ITEM 2 DESCRIPTION OF PROPERTY
We own manufacturing and assembly plants and own or lease various replacement parts and repair facilities in the United States, Canada and Mexico.
COACH MANUFACTURING FACILITIES
WINNIPEG, MANITOBA. We own or lease several facilities in Winnipeg that are utilized for the conversion of raw materials into the proprietary coach bodies or "shells." The manufacturing process entails shaping, welding and riveting raw metal into an exterior shell and then attaching a limited number of preliminary components, including the front windshield, interior carpeting, and portions of the lavatory and air conditioning equipment. Production of the shells takes approximately four to five days after which they are shipped to Pembina, a distance of approximately 90 miles. The D-and E-Series shells are manufactured at this location.
PEMBINA, NORTH DAKOTA. We own an assembly facility in Pembina, which totals approximately 188,500 square feet and recently received its ISO 9002 certification. This facility is responsible for completing the coach manufacturing process. Once the shells are delivered to the Pembina facility they enter the production line where they are integrated with component materials supplied by outside vendors. This process yields a semi-monocoque, or one-piece, coach body that is more durable than a body-on-chassis design within the inter-city coach market. Once the body of the coach is assembled, the interior is installed, including all necessary electrical wiring, electronics, seating, air conditioning, parcel racks, and lavatory units as stipulated by the customer in the purchase order or, in the case of units produced without purchase orders, to a standard option package frequently requested by customers. Once this process is completed, the units are either painted to customer specifications or, in the case of coaches built for inventory, plain white. We outsource some painting and final delivery preparation functions when necessary.
SAHAGUN, MEXICO. Our Sahagun facility is approximately 1,088,100 square feet of which approximately 710,000 square feet is used for manufacturing and this facility is ISO 9001 certified. This facility is responsible for all aspects of new coach manufacturing, including the manufacturing of the shells and the assembly of the interior. The majority of the coaches currently manufactured in this facility are produced to specifications. We currently manufacture the VIAGGIO-Registered Trademark- and F-Series models in this facility. The Sahagun facility currently has excess manufacturing capacity. However, as we begin to manufacture the F-Series coaches for sale in the United States and introduce the G-Series coach, the facility will become integral to our future operations.
OTHER PROPERTIES
We distribute products from locations strategically located across the United States, Canada and Mexico, with sites in Dayton, New Jersey; Louisville, Kentucky; Loudonville, Ohio; and Newcastle, Ontario. In addition, we have parts manufacturing locations in Canada and Loudonville, Ohio, and corporate and divisional offices in Des Plaines, Illinois.
We believe that our facilities are adequate for our present needs and that our properties are generally in good condition, well maintained and suitable for their intended use. The following table is a summary of our primary facilities and the approximate square footage of such facilities as of March 1, 2000.
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(1) Consists of property owned by Dina Autobuses, S.A. de C.V. and property owned by Grupo Dina entities that will be transferred to Dina Autobuses under existing contracts.
(2) Our subsidiary, Hausman Bus Sales, Inc. has purchased approximately 10 acres of vacant land upon which it intends to build the listed facility for a planned end of third quarter opening.
(3) This facility was completed in October 1999. Des Plaines warehouse operations have been moved and operations at Dayton and Loudonville will be discontinued on a phased basis.
(4) This property has been listed for sale with a national real estate brokerage firm.
ITEM 3
ITEM 3 LEGAL AND ADMINISTRATIVE PROCEEDINGS
In the ordinary course of our business, we are party to various employment, product liability and other legal actions, as plaintiff or defendant. We are not involved in any litigation or arbitration proceedings which, if determined adversely to us, individually or in the aggregate would, in our opinion, have a material adverse effect on us or our operations, nor, so far as we are aware, are any such proceedings threatened.
We are subject to various product liability lawsuits in the United States and Canada for personal injuries and property damage allegedly relating to the use of products manufactured or sold by us. We consider litigation of this nature to be in the ordinary course of our business and unrelated to any fault on our part. For example, on May 9, 1999, a coach manufactured by us was involved in an accident in New Orleans, Louisiana, which resulted in 22 fatalities and several injuries. To date, we have been named in several of the lawsuits arising out of this accident, which generally allege that the coach was not crashworthy. While we intend to vigorously defend such lawsuits, we cannot presently determine the ultimate outcome of these lawsuits, or potential future lawsuits. We maintain product liability insurance in customary amounts, but we cannot assure you that such insurance will be sufficient to satisfy any such lawsuits or that such insurance will be available in the future or on terms acceptable to us.
The Canadian income tax returns of Motor Coach Industries Limited, our Canadian subsidiary, for the years 1982 through 1992 are currently under review by Canada Customs and Revenue Agency ("CCRA"), the Canadian tax authority, which is reviewing the profit allocation procedures between MCI Canada and Motor Coach Industries, Inc., a wholly owned U.S. subsidiary of MCII. CCRA's position is that, under such procedures, insufficient income was allocated to MCI Canada, and that, as a result, Canadian income taxes were underpaid. A formal reassessment has been issued by CCRA with respect to the 1985 return. We have filed a notice of objection for 1985. In the event of an adverse judgment, as of December 31, 1999 the additional income taxes for 1982 through 1992 could amount up to US$24 million plus interest of approximately US$56 million and, in addition, we may be subject to potential reassessments for years subsequent to 1992 on the same basis which could result in additional income taxes and interest, all before recoveries of U.S. Federal income taxes which may be available to offset a portion of any additional taxes paid to Canada. We have submitted an advance transfer pricing agreement to CCRA and the Internal Revenue Service, which may apply to the years 1995 through 2000. Although we are still in the process of obtaining additional information based on its review of current information, including the advice of outside counsel, the Company is of the opinion that CCRA's arguments are without merit. We are currently negotiating to resolve these claims and expect that the resolution will not be material to our financial condition or results of operations. Also, pursuant to the investment agreement between JLL and Grupo Dina signed as part of the financial restructuring transaction (see discussion in Note 3 to the Consolidated Financial Statements), Grupo Dina is obligated to indemnify the Company in the event and to the extent that the amount we are required to pay exceeds the amount reserved for such loss on the Company's 1998 Balance Sheet.
ITEM 4
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
PART II ITEM 5
ITEM 5 MARKET DATA
N/A
ITEM 6
ITEM 6 SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA (DOLLARS IN THOUSANDS)
The selected consolidated financial data as of and for the three years ended December 31, 1999 are derived from our audited consolidated financial statements included elsewhere in this Form 10-K. Those financial statements have been audited by Arthur Andersen LLP, our independent public accountants. The selected consolidated financial data for the year ended December 31, 1996 are derived from our consolidated financial statements audited by PricewaterhouseCoopers LLP, our predecessor independent accountants.
The selected unaudited consolidated financial data as of and for the year ended December 31, 1995 are derived from our financial records. The unaudited consolidated financial statements, in our opinion, have been prepared on the same basis as the audited consolidated financial statements and include all adjustments necessary for a fair presentation of our financial condition and results of operations for such periods.
The following selected consolidated financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and related notes included in this form 10-K.
(SEE FOOTNOTES ON FOLLOWING PAGE)
NOTES TO SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA
(1) Cost of sales for the year ended December 31, 1999 includes a $21.0 million non-cash inventory charge comprised of $15.0 million to adjust used coach inventories to reflect a change in asset management strategy implemented by new management brought in by the equity investors and $6.0 million to rationalize replacement parts inventories in connection with a revised plan, developed during the second quarter of 1999, to consolidate the replacement parts distribution activities into a single location.
(2) Other operating expenses are comprised of selling, general and administrative expenses and other miscellaneous operating expenses. Other operating expenses were offset by $8.5 million for business insurance recoveries in 1998 and $3.2 for a net curtailment gain in 1999.
(3) As proceeds from the financial restructuring were used to repay the $206.5 million of Grupo Dina's senior secured discount notes, our consolidated financial statements have been adjusted to include the "push down" of the senior secured discount notes, and the related interest expense, in order to comply with applicable Securities and Exchange Commission accounting policies.
(4) EBITDA represents income before the second quarter 1999 non-cash inventory charge, the fourth quarter 1999 net curtailment gain, interest expense, income taxes, discontinued operations, extraordinary items, depreciation and amortization and other non-operating income and expenses, each of which can significantly affect our results of operations and liquidity and should be considered in evaluating our financial performance. EBITDA is included because we understand that such information is considered to be an additional basis on which to evaluate our ability to pay interest, repay debt and make capital expenditures. EBITDA is not intended to represent and should not be considered more meaningful than, or as an alternative to, measures of performance, profitability or liquidity determined in accordance with generally accepted accounting principles.
(5) For the purpose of this calculation, earnings are defined as income from continuing operations before income taxes, plus fixed charges. Fixed charges include interest expense on all indebtedness (including amortization of deferred financing costs) and the portion of operating lease rental expense which management believes is representative of the interest factor of rent expense (approximately one-third of rent expense). In addition, we have calculated the ratio of earnings to fixed charges excluding the effect of the long-term debt pushed down from Grupo Dina.
(6) Working capital is defined as current assets (excluding cash and cash equivalents) less current liabilities (excluding short-term debt and current portion of long-term debt).
ITEM 7
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
FINANCIAL RESTRUCTURING & REORGANIZATION
As of December 31, 1998, Transportation Manufacturing Operations, Inc. ("TMO"), a principal indirect wholly owned subsidiary of MCII Holdings (USA), Inc., 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 was due to expire on October 1, 1999, and the lenders had indicated that they were 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 did 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 Grupo Dina.
On April 19, 1999, TMO executed an agreement with CIBC Oppenheimer 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 was used by the Company to meet short-term working capital requirements while the financial restructuring process was being completed.
In addition to the bridge financing, the Company, in association with CIBC Oppenheimer, had 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, Grupo Dina, which at the time, indirectly owned 100% of the stock of the Company, 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 Parent Company. Grupo Dina also commenced 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.
In connection with the tender offers, Grupo Dina solicited 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 was (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 was paid only for tendered Notes for which consents were validly delivered and not revoked prior to the termination date. The tender offers expired on June 14, 1999, and virtually all of the notes were tendered and purchased in conjunction with the tender offer.
The tender offers were 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, with (a) a $175 million investment made by an investment group led by Joseph Littlejohn & Levy Fund III in the Company, consisting of a $125 million equity investment, in exchange for an equity interest of 61% in MCII Holdings (USA) Inc., (the "Parent Company"), warrants to purchase up to an additional 10% of the common stock of the Parent Company on a fully dilutive basis and $50 million in senior notes issued by the Parent Company, due 2010, (b) the Company entering into a new senior credit facility in an approximate amount of $445 million and (c) TMO issuing approximately $152.3 million of senior subordinated notes due 2009. In addition to the debt repurchased pursuant to the tender offers, TMO repaid 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 secured discount notes due 2002. Also, TMO changed its name to Motor Coach Industries International, Inc. For further information on the details of the debt repayment and the current outstanding debt under the new credit facility see Note 12 on long term debt. Finally, the Parent Company (USA), Inc. transferred its Dina Autobuses, S.A. de C.V. subsidiary to MCII.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's total debt to equity ratio decreased from 82% as of December 31, 1998 to 78% at December 31, 1999 as a result of the financial restructuring. The Company incurred $28.2 and $11.7 million in capital expenditures during 1999 and 1998 respectively. These expenditures were largely financed through the use of additional debt. The Company's working capital,excluding cash and cash equivalents also increased from $203.4 million at the end of 1998 to $254.2 million at the end of 1999. As of December 31, 1999, the Company had the ability to borrow an additional $49 million under the revolving credit facility.
Net cash used in operating activities during 1999 totaled $23.2 million compared to $73.7 million of net cash provided by operating activities for 1998 and net cash used in operating activities of $52.6 in 1997. A major cause for the change in cash from operating activities is due to the Company's income tax payments which resulted in a decrease in accrued income taxes payable of $27.6 million during 1999 and an increase in deferred income tax assets of $19.1 million during 1999. The Company had an increase in accounts receivable of $29.6 million, driven largely by a 3 year installment sale contract with a leading Mexican coach operator, and also had an increase in inventories of $15.9 million. The Company received a refund of approximately $6.2 million of previously paid 1999 estimated tax payments during the first quarter of 2000. Net cash provided by operating activities improved in 1998 from 1997 primarily due to reductions in inventory levels in 1998 following significant increases in inventory and other working capital requirements during 1997 due to the introduction of the E-Series Coach.
Net cash used in investing activities of $48.1 million for 1999 increased from $14.7 used in 1998. The increase in capital expenditures from $11.7 million in 1998 to $28.2 million in 1999 is primarily due to approximately $19.9 million of additions to the replacement parts division. This $19.9 million is primarily associated with the construction of a new distribution facility in Louisville, Kentucky and the cost of a new computer system. Proceeds from the sale of property and investments for 1999 include approximately $5.5 million of proceeds from the sale of the Des Plaines, Illinois replacement parts distribution facility. A portion of this Des Plaines facility is currently being leased back by the Company as office space for the replacement parts group. The balance of the proceeds received in 1999 is from the sale of investment in assets held for lease. Proceeds from the sale of property and investments for 1998 include $5.0 million from the sale of its equity interest in Mexicana de Autobuses, S.A. de C.V., a Mexican coach manufacturing company. The Company also had cash used in investing activities of approximately $9.5 million in 1999 for additions to its investments in assets held for lease compared to $4.3 million used in 1998. The other major factor resulting in a use of cash from investing activities during 1999 is a $29.3 million increase in the investment of notes receivable, compared to a
$0.8 million net decrease in the investment in notes receivable during 1998. This change was generated primarily by an increase in the volume of notes receivable issued during 1999 and the sales of notes receivable in 1998 that did not reoccur during 1999. The Company's reduction in cash used in investing activities from $71.2 million in 1997 to $14.7 million in 1998 reflects reductions in capital expenditures in 1998, and the initial investment made in MCII Financial Services in 1997 that did not reoccur in 1998.
Net cash provided by financing activities in 1999 of $62.9 was primarily caused by the impact of the financial restructuring. Net cash used in financing activities of $49.0 million in 1998 was caused by the Company paying down its long-term debt obligations. Net cash provided by financing activities of $128.3 million in 1997 was generated by additional borrowings needed to fund its acquisition of MCII Financial Services and cash needed to fund significant increases in its inventory and other working capital requirements and capital expenditures as the Company introduced its new E-Series coaches.
The Company expects to be able to fund its expected liquidity requirements in 2000 through cash generated from operations and through use of additional borrowings under its current credit facilities.
RESULTS OF OPERATIONS:
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
OVERVIEW:
Revenues for the year ended December 31, 1999 were $911.1 million, a decrease of $20.6 million from $931.7 million in 1998. Included in 1998 revenues were approximately $8.5 million realized from June 16, 1998 through December 31, 1998 from subsidiary operations that were contributed to Grupo Dina, as part of the financial restructuring plan completed on June 16, 1999. The year-over-year revenue decline excluding this 1998 revenue, would have been $12.1 million or 1.3%.
Gross profit for the year ended December 31, 1999, was $207.0 million, an increase of $6.2 million or 3.1% from $200.8 million in 1998. 1999 gross profits include the impact of a $21.0 million non-cash inventory charge taken during the second quarter of 1999. The Company's gross profit margin, excluding the non-cash inventory charge, increased from 21.5% in 1998 to 25.0% in 1999.
Business insurance recoveries of $8.5 million were realized in 1998 from the settlement of insurance claims seeking recovery of various out-of-pocket costs and business interruption losses at the Company's Pembina, North Dakota and Winnipeg, Manitoba facilities as a result of 1997 flooding along the Red River.
Selling, general and administrative expenses for the year ended December 31, 1999 of $101.8 million increased 12.0% from $90.9 million for 1998. The increase in selling, general and administrative expenses is largely due to an increase in sales promotion expenses and employee related expenses due to an increase in the number of employees. Higher costs associated with the financial restructuring transaction and computer system upgrades were partially offset by lower royalty and management fees charged by Grupo Dina.
Interest expense for the year ended December 31, 1999 increased $10.5 million or 23.3% from 1998 due primarily to higher average effective interest rates associated with the new borrowings.
Foreign currency translation losses of $3.8 million for 1999 compared to a $3.3 million gain for 1998 was largely due to peso fluctuations against the US dollar and changes in the monetary position of the Company's Mexican subsidiary and the impact of the fluctuation of the Canadian dollar against the US dollar on the receivable/payable balances owed between the Company's U.S. and Canadian entities.
The $5.0 million gain on sale of investment was the result of a gain on the sale of the Company's ownership interest in Mexicana de Autobuses, S.A. de C.V. ("MASA") recognized in 1998.
The Company recognized other non-operating expense of $0.4 million for 1999 primarily due to withholding taxes paid on a Mexican benefit plan fund withdrawal. During 1998, the Company recognized other non-operating expenses of $0.5 million primarily due to disposal of other assets in Mexico.
Income taxes in 1999 decreased by $33.7 million from 1998 as the Company recorded an income tax benefit of $1.9 million in 1999 compared to an income tax expense of approximately $31.8 million in 1998. The decrease in income taxes is primarily due to a reduction of pre-tax income, a reduction in the income tax valuation allowance attributable to Mexico operations as a result of the financial restructuring and the impact of a reduction of $13.6 million in non-deductible interest expense associated with the pushdown of debt from the Parent Company.
Extraordinary losses of $2.6 million (net of tax benefit of $1.6 million) were incurred as a result of the early extinguishment of debt associated with the financial restructuring and reorganization. This charge consisted of redemption premiums and other financing costs partially offset by a gain resulting from the recognition of unamortized swap accretion credits.
COACH OPERATIONS:
Revenues from coach operations of $736.0 million for the year ended December 31, 1999 were essentially unchanged from 1998. Revenue from the sale of new coaches increased $22.1 million or 3.7% as sales of new inter-city coaches totaled 2192 units (1783 units in the United States and Canada) in 1999 compared to 2156 units (1829 units in the United States and Canada) during 1998. Used coach revenue during 1999 decreased $22.4 million or 15.6% from 1998 due primarily to used coach pricing and product mix. The number of used coaches sold of 788 units in 1999 was relatively unchanged from the 779 units sold in 1998.
Gross profits for coach operations of $172.0 million for 1999 increased $14.4 million or 9.1% over 1998. Operating expenses for 1999 include a non-cash inventory charge of $15.0 million taken during the second quarter to adjust used coach inventories to reflect a change in asset management strategy implemented by the new management brought in by the equity investors in response to the changing dynamics of the marketplace. Exclusive of this charge, gross profits increased by $29.4 million or 18.7% during 1999 as the gross profit margins increased from 21.4% in 1998 to 25.4% in 1999. The increase in the gross margins is primarily attributed to a significant reduction in the labor hours per coach produced on the new E-Series coach, which was in a start-up phase during early 1998, and the implementation of other cost improvement initiatives offset partially by the impact of the lower used coach pricing.
Operating income from coach operations of $69.0 million for 1999 increased $7.8 million or 12.8% from 1998 as operating income margins increased from 8.3% for 1998 to 9.4% for 1999. Operating income in 1998 was favorably impacted by approximately $8.5 million in business insurance recoveries realized from the 1997 flooding along the Red River. Operating income margins, exclusive of the $15.0 non-cash inventory charge in 1999 and the $8.5 of business insurance recoveries realized in 1998 increased from 7.2% in 1998 to 11.4% in 1999.
REPLACEMENT PARTS:
Revenues for replacement parts operations of $166.5 million for 1999 declined by $19.6 million or 10.5% from the comparable period of 1998. Effective June 16, 1999, as part of the financial restructuring, the Company contributed its Mexican parts company to Grupo Dina, which resulted in a decrease in revenue of approximately $6.6 million from a year ago. The balance of the decrease is primarily due to a lower demand for replacement parts as the demand tends to be counter-cyclical to sales of new coaches as operators choose to replace their fleets rather than experience increased maintenance requirements.
Gross profits from replacement parts operations of $29.9 million for 1999 were $7.1 million or 19.3% below the same period of 1998. A non-cash inventory charge of $6.0 million was recorded during the second quarter of 1999 to rationalize inventories in connection with a revised plan developed in the second quarter of 1999 to consolidate the replacement parts distribution activities into a single location. Exclusive of this charge, gross profits would have decreased $1.1 million or 3.1% from the prior year while the gross profit margins would have increased from 19.9% in 1998 to 21.6% in 1999. The improvement in gross margin is largely due to higher costs in 1998 incurred by our Mexico distribution operations which were in a start-up phase in early 1998 and other benefits realized from cost improvement initiatives undertaken by the Company.
Operating income from replacement parts operations of $8.9 million for 1999 was $11.4 million or 56% below 1998 as operating income margins declined from 10.9% for 1998 to 5.2% for 1999. Operating income margins, exclusive of the $6.0 million non-cash inventory charge discussed above, were 8.9% for 1999 which is lower than the 10.9% in 1998 due largely to higher selling, general and administrative expenses in 1999 caused primarily by the implementation of a new computer system and the relocation of its distribution operations from Des Plaines, IL to Louisville, KY.
FINANCE OPERATIONS:
Revenues from finance operations of $8.6 million for 1999 declined $0.8 million or 8.5% from 1998. The decrease in revenues is a direct result of efforts to reduce the total lease and loan portfolio to generate cash for working capital needs.
Gross profits from finance operations of $5.1 million for 1999 declined $1.0 million or 17.0% from 1998. The decrease in revenue is the largest factor contributing to the decrease.
Operating losses from finance operations of $3.7 million for 1999 were recorded compared to approximately $2.3 million of operating income for 1998. A change in estimates of the reserves needed for the prior year sales of notes receivable with recourse is the largest factor contributing to the decline in operating income.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
OVERVIEW:
Revenues increased 25.9% in 1998 to $931.7 million from $739.8 million in 1997 due to strong customer demand for new and used coaches. Low interest rates and solid economic growth in the United States and Canada, coupled with slowly improving economic conditions in Mexico, allowed for record sales volumes. In addition, strong customer acceptance of our high-end E-Series coach, following its initial introduction in late 1997, further stimulated revenue growth.
Gross profit increased 5.2% to $200.8 million in 1998 from $190.8 million in 1997. However, overall gross profit margins declined to 21.5% in 1998 from 25.8% in 1997. Lower gross margins in 1998 were due primarily to the mix of new coaches sold in the United States and Canada and depressed used coach prices.
Selling, general and administrative expenses of $90.9 million increased by $15.0 million or 20% from 1998, due primarily to higher selling and marketing expenses and higher personnel related costs.
New product start-up costs and R&D costs combined decreased from $14.0 million in 1997 to $9.7 million in 1998, as the Company experienced higher cost in 1997 in conjunction with the introduction of the E-Series Coach, and difficulties caused by the 1997 flooding along the Red River.
Business insurance recoveries of $8.5 million and $0.5 million were realized in 1998 and 1997, respectively from the settlement of insurance claims seeking recovery of various out-of pocket costs and business interruption losses at the Company's Pembina, North Dakota and Winnipeg, Manitoba facilities as a result of 1997 flooding along the Red River.
Operating income for 1998 was $83.8 million, an increase of 6.8% over the $78.5 million recorded in 1997. The increase in operating income resulted from higher new coach sales volumes and improved margins on replacement parts, partially offset by lower new coach and used coach margins. Reductions in product development and launch costs also contributed to the growth in operating income.
Interest expense increased 3.9% to $45.2 million in 1998, compared to $43.5 million in the prior year. Interest expense includes $25.2 million and $21.6 million, respectively, of interest expense relating to the push down of Grupo Dina's $206.5 million senior secured discount notes.
The company realized a $5.0 million net gain from the sale of its 10% ownership interest in Mexicana de Autobuses S.A. de C.V. ("MASA") a Mexican coach manufacturing company, which it sold for $7.0 million less $2.0 million of transaction related expenses. The Company had written off its investment in MASA in 1996 after experiencing continued MASA operating losses which resulted in a $1.2 million change to income.
The Company experienced a $3.3 million foreign currency translation gain primarily as a result of peso fluctuations against the US dollar and changes in the monetary position of the Company's Mexican subsidiary.
COACH OPERATIONS:
Revenues for our coach operations were $736.2 million in 1998, an increase of 37.1% over the $537.2 million reported in 1997. New coach deliveries totaled 2,173 units for 1998, compared to 1,732 units in the prior year. Demand for new coaches in the U.S. and Canadian markets continued to grow in 1998 due to the availability of low-cost financing and favorable economic conditions. Our used coach business responded well to management initiatives to increase inventory turnover, with sales increasing to 779 units, compared to 496 units to 1997.
Gross profit from coach operations increased to $157.6 million in 1998, a 3.6% increase over the $152.1 million recorded in 1997. However, gross margins declined to 21.4% in 1998, compared to 28.3% in 1997. Gross profit was primarily impacted by lower margins on used coaches in the United States and Canada resulting from the acceleration of fleet replacement programs by our major new coach customers.
Operating income for our coach operations declined to $61.1 million in 1998, or 2.1%, compared to $62.5 million recorded in 1997. The decline was primarily due to losses associated with used coaches, which were partially offset by approximately $8.5 million in business insurance recoveries in 1998. In addition, operating income in 1997 was depressed by approximately $7.3 million of new product start-up costs.
REPLACEMENT PARTS OPERATIONS:
Revenues within our replacement parts operations were down 3.8% to $186.1 million in 1998, compared to $193.4 million in 1997. Historically, the demand for replacement parts tends to run counter-cyclical to the demand for new coaches, and this trend continued during 1998 in the U.S. and Canadian markets.
Gross profit from replacement parts operations increased to $37.0 million, a 14.7% increase over the $32.3 million recorded in 1997. Gross margins increased to 19.9% in 1998 compared to 16.7% in 1997, due primarily to lower operating costs in parts distribution operations.
Operating income in the replacement parts operations increased 44.7% to $20.3 million in 1998, compared to $14.0 million in 1997. The combination of improved gross margins and lower selling, general and administrative costs contributed to the positive improvement in operating income.
FINANCE OPERATIONS:
Revenues from our finance operations increased marginally to $9.4 million in 1998, compared to $9.2 million in 1997. Flat revenues reflect management efforts to limit growth of the loan and lease portfolio by referring financing business to MCII Financial Services, while attempting to maintain financing support for new coach sales through use of external financing sources.
Gross profit from finance operations declined to $6.1 million, a 4.4% decrease from $6.4 million in 1997. Gross margins also declined to 64.9% in 1998, compared to 69.4% in 1997. Finance margins were negatively impacted by a higher external cost of capital in 1998.
Operating income from our finance operations increased 20.7% to $2.3 million in 1998, compared to $1.9 million in 1997. Operating income was impacted favorably by lower selling, general and administrative costs.
YEAR 2000 MATTERS:
We developed and executed a plan to ensure that our systems had the ability to process transactions in the year 2000. We identified and documented all applications and completed and tested all modifications made on mission critical systems. This project was completed in 1999 at a total cost of approximately $1.2 million. We also contacted business partners and received documentation from all but one non-critical supplier that indicate they were year 2000 compliant.
Subsequent to year-end we have not experienced any year 2000 related problems with either our systems or with those of our suppliers or customers.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial position, results of our operations or cash flows due to adverse changes in financial and commodity market prices and rates. As a result of the financial restructuring discussed above, we are exposed to market risk in the area of change in U.S. interest rates. This exposure is directly related to our normal operating and funding activities.
Because our obligations under our senior credit facility include interest at floating rates, based on certain quoted rates, we are sensitive to changes in prevailing interest rates. An increase of 1% in the applicable base interest rates, based upon $386.3 million of borrowings under the facility as of December 31, 1999, would result in additional annual interest expense of approximately $3.9 million ($2.3 million after tax) to us and would not be material to our cash flow or financial position.
FORWARD-LOOKING STATEMENTS
We make "forward-looking statements" throughout this form 10-K. Whenever you read a statement that is not simply a statement of historical fact, such as when we describe what we "believe" "expect" or "anticipate" will occur, and other similar statements, you must remember that our expectations may not be correct, even though we believe they are reasonable. You are cautioned not to put undue reliance on any forward-looking statement.
You should understand that a number of factors, in addition to those discussed herein, could affect us and could cause results to differ materially from those expressed in such forward-looking statements. Among these factors are: (1) increased competition in our markets, (2) our substantial leverage and uncertainties associated with servicing our debt, (3) changes in laws or regulations and approvals and decisions of courts, regulators and governmental bodies, (4) uncertainties associated with the general economic conditions in our markets, (5) dependence on the inter-city coach and transit bus industries, (6) changes in product demand, (7) changes in customer concentration, (8) interest rate fluctuations, (9) risks associated with Mexican operations, (10) foreign currency risks and (11) dependence on suppliers. Further, we operate in an industry sector where securities' values may be volatile and may be influenced by economic and other factors beyond our control. We do not intend, and undertake no obligation, to update these forward-looking statements.
ITEM 8
ITEM 8
MOTOR COACH INDUSTRIES INTERNATIONAL, INC. CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Motor Coach Industries International, Inc.:
We have audited the accompanying consolidated balance sheets of Motor Coach Industries International, Inc., and its subsidiaries (the "Company") as of December 31, 1999 and December 31, 1998 and the related consolidated statements of income, stockholder's equity and cash flows for the years ended December 31, 1999, 1998 and 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 1999 and December 31, 1998, and the consolidated results of their operations and cash flows for the years ended December 31, 1999, 1998 and 1997 in conformity with generally accepted accounting principles in the United States.
Arthur Andersen LLP Chicago, Illinois March 30, 2000
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
The accompanying notes are an integral part of these statements.
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these statements.
MOTORCOACH INDUSTRIES INTERNATIONAL INC.
STATEMENT OF CONSOLIDATED CASH FLOWS
AS OF DECEMBER 31, 1999 AND 1998
The accompanying notes are an integral part of these statements.
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
The accompanying notes are an integral part of these statements.
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. NATURE OF BUSINESS
The Company is the leading designer, manufacturer and marketer of new inter-city coaches and related replacement parts for the North American market. To support these activities, the Company also sells and services used coaches and offers a comprehensive package of leasing and financing services to its customers.
NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
On June 16, 1999, in conjunction with the financial restructuring discussed in Note 3 to the consolidated financial statements, Transportation Manufacturing Operations, Inc. changed its corporate name to Motor Coach Industries International, Inc. ("MCII"). The accompanying consolidated financial statements include the accounts of MCII and Subsidiaries (the "Company"), which is an indirect, wholly owned subsidiary of MCII Holdings (USA), Inc. ("MCII Holdings"), which, as a result of the financial restructuring completed on June 16, 1999 and more fully discussed in Note 3 to the consolidated financial statements, is 61% owned by a group of investors controlled by Joseph Littlejohn & Levy Fund III L.P. ("JLL Fund III"), an affiliate of Joseph Littlejohn & Levy, Inc. ("JLL"), and 39% owned by Consorcio G Grupo Dina S.A. de C.V. ("Grupo Dina"), a Mexican corporation. The Company is a manufacturer of motor coaches and a manufacturer and distributor of motor coach and transit bus replacement parts, with manufacturing facilities in the United States, Canada and Mexico. Sales are predominately to a diversified customer base, including independent operators, national fleet operators and government agencies.
As a result of the financial restructuring discussed in Note 3 to the consolidated financial statements, MCII Holdings contributed its Dina Autobuses, S.A. de C.V. subsidiary ("Autobuses") to the Company at historical cost and some immaterial Mexican subsidiaries were transferred by the Company to Grupo Dina. The Company's consolidated financial statements include Autobuses for all periods presented, as this is a reorganization of entities under common control. All significant inter-company transactions have been eliminated.
Certain reclassifications have been made to the financial statements of prior periods to conform to 1999 classifications.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, as well as contingent assets and liabilities disclosed in the financial statements. Actual results could differ from those amounts reported or disclosed.
CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of three months or less to be cash equivalents.
FOREIGN CURRENCY TRANSACTIONS
As a means of reducing exposure to fluctuations in foreign currency exchange rates, the Company may enter into foreign exchange forward contracts to hedge certain firm and anticipated purchase commitments settled in foreign currencies (principally the Canadian dollar). The Company does not
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
engage in foreign currency speculation. The contracts do not subject the Company to risk due to exchange rate movements as gains and losses on the contracts offset gains and losses on the transactions being hedged. Foreign currency transactions, that are not hedged, are converted at the exchange rates in effect at the date of the transaction. Any gain or loss resulting from the translation of such transactions is included in the income statement and was not material in any year. The Company did not enter into any such hedge transactions during 1998 or 1999.
INTANGIBLES
Intangibles, which consist primarily of goodwill, are carried at cost less accumulated amortization of $33,631,000 at December 31, 1999 and $26,925,000 at December 31, 1998. Intangibles are amortized primarily on the straight-line method over the periods of expected benefit, generally, but not in excess of 40 years. The Company evaluates the carrying value of goodwill and other long- lived assets at each reporting period for possible impairment in accordance with the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
INVENTORIES
Inventories are generally stated at the lower of cost or market. Cost is generally determined on a first-in, first-out basis. Inventory of used coach are valued based on Managements estimates of current market value. The inventory value is reviewed periodially and adjusted as necessary.
NOTES RECEIVABLE
Notes receivable are collateralized by coaches. Substantially all notes carry market floating rates of interest based on the creditworthiness of each individual purchaser. The allowance for uncollectible contracts is adjusted periodically based on an evaluation of individual contract collectibility.
PENSIONS AND OTHER BENEFITS
Trusteed, noncontributory pension plans cover substantially all employees in the United States and Canada. Benefits for the noncontributory plans are based primarily on final average salary and years of service. Net periodic pension cost for the Company is based on the provisions of SFAS No. 87, "Employers' Accounting for Pensions." Funding policies provide that payments to pension trusts shall be at least equal to the minimum funding required by applicable regulations.
Under Mexican labor law, companies are liable for severance payments for all indemnities and seniority premiums to employees terminated under certain circumstances. Additionally, there is a liability for voluntary retirements as agreed in the union contract and a pension plan for the personnel. Indemnity payments are expensed as incurred. The liability for seniority premiums, pensions and severance payments is recorded as incurred based on actuarial computations determined by using the projected unit credit method.
Certain employees in the U.S. and Canada are covered under defined benefit post retirement plans that provide medical and life insurance for eligible retirees and dependents. The net periodic post-retirement benefit cost for the Company is based on the provisions of SFAS No. 106, "Employers' Accounting for Post-retirement Benefits Other Than Pensions."
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation is provided principally by use of the straight-line method at annual rates as follows:
RESEARCH AND DEVELOPMENT
Research and development expenses, net of contributions, are charged to income as incurred.
Autobuses has a trust arrangement to earmark deductible funds for research and development of technology. Autobuses is authorized to use these funds for specific purposes and the fund may be increased by future contributions or by fund earnings. The fund was established in 1990 and no subsequent cash contributions were made. The balance of the fund at December 31, 1999 and 1998 was $0 and $1,543,000 respectively, and was included in other assets.
REVENUE RECOGNITION
Sales are generally recognized on shipment of product to customers. Price allowances are recorded at the time of sale. An allowance for losses on receivables is maintained at an amount that management considers appropriate in relation to the outstanding receivable portfolio. Allowances for losses on receivables are charged to expense as appropriate. In 1997, the Company delivered coaches with related revenues of $6,918,000 and earnings before taxes of $1,187,000 that were omitted from revenues and income because they involved guaranteed residual values of approximately $3,700,000. These coaches are being accounted for on a lease basis and will be recognized in revenues and income over periods ranging from 2 to 15 years. During 1999 and 1998, the Company did not enter into any transactions that require deferral.
WARRANTY
In the United States and Canada, an accrual for warranty claims is made at the time of sale. This accrual is based on management's estimate of future warranty liabilities and is charged to operations. Actual warranty expenditures are charged to the accrual as incurred. The accrual is reviewed periodically for adequacy and adjustments are recorded if necessary.
In Mexico the suppliers of components pay most warranty costs. Accordingly, the exposure is not material.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance for determining whether computer software is internal-use software and on accounting for the proceeds of computer software originally developed or obtained for internal use and then subsequently sold to the public. It also provides guidance on capitalization of the costs incurred for computer software developed or obtained for internal use. SOP 98-1 is effective for fiscal years beginning after December 31, 1998. The adoption of SOP 98-1 did not have a material effect on the Company's consolidated financial statements.
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is required to be adopted in years beginning after June 15, 1999. In July 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133", which amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. This statement is effective for the Company beginning January 1, 2001. The Company anticipates that the adoption of SFAS No. 133 will not have a significant effect on the results of operations or financial condition of the Company.
NOTE 3. FINANCIAL RESTRUCTURING
As of December 31, 1998, MCII had a $170 million U.S. senior revolving credit facility (the "Senior credit facility") with a nine-bank syndicate to finance working capital and other general corporate needs. This facility expired on October 1, 1999, and the lenders indicated that they were not willing to extend its maturity. 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 MCII'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 in 1999.
As a result of the debt reductions during 1998 and the additional debt obligations and working capital requirements for 1999, the Company did 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 World Markets Corp. (formerly CIBC Oppenheimer Corp.) and its affiliates (collectively "CIBC") to act as the Company's lead bank agent, financial advisor, placement agent, and/or underwriter to undertake a financial restructuring of the debt obligations of the Company and Grupo Dina.
On April 19, 1999, MCII executed an agreement with CIBC 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 was used by MCII to meet its short-term working capital requirements during the financial restructuring process.
In addition to the bridge financing, the Company, in association with CIBC, developed and executed a financial restructuring plan to refinance substantially all of the indebtedness of Grupo Dina, the Company, and their respective subsidiaries.
On May 14, 1999, Grupo Dina commenced a tender offer and consent solicitation relating to all of the approximately $206.5 million aggregate principal amount of outstanding senior secured discount notes due 2002 (the "Discount Notes") issued by Grupo Dina and MCII Holdings. Grupo Dina also commenced a tender offer and consent solicitation relating to all of the $35.0 million 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.
The consideration for each Discount Note and Guaranteed Note tendered and accepted for payment was (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.
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On June 16, 1999, holders of approximately 99.97% of the outstanding Discount Notes tendered their notes for payment pursuant to the tender offer. The remaining Discount Notes were redeemed by the Company. On June 16, 1999, all Guaranteed Notes were tendered for payment pursuant to the tender offer.
On June 16, 1999, the Company also completed a series of transactions to re-capitalize and restructure substantially all of the indebtedness of the Company and Grupo Dina and their subsidiaries, including:
(a) MCII Holdings redeemed a portion of its outstanding common stock from Grupo Dina for total proceeds of $328 million. Grupo Dina used $256.6 million of the proceeds to conclude the above tender offers and retained $71.4 million in cash;
(b) An investment group led by Joseph Littlejohn & Levy Fund III L.P. ("JLL Fund III"), a private equity partnership, made an equity contribution of $125 million in MCII Holdings. MCII Holdings also issued warrants to JLL Fund III to purchase up to an additional 10% of its common stock on a fully dilutive basis. In addition, MCII Holdings issued senior notes due 2010 in an amount of $50 million to the new equity investors. MCII Holdings subsequently made a capital contribution of the total proceeds of $175 million to MCII. As a result of the equity investment and redemption, the investment group led by JLL became a 61% majority owner of MCII Holdings and Grupo Dina became a 39% minority stockholder;
(c) MCII issued $152.3 million of Senior Subordinated Notes due 2009 at a discount of 98.5755% to yield total cash proceeds of $150.1 million. The notes are not secured by any collateral and rank junior to any of the Company's other senior debt but equal to any future senior subordinated debt issuance. The Company has a right to buy back some or all of the notes prior to their due date subject to certain limitations and premium provisions as specified in the agreement; and
(d) MCII entered into a new senior secured credit facility in the total amount of $445 million, consisting of $333 million in Term B loans due 2006 drawn on the June 16, 1999 closing date. Additionally, a $112 million revolving credit facility due 2005 is available. The agreement contains financial covenants that the Company will not exceed certain leverage ratios or fall below certain interest coverage ratios as specified in the agreement. The agreement also contains a mandatory prepayment provision based upon a free cash flow formula as specified in the agreement. The prepayment provision calls for any prepayment made to be first applied to the term loans and then to the loans made under the revolving credit agreement. The facility provides for variable rates of interest based upon certain specified formulas that include a base rate of interest and an applicable margin based upon a calculation of the Company's consolidated total leverage ratio. The Company also pays a 0.5% annualized facility fee on the daily unused portion of the revolving credit agreement. The credit facility calls for interest payments and payment of the facility fee to be paid at the end of each calendar quarter. The term loan agreement also calls for a principal payment of $832,500 due at the end of each calendar quarter commencing on September 30, 1999 and ending on March 31, 2006. A final principal payment of $310,522,500, plus accrued interest, is due on June 16, 2006. It is the Company's intention to fund its quarterly term loan principal obligations through the senior secured credit facility. Therefore, the current portion of this term loan is classified as long term.
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition to the debt repurchased pursuant to the tender offers, MCII repaid substantially all of its outstanding indebtedness including:
(a) The $40 million of IRN's along with $0.2 million of accrued interest and $0.2 million of redemption premiums;
(b) The existing U.S. revolving credit facility in a total amount of $165.5 million (including outstanding letters of credit) due to mature on October 1, 1999, along with $0.5 million of accrued interest and $0.2 million of redemption premiums;
(c) The $100 million of 9.02% Senior Notes due 2002, along with $0.4 million of accrued interest and a prepayment premium of approximately $5.3 million.
In connection with the debt refinancings, the following restructuring transactions and agreements were also consummated:
(a) MCII Holdings transferred Autobuses to MCII and a portion of the proceeds of the refinancing was used to repay Autobuses' outstanding credit facilities of $14.2 million;
(b) MCII Holdings and certain of its subsidiaries transferred certain indirect subsidiaries, including Autopartes Hidalguenses, S.A. de C.V., Carroceria Sahagun, S.A. de C.V., Mexicana de Manufacturas Especiales, S.A. de C.V., and Universal Coach Parts Mexico, S.A. de C.V. (UCP Mexico) to certain subsidiaries of Grupo Dina and MCII canceled a $7.3 million receivable from UCP Mexico;
(c) One of our Canadian subsidiaries entered into a sale-leaseback transaction with Grupo Dina for tooling and equipment located at the facility on St. Matthews Street in Winnipeg, Manitoba. The market value of the tooling and equipment at the facility was between $2 million and $4 million and the transfer price and lease payments were for nominal amounts.
(d) Autobuses transferred to Grupo Dina a group of transit buses that are leased to a company affiliated with Grupo Dina, together with the related lease rights;
(e) Autobuses agreed to transfer certain undeveloped land to a subsidiary of Grupo Dina in exchange for land and buildings required for ongoing operations;
(f) MCII acquired certain royalty-free rights to use the Dina name and trademarks in marketing inter-city coaches;
(g) Grupo Dina, through its subsidiaries, acquired rights, subject to certain conditions, to supply various manufactured parts and components to the operating subsidiaries of MCII; and
(h) Grupo Dina agreed to perform certain transitional services for MCII and its operating subsidiaries.
NOTE 4. COST OF SALES INVENTORY VALUATION CHARGE
The Company recorded a non-cash inventory charge of $21.0 million in the second quarter of 1999. $15.0 million of this charge was recorded to adjust the inventory of used coaches to reflect a change in asset management strategy implemented by the new management, brought in by the new equity investors, in response to the changing dynamics of the marketplace. The remaining $6.0 million charge was recorded to rationalize the inventory of replacement parts in conjunction with a revised plan developed during the second quarter of 1999 to consolidate the Company's replacement parts distribution activities into a single location.
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5. EXTRAORDINARY LOSS
The Company recorded a $2.6 million after-tax ($4.2 million pre-tax) extraordinary charge associated with the early retirement of debt in connection with the financial restructuring. The charge consists primarily of early redemption premiums and other financing costs incurred, partially offset by a gain resulting from the recognition of unamortized swap accretion deferred credits.
NOTE 6. GAIN ON SALE OF INVESTMENT
In 1993, the Company purchased a 10% ownership interest in Mexicana de Autobuses, S.A. de C.V. ("MASA"), a Mexican coach manufacturing company, for $6,000,000. In December 1994, the Company distributed the MASA shares to Grupo Dina as a dividend. In December 1995, the Company repurchased the MASA shares directly from Grupo Dina for $1,200,000. In 1996, the Company evaluated the realizability of its investment in MASA, and, due to the continuing operating losses of MASA and prolonged weakness in the Mexican economy, wrote off the investment, resulting in a pre-tax loss of $1,200,000.
In 1998, the Company sold its interest in MASA for $7,000,000 less reimbursement of fees and expenses of $2,000,000 paid to Grupo Dina.
NOTE 7. BUSINESS INTERRUPTION INSURANCE RECOVERIES
During 1997, flooding along the Red River caused significant operating disruptions at the Company's Pembina, North Dakota and Winnipeg, Manitoba facilities. As a result, the Company filed insurance claims seeking recovery of various out-of-pocket costs and business interruption losses. Partial recoveries of $500,000 and $500,000 were received in 1998 and 1997, respectively. In early 1999, the Company reached a settlement of its claim for business interruption for a total of $8,962,000.
NOTE 8. NET RECEIVABLE FROM AFFILIATES
In 1999, as a result of the financial restructuring, the Company forgave $58,366,000 of net receivables due it from Grupo Dina companies and MCII subsidiaries that were contributed to Grupo Dina as part of the restructuring. The forgiveness resulted in a $58,366,000 charge against additional capital in stockholder's equity.
During 1998 the Company took a net charge of $42,907,000 against additional capital in stockholder's equity to reflect the write off of net receivables from Grupo Dina.
NOTE 9. INVENTORIES
Inventories at December 31 consisted of the following:
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10. NOTES RECEIVABLE
Notes receivable at December 31 consisted of the following:
Scheduled annual maturities of note receivables at December 31, 1999, were:
NOTE 11. PROPERTY, PLANT & EQUIPMENT
Property, Plant and equipment at December 31, consisted of the following:
Depreciation and amortization expense for property, plant and equipment was $16,990,000 $17,001,000 and $14,072,000 for the years ended December 31, 1999 1998 and 1997, respectively.
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12. LONG-TERM DEBT
Below is a schedule of outstanding debt as of December 31,1999 and 1998:
On June 16, 1999, the Company completed a major financial restructuring where the Company issued $152.3 million of senior subordinated notes and also entered into a $445 million secured credit agreement.
The 11.25% senior subordinated notes were issued at a discount of 98.5755 so as to yield cash proceeds of $150.1 million. Interest payments are twice a year, on each May 1 and November 1, and began on November 1, 1999. The notes are not secured by any collateral and rank junior to any of the Company's other senior debt but equal to any future senior subordinated debt issuance. The Company has a right to buy back some or all of the notes prior to their due date, subject to certain limitations and premium provisions as specified in the agreement. These notes contain certain non-financial covenants for which the Company was in compliance at December 31, 1999.
The $445 million secured credit agreement consists of $333 million of term loans and a $112 million revolving credit facility. The Company has pledged substantially all of its assets under these agreements. This agreement contains financial covenants that the Company will not exceed certain leverage ratios or fall below certain interest coverage ratios. As of December 31, 1999, the Company is in compliance with all such covenants. The credit agreement also contains a mandatory prepayment provision based upon a free cash flow formula as specified in the agreement. The prepayment provision calls for any prepayments made to be first applied to the term loans and then to
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the loans made under the revolving credit agreement. The Company has reviewed the formula and does not have an additional prepayment required as of December 31, 1999.
The $333 million of the term loans are variable rate loans with accrued interest plus a principal payment of $832,500 due at the end of each calendar quarter, which began on September 30, 1999 and will end on March 31, 2006. A final principal payment of $310.5 million, plus accrued interest, is due on June 16, 2006. The variable rate of interest is based upon certain formulas stated in the agreement, which includes a base rate of interest and an applicable margin based upon a calculation of the Company's consolidated total leverage ratio. As of December 31, 1999, the average effective interest rate on $331.3 million of outstanding borrowings was 9.38%.
The $112 million revolving credit agreement due 2005 provides the Company with the ability to borrow funds as needed at variable rates of interest based upon certain formulas stated in the agreement that includes a base rate of interest and an applicable margin based upon a calculation of the Company's consolidated total leverage ratio. The Company also pays a 0.5% facility fee on the unused portion of the revolving credit agreement. As of December 31, 1999, the Company had $55 million in outstanding borrowings at an average effective interest rate of 10.1%.
As of December 31, 1999, the Company had approximately $3.3 million of current outstanding debt that the Company has reclassified to non-current since it is the Company's intention to refinance the debt and it has the ability to do so under its revolving credit agreement. Outstanding debt at December 31, 1998 has been classified in accordance with the terms and provisions of the new debt outstanding as of June 16, 1999.
On April 19, 1999, the Company executed an agreement with CIBC Oppenheimer for the issuance of $40 million of senior subordinated increasing rate notes ("IRN's") due December 31, 1999. These IRN's were repaid along with approximately $0.2 million of accrued interest and with approximately a $0.2 million premium as part of the financial restructuring.
As of December 31, 1998, the Company had approximately $137 million of outstanding borrowings under a $170 million credit facility. The amount of borrowings under this credit facility increased to approximately $165.5 million at June 16, 1999 which the company paid off along with approximately $0.5 million of accrued interest and $0.2 million of premium on this date as part of the financial restructuring.
As of December 31, 1998, the Company had $100 million of outstanding 9.02% Senior Notes. As part of the financial restructuring on June 16, 1999, the Company repaid the Senior Notes along with approximately $0.4 million of accrued interest and a prepayment premium of approximately $5.3 million.
As of December 31, 1998, the Company had approximately $206.5 million of outstanding senior secured discount notes issued by Consorcio G Grupo Dina, S.A. de C.V. ("Grupo Dina") and the Company. On June 16, 1999, the Company repaid $206.5 million and $14.5 million of accrued interest as part of the financial restructuring. The Company also repaid $35.0 million of the Dina Truck Notes and $0.6 million of accrued interest as a part of the financial restructuring.
As of December 31, 1998, the Company had borrowings of approximately $8.6 million under a $30 million dollar credit facility to Dina Autobuses S.A. de C.V. ("Autobuses"), a wholly owned subsidiary, at the time, of Grupo Dina, for the purpose of financing export sales, through the National Bank Foreign Trade S.N.C. ("BancoMext"). On June 16, 1999, the Company repaid its current outstanding borrowings of $14.0 million in addition to $0.1 million of accrued interest.
Interest paid in the years ended December 31, 1999, 1998 and 1997 was $49,802,000, $24,858,000 and $26,067,000.
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosures of the estimated fair value of financial instruments have been determined by using available market information and the valuation methodologies described below. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein may not be indicative of the amounts that the Company could realize in a current market exchange. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.
The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate fair values due to the short-term maturities of these instruments. The carrying value of the notes receivable approximates fair value because a significant portion of the notes receivable is variable rate notes rather than fixed rate notes. The carrying amounts and estimated fair values of the Company's other financial instruments at December 31 were as follows:
The fair value of the 11.25% Senior Subordinated Notes was estimated by using the value the notes were priced at on December 31, 1999. The carrying value of the other long term debt approximates fair value because the debt is based on variable rates of interest.
NOTE 14. INCOME TAXES
The U.S. operations of the Company are included in the consolidated and other applicable U.S. income tax returns of the Company. Tax returns for the Canadian and Mexican entities are filed separately in Canada and Mexico.
Income (loss) before taxes and extraordinary items in the United States, Canada, and Mexico for the years ended December 31, was as follows:
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. INCOME TAXES (CONTINUED) Income tax expense (benefit) for the years ended December 31 was comprised of the following:
A reconciliation of the provision for income taxes and the amount computed using statutory federal income tax rates on income before income taxes is set forth below:
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. INCOME TAXES (CONTINUED) Deferred income tax assets and liabilities included in the Consolidated Balance Sheet at December 31 consisted of the following:
SFAS No. 109, "Accounting for Income Taxes," requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or the entire deferred tax asset will not be realized. Prior to the fourth quarter of 1999, the Company had a valuation allowance against the entire net deferred tax asset for Mexico as it was more likely than not that the deferred tax asset would not be realized. The Company reduced the valuation allowance in the fourth quarter of 1999, as it now believes that a portion of the deferred tax asset will be realized. The Mexico net operating loss remains fully reserved.
Income taxes paid in the years ended December 31, 1999, 1998 and 1997 were, $29,126,000, $12,907,000 and $10,814,000 respectively.
The Company's Canadian income tax returns for 1982 through 1992 are currently under review by Canada Customs and Revenue Agency ("CCRA"). Authorities have proposed imputing additional income related to transactions with a U.S. based subsidiary of the Company. CCRA has issued a formal reassessment on the 1985 return. The Company has filed a notice of objection 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 $56,000,000 through December 31, 1999 and, in addition, the Company may be subject to potential reassessments for the years subsequent to 1992 on the same basis which
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14. INCOME TAXES (CONTINUED) 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 Grupo Dina's purchase price on acquiring MCII Holdings, resulting in an increase of purchase goodwill. (If the ultimate liability were $80,000,000, then approximately $48,000,000 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 CCRA'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 not provided for U.S. federal income taxes and foreign withholding taxes on the undistributed earnings of non-U.S. subsidiaries. The undistributed earnings are intended to be reinvested indefinitely. If these earnings were distributed, foreign withholding taxes would be imposed; however, foreign tax credits would become available to substantially reduce any resulting U.S. income tax liability.
NOTE 15. PENSION BENEFITS
The Company sponsors various retirement plans for most full-time employees. Benefits of the plans are generally based on years of service and employees' compensation during the final years of employment. In 1998, the Financial Accounting Standards Board issued SFAS 132, "Employers' Disclosures about Pensions and Other Post Retirement Benefits," which the Company adopted as of December 31, 1998.
The Company, during 1999, terminated the Company's one unqualified pension plan resulting in a curtailment loss of $179,000 realized in 1999. While the participants in the plan at the time of termination will continue to receive benefits, all benefits are frozen and no future benefits will be accrued.
The components of net periodic pension costs are summarized in the following table:
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. PENSION BENEFITS (CONTINUED) The following tables summarize pension benefit obligations, plan assets and funded status as of December 31:
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15. PENSION BENEFITS (CONTINUED) The Company has one pension plan for which the employer must recognize an additional minimum liability in accordance with the provisions of paragraph 36 of Statement 87.
Weighted average assumptions used were:
The Company also has defined contribution plans for certain employees. Company contributions in the years ended December 31, 1999, 1998 and 1997 were $470,000, $472,000 and $623,000 in the U.S. and $1,133,000, $1,147,000 and $950,000 in Canada, respectively.
NOTE 16. MEXICAN EMPLOYEE BENEFITS
Net periodic pension cost for the two years ended December 31 included the following components:
The Company, under Mexican labor laws, is able to withdraw funds from a pension trust and use them for other purposes. During the first quarter Grupo Dina withdrew the funds held by the trust and used the funds to pay-off existing indebtedness of Grupo Dina.
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16. MEXICAN EMPLOYEE BENEFITS (CONTINUED) The following tables summarize pension benefit obligations, plan assets and funded status as of December 31:
NOTE 17. POST-RETIREMENT BENEFITS
The Company has defined post retirement benefit plans that provide medical and life insurance benefits for eligible retirees and dependents. In 1998, the Financial Accounting Standards Board issued SFAS 132, "Employers' Disclosures about Pensions and other Post retirement Benefits," which the company adopted as of December 31, 1998.
Effective at the end of 1999, the Company terminated its remaining active post-retirement medical plan covering employees in the replacement parts division. Any participant receiving benefits under the
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. POST-RETIREMENT BENEFITS (CONTINUED) plan at the time of termination will continue to receive benefits, but no new people will be eligible to receive benefits under the plan. As a result of the termination of this plan the Company recorded a gross curtailment gain of $4,596,000 and a curtailment gain net of current year post-retirement expenses of $3,347,000 as illustrated in the table below.
The net periodic post retirement benefit cost for the years ended December 31 included the following components:
The following tables summarize post-retirement benefit obligations and funded status as of December 31:
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17. POST-RETIREMENT BENEFITS (CONTINUED) The assumed health care cost trend rate used in measuring the accumulated post retirement benefit obligation ("APBO") for the Company's U.S. operations was 9.0% as of December 1999, declining by 1.0% per year to 5.0% by the year 2002 and remaining at that level thereafter for retirees below the age 65, and 6.5% as of December 31, 1998, declining by 0.5% per year to 5.0% by the year 2002 and remaining at that level thereafter for retirees above age 65. A one percentage-point change in the assumed health-care-cost trend rate would have the following effects:
The post retirement benefit obligation of the Company's Canadian operations does not contain a health care component.
NOTE 18. LEASE OBLIGATIONS
Certain warehouses, offices, and equipment are leased under leases expiring through the year 2014 with some of the leases providing for renewal options. Leases, which expire, are generally renewed or replaced by similar leases.
At December 31, 1999, future minimum rental payments with respect to non-cancelable operating leases with terms in excess of one year were as follows:
Total rental expenses for the years ended December 31, 1999, 1998 and 1997 were $4,354,000, $4,068,000 and $3,384,000 respectively.
NOTE 19. COMMON STOCK
The Company is a wholly owned subsidiary of MCII Holdings, Inc., which is a wholly owned subsidiary of MCII Holdings (USA), Inc. Prior to the completion of the financial restructuring, MCII Holdings (USA), Inc. was a wholly owned subsidiary of Grupo Dina. On June 16, 1999, as a part of the financial restructuring, a 61% equity interest of MCII Holdings (USA), Inc. was purchased by an investment group led by Joseph Littlejohn and Levy Fund III LP ("JLL"). As part of the transaction, the investment group led by JLL received warrants to purchase up to 10% of the fully diluted common stock of MCII Holdings (USA), Inc. These warrants are immediately exercisable at a price of $204.918 per share, which is equivalent to the price per share that JLL invested in MCII Holdings (USA), Inc.
NOTE 20. EQUITY CONSOLIDATION ADJUSTMENT
In 1998, the Company made a $2,914,000 Stockholder's Equity adjustment that corrected an immaterial prior period accounting error occurring in a consolidation adjustment of a subsidiary company.
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 21. CHANGES IN OTHER OPERATING ACTIVITIES
Changes in other operating activities as of December 31, 1999, 1998 and 1997 consisted of:
NOTE 22. RELATED PARTY TRANSACTIONS
Related party transactions for the years ended December 31 were as follows:
Related party balances included in the December 31 balance sheet were:
During 1997, Autobuses put 240 transit bus units, with a sales value of $9,340,000, out on lease to Transportes y Servicios Terrestres G.S.A. de C.V. ("TSTG"). TSTG is controlled by members of the group consisting of the indirect controlling shareholders of Grupo Dina.
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23. BUSINESS AND GEOGRAPHIC DATA
BUSINESS SEGMENT DATA
The Company has three reporting segments, Coach and Support, Replacements Parts, and Finance. The Coach and Support segment manufactures motor coaches and buys and sells used motor coaches. The Replacement Parts segment distributes replacement parts for motor coaches, transit buses and school buses. The Finance segment provides financing options for the sale of new and used coaches. The reportable segments are managed separately because each business has differing customer selling requirements. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Intangible assets are included in each segment's reportable assets, and the corresponding amortization of these intangible assets is included in the determination of a segment's operating profit or loss. The Company evaluates performance based on profit or loss from operations before income taxes, interest, and other non-operating income (expenses).
Data for these three segments of the years ending December 31 are as follows:
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23. BUSINESS AND GEOGRAPHIC DATA (CONTINUED)
There are no material inter-segment transactions.
Major customers are generally defined as those which individually account for more than 10% of the Company's revenue. For the years ended 1999, 1998 and 1997, Greyhound Lines, Inc. ("GLI") accounted for 13.4%, 8.0% and 9.5%, respectively, of the Company's consolidated revenues. In January 1998, GLI and MCII Holdings signed a 10-year long-term supply agreement until the year 2007. For the years-ended 1999, 1998 and 1997, sales to Coach USA, Inc. ("CUI") accounted for 5.0%, 9.2% and 8.6%, respectively, of the Company's consolidated revenues. Effective June 9th, 1997, CUI and MCII Holdings signed an agreement pursuant to which CUI agreed that MCII Holdings would be the primary supplier of CUI's annual new coach requirements through 1999. On December 22, 1999, a new 5-year agreement was signed between CUI and the Company.
The Company's Mexican subsidiary, Dina Autobuses S.A. de C.V. (DASA), has a long-term agreement to purchase Coach part "kits" from Marcopolo (a Brazilian manufacturer) for its Viaggio coaches manufactured in Mexico. The agreement required DASA to pay a royalty fee based upon the value of certain "kit" parts and components purchased from suppliers other than Marcopolo. The royalty fee ranged from 2.7% to 3.5% of the "kit" value. Royalty fees paid in 1999, 1998, and 1997 were $135,000, $291,000 and $1,114,000 respectively. DASA has reached an agreement in principle with Marcopolo (expected to be signed by DASA on or before March 31, 2000), under which any currently unpaid royalty fees will be forgiven and all future royalty obligations of DASA will be cancelled. In exchange, DASA will assign its U.S. Trademark "Viaggio" to Marcopolo. Marcopolo will continue to supply parts during the remaining term of the agreement and for a period of five (5) years thereafter. In addition, the revised agreement contains a non-compete provision barring Marcopolo from marketing in the U.S. prior to February 21, 2002. Should the non-compete provision be violated, Marcopolo will have to pay DASA royalties based upon its sales in the U.S.
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 23. BUSINESS AND GEOGRAPHIC DATA (CONTINUED) GEOGRAPHICAL DATA
NOTE 24. FINANCIAL INFORMATION WITH OFF-BALANCE SHEET RISK
As an adjunct to its coach business, the Company has entered into repurchase and first loss agreements with certain companies that provide financing for coaches sold by the Company, pursuant to which the Company agrees to either repurchase coaches from such companies or guarantee the payment of certain obligations of coach owners or operators. The amounts of such repurchase agreements as of December 31, 1999 and 1998 were approximately $18,000,000 and $21,000,000, respectively. The Company has other agreements with customers where the customers have been guaranteed a residual value. The Company has purchased residual value insurance to protect it from future loss for the value of these coaches. Additionally, as a result of certain sales of notes receivable and leases, the Company is obligated to reimburse the purchaser of such notes and leases for any losses as a result of defaults up to $2,700,000 and $6,700,000 as of December 31, 1999 and 1998, respectively. Losses under existing agreements are not expected to have a material effect on the Company's future financial position or results of operations.
NOTE 25. COMMITMENTS AND CONTINGENCIES
As a part of the Company's marketing strategy for the 1997 introduction of the new E-Series inter-city coach model, the "Renaissance", it entered into trade-in agreement in 1996 whereby certain customers may trade-in, at predetermined values, their recently purchased D-Series model coaches when purchasing a new E-Series model. Under the terms of the agreements, the Company has committed to trade-in values ranging from 73% to 82% of the original invoice price for a 36-month-old coach, such trade-in values being estimated by management to approximate fair market value for such coaches at the time of the trade-in. At December 31, 1999, the Company's final year's commitment under this program has been reduced to 173 coaches. From past experience management feels that there is no exposure on this program and has not made any specific provision.
During 1996, the Company completed a research and development project in connection with the development of the E-Series coach, which had been undertaken, with the cooperation of the
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 25. COMMITMENTS AND CONTINGENCIES (CONTINUED) Government of Canada and the Province of Manitoba. Agreements entered into between the parties for this project provided for payment of matching contributions and specified that the contributions may be repayable if, during the first five years following project completion, the ratio of Canadian employees to total employees of the Company falls below 40%. As of December 31, 1999, the total amount of such contributions was $6,891,000 and the Company had met the employee ratio commitment.
The Company and certain of its subsidiaries are plaintiffs or defendants to various actions, proceedings and pending claims. Some of the foregoing involve or may involve claims for compensatory, punitive, or other damages in material amounts. Litigation is subject to many uncertainties and it is possible that some of these legal actions, proceedings and pending claims could be decided against the Company. Although the amount of liability at December 31, 1999 with respect to these matters is not ascertainable, the Company believes that any resulting liability would not materially affect the Company's financial condition or results of operations.
NOTE 26. NON-CONSOLIDATED AFFILIATE
In 1997 a new company was formed, MCII Financial Services ("MFS"). The Company acquired 250,000 shares, or 25%, of voting common stock of MFS and 15,000,000 shares of non-voting preferred stock of MFS for $250,000 and $15,000,000 respectively. The remaining 750,000 shares, or 75%, of the voting common stock were acquired by the indirect controlling shareholders of the Company. In 1998, the Company increased its investment by $7,650,000. The Company also recognized its share of equity income of $695,000 and $210,000 for 1999 and 1998, respectively. MFS will operate independently from the Company and will provide conditional sales contracts and operating leases to the Company's customers. MFS is expected to have better access to funding on competitive terms.
MFS's initial transaction was the purchase of $19,406,000 of loans and $12,742,000 of leases from certain subsidiaries of the Company. The Company has guaranteed the full and prompt collection of the loans sold to MFS. The Company received a fairness opinion from an independent third party as to the basis for the selling price of these assets. No gain was recognized on the transaction. MFS will in the future engage in loan and leasing activities involving the Company and others in the motor coach and other industries. During 1999 and 1998, MFS purchased additional loans of $60,005,748 and $35,519,000 and leases of $12,723,488 and $3,216,000, respectively from the Company.
NOTE 27. GUARANTOR/NON-GUARANTOR FINANCIAL STATEMENTS
In connection with the issuance of the Senior Subordinated Notes due 2009 (the "Notes") (See note 2), certain of the Company's U.S. subsidiaries became guarantors to these Notes. The following tables present condensed consolidating financial information for MCII Guarantors (U.S. entities), and Non-Guarantors (Non-U.S. entities including Autobuses and MCI, Ltd.). Each of the Guarantors is a direct or indirect wholly owned subsidiary of MCII. The Guarantors will jointly and severally and fully and unconditionally guarantee the Notes of the Company. The following condensed consolidating financial information presents the results of operations, financial position and cash flows of MCII, Guarantors, and Non-Guarantors, and the eliminations necessary to arrive at the information for the Company on a condensed consolidated basis.
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 27-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATED INCOME STATEMENT--1999
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 27-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATED INCOME STATEMENT--1998
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 27-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATED INCOME STATEMENT--1997
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 27-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATED BALANCE SHEET--1999
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 27-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATED BALANCE SHEET--1998
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 27-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--1999
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 27-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--1998
MOTOR COACH INDUSTRIES INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 27-GUARANTOR CONDENSED FINANCIAL STATEMENTS (CONTINUED) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS--1997
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
The information required here-in is incorporated by reference to the Company's Form 8-K reports dated October 8, 1999, November 8, 1999 and March 1, 2000.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS AND DIRECTORS
The Company is an indirect, wholly owned subsidiary of MCII Holdings (USA). MCII Holdings (USA), is a corporation whose affairs are governed by a board of directors. The following table sets forth certain information about the directors of MCII Holdings (USA) and our executive officers and their ages as of March 1, 2000. There are seven members of the board of directors of MCII Holdings. Pursuant to the terms of a stockholders agreement, the board is comprised of three representatives from Grupo Dina, including the Chief Executive Officer of MCII Holdings and MCII, Mr. C. Roberto Cordaro and four representatives from JLL.
C. ROBERTO CORDARO. Mr. Cordaro was elected Chief Executive Officer in January 2000. Prior to joining the Company, Mr. Cordaro was Executive Vice President and Group President of the Automotive Group of Cummins Engine since April of 1996. From 1990 through April of 1996, Mr. Cordaro held the position of Group Vice President Marketing
MARIO GONZALEZ. Mr. Gonzalez was recently appointed Chief Operating Officer, and prior to that was Vice President of Plant Operations since September 1996. From April 1995 to September 1996, Mr. Gonzalez was appointed Vice President of Plant Operations (Dina Camiones and Autobuses). From October 1994 to April 1995, Mr. Gonzalez was employed as a consultant for Grupo Dina. Prior to October 1994, Mr. Gonzalez was a consultant to a company in the manufacturing industry.
HORST SIEBEN. Mr. Sieben became Chief Financial Officer on June 16, 1999. During the last twelve years, Mr. Sieben served as Chief Financial Officer of a number of portfolio companies controlled by
JLL. From 1994 through May 1997, Mr. Sieben was Senior Vice President and Chief Financial Officer of Foodbrands America Inc. (formerly Doskocil Inc.), and after the sale of Foodbrands he assumed the same position at Freedom Chemical Company where he served until it was sold in March 1998. From April 1998 through June 1999 he served as financial consultant to JLL and others.
RONALD L. BATCHELDER. Mr. Batchelder was appointed Vice President and Corporate Controller in August 1999. Prior to joining the Company, Mr. Batchelder has been associated with a number of portfolio companies controlled by JLL in various financial positions including Chief Financial Officer, Corporate Controller, Vice President of Finance, Division Controller and Financial Consultant. In addition, Mr. Batchelder is President of Ronald Lee and Company, a financial consulting firm.
WILLIAM M. MURRAY. Mr. Murray was appointed Vice President, Finance and Treasurer in February 2000. Prior to joining the Company, Mr. Murray was Vice President and Treasurer of the Beloit Corporation from 1998 through February 2000 and was Treasurer of the Fuller Company from 1985 through 1997.
ALEXANDER C. BAKER. Mr. Baker has been Vice President of Sales and Marketing since October of 1993, except for an 11-month period during 1996 and 1997 when he was Vice President of Sales and Marketing for Metrotrans Corporation. Mr. Baker joined us in June 1979 in school bus and small commercial vehicle sales.
PEDRO FERRO. Mr. Ferro was appointed Vice President and General Manager, Customer Support Business in February 2000. Prior to joining the Company, Mr. Ferro held the position of Director of Marketing, Federal with Dell Computer Corporation from June 1999 to February 2000. From 1985 through June of 1999, Mr. Ferro held several management positions with Cummins Engine Co., most recently serving as Vice President, Automotive Information Business from 1995 through June 1999.
PETER PALLADINO. Mr. Palladino was appointed Vice President of Marketing in February 2000. Prior to joining the Company, Mr. Palladino held several positions of increasing responsibility with Cummins Engines since joining them in 1969. Most recently, Mr. Palladino held the positions of Executive Director of the Truck OEM Business since 1997 and General Manager of the OEM Business from 1994 through 1997.
TIMOTHY J. NALEPKA. Mr. Nalepka has been the Vice President, Secretary and General Counsel since November 1998. Previously, Mr. Nalepka, who joined MCII in January 1997, served as senior counsel. Prior to joining MCII, Mr. Nalepka was employed from 1989 to 1996 as senior counsel for Sears, Roebuck and Co.
HAROLD ZUSCHLAG. Mr. Zuschlag has been a vice president since 1982. His varied assignments have included plant operations management, division acquisition & relocation, product engineering management, plant & facilities construction, product planning & customer relations, division operating executive, and product design & operations launch of our recently introduced E-Series RENAISSANCE-REGISTERED TRADEMARK- coach. His current focus is the launch of the G-Series coach and on product integrity and customer support operations.
RAFAEL GOMEZ FLORES. Mr. Gomez Flores has been Chairman since 1996, and has been Chairman and President of Grupo Dina, and the holding company of Grupo Dina, Grupo Empresarial G, for the past ten years. Mr. Gomez Flores maintains full executive and board member responsibilities with Grupo Dina and maintains board member responsibilities with MCII. Mr. Gomez Flores is a director of Grupo Empresarial G's other companies including Grupo Minsa, the second largest corn flour manufacturer in Mexico, and Grupo Immobiliario G, a real estate development company engaged in the construction and sale of housing units, office buildings, commercial malls, hotels, sports clubs, and industrial complexes. Prior to his current activities at the holding company and its subsidiaries,
Mr. Gomez Flores was Chairman and Chief Executive of Arrendadora Financiera Dina, a lease finance company.
GAMALIEL GARCIA CORTES. Mr. Garcia Cortes has been Chief Executive Officer of Grupo Dina for Mexico and Latin America since December 1996. From August 1996 until December 1996, he was the Chief Operating Officer of Grupo Dina for Mexico and Latin America. From July 1996 until August 1996, he was the Sales, Marketing and Operations Vice President of Grupo Dina for Mexico and Latin America. From July 1995 until July 1996, Mr. Garcia Cortes was a Commercial Director for Grupo Dina. From April 1995 until July 1995, he was a transportation sub-director for Grupo Dina. Prior to joining Grupo Dina, Mr. Garcia Cortes was Chief Executive Officer for Premium Internacional, S.A. de C.V. since June 1994.
PAUL S. LEVY. Mr. Levy was appointed a director on June 16, 1999. Mr. Levy has been a Senior Managing Director of JLL since its formation in May 1988. Mr. Levy serves on the boards of directors of Hayes Lemmerz International Inc., Builders FirstSource, Inc., Jackson Automotive Group, Inc., Fairfield Manufacturing Company, Inc., IASIS Healthcare Corp. and New World Pasta Company.
JEFFREY LIGHTCAP. Mr. Lightcap was appointed a director on June 16, 1999. Mr. Lightcap is a Senior Managing Director of JLL, which he joined in 1997. From 1993 to 1997, he was a Managing Director and head of leveraged buyout firm coverage for the mergers and acquisitions group at Merrill Lynch & Co., Inc. Mr. Lightcap serves on the boards of directors of Hayes Lemmerz International Inc., Jackson Automotive Group, Inc., IASIS Healthcare Corp. and New World Pasta Company.
DAVID YING. Mr. Ying was appointed as a director on June 16, 1999. Mr. Ying is a Senior Managing Director of JLL, which he joined in 1997. He was previously a Managing Director at Donaldson, Lufkin & Jenrette, Inc., which he joined in January 1993 and the head of its restructuring department. Mr. Ying serves on the boards of directors of Hayes Lemmerz International Inc., Builders FirstSource, Inc., IASIS Healthcare Corp. and New World Pasta Company.
FRANK RODRIGUEZ. Mr. Rodriguez was appointed as a director on June 16, 1999. Mr. Rodriguez is a Vice President of JLL, which he joined in 1995. He was formerly a member of the Merchant Banking Group of Donaldson, Lufkin and Jenrette, which he joined in 1992. Mr. Rodriguez serves on the board of directors of IASIS Healthcare Corp. and Jackson Automotive Group, Inc.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth-certain information regarding compensation paid or accrued by us during 1999 to our chief executive officer and the next 4 most highly compensated executive officers December 31, 1999.
SUMMARY COMPENSATION TABLE
BENEFIT PLANS
We sponsor various retirement plans for most full-time employees, with benefits generally based on years of service and employees' compensation. For executive employees, we have had a supplemental employee retirement plan and executive incentive compensation plan. For detailed information regarding pension costs, benefit obligations, plan assets and other related information, please see notes 15, 16 and 17 in the notes to our consolidated financial statements included in Form 10-K.
COMPENSATION OF DIRECTORS
Directors who are not our employees are not compensated for serving on the board. All directors will receive reimbursement of reasonable out-of-pocket expenses incurred in connection with meetings of the board.
EMPLOYMENT AGREEMENTS
We have entered into an employment agreement effective June 16, 1999 with Mr. Gomez Flores, who is chairman of the board, that provides for total annual compensation of $1.5 million, which represents a $1.6 million reduction from 1998 compensation of $3.1 million. The employment agreement also provided that Mr. Gomez Flores will receive a lump sum payment of $6.0 million conditioned upon consummation of a change of control of the Company during the term. The initial term of the employment agreement is five years and is automatically renewable each year thereafter unless sooner terminated as provided therein. The agreement also contains a non-compete covenant for Mr. Gomez Flores for a three year period after the expiration or termination of the employment agreement.
MANAGEMENT OPTIONS
Certain key senior executives of MCII Holdings and MCII, including their chairman Mr. Gomez Flores, either have been or will be allocated options to purchase MCII Holdings' common stock. The options that were granted concurrently with the consummation of the Transactions represent approximately 20% of the fully-diluted equity value of MCII Holdings with an exercise price equivalent to the value per share at which the equity investors invested in MCII Holdings. The grant was designed as an incentive to selected employees or directors to acquire a proprietary interest in MCII Holdings, to continue to perform services for MCII Holdings, to increase their efforts on behalf of MCII Holdings and to promote the success of the business. The stock options vest ratably commencing on the first anniversary of grant and annually thereafter until the fifth anniversary of grant. Pursuant to this plan, Mr. Gomez Flores was granted options to purchase 214,285 shares of MCII Holdings common stock. The remaining options have not been allocated to the other senior executives.
ITEM 12
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
MCII Holdings, through its wholly owned subsidiary MCII Holdings, Inc., owns all of the issued and outstanding stock of MCII. The following table sets forth certain information regarding the beneficial ownership of the issued and outstanding stock of MCII Holdings as of March 1, 2000.
For descriptions of certain voting and other arrangements among such holders, see "Certain Transactions; Relationship with Grupo Dina" beginning on page 66.
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(a) "Beneficial ownership" generally means any person who, directly or indirectly, has or shares voting or investment power with respect to a security or has the right to acquire such power within 60 days. Unless otherwise indicated, we believe that each holder has sole voting and investment power with regard to the equity interests listed as beneficially owned.
(b) Includes warrants to purchase 122,448.45 shares of common stock, which together with the warrants issued to the other equity investors, represents 10% of the fully diluted common stock of MCII Holdings. Messrs. Levy, Lightcap, Ying and Rodriguez are all associated with JLL Fund III, which owns 56.46% of the total common stock, 59.21% of the voting common stock, of MCII Holdings. Mr. Rodriguez disclaims any beneficial ownership of such common stock. Messrs. Levy, Lightcap and Ying are general partners of JLL Associates III, LLC, the general partner of JLL Fund III, and, as a result, each of them may be deemed to beneficially own all of the shares of common stock held directly or indirectly by JLL Fund III. Includes 10,980 shares of common stock and warrants to purchase 2,571.43 shares of common stock owned by Coaches, LLC, an entity controlled by JLL. Coaches' members include certain executive officers of the Company. Pursuant to the Coaches operating agreement, the members have granted an irrevocable proxy to JLL and are prohibited from transferring their interests in Coaches to any entity or individual, other than Coaches, without the prior written consent of JLL. Messrs. Levy, Lightcap and Ying are the Managers of Coaches and as a result of such may be deemed to beneficially own all of the securities owned by Coaches.
(c) Based upon information available as of December 31, 1999, Grupo Empresarial G, S.A. de C.V., a Mexican corporation, is the only person known to Grupo Dina to be the beneficial owner of more than 5% of Grupo Dina. Grupo Empresarial owns 127,912,420 shares, or 62.8%, of Grupo Dina's common stock. Grupo Empresarial is a holding company owned by Mr. Rafael Gomez Flores and the following members of his family: O. Raymundo Gomez Flores, Armando Gomez Flores, Alfonso Miguel Gomez Flores and Guillermo Gomez Flores. Since each of the named members of the Gomez Flores family has voting power or shares voting power and/or investment power over the shares owned of record by Grupo Empresarial, each such family member may be deemed to be the beneficial owner of all 127,912,420 shares of Grupo Dina owned by Grupo Empresarial. In addition, Mr. Rafael Gomez Flores and each of the foregoing named family members each individually own approximately 1,666,300 shares, or 0.8%, of Grupo Dina's common stock.
(d) Andrew R. Heyer, Jay R. Bloom and Dean C. Kehler, who are employees of an affiliate of CIBC, have shared power to vote and dispose of the shares of common stock reported in the table. The business address of Messrs. Heyer, Bloom and Kehler is 425 Lexington Avenue, 7th Floor, New York, New York 10017. Share amounts include warrants to purchase 20,408.55 shares of nonvoting common stock, which for calculation purposes are assumed to be converted to voting common stock to the maximum level currently permissible under regulatory requirements and the terms of such warrants. Together with the warrants issued to JLL, such warrants represent 10% of the fully diluted common stock of MCII Holdings.
(e) No director or officer of MCII directly owns any shares of common stock. Mr. Rafael Gomez Flores may be deemed to beneficially own 34.13% of MCII Holdings' total common stock, 35.79% of the voting common stock (see footnote (c) above), and each of Messrs. Levy, Lightcap and Ying may be deemed to beneficially own 56.46% of MCII Holdings' total common stock, 59.21% of the voting common stock (see footnote (b) above).
MCII HOLDINGS EQUITY STRUCTURE
MCII is an indirect, wholly owned subsidiary of MCII Holdings. MCII Holdings has authorized two classes of common stock, a voting and nonvoting class. The voting common stock has one vote per share for the election of directors and all other corporate matters. Except as provided by law, the nonvoting common stock will have no vote on any matter and will not be included in determining the number of shares voting or entitled to vote. Each holder of nonvoting common stock is entitled to convert any or all of its nonvoting shares into an equal number of voting common stock, unless as a result of such conversion, such holder or its affiliates would own a greater quantity of securities than it
is permitted to own under any law, regulation order, rule or other requirement of any governmental authority. The stockholders agreement for MCII Holdings contains certain provisions relating to the governance of MCII and restrictions on, and rights in the event of, the transfer of MCII Holdings' common stock. See "Certain Transactions; Relationship with Grupo Dina-Stockholders Agreement."
MANAGEMENT OPTIONS
Pursuant to the investment agreement, certain key executives of MCII Holdings and MCII may be granted stock options to purchase up to 20% of MCII Holdings' fully diluted common stock. See "Executive Compensation--Management Options."
WARRANTS
In connection with the equity investment, the equity investors received warrants to purchase up to 10% of the fully diluted common stock of MCII Holdings. The warrants are immediately exercisable at a price equivalent to the value per share at which the equity investors invested in MCII Holdings.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS; RELATIONSHIP WITH GRUPO DINA
GENERAL
Prior to the consummation of the Financial Restructuring and Reorganization Transactions ("Transactions"), we and Autobuses were indirect wholly-owned subsidiaries of Grupo Dina. Grupo Dina is a manufacturer of trucks and is listed on the Bolsa Mexicana de Valores, Mexican Stock Exchange, and the New York Stock Exchange. In the ordinary course of business, we and Autobuses have routinely made purchases and sales of goods and services from Grupo Dina and other affiliated companies. For more information about these historical transactions, see note 24 to our consolidated financial statements.
JLL owns in excess of 50% of MCII Holdings and MCII Holdings indirectly owns all of the outstanding common stock of MCII. Consequently, and subject to the terms of the stockholders agreement described below, JLL is able to significantly influence such actions as, the election of directors of MCII Holdings, the approval of matters submitted for stockholders approval, or preventing a potential takeover.
Prior to the consummation of the Transactions, our Autobuses subsidiary obtained certain services from, and provided certain services to, Grupo Dina, and was included as part of Grupo Dina's consolidated group for income tax purposes. In connection with the Transactions, MCII Holdings and we entered into agreements with Grupo Dina that cover transition services, sales, benefit administration services, data center and software administration services, procurement services, purchasing services, transfer of employees and general management services. These agreements resulted from an "arm's-length" negotiation and are on terms that we believe are at least as favorable as the terms that could be obtained by us in comparable transactions made on an arm's-length basis between unaffiliated parties. Grupo Dina and its subsidiaries also have a first right and obligation to supply substantially all non-major component parts to MCII Holdings and its subsidiaries until June, 2014, so long as
(1) they are sold at a discount below any U.S. or Canadian supplier, and
(2) they meet quality and delivery standards.
Grupo Dina has agreed not to sell products to MCII Holdings' competitors.
Additionally, in connection with the Transactions, Autobuses entered into an agreement with Grupo Dina or with one or more of its subsidiaries regarding the exchange of certain of Autobuses' unimproved real property at the Sahagun facility for certain of Grupo Dina's property, general maintenance and security services at the Sahagun facility, and certain administrative and employee services. These agreements resulted from an "arm's-length" negotiation and are on terms that we believe are at least as favorable as the terms that could be obtained by us in comparable transactions made on an arm's-length basis between unaffiliated parties.
In connection with the Transactions, we made a final distribution to Grupo Dina of approximately $71.4 million. (See "Note 3 to the Consolidated Financial Statements.")
ASSET TRANSFERS
Concurrent with the consummation of the Transactions, Grupo Dina made certain transfers of its assets and subsidiaries in order to concentrate its core coach business assets at or under us. Specifically:
- MCII Holdings transferred its Dina Autobuses, S.A. de C.V. subsidiary to us and Autobuses then became our subsidiary. The financial position and results of Autobuses and us are set forth in the consolidated financial statements included elsewhere in this Form 10-K.
- MCII Holdings transferred its Mexicana de Manufacturas Especiales, S.A. de C.V., subsidiary to Grupo Dina.
- Autobuses transferred the following immaterial subsidiaries to Grupo Dina, Autopartes Hidalguenses, S.A. de C.V. and Carroceria Sahagun, S.A. de C.V. Carroceria Sahagun was a dormant company with virtually no operations or assets. As at and during the year ended December 31, 1998, Autopartes had revenues, excluding intercompany, operating loss and total assets of approximately $3.7 million, ($0.5 million) and $3.6 million, respectively.
- Autobuses exchanged certain of its unimproved property in Mexico for unimproved property and two facilities of a Grupo Dina subsidiary.
- Autobuses transferred to Grupo Dina a group of 240 transit buses that are leased to a company affiliated with Grupo Dina, together with the related lease rights. As at and during the year ended December 31, 1998, Autobuses' financial statements reflected revenues, operating income and net book value of approximately $1.5 million, $0.3 million and $3.0 million, respectively, relating to these leased transit buses.
- We transferred our Universal Coach Parts Mexico, S.A. de C.V. subsidiary to Grupo Dina and canceled a $7.3 million receivable. As at and during the year ended December 31, 1998, UCP Mexico had revenues, excluding intercompany, operating income and total assets of $17.4 million, $0.6 million and $9.9 million, respectively.
In addition, Autobuses canceled certain intercompany advances due from Grupo Dina of approximately $115 million which had been previously charged against equity on Autobuses' financial statements.
LICENSE AGREEMENTS
In connection with the Transactions, MCII Holdings licensed from Grupo Dina certain trademarks, trade names and service marks with respect to the name "Dina" for a perpetual term which is exclusive and royalty-free in the United States, Mexico, Canada, Argentina and Brazil.
OMNIBUS AGREEMENT
ST. MATTHEWS FACILITY
In connection with the Transactions, one of our Canadian subsidiaries entered into a sale-leaseback transaction with Grupo Dina for certain tooling and equipment located at the manufacturing facility of Motor Coach Industries Limited, a wholly owned subsidiary of ours, at St. Matthews Avenue, Winnipeg, Manitoba. The purchase price and lease payment were for nominal amounts and the estimated market value of the tooling and equipment is between $2 million and $4 million. We will lease the tooling and equipment for a period of up to three years and prior to the expiration of such lease, we will transfer the manufacturing operations at this facility to a wholly-owned subsidiary of Grupo Dina, who will then manufacture parts for us at this facility.
LATIN AMERICA RIGHTS
In the event MCII Holdings determines (i) not to manufacture, distribute or sell its products in any country in Latin America and (ii) that the business should be conducted by a third party, it will offer to Grupo Dina the right to manufacture, distribute, and sell MCII Holdings' products in such country to the extent permitted by law.
DINA DISTRIBUTION RIGHTS
In addition, MCII Holdings has a right of first refusal to distribute any of Grupo Dina's body-on-chassis bus products in the United States and Canada that are not distributed by Grupo Dina itself.
The rights are on terms and conditions no less favorable to MCII Holdings and MCII than any other distribution rights granted by Grupo Dina with respect to its products.
MME INVESTMENT
The equity investors have the right to purchase 20%, and under certain conditions up to 50%, of Mexicana de Manufacturas Especiales, S.A. de C.V., for a price and other terms that are mutually agreeable to the parties.
MCII FINANCIAL SERVICES INC.
In 1997, MCII and Mr. Gomez Flores and members of his family formed MCII Financial Services Inc., a coach finance company. MCII acquired 25% of the voting common stock and 15,000,000 shares of non-voting preferred stock for $250,000 and $15,000,000 respectively. The remaining 75% of the voting common stock was acquired by the Gomez Flores family members. In 1998, MCII increased its investment by $7,650,000. Financial Services operates independently from MCII and provides conditional sales contracts and operating leases to MCII's customers. Financial Services was created to provide attractive financing alternatives to our coach customers. As an independent company, Financial Services is expected to have better access to funding on competitive terms.
Financial Services' initial transaction was the purchase of $19,406,000 of loans and $12,742,000 of leases from certain subsidiaries of MCII. MCII has guaranteed the full and prompt collection, under certain circumstances, of the loans sold to Financial Services. MCII received a fairness opinion from an independent third party as to the basis for the selling price of these assets. No gain was recognized on the transaction. During 1998, Financial Services purchased additional loans of $35,519,000 and leases of $3,216,000 from MCII.
The terms of the business arrangement between MCII and certain of our subsidiaries and Financial Services are governed by a finance services agreement dated as of May 6, 1998. Pursuant to the agreement, Financial Services provides advice and assistance to MCII in marketing MCI-Registered Trademark- coaches, in analyzing the creditworthiness of MCII's customers who are seeking financing, and in documenting financing transactions that are approved by Financial Services. The agreement further provides that MCII will not direct or refer potential customers to any source of financing other than Financial Services. MCII is obligated to pay Financial Services a one percent origination fee for each MCII sale financed by Financial Services.
MCII is also required under the agreement to remarket motor coaches designated by Financial Services. MCII earns a five percent remarketing fee to be paid out of resale proceeds after MCII's lien has been satisfied. Financial Services has the option to require MCII to repurchase any item of equipment that has been remarketed for more than 150 days, the repurchase price being the greater of (a) fair market value times 95%, or (b) the original invoice price less one percent for each month that has elapsed from the original delivery date to the date MCII receives possession of the equipment. The remarketing obligation expires upon the later of (a) the expiration of the agreement, or (b) the expiration of all outstanding finance documents, plus one year.
The finance services agreement has an initial term of ten years, and Financial Services has the right and option to extend the agreement for an additional ten years.
STOCKHOLDERS AGREEMENT
In connection with the Transactions, Grupo Dina and the equity investors entered into a stockholders agreement governing their ownership of MCII Holdings. The following is a summary of the material terms included in the stockholders agreement. The parties have agreed to modify certain provisions of the stockholders agreement in the event of an initial public offering.
- The stockholders agreement provides that the board of directors will have seven members, composed of three representatives of Grupo Dina, one of which shall include the CEO of MCII Holdings, and four representatives of JLL Fund III.
- Subject to certain exceptions, no stockholder other than JLL Fund III may transfer any of its shares prior to June 16, 2004.
- Certain extraordinary transactions must be approved by at least six directors.
- Following an initial public offering, the stockholders are entitled to an unlimited number of "piggyback registrations," which allow them to include shares of common stock held by them in certain registrations of common shares by MCII Holdings.
- All parties to the stockholders agreement have a right to participate proportionately in any sale by JLL Fund III or any permitted sale by Grupo Dina of MCII Holdings' common stock.
- Grupo Dina entered into certain non-competition agreements with MCII Holdings and its subsidiaries, including MCII, upon any sale of MCII Holdings.
- Prior to an initial public offering, the stockholders have the right to participate on a pro rata basis in any future private offerings of common stock.
- Grupo Dina has a right of first offer to purchase the shares held by the equity investors in any permitted sale by JLL Fund III of all of its shares.
PART IV
ITEM 14.
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
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* Previously filed.
+ Filed herewith.
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1. Previously filed and incorporated herein by reference from Registrant's prospectus on Form S-4 dated July 28, 1999.
2. Previously filed and incorporated herein by reference from Registrant's prospectus on amendment number one to Form S-4 dated September 23, 1999.
3. Previously filed and incorporated herein by reference from Registrant's Form 8-K dated October 15, 1999.
4. Previously filed and incorporated herein by reference from Registrant's Form 8-K dated November 16, 1999.
5. Previously filed and incorporated herein by reference from Registrant's Form 8-K dated February 3, 2000.
14(b) Reports on Form 8-K
On October 8, 1999, the Company issued a report on Form 8-K announcing the dismissal of Arthur Andersen LLP and the hiring of PriceWaterhouseCoopers LLP as its new independent public accountants and auditors. On November 8, 1999 the Company issued a report on Form 8-K announcing the resignation of PriceWaterhouseCoopers as its independent public accountants and auditors. Subsequent to year-end, the Company issued another report on Form 8-K dated February 3 announcing the appointment of Roberto Cordaro as Chief Executive Officer and also announcing that on March 1, 2000, Arthur Andersen LLP were reappointed as the Company's independent public accountants and auditors.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated.