary for this type
of financing, and are guaranteed by TMO's material domestic subsidiaries.
On April 19, 1999, TMO and its principal subsidiaries obtained the
necessary consent and related amendments required from the existing lenders
to permit the bridge financing and remain in compliance with certain
financial covenants. As consideration for the consent of the existing
lenders, TMO agreed to certain changes in the terms of the existing debt
agreements.
In the event that the financial restructuring is not completed by
September 30, 1999, and TMO has not been able to obtain sufficient funding to
retire the IRN's, the United States bank credit facility, and the 9.02%
Senior Notes due 2002, TMO will be in default of each of these credit
agreements. This in turn would trigger cross default covenants in
substantially all of the Company's other debt agreements and provide the
holders of its debt with the right to accelerate payments of all amounts
outstanding. The existence of acceleration rights would also require the
Company to classify all long-term indebtedness as current. In light of these
potentially adverse consequences to the Company's financial position,
management is diligently pursuing the consummation of the financial
restructuring.
6
<PAGE>
Note 6 - Revenues, Gross Profit and Operating Income, Supplementary Information
<TABLE>
<CAPTION>
Three Months
Ended
March 31,
---------
1999 1998
---- ----
<S> <C> <C>
Units:
United States and Canadian Operations
New Coach Sales 438 421
Viaggio - Registered Trademark- 1000(1) 22 20
Used Coach Sales 264 150
Mexican Operations
Mexican intercity coach sales 6(2) 65
Used Coach Sales 70 -
Urban Buses - 209
Revenues from External Customers (000's omitted):
United States and Canadian Operations
Coach and Support $176,611 $156,369
Replacement Parts 42,942 43,305
-------- --------
219,553 199,674
Mexican Operations 23,595 23,878
-------- --------
$243,148 $223,552
-------- --------
-------- --------
Intersegment Revenues (000's omitted):
United States and Canadian Operations $ 214 $ 536
Mexican Operations (3) 20,240 6,262
-------- --------
$ 20,454 $ 6,798
-------- --------
-------- --------
Operating Income (000's omitted):
United States and Canadian Operations
Coach and Support $19,662 $18,475
Replacement Parts 5,361 5,629
------- -------
25,023 24,104
Mexican Operations (2,608) (833)
-------- -------
$22,415 $23,271
-------- --------
-------- --------
<CAPTION>
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Total Assets (000's omitted):
United States and Canadian Operations
Coach and Support $579,163 $560,978
Replacement Parts 181,100 174,455
-------- --------
760,263 735,433
Mexican Operations 74,426 70,721
-------- --------
$834,689 $806,154
-------- --------
-------- --------
</TABLE>
- -------------------------------
(1) Represents sales of Viaggio -Registered Trademark- 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) Excludes 41 brokered units.
(3) These figures primarily represent sales of Viaggio -Registered Trademark-
1000 coaches to the U.S.
7
<PAGE>
Note 7 - Comprehensive Income
For the quarters ended March 31, 1999 and 1998, the Company's
comprehensive income included net income, foreign currency translation
losses, and minimum pension liability adjustments. The foreign currency
translation losses totaled $1,575,000 and $331,000 for the quarters ended
March 31, 1999 and 1998, respectively. The minimum pension liability losses
totaled $0 and $126,000 for the quarters ended March 31, 1999 and 1998,
respectively. Therefore, total comprehensive income/(loss) was ($3,641,000)
for the quarter ended March 31, 1999, compared with $12,515,000 for the same
quarter of 1998.
Note 8 - Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---- ----
(000 omitted)
<S> <C> <C>
Raw material $ 40,821 $ 38,506
Work in process 39,742 42,515
Finished goods 174,743 171,661
----------- -----------
255,306 252,682
Inventory reserves (23,691) (26,410)
----------- -----------
$ 231,615 $ 226,272
----------- -----------
----------- -----------
</TABLE>
Note 9 - Cash Flow Effect of Change in Operating Assets and Liabilities
Change in operating assets and liabilities consisted of:
<TABLE>
<CAPTION>
Three Months Ended
------------------
March 31, March 31,
1999 1998
---- ----
(000 omitted)
<S> <C> <C>
Decrease (Increase) in Operating Assets:
Receivables $ (31,619) $ (19,883)
Inventories 5,395 6,508
Other operating assets 2,324 (50)
---------- ---------
(23,900) (13,425)
Increase (Decrease) in Operating Liabilities:
Accounts payable 824 12,271
Accrued income taxes 3,215 533
Other operating liabilities 10,276 6,163
---------- ---------
14,315 18,967
---------- ---------
Net Cash Flow Effect $(9,585) $ 5,542
---------- ---------
---------- ---------
</TABLE>
8
<PAGE>
Note 10 - Related Party Transactions
Related party transactions for the three months ended were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
(000 omitted)
<S> <C> <C>
Purchases from affiliated companies:
Goods $ 936 $2,852
Services 2,763 4,487
------ ------
$3,699 $7,339
------ ------
------ ------
Sales to affiliated companies:
Goods $ 753 $1,391
Services - 2,052
------ ------
$ 753 $3,443
------ ------
------ ------
Charges for Dina management services $ 250 $ 250
------ ------
------ ------
</TABLE>
Note 11 - 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 $49,000,000
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 was $72,000,000, then approximately $47,000,000 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.
9
<PAGE>
Note 12 - Subsequent Events
On April 28, 1999, the Company's Universal Coach Parts subsidiary sold
and leased back its primary parts distribution facility. Additionally, it
entered into an agreement with the same party to build a new parts
distribution facility.
The Company has also entered into an agreement whereby the Company
will sell Mexicana to a Mexican subsidiary of the parent company as of
April 1, 1999.
10
<PAGE>
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 FIRST QUARTER 1999 TO FIRST QUARTER 1998
GENERAL. Revenues for the quarter ended March 31, 1999 were $243.1
million, an increase of 9% from $223.6 million in 1998. Increased revenues
were due to higher coach sales in the United States and Canada.
The overall gross profit (excluding depreciation and amortization) for
the first quarter of 1999 as a percentage of sales increased to 23.5%, compared
with 21.7% for the first quarter of 1998. Improvements were recorded in all
business areas.
Operating income was $22.4 million in the first quarter of 1999 compared
with $23.3 million in 1998. The decrease was primarily attributable to losses
of $2.6 million in Mexican operations in 1999, compared with losses of $0.8
million in 1998.
Net loss was $2.1 million in 1999, compared with net income of $13.0
million in the first quarter of 1998. This was essentially due to Mexican
losses of $6.1 million in 1999, compared with income of $1.5 million in 1998
and $6.4 million in additional interest expense (after taxes) attributable to
the Company's liability for debt principal and interest payments of the
parent company. The Company recognized this liability at the end of 1998 due
to substantial doubt about the parent company's ability to service the debt.
UNITED STATES AND CANADIAN OPERATIONS. United States and Canadian
Operations reported revenues for the first quarter of 1999 of $219.6 million,
an increase of 10% over $199.7 million in the first quarter of 1998. Coach
revenues increased 13% to $176.6 million. New coach sales were 438 units in
the first quarter of 1999, compared with 421 units in the first quarter of
1998 and excluding sales of Mexican manufactured Viaggios which were 22 units
in 1999 and 20 units in 1998. Used coach sales were 264 units in the first
quarter of 1999, compared with 150 units in the first quarter of 1998.
Customer demand continued to be strong and used coach sales benefited from a
first-ever three-day inventory clearance sale, held to coincide with the
opening of the Company's new service center in Dallas. Replacement parts'
revenues decreased 1% to $42.9 million. Demand for replacement parts
typically runs in a counter cyclical manner to sales of new units.
Gross profit margin for the first quarter of 1999 increased to 23.4%,
compared with 22.1% in the same quarter of the prior year. Coach profit
margins were 23.6% in the 1999 quarter, compared with 22.1% in the same
quarter last year. Coach benefited considerably from a significant reduction
in manhours per coach produced on the E model coach, which was still in the
start-up phase in 1998. Gross profit margin on used coaches declined to 23.1%
in the first quarter of 1999, compared with 33.3% in 1998. Used coach margins
have been under pressure as trade-ins on new coaches have increased and some
traditional used coach buyers have moved to new coaches. Replacement parts
profit margins were 22.9% in the 1999 quarter, compared with 22.0% in the
same quarter last year.
Operating income was $25.0 million for the first quarter of 1999,
compared with $24.1 million in the first quarter of 1998. The improved first
quarter results were due to increased new coach sales
11
<PAGE>
volume and better control of costs, largely offset by reduced used coach
earnings, by higher research and development expenses and by higher
selling, general, and administrative expenses.
Order backlog for the United States and Canada as of March 31, 1999 was
552 units, compared with 575 units at March 31, 1998.
MEXICAN OPERATIONS. Mexican Operations reported revenues in the first
quarter of 1999 of $23.6 million, a decrease of $0.3 million, or 1%, from
$23.9 million in the same quarter of the prior year. This was caused by a
decrease in sales in the domestic Mexican market where intercity coach sales
were only 6 units in the first quarter of 1999, compared with 65 units in
1998. Sales in 1999 included 70 units delivered at the end of their operating
leases with revenues of $6.1 million, compared with first quarter of 1998
which included 209 units of minimally profitable Citus transit buses with
revenues of $6.0 million.
Gross profit margin for the first quarter of 1999 increased to 24.5%,
compared with 18.8% in the first quarter of 1998. The increase was due to an
improved mix of products
There was an operating loss of $2.6 million for the first quarter of
1999, compared with operating loss of $0.8 million in the first quarter of
1998. The current year quarter was adversely affected by start-up losses at
Mexicana ($1.5 million) and higher selling, general, and administrative
expenses at Autobuses.
At March 31, 1999, Autobuses' backlog of intercity coaches was 365, of
which 227 were for the domestic Mexican market and 138 were for the export
market. At March 31, 1998, Autobuses' backlog of intercity coaches was 642,
of which 412 were for the domestic Mexican market and 230 were for the export
market.
INTEREST EXPENSE. In the first quarter of 1999, net interest expense was
$12.3 million, compared with $4.7 million in 1998. The increase was
substantially due to $6.4 million in additional interest expense (with no
related taxes benefits) attributable to the Company's liability for debt
principal and interest payments of the parent company. The Company recognized
this liability at the end of 1998 due to substantial doubt about the parent
company's ability to service the debt.
OTHER INCOME. Other income in the first quarter of 1999 was an expense
of $4.2 million, compared with an income $2.2 million in the first quarter of
1998. Net foreign exchange losses were $1.7 million in 1999, compared with
gains of $1.8 million in 1998. In addition, Autobuses paid a tax penalty
($1.3 million) in respect to recovery of a research trust fund.
INCOME TAXES. The Company's effective income tax rates in the first
quarter of 1999 and 1998 were 131.6% and 33.4% respectively. The Company
experiences a generally high effective tax rate due to the amortization
expense of nondeductible goodwill; however, the rate was unusually high in
the first quarter of 1999 due to the lack of tax benefits on $6.4 million of
additional interest expense and Mexican losses.
LIQUIDITY. As of December 31, 1998, Transportation Manufacturing
Operations, Inc. ("TMO") a principal subsidiary of the Company, had a $170
million US revolving credit agreement ("the Senior Credit Facility") with a
nine-bank syndicate to finance working capital and other general corporate
needs. This credit facility expires on October 1, 1999, and the lenders have
indicated that they are not willing to extend the maturity of this agreement.
In addition, during 1998, the Company was required to reduce existing
long-term debt obligations by $50 million, consisting of a $25 million
principal payment on TMO's Senior Term Notes due 2002, a $12 million
reduction in its Canadian bank credit facility, and a $13 million principal
payment on the Pre-Export Notes due 1999.
As a result of the debt reductions during 1998 and the additional debt
obligations and working capital requirements for 1999, the Company does not
expect to generate sufficient cash flow from operations to fund both short
term requirements and meet the required expiration of the Senior Credit
Facility.
On March 18, 1999, the Company engaged CIBC Oppenheimer Corp. and its
affiliates ("CIBC Oppenheimer") to act as the Company's lead bank agent,
financial advisor, initial purchaser, placement agent, and underwriter to
undertake a financial restructuring of the debt obligations of the Company
and its parent company.
On April 19, 1999, TMO executed an agreement with CIBC Oppenhiemer for
the issuance of $40 million of Senior Subordinated Increasing Rate Notes
("IRNs"), due December 31, 1999, (subject to extension to March 31, 2000).
This bridge financing will be used by TMO to meet short-term working capital
requirements while the financial restructuring process is underway.
In addition to the bridge financing, the Company, in association with
CIBC Oppenheimer, has developed a financial restructuring plan to refinance
all of the material debt obligations of the parent, the Company, and their
respective subsidiaries.
On May 14, 1999, Consorcio G Grupo Dina, S.A. de C.V. ("Grupo Dina")
commenced a tender offer and consent solicitation relating to all of
approximately $206,500,000 aggregate principal amount of outstanding Senior
Secured Discount Notes due 2002 (the "Discount Notes") issued by Grupo Dina.
Grupo Dina commenced on May 14, 1999 the company a tender offer and consent
solicitation relating to all of the $35,000,000 aggregate principal amount of
outstanding Senior Secured Guaranteed Notes due 2000 (the "Guaranteed Notes")
issued by its wholly-owned subsidiary, Dina Trucks (USA), L.L.C., and
guaranteed by Grupo Dina and Dina Camiones, S.A. de C.V.
Grupo Dina and MCII Holdings have deferred making its required interest
payment of $12,300,000 on May 15, 1999 on the Discount Notes. Although this
is a technical default of the Discount Notes, they have 30 days to cure this
default.
In connection with the tender offers, Grupo Dina is soliciting consents
to (a) defer payment of interest on the Discount Notes until the earlier of
July 15, 1999, or settlement of the tender offer and (b) adopt amendments to
the indentures under which the Discount Notes and Guaranteed Notes were
issued to eliminate substantially all restrictive covenants and certain event
of default provisions.
The consideration for each Discount Note and Guaranteed Note tendered
and accepted for payment will be (a) $980 per $1,000 of Notes, plus (b) a
consent payment of $20 per $1,000 of Notes, plus (c) accrued interest through
the settlement date. The consent payment will be paid only for tendered Notes
for which consents have been validly delivered and not revoked prior to
May 26, 1999, unless extended. The tender offers will terminate on June 14,
1999, unless extended.
The tender offers are part of the overall plan to recapitalize and
restructure substantially all of the indebtedness of Grupo Dina and its
subsidiaries through a series of dependent transactions, including
(a) an approximate $150 million investment by Joseph Littlejohn & Levy,
Fund III in the Company, or in one or more of the Company's subsidiaries or
affiliates, in exchange for an equity interest in excess of 50% in such
entity, (b) the Company's Transportation Manufacturing Operations, Inc.
("TMO") subsidiary entering into a new senior credit facility in an
approximate amount of $300 million and (c) TMO issuing approximately
$200 million of senior subordinated notes. In addition to the debt
repurchased pursuant to the tender offers, TMO would repay substantially all
of its outstanding indebtedness including, but not limited to, the IRN's, the
existing US and Canadian revolving credit facilities and the 9.02% Senior
Term Notes due 2002. Finally, it is contemplated that the Company would
transfer its Dina Autobuses, S.A. de C.V. subsidiary to TMO. Each of the
foregoing transactions is conditioned upon the closing of the others and
numerous other conditions precedent, including satisfactory completion of
applicable due diligence investigations. The Company expects to complete the
new financing and refinancing prior to the October 1, 1999, maturity of the
existing senior credit facilities.
While there is no assurance that the financial restructuring plan will
be completed successfully at this time, the Company is continuing to work
with CIBC Oppenheimer to execute this plan. In the event that the financial
restructuring cannot be completed prior to the October 1, 1999, maturity, the
Company is also exploring alternatives to generate additional cash flow
including, but not limited to, selling substantial Company assets and seeking
strategic equity investors.
12
<PAGE>
PART II. - OTHER INFORMATION
ITEM 6. - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
None
13
<PAGE>
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)
May 14, 1999 By /s/ MICHAEL GRAHAM
-------------------------
Michael Graham
Chief Accounting Officer
14
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