-----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, Oq7mpJMoan0hBI1pKZcgD7qOGpNlVchLPwrosmZfDBA9z040Y2dktCPVM/xAgQlE eZVEuzLwuDCO2Cba4n037Q== 0000950153-97-000359.txt : 19970410 0000950153-97-000359.hdr.sgml : 19970410 ACCESSION NUMBER: 0000950153-97-000359 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970409 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MCII HOLDINGS USA INC CENTRAL INDEX KEY: 0001019534 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 333-08871 FILM NUMBER: 97577445 BUSINESS ADDRESS: STREET 1: 1850 NORTH CENTRAL AVE CITY: PHOENIX STATE: AZ ZIP: 85004 BUSINESS PHONE: 6022075000 10-K405 1 FORM 10-K405 FOR 12/31/96 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 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, 1996 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, 1997. The number of shares outstanding of the registrant's Common Stock: 1,000 shares as of March 15, 1997. DOCUMENTS INCORPORATED BY REFERENCE None REDUCED DISCLOSURE FORMAT The registrant meets the conditions set forth in General Instruction J(1)(a) and (b) of Form 10-K and is therefore filing this Form with the reduced disclosure format. 2 ITEM 1. BUSINESS GENERAL MCII Holdings (USA), Inc. ("MCII Holdings") is a Delaware corporation and a wholly-owned subsidiary of Consorcio G Grupo Dina, S.A. de C.V. ("Grupo Dina"). On January 31, 1997, Grupo Dina contributed to MCII Holdings 99.99% of the shares of Dina Autobuses, S.A. de C.V. ("Autobuses"). As this transaction occurred after year end and, as such, is not included in the MCII Holdings financial statements, a description of its business is not included herein. MCII Holdings designs, manufactures, assembles and markets intercity coaches and replacement parts for intercity coaches and transit buses. MCII Holdings is the leading manufacturer of intercity coaches in the United States, with a market share consistently in excess of 50%. Management believes that MCII Holdings is the largest distributor of replacement parts to the combined intercity coach and transit bus industries in the United States and Canada. Revenues and operating income from continuing operations for each of the segments for the last three years are as follows:
Year Ended December 31 -------------------------------- 1996 1995 1994 -------------------------------- (in millions) Revenues: Coach manufacturing and $502.1 $375.8 $332.8 Replacement parts 159.2 140.5 134.6 ------ ------ ------ $661.3 516.3 467.4 ====== ====== ====== Operating income: Coach manufacturing and support $ 40.1 $ 23.3 $ 26.8 Replacement parts 14.6 15.0 19.2 Nonrecurring merger expenses -- -- (11.3) ------ ------ ------ $ 54.7 $ 38.3 $ 34.7 ====== ====== ======
COACH MCII Holdings designs, manufactures, assembles and markets intercity coaches principally in the United States and Canada. MCII Holdings, through its indirect subsidiary, Motor Coach Industries Limited, a Canadian corporation ("MCIL"), began manufacturing intercity coaches and providing replacement parts in Canada in 1932, and began manufacturing these products in the United States with the incorporation of Motor Coach Industries, Inc. ("MCI") in 1963. In 1995, MCII Holdings began marketing in the United States an intercity coach manufactured by Grupo Dina. This coach, the Viaggio, is used primarily for tour and charter service and intercity regularly scheduled passenger service. MCII Holdings' coaches are used primarily for intercity regularly scheduled passenger service, tour and charter service and suburban commuting. Management believes that MCII Holdings' coaches have a reputation for solid construction, durability, ease of maintenance and comfort. MARKET. MCII Holdings' management believes that there is currently an industry-wide fleet of over 30,000 intercity coaches in operation in the United States and Canada, having an average age of approximately nine years. Coaches are used primarily to transport passengers between cities at regularly scheduled intervals ("line-haul operations") or on special tour or charter trips. Certain state and municipal transportation agencies, such as New Jersey Transit, utilize intercity coaches to transport passengers who have a relatively long daily commute. 1 3 The coach business in the United States and Canada is highly cyclical. During times of general economic weakness, many coach operators postpone fleet replacement programs and may even reduce the size of their fleets. As economic recovery occurs, they tend to accelerate fleet replacement and may increase fleet size. BACKLOG. MCII Holdings' coach backlog was 577 units at December 31, 1996 which included 27 units for Greyhound Lines, Inc. ("GLI"), compared to 619 units at December 31, 1995, which included 151 units for GLI. No material part of MCII Holdings' backlog at December 31, 1996 is attributable to government orders. PRODUCTS. MCII Holdings currently produces, under the trademark of MCI, three integral-frame models. Two of MCII Holdings' models are standard 40-foot long vehicles and the third is a 45-foot long vehicle. The Model 102D3 is a 40-foot long, 102-inch wide European-styled vehicle. The Model 102DL3 is a 45-foot long, 102-inch wide model with increased passenger and baggage capacity, with a standard configuration of 55 seats, giving it an increased passenger capacity of 17% over the 40-foot models which generally enables operators to reduce their operating cost per passenger mile. The MC-12 model is a lower-priced, line-haul coach, 40-feet long and 96 inches wide, produced principally for GLI. The two 40-foot coach models generally sell in a price range of $240,000 to $325,000 and the 45-foot coach sells in a range of $290,000 to $350,000. These prices depend on width, options, special features and volume purchased. Substantially all of MCII Holdings' coaches are built to order with over 2,000 options available. The standard warranty period is 24 months. MCII Holdings also markets the Viaggio, a body-on-chassis constructed model manufactured by Grupo Dina. The Viaggio, which name is a trademark of Marcopolo S.A. -- Carrocerias e Omnibus of Brazil used under license by Grupo Dina, sells in a range of $225,000 to $270,000. The standard warranty period for the U.S. market is 24 months. MCII Holdings is currently in the process of developing two new coach models to replace its current product offerings. The first model, which management expects to introduce in 1997, will consist of a 45-foot luxury tour and charter model. The second model will consist of a lower-priced, durable line-haul model, which management anticipates offering in 41-foot, 45 foot and 11 meter versions. The introduction of the 41-foot line-haul model is expected in late 1998. These development efforts will result in significant product development and capital expenditures being made over the next few years. MARKETING. In the United States and Canada MCII Holdings relies on its direct-sales force to market the MCI and Viaggio 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 Holdings' sales force among coach operators solidify MCII Holdings' reputation and enhance its sales position. MCII Holdings uses agents to market its coaches overseas. MCII Holdings does not use distributors in the United States or Canada. CUSTOMERS. The customer base in the intercity coach industry in the United States and Canada is highly diversified. The largest coach transportation company in the United States, GLI, currently has a fleet of over 2,000 coaches, or 7% of the 30,000 industry-wide fleet. The remaining 93% of the market is comprised of smaller to mid-size operators. The primary customers for intercity coaches are independent coach operators, national coach fleet operators, including GLI and Greyhound Lines of Canada, Ltd. ("GLOC"), government agencies that use coaches for public transit services, international customers and custom coach converters. 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. 2 4 INDEPENDENT OPERATORS. Management estimates that in the United States, independent regional operators (i.e., operators other than GLI and GLOC) of regular route or tour and charter operations account, on average, for approximately 75% of MCII Holdings' annual coach sales. Management believes that purchasing decisions by these buyers are based upon a number of factors, including service and parts availability, operating costs, resale value, financing terms, curbside appeal and interior amenities. In 1996, MCII Holdings sold coaches to 412 different independent operators of whom only 50 purchased five or more coaches. GLI AND GLOC. GLI is a nationwide regular route operator in the United States and GLOC is a regular route operator throughout most of Canada. GLI's fleet totaled over 2,000 coaches at December 31, 1996. GLOC currently operates approximately 390 coaches. For the years ended 1996, 1995 and 1994, GLI and GLOC accounted for 14%, 11%, and 17%, respectively, of consolidated revenue. Management believes that important purchase criteria for GLI and GLOC include life cycle costs, reliability, availability of replacement parts and support, passenger comfort, interior amenities and purchase price. MCII Holdings and GLI have an agreement, which extends through March 18, 1998, which provides that GLI will purchase from MCII Holdings at least 75% of its annual requirements for new coaches of the type produced (or planned, at the time ordered, to be produced) by MCII Holdings. MCII Holdings and GLOC have entered into a similar agreement which runs through 2002. Pursuant to those agreements, 228 coaches were delivered to GLI and seven to GLOC in 1996. No assurance can be given regarding GLI's and GLOC's future ability or need to purchase coaches from MCII Holdings. GOVERNMENT AGENCIES. Government-funded public transportation agencies utilize a variety of commuter, wheelchair-lift compatible and other specialty coaches. 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, and in any given year, such customers may represent over 10% of MCII Holdings' sales of new coaches. MCII Holdings sold 700 coaches to the New Jersey Transit Authority ("NJTA") which were delivered in 1982 through 1984, and 415 coaches to NJTA which were delivered in 1987 and 1988. NJTA uses these coaches for public transport of passengers with relatively long daily commutes or in intercity service. Because over 90% of NJTA's fleet consists of MCII Holdings coaches, management believes it will have a competitive advantage when NJTA's next purchase is made. However, there can be no assurance that NJTA will order new coaches, when such order will occur or that MCII Holdings will be awarded the contract. Government contracts generally contain provisions permitting the purchaser to terminate the contract at will. Such contracts provide that the purchaser must reimburse the manufacturer for completed product and pay the manufacturer's cost of termination. It is MCII Holdings' experience that this type of provision is rarely exercised. COACH CONVERTERS. The coach conversion market involves the customizing of a coach interior for personal or corporate use. MCII Holdings sells coach shells to coach conversion companies and, until 1996, customized coaches for sale to the final user. In June 1996, MCII Holdings exited the business of customizing coaches for sale to the final user by selling the assets of Custom Coach Corporation ("Custom Coach"), MCII Holdings' former coach conversion subsidiary. Custom Coach served the high end of the coach conversion market, focusing on motor homes for commercial and personal applications, executive style coaches for business travel, specialized units for training and entertainer bunkhouse units. Over the past three years, MCII Holdings has averaged sales of 17 units, including sales to Custom Coach, to the conversion market. 3 5 COMPETITION. MCII Holdings 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 Holdings has maintained a strong market position in the new coach market in the face of lower prices by competitors, which management believes is primarily due to customer loyalty stemming from a quality product and strong aftermarket parts and service capability. An additional factor contributing to customer loyalty is the 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 as well as smaller, independent operators, which rely on MCII Holdings for a variety of support services. FINANCING. MCII Holdings primarily sells coaches for cash, occasionally offers 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 Holdings had $32.2 million of contract receivables at December 31, 1996. MCII Holdings provides new and used coach financing to its intercity coach customers principally through its financing subsidiary, MCI Acceptance Corp. ("MCIAC"). MCIAC provides financing 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 Holdings, through its leasing subsidiary BusLease, Inc., also provides coaches to customers under operating leases. The leases require security deposits and usually have a duration of three to seven years. At December 31, 1996, the book value of coaches being leased to customers under operating leases was $18.1 million. Periodically, MCIAC sells contract receivables to financial institutions and provides a limited guarantee to those institutions against losses related to such contracts with respect to debtor defaults. USED COACHES MCII Holdings provides used coach brokerage and dealership services through Hausman Bus Sales Inc. ("HBSI"), which was acquired in 1989. The used coach operations provided revenues for the years 1996, 1995, and 1994, of $51.3 million, $47.2 million, and $46.8 million, respectively. During that period, the used coach operation accounted for $15.0 million to $31.0 million of MCII Holdings' inventories. 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 30,000 coaches changes ownership every 12 years, creating an average used coach volume of about 2,500 units per year. Due to MCII Holdings' 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 Holdings' capacity to accept used coaches in support of new coach sales and resell them through its distribution system provides MCII Holdings 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. RESEARCH AND DEVELOPMENT. As part of MCII Holdings' new coach development project it received $7.4 million in contributions from the Government of Canada and the Province of Manitoba. These contributions have been applied against research and development expenses. Contributions may be repayable should the project not be completed, or, for the first five years following project completion, should the ratio of Canadian employees to total employees of MCII Holdings be less then 40%. 4 6 REPLACEMENT PARTS Management believes that MCII Holdings is a leading supplier of original equipment manufacturer ("OEM") quality replacement parts for the combined intercity coach and transit bus aftermarkets in the United States and Canada. MCII Holdings offers over 67,000 items necessary for coach and bus repair and regularly scheduled maintenance. MCII Holdings has six strategically located distribution outlets in the United States and Canada which allow MCII Holdings to promptly (if necessary, within 24 hours) deliver replacement parts nationwide. Management believes that MCII Holdings' breadth of product line and geographic scope are unmatched in the industry. In addition to the core intercity coach and transit bus parts business, MCII Holdings also distributes parts for school buses and diesel engines. In the replacement parts business, MCII Holdings has improved responsiveness to customer demands through the development of its information systems. MCII Holdings has installed remote order entry terminals in over 260 customer locations in order to minimize lead times and to accelerate the delivery process. Management believes that the installation of these electronic order entry terminals at customer locations expedites replacement parts orders and strengthens customer loyalty. MCII Holdings' competitive position in the parts business is further enhanced by the large installed base of its vehicles. The approximately 23,000 coaches and 47,000 transit buses in the United States and Canada produced by MCII Holdings create a core demand for MCII Holdings parts, approximately 20% of which are proprietary to MCII Holdings and may not be purchased elsewhere. Despite the fact that MCII Holdings no longer manufactures transit buses, MCII Holdings continues to supply replacement parts to the Canadian transit bus market, and until November 1999, will provide OEM replacement parts for the RTS line of transit buses previously manufactured in the United States by MCII Holdings. 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 value basis. Management believes that MCII Holdings' current strength is in providing OEM parts that are either manufactured by MCII Holdings or acquired by MCII Holdings from the original equipment manufacturer. MCII Holdings' Universal Coach Parts ("UCP") subsidiary in the United States and MCIL in Canada offer a wide selection of replacement and repair parts to MCII Holdings' 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 COACHGUARD name. More than sixty products have been introduced for this segment since its inception in 1993. MCII Holdings 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 MCII Holdings to access new markets that are currently served by local and regional parts rebuilders. In 1994, MCII Holdings began marketing diesel engine parts under the name DIESEL GUARD and also began targeting the school bus parts market. As a result of its focus on the school bus market, MCII Holdings purchased the operations of a school bus parts distributor in April 1995 for $2.9 million. MARKETING. For sales of replacement parts, MCII Holdings 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 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 MCII Holdings' larger customers, of remote order entry terminals to minimize lead time. Management believes that MCII Holdings' efficiency and responsiveness allow customers to minimize inventory holding costs and to increase fleet utilization ratios. 5 7 COACH PARTS CUSTOMERS. Customers served by MCII Holdings include both purchasers of MCII Holdings coaches as well as purchasers of non-MCII Holdings coaches such as Grupo Dina's Viaggio 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 but not before April 30, 1997, MCII Holdings supplies and manages most of GLI's inventory of replacement parts. TRANSIT PARTS CUSTOMERS. 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 MCII Holdings' 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, minimum price. In addition, management believes that the installed base of vehicles manufactured by MCII Holdings, its predecessors and successors also provides MCII Holdings a distinct competitive advantage. Management estimates that MCII Holdings has consistently captured a significant share of the replacement parts business in its core intercity coach and transit bus parts segments (excluding engines, transmissions and related parts). DISCONTINUED OPERATIONS In November 1993, the Board of Directors of MCII Holdings approved a plan of disposition of the transit manufacturing segment. This decision was based upon 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 manufacturing business may not achieve acceptable profitability in the foreseeable future. In November 1994, MCII Holdings sold the fixed assets and certain of the inventory of the transit manufacturing business, as well as the right to manufacture, remanufacture and distribute transit buses previously made by MCII Holdings. 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 MCII Holdings. MCII Holdings retained all other assets and all of the remaining liabilities of the transit manufacturing business. As of December 31, 1996, the remaining net liabilities of the transit manufacturing business totaled $(0.1) million and were comprised principally of warranty and product liability reserves, offset somewhat by receivables. 6 8 RAW MATERIALS/COMPONENTS MCII Holdings' manufacturing operations utilize raw materials supplied by diverse sources and component parts provided by other original equipment manufacturers, which are assembled into intercity coaches. For certain materials and components, MCII Holdings relies primarily on a limited number of suppliers, namely Rockwell International Corporation for axles, Detroit Diesel Corporation for engines, Allison Transmission for transmissions 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 Engine Company and Caterpillar Inc. for engines, Eaton Fuller and ZF Friedrichshafen AG for transmissions and Namasco Ltd and others for stainless steel. 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 which 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 requires, among other things, that the U.S. Department of Transportation (the "DOT") promulgate handicapped accessibility standards for coaches. Although the DOT has not issued proposed regulations for public comment, there are indications that the regulations (which may be issued and finalized in 1997) might require each coach in an operator's fleet to be handicapped accessible, rather than permitting the operation of a limited number of accessible coaches. Requiring complete fleet accessibility could have a material adverse effect on an operator's business and possibly on MCII Holdings' coach business. The final regulations will be applicable to operators with larger fleets 2 years after issuance of the final regulations and applicable to operators with smaller fleets 3 years after issuance of the final regulations. PATENTS AND TRADEMARKS MCII Holdings owns numerous trademarks representing goodwill in the businesses using the marks and own a number of patents which 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 well known MCI and FLXIBLE marks. The marks COACH GUARD and DIESEL GUARD are in use in the replacement parts operations and filings have been made to register these trademarks. 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 intercity coaches, transit buses and replacement parts in all countries other than the United States, Canada and Mexico. 7 9 EMPLOYEES MCII Holdings, through its subsidiaries, had approximately 3,300 employees, as of December 31, 1996, with approximately 1,300 in the United States and 2,000 employees in Canada. The hourly workers at most locations are organized and represented by unions. Approximately 2,000 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 with Winnipeg/Pembina expire September 30, 1997. MCII's subsidiaries have historically enjoyed satisfactory relations with both union and nonunion employees. ITEM 2. PROPERTIES COACH. MCII Holdings conducts its coach manufacturing operations through subsidiaries located both in the United States and Canada. The operations in Winnipeg produce metal bus components, fiberglass parts, subassemblies for intercity coaches and complete intercity coach shells. Once assembled, outer shells of coaches are transported by truck-hauled flatbed trailers to its Pembina, North Dakota plant. In Pembina, the manufacturing process is completed by installing components such as engines, transmissions, axles, wheels, tires, electrical components, air conditioning systems and passenger seats, as well as completing final paint scheme requirements. Finished units are distributed from the Pembina facility to customers throughout the United States and are returned to Winnipeg for sale and delivery to Canadian customers. With the Winnipeg/Pembina complex in full production, MCII Holdings is capable of producing approximately 1,400 coach units per year. PARTS. MCII Holdings distributes products from six locations, strategically located across the United States and Canada, with sites in Dayton, New Jersey; Chicago, Illinois; Los Angeles, California; Huntsville, Texas; Winnipeg, Manitoba; and Newcastle, Ontario. In addition, there are two parts manufacturing locations: Delaware, Ohio and Loudonville, Ohio. OTHER PROPERTIES. MCII Holdings also has leases on warehouses and parking lots. MCII Holdings believes that its facilities are adequate for its present needs and that its properties are generally in good condition, well maintained and suitable for their intended use. The following table is a summary of MCII's primary facilities as of December 31, 1996. 8 10
LOCATION/OWNERSHIP ------------------ U.S. Canada Building sq. ft. Segment ------ ------ ---------------- ------------- MANUFACTURING AND ASSEMBLY PLANTS: 1149 St. Matthews Ave. - Owned 128,000 Coach Winnipeg, Canada 841 & 850 Erin Street - Owned 78,000 Coach Winnipeg, Canada 400 Archibald Street - Owned 36,000 Coach Winnipeg, Canada 1475 Clarence Ave. - Owned 381,000 Coach Winnipeg, Canada 552 W. Stutsman Ave. Owned - 186,000 Coach Pembina, ND 140 Otter Street - Owned 144,000 Coach Winnipeg, Canada MODIFICATION OR REPAIR FACILITIES: 10 E. Golf Road Owned - 60,000 Coach Support Des Plaines, IL 9846 Atlantic Ave. Leased - 16,000 Coach Support Southgate, CA 14 Harmon Dr. Leased - 28,000 Coach Support Blackwood, NJ 1250 Slocum Street Leased - 30,000 Coach Support Dallas, TX REPLACEMENT PARTS FACILITIES: 1558 Wilson Place - Leased 60,000 Parts Winnipeg, Canada 105 E. Oakton Owned - 180,000 Parts Des Plaines, IL 55 Howard Street Leased - 75,000 Parts Des Plaines, IL 9 Nicholas Court Leased - 106,000 Parts Dayton, NJ 7030 East Slauson Leased - 50,000 Parts Los Angeles, CA Huntsville, TX Leased - 75,000 Parts 260 Toronto Street - Owned 44,000 Parts Newcastle, Ontario 920 Pittsburgh Drive Leased - 245,000 Parts Delaware, OH 520 North Spring Drive Owned 356,000 Parts Loudonville, OH
9 11 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. MCII Holdings' Canadian income tax returns for 1982 through 1992 are currently under review by Revenue Canada, which is reviewing certain profit allocation procedures between MCIL and MCI and may seek to impute additional Canadian income to MCIL. MCII Holdings is of the opinion that Revenue Canada's arguments are without merit. See Note I to the Consolidated Financial Statements at page F-15 herein. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS This item has been omitted pursuant to General Instruction J 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. ITEM 6. SELECTED FINANCIAL DATA This item has been omitted pursuant to General Instruction J 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 J 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. RESULTS OF OPERATIONS 1996 COMPARED TO 1995 General. Revenues for 1996 were $661.3 million, an increase of 28.1% from $516.3 million for 1995. The improvement was due to a 33.6% increase in revenues in the coach manufacturing and support segment and a 13.3% increase in the replacement parts segment. The overall gross margin, defined as sales less cost of sales (exclusive of depreciation and amortization), as a percentage of sales was 20.7% for 1996 compared to 22.1% for 1995. 10 12 Operating income was $54.7 million in 1996 compared to $38.3 million in 1995. The increase was primarily attributable to increased revenues partially offset by the lower gross margin percentage, increased research and development expenses and depreciation and amortization expenses. Income from continuing operations was $22.8 million in 1996, compared to $18.3 million in 1995. Net income for 1996 was $16.9 million which included an after-tax loss of $5.0 million from discontinued operations resulting from an adjustment to the estimated loss on the disposal of the transit manufacturing segment and an $851,000 after-tax extraordinary charge due to the write-off of unamortized debt issuance costs. Coach Manufacturing and Support. Coach manufacturing and support revenues for 1996 increased 33.6% to $502.1 million, reflecting sales of 1,521 new units (1,295 MCIs and 226 Viaggios), compared to $375.8 million for 1995 which was driven by sales of 1,119 new units (1,007 MCIs and 112 Viaggios). In addition to the units sold, 50 units were delivered in 1995 to customers who entered into operating leases with the Company and, as such, were not reflected in sales until 1996 when the customers purchased the units. Taking into account these units, new coach deliveries increased 25.8% from 1,169 to 1,471 units. This increase was due to increased demand from the Company's broad base of independent tour and charter operators, a 67 unit improvement in deliveries to GLI and continuing customer acceptance of the Viaggio model that was first introduced to the U.S. market in 1995. In 1996, the gross margin percentage decreased to 20.8% compared to 21.6% for 1995. The decrease in gross margin was principally due to a higher mix of low-margin Viaggio sales. In 1996, Viaggio sales represented 10.9% of segment revenues and produced a gross margin of 2.6%, compared to a 7.1% share of segment sales, with a 6.6% gross margin in 1995. Since the Viaggio is manufactured by Autobuses, the manufacturing profit accrues to the benefit of Autobuses. Additionally, the gross margin was impacted by a reduction in the margin realized on the resale of used units, however, this was more than offset by a margin improvement on MCI new coach sales which was principally due to the increased volume of units produced. Order backlog as of December 31, 1996 was 577 units, which included 27 units for GLI, compared to 619 units at December 31, 1995, which included 151 units for GLI. Replacement Parts. Replacement parts revenues were $159.2 million for 1996 compared to $140.5 million in 1995. The 13.3% improvement was primarily attributable to an increase in volume based supply agreements entered into with coach operators whereby the Company becomes their principal supplier of replacement parts, as well as revenue gains in the Company's new diesel engine and school bus parts lines. The gross margin percentage decreased to 20.6% in 1996 from 23.2% in 1995 primarily as a result of a large inventory obsolescence provision reflected in 1996 for anticipated losses on dispositions of obsolete and excess inventory due to the planned phase-out of two distribution centers, increased volume discounts attributable to the new volume based supply agreements and increased competition in the transit parts market. Depreciation and Amortization. Depreciation and amortization expenses increased to $16.7 million in 1996, a 14.4% increase over the $14.6 million recorded in 1995. The increase was primarily attributable to an increase in coaches held for lease and property, plant and equipment additions. Research and Development. Research and development expenses increased to $7.3 million, a $4.4 million increase over the $2.9 million recorded in 1995 reflecting increased expenditures for the new tour and charter coach model to be introduced in 1997. Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased slightly to $58.5 million in the twelve months of 1996 compared to $60.4 million in 1995. 11 13 Furthermore, as a percentage of sales, SG&A expenses decreased to 10.4% in 1996 from 11.8% in 1995. The decrease in SG&A is principally due to higher consulting costs incurred in 1995 due to the implementation of a new information system for use in new coach manufacturing. Interest Expense. Interest expense was relatively unchanged at $13.3 million in the twelve months of 1996 and $13.4 million in 1995. Loss (gain) on equity investments. For 1995, the Company realized a $10.5 million gain on sale of an investment in GLI common stock. In 1996, the Company recorded a $1.2 million write-down of a 10% investment in a Mexican coach company (See Note Q to the consolidated financial statements). Income Taxes. The Company's effective income tax rates in 1996 and 1995, excluding non-deductible goodwill amortization, a lower Canadian capital gains rate realized on the GLI gain and the tax effect of a foreign dividend received in 1995, were 41.0% and 40.7%, respectively. 1995 COMPARED TO 1994 General. Revenues for 1995 were $516.3 million, up 10.4% from $467.5 million for 1994. The increase is primarily attributable to an increase in new and used coach sales. The overall gross margin, defined as sales less cost of sales (exclusive of depreciation and amortization) as a percent of sales, was 22.1% for 1995 compared to 23.4% for 1994. Operating income was $38.3 million and $34.7 million in 1995 and 1994, respectively. Excluding merger related expenses and the additional depreciation and amortization which resulted from the Merger, operating income would have been $44.7 million in 1995 compared to $48.7 million in 1994. On an adjusted basis, the overall operating margin declined from 10.4% in 1994 to 8.7% in 1995. Income from continuing operations was $18.3 million, up 22.0% from $15.0 million during 1994. Income from continuing operations in 1995 included an after-tax gain from the sale of an investment in GLI common stock of $6.9 million while 1994 included expenses of $8.6 million after tax related to the Merger. Excluding these items, income from continuing operations would have been $11.4 million and $23.6 million for 1995 and 1994, respectively. Coach manufacturing and support. Coach manufacturing and support revenues were $375.8 million reflecting 1,119 new units sold (of which 112 units were Grupo Dina's Viaggio model) in 1995 compared to $332.8 million based on 1,059 new units sold (of which none were Viaggio models) in 1994. This increase in revenues was due to an increase in the average sales price of new coaches and a change in the mix of units sold as higher-priced 45-foot models comprised a larger percentage of units sold while lower-priced GLI models comprised a smaller percentage. GLI purchased 282 units in 1994 compared to 111 units in 1995. Also, in 1995 50 units were delivered to GLI under intermediate-term leases and, as such, these units were not included in sales for 1995. Including these 50 units, total new coach deliveries in 1995 were 1,169 units compared to 1,059 units for 1994. Gross margins decreased to 21.6% in 1995 from 22.8% in 1994. The decrease in gross margin percentage resulted primarily from an increase in sales of lower-margin Viaggio units, which only produced a 6.6% margin for MCII. Replacement parts. Replacement parts revenues increased by 4.3% to $140.5 million in 1995 from $134.7 million in 1994. The introduction of a line of diesel engine parts and increased school bus parts sales and sales to GLI contributed to the increase in replacements parts revenues. The increase in school bus parts sales is primarily attributable to the April 1995 acquisition of a school bus parts distribution company. Gross margin as a percent of revenues decreased to 23.2% in 1995 from 24.9% in the preceding year. The reduction in gross margin percentage primarily resulted from higher distribution costs in 1995 compared to 1994 reflecting an increase in capacity to accommodate anticipated growth from diesel engine and school bus parts sales. 12 14 Depreciation and amortization. Depreciation and amortization increased from $9.1 million during 1994 to $14.6 million during 1995. The increase is due to the depreciation and amortization related to the revaluation of fixed assets and recognition of goodwill, which occurred due to the Merger with Grupo Dina. Research and development expenses. For 1995 research and development expenses were $2.9 million, or $1.2 million higher than 1994. The increase is due to higher spending in 1995 for the development of a new tour and charter model. Selling, general and administrative expenses. Selling, general and administrative expenses increased to $60.4 million for 1995 from $54.4 million for 1994. During 1995, MCII experienced increased payroll and consulting expenses as a result of the introduction of the diesel engine and school bus parts lines and implementation of a new information system for use in new coach manufacturing. However, as a percentage of revenues, selling, general and administrative expenses in 1995 were consistent with 1994 at 11.7% and 11.6%, respectively. Interest expense. Interest expense for 1995 was $13.4 million compared to $4.3 million in the preceding year. The increase is a result of additional borrowings outstanding and a higher average interest rate during 1995 compared to 1994. Loss (gain) on equity investments. For 1995, the Company realized a $10.5 million gain on sale of an investment in GLI common stock. Income taxes. MCII Holdings' effective combined income tax rates, excluding the effect of non-deductible goodwill amortization, merger related costs in 1994, a lower Canadian capital gains rate and the tax effect of a foreign dividend received, were 40.7% and 41.2% for 1995 and 1994, respectively. 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. 13 15 The following table sets forth the condensed quarterly operating results of MCII Holdings. In the opinion of management, such quarterly information has been prepared on the same basis as MCII Holdings' annual audited consolidated financial statements and includes all adjustments consisting of normal recurring adjustments, necessary to present fairly the information for the periods when read in conjunction with the consolidated financial statements and notes thereto. The operating results for any one quarter are not necessarily indicative of the results to be achieved for a full year or any future quarter. Unaudited Supplementary Financial Information (In Millions of Dollars)
Mar 31, Jun 30, Sep 30, Dec 31, Mar 31, Jun 30, Sep 30, Dec 31, 1995 1995 1995 1995 1996 1996 1996 1996 Revenues 124.4 145.6 96.6 149.7 142.1 177.7 127.1 214.4 Operating Income 10.6 17.8 1.4 8.5 8.1 20.6 7.6 18.3 Income (Loss) From Continuing Operations 4.2 8.1 (1.8) 7.8 2.4 10.1 2.6 7.7 Discontinued Operations (5.0) Extraordinary Charges (0.9) Net Income (Loss) 4.2 8.1 (1.8) 7.8 2.4 5.1 2.6 6.8
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 J of Form 10-K which provides for a reduced disclosure format. ITEM 11. EXECUTIVE COMPENSATION This item has been omitted pursuant to General Instruction J 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 J of Form 10-K which provides for a reduced disclosure format. 14 16 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. This item has been omitted pursuant to General Instruction J 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 Balance Sheet, December 31, 1996 and 1995 Statement of Consolidated Income, years ended December 31, 1996 and 1995, the five month period ended December 31, 1994 and the seven month period ended July 31, 1994. Statement of Consolidated Changes in Stockholder's Equity, years ended December 31, 1996 and 1995, the five month period ended December 31, 1994 and the seven month period ended July 31, 1994. Statement of Consolidated Cash Flows, years ended December 31, 1996 and 1995, the five month period ended December 31, 1994 and the seven month period ended July 31, 1994. Notes to Consolidated Financial Statements 2. FINANCIAL STATEMENT SCHEDULES Report of Independent Accountants Schedule I -- Condensed Financial Information of Registrant 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 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. 15 17 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. 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. 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. 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. 12 Computation of ratio of earnings to fixed charges. 21 List of Subsidiaries of MCII Holdings. 27 EDGAR Financial Data Schedule. 16 18 * 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. (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. 17 19 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: March 24, 1997 MCII HOLDINGS (USA), INC. (Registrant) By: /s/ Guillermo Kareh Aarun ------------------------------------ Director, General Counsel and Secretary 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 Gomez Flores President and Director March 24, 1997 - -------------------------- (Principal Executive Officer) Rafael Gomez Flores /s/ Juan Jaime Petersen Vice President and Chief Financial March 24, 1997 - -------------------------- Officer and Director Juan Jaime Petersen (Principal Financial and Accounting Officer) /s/ Gamaliel Garcia Cortes Director March 24, 1997 - -------------------------- Gamaliel Garcia Cortes /s/ Guillermo Kareh Aarun Director, General Counsel and Secretary March 24, 1997 - -------------------------- Guillermo Kareh Aarun /s/ Stephen P. Glennon Director March 27, 1997 - -------------------------- Stephen P. Glennon
18 20 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. 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. 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. 21 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. 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. 22 MCII HOLDINGS (USA), INC. CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES 23 Report of Independent Accountants February 28, 1997 To the Stockholder of MCII Holdings (USA), Inc.: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, changes in stockholder's equity and cash flows present fairly, in all material respects, the financial position of MCII Holdings (USA), Inc. and its subsidiaries (the Company) at December 31, 1996, and the results of their operations and their cash flows for the year 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. The financial statements of the Company for the years ended December 31, 1995 and 1994 were audited by other independent accountants whose reports dated February 19, 1996 and February 24, 1995, respectively, expressed unqualified opinions. Price Waterhouse LLP Chicago, Illinois 24 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, except share data) 1996 1995 - ----------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 7,979 $ 30,607 Receivables, less allowance of $1,637 and $1,903 48,740 34,936 Current portion of notes receivable 4,615 4,722 Inventories 169,883 146,718 Deferred income taxes 12,308 8,570 Other current assets 3,589 4,073 --------- --------- Total current assets 247,114 229,626 Property, plant and equipment 81,046 75,021 Notes receivable 27,574 30,909 Assets and liabilities of discontinued operations, net 11,311 Deferred income taxes 8,208 14,350 Intangibles 236,954 242,923 Other assets 8,273 9,902 --------- --------- $ 609,169 $ 614,042 ========= ========= LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Bank overdrafts $ 2,656 $ 504 Accounts payable 31,157 24,722 Accrued compensation and other benefits 11,641 13,101 Accrued warranties 9,543 5,381 Accrued income taxes 6,713 11,924 Insurance reserves 5,325 5,337 Other current liabilities 15,782 11,972 --------- --------- Total current liabilities 82,817 72,941 Long-term debt 210,520 217,668 Pensions and other benefits 11,185 8,866 Assets and liabilities of discontinued operations, net 89 Other deferred items and insurance reserves 17,785 13,146 Deferred income taxes 6,073 6,613 Commitments and contingent liabilities (Notes G,I,L,M,N,O,S) Stockholder's equity: Common stock, $.01 par value, 1,000 shares authorized and issued Additional capital 317,465 317,465 Deficit (31,923) (18,856) Unfunded pension loss, net of taxes (423) Cumulative translation adjustments (4,419) (3,801) --------- --------- Total stockholder's equity 280,700 294,808 --------- --------- $ 609,169 $ 614,042 ========= =========
See notes to consolidated financial statements. F - 1 25 MCII HOLDINGS (USA), INC. (A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.) STATEMENT OF CONSOLIDATED INCOME
Predecessor -------------- Year Ended December 31, Five Months Ended Seven Months ----------------------- December 31, Ended July 31, (000 omitted) 1996 1995 1994 1994 - ---------------------------------------------------------------------------------------------------------------------------- Revenues: Sales $ 653,032 $ 509,925 $ 191,789 $ 271,797 Finance income 8,261 6,412 2,584 1,297 --------- --------- --------- --------- 661,293 516,337 194,373 273,094 --------- --------- --------- --------- Operating costs and expenses: Cost of sales (exclusive of items shown separately below) 517,571 397,395 151,614 203,538 Depreciation and amortization 16,658 14,618 5,841 3,279 Interest expense, finance operations 3,605 2,658 693 291 Research and development expenses 7,287 2,915 492 1,238 Provision for relocation of Corporate office (Note R) 3,000 Selling, general and administrative expenses 58,519 60,412 26,614 27,825 --------- --------- --------- --------- 606,640 477,998 185,254 236,171 --------- --------- --------- --------- Operating income 54,653 38,339 9,119 36,923 --------- --------- --------- --------- Other (income) and expense: Interest expense 13,347 13,435 2,464 1,812 Other (income) (1,245) (469) (189) (225) Loss (gain) on equity investments (Note Q) 1,200 (10,522) Merger related expenses (Note B) 11,294 Minority interests 378 --------- --------- --------- --------- 13,302 2,444 2,275 13,259 --------- --------- --------- --------- Income before income taxes 41,351 35,895 6,844 23,664 Income taxes 18,567 17,637 3,958 11,522 --------- --------- --------- --------- Income from continuing operations 22,784 18,258 2,886 12,142 --------- --------- --------- --------- Discontinued operations: Loss on disposal of transit manufacturing, net of tax benefit of $3,130 and $1,885 (5,000) (3,500) --------- --------- --------- --------- Income before extraordinary charge 17,784 18,258 2,886 8,642 Extraordinary charge for early retirement of debt, net of tax benefit of $550 (851) --------- --------- --------- --------- Net income $ 16,933 $ 18,258 $ 2,886 $ 8,642 ========= ========= ========= =========
See notes to consolidated financial statements. F-2 26 MCII HOLDINGS (USA), INC. (A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.) STATEMENT OF CONSOLIDATED CHANGES IN STOCKHOLDER'S EQUITY
Unfunded Cumulative Common Additional Pension Translation (000 omitted) Stock Capital Deficit Loss Adjustment Total - ---------------------------------------------------------------------------------------------------------------- BALANCE, JANUARY 1, 1994 (PREDECESSOR) $ 202 $ 147,400 $ (46,879) $ 0 $ (2,354) $ 98,369 Net income 8,642 8,642 Common stock issued in connection with employee benefit plan 1,140 1,140 Unrealized translation loss (2,733) (2,733) Dividends on common stock (2,017) (2,017) ------ --------- --------- ------- --------- --------- BALANCE, JULY 31, 1994 (PREDECESSOR) 202 148,540 (40,254) 0 (5,087) 103,401 Effect of push-down purchase accounting adjustments due to Dina's acquisition of MCII (202) 168,925 40,254 (751) 208,226 Net income 2,886 2,886 Unrealized translation loss (1,701) (1,701) Dividends on common stock (40,000) (40,000) ------ --------- --------- ------- --------- --------- BALANCE, DECEMBER 31, 1994 0 317,465 (37,114) 0 (7,539) 272,812 Net income 18,258 18,258 Unrealized translation gain 3,738 3,738 ------ --------- --------- ------- --------- --------- BALANCE, DECEMBER 31, 1995 0 317,465 (18,856) 0 (3,801) 294,808 Net income 16,933 16,933 Unrealized translation loss (618) (618) Unfunded pension loss (423) (423) Dividends on common stock (30,000) (30,000) ------ --------- --------- ------- --------- --------- BALANCE, DECEMBER 31, 1996 $ 0 $ 317,465 $ (31,923) $ (423) $ (4,419) $ 280,700 ====== ========= ========= ======= ========= =========
See notes to consolidated financial statements. F-3 27 MCII HOLDINGS (USA), INC. (A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.) STATEMENT OF CONSOLIDATED CASH FLOWS
Predecessor -------------- Year Ended December 31, Five Months Ended Seven Months ------------------------- December 31, Ended July 31, (000 omitted) 1996 1995 1994 1994 - ----------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES: Net income $ 16,933 $ 18,258 $ 2,886 $ 8,642 Adjustments to reconcile net income to net cash provided (used) by operations: Depreciation and amortization 16,658 14,618 5,841 3,279 Deferred income taxes (4,610) 1,019 (1,760) 1,187 Discontinued operations 5,000 3,500 Extraordinary charge for early retirement of debt 851 Provision for relocation of Corporate office 3,000 Gain on sale of property and notes receivable (1,664) (1,945) 180 (69) Loss (gain) on equity investments 1,200 (10,522) Other noncash items, net 85 4,335 (1,524) (1,145) Change in operating assets and liabilities: Receivables (14,746) (8,649) (2,536) 3,280 Inventories (10,794) (24,384) (11,662) (16,706) Accounts payable 6,746 (770) 4,780 (10,825) Accrued income taxes (5,211) 6,064 (4,788) (3,567) Other current liabilities 4,700 2,235 1,022 9,031 Other assets and liabilities, net 11,375 (5,484) (3,211) 1,566 -------- --------- -------- -------- Net cash provided (used) by operating activities 29,523 (5,225) (10,772) (1,827) -------- --------- -------- -------- CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES: Capital expenditures (12,978) (12,559) (4,915) (1,936) Investment in assets held for lease (54,538) (45,667) (689) (6,846) Proceeds from sale of property and assets held for lease 50,880 32,466 96 345 Investments in, or purchases of, businesses or equity investments (12,200) (17,742) (34,616) Proceeds from sale of equity investments 23,716 Proceeds from sale of notes receivable 26,229 8,209 3,463 1,107 Investment in notes receivable (40,344) (26,483) (18,090) (19,739) Collections of notes receivable 18,844 21,095 2,029 1,050 Assets and liabilities of discontinued operations, net 6,400 24,210 23,671 489 -------- --------- -------- -------- Net cash provided (used) by investing activities (17,707) 7,245 5,565 (60,146) -------- --------- -------- -------- CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES: Net change in bank overdrafts 2,152 (5,230) (680) (730) Additional long-term borrowings 68,000 125,000 Payment of long-term borrowings (68,148) (74) (42,000) Net change in bank credit facilities (7,000) 22,000 (49,000) 70,533 Termination of interest rate swap position 4,733 4,950 Payment of debt issuance costs (3,330) Extraordinary charge for early retirement of debt (851) Dividends on common stock (30,000) (34,000) (2,017) Common stock issued 1,140 -------- --------- -------- -------- Net cash provided (used) by financing activities (34,444) 21,646 (680) 68,926 -------- --------- -------- -------- Net increase (decrease) in cash and cash equivalents (22,628) 23,666 (5,887) 6,953 Cash and cash equivalents, beginning of period 30,607 6,941 12,828 5,875 -------- --------- -------- -------- Cash and cash equivalents, end of period $ 7,979 $ 30,607 $ 6,941 $ 12,828 ======== ========= ======== ========
See notes to consolidated financial statements. F-4 28 MCII HOLDINGS (USA), INC. (A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include the accounts of MCII Holdings (USA), Inc. and subsidiaries ("MCII Holdings" or the "Company"). Financial statements of the Company as of and for any period prior to the August 8, 1994 acquisition described below are designated as "Predecessor." MCII Holdings was formed for the purpose of holding Motor Coach Industries International, Inc. ("MCII") as its wholly owned subsidiary. On May 28, 1996, Grupo Dina transferred to MCII Holdings all 100 shares of MCII $.01 par value common stock, in exchange for which MCII Holdings issued to Grupo Dina all 1,000 shares of its $.01 par value common stock. As a result of this exchange between entities under common control, the transaction was accounted for at historical cost in a manner similar to that in a pooling of interests and, therefore, all prior financial statements presented have been restated as if the exchange took place at the beginning of such periods. On August 8, 1994, Consorcio G Grupo Dina, S.A. de C.V. ("Grupo Dina") acquired all of the issued and outstanding common stock of MCII. As a result of this transaction, the assets and liabilities of MCII were stated at estimated fair value as of the acquisition date, and the excess of the consideration paid by Grupo Dina over the estimated fair value of the net assets acquired was recorded as goodwill. For financial reporting purposes, the Company accounted for the transaction effective August 1, 1994. See Note R for further discussion. The Company is a manufacturer of coaches, and a manufacturer and distributor of coach and transit bus replacement parts, with manufacturing facilities in the United States and Canada. Sales are made predominately in the United States and Canada to a diversified customer base, including independent coach operators, national coach fleet operators, government agencies and others. The financial statements have been prepared in accordance with generally accepted accounting principles. 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. However, management does not believe that such differences, if any, would be material to the Company's financial condition or results of operations. Intercompany accounts and transactions between the Company and its subsidiaries have been eliminated. Certain reclassifications have been made to the financial statements of prior periods to conform F-5 29 to 1996 classifications. Described below are those accounting policies that are particularly significant to the Company, including those selected from acceptable alternatives. CASH EQUIVALENTS The Company considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Cost is generally determined on a first-in, first-out basis. 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 6% to 33%
NOTES RECEIVABLE Notes receivable are collateralized by coaches. Substantially all contracts carry 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. INTANGIBLES Intangibles, which consist primarily of goodwill, are carried at cost less accumulated amortization of $15,294,000 at December 31, 1996 and $8,991,000 at December 31, 1995. Intangibles are amortized primarily on the straight-line method over the periods of expected benefit, but not in excess of 40 years. The Company evaluates the carrying value of goodwill and other intangible assets at each reporting period for possible impairment in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." WARRANTY At the time of sale, an accrual for warranty claims, which is based upon management's estimate of future warranty liabilities, is recorded and charged to operations. Actual warranty expenditures are charged to the accrual as incurred, and periodically the accrual is reviewed for adequacy in light of actual experience and adjustments are recorded if necessary. F-6 30 RESEARCH AND DEVELOPMENT Research and development expenses, net of contributions, are charged to income as incurred. FOREIGN CURRENCY EXCHANGE The Company enters into foreign exchange forward contracts to hedge certain firm and anticipated purchase commitments settled in foreign currencies as a means of reducing exposure to fluctuations in foreign exchange rates. 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 rate in effect at the date of the transaction. Any gain or loss resulting from the translation is included in the income statement. PENSIONS AND OTHER BENEFITS Trusteed, noncontributory pension plans cover substantially all employees. 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. The Company has 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 upon the provisions of SFAS No. 106 "Employers' Accounting for Postretirement Benefits Other Than Pensions." B. PROVISION FOR THE RELOCATION OF CORPORATE HEADQUARTERS During December 1996, the Company provided $3,000,000 for exit costs associated with the decision to relocate the Company's corporate headquarters from Phoenix, Arizona to Des Plaines, Illinois. The exit costs associated with the relocation, which is expected to occur during the first quarter of 1997, consist of approximately $1,600,000 for abandonment cost related to the Phoenix office lease and $1,400,000 for severance and other costs. At December 31, 1996, severance and other costs totaling $61,000 had been paid and charged against the reserves. The remaining $2,939,000 of reserves are included in the Consolidated Balance Sheet under the captions, "Other current liabilities" ($1,884,000) and "Other deferred items and insurance reserves" ($1,055,000). Substantially all of the remaining severance and other costs will be paid in 1997 and the lease costs will be paid through 2003. F-7 31 C. ACQUISITIONS 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 distributor of related replacement parts. The assets were purchased for $12.2 million, funded from the Company's bank credit facility, and will be utilized for the purpose of becoming the OEM parts distributor for the installed fleet of Flxible transit buses. The fair value of assets acquired was $9,774,000 in inventory and $2,426,000 in property, plant and equipment. In November 1995, the Company purchased, for $2,021,000, a 70% ownership interest in Nanjing Starley Transportation Company Limited, an intercity coach operation which provides regularly scheduled passenger service in China. The investment, which is being accounted for under the equity method, was made by contributing ten refurbished used coaches valued at $1,071,000 and payment of related fees, duties and shipping costs of $950,000. In April 1995, the Company acquired substantially all of the net assets of Billingsley Parts and Equipment, Inc., a distributor of school bus parts. The acquisition was accounted for as a purchase in which total consideration was $2,890,000, of which $2,000,000 was paid in cash and the remainder in the form of a note payable. In February 1994, the Company acquired the remaining 31% of the outstanding stock of its then 69% owned Canadian coach manufacturing subsidiary, Motor Coach Industries Limited ("MCIL"), for $34,290,000. The acquisition was accounted for as a purchase and the excess of the purchase price over the estimated fair value of net assets acquired was $11,933,000. Such excess is being amortized over 40 years using the straight line method. As a result of this acquisition, no additional charge to minority interests will be recorded in the Statement of Consolidated Income subsequent to the acquisition date. The following table reflects the changes made in the accounts of MCIL as a result of applying push down purchase accounting:
(000 OMITTED) Assets: Property, plant and equipment $15,500 Intangibles 11,933 ------- $27,433 ======= Liabilities and Equity: Deferred income taxes $ 6,425 Pensions and other benefits 235 Stockholders' equity 20,773 ------- $27,433 =======
F-8 32 The purchase accounting adjustments described above have resulted in an increase in depreciation expense due to the step-up in the basis of property, plant and equipment, and an increase in amortization expense due to the creation of the intangible. As a result of these adjustments, depreciation and amortization expenses for 1996, 1995 and 1994 increased by $1,879,000, $1,879,000 and $1,598,000, respectively. D. DISCONTINUED OPERATIONS In November 1993, the Board of Directors of MCII approved a plan of disposition of the transit bus manufacturing segment. This decision was based upon 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 may not achieve acceptable profitability in the foreseeable future. As a result of this decision, a charge to discontinued operations of $87,202,000 ($53,629,000 after-tax) was recorded in the third quarter of 1993 to reflect the estimated loss on disposal of the transit manufacturing segment. During 1994 and 1996, based upon further analysis of the estimated loss to be incurred on the disposal, additional provisions of $5,385,000 ($3,500,000 after-tax) and $8,130,000 ($5,000,000 after-tax), respectively, were recorded resulting in total charges relating to discontinued operations of $100,717,000 ($62,129,000 after-tax). 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. 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. The summarized balance sheet of the transit manufacturing segment at December 31 was as follows:
1996 1995 ---- ---- (000 OMITTED) Assets: Accounts receivable $ 3,372 $18,247 Other current assets 815 2,548 Deferred taxes and other assets 5,538 5,097 -------- ------- 9,725 25,892 -------- ------- Liabilities: Accounts payable -- 378 Other current liabilities 8,711 12,858 Other liabilities 1,103 1,345 -------- ------- 9,814 14,581 -------- ------- Assets and liabilities, net $ (89) $11,311 ======== =======
F-9 33 As there were no operations in 1996, the following is a summary of the operating results of the transit manufacturing segment for the years ended December 31:
1995 1994 ---- ---- (000 OMITTED) Revenues $ 24,278 $ 166,235 Operating costs and expenses 24,881 177,009 -------- --------- (603) (10,774) Income tax benefit 232 4,148 -------- --------- Losses charged to discontinued operations reserve $ (371) $ (6,626) ======== =========
The cumulative loss on disposal of the transit manufacturing segment, recorded in 1993, 1994 and 1996, included the following components:
(000 OMITTED) Write-down of assets to estimated liquidation value $ 58,454 Provision for shut-down costs and other reserves 21,841 Provision for operating losses during phase-out period 20,422 --------- 100,717 Tax benefit (38,588) --------- $ 62,129 =========
E. INVENTORIES Inventories at December 31 consisted of the following:
1996 1995 ---- ---- (000 OMITTED) Raw materials $ 21,065 $ 26,219 Work in process 32,614 36,371 Finished goods 129,214 98,979 --------- --------- 182,893 161,569 Excess quantity and obsolescence reserve (13,010) (14,851) --------- --------- $ 169,883 $ 146,718 ========= =========
F-10 34 F. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31 consisted of the following:
1996 1995 ---- ---- (000 OMITTED) Land $ 4,935 $ 3,459 Buildings and leasehold improvements 32,375 31,947 Assets held for lease 19,368 21,361 Machinery and equipment 40,730 27,896 -------- -------- 97,408 84,663 Less accumulated depreciation and amortization (16,362) (9,642) -------- -------- $ 81,046 $ 75,021 ======== ========
Depreciation and amortization expense for property, plant and equipment was $9,004,000, $7,778,000, $3,263,000 and $2,839,000 for the years ended December 31, 1996 and 1995, the five month period ended December 31, 1994 and the seven month period ended July 31, 1994 respectively. G. NOTES RECEIVABLE Notes receivable at December 31 consisted of the following:
1996 1995 ---- ---- (000 OMITTED) Notes receivable, net of allowance for uncollectible contracts of $1,285 and $890 $ 32,189 $ 35,631 Less current portion (4,615) (4,722) -------- -------- Long-term notes receivable $ 27,574 $ 30,909 ======== ========
During the years ended December 31, 1996 and 1995, the five month period ended December 31, 1994 and the seven month period ended July 31, 1994, the Company sold $42,705,000, $42,366,000, $21,486,000 and $23,097,000 of its notes receivable for $44,328,000, $44,126,000, $22,386,000 and $23,642,000, respectively. The Company has agreed to repurchase, for the unpaid balance, any contract for which there has been a material breach of any warranty, representation, covenant or other obligation of the Company as specified in the contract. In the case of default by a debtor, the purchaser, after taking possession of the underlying collateral F-11 35 equipment, may permit the Company to remarket the equipment. The Company is required to reimburse the purchaser for any losses as a result of defaults up to an aggregate of $5,135,000 at December 31, 1996. Scheduled annual maturities of notes receivable at December 31, 1996 are $4,615,000 (1997), $4,478,000 (1998), $4,560,000 (1999), $3,580,000 (2000), $3,336,000 (2001), and $12,905,000 (thereafter). H. LONG-TERM DEBT Long-term debt at December 31 was as follows:
1996 1995 ---- ---- (000 OMITTED) Borrowings under bank credit facility $ 85,000 $ 92,000 Term notes payable, due to 2002 125,000 125,000 Note payable at 7% due to 2001 668 816 --------- --------- 210,668 217,816 Less current portion 148 148 --------- --------- Long-term debt $ 210,520 $ 217,668 ========= =========
In October 1996, the Company refinanced its bank credit facility. The new credit facility provides up to $125,000,000 for borrowing purposes, of which up to $35,000,000 is available for issuance of standby letters of credit, and contains other terms which are substantially similar to the facility refinanced. Borrowings are available under the new facility on a revolving basis through September 30, 1999. As a result of this refinancing, the Company recorded a $1.4 million ($851,000 after-tax) extraordinary charge for the write off of related debt issuance costs. At December 31, 1996, the Company was contingently liable under standby letters of credit in the amount of $6,122,000. Canadian revolving credit loans are available to a subsidiary of the Company which provide for loans up to the Canadian equivalent of $7,297,000 of which no amounts were outstanding at December 31, 1996. Borrowings were available at December 31, 1996 on a revolving basis until January 31, 1997. The Company is in the process of extending the term of the loan. Until a final agreement is entered into, the bank has agreed to continue to allow borrowings under this facility on a demand basis. The interest rates applicable to borrowings under these agreements are, at the Company's option, indexed to the bank prime rate or the London Interbank Offered Rate ("LIBOR"), plus appropriate spreads over such indices during the period of each borrowing agreement. The agreements also provide for commitment fees. Such spreads and fees can change based upon changes in the Company's financial ratios. Annually, with the participating banks' consent, the term of the agreements may be extended for one year. F-12 36 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%. During 1996 and 1995, the Company terminated the swap 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 is at a fixed rate of 7.31% on the $125,000,000 borrowing. The Company's long-term debt agreements include various restrictive covenants and require the maintenance of certain defined financial ratios with which the Company is in compliance. At December 31, 1996, no stockholder's equity was available for the payment of dividends by the Company. Annual maturities of long-term debt due in the next five years will approximate $148,000 (1997), $25,148,000 (1998), $110,148,000 (1999), $25,148,000 (2000), $25,076,000 (2001) and $25,000,000 (thereafter). Interest paid in the years ended December 31, 1996 and 1995, the five months ended December 31, 1994 and the seven months ended July 31, 1994 was $16,520,000, $15,920,000, $3,559,000 and $5,007,000, respectively. I. INCOME TAXES Income tax expense (benefit) for the years ended December 31 was comprised of the following:
YEAR ENDED DECEMBER 31, FIVE MONTHS ENDED SEVEN MONTHS -------------------- DECEMBER 31, ENDED JULY 31, 1996 1995 1994 1994 ---- ---- ---- ---- (000 OMITTED) Current: United States: Federal $ 11,098 $ 3,864 $ 2,267 $ 3,442 State 1,685 1,108 537 1,699 Foreign 10,394 11,646 2,914 5,194 -------- -------- -------- -------- $ 23,177 $ 16,618 $ 5,718 $ 10,335 ======== ======== ======== ======== Deferred: United States: Federal (2,812) 373 $ (246) $ 1,220 State (236) 79 (69) (22) Foreign (1,562) 567 (1,445) (11) -------- -------- -------- -------- (4,610) 1,019 (1,760) 1,187 -------- -------- -------- -------- Total income tax expense $ 18,567 $ 17,637 $ 3,958 $ 11,522 ======== ======== ======== ========
F-13 37 Deferred income tax assets and liabilities included in the Consolidated Balance Sheet at December 31 consisted of the following:
1996 1995 ---- ---- (000 OMITTED) Deferred tax assets: Pensions and other benefits $ 5,775 $ 4,979 Allowances and reserves for losses 10,908 8,739 Net operating loss carryforward 5,420 12,150 Deferred state income taxes 1,517 1,222 Other 1,236 546 -------- -------- Total gross deferred tax assets 24,856 27,636 -------- -------- Deferred tax liabilities: Property, plant and equipment (6,847) (8,186) Intangibles (3,282) (2,439) Installment sales (108) (606) Other (176) (98) -------- -------- Total gross deferred tax liabilities (10,413) (11,329) -------- -------- Net deferred tax asset $ 14,443 $ 16,307 ======== ========
Income taxes paid (received) in the years ended December 31, 1996 and 1995, the five month period ended December 31, 1994 and the seven month period ended July 31, 1994 were $12,984,000, $4,606,000, $6,783,000 and $(1,268,000) respectively. At December 31, 1996, the Company had a U.S. net operating loss carry forward of $15,485,000 which expires in 2009. United States and Canadian income before income taxes for the years ended December 31 was as follows:
YEAR ENDED DECEMBER 31, FIVE MONTHS ENDED SEVEN MONTHS ---------------------- DECEMBER 31, ENDED JULY 31, 1996 1995 1994 1994 ---- ---- ---- ---- (000 OMITTED) United States $21,874 $12,979 $ 4,649 $12,123 Canada 19,477 22,916 2,195 11,541 ------- ------- ------- ------- $41,351 $35,895 $ 6,844 $23,664 ======= ======= ======= =======
F-14 38 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 for the years ended December 31 is set forth below:
YEAR ENDED DECEMBER 31, FIVE MONTHS ENDED SEVEN MONTHS ------------------ DECEMBER 31, ENDED JULY 31, 1996 1995 1994 1994 ---- ---- ---- ---- (000 OMITTED) Computed income tax provision at statutory tax rate of 35% $14,473 $ 12,563 $2,395 $ 8,283 State income taxes 942 773 304 1,090 Canadian tax differences 1,258 637 524 775 Intangible amortization 1,367 1,652 543 53 Foreign dividend received 2,039 Minority interests 132 Merger related expenses 1,563 Other, net 527 (27) 192 (374) ------- -------- ------ -------- Total income tax expense $18,567 $ 17,637 $3,958 $ 11,522 ======= ======== ====== ========
The Company's U.S. federal income tax returns have been examined through 1990 and are currently being examined for 1991, 1992, 1993 and 1994. The Company's Canadian income tax returns for 1982 through 1992 are currently under review by Revenue Canada. Authorities have proposed imputing additional income relating to transactions with a U.S. based subsidiary of the Company. A formal reassessment has been issued by Revenue Canada on the 1985 return. A notice of objection has been filed by the Company for 1985. In the event of an adverse judgment, the additional income taxes for 1982 through 1992 could amount to up to $26,000,000 plus interest of approximately $40,000,000 and, in addition, the Company may be subject to potential reassessments for years subsequent to 1992 on the same basis which could result in additional income taxes and interest, all before recoveries of U.S. Federal income taxes which may be available to offset a portion of any additional taxes paid to Canada. Although the Company is still in the process of obtaining additional information, based upon 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. F-15 39 J. PENSION BENEFITS Net periodic pension cost for the two years ended December 31, 1996, 1995, and the five month period ended December 31, 1994 and the seven month period ended July 31, 1994 included the following components:
UNITED STATES ----------------------------------------------------- YEAR ENDED DECEMBER 31, FIVE MONTHS ENDED SEVEN MONTHS ------------------ DECEMBER 31, ENDED JULY 31, 1996 1995 1994 1994 ---- ---- ---- ---- (000 OMITTED) Service cost benefits earned $ 996 $ 797 $ 389 $ 545 during the period Interest cost on projected 896 827 269 377 benefit obligation Actual return on plan assets (1,019) (1,592) (135) (189) Net amortization and deferral 726 1,127 (78) (109) Other items, primarily defined contribution plans, curtailment gains and settlement cost 618 842 162 227 ------- ------- ----- ----- Net pension cost $ 2,217 $ 2,001 $ 607 $ 851 ======= ======= ===== =====
CANADA ---------------------------------------------------------- YEAR ENDED DECEMBER 31, FIVE MONTHS ENDED SEVEN MONTHS -------------------- DECEMBER 31, ENDED JULY 31, 1996 1995 1994 1994 ---- ---- ---- ---- (000 OMITTED) Service cost benefits earned during the period $ 452 $ 375 $ 134 $ 188 Interest cost on projected benefit obligation 415 401 143 200 Actual return on plan assets (559) (494) (187) (261) Net amortization and deferral 3 1 (3) (4) Other items, primarily defined contribution plans, curtailment gains and settlement cost 846 610 223 313 ------- ----- ----- ----- Net pension cost $ 1,157 $ 893 $ 310 $ 436 ======= ===== ===== =====
F-16 40 The following tables indicate the plans' funded status and amounts recognized in the Consolidated Balance Sheet at December 31:
UNITED STATES --------------------------------------------------------------- 1996 1995 ---- ---- ASSETS EXCEED ACCUMULATED ASSETS EXCEED ACCUMULATED ACCUMULATED BENEFITS ACCUMULATED BENEFITS EXCEED BENEFITS EXCEED ASSETS BENEFITS ASSETS -------- ------------- -------- ------ (000 OMITTED) Actuarial present value of benefit obligations: Vested benefit obligation $ 6,839 $ 2,757 $ 5,035 $ 1,450 ======== ======= ======= ======= Accumulated benefit obligation $ 7,934 $ 2,961 $ 6,422 $ 1,572 ======== ======= ======= ======= Projected benefit obligation $ 10,121 $ 3,422 $ 8,048 $ 1,809 Market value of plan assets, primarily equity and fixed income securities 10,025 209 8,935 162 -------- ------- ------- ------- Plan assets over (under) projected benefit obligation (96) (3,213) 887 (1,647) Unrecognized transition asset (54) (63) Unrecognized prior service cost (credit) (5) 1,716 (12) 1,260 Unrecognized net (gain) loss (1,089) 1,111 (1,531) 190 Additional minimum liability -- (2,367) -- (1,233) -------- ------- ------- ------- Accrued pension cost $ (1,244) $(2,753) $ (719) $(1,430) ======== ======= ======= =======
CANADA ---------------------------------- ASSETS EXCEED ACCUMULATED BENEFITS ---------------------------------- 1996 1995 ---- ---- Actuarial present value of benefit obligations: Vested benefit obligation $ 4,355 $ 3,711 ======= ======= Accumulated benefit obligation $ 4,378 $ 3,713 ======= ======= Projected benefit obligation $ 5,582 $ 4,794 Market value of plan assets, primarily equity and fixed income securities 5,810 5,030 ------- ------- Plan assets over projected benefit obligation 228 236 Unrecognized transition asset (4) (6) Unrecognized prior service cost 47 51 Unrecognized net loss 382 201 ------- ------- Prepaid pension cost $ 653 $ 482 ======= =======
F-17 41 Weighted average assumptions used were:
UNITED STATES CANADA ------------- ------ 1996 1995 1994 1996 1995 1994 ---- ---- ---- ---- ---- ---- Discount rate for obligation 7.5% 7.5% 7.5% 7.5% 8.5% 8.5% Rate of increase in compensation 5.0% 4.5% 4.5% 4.5% 5.0% 5.0% Long-term rate of return on assets 9.5% 9.5% 9.5% 9.5% 9.0% 9.0%
K. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The net periodic postretirement benefit cost for the years ended December 31, 1996, 1995, and the five month period ended December 31, 1994 and the seven month period ended July 31, 1994 included the following components:
YEAR ENDED DECEMBER 31, FIVE MONTHS ENDED SEVEN MONTHS ------------------ DECEMBER 31, ENDED JULY 31, 1996 1995 1994 1994 ---- ---- ---- ---- (000 OMITTED) Service cost benefits attributed $ 538 $ 416 $ 188 $ 262 to service during the period Interest cost on the accumulated 451 401 162 227 postretirement benefit obligation Net amortization and deferral (71) (45) (5) (6) Curtailment gain (665) ----- ------ ----- ----- Net periodic postretirement benefit cost $ 253 $ 772 $ 345 $ 483 ===== ====== ===== =====
As a result of a workforce reduction in the Company's New Mexico engineering facility, a curtailment gain of $665,000 was realized during 1996. The status of the plans at December 31 was as follows:
1996 1995 ---- ---- (000 OMITTED) Retirees $ 709 $1,173 Fully eligible active plan participants 1,737 1,425 Other active plan participants 3,910 3,686 ------ ------ Accumulated postretirement benefit obligation 6,356 6,284 Unrecognized prior service cost 21 34 Unrecognized net gain 505 329 ------ ------ Accrued postretirement benefit cost $6,882 $6,647 ====== ======
F-18 42 The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation ("APBO") was 11.0% in 1996, gradually declining to 5.0% by the year 2002 and remaining at that level thereafter for retirees below age 65, and 8.0% in 1996, gradually declining to 5.0% by the year 2002 and remaining at that level thereafter for retirees above age 65. A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 by approximately 20%, and the net periodic postretirement benefit cost by approximately 23%. The assumed discount rate used in determining the APBO was 7.5% in 1996 and 1995. L. LEASE OBLIGATIONS Certain warehouses, offices and equipment are leased under leases expiring through the year 2007 with some of the leases providing for renewal options. Leases which expire are generally renewed or replaced by similar leases. At December 31, 1996, future minimum rental payments with respect to noncancellable operating leases with terms in excess of one year were as follows: $2,273,000 (1997), $1,465,000 (1998), $1,293,000 (1999), $1,043,000 (2000), $631,000 (2001) and $1,039,000 (thereafter). Total rental expense for the years ended December 31, 1996 and 1995, the five month period ended December 31, 1994 and the seven month period ended July 31, 1994 was $3,440,000, $3,106,000, $1,211,000 and $1,829,000, respectively. M. 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, 1996 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. N. COMMITMENTS AND CONTINGENT OBLIGATIONS As a part of the Company's marketing strategy for the 1997 introduction of the new EL model intercity coach, the "Renaissance", The Company has entered into trade-in agreements 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 F-19 43 Company has committed to trade-in values ranging from 91% of the original invoice price for an 18 month old coach to 73% for a 36 month old coach; the trade-in values are estimated by management to approximate fair value for the coaches at the time of the trade-in. At December 31, 1996, the Company's commitments under this program ranged from a high of $16,152,000 to a low of $14,525,000. During 1996, the Company completed a research and development project 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%. During 1996, 1995 and 1994, the Company recorded $1,479,000, $3,305,000 and $698,000, respectively, from the contribution programs, which has been applied against research and development expenses. As of December 31, 1996, the total amount of such contributions totaled $7,373,000. O. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS 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 as gains and losses on the contracts offset gains and losses on the materials being purchased. At December 31, 1996 and 1995, the Company had approximately $17,855,000 and $52,902,000, respectively, of Canadian dollar exchange forward contracts outstanding. The Company's theoretical risk in these transactions is the cost of replacing, at current market rates, these contracts in the event of default by the other party. Management believes the risk of incurring such losses is remote as the contracts are entered into with major financial institutions. At December 31, 1995, the Company had an interest rate swap outstanding with a commercial bank which had a notional principal amount of $62,500,000 on which the Company paid interest at LIBOR and received interest at 7.88%. The swap was entered into to effectively change the interest rate on $62,500,000 of the Company's $125,000,000 of term notes payable to LIBOR plus 1.14%. During 1996, the Company settled the entire notional principal amount of the swap, resulting in proceeds to the Company of $4,733,000 which is being amortized as an adjustment to interest expense over the remaining life of the notes. As an adjunct to its new and used 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 F-20 44 companies or guarantees the payment of certain obligations of coach owners or operators. The amount of such agreements as of December 31, 1996 and 1995 was approximately $26,678,000 and $3,462,000, respectively. Additionally, as a result of certain sales of notes receivable and leases during 1996 and 1995, the Company is obligated to reimburse the purchaser of such notes and leases for any losses as a result of defaults up to $6,272,000 as of December 31, 1996 and $9,526,000 as of December 31, 1995. The Company has experienced no material losses in respect of such obligation, and losses under existing agreements are not expected to exceed amounts reserved for such losses. 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 methodologies may have a material effect on the estimated fair value amounts. The carrying values of cash and cash equivalents, receivables, bank overdrafts and accounts payable approximate fair values due to the short-term maturities of these instruments. The carrying amounts and estimated fair values of the Company's other financial instruments at December 31 were as follows:
1996 1995 ---- ---- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- (000 OMITTED) Notes receivable $ 32,189 $ 32,184 $ 35,631 $ 35,658 Investment in equity security -- -- 1,200 1,200 Debt (210,668) (209,710) (217,816) (229,678) Foreign exchange forward contracts -- 22 -- 84 Interest rate swap -- -- -- 5,891
The methods and assumptions used to estimate the fair values of the financial instruments are summarized as follows: Notes receivable - Estimated by discounting the future cash flows using rates currently used for notes of similar terms and maturities. Investment in equity security - Estimated at its carrying value. F-21 45 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. Interest rate swap - Estimated by discounting future cash flows using rates currently available. The swap agreement specifically hedged portions of the Company's term notes payable. P. RELATED PARTY TRANSACTIONS In 1993, the Company purchased a 10% ownership interest in Mexicana de Autobuses, S.A. de C.V. ("MASA"), a coach manufacturing company in Mexico, for $6,000,000. In December 1994, the Company distributed the MASA shares to MCII as a dividend. MCII in turn distributed the shares to Grupo Dina as a dividend. In December 1995, the Company repurchased the MASA shares directly from Grupo Dina for $1,200,000. Amounts due from (to) Grupo Dina were $353,000, included in other current assets, and $(880,000), included in other current liabilities, as of December 31, 1996 and $(367,000), included in other current liabilities, as of December 31, 1995. Notes receivable at December 31, 1996 included a $116,000 note from Nanjing Starley Transportation Company Limited. Additional related party transactions for the years ended December 31 were as follows:
1996 1995 ---- ---- (000 OMITTED) Purchases from Grupo Dina: Coaches for resale $58,215 $27,289 Production materials and tooling 3,422 1,423 ------- ------- $61,637 $28,712 ======= ======= Quantity of coaches purchased for resale 270 129 Sales to Grupo Dina: Production materials and after-market parts $ 1,691 $ 2,279 ======= ======= Payments to Grupo Dina for management services $ 1,000 =======
Q. LOSS OR GAIN ON EQUITY INVESTMENTS In 1996, the Company evaluated the realizability of its investment in MASA and, due to the continuing operating losses of MASA and prolonged weaknesses in the Mexican economy, wrote off the investment resulting in a pre-tax loss of $1,200,000. F-22 46 In January 1995, the Company purchased 6,004,144 shares of Greyhound Lines, Inc. ("GLI") through a rights offering of GLI's Common Stock. In October 1995, the investment was sold, resulting in a pre-tax gain of $10,522,000. R. ACQUISITION BY GRUPO DINA PURCHASE ACCOUNTING ADJUSTMENTS On August 8, 1994, Grupo Dina acquired all of the issued and outstanding common stock of MCII. The acquisition was accounted for as a purchase and "push down accounting" was applied, with the result that purchase accounting adjustments were reflected in the accounting of MCII and its subsidiaries. Application of push down purchase accounting resulted in a preliminary adjustment of all outstanding assets and liabilities of the Company to their estimated fair value on the date of the acquisition. The Company is also in the process of obtaining additional information to quantify the potential liability related to certain preacquisition U.S. and Canadian tax contingencies. Once those amounts have been quantified, the contingencies may be recorded as an additional purchase accounting adjustment. The excess of the consideration paid by Grupo Dina over the estimated fair value of the net assets acquired, based upon the preliminary purchase accounting adjustment, was $236,064,000 and is being amortized over 40 years using the straight line method. The following table reflects the changes made in the accounts of MCII Holdings and its subsidiaries as a result of applying push down accounting:
(000 OMITTED) Assets: Inventories $ (1,200) Property, plant and equipment 7,383 Deferred income taxes (34,021) Intangibles 236,064 --------- $ 208,226 ========= Liabilities and Equity: Stockholders' equity $ 208,226 =========
The purchase accounting adjustments described above have resulted in an increase in depreciation expense due to the step-up in the basis of property, plant and equipment, and an increase in amortization expense due to the creation of the intangible. As a result of these adjustments, the increase in depreciation and amortization expense for 1996, 1995 and 1994 was $6,429,000, $6,450,000 and $2,655,000, respectively. F-23 47 MERGER RELATED EXPENSES In connection with the 1994 acquisition of MCII by Grupo Dina, the Company incurred $11,294,000 of merger related expenses. These expenses were for the cash settlement of all outstanding stock options and the acceleration of vesting on all unvested restricted stock ($6,831,000) and for professional fees, printing, travel and other costs related to the transaction ($4,463,000). S. GUARANTEE OF PARENT COMPANY DEBT AND PLEDGE OF ASSETS On June 3, 1996 the Company became contingently liable for payments of principal and interest on Senior Secured Discount Notes of Grupo Dina due 2002 with an aggregate principal amount of $206,499,680 ("Discount Notes"). It is intended that all payments with respect to the Discount Notes be paid by Grupo Dina, and that payments be made by the Company only in the event of a failure to pay by Grupo Dina. The Company's obligation under the Discount Notes is secured by a pledge of the common stock of its wholly owned subsidiary, Motor Coach Industries International, Inc. The indenture governing the Discount Notes provides for certain restrictive covenants with which the Company is currently in compliance. 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. As of December 31, 1996, the book value of the Discount Notes was $166.7 million and the fair value was $169.3 million. T. SUBSEQUENT EVENTS (UNAUDITED) On January 31, 1997, MCII Holdings acquired from its parent company, Grupo Dina, 99.99% of the shares of Dina Autobuses, S.A. de C.V. ("Autobuses"). This change in structure was accomplished by Grupo Dina contributing 99.99% of the capital stock of Autobuses ($50.3 million in net assets as of December 31, 1996) to MCII Holdings, thereby making Autobuses and its two subsidiaries, Autopartes Hidalguenses, S.A. de C.V. and Carrocera Sahagun, S.A. de C.V., subsidiaries of MCII Holdings. The acquisition will be accounted for as a pooling of interests. Accordingly, the financial statements which include periods after January 31, 1997 will reflect the financial condition, results of operations, changes in stockholders' equity and cash flows of MCII Holdings and Autobuses as if the companies had been consolidated for all periods presented. Pro forma revenues and net income of the combined companies (which will become the historical revenues and net income for financial statements which include periods after January 31, 1997) were $656,046,000 and $30,947,000, for the year ended December 31, 1996 and $522,174,000 and $2,953,000 for the year ended December 31, 1995. F-24 48 U. BUSINESS SEGMENT AND GEOGRAPHIC DATA BUSINESS SEGMENT DATA The Company's principal business activities are categorized into two business segments for financial reporting purposes -- coach manufacturing and support and distribution of replacement parts.
YEAR ENDED DECEMBER 31, FIVE MONTHS ENDED SEVEN MONTHS ---------------------- DECEMBER 31, ENDED JULY 31, 1996 1995 1994 1994 ---- ---- ---- ---- (000 OMITTED) Revenues: Coach manufacturing and support $ 502,092 $375,837 $137,942 $194,873 Replacement parts 159,201 140,500 56,431 78,221 --------- -------- -------- -------- $ 661,293 $516,337 $194,373 $273,094 ========= ======== ======== ======== Operating income: Coach manufacturing and support $ 40,092 $ 23,326 $ 2,118 $ 24,715 Replacement parts 14,561 15,013 7,001 12,208 --------- -------- -------- -------- Non recurring merger expenses (11,294) ========= ======== ======== -------- $ 54,653 $ 38,339 $ 9,119 $ 25,629 ========= ======== ======== ======== Depreciation and amortization: Coach manufacturing and support $ 12,417 $ 10,710 $ 4,268 $ 2,644 Replacement parts 4,241 3,908 1,573 635 --------- -------- -------- -------- $ 16,658 $ 14,618 $ 5,841 $ 3,279 ========= ======== ======== ======== Capital expenditures: Coach manufacturing and support $ 11,749 $ 10,595 $ 4,052 $ 1,158 Replacement parts 1,229 1,964 863 778 --------- -------- -------- -------- $ 12,978 $ 12,559 $ 4,915 $ 1,936 ========= ======== ======== ========
YEAR ENDED DECEMBER 31, 1996 1995 ---- ---- (000 OMITTED) Assets: Coach manufacturing and support $410,419 $411,493 Replacement parts 198,750 191,238 Discontinued operations 11,311 -------- -------- $609,169 $614,042 ======== ========
F-25 49 Major customers are defined as those which individually accounted for more than 10% of the Company's revenue. The Company's only major customer was Greyhound Lines, Inc. which, during the year ended 1996 and the seven months ended July 31, 1994 accounted for 14% and 21%, respectively, of the Company's consolidated revenues. GEOGRAPHIC DATA
YEAR ENDED DECEMBER 31, FIVE MONTHS ENDED SEVEN MONTHS ---------------------- DECEMBER 31, ENDED JULY 31, 1996 1995 1994 1994 ---- ---- ---- ---- (000 OMITTED) Revenues: United States $ 579,136 $445,732 $180,478 $247,974 Canada 82,157 70,605 13,895 25,120 --------- -------- -------- -------- $ 661,293 $516,337 $194,373 $273,094 ========= ======== ======== ======== Operating Income: United States $ 45,005 $ 31,496 $ 7,736 $ 34,060 Canada 9,648 6,843 1,383 2,863 Non recurring merger expenses (11,294) --------- -------- -------- -------- $ 54,653 $ 38,339 $ 9,119 $ 25,629 ========= ======== ======== ========
YEAR ENDED DECEMBER 31, 1996 1995 ---- ---- (000 OMITTED) Assets: United States $449,765 $430,087 Canada 159,404 183,955 -------- -------- $609,169 $614,042 ======== ========
F-26 50 REPORT OF INDEPENDENT ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULE To the Stockholder of MCII Holdings (USA), Inc.: Our audits of the consolidated financial statements referred to in our report dated February 28, 1997 appearing in this Form 10-K also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Chicago, Illinois March 28, 1997 51 SCHEDULE I MCII HOLDINGS (USA), INC. (A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.) BALANCE SHEET
December 31, December 31, (000 omitted, except share data) 1996 1995 - ------------------------------------------------------------------------------------------------------- ASSETS Investment in subsidiary $ 280,700 $ 294,808 ========= ========= STOCKHOLDER'S EQUITY Common stock, $.01 par value, 1,000 shares authorized and issued Additional capital 317,465 317,465 Deficit (31,923) (18,856) Unfunded pension loss, net of taxes (423) Cumulative translation adjustments (4,419) (3,801) --------- --------- Total stockholder's equity 280,700 294,808 --------- --------- $ 280,700 $ 294,808 ========= =========
F-27 52 MCII HOLDINGS (USA), INC. (A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.) STATEMENT OF INCOME
Predecessor ----------- Year Ended December 31, Five Months Ended Seven Months ------------------------- December 31, Ended July 31, (000 omitted) 1996 1995 1994 1994 - ------------------------------------------------------------------------------------------------- Equity in income of subsidiary $16,933 $18,258 $2,886 $8,642 ------- ------- ------ ------ Net income $16,933 $18,258 $2,886 $8,642 ======= ======= ====== ======
F-28 53 MCII HOLDINGS (USA), INC. (A WHOLLY OWNED SUBSIDIARY OF CONSORCIO G GRUPO DINA, S.A. DE C.V.) STATEMENT OF CASH FLOWS
Predecessor ----------- Year Ended December 31, Five Months Ended Seven Months ----------------------- December 31, Ended July 31, (000 omitted) 1996 1995 1994 1994 - ----------------------------------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES: Net income $ 16,933 $ 18,258 $ 2,886 $ 8,642 Adjustments to reconcile net income to net cash provided by operations: Equity in income of subsidiary (16,933) (18,258) (2,886) (8,642) -------- -------- ------- ------- Net cash provided (used) by operating activities 0 0 0 0 -------- -------- ------- ------- CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES: Dividends received from subsidiary 30,000 34,000 877 Dividends paid on common stock (30,000) (34,000) (2,017) Common stock issued 1,140 -------- -------- ------- ------- Net cash provided (used) by financing activities 0 0 0 0 -------- -------- ------- ------- Net increase (decrease) in cash and cash equivalents 0 0 0 0 Cash and cash equivalents, beginning of period 0 0 0 0 -------- -------- ------- ------- Cash and cash equivalents, end of period $ 0 $ 0 $ 0 $ 0 ======== ======== ======= =======
F-29 EX-4.2 2 AMENDMENT TO CREDIT AGREEMENT 1 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 Advanced 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 a 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 it 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 OF 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 document. IN WITNESS WHEREOF, this Amendment has been 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. Junker ------------------------------ Name: James B. Junker 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-12 3 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, --------------------------------------------------- 1992 1993 1994 1995 1996 --------------------------------------------------- Income from continuing operations before provision for income taxes $41,212 $43,247 $30,508 $35,895 $41,351 Add: Interest expense, including amortization 752 1,508 4,276 13,435 13,347 Finance interest expense 2,496 775 984 2,658 3,605 ------- ------- ------- ------- ------- Earnings, as adjusted $44,460 $45,530 $35,768 $51,988 $58,303 ======= ======= ======= ======= ======= Fixed Charges: Interest expense, including amortization 752 1,508 4,276 13,435 13,347 Finance interest expense 2,496 775 984 2,658 3,605 ------- ------- ------- ------- ------- Fixed Charges $ 3,248 $ 2,283 $ 5,260 $16,093 $16,952 ======= ======= ======= ======= ======= Ratio of earnings to fixed charges* 13.7 19.9 6.8 3.2 3.4 ======= ======= ======= ======= =======
*For the period prior to its initial public offering on August 12, 1993, MCII and its subsidiaries were owned by Dial and relied on funds provided by Dial to fund its operations and capital expenditures. The intercompany advances provided by Dial were reflected in the financial statements as non-interest bearing. Therefore, for the years ended December 31, 1991 and 1992 and for the period from January 1, 1993 through August 12, 1993, MCII and its subsidiaries had minimal amounts of outside financing and therefore, a minimum of interest expense. Subsequent to MCII's initial public offering, it incurred significant indebtedness to fund its working capital needs as well as to finance capital expenditures, to purchase the MCIL minority interest in February 1994 and to pay cash dividends to Grupo Dina of $34,000,000 and $30,000,000 in 1994 and 1996, respectively. As a result, a comparison of the ratio of earnings to fixed charges for the periods prior to and subsequent to the initial public offering may not be meaningful. EX-21 4 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) *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 March 12, 1997. EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 U.S. DOLLARS 12-MOS DEC-31-1996 JAN-01-1996 DEC-31-1996 1 7,979 0 50,377 1,637 169,883 247,114 97,408 16,362 609,169 82,817 210,520 0 0 0 317,465 609,169 653,032 661,293 517,571 534,229 72,411 0 13,302 41,351 18,567 22,784 5,000 851 0 16,933 0 0
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