-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P5MUdc7qoooY0tMXIoOWt7EGeUjtr8u7nb7KJSNThkxXhX4YqKvTFfqHW9NwLB2K nUtCjSU/RXHwIheQ1+BeIA== 0000950137-99-001043.txt : 19990421 0000950137-99-001043.hdr.sgml : 19990421 ACCESSION NUMBER: 0000950137-99-001043 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990420 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCII HOLDINGS USA INC CENTRAL INDEX KEY: 0001019534 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 860830781 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 333-08871 FILM NUMBER: 99597644 BUSINESS ADDRESS: STREET 1: 10 E GOLF ROAD CITY: DES PLAINES STATE: IL ZIP: 60016 BUSINESS PHONE: 6022075000 MAIL ADDRESS: STREET 1: 10 E GOLF ROAD CITY: DES PLAINES STATE: IL ZIP: 60016 10-K405/A 1 AMENDMENT #1 TO FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 1 to FORM 10-K [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 333-08871 MCII HOLDINGS (USA), INC. (Exact name of registrant as specified in its charter) Delaware 86-0830781 (State or other jurisdiction of (I.R.S. Employer Identification No.) (incorporation or organization)
10 East Golf Road, Des Plaines, Illinois 60016 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (847) 299-9900 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the registrant: None as of March 15, 1999. The number of shares outstanding of the registrant's Common Stock: 1,000 shares as of March 15, 1999. DOCUMENTS INCORPORATED BY REFERENCE None REDUCED DISCLOSURE FORMAT The registrant meets the conditions set forth in General Instruction I (1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format. 1 2 On April 15, 1999, an EDGAR filing was made with the Securities and Exchange Commission (the "Commission") of the Company's Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998 Form 10-K") pursuant to Rule 12b-25. This filing, however, was made by the financial printer without the Company's or its independent accountants' authorization. Because the 1998 Form 10-K that was filed with the Commission was in draft, not final form, the 1998 Form 10-K, including the auditor's report should not be relied upon. The attached final Annual Report on Form 10-K for the year ended December 31, 1998, including the auditor's report, as filed on April 20, 1999 has been authorized by the Company and its independent public accountant. 3 TABLE OF CONTENTS
PART I ITEM 1. BUSINESS..................................................................... 3 ITEM 2. PROPERTIES................................................................... xx ITEM 3. LEGAL PROCEEDINGS............................................................ xx ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................... omitted PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.................................................. N/A ITEM 6. SELECTED FINANCIAL DATA...................................................... omitted ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION................................ xx ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................. xx ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................................... none PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............................................................ omitted ITEM 11. EXECUTIVE COMPENSATION....................................................... omitted ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT........................................................ omitted ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................... omitted PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K.......................................................... XX
Some information included in this Report on Form 10-K may constitute forward-looking statements that involve a number of risks and uncertainties. The Private Securities Litigation Reform Act (the "Act") provides a "Safe Harbor" for forward looking statements to encourage companies to provide prospective investors information, to the extent such statements are identified as forward looking and are accompanied by meaningful cautionary statements identifying important factors which could cause actual results to be materially different to those discussed in the statement. MCII Holdings (USA), Inc. would like to take advantage of this provision of the Act. In discussing the future prospects of MCII Holdings (USA), Inc., management has identified factors including, but not restricted to, the following: general economic conditions including inflation, interest rate fluctuations, trade restrictions, and general debt levels; competitive factors including price pressures, technological developments, and products offered by competitors; inventory risks due to changes in market demand or business strategies; and changes in effective tax rates. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date made. MCII Holdings (USA), Inc. undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. 2 4 ITEM 1. BUSINESS GENERAL MCII Holdings (USA), Inc. ("MCII Holdings" or the "Company") is a leading designer, manufacturer and marketer of inter-city coaches and related replacement parts for the North American market. The Company's Motor Coach Industries International, Inc. ("MCII") subsidiaries began manufacturing inter-city coaches and distributing replacement parts in Canada in 1933 and since 1963 in the United States. Since the late 1970s, the Company has consistently maintained a market share in excess of 50% in the United States and Canadian coach markets. MCII's established market position and product longevity have led to an installed base of approximately 75% of the estimated 38,000 industry-wide fleet of coaches operating in the United States and Canada. The Company's Dina Autobuses, S.A. de C.V. ("Autobuses") subsidiary began manufacturing inter-city coaches and distributing replacement parts in Mexico in 1951. Autobuses has an installed base of approximately 65% of the estimated 34,000 industry-wide fleet of coaches operating in Mexico. The Company's large installed customer base creates a high level of customer loyalty leading to new coach purchases and demand for its replacement parts. MCII Holdings is 100% owned by Consorcio G Grupo Dina, S.A. de C.V. ("Dina"), a Mexican manufacturer of trucks and buses listed both on Bolsa Mexican de Valores (Mexican Stock Exchange) and the New York Stock Exchange ("NYSE"). Dina was formed by the Mexican government in 1951 in a joint venture with Fiat and was privatized in 1989. Grupo Empresarial G, S.A. de C.V., a holding company owned by members of the Gomez Flores family, owns approximately 48% of the outstanding shares of the capital stock of Dina. Collectively, the Gomez Flores family owns an additional 3.2% of the capital stock of the Company directly. Revenues and operating income from continuing operations for each of the segments for the last three years are as follows:
Year Ended December 31 ---------------------------------------------------------------- 1998 1997 1996 ---------------------------------------------------------------- (000 omitted) Revenues: United States and Canadian Operations Coach and Support $677,661 $503,635 $499,611 Replacement Parts 172,815 190,178 161,682 Mexican Operations 81,307 45,970 5,791 -------- -------- -------- $931,783 $739,783 $667,084 ======== ======== ======== Operating income: United States and Canadan Operations Coach and Support $70,114 $46,785 $39,865 Replacement Parts 21,497 15,754 14,788 Mexican Operations (9,740) 15,914 5,180 -------- -------- -------- $81,871 $78,453 $59,833 ======== ======== ========
MCII COACH MANUFACTURING AND SUPPORT MCII designs, manufactures, and markets inter-city coaches for sale into the United States and Canadian markets. 3 5 MARKET AND CUSTOMERS. MCII's management believes that there is currently an industry-wide fleet of 38,000 inter-city coaches in operation in the United States and Canada, having an average age of approximately nine years. Activity in the new coach market has proven closely correlated to the economic cycle, particularly to interest rates. During times of general economic weakness and high interest rates, many coach operators postpone fleet replacement programs and may even reduce the size of their fleets. As economic recovery occurs, operators tend to accelerate fleet replacement and increase fleet size. As a result of underlying economic strength and certain other factors explained below, MCII has seen substantial improvements in its business in recent years. While the coach operator market is characterized by a high degree of fragmentation with a large number of operators utilizing some 38,000 units, several large players exist. Greyhound Lines, Inc. (GLI), which operates 2,000 units, and Coach USA, Inc. (CUI), which operates 3,400 units, are leaders in the line haul and tour and charter markets. Several state transit authorities, including New York City Transit Authority ("NYCTA") and New Jersey Transit Corporation ("NJTC") also have large fleets. While management estimates that in the past three years the average order size (excluding GLI orders) for any single operator has been approximately 2.7 units, order size has ranged from one coach up to approximately 100 coaches. By virtue of their relative size, large operators are able to negotiate favorable terms when acquiring new units. MCII has long term contracts with GLI and CUI. Coach buyers may be characterized into four general groups. While the profile of each segment varies considerably, several purchasing criteria are common to all: life cycle costs, reliability, availability of replacement parts and support, passenger comfort, interior amenities and purchase price. The importance of these and other criteria vary across each market niche. 1 LINE HAUL OPERATORS transport passengers between cities at regularly scheduled intervals. The largest operator in this sector is GLI. In January 1998, GLI and MCII renewed a 10-year long-term supply agreement until 2007. The agreement guarantees GLI discounts from MCII if a minimum order level is placed. In 1998 GLI agreed to merge with Laidlaw, a large operator of buses in Canada and the United States. Sales to Line Haul operators represented approximately 29%, 25%, and 16% of MCII's new unit sales in 1998, 1997 and 1996, respectively. 2. TOUR AND CHARTER OPERATORS TYPICALLY PROVIDE TRANSPORTATION TO THE TOURIST MARKET. This segment is the largest area of product sales representing approximately 54%, 62%, and 81% of MCII's new unit sales in 1998, 1997 and 1996, respectively. CUI operates across the United States with a fleet of 3,400 units, the largest provider of coach charter, tour and sightseeing services and one of the five largest non-municipal providers of commuter and transit coach services in the United States. CUI continues to implement a growth strategy that concentrates on the acquisition of coach operators, internal growth and developing economies of scale. Effective June 9, 1997, CUI signed an agreement with MCII pursuant to which CUI 4 6 agreed that MCII would be the primary supplier of CUI's annual new coach requirements through 1999. 3. GOVERNMENT AGENCIES. Government-funded public transportation agencies utilize a variety of commuter, wheelchair-lift compatible and other specialty coaches. Given that the majority of units in this category are sold on a bid basis, management believes that the primary buying criterion for such customers is initial price for a given set of design specifications, with overall lifecycle costs as a secondary concern. The demand from such customers varies widely from year to year as government agencies periodically make large procurements, every three to six years on average. Sales to government agencies were approximately 15%, 13%, and 2% of MCII's new unit sales in 1998, 1997 and 1996 respectively. Two government authorities, NYCTA and NJTC, proved to be large customers in 1998, acquiring 180 and 50 units, respectively or approximately 77% of units sales to this segment. 4. COACH CONVERTERS. The coach conversion market involves the customizing of a coach interior for personal or corporate use. MCII sells coach shells to coach conversion companies. With the recent introduction of the E-Series unit (described below) MCII is optimistic of gaining market share in this sector, estimated to account for approximately 500 units in each of the last three years. In 1998, MCI sold 49 units to this segment PRODUCTS. MCII currently manufactures under the MCI trademark three integral-frame models. A fourth is due to enter production in 1999. MCII also distributes the Viaggio(R), a coach, which is produced in Mexico by Autobuses. - - THE D SERIES is a 102-inch wide vehicle available in either a 40 or 45 foot length with space for up to 55 seats. The model was introduced in 1992, although the unit evolved from a basic design over 25 years old. The unit is utilized in a broad range of applications and is MCII's most popular unit representing approximately 61%, 69%, and 68% of MCII's new unit sales in 1998, 1997, and 1996, respectively. The unit retails from $240,000 to $350,000 depending on customer specification and length. - - THE MC-12 MODEL is a lower-priced, line-haul coach, 40-feet long and 96 inches wide, produced principally for GLI although also having alternative applications. Sales of MC-12 units represented approximately 4%, 12%, and 16% of MCII's new unit sales in 1998, 1997, and 1996, respectively. The price range for this model is $240,000 to $275,000. - - THE E-SERIES "RENAISSANCE(R)" UNIT was introduced in 1997, the first all-new design from MCII in more than 25 years. The model incorporates many new design features including a spiral staircase and features 10 patented designs. The unit has been quickly accepted by its target tour and charter markets representing approximately 26% of MCII's new unit sales in 1998, compared with 4% in its launch year 1997. The Company intends to utilize the design in gaining further market share in the conversion market, an area in which it has not been an aggressive competitor in recent years. The approximate price of the E-Series unit is $375,000. - - THE G-SERIES unit will be introduced into the line-haul market in 1999, a design which will build on the experience of the E-Series unit. GLI, the launch customer for the product, has actively assisted the Company in the design of the unit, which will be phased into markets currently serviced by the MC-12 and some D-Series models. It is envisaged that the unit will be priced at approximately $260,000. - - THE VIAGGIO(R) 1000 is a unit manufactured by Autobuses, a subsidiary of MCII Holdings and distributed in the United States by Hausman Bus Sales, Inc. ("HBSI"), a subsidiary of MCII. Since its introduction in 1995 the unit has proved popular in an economy niche, competing primarily with used units. Viaggio sales represented approximately 9%, 15%, and 15% of MCII's new unit sales in 1998, 1997, and 1996, respectively. The Viaggio(R), which is manufactured under license from Marcopolo S.A. -- Carrocerias e Omnibus of Brazil, sells in a range of $225,000 to $270,000. 5 7 The manufacture of long-distance coaches is characterized by a high degree of flexibility with orders generally being engineered and built to operator's specifications. Buyers can choose from over 2000 options on each unit. The Company offers a standard warranty period of 24 months or 30 months, depending upon the coach model selected. MARKETING. In the United States and Canada, MCII relies on its direct-sales force to market the MCI and Viaggio(R) coaches, with 18 full-time new coach sales representatives who make regular visits to both current and potential customers and attend major industry trade shows. Management believes that the attentiveness and visibility of MCII's sales force among coach operators solidify MCII's reputation and enhance its sales position. MCII uses agents to market its coaches overseas. MCII does not use distributors in the United States or Canada. COMPETITION. MCII has two principal competitors in the United States and Canadian coach market: Prevost, a subsidiary of Volvo, which management believes to be the largest of its competitors, and Van Hool. MCII has maintained a strong market position in the new coach market despite aggressive price competition Management believes customer loyalty stems from a quality product and strong after-market parts and service capability. As well as convenience and cost efficiencies which operators derive from managing and servicing a fleet of coaches manufactured and supported by a single supplier. These efficiencies may exist for both larger, multi-site operators and smaller, independent operators, which rely on MCII for a variety of support services. The high resale value of MCII units has also proved popular with independent operators. FINANCING. MCII sells coaches for cash, credit terms (generally net 30 days) to its most creditworthy customers, and provides long-term financing as a necessary adjunct to its coach manufacturing business. Demand for new coach financing from MCII is primarily dependent upon the annual level of new coach sales as well as the availability of alternative sources of financing. MCII had $45.9 million of notes receivables at December 31, 1998. MCII provides new and used coach financing to its inter-city coach customers principally through an affiliated, independent financing company, MCII Financial Services Inc. ("MCIFS"). MCIFS provides financing through its MCII Funding Inc. Subsidiary primarily at a floating rate of interest for three to five years, in the case of used coaches, and seven to 10 years in the case of new coaches. MCII, through its wholly-owned leasing and financing subsidiary, BusLease, Inc. ("BLI"), also finances coaches for customers under operating leases and loans. The leases require security deposits and usually have a duration of three to seven years. At December 31, 1998, the book value of coaches being leased to customers under operating leases was approximately $18.5 million. Periodically, BLI sells notes receivables to financial institutions and provides a limited guarantee to those institutions against losses related to such notes with respect to debtor defaults. USED COACHES MCII provides used coach brokerage and dealership services through HBSI. MCII offers used coaches in support of its new bus operations since typically 1/3 of all customers trade-in used coaches when buying new coaches. The size of the used coach business is dependent upon several factors, including the size of the entire coach fleet, new coach orders which generate trade-ins and the level of changes in the fleet composition of coach operators. Management estimates that the existing industry-wide fleet of over 38,000 coaches changes ownership every 12 years, creating an average used coach volume of about 2,500 units per year. 6 8 The used coach operations provided revenues for the years 1998, 1997, and 1996, of approximately $86.0 million, $50.4 million, and $52.3 million respectively. The used coach operations accounted for $72.0 million and $58.6 million of MCII's inventories at December 31, 1998 and 1997, respectively.. Due to MCII's installed base of coaches, its maintenance and repair capabilities, customer network and industry knowledge, HBSI is able to repurchase and resell a substantial volume of used coaches. Management believes that MCII's capacity to accept used coaches in support of new coach sales and resell them through its distribution system provides MCII with a competitive advantage. Management believes that HBSI's largest competitor in the dealership business is ABC Bus, Inc., which also serves as Van Hool's United States sales agent for new coaches. REPLACEMENT PARTS Management believes that MCII is the leading supplier of original equipment manufacturer ("OEM") quality replacement parts for the combined inter-city coach and transit bus aftermarkets in the United States and Canada. Through its Universal Coach Parts, Inc. ("UCP") subsidiary, MCII offers over 160,000 items necessary for coach and bus repair and regularly scheduled maintenance. MCII has six strategically located distribution outlets in the United States and Canada which allow MCII to promptly (if necessary, within 24 hours) deliver replacement parts nationwide. In addition to the core inter-city coach and transit bus parts business, MCII also distributes parts for school buses and diesel engines. The large installed base of its vehicles further enhances MCII's competitive position in the parts business. The approximately 23,000 coaches and 47,000 transit buses in the United States and Canada originally produced by MCII creates a core demand for MCII parts, approximately 20% of which are proprietary to MCII and may not be purchased elsewhere. Despite the fact that MCII no longer manufactures transit buses, MCII continues to supply replacement parts to the Canadian transit bus market, and until November 1999, is the provider of OEM replacement parts for the RTS line of transit buses previously manufactured in the United States by MCII. Universal Coach Parts Mexico, S.A. de C.V., a wholly owned subsidiary of UCP, supplies OEM replacement parts to the inter-city coach and transit bus aftermarkets in Mexico. PRODUCT LINE. The replacement parts business is segmented into high quality parts supplied by an OEM, which may fit coaches made by other manufacturers, and non-OEM parts, which are marketed primarily on a price basis. Management believes that MCII's current strength is in providing OEM parts that are either manufactured by MCII or acquired by MCII from the OEM. UCP in the United States and Motor Coach Industries Limited ("MCIL") in Canada offer a wide selection of replacement and repair parts to MCII's coach customers. In an effort to leverage further the competitive strength of its replacement parts business and distribution facilities, UCP has developed its own brand of alternate, non-OEM parts under the COACH GUARD(R) name. More than sixty products have been introduced under this brand name since its inception in 1993. UCP has also developed a line of remanufactured parts and components, which were introduced during 1994. Management believes that the availability of remanufactured products has permitted UCP to access new markets that are currently served by local and regional parts remanufacturers. In 1994, UCP began marketing diesel engine parts under the name DIESEL GUARD(R) and also began targeting the school bus parts market. As a result of its focus on the school bus market, UCP purchased the assets of a school bus parts distributor, Billingsley Parts and Equipment, Inc., in April 1995 for $2.9 million. MARKETING. For sales of replacement parts, UCP utilizes 13 full-time field representatives, as well as telemarketing salespersons. The sales force makes regular visits to both current and potential customers, attends major 7 9 industry trade shows, responds to advertisements for bids to supply replacement parts and uses telemarketing techniques. In addition, customer orders are facilitated through the use, by the sales force and certain of UCP's larger customers, of remote order entry terminals to minimize lead-time. Management believes that UCP's efficiency and responsiveness allow customers to minimize inventory-holding costs and to increase fleet utilization ratios. CUSTOMERS. Coach part customers served by UCP include both purchasers of MCII coaches as well as purchasers of non-MCII coaches such as Dina's Viaggio(R) coach model. Management believes that customers place considerable emphasis on the quality of parts purchased as well as the speed and efficiency provided by their parts suppliers. Under an agreement with GLI, which is terminable by either party upon 180 days notice, UCP supplies and manages most of GLI's inventory of replacement parts. Management believes that the demand for transit parts is a function of the number of transit buses currently in operation, the average level of usage for each bus and the average age of the bus fleet. Management believes that purchasers of transit parts are more price-sensitive and less service sensitive than customers in the coach aftermarket, as the opportunity cost to the transit authority of a transit bus out of operation is less significant than the lost revenue of a line-haul coach operator. As a result, a large percentage of transit parts purchases are conducted on a public bid basis. Customers often choose to make a major purchase of parts inventory upon the procurement of additional new transit buses to ensure the availability of parts and to minimize cost through volume purchasing. COMPETITION. The replacement parts business is highly fragmented and competitive. Management believes that UCP's largest competitors are Prevost and Mohawk, for coach replacement parts, and the major transit manufacturers - BIA and Neopart (the parts operation of Neoplan), for transit bus replacement parts. The remaining competitors include other coach manufacturers, diesel engine manufacturers, niche marketers and local vendors. Management believes that the factors influencing the choice of parts suppliers include a supplier's proximity to the customer, the number of replacement parts offered, level of technical knowledge and support and, to a lesser extent, price. In addition, management believes that the installed base of vehicles manufactured by MCII, also provides UCP a distinct competitive advantage. Management estimates that UCP has consistently captured a significant share of the replacement parts business in its core inter-city coach and transit bus parts segments (excluding engines, transmissions and related parts). AUTOBUSES Autobuses designs, manufacturers and sells coaches in the Mexican market and manufactures for sale in the United States which is distributed by HBSI. In January 1997, Dina contributed 99.99% of the capital stock of Autobuses to MCII Holdings. This change in structure made Autobuses and its two subsidiaries, Autopartes Hidalguenses, S.A. de C.V. and Carrocera Sahagun, S.A. de C.V., indirect subsidiaries of MCII Holdings. Autobuses subsequently established MCII Buses (USA), Inc. as its third subsidiary.
Year Ended December 31, ---------------------------------------------------------------------- 1998 1997 1996 ---- ---- ---- Autobuses' Mexican inter-city coach sales 325 232 40
8 10
Year Ended December 31, ---------------------------------------------------------------------- 1998 1997 1996 ---- ---- ---- Total Mexican market sales............. 1,308 772 313 Autobuses' market share................ 25% 30% 13% Autobuses' export sales................ 126 234 270 Urban buses 211 248 3
MARKET AND CUSTOMERS The use of coaches for inter-city travel in Mexico is more prevalent than in the United States due to lower per capita disposable income and a relatively under developed railway system. The current installed base of inter-city coaches in Mexico is approximately 34,000 units, compared with approximately 38,000 units in the United States, a country with nearly triple the population. Market demand for coaches has proved sensitive to underlying economic conditions, particularly interest rates. The Mexican new bus market is still suffering from the consequences of the peso devaluation in late 1994 The provision of transit services is concentrated among relatively few companies. Management estimates that four companies, operate over half of the total long distance buses in the country. Due to the existing fleets and purchase agreements each operator is closely identified to specific manufacturers. The acquisition strategy of any of the four operators tends to have a very important determinant on the market dynamics in each particular year. In 1993, Autobuses entered into a thirty-year contract with Grupo Estrella Blanca, S.A. de C.V. ("Estrella Blanca"), pursuant to which Estrella Blanca agreed to purchase coaches exclusively from Autobuses so long as Autobuses priced its coaches competitively with the Mexican coach market. Due to the crisis in the Mexican economy and Estrella Blanca's distressed financial condition, Autobuses made no sales to Estrella Blanca in 1995, 1996 or 1997, but was paid in full by FOBAPROA, a trust established by the Mexican government to assist financially distressed vital service entities in Mexico, for the coaches delivered to Estrella Blanca in 1994. Following the financial recovery of Estrella Blanca, in 1997 Autobuses and Estrella Blanca agreed to extend the contract for the sale of coaches until 2027. 9 11 PRODUCT LINE Currently Autobuses manufactures two intracity coach models and a transit bus model in Mexico, available in five variations. - - THE VIAGGIO(R) MODEL is manufactured by Autobuses under a license from Marcopolo SA -- Carrocerias e Omnibus, a Brazilian bus manufacturer. Autobuses produces two products: the two axle 850 and the three-axle 1000 unit, for different niches in the Mexican market. Autobuses also produces a variant of the 1000 compliant with Department of Transportation ("DOT") regulations for sale in United States markets; Such sales are handled by MCII's HBSI subsidiary. - - THE F-SERIES models were introduced in the first quarter of 1998 with the launch of the F-11. This new unit has proved popular with operators, representing over half of total Autobuses deliveries in 1998. The unit is a basic line-haul product produced from a proprietary design, which offers operators an attractive unit at an economic price. Autobuses launched the F-12, a twelve-meter unit in the first quarter of 1999. Management is considering producing a DOT unit for the US market. - - In 1994 Autobuses introduced to the cities and urban transit bus for use in inner-city markets. COMPETITION. Autobuses competes against two other major companies --Mexicana de Autobuses (MASA), which had been operating under bankruptcy laws until it was acquired by Volvo in 1998, and Omnibus Integrales. Each manufacturer is closely affiliated with a specific operator. Autobuses' market share was 25% in 1998 compared with 30% and 13% in 1997 and 1996, respectively. The bases for competition in the inter-city coach market are original sales price, parts availability and U.S.-manufactured componentory. Autobuses believes it enjoys a competitive advantage due to its domestic production facilities, its U.S.-designed components, the ability to tailor bodies to customer specifications by offering a wide array of seating options and other amenities, the well-established Dina brand names, nationwide replacement parts availability and the imposition of tariffs on new coach imports by companies located in countries that are not subject to the terms of NAFTA. DISTRIBUTION. Except for sales in the United States by HBSI, coaches and transit buses are currently sold by Autobuses directly to end users without the use of distributors. PRODUCTION. Autobuses assembles coaches at its plant in Ciudad Sahagun, Mexico. In addition to Marcopolo bodies, Autobuses uses several suppliers, primarily in the United States, for materials, components and other parts. Purchases from these suppliers provide substantially all of Autobuses' requirements for diesel engines, transmissions, suspensions, axles, brakes, electronic components, glass parts and most components for bodies. Autobuses operates one line at its plant with the capacity to produce 1,800 coaches annually. In 1998 Mexicana Manufactura Especiales ("MME") was formed as a subsidiary of MCII Trucks, a wholly owned subsidiary of MCII Holdings. MME will establish six facilities in the city of Guadalajara, Mexico and the surrounding Jalisco state with the intention of manufacturing automotive parts for both subsidiaries of Dina, including MCI and Dina Autobuses, and outside parties. In establishing such a subsidiary management hopes to achieve considerable cost savings through eliminating component outsourcing, as well as improve quality standards. Initially parts production will focus on brake parts, sub-assembly, windows, hoses, exhaust tubing, seats, electrical harnesses, steel shapes and structural tubing; Later products will include bus bodies. 10 12 OTHER CONSIDERATIONS BUSINESS STRATEGY In recent years MCII has benefited from the strength of the US economy. Management is aware of the cyclical nature of the business and is pursuing the following strategies to maximize profitability: MAINTAIN A TECHNOLOGY ADVANTAGE OVER COMPETITORS In the last two years, the Company has introduced two new model lines, the E-Series "Renaissance" for use in luxury tour & charter markets, and the F-Series a budget line haul model designed for the Mexican marketplace. Management believes that each unit is highly competitive within each specific market place and that customer acceptance of both units has been high in 1998. In 1999, the Company intends to introduce the G-Series unit, which will enter pilot production late in the year. The all-new unit, designed in conjunction with GLI, incorporates many of the design lessons derived from the introduction of the E-Series unit and is targeted to serve the needs of the line haul market. SEEK NEW MARKET NICHES AND GEOGRAPHIC OPPORTUNITIES In 1999, Management intends to build on the success of recently launched units. In the United States Management will increase its marketing of E-Series units into the conversion segment. The Company is also examining the possibility of introducing the F-Series model into this niche. In Mexico, the Company will introduce a twelve-meter version of the F-Series market to broaden the availability of options to operators. In the longer term the Company is considering marketing the F-Series unit internationally, with a particular focus into Latin America. IMPROVE THE SERVICE ASPECTS OF THE BUSINESS Management firmly believes that a major reason behind the Company's success has been its dedication to offer customers the best in service. This culture is one reflected in the full-service approach to business undertaken by MCII, including new bus sales, used bus sales, financing, leasing and parts. In 1998, the Company opened three new facilities in Dallas, Montreal and Los Angeles while other such facilities are planned. At UCP, the Company announced the consolidation of facilities in a new custom-built facility in Louisville, Kentucky. The strategic location of this facility will permit orders placed as late as 10pm to be delivered next day to customers nationwide. LEVERAGE LOW COST MANUFACTURING The Company continues to seek to lower manufacturing costs particularly by leveraging Autobuses's underutilized facilities in Ciudad Sahgun, Mexico. In a limited manner this process commenced with the introduction of the Viaggio(R) 1000 DOT units, which have filled a niche in the United States and Canadian markets. RESEARCH AND DEVELOPMENT. The Company devotes significant resources to developing new products and proprietary technology in order to expand and enhance its product line, reduce production costs and improve service to customers. The Company conducts engineering, testing and design at three facilities in Winnipeg, Manitoba; Roswell, New Mexico; and Ciudad Sahagun, Mexico. In addition, the Company periodically engages the services of engineering, testing and design companies. The Company spent $10.2 million, $6.7 million and $7.3 million in the fiscal years ended December 31, 1998, 1997 and 1996, respectively on research and development. Current research and development projects for the Company's coach operations include the G-Series and F-Series coach models. 11 13 RAW MATERIALS/COMPONENTS The Company's manufacturing/assembling operations utilize raw material and components supplied by diverse North American and international sources. Major component parts, such as engines, axles, transmissions, suspension, seats and air conditioners, are provided by original equipment manufacturers. For certain materials and major components, the Company relies primarily on a limited number of suppliers, namely Meritor for axles, Detroit Diesel for engines, Allison Transmission for transmissions, Carrier for air conditioning units and Atlas Alloys for stainless steel. Alternate suppliers used to a lesser extent or available for use are Dana Corporation and Eaton Corporation for axles, Cummins and Caterpillar for engines, Eaton Fuller and ZF Friedrichshafen AGA for transmissions, Thermoking for air conditioning units and Namasco Ltd. and others for stainless steel. Although there are additional alternate suppliers, the Company's customers demand the component parts that are currently assembled into its coaches. The Company also relies on component parts and design technology provided by Marcopolo in the assembly of its Viaggio(R) coach models. GOVERNMENT REGULATION The operations of, and the products manufactured by, MCII Holdings' subsidiaries are subject to various United States federal and state and Canadian federal and provincial laws and agency regulations. In the United States, these regulations include the Clean Air Act and other environmental acts which regulate coach engine emissions and plant operations; Federal Motor Vehicle Safety Standards which establish minimum safety standards for various components of coaches; the Americans With Disabilities Act, which specifies accessibility standards for the physically challenged; and Buy America legislation prohibiting the use of federal funds for coaches with less than 60% United States content. In Canada, regulations include various environmental acts, which regulate coach plant operations, and Canadian Motor Vehicle Safety Regulations that establish minimum safety standards for various coach components. Although the Canadian government has not adopted accessibility standards for the physically challenged, such standards are currently the subject of several official studies. MCII Holdings cannot accurately predict future expenses or liability which might be incurred as a result of such laws and regulations. The Americans with Disabilities Act required, among other things, that the Department of Transportation ("DOT") promulgate handicapped accessibility standards for coaches. On September 28, 1998, DOT issued final regulations regarding coach accessibility requirements. The rules require that all coaches delivered to large line haul operators beginning October 2000 must be handicapped accessible. Further, the rules also contain certain other requirements concerning accessible fleet percentages and providing accessible service. The Company cannot predict whether rules, will have a material adverse effect on an operator's business and possibly on the Company's coach business. Sales of coaches to the public sector in the United States are typically to local transit authorities, paid for in part by federal grants administered by the FTA and subject to the Buy America Act. The Buy America Act generally prohibits the use of federal funds for coach procurements unless (1) the cost of the coach components manufactured in the United States equals or exceeds 60% of the cost of all components and (2) final assembly of the coach occurs in the United States. While the Company believes that its manufacturing processes comply with the Buy America requirements for coach sales that are subject to the act, the Company cannot predict whether any future changes made by the Federal Transit Administration to the Buy America regulations would have any material effect on the Company. The operations and products of the Company are subject to Mexican federal and state laws and regulations relating to the protection of the environment. The fundamental environmental law in the 12 14 Mexican federal system is the Ley General de Equilibrio Ecologico y Proteccion al Ambiente (the General Law of Ecological Balance and Environmental Protection, or the "Ecological Law"). Under the Ecological Law, rules have been promulgated concerning water pollution, air pollution, noise pollution and hazardous substances. Additionally, the Mexican federal government has enacted regulations concerning the importation and exportation of hazardous materials and hazardous wastes. The Ministry of the Environment, in conjunction with other governmental entities, state and municipal governments and with the participation of the social and private sectors, is the Mexican federal agency in charge of overseeing compliance with the federal environmental laws. The Ministry of the Environment has the authority to enforce the Mexican federal environmental laws. As part of its enforcement powers, the Ministry of the Environment can bring administrative and criminal proceedings against companies that violate environmental laws, and it also has the power to close non-complying facilities. It is possible that changes in Mexican federal and state environmental laws, or their interpretation or enforcement, could result in material costs to the Company. At this time, management of the Company is not aware of any pending legislation which might, if passed, result in material costs to the Company. All of the engines used on the Company's coaches comply with current United States and Mexican government emissions standards. After the implementation of NAFTA in 1994, the Mexican Auto-Transportation Decree was replaced with a transitional system of quotas which were to be phased out over five years. Commencing in 1999, such import limitation is scheduled to be eliminated. NAFTA permits Mexico to maintain quotas on parts and components for a ten-year period. Under NAFTA, Mexican import tariffs for 1994 were 9% for components and 8% for engines. These tariffs will be phased out over a ten-year period with respect to new United States and Canadian coaches that satisfy NAFTA's United States, Canadian and Mexican regional content requirements (50% regional content required to qualify for reduced tariffs in 1994 to 1998, 55% in 1999 to 2002 and 60% thereafter). In addition, under NAFTA, Mexican import tariffs on coach parts and components will be phased out over a ten-year period. The present prohibition on importing used coaches into Mexico will be maintained under NAFTA for 15 years and then will be eliminated over a ten-year transition period, permitting the importation of used coaches into Mexico with model ages not exceeding ten years. Dina products imported by MCII for sale in the United States and Canada are subject to various United States and Canadian laws and regulations. PATENTS AND TRADEMARKS MCII Holdings owns numerous trademarks and patents that MCII Holdings believes give it a competitive advantage in the marketplace. United States trademark registrations are for a term of 10 years, renewable every 10 years so long as the trademarks are used in the regular course of trade. The trademarks owned and used by MCII Holdings include the MCI, and FLXIBLE marks. COACH GUARD and DEISEL GUARD marks are in use in the replacement parts operations. MCII Holdings owns numerous patents protecting, among other things, various aspects of the MCI coaches. Patents are granted for a term of 17 years. MCII Holdings has the right to use the Greyhound name and the "Image of the Running Dog" for the manufacture and sale of inter-city coaches, transit buses and replacement parts in all countries other than the United States, Canada and Mexico. 13 15 In Mexico, Dina has registered certain trademarks including DINA, DIMEX and Citus. The Company also uses the Viaggio brand under license from Marcopolo in Mexico, and owns the same trademark in the United States. The Company has certain patents relating to its advanced "torsilastic" suspension system and other components used in coaches. The Company operates under license for numerous patents relating to its products and their manufacture held by third parties. While many of these patents are considered important to particular products, no particular patent or group of patents is considered by the Company to be essential to its business as a whole. EMPLOYEES As of December 31, 1998, the Company had approximately 4,800 employees, with approximately 1,400 in the United States, 2,300 employees in Canada and 1,100 in Mexico. The hourly workers at most locations are organized and represented by unions. Approximately 2,500 employees of the total work force are represented by labor unions. The largest contracts are with the International Association of Machinists and Aerospace Workers (the "IAM") in Winnipeg, Manitoba and Pembina, North Dakota. The IAM contracts at Pembina expire September 30, 2000; those at Winnipeg will expire in January 2000. MCII's subsidiaries have historically enjoyed satisfactory relations with both union and non-union employees. Approximately 800 Mexican employees are represented by the Independent Union of Workers in the Automotive and Related Industries (the "Automotive Workers Union".) In accordance with Mexican law, the salary provisions of these agreements are renegotiated every year with the benefits provisions every two years. The salary provision was renegotiated in February 1999. On February 10, 1999 the Company announced that it had reached agreement with the unions to increase workers' salaries 18% immediately with an additional 4% in benefits. The Company has experienced labor stoppages in early 1992, February 1994, and most recently in February 1999 when Mexican production was halted for nearly one week. ITEM 2. PROPERTIES The Company owns manufacturing and assembly plants in the United States, Canada and Mexico. Additionally, the Company owns or leases various replacement parts and repair facilities in the United States and Canada. The Company also owns or leases other properties in Mexico, including a vehicle and parts distribution center. The following table is a summary of the approximate square footage of the Company's facilities as of December 31, 1998:
United States Canada Mexico Total ------------- ------ ------ ----- Facility Type ------------- Manufacturing 186,000 767,000 1,359,000 2,312,000 Replacement parts 1,087,000 104,000 653,880 1,844,880 Modification or repair 134,000 0 0 134,000 --------- ---------- --------- --------- Total square feet 1,407,000 871,000 2,012,880 4,290,880 ========= ========== ========= ========= Ownership --------- Owned property 782,000 811,000 1,359,000 2,952,000 Leased property 625,000 60,000 653,880 1,338,880 --------- ---------- --------- --------- Total square feet 1,407,000 871,000 2,012,880 4,290,880 ========= ========== ========= =========
14 16 ITEM 3. LEGAL PROCEEDINGS MCII Holdings and certain of its subsidiaries are parties either as plaintiffs or defendants to various actions, proceedings and pending claims, certain of which involve claims for compensatory, punitive or other damages. Litigation is subject to many uncertainties and it is possible that some of the legal actions, proceedings or claims referred to above could be decided against MCII Holdings. Although the ultimate amount for which MCII Holdings may be held liable with respect to matters where MCII Holdings is a defendant is not ascertainable, MCII Holdings believes that any resulting liability will not materially affect its financial condition or results of operations. The Company's Canadian income tax returns for 1982 through 1992 are currently under review by Revenue Canada. Authorities have proposed imputing additional income related to transactions with a United States based subsidiary of the Company. Revenue Canada 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 $23,000,000 plus interest of approximately $47,000,000 and, in addition, the Company may be subject to potential reassessments for the years subsequent to 1992 on the same basis, which could result in additional income taxes and interest. These amounts are all before recoveries of United States 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 United States federal income tax purposes. In accordance with SFAS No. 109, "Accounting for Income Taxes," a portion of any ultimate liability owed as a result of this issue would be treated as an adjustment of Dina's purchase price on acquiring the Company, resulting in an increase of purchase goodwill. (If the ultimate liability were $70,000,000, then approximately $45,000,000 would be a purchase accounting adjustment.) Based on its review of current relevant information, including the advice of outside counsel, the Company is of the opinion that Revenue Canada's arguments are without merit and that any liability from this matter will not be material to its financial condition or results of operations. Manufacturers and sellers of defective products in Mexico may be subject to liability for loss and injury caused by such products under Mexican law. The Company does not carry product liability insurance for product sales in Mexico. Although the Company has never had a product liability claim brought against its Mexican operations and the Mexican laws providing for such liability appear to have been seldom utilized, no assurance can be given that the Company may not be exposed to future product liability claims in Mexico and, if such claims are successful, that the Company will have sufficient resources to pay such claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS This item has been omitted pursuant to General Instruction I of Form 10-K, which provides for a reduced disclosure format. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Not applicable. 15 17 ITEM 6. SELECTED FINANCIAL DATA This item has been omitted pursuant to General Instruction I of Form 10-K, which provides for a reduced disclosure format. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pursuant to General Instruction I of Form 10-K, which provides for a reduced disclosure format, the following is management's narrative analysis of the material changes in the Statement of Consolidated Income and is in lieu of management's discussion and analysis pursuant to Regulation S-K 303. The following discussion should be read in conjunction with MCII Holding's consolidated financial statements included in this Annual Report. 16 18 MCII HOLDINGS OPERATING HIGHLIGHTS
1998 1997 1996 ---- ---- ---- Units: United States and Canadian Operations MCII New Coaches 1,670 1,279 1,245 Viaggio Coaches 159 222 226 Used Coaches 779 496 571 Mexican Operations Intercity Coaches 325 232 40 (000 OMITTED) Revenues: United States and Canadian Operations Coach and Support $ 677,661 $ 503,635 $ 499,611 Replacement Parts 172,815 190,178 161,682 Mexican Operations 81,307 45,970 5,791 --------- --------- --------- $ 931,783 $ 739,783 $ 667,084 ========= ========= ========= Operating income: United States and Canadian Operations Coach and Support $ 70,114 $ 46,785 $ 39,865 Replacement Parts 21,497 15,754 14,788 Mexican Operations (9,740) 15,914 5,180 -------- --------- -------- $ 81,871 $ 78,453 $ 59,833 ======== ========= ========
17 19 RESULTS OF OPERATIONS 1998 COMPARED WITH 1997 Revenues increased 26% in 1998 to $931.8 million due to strong customer demand and acceptance of the E-Series Coach in the United States and Canada and improving economic conditions in Mexico. Operating income increased 4% to $81.9 million. Operating income in the United States and Canada increased $29.1 million, or 46%, to $91.6 million, due to increased sales, reduced production costs, and recovery of business insurance claims for business interruptions caused by flooding conditions in 1997. Operating income in Mexico decreased $25.7 million to a loss of $9.7 million Net income from continuing operations was $38.6 million in 1998, compared with $38.2 million in 1997. MCII MCII's revenues were a record $850.5 million in 1998, an increase of $156.7 million, or 23%, over 1997. New coach deliveries were a record 1,670, up 32% from 1997. Improvements were derived from the continued high growth / low interest rate environment of the United States economy which has heightened demand for coach travel and facilitated lower cost financing for operators. Growth was particularly enabled by the non-recurrence of production problems that impacted the Company during 1997 (flooding conditions during the second quarter and difficulties associated wit h the initial rollout of the E-Series coach. The increasing acceptance of the new E-Series unit has been a major feature of the demand profile. Sales reached 482 units in 1998, compared to 67 units when introduced in 1997. The used coach business responded well to management initiatives aimed at increasing turnover, with sales advancing to 779, compared to 496 units in 1997. Over the course of 1998, HBSI accepted 733 units as trade-ins as part of new unit transactions. Parts sales declined 9%, to $172.8 million. Traditionally, parts demand has run in a counter-cyclical manner to the demand for new units and this trend appears to continue. MCII's operating income of $91.6 million represented an increase of $29.1 million from $62.5 million in 1997. MCII's coach manufacturing operations benefited from the increasing production efficiency of the E-Series unit as the learning curve of the model rollout continued to improve. Other cost improvements resulted from the settlement of flood related insurance claims in 1998 ($8.0 million) and reduced new product start-up costs ($7.3 million). 18 20 Mexico Mexican sales continued to improve in 1998, reaching $81.3 million, an increase of $35.3 million. Deliveries of inter-city coaches increased to 325 units in 1998 from 232 units in 1997. Replacement parts sales increased $13.7 million, or 164%, to $22.0 million in 1998. Mexican operating losses of $9.8 million were a disappointment compared to income of $15.9 million in 1997. Earnings at Autobuses declined $18.2 million, due to higher commissions expense of $1.1 million and increased provision for bad debts of $3.9 million. Mexicana had start-up losses of $2.2 million, caused mainly by new product start-up costs of $1.4 million. Finally, manufacturing profits on Viaggio units sold in the United States decline by $5.7 million. Other Income and Expense Other income and expenses reduced income by $12.0 million in 1997, compared with $19.0 million. The favorable effect of $5.0 million was essentially due to a gain on the sale of an equity investment. On September 14 1998, a subsidiary of MCII Holdings sold its 10% stake in Mexicana de Autobuses S.A. de C.V. (MASA) for $7 million in cash. The Company acquired its 10% ownership interest in MASA in 1995 and had revalued the investment to zero when MASA subsequently filed for bankruptcy. The 1998 gain on the sale was $5.0 million before taxes, after reimbursing Dina for $2 million in related expenses. Net interest expense was $20.0 million in 1998, compared with $21.9 million in 1997. Dina allocated net interest income of $8.8 million to Autobuses in 1998, compared with Dina's allocation of net interest income of $1.4 million to Autobuses in 1997. Therefore, external interest expense increased approximately $5.5 million, primarily due to Autobuses Pre-Export Notes. Income Taxes The effective income tax rate increased to 44.8% in 1998 from 35.8% in 1997 primarily due to the decline Autobuses' Mexican income. Autobuses has generated net loss carry-forwards in prior years as a result of economic difficulties encountered in the early 1990s. The Company had not previously recognized the carry-forward benefit of such losses due to the uncertainty of the realization of such benefits. Therefore, these loss carryforwards were recognized in 1997 to offset Autobuses 1997 income. Due to the continued uncertainty of the realization of any net operating loss carryforwards, Autobuses' 1998 Mexican losses were recorded without income tax benefits. 19 21 1997 COMPARED WITH 1996 Results in 1997 were characterized by strong market demand for units being negated by production problems at MCII and resulting in lower market share and flat sales. Mexican sales indicated substantial year-on-year improvements although the overall level of activity was still very depressed due to the after effects of the 1994 peso crisis. Revenues for 1997 were $739.8 million, 11% higher than those generated in 1996. Operating income increased 31% to $78.5 million. Net income from continuing operations was $38.2 million in 1997, compared with $27.7 million in 1996 (net income for 1996 was $21.8 million, which reflected an additional $5.0 million expense incurred for MCII's discontinued transit manufacturing business and $0.9 million of debt issuance costs.) MCII Despite very strong underlying strength in the United States coach market, MCII was unable to take full advantage of such growth due to two production problems: (1): The flooding of the Red River in the second quarter of the year closed access roads to MCII's manufacturing operations in the United States and Canada, and unfavorably affecting production; and (2): Production difficulties encountered with the introduction of the E-Series unit over the course of the year. As a result of these two factors, new coach sales were 1,279 in 1997, compared with 1,245 in 1996. Sales of Viaggios in the United States declined to 222 units in 1998, compared with 226 in 1996. To compensate customers who experienced delays as a result of the production difficulties, the Company leased 75 used units at favorable terms. As a result of such leases, used coach sales declined to 496 in 1997, compared with 571 in 1996. MCII's revenues of $693.8 million in 1997 increased from 1996 by 5% as coach manufacturing revenues increased 1% against the prior year and replacement parts' revenues of $190.2 million in 1997 increased from 1996 by 18%, due largely to the 1996 acquisition of certain assets of the Flxible business. MCII's operating income of $62.5 million in 1997 was a $7.9 million increase over MCII's operating income in 1996. Operating income from MCII's coach manufacturing operations increased $6.9 million in 1997, due to improved operating cost control efforts which more than offset $7.3 million in new product start-up costs and $0.9 million of additional corporate office relocation costs. Operating income from replacement parts increased $1.0 million in 1997, due to higher sales volume. Mexico In Mexico, Autobuses continued to reposition itself in response to the lingering problems created by the 1994 devaluation and ensuing severe economic recession. In 1997, Autobuses' domestic sales increased to 232 units, compared with sales of 40 units in 1996. In addition, Autobuses, in a new business initiative, leased 440 transit bus units during 1997, including 240 units to a related party. Mexican revenues in 1997 of $46.0 million increased by $40.2 million over 1996 revenues. 20 22 Mexican operating income increased $10.7 million in 1997 due to higher revenues in Mexico and higher manufacturing profit on units sold in the United States. Other Income and Expense Other income and expenses reduced income by $19.0 million in 1997, compared with $13.7 million. The unfavorable effect of $5.3 million was due to higher net interest expenses. Interest expense increased $5.8 million to $21.9 million in 1997, reflecting higher debt levels at MCII (greater use of revolving bank credit facilities) and Autobuses (pre-export loans and notes). Dina allocated net interest income of $1.4 million to Autobuses in 1997, compared with Dina's allocation of net interest expense of $1.5 million to Autobuses in 1996. Income Taxes The effective income tax rate declined to 35.8% in 1997 from 40.0% in 1996 primarily due to the application of net loss carry-forwards to Autobuses' increased Mexican income. Autobuses had generated net loss carry-forwards in prior years as a result of economic difficulties encountered in the early 1990s. The Company had not previously recognized the carry-forward benefit of such losses due to the uncertainty of the realization of such benefits. In 1997, the Company was able to offset these losses against the current year's income. Consequently, Autobuses' 1997 Mexican profits for book purposes were recorded with no income tax. 21 23 OTHER FACTORS. FINANCIAL RESTRUCTURING On June 3, 1996, the Company became contingently liable for payments of principal and interest on the Senior Secured Discount Notes due 2002 ("Discount Notes") of Dina, the parent company. It was intended that all payments with respect to the Discount Notes would be paid by Dina, and that payments would be made by the Company only in the event of the inability of the parent company to service the debt. Effective December 31, 1998, the Company recognized it's liability for interest and principal payments with regard to this debt obligation due to substantial doubt about the parent company's ability to service the debt. Consequently, the Company recorded $206,499,680 of additional debt as more fully described in Note 16, accrued $2,919,000 of interest payable, and adjusted shareholder's equity accordingly. As at December 31, 1998, Transportation Manufacturing Operations Inc. ("TMO") a principal subsidiary of the Company, had a $170 million US revolving credit agreement ("the Senior Credit Facility") with a nine bank syndicate to finance working capital and other general corporate needs, as more fully described in Note 16. This credit facility expires on October 1, 1999, and the lenders have indicated that they are not willing to extend the maturity of this agreement. In addition, during 1998, the Company was required to reduce existing long-term debt obligations by $50 million, consisting of a $25 million principal payment on TMO's Senior Term Notes, due 2002, a $12 million reduction in it's Canadian bank credit facility, and a $13 million principal payment on the Pre-Export Notes due 1999 (see Note 16). As a result of the debt reductions during 1998 and the additional debt obligations and working capital requirements for 1999, the Company does not expect to generate sufficient cash flow from operations to fund both short term requirements and meet the required expiration of the US 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 the parent company. On April 19, 1999, TMO executed an agreement with CIBC Oppenheimer for the issuance of $40 million of Senior Subordinated Increasing Rate Notes ("the IRNs"), due December 31, 1999 (subject to extension to March 31, 2000). This bridge financing will be used by TMO to meet short-term working capital requirements while the financial restructuring process is underway. The IRNs will mature on December 31, 1999 (with an option to extend the maturity to March 31, 2000) and will bear an increasing rate of interest, commencing with a rate that will be the greater of (i)LIBOR plus 6.50% or (ii) 11.625%, and increasing by 25 basis points (0.25%) every 30 days that the IRNs are outstanding to a maximum rate of 18%. As a condition of the consent of the existing lenders, interest above 15.0% must be paid in kind. The IRNs will rank senior to all existing subordinated debt and subordinated to all existing senior debt of TMO. The agreement provides TMO with an option to redeem the IRNs, in whole, but not in part, at any time prior to maturity at fixed redemption prices. TMO must also redeem the IRNs at a fixed redemption price upon a change in control of TMO or any of its parent companies. TMO has the option to extend the maturity date of the IRNs to March 31, 2000, at the maximum interest rate of 18.0% (with interest above 15.0% paid in kind). However, as additional consideration for the extension, TMO will be required to issue to the existing noteholders an additional $4 million aggregate principal amount of IRNs (the "Extension IRNs"). The IRNs are subject to certain affirmative and negative covenants customary for this type of financing, and are guaranteed by TMO's material domestic subsidiaries. On April 19, 1999, TMO and its principal subsidiaries obtained the necessary consent and related amendments required from the existing lenders to permit the bridge financing and remain in compliance with certain financial covenants. In consideration for the consent of the existing lenders, TMO agreed to certain changes in the terms of the existing debt agreements, as further described in Note 16. In addition to the bridge financing, the Company, in association with CIBC Oppenheimer, has developed a financial restructuring plan to refinance all of the material debt obligations of the parent, the Company and their respective subsidiaries. The new financing is expected to result in gross proceeds to the Company of approximately $715 million. The proceeds of the new financing are expected to be used by the Company to refinance certain indebtedness of the parent, the Company and their respective subsidiaries including, but not limited to, the IRNs, the US and Canadian revolving credit facilities, the 9.02% Senior Term Notes due 2002, and the Senior Secured Discount Notes due 2002. The Company expects to complete the new financing and the refinancing prior to the October 1, 1999 maturity of the existing US credit facilities. In the event that the financial restructuring is not completed by September 30, 1999, and TMO has not been able to obtain sufficient funding to retire the IRN's, the US Bank credit facility and the Term Notes due 2002, TMO will be in default of each of these credit agreements. This in turn would trigger cross default covenants in substantially all of the Company's other debt agreements and provide the holders of its debt with the right to accelerate payments of all amounts outstanding. The existence of acceleration rights would also require the Company to classify all long-term indebtedness as current. In light of these potentially adverse consequences to the Company's financial position, management is diligently pursuing the consummation of the financial restructuring. 22 24 While there is no assurance that the financial restructuring plan will be completed successfully at this time, the Company is continuing to work with CIBC Oppenheimer to execute this plan. In the event that the financial restructuring cannot be completed prior to the October 1, 1999 maturity, the Company is also exploring alternatives to generate additional cash flow including, but not limited to, selling substantial Company assets and seeking strategic equity investors. YEAR 2000 READINESS DISCLOSURE In today's business environment, companies have developed a strong technological interdependence with each other. As the Year 2000 draws near, many businesses are increasingly concerned about how their business applications, as well as those utilized by their business partners, will handle the century date change. A summarized definition of the Year 2000 issue is the inability of certain computer systems, software, and embedded-technologies to recognize or process dates beyond December 31, 1999. This problem may cause significant disruptions in manufacturing, administrative, and distribution processes, as well as other computer supported activities. The Company has developed a plan to ensure that its systems have the ability to process transactions in the year 2000. The Company believes that it has identified the applications that will need to be modified to properly utilize dates beyond December 31, 1999. Both internal and external resources will be utilized to reprogram and test software for Year 2000 compliance. It is anticipated that the Year 2000 project will be completed no later than September 1999. The estimated total cost of making the systems Year 2000 compliant is approximately $2.0 million. This cost will be expensed as incurred except for the installation of new applications that are already Year 2000 compliant. Based on present information, the Company believes that it will be able to achieve Year 2000 compliance through a combination of modifications to some existing systems and the purchase of other systems that are already Year 2000 compliant. The Company 23 25 believes that the expenses and capital expenditures associated with achieving Year 2000 compliance will not have a material effect on its financial results in 1999. The Company is contacting business partners whose Year 2000 non-compliance could adversely affect the Company's operations, employees, or customers. The Company believes the most likely worst case scenario would be the failure of a material business partner to be Year 2000 compliant. Therefore, the Company will continue to work with and monitor the progress of its partners and formulate a contingency plan when the Company does not believe the business partner will be compliant. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA MCII Holdings' consolidated financial statements and Report of Independent Accountants is set forth at pages F-1 to F-26 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT This Item has been omitted pursuant to General Instruction I of Form 10-K, which provides for a reduced disclosure format. 24 26 ITEM 11. EXECUTIVE COMPENSATION This item has been omitted pursuant to General Instruction I of Form 10-K, which provides for a reduced disclosure format. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT This item has been omitted pursuant to General Instruction I of Form 10-K, which provides for a reduced disclosure format. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. This item has been omitted pursuant to General Instruction I of Form 10-K, which provides for a reduced disclosure format. PART IV ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)LIST OF DOCUMENTS FILED 1. FINANCIAL STATEMENTS Report of Independent Accountants Statement of Consolidated Income, Years ended December 31, 1998, 1997, and 1996 Balance Sheet, December 31, 1998 and 1997 Statement of Consolidated Changes in Stockholder's Equity, Years ended December 31, 1998 and 1997. Statement of Consolidated Cash Flows, Years ended December 31, 1998, 1997, and 1996 Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES Report of Independent Accountants Schedule I -- Condensed Financial Information of Registrant 25 27 All other schedules are omitted because they are not applicable or the required information is presented in the consolidated financial statements or notes thereto. 3. EXHIBITS EXHIBIT NO. DESCRIPTION ----------- ----------- 3.1 Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.2 to Dina's Registration Statement on Form F-1/S-1, File No. 333-08843) 3.2 Restated Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.3 to Dina's Registration Statement Form F-1/S-1, File No. 333-08843) 4.1 Credit Agreement, dated as of September 30, 1996, among Transportation Manufacturing Operations, the Lenders named therein and NBD Bank, as Administrative Agent (incorporated by reference to Exhibit 4.3 to Dina's Registration Statement on Form F-1/S-1, File No. 333-08843) 4.2 Amendment No. 1 to Credit Agreement, dated as of December 17, 1996, by and between Transportation Manufacturing Operations, Inc. and NBD Bank, as Administrative Agent, Swing Line Bank and Issuing Lender (incorporated by reference to Exhibit 4.2 to the Company's Form 10-K for the fiscal year ended December 31, 1996) 4.3 Amendment No. 2 to Credit Agreement, dated as of May 23, 1997, among Transportation Manufacturing Operations, Inc., the Guarantors named therein, the Lenders named therein, The First National Bank of Chicago, as Swing Line Bank and an Issuing Lender, and as Administrative Agent, and NBD Bank, as Swing Line Bank and an Issuing Lender, and as the resigning Administrative Agent 4.4 Amendment No. 3 to Credit Agreement, dated as of September 25, 1997, among Transportation Manufacturing Operations, Inc., the Lenders named therein, The First National Bank of Chicago, as Administrative Agent, and The Bank of New York, as Co-Agent 4.5 Amendment No. 4 to Credit Agreement dated as of June 26, 1998, among Transportation Manufacturing Operations, Inc., the Lenders named therein, The First National Bank of Chicago, as Administrative Agent, and The Bank of New York as Co-Agent 4.6 Amendment No. 5 to Credit Agreement, dated as of April 19, 1999, among Transportation Manufacturing Operations, Inc., the lenders named therein, and the First National Bank of Chicago, as Administrative Agent for the Lenders. 4.7 Note Agreement, dated as of November 15, 1994, among Transportation Manufacturing Operations, Inc. and the Purchasers named therein governing the 9.02% Senior Notes due November 15, 2002 (incorporated by reference to Exhibit 3.23 to Dina's Form 20-F for the year ended December 31, 1994) 4.8 Amendment to Note Agreement, dated as of April 7, 1995, among Transportation Manufacturing Operations, Inc. and the Purchasers named therein (incorporated by reference to Exhibit 4.4 to Dina's Registration Statement on Form F-1/S-1, File No. 333-08843) 4.9 Amendment to Note Agreement, dated as of September 1996, among Transportation Manufacturing Operations, Inc. and the Holders named therein 4.10 Amendment to Note Agreement, dated as of October 30, 1997, among Transportation Manufacturing Operations, Inc. and the Holders named therein 4.11 Amendment to Note Agreement, dated as of April 19, 1999, among Transportation Manufacturing Operations, Inc., and the Holders named therein. 4.12 Intercreditor Agreement, dated as of September 30, 1996, by and among the Lenders under the Credit Agreement dated as of 26 28 September 30, 1996, NBD Bank, and the holders of the 9.02% Senior Notes due 2002 (incorporated by reference to Exhibit 4.6 to Dina's Registration Statement on Form F-1/S-1, File No. 333-08843) 4.13 Indenture, dated as of April 30, 1996 between Dina and IBJ Schroder Bank & Trust Company, as Trustee, relating to the 9.02% Senior Notes due November 15, 2002, including the form of Old Note and New Note, filed as Exhibit 2.4 to Dina's Annual Report on Form 20-F for the year ended December 31, 1995 and incorporated by reference herein (incorporated by reference to Exhibit 4.6 to the Company's Form 10-K for the fiscal year ended December 31, 1996) 4.14 Form of 9.02% Senior Note due 2002 (incorporated by reference to Exhibit 2.4 to Dina's Annual Report on Form 20-F for the year ended December 31, 1995) 10 Employment Agreement, dated as September 30, 1996, between Transportation Manufacturing Operations, Inc., and James P. Bernacchi (incorporated by reference to Exhibit 10.24 to Dina's Registration Statement on Form F-1/S-1, File No. 333-08843) 12 Computation of ratio of earnings to fixed charges 27 EDGAR Financial Data Schedule (b) REPORTS ON FORM 8-K The Company did not file any reports on Form 8-K during the fourth quarter of the fiscal year covered by this report. 27 29 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. DATE: April 19, 1999 MCII HOLDINGS (USA), INC. (Registrant) By: /s/ ----- Director, Chief Executive Officer By: /s/ ----- Chief Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Rafael G\mez - ---------------------------- President and Director April 15, 1999 Rafael G\mez Flores (Principal Executive Officer ) /s/ ---------- April 15, 1999 Jose Ignacio Moreno Chief Financial Officer /s/ ---------- Director April 15, 1999 Gamaliel Garcia Cortes /s/ ---------- Director April 15, 1999 Stephen P. Glennon
28 30 MCII HOLDINGS (USA), INC. CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES 31 Report of Independent Public Accountants To the Shareholder of MCII Holdings (USA), Inc.: We have audited the accompanying consolidated balance sheets of MCII Holdings (USA), Inc. and its subsidiaries (the "Company") as of December 31, 1998 and December 31, 1997 and the related consolidated statements of income, changes in stockholder's equity and cash flows for the years then ended. 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. 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, 1998 and December 31, 1997, and the consolidated results of its operations and cash flows for the years then ended in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 and 15 to the financial statements, the Company and its principal subsidiaries have significant debt obligations, including a US bank credit facility that expires on October 1, 1999. The Company does not expect to generate sufficient cash flow from operations to meet its current debt obligations and provide for growth in working capital. While the Company plans to refinance all of its existing material debt obligations prior to maturity, no binding agreement currently exists to undertake the refinancing. This matter raises substantial doubt about the Company's ability to continue as a going concern. Management plans with regard to this matter are described in Note 2. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. Arthur Andersen LLP Chicago, IL April 20, 1999 32 Report of Independent Accountants To the Stockholder of MCII Holdings (USA), Inc.: In our opinion, the accompanying consolidated statements of income, changes in stockholder's equity and cash flows (as restated for acquisition of affiliate, see Note 6) for the year ended December 31, 1996 present fairly, in all material respects, the results of operations and cash flows of MCII Holdings (USA), Inc. and its subsidiaries (the Company) for the year ended December 31, 1996 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of the company for any period subsequent to December 31, 1996. PricewaterhouseCoopers LLP Chicago, Illinois February 28, 1997 (except with respect to the matter in Note 6, as to which the date is March 23, 1998). 33 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS MCII HOLDINGS (USA), INC. (A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.) STATEMENTS OF CONSOLIDATED INCOME
Year Ended December 31, -------------------------------------------------- (000 omitted) 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- Revenues: Sales $925,945 $735,210 $658,823 Finance income 5,838 4,573 8,261 ------------ ------------- ------------ 931,783 739,783 667,084 ------------ ------------- ------------ Operating costs and expenses: Cost of sales (exclusive of items shown separately below) 728,395 546,607 506,199 Depreciation and amortization 24,819 22,035 17,618 Interest expense, finance operations 2,765 2,394 3,605 Research and development expenses 9,641 6,655 7,346 New product start-up costs 1,521 7,333 - Business insurance recoveries (8,462) (500) - Provision for relocation of Corporate office - 886 3,000 Selling, general and administrative expenses 91,233 75,920 69,483 ------------ ------------- ------------ 849,912 661,330 607,251 ------------ ------------- ------------ Operating Income 81,871 78,453 59,833 ------------ ------------- ------------ Other income and (expense): Interest (expense) - net (19,980) (21,859) (16,029) Other income (502) 2,920 2,197 Gain (loss) on equity investments 5,000 - (1,200) Foreign currency translation gain (loss) 3,482 (85) 1,347 ------------ ------------- ------------ (12,000) (19,024) (13,685) ------------ ------------- ------------ Income before income taxes 69,871 59,429 46,148 Income taxes 31,283 21,268 18,474 ------------ ------------- ------------ Income from Continuing Operations 38,588 38,161 27,674 Discontinued operations: (Loss) on disposal of transit manufacturing, net of tax benefit of $3,130 - - (5,000) ------------ ------------- ------------ Income before extraordinary item 38,588 38,161 22,674 Extraordinary (charge) for early retirement of debt, net of tax benefit of $550 - - (851) ------------ ------------- ------------ Net Income $ 38,588 $ 38,161 $ 21,823 ============ ============= ============
The accompanying notes are an integral part of these statements F-1 34 MCII HOLDINGS (USA), INC. (A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.) CONSOLIDATED BALANCE SHEET
December 31, December 31, (000 omitted) 1998 1997 Except per share info - ----------------------------------------------------------------------------------------------------------------- ASSETS Current Assets: Cash and cash equivalents $ 24,103 $ 13,997 Receivables, less allowance of $10,316 and $3,244 122,508 88,543 Receivables from affiliates (Note 3) - 16,293 Current portion of notes receivable 10,548 6,625 Inventories 226,272 257,795 Deferred income taxes 21,488 14,430 Other current assets 6,089 7,591 ------------ ------------- Total Current Assets 411,008 405,274 Property, plant, and equipment, net 104,530 106,845 Notes receivable 35,400 42,465 Investments in affiliates 23,116 15,253 Intangible assets 215,589 227,367 Other assets 16,511 23,469 ------------ ------------- Total Assets $806,154 $820,673 ============ ============= LIABILITIES AND STOCKHOLDER'S EQUITY Current Liabilities: Accounts payable $ 82,420 $ 67,580 Accrued compensation and other benefits 13,343 12,380 Accrued warranties 13,960 10,020 Accrued income taxes 32,390 7,251 Self insurance reserves 6,365 5,610 Net liabilities of discontinued operations 4,416 2,229 Other current liabilities 31,132 25,111 Current portion of long-term debt 192,742 44,418 ------------ ------------- Total Current Liabilities 376,768 174,599 Long-term debt 281,723 268,833 Pensions and other benefits 15,787 14,037 Other deferred items and self insurance reserves 19,059 24,370 Deferred income taxes 6,522 6,916 ------------ ------------- Total Liabilities 699,859 488,755 ------------ ------------- Commitments and contingent liabilities Stockholder's Equity: Common stock, $.01 par value, 1,000 shares authorized, issued, and outstanding and additional capital 159,500 411,524 Accumulated deficit (23,945) (58,590) Accumulated other Comprehensive Income (29,260) (21,016) ------------ ------------- Total Stockholder's Equity 106,295 331,918 ------------ ------------- Total Liabilities and Stockholder's Equity $806,154 $820,673 ============ =============
The accompanying notes are an integral part of these statements F-2 35 MCII HOLDINGS (USA), INC. (A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.) CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
Accumulated Other Comprehensive Income ---------------------- Common Stock Unfunded Cumulative Total Comprehensive and Additional Accumulated Pension Translation Stockholder's (000 omitted) Income Capital Earnings/(Deficit) Loss Adjustment Equity - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1996 $ 419,176 $(76,126) $ - $ (14,572) $ 328,478 Comprehensive income -- 1996: Net income -- 1996 $ 21,823 21,823 21,823 Other comprehensive income: Unfunded pension loss (423) (423) (423) Unrealized translation loss (1,061) (1,061) (1,061) -------- Comprehensive income $ 20,339 -------- Capital contribution 1,342 1,342 Return of capital to parent company (13,030) (13,030) Dividends on common stock (30,000) (30,000) --------- -------- ------ --------- --------- BALANCE, DECEMBER 31, 1996 407,488 (84,303) (423) (15,633) 307,129 Comprehensive income -- 1997: Net income -- 1997 $ 38,161 38,161 38,161 Other comprehensive income: Unfunded pension loss (154) (154) (154) Unrealized translation loss (4,806) (4,806) (4,806) -------- Comprehensive income $ 33,201 -------- Dividends on common stock (12,448) (12,448) Capital contribution 4,036 4,036 --------- -------- ------ --------- --------- BALANCE, DECEMBER 31, 1997 411,524 (58,590) (577) (20,439) 331,918 Comprehensive income -- 1998: Net income -- 1998 $ 38,588 38,588 38,588 Other comprehensive income: Unfunded pension loss 61 61 61 Unrealized translation loss (10,161) (10,161) (10,161) -------- Comprehensive income $ 28,488 - -------- Recognition of contingent obligation (Note 2) (209,419) (209,419) Net Receivable from Affliate (Note 3) (38,278) (38,278) Adjustment (Note 5) (4,327) (443) 1,856 (2,914) Dividends on common stock (3,500) (3,500) --------- -------- ---------- --------- --------- BALANCE, DECEMBER 31, 1998 $ 159,500 $(23,945) $ (516) $ (28,744) $ 106,295 ========================================================================
The accompanying notes are an integral part of these statements F-3 36 MCII HOLDINGS (USA), INC. (A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.) STATEMENTS OF CONSOLIDATED CASH FLOWS
Year Ended December 31, ------------------------------------------------------------ (000 omitted) 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------------- Cash Flows Provided (Used) By Operating Activities: Net Income $ 38,588 $ 38,161 $ 21,823 Adjustments to reconcile net income to net cash provided (used) by operations: Depreciation and amortization 24,819 22,035 17,618 Deferred income taxes (5,222) 1,373 (4,812) Discontinued operations - - 5,000 Extraordinary items - - 851 Provision for relocating corporate office - 886 3,000 Gain on sale of property and notes receivable (1,188) (92) (1,664) (Gain)/loss on equity investment (5,000) - 1,200 Other noncash items, net 8,609 2,378 5,403 Change in operating assets and liabilities 14,930 (117,326) (4,099) ------------ ------------ ------------ NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 75,536 (52,585) 44,320 ------------ ------------ ------------ Cash Flows Provided (Used) By Investing Activities: Capital expenditures (13,478) (32,096) (25,609) Investments in assets held for lease (4,279) (56,375) (54,538) Proceeds from sale of property and assets held for lease 1,247 57,372 50,880 Notes receivable from customers (59,644) (49,580) (40,344) Collections of notes receivable 57,656 15,696 18,844 Proceeds from sale of notes receivable 2,750 17,381 24,934 Purchase of, investment in, businesses (7,860) - (12,200) Investment in affiliates 5,000 (25,708) - Proceeds from sale of business - - 1,295 Discontinued operations, net changes 2,187 2,140 6,400 ------------ ------------ ------------ NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (16,421) (71,170) (30,338) ------------ ------------ ------------ Cash Flows Provided (Used) By Financing Activities: Additional long-term borrowings - - 68,000 Payment of long-term borrowings (37,573) (149) (68,148) Net change in bank credit facilities (7,936) 136,910 (7,000) Termination of interest rate swap position - - 4,733 Payment of debt issuance costs - - (3,330) Extraordinary charge for early retirement of debt - - (851) Increasing (decreasing) capital - 4,036 1,342 Dividends paid to parent company (3,500) (12,448) (30,000) ------------ ------------ ------------ NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (49,009) 128,349 (35,254) ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH 10,106 4,594 (21,272) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 13,997 9,403 30,675 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 24,103 $ 13,997 $ 9,403 ============ ============ ============
The accompanying notes are an integral part of these statements F-4 37 MCII HOLDINGS (USA), INC. (A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1996 HAS BEEN RESTATED TO INCLUDE AUTOBUSES - SEE NOTE 6) 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of MCII Holdings (USA), Inc., and its subsidiaries ("MCII Holdings" or the "Company"), which is wholly owned by Consorcio G Grupo Dina, S.A. de C.V. ("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 made predominately to a diversified customer base, including independent operators, national fleet operators, government agencies, and others. The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles. Intercompany accounts and transactions between MCII Holdings and its subsidiaries have been eliminated. Certain reclassifications have been made to the financial statements of prior periods to conform to 1998 classifications. Described below are those accounting policies that are particularly significant to the Company. 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. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the financial statements of MCII Holdings and its majority and wholly owned subsidiaries:
PARTICIPATION (%) ----------------- Motor Coach Industries International, Inc. ("MCII") 100.0 Transportation Manufacturing Operations, Inc. ("TMO") 100.0 (A direct subsidiary of MCII) Dina Autobuses, S.A. de C.V. ("Autobuses") 99.99 Mexicana de Manufacturas Especiales, S.A. de C.V. ("Mexicana") 100.0
F-5 38 In March 1998, the Company formed Mexicana to manufacture coach parts in Mexico. In January 1997, the Company acquired from Dina 99.99% of the shares of Autobuses. This event represented a combination of entities under common control and has been accounted for on an "as-if" pooling-of-interest basis, with the accompanying financial statements and related footnotes restated for all periods presented, see Note 6. CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less, when purchased, 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 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, which 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 were not material in any year. The Company did not enter into any such transactions during 1998. The assets and liabilities of the Company's Canadian operations are translated into U.S. dollars at current exchange rates, and revenues and expenses are translated at average exchange rates for the years 1998, 1997, and 1996. Resulting translation adjustments are reflected as other comprehensive income. This same approach has been applied to the Company's Mexican operations for the year 1996. However, the application of Statement of Financial Accounting Standards ("SFAS") No. 52 "Foreign Currency Translation" requires that the Mexican economy be judged a highly inflationary economy for 1998 and 1997 and that the Company's Mexican operations be remeasured as if the U.S. dollar was the functional currency during 1998 and 1997. This treatment caused a resulting translation gain for the 1998 period of $3,482,000 and a translation loss for the 1997 period of $85,000 to be included in the income statement rather than as other comprehensive income. INTANGIBLES Intangibles, which consist primarily of goodwill, are carried at cost less accumulated amortization of $26,925,000 at December 31, 1998 and $21,288,000 at December 31, 1997. 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." F-6 39 INVENTORIES Inventories are generally stated at the lower of cost or market. Cost is generally determined on a first-in, first-out basis. NOTES RECEIVABLE Notes receivables 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 postretirement benefit cost for the Company is based on the provisions of SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." 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: Buildings and leasehold improvements 3% to 25% Assets held for lease 10% to 20% Machinery and equipment 8% to 33%
F-7 40 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 make use of 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, 1998 and 1997 was $1,543,000 and $1,723,000, 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. In accordance with the Emerging Issues Task Force Issue ("EITF") 95-1, 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 1998, the Company did not enter into any transactions that require deferral under EITF 95-1. START-UP COSTS Start-up costs on major projects are charged to expense as incurred. 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 in light of actual experience and adjustments are recorded if necessary. In Mexico the suppliers of components pay most warranty costs. Accordingly, the exposure for warranty is not material. F-8 41 2. FINANCIAL RESTRUCTURING On June 3, 1996, the Company became contingently liable for payments of principal and interest on the Senior Secured Discount Notes due 2002 ("Discount Notes") of Dina, the parent company. It was intended that all payments with respect to the Discount Notes would be paid by Dina, and that payments would be made by the Company only in the event of the inability of the parent company to service the debt. Effective December 31,1998 the Company recognized its liability for interest and principal payments with regard to this debt obligation due to substantial doubt about the parent company's ability to service the debt. Consequently, the Company recorded $206,499,680 of accrued additional debt as more fully described in Note 15, $2,919,000 of accrued interest payable, and adjusted stockholder's equity accordingly. As of December 31,1998, Transportation Manufacturing Operations, Inc. ("TMO") a principal subsidiary of the Company, had a $170 million US revolving credit agreement (" the Senior Credit Facility") with a nine-bank syndicate to finance working capital and other general corporate needs, as more fully described in Note 15. This credit facility expires on October 1, 1999, and the lenders have indicated that they are not willing to extend the maturity of this agreement. In addition, during 1998, the Company was required to reduce existing long-term debt obligations by $50 million, consisting of a $25 million principal payment on TMO's Senior Term Notes due 2002, a $12 million reduction in it's Canadian bank credit facility, and a $13 million principal payment on the Pre-Export Notes due 1999 (see Note 15). As a result of the debt reductions during 1998 and the additional debt obligations and working capital requirements for 1999, the Company does not expect to generate sufficient cash flow from operations to fund both short term requirements and meet the required expiration of the Senior Credit Facility. On March 18,1999, the Company engaged CIBC Oppenheimer Corp. and its affiliates ("CIBC Oppenheimer") to act as the Company's lead bank agent, financial advisor, initial purchaser, placement agent and underwriter to undertake a financial restructuring of the debt obligations of the Company and its parent company. On April 19, 1999, TMO executed an agreement with CIBC Oppenhiemer for the issuance of $40 million of Senior Subordinated Increasing Rate Notes ("the IRNs"), due December 31, 1999, (subject to extension to March 31,2000). This bridge financing will be used by TMO to meet short-term working capital requirements while the financial restructuring process is underway. The IRNs will mature on December 31, 1999, (with an option to extend the maturity to March 31, 2000) and will bear an increasing rate of interest, commencing with a rate that will be the greater of i) LIBOR plus 6.50% or ii) 11.625%, and increasing by 25 basis points (0.25%) every 30 days that the IRNs are outstanding to a maximum rate of 18%. As a condition of the consent of the existing lenders, interest above 15.0% must be paid in kind. The IRNs will rank senior to all existing subordinated debt and subordinated to all existing senior debt of TMO. The agreement provides TMO with an option to redeem the IRNs, in whole, but not in part, at any time prior to maturity at fixed redemption prices. TMO must also redeem the IRNs at a fixed redemption price upon a change in control of TMO or any of its parent companies. TMO has the option to extend the maturity date of the IRNs to March 31, 2000, at the maximum interest rate of 18.0% (with interest above 15.0% paid in kind). However, as additional consideration for the F-9 42 extension, the company will be required to issue to the existing noteholders, an additional $4 million aggregate principal amount of IRNs (the "Extension IRNs). The IRNs are subject to certain affirmative and negative covenants customary for this type of financing, and are guaranteed by TMO's material domestic subsidiaries. On April 19, 1999, TMO and its principal subsidiaries obtained the necessary consent and related amendments required from the existing lenders to permit the bridge financing and remain in compliance with certain financial covenants. In consideration for the consent of the existing lenders, TMO agreed to certain changes in the terms of the existing debt agreements, as further described in Note 15. In addition to the bridge financing, the Company, in association with CIBC Oppenheimer, has developed a financial restructuring plan to refinance all of the material debt obligations of the parent, the Company and their respective subsidiaries. The new financing is expected to result in gross proceeds to the Company of approximately $715 million. The proceeds of the new financing are expected to be used by the Company to refinance certain indebtedness of the parent, the Company and their respective subsidiaries including, but not limited to, the IRNs, the US and Canadian revolving credit facilities, the 9.02% Senior Term Notes due 2002, and the Senior Secured Discount Notes due 2002. The Company expects to complete the new financing and the refinancing prior to the October 1, 1999 maturity of the existing Senior Credit Facilities. In the event that the financial restructuring is not completed by September 30, 1999, and TMO has not been able to obtain sufficient funding to retire the IRN's, the US Bank credit facility and the Term Notes due 2002, TMO will be in default of each of these credit agreements. This in turn would trigger cross default covenants in substantially all of the Company's other debt agreements and provide the holders of its debt with the right to accelerate payments of all amounts outstanding. The existence of acceleration rights would also require the Company to classify all long-term indebtedness as current. In light of these potentially adverse consequences to the Company's financial position, management is diligently pursuing the consummation of the financial restructuring. While there is no assurance that the financial restructuring plan will be completed successfully at this time, the Company is continuing to work with CIBC Oppenheimer to execute this plan. In the event that the financial restructuring cannot be completed prior to the October 1, 1999 maturity, the Company is also exploring alternatives to generate additional cash flow including, but not limited to, selling substantial Company assets and seeking strategic equity investors. 3. NET RECEIVABLE FROM AFFILIATES During the second quarter of 1998, Dina forgave, in the Company's favor, a receivable from Autobuses in the amount of $35,038,000. In addition, due to the uncertainty of the financial position of its parent company, the Company has made a provision for the uncollectabilitty of the December 31, 1998 net receivable balance from Dina in the amount of $73,316,000. These two transactions have resulted in a $38,278,000 net charge against Additional Capital in Stockholder's Equity. 4. 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. F-10 43 5. EQUITY CONSOLIDATION ADJUSTMENT During the year, 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. 6. TRANSFER OF ENTITIES UNDER COMMON CONTROL In January 1997, MCII Holdings acquired from its parent company, Dina, 99.99% of the shares of Autobuses. This change in structure was accomplished by Dina contributing 99.99% of the capital stock of Autobuses ($30,363,000 in net assets as of December 31, 1996) to MCII Holdings, thereby making Autobuses and its two subsidiaries, Autopartes Hidalguense, S.A. de C.V. and Carrocera Sahagun, S.A. de C.V., subsidiaries of MCII Holdings. The transaction was a transfer of entities under common control, which requires the acquisition to be accounted for as a pooling of interests. Accordingly, the financial statements for all periods reflect the results of operations, financial condition, cash flows, and changes in stockholder's equity of MCII Holdings and Autobuses as if the companies had been consolidated for all periods presented. A reconciliation of a condensed income statement between amounts previously reported for 1996 and as restated is as follows:
PREVIOUSLY REPORTED AUTOBUSES ELIMINATIONS TOTAL -------- --------- ------------ ----- 1996 (000 omitted) Revenues $ 661,293 $ 64,148 $ (58,357) $ 667,084 --------- -------- ---------- --------- Income from Continuing Operations 22,784 7,757 (2,867) 27,674 Discontinued Operations (5,000) - - (5,000) Extraordinary Item (851) - - (851) ---------- -------- --------- ---------- Net Income $ 16,933 $ 7,757 $ (2,867) $ 21,823 ======== ======= ======== ========
7. GAIN ON EQUITY 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 Dina as a dividend. In December 1995, the Company repurchased the MASA shares directly from 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. F-11 44 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 Dina. 8. DISCONTINUED OPERATIONS In 1993, the Board of Directors approved a plan of disposition for the transit bus-manufacturing segment of the Company. This decision was based on management's review of market activities, business prospects, competitive bidding, evaluation of backlogs, economic value analysis, and opportunities for cost reduction, which indicated that the transit bus manufacturing business might not achieve acceptable profitability in the foreseeable future. As a result of this decision, a charge to discontinued operations of $53,629,000 ($87,202,000 before taxes) was recorded in 1993 to reflect the estimated loss on disposal of the transit-manufacturing segment. In November 1994, the Company sold the fixed assets and certain of the inventory of the transit bus manufacturing business, as well as the right to manufacture, remanufacture, and distribute transit buses previously made by the Company, for aggregate consideration of $14,947,000, of which $4,877,000 was in the form of a note receivable and the remainder was in cash. Additionally, the purchaser, for a period of five years from the sale date, has agreed not to distribute parts to transit buses previously made by the Company. The Company retained all other assets and all of the remaining liabilities of the transit manufacturing business. Based on further analysis of the estimated loss to be incurred on the disposal, additional provisions were made in 1994 and 1996 of $3,500,000 ($5,385,000 before taxes) and $5,000,000 ($8,130,000 before taxes), respectively. The summarized balance sheet of the discontinued transit bus manufacturing segment at December 31 was as follows:
1998 1997 ---- ---- (000 OMITTED) Assets: Notes receivable $ 1,496 $ 3,953 Other current assets 79 82 Deferred taxes and other assets 2,063 2,314 ------- ------- 3,638 6,349 ------- ------- Liabilities: Other current liabilities 7,150 7,582 Other liabilities 904 996 ------- ------- 8,054 8,578 ------- ------- Net Liabilities $ 4,416 $ 2,229 ======= =======
F-12 45 9. PROVISION FOR THE RELOCATION OF CORPORATE HEADQUARTERS In December 1996, the Company provided $3,000,000 for the costs associated with the decision to relocate the Company's corporate headquarters from Phoenix, Arizona to Des Plaines, Illinois. An additional $886,000 was provided in 1997 based on a revised estimate of the likelihood that the Phoenix office would be subleased. At December 31, 1998, the remaining $2,063,000 of reserves are included in the Consolidated Balance Sheet under the captions, "other current liabilities" ($644,000) and "other deferred items and insurance reserves" ($1,419,000). Substantially all of the severance and other relocation costs were paid in 1997 and the lease costs will be paid through 2003. 10. ACQUISITION In October 1996, the Company purchased certain assets of The Flxible Corporation ("Flxible") that were being sold through bankruptcy proceedings. Flxible was a manufacturer of transit buses and a distributor of related replacement parts. The purpose of the purchase was to utilize the assets to become the OEM parts distributor for the existing fleet of Flxible transit buses. The transaction was accounted for as a purchase of assets. The total purchase price was $ 12,200,000. 11. CASH FLOW EFFECT OF CHANGES IN OPERATING ASSETS AND LIABILITIES Change in operating assets and liabilities consisted of:
1998 1997 1996 ---- ---- ---- (000 OMITTED) Decrease (Increase) in operating assets: Receivables $ (44,663) $ (25,839) $ (21,894) Inventories 27,856 (69,006) (4,414) Other operating assets 9,101 (2,854) 3,525 --------- ---------- --------- (7,706) (97,699) (22,783) --------- ---------- --------- Increase (Decrease) in operating liabilities: Accounts payable 14,349 26,525 12,724 Accrued income taxes 25,315 2,916 (4,549) Other operating liabilities (17,028) (49,068) 10,509 --------- ---------- --------- 22,636 (19,627) 18,684 --------- ---------- --------- Net Cash Flow Effect $ 14,930 $ (117,326) $ (4,099) ========= ========== =========
F-13 46 12. INVENTORIES Inventories at December 31 consisted of the following:
1998 1997 ---- ---- (000 OMITTED) Raw materials $ 38,506 $ 48,938 Work in process 42,515 61,230 Finished goods 171,661 170,879 -------- -------- 252,682 281,047 Excess quantity and obsolescence reserve (26,410) (23,252) -------- -------- $ 226,272 $ 257,795 ========= =========
13. PROPERTY, PLANT, AND EQUIPMENT Property, plant, and equipment at December 31 consisted of the following:
1998 1997 ---- ---- (000 OMITTED) Land $ 5,183 $ 5,309 Buildings and leasehold improvements 45,831 43,261 Assets held for lease 31,132 28,386 Machinery and equipment 62,395 58,218 -------- -------- 144,541 135,174 Less accumulated depreciation and amortization (40,011) (28,329) -------- -------- $ 104,530 $ 106,845 ========= =========
Depreciation and amortization expense for property, plant, and equipment was $17,005,000, $14,072,000 and $9,964,000, respectively, for the years ended December 31, 1998, 1997, and 1996. 14. NOTES RECEIVABLE Notes receivable at December 31 consisted of the following:
1998 1997 ---- ---- (000 OMITTED) Notes receivable, at contract amount $ 47,693 $ 50,359 Less allowance for uncollectible contracts (1,745) (1,269) -------- -------- Notes receivable, net 45,948 49,090 Less current portion (10,548) (6,625) -------- --------
F-14 47 Long-term notes receivable $ 35,400 $ 42,465 ======== ========
Scheduled annual maturities of note receivables at December 31, 1998, were:
1999 2000 2001 2002 2003 THEREAFTER ---- ---- ---- ---- ---- ---------- $10,548,000 $4,618,000 $4,541,000 $4,238,000 $4,061,000 $19,687,000
15. LONG-TERM DEBT Long-term debt at December 31 was follows:
1998 1997 ---- ---- (000 OMITTED) United States bank credit facility $ 137,000 $ 135,000 Canadian bank credit facility - 12,033 Bancomext export loan facility 8,594 6,496 Pre-Export Notes, due to 1999 22,000 34,203 9.02% of Senior Notes, due 2002 100,000 125,000 Senior Secured Discount Notes, due 2002 206,500 - Note payable at 7%, due 2001 371 519 -------- --------- 474,465 313,251 Less current portion (192,742) (44,418) --------- --------- Long-term debt $ 281,723 $ 268,833 ========= =========
The United States bank credit facility was increased in September 1997 to provide up to $170,000,000 for borrowing purposes, of which up to $35,000,000 is available for issuance of standby letters of credit. The facility previously provided $125,000,000 for borrowing purposes. Borrowings are available under the bank credit facility on a revolving basis through October 1, 1999. This facility replaced a former bank credit facility in October 1996 in a refinancing which resulted in an extraordinary charge for the write off of related debt issuance costs of $851,000 ($1,401,000 before taxes). At December 31, 1998, the Company was contingently liable under standby letters of credit in the amount of $10,980,000. The interest rates applicable to borrowings under this agreement are, at the Company's option, indexed to the bank prime rate or the 30-day London Interbank Offered Rate ("LIBOR"), plus appropriate spreads over such indices during the period of each borrowing agreement. The average 30-day LIBOR rate was 6.3% for 1998 and 6.2% at December 31, 1998. The average base rate applicable to borrowings of less than 30 days was 8.25% for 1998 and was 7.75% at December 31, 1998. The agreements also provide for commitment fees. Such spreads and fees can change based on changes in the Company's financial ratios. Interest rate prime rate only. As a result of amendments to this facility, effective, April 15, 1999, the Company will no longer have the option of indexing interest rates based on LIBOR. F-15 48 The Canadian bank credit facility was increased in July 1997 to provide up to Cdn$30,000,000 (equivalent to $19,605,000 at December 31, 1998 exchange rates) for borrowing purposes, of which Cdn$4,000,000 is reserved for certain specific purposes. Borrowings are available under the bank credit facility on a revolving basis through October 1, 1999. The interest rates applicable to borrowings under this agreement are, at the Company's option, indexed to the bank prime rate or the 30-day London Interbank Offered Rate ("LIBOR"), plus appropriate spreads over such indices during the period of each borrowing agreement. The average interest rate was 6.6% for 1998 and 6.75% at December 31, 1998. The agreements also provide for commitment fees. Such spreads and fees can change based on changes in the Company's financial ratios. On December 4, 1997, an indirect subsidiary of the Company completed the placement of $35,000,000 of Guaranteed Pre-Export Notes with international investors. The securities were issued in two Series: Series 1 Notes, of which $13,000,000 were issued, carry a 10.0% coupon and had a maturity date of December 3, 1998; and Series 2 Notes, of which $22,000,000 were issued, carry a 10.5% coupon and have a maturity date of March 31, 1999. This note was fully paid on March 31, 1999. The Company has $125,000,000 of term notes payable which are due in annual installments of $25,000,000 beginning in November 1998 and extending through November 2002. Interest on the notes is at a fixed rate of 9.02%. However, the Company entered into an interest rate swap agreement in November 1994, which effectively changed the interest rate on the notes to LIBOR plus 1.14%. The Company terminated $62,500,00 of the swap in 1995 and the remainder of the swap in 1996 in exchange for an aggregate cash consideration of $9,683,000 which is being amortized as a reduction of interest expense over the remaining life of the notes. As a result, the effective interest rate on the $125,000,000 borrowing is at a fixed rate of 7.3% for 1997 and 1998. For the future years, 1999-2002, the estimated effective interest rate ranges from 7.5% to 7.99%. As a result of amendments to the term notes payable agreement, effective April 15, 1999, interest on the Notes will become payable monthly. Additionally, these amendments, contain changes to certain financial covenants for which the Company would be in violation had they not been changed. The amendment also added a covenant that causes the Company to be in default if the refinancing (as defined) is not consummated by September 30, 1999. In September 1996, The National Bank Foreign Trade S.N.C. ("Bancomext") provided a $20,000,000 credit facility to Autobuses for the purpose of financing export sales. This agreement terminated on March 29, 1998. A new one year agreement, effective May 25, 1998, was entered into which provides a $30,000,000 credit facility at the Mexican Interbank rate. As discussed in Note 2, The Company became contingently liable for payments of interest and principal on the Senior Secured Discount Notes due 2002. The Company's obligation under the Discount Notes is secured by a pledge of the common stock of its wholly owned subsidiary, MCII. The Discount Notes bear interest at an annual rate of 12% through maturity on a zero coupon basis through November 15, 1998 and, thereafter payable in cash. If, however, the Discount Notes do not achieve minimum debt ratings by November 15, 1999, the interest rate increases to 15% from such date through maturity. No interest expense was recorded during 1998 in regards to these notes. The Company's long-term debt agreements include various restrictive covenants, including financial covenants; the most restrictive of which is negative covenants regarding transactions with affiliates and current ratio test. The Company is in compliance with these covenants, or has received waivers and amendments for any violations. At December 31, 1998, $17,791,000 of stockholders' equity was available for the payment of dividends by TMO. Annual maturities of long-term debt in the next five years will approximate:
1999 2000 2001 2002 2003 THEREAFTER ---- ---- ---- ---- ---- ---------- $192,742,000 $25,148,000 $25,075,000 $231,500,000 - -
F-16 49 Interest paid in the years ended December 31, 1998, 1997, and 1996 was $24,858,000, $26,067,000, and $21,362,000, respectively. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosures of the estimated fair value of financial instruments have been determined by the Company using available market information and 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 methodology may have a material affect on the estimated fair value amounts. The carrying values of cash and cash equivalents, receivables, 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 are 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:
1998 1997 ---- ---- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ----- ----- ------ ----- (000 OMITTED) Debt (474,465) (445,284) (313,251) (317,054) Foreign exchange forward contracts - - - (306)
The methods and assumptions used to estimate the fair values of the financial instrument are summarized as follows: Debt - Estimated by discounting the future cash flows using rates currently available for debt of similar terms and maturity. Foreign exchange forward contracts (used for hedging purposes) - Estimated using quoted exchange rates. 17. INCOME TAXES The U.S. operations of MCII are included in the consolidated and other applicable U.S. income tax returns of the Company. Tax returns for the Company's Canadian and Mexican subsidiaries are filed separately in Canada and Mexico. F-17 50 United States, Canadian, and Mexican income before income taxes was as follows:
1998 1997 1996 ---- ---- ---- (000 OMITTED) United States $ 33,163 $ 21,753 $ 21,874 Canada 41,145 23,671 19,477 Mexico (4,437) 14,005 4,797 -------- -------- -------- $ 69,871 $ 59,429 $ 46,148 ======== ======== ========
Income tax expense (benefit) for the years ended December 31 was comprised of the following:
1998 1997 1996 ---- ---- ---- (000 OMITTED) Current: United States: Federal $ 14,661 $ 8,435 $ 11,098 State 3,665 1,806 1,685 Foreign 18,288 9,654 10,503 -------- -------- -------- 36,614 19,895 23,286 -------- -------- -------- Deferred: United States: Federal (3,812) (351) (2,812) State (706) (195) (236) Foreign (813) 1,919 (1,764) -------- -------- -------- (5,331) 1,373 (4,812) -------- -------- -------- Total income tax expense $ 31,283 $ 21,268 $ 18,474 ======== ======== ========
A reconciliation of the provision for income taxes and the amount that would be computed using statutory federal income tax rates on income before income taxes is set forth below:
1998 1997 1996 ---- ---- ---- (000 OMITTED) Computed income tax provision at Statutory rate of 35% $ 24,455 $ 20,800 $ 16,152 State income taxes 1,923 1,057 942 Canadian tax differences 2,601 1,126 1,258 Mexican tax differences 690 (3,970) (1,772) Foreign dividend received - 1,160 - Intangible amortization 1,778 1,425 1,367 Other, net (164) (330) 527 -------- -------- -------- Total income tax expense $ 31,283 $ 21,268 $ 18,474 ======== ======== ========
F-18 51 Deferred income tax assets and liabilities included in the Consolidated Balance Sheet at December 31 consisted of the following:
1998 1997 ---- ---- (000 OMITTED) Deferred tax assets: Property , plant, and equipment $ 6,767 $ 8,315 Pension and other benefits 7,650 6,228 Allowances and reserves for losses 21,500 13,920 Net operating loss carryforward 15,040 15,554 Alternative minimum tax carryforward 7,901 8,065 Deferred state income taxes 1,876 1,431 Inventories 4,062 929 Other 4,938 3,295 ------- ------- Total gross deferred tax assets 69,734 57,737 Valuation allowance (37,711) (33,707) ------- ------- Total gross deferred tax assets 32,023 24,030 ------- ------- Deferred tax liabilities: Property , plant, and equipment (6,996) (8,615) Intangibles (5,964) (4,608) Installment sales (309) (489) Other (3,788) (2,804) ------- ------- Total gross deferred tax liabilities (17,057) (16,516) ------- ------- Net deferred tax asset $ 14,966 $ 7,514 ======== =======
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. A valuation reserve was established against the deferred tax assets in Mexico, primarily loss carryforwards, that might not be realized. The Mexican net operating losses expire between 1999 and 2007. Income taxes paid in the years ended December 31, 1998, 1997, and 1996 were $12,907,000 $10,814,000 and $13,093,000, respectively. F-19 52 The Company's Canadian income tax returns for 1982 through 1992 are currently under review by Revenue Canada. Authorities have proposed imputing additional income related to transactions with a U.S. based subsidiary of the Company. Revenue Canada 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 $23,000,000 plus interest of approximately $47,000,000 and, in addition, the Company may be subject to potential reassessments for the years subsequent to 1992 on the same basis which could result in additional income taxes and interest. These amounts are all before recoveries of U.S. federal income taxes which may be available to offset a portion of any additional taxes paid to Canada as these years are still open for U.S. federal income tax purposes. In accordance with SFAS No. 109, "Accounting for Income Taxes," a portion of any ultimate liability owed as a result of this issue would be treated as an adjustment of Dina's purchase price on acquiring the Company, resulting in an increase of purchase goodwill. (If the ultimate liability were $70,000,000, then approximately $45,000,000 would be a purchase accounting adjustment.) Based on its review of current relevant information, including the advice of outside counsel, the Company is of the opinion that Revenue Canada's arguments are without merit and that any liability from this matter will not be material to its financial condition or results of operations. The Company has 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 and were approximately $81,000,000. 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. F-20 53 18. 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 Postretirement Benefits," which the Company adopted as of December 31, 1998. The components of net periodic pension costs are summarized in the following table:
UNITED STATES CANADA ------------- ------ 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- (000 OMITTED) Service cost benefits earned During the period $ 1,214 $ 1,028 $ 996 $ 485 $ 475 $ 452 Interest cost on projected Benefit obligation 1,494 1,262 1,072 427 435 415 Expected return on plan assets (1,289) (1,154) (1,002) (621) (597) (559) Amortization of prior service cost 510 510 512 3 4 3 Amortization of transition obligation (9) (9) (9) (2) (2) (2) Recognized net actuarial (gain)/loss 100 26 30 - 17 2 FAS 88 settlement - - (165) - - - ------- ------- ------- ------- ------- ------- Net pension cost $ 2,020 $ 1,663 $ 1,434 $ 292 $ 332 $ 311 ======= ======= ======= ======= ======= =======
The following tables summarize pension benefit obligations, plan assets and funded status as of December 31:
CHANGE IN PENSION BENEFIT UNITED STATES CANADA ------------- ------ OBLIGATION: 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- (000 OMITTED) Benefit obligation as of January 1 $ 19,559 $ 15,943 $ 12,329 $ 6,407 $ 6,361 $ 5,607 Service cost 1,214 1,028 996 485 475 452 Interest cost 1,494 1,262 1,072 427 435 415 Plan participants' contributions - - - - - - Amendments - - - - - - Actuarial (gain)/loss 1,933 1,646 1,959 495 35 478 Benefits paid (360) (320) (413) (280) (623) (563) Foreign currency rate change - - - (453) (276) (28) -------- -------- -------- ------- ------ ------- Benefit obligation as of December 31 $ 23,840 $ 19,559 $ 15,943 $ 7,081 $ 6,407 $ 6,361 ======== ======== ======== ======= ======= =======
F-21 54
CHANGE IN PLAN ASSETS: UNITED STATES CANADA ------------- ------ 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- (000 OMITTED) Fair value of plan assets at beginning of year $ 15,412 $ 12,863 $ 11,790 $ 7,205 $ 6,713 $ 5,835 Actual return on plan assets 3,938 2,820 1,416 831 969 1,060 Employer contribution 241 49 70 510 451 411 Plan participants' contributions - - - - - - Benefits paid (360) (320) (413) (280) (623) (563) Foreign currency rate change - - - (503) (305) (30) -------- -------- -------- ------- ------- ------- Fair value of plan assets at end of year $ 19,231 $ 15,412 $ 12,863 $ 7,763 $ 7,205 $ 6,713 ======== ======== ======== ======= ======= =======
FUNDED STATUS: UNITED STATES CANADA ------------- ------ 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- (000 OMITTED) Funded status at end of year $ (4,609) $ (4,147) $ (3,220) $ 682 $ 798 $ 352 Unrecognized transition obligation (36) (45) (54) 9 8 7 Unrecognized net actuarial (gain)/loss (812) 4 (67) 256 (31) 327 Unrecognized prior service cost 691 1,201 1,711 32 38 43 -------- -------- -------- ----- ----- ----- Prepaid (accrued) benefit cost $ (4,766) $ (2,987) $(1,630) $ 979 $ 813 $ 729 ========= ======== ======== ===== ===== =====
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.
AMOUNTS RECOGNIZED IN THE UNITED STATES CANADA STATEMENT OF FINANCIAL POSITION ------------- ------ CONSIST OF: 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- (000 OMITTED) Prepaid benefit cost $ 38 $ 9 $ - N/A N/A N/A Accrued benefit liability (6,290) (5,044) (3,997) N/A N/A N/A Intangible asset 691 1,203 1,716 N/A N/A N/A Accumulated other comprehensive income (pretax) 794 845 651 N/A N/A N/A -------- -------- -------- --- --- --- Net amount recognized $ (4,767) $ (2,987) $ (1,630) N/A N/A N/A ========= ========= ========= === === ===
F-22 55 Weighted average assumptions used were:
UNITED STATES CANADA ------------- ------ 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- Discount rate for obligation 6.8% 7.0% 7.5% 6.8% 7.0% 7.5% Rate of increase in compensation 4.0% 4.0% 5.0% 4.0% 4.0% 4.5% Long-term rate of return on assets 9.5% 9.5% 9.5% 9.5% 9.5% 9.5%
The Company also has defined contribution plans for certain employees. Company contributions in the years ended December 31, 1998, 1997 and 1996 were $1,307,000, $623,000, and $783,000 in the U.S. and $1,147,000, $950,000 and $846,000 in Canada, respectively. 19. MEXICAN EMPLOYEE BENEFITS Net periodic pension cost for the three years ended December 31 included the following components:
1998 1997 1996 ---- ---- ---- (000 OMITTED) Service cost benefits earned During the period $ 57 $ 96 $ 123 Interest cost on projected Benefit obligation 456 574 474 Expected return on plan assets (666) (808) (644) Net amortization and deferral (51) (66) 1 ------ ------ ----- Net pension cost $ (204) $ (204) $ (46) ======= ======= ------
The following tables summarize pension benefit obligations, plan assets and funded status as of December 31:
CHANGE IN PENSION BENEFIT 1998 1997 1996 OBLIGATION: ---- ---- ---- (000 OMITTED) Benefit obligation as of January 1 $ 2,845 $ 2,264 $ 1,809 Service cost 57 96 123 Interest cost 456 574 474 Plan participants' contributions - - Amendments - - Actuarial (gain)/loss (612) - (94) Benefits paid (17) (22) Foreign currency rate change (517) (67) (47) ------- ------- ----- Benefit obligation as of December 31 $ 2,212 $ 2,845 $ 2,265 ======= ======= -------
F-23 56
CHANGE IN PLAN ASSETS: 1998 1997 1996 ---- ---- ---- (000 OMITTED) Fair value of plan assets at Beginning of year $ 3,700 $ 3,001 $ 1,878 Actuarial (gain)/loss in rate (668) - 551 Actual return on plan assets 666 809 644 Employer contribution - - Plan participants' contributions - - Benefits paid (17) (22) Foreign currency rate change (682) (88) (72) ------- ------- ------- Fair value of plan assets at end of year $ 2,999 $ 3,700 $ 3,001 ======= ======= ------- Funded status: 1998 1997 1996 ---- ---- ---- (000 OMITTED) Funded status at end of year $ 787 $ 855 $ 85 Unrecognized transition obligation - - Unrecognized net actuarial (gain)/loss (802) (1,041) 203 Unrecognized prior service cost 52 - (635) ----- ------ ------ Prepaid (accrued) benefit cost $ 37 $ (186) $ (347) Weighted average assumptions used were: 1998 1997 1996 ---- ---- ---- Discount rate for obligation 24.0% 25.4% 24.0% Rate of increase in compensation 18.6% 20.0% 21.0% Long-term rate of return on assets 25.7% 27.2% 32.0%
F-24 57 20. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company has defined benefit postretirement 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 Postretirement Benefits," which the company adopted as of December 31, 1998. The net periodic postretirement benefit cost for the years ended December 31 included the following components:
UNITED STATES CANADA ------------- ------ 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- (000 OMITTED) Service cost $ 563 $ 531 $ 494 $ 21 $ 24 $ 21 Interest cost 475 453 425 18 25 24 Expected return on plan assets - - - - - - Amortization of prior service cost (3) (3) (3) - - - Amortization of transition obligation - - - - - - Recognized net actuarial (gain)/loss (69) (5) - 2 2 (68) Curtailment (gain)/loss - - (665) - - - ----- ----- ----- ---- ---- ---- Net periodic benefit cost $ 966 $ 976 $ 183 $ 39 $ 51 $ 47 ===== ===== ===== ==== ==== ====
The following tables summarize postretirement benefit obligations and funded status as of December 31:
CHANGE IN POSTRETIREMENT BENEFIT UNITED STATES CANADA _ OBLIGATION: ------------- ---- -------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- (000 OMITTED) Benefit obligation as of January 1 $ 7,574 $ 6,066 $ 6,042 $ 278 $ 289 $ 264 Service cost 563 531 494 21 24 21 Interest cost 475 453 425 18 25 24 Plan participants' contributions - - - - - - Amendments (3) (3) (665) - - - Actuarial (gain)/loss (457) 583 (441) - (37) 2 Benefits paid (69) (56) 211 (25) (11) (21) Foreign currency rate change - - - (18) (12) (1) ------- -------- ------- ----- ----- ----- Benefit obligation as of December 31 $ 8,083 $ 7,574 $ 6,066 $ 274 $ 278 $ 289 ======= ======= ======= ===== ===== =====
F-25 58
FUNDED STATUS: UNITED STATES CANADA ------------- ------ 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- (000 OMITTED) Funded status at end of year $ (8,083) $ (7,574) $ (6,066) $ (274) $ (278) $ (289) Unrecognized transition obligation - - - - - - Unrecognized net actuarial (gain)/loss (368) 23 (505) (21) (25) - Unrecognized prior service cost (15) (18) (21) - - - --------- --------- --------- -------- ------- ------- Prepaid (accrued) benefit cost $ (8,466) $ (7,569) $ (6,592) $ (295) $ (303) $ (289) ========= ========= ========= ======= ======= =======
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation ("APBO") for the Company's U.S. operations was 9.0% as of December 1998, 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:
ONE PERCENTAGE ONE PERCENTAGE (THOUSANDS) POINT INCREASE POINT DECREASE - --------------------------------------------------------------------------------------------------------------- Effect on total of service and interest cost components 261 (199) Effect on postretirement benefit obligation 1,945 (1,530) - --------------------------------------------------------------------------------------------------------
The postretirement benefit obligation of the Company's Canadian operations does not contain health care component. 21. 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, 1998, future minimum rental payments with respect to noncancellable operating leases with terms in excess of one year were as follows:
1999 2000 2001 2002 2003 THEREAFTER ---- ---- ---- ---- ---- ---------- $2,551,686 $2,340,937 $1,809,653 $1,451,543 $1,303,316 $5,439,363
Total rental expenses for the years ended December 31, 1998, 1997, and 1996 were $4,068,000 , $3,384,000 and $3,440,000, respectively. F-26 59 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company enters into foreign exchange forward contracts to hedge certain firm and anticipated purchase commitments which are settled in Canadian dollars. These contracts are purchased to reduce the impact of Canadian dollar currency fluctuations on operating results. The Company does not engage in Canadian dollar currency speculation. The contracts do not subject the Company to risk due to exchange rate movements because gains and losses on the contract are offset by gains and losses on the materials being purchased. At December 31, 1998 the Company had no Canadian dollar exchange forward contract outstanding. At December 31, 1997, the Company had approximately $7,558,000 of Canadian dollar exchange forward contracts outstanding. The Company's theoretical risk in these transactions is the cost of replacing, at current rates, these contracts in the event of default by the other party to the contract. Management believes the risk of incurring such losses is remote because the contracts are entered into with major financial institutions. As an adjunct to its coach business, the Company has entered into repurchase and first loss agreements with certain companies which 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, 1998 and 1997 were approximately $21,000,000 and $23,000,000, respectively. 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 $6,700,000 and $6,600,000 as of December 31, 1998 and 1997, respectively. The Company has experienced no material losses in respect to such obligations and losses under existing agreements are not expected to have a material affect on the Company's financial statements. 22. LITIGATION Certain entities of the Company 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, 1998 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. 23. COMMITMENTS AND CONTINGENCIES As a part of the Company's marketing strategy for the 1997 introduction of the new EL model intercity coach, the "Renaissance", it has entered into trade-in agreements, in 1996, whereby certain customers may trade-in, at predetermined values, their recently purchased D or DL model coaches when purchasing a new EL 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, 1998 the Company's commitment under this program was $14,525,000. The Company has reserved $600,000 for the estimated net cost to the Company. F-27 60 During 1996, the Company completed a research and development project in connection with the development of the E coach, which had been undertaken, with the cooperation of the 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, 1998, the total amount of such contributions was $6,891,000 and the Company had met the employee ratio commitment ($1,479,000 was recorded as income in the 1996 Statement of Consolidated Income). 24. NONCONSOLIDATED AFFILIATE In 1997 a new company was formed, MCII Financial Services, Inc. ("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 $210,000 for 1998. 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 1998, MFS purchased additional loans of $35,519,000 and leases of $3,216,000 from the Company. 25. RELATED PARTY TRANSACTIONS Related party transactions for the years ended December 31 were as follows:
1998 1997 1996 ---- ---- ---- (000 OMITTED) Purchases from affiliated companies: Goods $ 3,253 $ 15,044 $ 4,815 Services 7,150 21,587 8,229 Allocated interest expense 3,234 6,978 3,172 ------- -------- -------- $ 13,637 $ 43,609 $ 16,216 ======== ======== ======== Sales to affiliated companies: Goods $ -- $ 2,973 $ 968 Services 2,640 7,384 4,443 Allocated interest income 11,989 8,376 1,720 ------- -------- -------- $ 14,629 $ 18,733 $ 7,131 ======== ======== ======= Charges for MFS Management Services $ 931 N/A N/A ======== ======== =======
F-28 61 Charges for Dina management services $ 1,000 $ 1,000 $ 1,000 ======= ======= ======= -------------------------- Related party balances included in the December 31 balance sheet were:
1998 1997 ---- ---- (000 OMITTED) Affiliated companies receivables (payables) - net $ 0 $ 16,293 === ========
Dina's interest income and expense is allocated to its subsidiaries based on relative monthly intercompany balances. During 1997, Autobuses put 240 transit bus units, with a sales value of $9,340,000, out on lease to Transportes y Services Terrestres G S.A. de C.V. ("TSTG"). TSTG is controlled by members of the group consisting of the indirect controlling shareholders of the Company. 26. BUSINESS SEGMENT AND GEOGRAPHIC DATA BUSINESS SEGMENT DATA The Company has three reporting segments, US and Canadian Coach and Support, US and Canadian Replacements Parts, and Mexican Operations. 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 Mexican segment manufactures Motor Coaches and Motor Coach components, and distributes replacement parts. The reportable segments are managed separately because each business has differing customer or manufacturing 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). F-29 62 Data for these three segments of the years ending December 31 are as follows:
1998 1997 1996 ---- ---- ---- (000 OMITTED) Revenues: United States and Canadian Operations Coach and Support $ 677,661 $ 503,635 $ 499,611 Replacement Parts 172,815 190,178 161,682 Mexican Operations 81,307 45,970 5,791 --------- --------- --------- $ 931,783 $ 739,783 $ 667,084 ========= ========= ========= Operating income: United States and Canadian Operations Coach and Support $ 70,114 $ 46,785 $ 39,865 Replacement Parts 21,497 15,754 14,788 Mexican Operations (9,740) 15,914 5,180 --------- -------- -------- $ 81,871 $ 78,453 $ 59,833 ========= ======== ======== Depreciation and amortization: United States and Canadian Operations Coach and Support $ 15,037 $ 13,944 $ 12,644 Replacement Parts 4,021 4,739 4,014 Mexican Operations 5,761 3,352 960 -------- -------- -------- $ 24,819 $ 22,035 $ 17,618 ======== ======== ======== Capital expenditures: United States and Canadian Operations Coach and Support $ 8,384 $ 12,361 $ 11,749 Replacement Parts 2,832 1,423 1,229 Mexican Operations 2,262 18,312 12,631 -------- -------- -------- $ 13,478 $ 32,096 $ 25,609 ======== ======== ======== Assets: United States and Canadian Operations Coach and Support $560,978 $522,817 Replacement Parts 174,455 178,788 Mexican Operations $ 70,721 $119,068 -------- -------- $806,154 $820,673 ======== ========
There are no material intersegment transactions. F-30 63 Major customers are generally defined as those which individually account for more that 10% of the Company's revenue. For the years ended 1998, 1997, and 1996, Greyhound Lines, Inc. ("GLI"), accounted for 8.0%, 9.5%, and 11.1%, respectively, of the Company's consolidated revenues. In January 1998, GLI and MCII signed a 10-year long-term supply agreement until the year 2007. For the years-ended 1998, 1997 and 1996, sales to Coach USA, Inc. accounted for 8.0%, 7.6% and 0.9%, respectively, of the Company's consolidated revenues. Effective June 9th, 1997, CUI and MCII signed an agreement pursuant to which CUI agreed that MCII would be the primary supplier of CUI's annual new coach requirements through 1999. The company also has a long-term agreement to purchase Coach part "kits" from Marcopolo for its Viaggio coaches manufactured in Mexico. The agreement requires the company to pay a royalty fee based on the value of certain "kit" parts and components purchased from suppliers other than Marcopolo. The royalty fee ranges from 2.7% to 3.5% of the "kit" value. Royalty fees paid in 1998 and 1997 were $291,000 and $1,114,000 respectively. GEOGRAPHICAL DATA
1998 1997 1996 ---- ---- ---- (000 OMITTED) Revenues: United States $ 770,351 $ 610,915 $ 579,136 Canada 80,125 82,898 82,157 Mexico 81,307 45,970 5,791 --------- --------- --------- $ 931,783 $ 739,783 $ 667,084 ========= ========= ========= Long-Lived Assets: United States $ 229,758 $ 222,501 Canada 101,669 110,965 Mexico 28,319 39,468 --------- --------- $ 359,746 $ 372,934 ========= =========
F-31 64 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION ------------ ----------- 3.1* Restated Certificate of Incorporation of MCII Holdings 3.2* Bylaws of MCII Holdings 4.1* $125,000,000 Credit Agreement, dated as of September 30, 1996, among Transportation Manufacturing Operations, Inc. as the Borrower, the Lenders Parties thereto and NBD Bank as Administrative Agent. 4.2 Amendment No. 1 dated December 17, 1996 to $125,000,000 Credit Agreement dated as of September 30, 1996. 4.3** $125,000,000 9.02% Senior Notes Due November 15, 2002 Note Agreement, as amended by letter agreement, dated April 1995. 4.4* Form of Amendment to $125,000,000 9.02% Senior Notes Due November 15, 2002 Note Agreement as executed by the requisite holders of the Notes. 4.5 Intercreditor Agreement, dated as of September 30, 1996, by and among the Lenders under the $125,000,000 Credit Agreement dated as of September 30, 1996, NBD Bank, and the holders of the 9.02% Senior Notes due 2002 issued by Transportation Manufacturing Operations, Inc. 4.6 Indenture, dated as of April 30, 1996, between Grupo Dina and IBJ Schroder Bank & Trust Company, as Trustee, relating to the Notes, including the form of Old Note and New Note, filed as Exhibit 2.4 to Grupo Dina's Annual Report on Form 20-F for the year ended December 31, 1995. 10.1** Bus Purchase Requirements Agreement by and among GLI Operating Company, Greyhound Lines, Inc., Transportation Manufacturing Corporation and Motor Coach Industries, Inc., as amended by: a letter agreement dated June 15, 1987 from GLI Holding Company to The Greyhound Corporation; Amendment to Bus Purchase Requirements Agreement; entered into as of June 30, 1988 by and among GLI Operating Company, Transportation Leasing Co., Transportation Manufacturing Corporation and Motor Coach Industries, Inc.; Term Sheet/Agreement in Principle dated July 13, 1988 among GLI Holding Company and The Greyhound Corporation; Claims Treatment Agreement made and entered into as of August, 1991 among Greyhound Lines, Inc., the other Debtors signatory thereto and The Greyhound Corporation; and Amendment Number 2 to Bus Purchase Requirements Agreement executed as of December 21, 1994 by Greyhound Lines, Inc., Transportation Leasing Co., Motor Coach Industries, Inc. and Transportation Manufacturing Corporation. 10.2* In Re: The Flxible Corporation, United State Bankruptcy Court, Southern District of Ohio, Eastern Division, Order Authorizing and Approving Sale of Debtor's Assets Pursuant to Sections 363 and 365 of the Bankruptcy Code. 10.3** Parts Purchase and Supply Agreement entered into as of May 1, 1994 by and between Greyhound Lines, Inc. and Universal Coach Parts, Inc., as amended by Amendment No. 1 entered into as of May 1, 1994. 65 10.4** Limited Recourse Chattel Paper Purchase Agreement dated as of March 31, 1994 between MCI Acceptance Corp. and The CIT Group/Equipment Financing, Inc. and related Guaranty dated as of March 31, 1994; and Amendment No. 1 dated May 15, 1995 and related Guaranty dated as of May 15, 1995. 2 66 10.5*** Registration Agreement, dated June 3, 1996, among Grupo Dina, MCII Holdings and Salomon Brothers, Inc., Alliance Capital Management Corporation and John Hancock Mutual Life Insurance Company. 10.6* Coach Purchase Agreement, dated August 1, 1995, between Dina Autobuses, S.A. de C.V. and Hausman Bus Sales, Inc. 10.7* Employment Agreement, dated as of September 30, 1996, between Universal Coach Parts, Inc. and Jerry W Bost. 10.8* Employment Agreement, dated as of September 30, 1996, between Transportation Manufacturing Operations, Inc. and James P. Bernacchi. 12 Computation of ratio of earnings to fixed charges. 21 List of Subsidiaries of MCII Holdings. 27 EDGAR Financial Data Schedule. * Previously filed on Form F-1/S-1, Registration No. 333-08843, and incorporated herein by reference. ** Previously filed on Form 20F for the year ended December 31, 1994 and incorporated herein by reference. *** Previously filed on Form 20F for the year ended December 31, 1995 and incorporated herein by reference. EX-4.2 2 AMENDMENT #1 TO CREDIT AGREEMENT DATED 12/17/96 1 EX 4.2 EXECUTION COPY TRANSPORTATION MANUFACTURING OPERATIONS, INC. AMENDMENT NO. 1 TO CREDIT AGREEMENT DATED AS OF SEPTEMBER 30, 1996 This Amendment No. 1 (this "Amendment") is dated as of December 17, 1996 and entered into by and between TRANSPORTATION MANUFACTURING OPERATIONS, INC. (the "Borrower") and NBD BANK (the "Bank") and is made with reference to the Credit Agreement dated as of September 30, 1996, by and between the Borrower and the Bank (the "Credit Agreement"); the Bank has entered into the Credit Agreement and this Amendment in its capacities as Administrative Agent, Swing Line Bank, Issuing Lender and sole Lender thereunder. Capitalized terms used herein without definition shall have the meanings ascribed thereto in the Credit Agreement. RECITALS: The Borrower and the Bank desire to amend the Credit Agreement to facilitate the primary syndication of the Credit Agreement, which will benefit both the Borrower and the Bank; ACCORDINGLY, in consideration of the premises and the agreements and provisions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower and the Bank agree as follows: Section 1. AMENDMENT TO CREDIT AGREEMENT. 1.1 Section 1.01 of the Credit Agreement is amended by amending and restating the definition of "Majority Lenders" in its entirety as follows: "Majority Lenders" means at any time the Lenders having at least 66-2/3% of the Commitments, or, if the Commitments shall then have been terminated, Lenders holding at least 66-2/3% of the then aggregate unpaid principal amount of the Advances held by Lenders (provided that, for purposes hereof, neither the Borrower, nor any of its Affiliates, if a Lender, shall be included in (i) the Lenders holding such amount of the Advances or having such amount of the Commitments or (ii) determining the aggregate unpaid principal amount of the Advances or the total Commitments; and provided, further, no Lender which shall have failed to fund its pro rata share of any Advance requested by the Borrower or any Swing Line Loan as requested by the Administrative Agent which such Lender is obligated to fund under the terms of this Agreement shall be included in (i) the Lenders 2 holding such amount of the Advances or having such amount of the Commitments or (ii) determining the aggregate unpaid principal amount of the Advances or the total Commitments for so long as such failure has not been cured). 1.2 Section 2.03(a) of the Credit Agreement is amended by adding thereto following clause (b) thereof and before the word "exceed" the phrase "plus (c) the amount of the Swing Line Bank's then outstanding Letter of Credit Exposure", 1.3 Section 2.07 of the Credit Agreement is amended by deleting the references to "Section 8.04(b)" in subsections (b) and (c) thereof and substituting therefor in each case a reference to "Section 8.04(D)", 1.4 Section 5.02(i) of the Credit Agreement is amended by amending and restating clause (i) thereof in its entirety as follows: (i) the Borrower may make the Dina Distribution, provided that (a) any portion of the Dina Distribution not paid on the Effective Date shall be paid in one or more payments on or before March 31, 1997, (b) on the date of each such payment, no Event of Default or Potential Event of Default shall have occurred or be continuing, or would result therefrom, and (c) prior to the date of each such payment after the Effective Date, the Borrower shall deliver to the Administrative Agent a financial condition certificate signed by the chief financial officer or treasurer of the Borrower certifying that the Borrower is Solvent after giving effect to such payment and attaching thereto financial projections and a pro forma "fair value" balance sheet of the Borrower and its Subsidiaries supporting such certification, which certificate and attachments shall be in form and substance satisfactory to each of the Lenders; and 1.5 Section 5.02(l) of the Credit Agreement is amended by deleting from clause (g) thereof the words "and other operating arrangements". 1.6 Section 6.01 of the Credit Agreement is amended by adding in clause (ii) of the remedial provisions thereof after the words "Administrative Agent" and before the word "may" the phrase "with the consent of Majority Lenders". 1.7 Section 7.12 of the Credit Agreement is amended by deleting the words "Loan Documents" from the first and third sentences thereof and substituting therefor in each case the word "Guaranties" and by deleting the words "Loan Document" from the second sentence thereof and substituting therefor the word "Guaranty". 1.8 Section 8.04 of the Credit Agreement is amended by redesignating subsection (D) thereof as subsection (E) and by adding a new subsection (D) thereto to read as follows: -2- 3 (D) Funding Indemnification. If any payment of a Eurodollar Rate Advance occurs on a date which is not the last day of the applicable Interest Period, whether because of acceleration, prepayment, or otherwise, or a Eurodollar Rate Advance is not made on the date specified by the Borrower for any reason other than default by the Lenders, the Borrower shall indemnify each Lender for any loss, cost or expense incurred by it resulting therefrom, including, without limitation, any loss, cost or expense in liquidating or employing deposits acquired to fund or maintain the Eurodollar Rate Advance. Section 2. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective as of the date hereof when, and only when, the Bank shall have received a counterpart of this Amendment executed by the Borrower and shall have delivered to the Borrower a counterpart of this Amendment executed by the Bank and the Bank shall have received a counterpart of the Consent attached hereto executed by the Subsidiary Guarantors. Section 3. REPRESENTATIONS AND WARRANTIES OR BORROWER. To induce the Bank to enter into this Amendment, to amend the Credit Agreement as provided herein and to effect the primary syndication contemplated by the Credit Agreement, the Borrower hereby represents and warrants that: (a) The Borrower has full power, authority and legal right to execute and deliver this Amendment and to perform the Credit Agreement as amended hereby, and each of the Subsidiary Guarantors has full power, authority and legal right to execute and deliver the Consent attached hereto (the "Consent"). The Borrower has duly executed and delivered this Amendment, and each of the Subsidiary Guarantors has duly executed and delivered the Consent. (b) This Amendment and the Credit Agreement as amended hereby are the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, and the Consent is the legal, valid and binding obligation of each of the Subsidiary Guarantors, enforceable against each such Subsidiary Guarantor in accordance with its terms, in each case as enforceability may be subject to the effect of applicable bankruptcy, insolvency, arrangement, moratorium and other similar laws affecting creditors' rights generally and to the application of general principles of equity. (c) No event has occurred and is continuing or will result from the execution and delivery of this Amendment that constitutes an Event of Default or Potential Event of Default. -3- 4 Section 4. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT. (a) Upon the effectiveness of Section 1 hereof, on and after the date hereof, each reference in the Credit Agreement to "this Credit Agreement," "hereunder," "hereof" "herein" or words of like import referring to the Credit Agreement, and each reference in the other Loan Documents to the "Credit Agreement," "thereunder," "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement as amended hereby. (b) The Credit Agreement, as amended hereby, and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed. (c) Except as expressly provided herein, the execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Administrative Agent, the Lenders or any Issuing Lender, nor constitute a waiver of any provision of the Credit Agreement or any other documents, instruments and agreements executed and/or delivered in connection therewith. Section 5. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the internal laws (as opposed to the conflict of law provisions) of the State of Illinois. Section 6. HEADINGS. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. Section 7. COUNTERPARTS. This Amendment may be executed by one or more of the parties to the Amendment on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same documents. IN WITNESS WHEREOF, this Amendment has duly executed and delivered on the date first above written. TRANSPORTATION MANUFACTURING OPERATIONS, INC. By: /s/ Albert J. Abram ----------------------------- Name: Albert J. Abram Title: Treasurer -4- 5 NBD BANK, as Administrative Agent, Swing Line Bank, Issuing Lender and Lender By: /s/ James B. Junior ------------------------------ Name: James B. Junior Title: Vice President -5- 6 CONSENT Dated as of December 17, 1996 Each of the undersigned, as Guarantor under the Subsidiary Guaranty dated as of September 30, 1996 (the "Guaranty") in favor of the Administrative Agent for the benefit of the Lenders parties to the Credit Agreement referred to in the foregoing Amendment, hereby consents to the Amendment and hereby confirms and agrees that the Guaranty is, and shall continue to be, in full force and effect and is hereby ratified and confirmed in all respects except that, upon the effectiveness of, and on and after the date of, the Amendment, each reference in the Guaranty to the "Credit Agreement," "thereunder," "thereof" or words of like import shall mean and be a reference to the Credit Agreement as amended by the Amendment. BUSLEASE, INC. By: /s/ Albert J. Abram ---------------------------- Name: Albert J. Abram Title: Treasurer HAUSMAN BUS SALES, INC. By: /s/ Albert J. Abram ---------------------------- Name: Albert J. Abram Title: Treasurer MCI ACCEPTANCE CORP. By: /s/ Albert J. Abram ---------------------------- Name: Albert J. Abram Title: Treasurer MOTOR COACH INDUSTRIES, INC. By: /s/ Albert J. Abram ---------------------------- Name: Albert J. Abram Title: Treasurer -6- 7 MOTOR COACH INDUSTRIES-CHINA, INC. By: /s/ Albert J. Abram ---------------------------- Name: Albert J. Abram Title: Treasurer TRANSIT BUS INTERNATIONAL, INC. By: /s/ Albert J. Abram ---------------------------- Name: Albert J. Abram Title: Treasurer CUSTOM ASSETS CORP. By: /s/ Albert J. Abram ---------------------------- Name: Albert J. Abram Title: Treasurer TRANSPORT TECHNOLOGY CORPORATION By: /s/ Albert J. Abram ---------------------------- Name: Albert J. Abram Title: Treasurer UNIVERSAL COACH PARTS, INC. By: /s/ Albert J. Abram ---------------------------- Name: Albert J. Abram Title: Treasurer -7- EX-4.5 3 AMENDMENT #4 TO CREDIT AGREEMENT 1 EXHIBIT 4.5 TRANSPORTATION MANUFACTURING OPERATIONS, INC. AMENDMENT NO. 4 to CREDIT AGREEMENT Dated as of June 26, 1998 This Amendment No. 4 to Credit Agreement (this "Amendment") is dated as of June 26,1998 and entered into by and among TRANSPORTATION MANUFACTURING OPERATIONS, INC., a Delaware corporation (the "Borrower"), the banks set forth on the signature pages hereof (collectively, the "Lenders" and individually, a "Lender"), and THE FIRST NATIONAL BANK OF CHICAGO, as Administrative Agent for the Lenders, RECITALS: A. The Borrower, certain Subsidiaries of the Borrower, as guarantors (the "Guarantors"), the Lenders and the Administrative Agent are parties to that certain Credit Agreement dated as of September 30, 1996, as amended (the "Credit Agreement"). Capitalized terms used herein and not otherwise defined herein shall have the meanings attributed to such terms in the Credit Agreement. B. The parties hereto have agreed to amend the Credit Agreement on the terms and conditions set forth herein. ACCORDINGLY, in consideration of the premises and the agreements and provisions contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1. AMENDMENT TO CREDIT AGREEMENT. Effective as of the Amendment Effective Date (as defined below) and subject to the satisfaction of the conditions precedent set forth in Section 3 below, the Credit Agreement is hereby amended as follows: (a) Section 5.01(a)(iii) of the Credit Agreement is hereby amended by adding after the words "subdivisions (i) and (ii) above," the words "and within 30 days after the last day of each month that is not also the last day of a fiscal quarter," and by deleting therefrom the reference to "Sections (a)(ii), (a)(vii), c(iv), and (d)(vi) of Section 5.02" and substituting therefor a reference to "Sections (a)(ii),(a)(vii),(c)(iv), (d)(vi), (j)(ii) and (l) of Section 5.02". 2 (b) Section 5.01 (a)(iv) of the Credit Agreement is hereby amended by adding thereto, after the words "subdivision (ii) above," the words "and, in the case of clause (c) below, pursuant to subdivision (i) above," and by amending clause (c) thereof in its entirety to read as follows: and (c) stating that based on their audit examination nothing has come to their attention that causes them to believe that the matters set forth in the Compliance Certificate delivered pursuant to subdivision (iii) above for the applicable fiscal year are not stated in accordance with the terms of this Agreement and providing an agreed upon procedure report on the matters set forth in the Compliance Certificate delivered pursuant to subdivision (iii) above for the applicable fiscal quarter; (c) Section 5.01(a) of the Credit Agreement is further amended hereby by redesignating clause (xv) thereof as clause (xvi) and adding a new clause (xv) thereto to read as follows: (xv) promptly upon receipt thereof, copies of all management letters received by the Borrower, Dina or any other consolidated Subsidiary of Dina from its independent certified public accountants; and (d) Section 5.02(l) of the Credit Agreement is hereby amended by adding at the end of the last sentence thereof the following: , which amount may be in addition to the $20,000,000 of inventory permitted by clause (i) above. The parties understand and agree that the amendment set forth in this Section 1(d) is a clarification of Section 5.02(l) and not a substantive change thereto. (e) Exhibit G of the Credit Agreement is hereby amended by adding at the end of Schedule 1 thereof the following: 9. Contingent Obligations, Section 5.02(d)(i) a. Aggregate outstanding amount of performance and warranty bonds (other than in connection with municipal transit authorities)..........$___________ b. Maximum amount of such bonds permitted ......$ 25,000,000 C. Aggregate outstanding amount of performance and warranty bonds in connection with municipal transit authorities................$___________ d. Maximum amount of such bonds permitted ......$180,000,000
-2- 3 10. Restricted Junior Payments, Section 5.02(j) a. Cumulative dividends and distributions (other than the Dina Distribution) since September 30, 1996 ................. $__________ b. 50% of cumulative Consolidated Net Income since December 31, 1996 ......................................... $__________ 11. Transaction with Affiliates, Section 5.02(l) a. Aggregate balance held in cash management accounts ........................................................ $__________ b. Maximum balance permitted ....................................... $ 5,000,000 c. Management fees paid to Dina during most recent calendar year ................................................... $__________ d. Maximum management fees permitted ............................... $ 500,000 e. Reimbursement of Dina expenses during most recent calendar year............................................. $__________ f. Maximum reimbursements permitted................................. $ 500,000 g. Inventory purchased from Dina and its Affiliates ................ $__________ h. Maximum amount of such inventory permitted ...................... $20,000,000 i Advance payments and letters of credit for purchase of inventory from Dina and its Affiliates .............. $__________ j. Maximum amount of such advance payments and letters of credit permitted ................................. $ 7,500,000
Section 2. WAIVER. Effective as of the Amendment Effective Date and subject to the satisfaction of the conditions precedent set forth in Section 3 below, the Lenders hereby waive any Event of Default or Potential Event of Default that may have occurred prior to the effectiveness of this Amendment as a result of the Borrower's failure to comply with the $7,500,000 limitation contained in the last sentence of Section 5.02(1) of the Credit Agreement in connection with certain transactions that have been disclosed to the Lenders in writing, provided that such waiver shall be effective only until August 31, 1998. -3- 4 Section 3. CONDITIONS TO EFFECTIVENESS. This Amendment shall become effective as of the date hereof (the"Amendment Effective Date") upon the satisfaction of each of the following conditions: (a) The Administrative Agent shall have received counterparts of this Amendment duly executed by the Borrower and the Majority Lenders and of the Consent attached hereto duly executed by the Guarantors. (b) The Administrative Agent and the Arranger shall have received a fee letter satisfactory to them and duly executed by the Borrower, and the Borrower shall have paid to the Arranger the fee specified therein in immediately available funds. (c) The Administrative Agent shall have received from the Borrower in immediately available funds, for the account of each Lender that shall have executed this Amendment prior to 5:00 p.m. on June 26, 1998, a fee in an amount equal to 0.125% of such Lender's Commitment in effect on the date hereof. (d) At the time of the effectiveness of this Amendment, and after giving effect thereto, no Event of Default or Potential Event of Default shall have occurred and be continuing. Section 4. REPRESENTATIONS AND WARRANTIES OF BORROWER. To induce the Lenders to enter into this Amendment and to amend the Credit Agreement as provided herein, the Borrower hereby represents and warrants that: (a) The Borrower has full power, authority and legal right to execute, deliver and perform this Amendment and the Credit Agreement as amended hereby and has duly executed and delivered this Amendment. (b) This Amendment and the Credit Agreement as amended hereby are the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, in each case as enforceability may be subject to the effect of applicable bankruptcy, insolvency, arrangement, moratorium and other similar laws affecting creditors' rights generally and to the application of general principles of equity. (c) The execution, delivery and performance by the Borrower of this Amendment and the Credit Agreement as amended hereby do not require any governmental registrations or filings or approvals and do not and will not violate or contravene any law or any order of any court or governmental agency or any indenture, agreement or other instrument, including, without limitation, with respect to the Senior Notes, to which the Borrower or any of the Guarantors is party or by which any of them or any of their respective properties may be bound. -4- 5 (d) At the time of effectiveness of this Amendment, and after giving effect thereto, no Event of Default or Potential Event of Default has occurred and is continuing. Section 5. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND OTHER LOAN DOCUMENTS. (a) From and after the Amendment Effective Date, each reference in any Loan Document to the Credit Agreement shall mean and be a reference to the Credit Agreement as amended hereby. (b) The Credit Agreement, as amended hereby, and all other Loan Documents shall remain in full force and effect, and are hereby ratified and confirmed, (c) Except as expressly provided herein, the execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of the Administrative Agent, the Lenders, the Swing Line Bank or any Issuing Lender, nor constitute a waiver of any provision of the Credit Agreement or any other Loan Document. Section 6. GOVERNING LAW. This Amendment shall be governed by and construed in accordance with the internal laws (as opposed to the conflict of law provisions) of the State of Illinois. Section 7. HEADINGS. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. Section 8. COUNTERPARTS. This Amendment may be executed by one or more of the parties to the Amendment on any number of separate counterparts and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Signature pages may be detached from multiple separate counterparts and attached to a single counterpart so that all signature pages are physically attached to the same document, IN WITNESS WHEREOF, this Amendment has been duly executed and delivered on the date first above written. TRANSPORTATION MANUFACTURING OPERATIONS, INC. BY: /s/ Rafael Gomez Flores ----------------------------- Name: Rafael Gomez Flores Title: Chairman of the Board and President -5- 6 THE FIRST NATIONAL BANK OF CHICAGO, as a Lender and as Administrative Agent By: /s/ Cristiana Freeman -------------------------------- Name: CRISTIANA FREEMAN Title: CORPORATE BANKING OFFICER THE BANK OF NEW YORK, as a Co-Agent and as a Lender By: -------------------------------- Name: Title: KEYBANK NATIONAL ASSOCIATION, as a Co-Agent and as a Lender By: -------------------------------- Name: Title: COMERICA BANK, as a Lender By: -------------------------------- Name: Title: HUNTINGTON NATIONAL BANK, as a Lender By: -------------------------------- Name: Title: BANK OF HAWAII, as a Lender By: -------------------------------- Name: Title: -6- 7 THE FIRST NATIONAL BANK OF CHICAGO, as a Lender and as Administrative Agent By: -------------------------------- Name: Title: THE BANK OF NEW YORK, as a Co-Agent and as a Lender By: /s/ Steven Watson ---------------------------------- Name: Steven Watson Title: Assistant Vice President KEYBANK NATIONAL ASSOCIATION, as a Co-Agent and as a Lender By: -------------------------------- Name: Title: COMERICA BANK, as a Lender By: -------------------------------- Name: Title: HUNTINGTON NATIONAL BANK, as a Lender By: -------------------------------- Name: Title: BANK OF HAWAII, as a Lender By: -------------------------------- Name: Title: -6- 8 THE FIRST NATIONAL BANK OF CHICAGO, as a Lender and as Administrative Agent By: -------------------------------- Name: Title: THE BANK OF NEW YORK, as a Co-Agent and as a Lender By: -------------------------------- Name: Title: KEYBANK NATIONAL ASSOCIATION, as a Co-Agent and as a Lender By: /s/ Marianne T. Meil -------------------------------- Name: Marianne T. Meil Title: Vice President COMERICA BANK, as a Lender By: -------------------------------- Name: Title: HUNTINGTON NATIONAL BANK, as a Lender By: -------------------------------- Name: Title: BANK OF HAWAII, as a Lender By: -------------------------------- Name: Title: -6- 9 THE FIRST NATIONAL BANK OF CHICAGO, as a Lender and as Administrative Agent By: -------------------------------- Name: Title: THE BANK OF NEW YORK, as a Co-Agent and as a Lender By: -------------------------------- Name: Title: KEYBANK NATIONAL ASSOCIATION, as a Co-Agent and as a Lender By: -------------------------------- Name: Title: COMERICA BANK, as a Lender By: -------------------------------- Name: Title: HUNTINGTON NATIONAL BANK, as a Lender By: /s/ Thomas Myers -------------------------------- Name: Thomas Myers Title: Vice President BANK OF HAWAII, as a Lender By: -------------------------------- Name: Title: -6- 10 THE FIRST NATIONAL BANK OF CHICAGO, as a Lender and as Administrative Agent By: ----------------------------------- Name: Title: THE BANK OF NEW YORK, as a Co-Agent and as a Lender By: ----------------------------------- Name: Title: KEYBANK NATIONAL ASSOCIATION, as a Co-Agent and as a Lender By: ----------------------------------- Name: Title: COMERICA BANK, as a Lender By: ----------------------------------- Name: Title: HUNTINGTON NATIONAL BANK, as a Lender By: ----------------------------------- Name: Title: BANK OF HAWAII, as a Lender By: /s/ Donna R. Parker ----------------------------------- Name: DONNA R. PARKER Title: Vice President -6- 11 NATIONSBANK, N.A., as a Lender By: /s/ VALERIE C. MILLS --------------------------- Name: VALERIE C. MILLS Title: SR. VICE PRESIDENT THE SUMITOMO BANK, LIMITED, as a Lender By: --------------------------- Name: Title: By: --------------------------- Name: Title: ALLIED IRISH BANK, P.L.C., CAYMAN ISLANDS BRANCH, as a Lender By: --------------------------- Name: Title: By: --------------------------- Name: Title: -7- 12 NATIONSBANK, N.A., as a Lender By: --------------------------- Name: Title: THE SUMITOMO BANK, LIMITED, as a Lender By: /s/ J. H. Broadley --------------------------- Name: J. H. Broadley Title: Vice President N.Y. Office By: /s/ Brian Smith --------------------------- Name: Brian Smith Title: SVP ALLIED IRISH BANK, P.L.C., CAYMAN ISLANDS BRANCH, as a Lender By: --------------------------- Name: Title: By: --------------------------- Name: Title: -7- 13 NATIONSBANK, N.A., as a Lender By: --------------------------- Name: Title: THE SUMITOMO BANK, LIMITED, as a Lender By: --------------------------- Name: Title: By: --------------------------- Name: Title: ALLIED IRISH BANK, P.L.C., CAYMAN ISLANDS BRANCH, as a Lender By: /s/ William J. Strickland ---------------------------- Name: William J. Strickland Title: Senior Vice President By: /s/ Marcia Meeker ---------------------------- Name: Marcia Meeker Title: Vice President -7- 14 CONSENT Each of the undersigned, as a Guarantor under the Subsidiary Guaranty dated as of October 1, 1996 (the "Guaranty") in favor of the Agent for the benefit of the Lenders parties to the Credit Agreement referred to in the foregoing Amendment, hereby consents to said Amendment and hereby confirms and agrees that notwithstanding the effectiveness of said Amendment, the Guaranty is, and shall continue to be, in full force and effect and is hereby confirmed and ratified in all respects. Dated: June 26, 1998 BUSLEASE, INC. HAUSMAN BUS SALES, INC. MOTOR COACH INDUSTRIES, INC. MOTOR COACH INDUSTRIES-CHINA, INC. TRANSIT BUS INTERNATIONAL, INC. CUSTOM ASSETS CORP. TRANSPORT TECHNOLOGY CORPORATION UNIVERSAL COACH PARTS, INC. By: /s/ Rafael Gomez Flores -------------------------------- Name: Rafael Gomez Flores Title: Chairman of the Board and President -8- EX-4.7 4 SENIOR NOTES DUE 1 EXHIBIT 4.7 September __, 1996 Transportation Manufacturing Operations, Inc. Dial Tower 1850 North Central Avenue Phoenix, Arizona 85004 Re: 9.02% Senior Notes due 2002 Gentlemen: Reference is made to the Note Agreement (the "Agreement"), dated as of November 15, 1994, among Transportation Manufacturing Operations, Inc. (the "Company"), the undersigned and the other persons named on Schedule A thereto (together with the undersigned, the "Purchasers"), pursuant to which the Company issued and sold, and the Purchasers purchased, the Company's 9.02% Senior Notes due November 15, 2002 in the original principal amount of $125,000,000. Unless otherwise defined herein, capitalized terms used herein which are defined in the Agreement shall have the meanings as given in the Agreement. Pursuant to paragraph 11C of the Agreement and the request of the Company, and subject to the satisfaction of the conditions set forth in Section 4 below, the undersigned and the Company agree as follows: 1. CONSENT. Notwithstanding paragraph 6C(9)(ii) of the Agreement, the undersigned consent to the payment by the Company of a dividend in cash of up to $30,000,000 to MCII, provided, that (a) the payment of such dividend is permitted by clauses (i) and (iii) of paragraph 6C(9) of the Agreement, (b) such dividend is paid on or before March 31, 1997 and (c) immediately upon receipt of such payment, MCII pays a dividend to Grupo Dina in the same amount as the dividend payment made by the Company to MCII. 2. AMENDMENTS TO AGREEMENT. 2.1. Paragraph 5A is amended by adding the following as new clauses (iii) and (iv) and by renumbering the existing clauses (iii), (iv), (v) and (vi) as (v), (vi), (vii) and (viii), respectively: 2 (iii) as soon as available and in any event within 60 days after the end of each fiscal quarter (beginning with the fiscal quarter ending September 30, 1996), the consolidated balance sheet for Grupo Dina and its consolidated subsidiaries as at the end of such fiscal quarter and the related consolidated statements of income and cash flows of Grupo Dina and its consolidated Subsidiaries for such fiscal quarter and for the period from the beginning of the then current fiscal year to the end of such fiscal quarter, setting forth in comparative form the corresponding figures for the corresponding periods of the previous fiscal year, all in reasonable detail, provided, that so long as Grupo Dina is a foreign private issuer complying with reporting requirements under the Exchange Act, the foregoing requirement shall be satisfied by delivery of Grupo Dina's quarterly report for such fiscal quarter on Form 6K thereunder; (iv) as soon as available and in any event within 120 days after the end of each fiscal year, the consolidated balance sheet of Grupo Dina and its consolidated Subsidiaries as at the end of such fiscal year and the related consolidated statements of income, stockholders, equity and cash flows of Grupo Dina and its consolidated Subsidiaries for such fiscal year, setting forth in comparative form the corresponding figures for the previous fiscal year, all in reasonable detail, provided, that so long as Grupo Dina is a foreign private issuer complying with reporting requirements under the Exchange Act, the foregoing requirement shall be satisfied by delivery of Grupo Dina's annual report for such fiscal year on Form 20F thereunder, and in the case of such consolidated financial statements of Grupo Dina, reports thereon of Arthur Anderson LLP or other independent auditors of recognized national standing selected by Grupo Dina, which reports shall be unqualified and shall not include any reference to doubts about the ability of Grupo Dina and its Subsidiaries to continue as a going concern; 2.2. Clause (ii) of paragraph 6C(4) of the Agreement is amended and restated in its entirety as follows: (ii) The aggregate amount of all Contingent Liabilities (excluding performance bonds not to exceed $180,000,000 relating to an order which may be made by The New Jersey Transit Authority but including the aggregate amount of coach repurchase contracts described in clause (i)) to exceed 100% of Consolidated Net Worth, provided, that the aggregate amount of Contingent Liabilities consisting of (a) Surety Bonds and outstanding undrawn letters of credit for the account of the Company or any Restricted Subsidiary shall not exceed 50% of Consolidated Net Worth and (b) Residual Value Guarantees and the aggregate amount of coach repurchase contracts described in clause (i) hereof shall not exceed 50% of Consolidated Net 2 3 Worth, in each case determined as of the end of the most recently completed fiscal quarter. 2.3. Clause (iii) of paragraph 6C(5) of the Agreement is amended and restated in its entirety as follows: (iii) Investments in addition to those set forth in clauses (i) and (ii) (other than Investments in any Person controlling, controlled by or under common control with the Company (other than Restricted Subsidiaries and Investments in Grupo Dina by the Company to the extent such Investments consist of purchases of motor coaches from Grupo Dina for resale in the United States or Canada ("Permitted Grupo Dina Investments"))), so long as (a) the aggregate original cost of such Investments, including, without limitation, Permitted Grupo Dina Investments, does not, at any time, exceed 5% of Consolidated Net Worth and (b) the aggregate original cost of such Permitted Grupo Dina Investments does not, at any time, exceed 2.5% of Consolidated Net Worth and all such Permitted Grupo Dina Investments are otherwise permitted by paragraph 6C(7) and 2.4. Clause (iv) of paragraph 6C(5) of the Agreement is amended by adding immediately after the phrase "Restricted Subsidiary" and before the parenthetical the phrase "and Permitted Grupo Dina Investments." 2.5. The following is added as a new paragraph 6D: 6D. ADDITIONAL GUARANTORS. The Company covenants not to permit any Subsidiary to become a guarantor of any of the obligations of the Company under the Bank Credit Facility or any other agreement, document or instrument now or hereafter executed or delivered in connection therewith unless concurrently therewith such Subsidiary provides to the holders of the Notes a guarantee of the obligations of the Company under this Agreement and the Notes pursuant to a written agreement in form and substance satisfactory to the Required Holders. 2.6. Paragraph 7A of the Agreement is amended by adding the following immediately after clause (13) as a new clause (14): (14) any Guarantor shall fail to perform or observe any agreement, term or condition contained in, or otherwise be in default (beyond any applicable grace period) under, any guarantee agreement in favor of the holders of the Notes; or any representation or warranty made by any Guarantor in any such guarantee shall be false in any material respect as of the date when made; or any such guarantee shall fail to be in full force and effect or otherwise shall not be enforceable in accordance with its terms; or any Guarantor shall contest or 3 4 deny the validity or enforceability of, or deny that it has any liability or obligations under, any such guarantee to which it is a party; The last sentence of paragraph 7A is also amended by deleting the phrase "(12) to (13)" and inserting in lieu thereof the phrase "(12) to (14)". 2.7. Paragraph 10B of the Agreement is amended as follows: (a) The following definition is added immediately after the definition of "Guarantee": "Guarantor" shall mean any Subsidiary that is a party to any guarantee agreement in favor of the holders of the Notes with respect to the Company's obligations under this Agreement and the Notes, including, without limitation, any Subsidiary that becomes a guarantor pursuant to paragraph 6D. (b) The definition of "Priority Debt" in paragraph 10B of the Agreement is amended by adding immediately after "Intercompany Indebtedness" the phrase "and Guarantees of Indebtedness under this Agreement and the Notes and Guarantees of Indebtedness under the Bank Credit Facility". (c) The following definition is added immediately after the definition of "Required Holders": "Residual Value Guaranties" means any agreement entered into by the Company or any of its Subsidiaries to promote the sales of any bus or coach pursuant to which the Company of any of its Subsidiaries is guaranteeing at some future time any minimum value (which may be determined by a formula) of a bus or coach as specified in such agreement, the terms and provisions of which agreement are consistent with the past practices and policies of the Company and its Subsidiaries prior to September _, 1996. (c) The definition of "Significant Subsidiary" in paragraph 10B of the Agreement is amended by adding immediately after the phrase "fiscal year" the phrase ", provided, that for clauses (7) through (12), inclusive, of paragraph 7A the term "Significant Subsidiary" shall also mean any Guarantor." 3. REPRESENTATIONS AND WARRANTIES. The Company represents and warrants as follows: (a) it has all necessary power and authority to execute and deliver this letter; (b) the execution, delivery and performance of this letter have been duly authorized by it; (c) this letter and the Agreement, as amended hereby, constitute the legal, valid and binding obligations of the Company and are enforceable against it in accordance with their terms; (d) the approval, execution, delivery and performance of the terms 4 5 hereof do not violate any contractual provision to which it is a party or by which it is or its properties are bound or any law applicable to it; (e) all consents, notices, waivers and other actions by or of the Company or any other Person that are necessary in connection with the subject matter of the foregoing consents and amendments have been obtained or taken; and (f) no Default or Event of Default has occurred and is continuing. 4. CONDITIONS TO EFFECTIVENESS. The effectiveness of the consents and amendments herein is subject to satisfaction of the following conditions (the date upon which such conditions are satisfied being called the "Effective Date"): 4.1. The undersigned shall have received counterparts to this letter executed by the Company; 4.2. The undersigned shall have received a Guarantee Agreement (the "Guarantee") in favor of the holders of the Notes, in form and substance satisfactory to the undersigned, duly executed by each Subsidiary that is executing a guarantee pursuant to the Credit Agreement referred to below (collectively, the "Guarantors"), and the Guarantee shall be in full force and effect; 4.3. The undersigned shall have received a favorable opinion of Latham & Watkins, special counsel to the Guarantors, in form and substance satisfactory to the undersigned, as to the Guarantee; 4.4. The undersigned shall have received a copy of the Credit Agreement among the Company, the First National Bank of Chicago, NBD Bank, N.A. and the other parties thereto (the "Credit Agreement"), in form and substance satisfactory to the undersigned, duly executed by each party thereto, and the Credit Agreement shall be in full force and effect; 4.5. The holders of the Notes and the lenders that are parties to the Credit Agreement shall have entered into an Intercreditor Agreement, in form and substance satisfactory to the undersigned, and such Intercreditor Agreement shall be in full force and effect; 4.6. The undersigned shall have received copies of duly executed agreements, in substance identical to this letter agreement, from holders of the Notes that together with the undersigned would constitute the Required Holders, and all conditions to the effectiveness of such agreements shall have been satisfied. 4.7. The representations and warranties of the Company contained in Section 3 hereof and of the Guarantors in the Guarantee shall be true on and as of the Effective Date, after giving effect to the amendments and other transactions contemplated by this Agreement; and after giving effect to such amendments and 5 6 other transactions there shall exist no Default or Event of Default. 4.8. The Company shall have paid to the undersigned a $17,143 amendment fee. 4. 9. The Company shall have paid such fees and expenses of special counsel to the holders of the Notes in connection with the transactions contemplated hereby as holders of the Notes shall have requested be paid on or prior to the Effective Date. 4.10. The transactions contemplated by this letter shall not violate any applicable law or governmental regulation and shall not subject the undersigned to any tax, penalty, liability or other onerous condition under or pursuant to any applicable law or governmental regulation, and the undersigned shall have received such certificates or other evidence as may be requested to establish compliance with this condition. 4.11. All corporate and legal proceedings and all instruments and agreements in connection with the transactions contemplated by this letter shall be reasonably satisfactory in form and substance to undersigned and its counsel, and the undersigned shall have received all information and copies of all documents and papers, including records of corporate and governmental proceedings, which the undersigned may reasonably have requested in connection therewith, such documents and papers when appropriate to be certified by proper corporate or governmental authorities. 5. MISCELLANEOUS. 5.1. Upon the Effective Date, each reference in the Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import shall mean and be a reference to the Agreement as amended hereby and each reference to the Agreement in the Notes shall mean and be a reference to the Agreement, as amended hereby. 5.2. This letter shall be construed and enforced in accordance with, and the rights of the parties shall be governed by, the internal law of the State of New York. 5.3. Except as specifically amended above, the Agreement and the Notes shall remain in full force and effect and are hereby ratified and confirmed. The execution, delivery and effectiveness of this letter shall not, except as expressly provided herein, operate as an amendment to any provision of the Agreement nor a waiver of any right, power or remedy of any holder of a Note, nor constitute a waiver of, or consent to any departure from, any provision of the Agreement or any Note. 5.4. This letter may be executed by one or more of the parties to this letter on any number of separate counterparts and all of 6 7 said counterparts taken together shall be deemed to constitute one and the same instrument. (signature pages to follow) 7 8 Please acknowledge the foregoing and your agreement thereto by signing this letter agreement where indicated below. Very truly yours, THE TRAVELERS INSURANCE COMPANY By: ----------------------------------- Title: -------------------------------- Accepted and Agreed to as of the date written above: TRANSPORTATION MANUFACTURING OPERATIONS, INC. By: /s/ illegible ------------------------------- Title: Senior Vice President EX-12 5 COMPUTATION OF RATIO OF EARNINGS 1 EXHIBIT 12 MCII HOLDINGS (USA) INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------- ------------- ------------- ------------- -------------- 1994 1995 1996 1997 1998 -------------- ------------- ------------- ------------- -------------- Income from continuing operations before # provision for income taxes $ -7041 $ 25460 $ 46148 $ 59429 $ 69871 Add: Interest expense, including amortization 8,824 12855 12857 14881 16816 Allocated interest 15587 # 22099 3172 6978 3164 Finance interest 984 2658 3605 2394 2765 -------------- ------------- ------------- ------------- -------------- Earnings, as adjusted $ 18,354 $ 63072 $ 65782 $ 83682 $ 92616 ============== ============= ============= ============= ============== Fixed charges: Interest expense, including amortization 8824 12855 12857 14881 16816 Allocated interest 15587 22099 3172 6978 3164 Finance interest 984 2658 3605 2394 2765 -------------- ------------- ------------- ------------- -------------- Fixed charges $ 25,395 $ 37612 $ 19634 $ 24253 $ 22745 ============== ============= ============= ============= ============== * Ratio of earnings to fixed charges .7 1.7 3.4 3.5 4.1 ============== ============= ============= ============= ==============
* Earnings were inadequate to cover fixed charges Coverage deficiency was $7,041 EX-21 6 LIST OF SUBSIDIARIES 1 EXHIBIT 21 LIST OF SUBSIDIARIES OF MCII HOLDINGS (USA), INC. Each subsidiary is 100% owned by its respective parent Company except as noted. Motor Coach Industries International, Inc. (Delaware) Transportation Manufacturing Operations, Inc. (Delaware) BusLease, Inc. (Delaware) Hausman Bus Sales, Inc. (Delaware) MCI Acceptance Corp. (Delaware) MCIL Holdings, Ltd. (Canada) Motor Coach Industries Limited (Canada) Frank Fair Industries Ltd. (Manitoba) Motor Coach Industries, Inc. (Delaware) Motor Coach Industries-China, Inc. (Delaware) Nanjing Starley Transportation Company Limited (China) (70%) TMO Holdings of Canada, Ltd. (Canada) Transit Bus International, Inc. (Delaware) Custom Assets Corp. (California) Greyhound Overseas Services, Inc. (Virgin Islands) Transport Technology Corporation (Arizona) Universal Coach Parts, Inc. (Delaware) Universal Coach Parts Mexico, S.A. de C.V. (Mexico) (98%) *Dina Autobuses, S.A. de C.V. (Mexico) (99.99%) Autopartes Hidalguenses, S.A. de C.V. (Mexico) (99.99%) Carrocera Sahagun, S.A. de C.V. (Mexico) (98%) **MCII Buses (USA), Inc. (Delaware) *Became a subsidiary on January 31, 1997. **Incorporated as a subsidiary on April 17, 1997. EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 12-MOS 12-MOS DEC-31-1997 DEC-31-1998 JAN-01-1997 JAN-01-1998 DEC-31-1997 DEC-31-1998 1 1 13,997 24,103 0 0 91,787 1,129,324 (3,244) (10,316) 257,795 229,772 405,274 411,008 135,174 144,541 (28,329) (40,011) 820,673 806,154 174,599 376,768 268,833 281,723 411,524 159,500 0 0 0 0 (79,606) (53,205) 820,673 806,154 735,210 925,945 739,210 931,783 546,107 728,395 661,330 849,912 (2,835) (7,980) 0 0 21,859 19,980 59,429 69,871 21,268 31,283 38,161 38,588 0 0 0 0 0 0 38,161 38,588 0 0 0 0
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