SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended July 4, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from ______ to ______
Commission File Number 0-23808
METROTRANS CORPORATION
(Exact name of Registrant as specified in its charter)
Georgia 58-1393777
(State of Incorporation) (I.R.S. Employer
Identification No.)
777 Greenbelt Parkway, Griffin, Georgia 30223
(Address of principal executive offices, including zip code)
(770) 229-5995
(Registrant's telephone number, including area code)
_______________
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 twelve 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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Outstanding at August 18, 1999
Common Stock, $.01 Par Value 4,129,737 shares
METROTRANS CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended July 4, 1999
Table of Contents
Item Page
Number Number
______ ______
PART I. FINANCIAL INFORMATION
1. Financial Statements:
Consolidated Balance Sheets as of July 4, 1999 and
December 31, 1998 3
Consolidated Statements of Income for the three and six months
ended July 4, 1999 and July 5, 1998 4
Consolidated Statements of Cash Flows for the six months ended
July 4, 1999 and July 5, 1998 5
Notes to Consolidated Financial Statements 6
2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. OTHER INFORMATION
1. Legal Proceedings 16
3. Default Under Senior Securities 18
4. Submission of Matters to a Vote of Security Holders 19
5. Other Information 19
6. Exhibits and Reports on Form 8-K 20
Signature 21
Index of Exhibits 22
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
METROTRANS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, Except Share Data)
July 4, December 31,
1999 1998
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ 0 $ 0
Accounts Receivable, net of allowance for
doubtful accounts of $490 and $134 in 1999
and 1998, respectively 4,610 6,047
Current portion of net investment in
sales-type leases 71 256
Inventories 27,855 39,628
Refundable income taxes 214 2,229
Prepaid expenses and other 1,932 1,192
________ ________
Total current assets 34,682 49,352
PROPERTY, PLANT AND EQUIPMENT, net 8,252 8,902
NET INVESTMENT IN SALES-TYPE LEASES 115 130
INTANGIBLES 485 502
DEPOSITS AND OTHER 438 415
________ ________
$ 43,972 $ 59,301
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 15,224 $ 24,587
Current portion of long-term debt 21,831 2,236
Customer deposits 1,374 1,211
________ ________
Total current liabilities 38,429 28,034
________ ________
LONG-TERM DEBT, net of current portion 1,534 16,076
________ ________
OTHER NONCURRENT LIABILITIES 150 300
________ ________
STOCHOLDERS' EQUITY:
Preferred stock, no par value; 10,000,000
shares authorized 0 0
Common stock, $.01 par value; 20,000,000
shares authorized, 4,129,737 and 4,098,244
shares issued and outstanding in
1999 and 1998, respectively 41 41
Additional paid-in capital 10,824 10,673
Deferred compensation (53) (105)
Retained earnings (deficit) (6,953) 4,282
________ ________
3,859 14,891
________ ________
$ 43,972 $ 59,301
======== ========
The accompanying notes are an integral part of these balance sheets.
3
METROTRANS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Share Data)
(Unaudited)
Three Months Ended Six Months Ended
__________________ ________________
July 4, July 5, July 4, July 5,
1999 1998 1999 1998
_______ _______ ______ ______
NET REVENUE $ 19,755 $ 22,899 $ 37,222 $ 38,917
COST OF SALES 19,131 18,528 38,188 32,324
_________ _________ _________ _________
Gross Profit (Loss) 624 4,371 (966) 6,593
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,006 2,857 9,356 5,765
_________ _________ _________ _________
Operating Income (Loss) (4,382) 1,514 (10,322) 828
INTEREST EXPENSE, net 472 275 913 554
_________ _________ _________ _________
INCOME (LOSS) BEFORE
INCOME TAXES (4,854) 1,239 (11,235) 274
INCOME TAX
PROVISION (BENEFIT) 0 486 0 107
_________ _________ _________ _________
NET INCOME (LOSS) $ (4,854) $ 753 $ (11,235) $ 167
========= ========= ========= =========
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ (1.18) $ 0.18 $ (2.73) $ 0.04
========= ========= ========= =========
Diluted $ (1.18) $ 0.18 $ (2.73) $ 0.04
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 4,130 4,084 4,117 4,084
========= ========= ========= =========
Diluted 4,130 4,121 4,117 4,121
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
4
METROTRANS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
__________________
July 4, July 5,
1999 1998
_______ _______
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (11,235) $ 167
_________ _________
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 883 351
Compensation under restricted stock award 52 52
Changes in assets and liabilities:
Accounts receivable 1,437 (4,140)
Inventories 11,773 (5,778)
Other assets 1,269 (91)
Accounts payable and accrued expenses (9,212) 4,494
Customer deposits 163 884
_________ _________
Total adjustments 6,365 (4,228)
_________ _________
Net cash (used in) provided by
operating activities (4,870) (4,061)
_________ _________
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (233) (930)
Net decrease (increase) in property held for lease 0 214
Net decrease in investment in sales-type leases 200 349
_________ _________
Net cash (used in) investing activities (33) (367)
_________ _________
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) under line of credit (185) 0
Net increase (decrease) in collateralized borrowings 0 355
Net borrowings (repayments) of long-term debt 5,088 4,073
_________ _________
Net cash provided by (used in)
financing activities 4,903 4,428
_________ _________
INCREASE IN CASH 0 0
CASH AT BEGINNING OF PERIOD 0 50
_________ _________
CASH AT END OF PERIOD $ 0 $ 50
========= =========
CASH PAID FOR INTEREST $ 912 $ 260
========= =========
CASH PAID FOR TAXES $ 0 $ 0
========= =========
The accompanying notes are an integral part of these statements.
5
METROTRANS CORPORATION
Notes to Consolidated Financial Statements
July 4, 1999
1. Basis of Presentation
The financial statements include the accounts of Metrotrans Corporation
and its Subsidiary (the "Company"). The financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information and, therefore, omit certain information and
footnotes required by generally accepted accounting principles for complete
financial statements. Accordingly, these statements should be read in
conjunction with the Company's audited financial statements included in its
Annual Report on Form 10-K for the year ended December 31, 1998, filed with
the Securities and Exchange Commission.
In the opinion of management, the financial statements contain all
adjustments necessary for a fair presentation of the financial position,
results of operations and cash flows for the periods presented. The
adjustments were of a normal recurring nature. Results presented for the six
months ended July 4, 1999 are not necessarily indicative of results that may
be expected for the full fiscal year.
2. Inventories
Inventories consist of (in thousands):
July 4, 1999 December 31, 1998
Chassis awaiting conversion $ 2,455 $ 3,958
Raw materials 5,476 6,061
Work in process 1,220 2,937
Finished goods 3,254 19,888
Used vehicles 5,450 6,784
_______ _______
$27,855 $39,628
6
3. Commitments and Contingencies
The Company enters into various leasing arrangements with customers and
leasing companies. Certain leases contingently obligate the Company to
indemnify the leasing company for any losses it incurs up to a specified
amount on the lease in the event the lessee defaults. In addition, the
Company enters into certain agreements with financial institutions whereby
the Company guarantees varying amounts of customers' purchase debt
obligations. The Company's obligation under these guarantees becomes
effective in the case of default in payments or certain other defined
conditions. The Company's aggregate potential liability under these
arrangements as of July 4, 1999 and December 31, 1998 was $17 million and $15
million, respectively. During the six months ended July 4, 1999, the Company
purchased buses totaling approximately $90,000 related to lease defaults and
litigation settlements on sales from prior periods. Purchases to date have
been or are expected to be sold to third parties at or above amounts
approximating the purchase price.
The Company is involved in certain legal matters primarily arising in
the normal course of business. In the opinion of management, the Company's
liability in any of these matters will not have a material adverse effect on
its financial condition or results of operations. The Company is also
involved in other litigation that is discussed in Item 1 of Part II of this
Quarterly Report on Form 10-Q.
4. New Accounting Pronouncements
The Company has no Other Comprehensive Income Items as defined by SFAS
No. 130.
In July 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133 "Accounting for Derivative Instruments and for Hedging
Activities". The Company does not presently have any hedging operations.
7
5. Long-Term Debt
Effective April 12, 1999, the Company entered into an amended secured
revolving credit facility (the "Amended Facility"). Under the Amended
Facility, the Company obtained a waiver of all defaults which existed under
the unsecured credit facility. The Amended Facility provides a commitment of
up to $23 million, an increase of $3 million. Interest under the Amended
Facility is at prime. In connection with the Amended Facility, the Company
has pledged a security interest in substantially all of its assets. The $23
million commitment is subject to certain automatic reductions, including
reductions related to decreases in the Company's level of inventory and an
automatic reduction on December 31, 1999 to $20 million. Under the Amended
Facility, the Company is subject to certain financial covenants, including a
restriction on total capital expenditures of $500,000 in any calendar year, a
prohibition on the payment of any cash dividends, as well as restrictions on
maximum inventory levels and other covenants related to net income and
tangible net worth.
As a result of the second quarter loss, as of July 4, 1999, the Company
was not in compliance with certain financial covenants contained in the
Amended Facility, including financial covenants related to the maintenance of
specified levels of tangible net worth and net income. As of August 18,
1999, the Company has entered into a forbearance agreement with the lender
(the "Forbearance Agreement"), under which the lender has agreed to forbear
until September 30, 1999 from exercising its rights and remedies under the
Amended Facility with respect to the non-compliance. Upon the expiration of
the Forbearance Agreement, unless the Company obtains a waiver of the
noncompliance, or is able to negotiate amended terms to the Amended Facility,
the lender will be entitled to exercise its rights and remedies under the
Amended Facility which include ceasing additional advances under the Amended
Facility and/or demanding payment in full of the outstanding borrowings under
the Amended Facility. If the lender were to take any of these actions, the
Company's operations and financial condition will be materially and adversely
affected unless it is able to secure new third party financing under terms
and conditions reasonably satisfactory to the Company. The Company is
currently in discussions with the lender regarding an amendment to the terms
of the Amended Facility.
Additionally, pursuant to the terms of the Amended Facility, in August
1999, the total commitment under the Amended Facility was automatically
reduced by approximately $670,000. The Company has entered into a Fifth
Amendment to the Company's credit facility (the "Fifth Amendment") which
contains a technical correction to the method used to determine the amount of
the August 1999 commitment reduction.
The foregoing is not a complete description of the terms of the
Forbearance Agreement or the Fifth Amendment or the transactions contemplated
thereby and is subject to and qualified in its entirety by reference to the
Forbearance Agreement and the Fifth Amendment, which are filed as Exhibits
10.2 and 10.3 hereto respectively.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Statements
In addition to historical information, this Quarterly Report on Form 10-
Q contains "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933 (the "Securities Act"), as amended, and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
When used in this report, the words "may," "could," "should," "would,"
"believe," "anticipate," "estimate," "expect," "intend," "plan" and similar
expressions or statements regarding future periods are intended to identify
forward-looking statements. All forward-looking statements are inherently
uncertain as they are based on various expectations and assumptions
concerning future events, which by their nature involve substantial risks and
uncertainties beyond Metrotrans Corporation's control. Among other things,
these risks and uncertainties include: the availability of third party lending
on terms favorable to the Company; changes in price and demand for the
Company's products; the ability of the Company to attract and retain qualified
management, manufacturing and sales personnel; the ability to control
manufacturing costs, overhead and Selling, General and Administrative expenses;
the effects of competition; changes in accounting policies and practices; the
ability of the
Company, its vendors, suppliers and customers to be Year 2000 compliant; the
ability to complete the implementation of a manufacturing cost accounting
system; the ability to obtain chassis and other materials on a timely basis on
terms acceptable to the Company; and the ability to satisfactorily resolve
litigation and vendor claims. Forward-looking statements may also be made in
Metrotrans Corporation's other reports filed under the Exchange Act, press
releases, and other documents; as well as by management in oral statements.
Metrotrans Corporation undertakes no obligation to update or revise any
forward-looking statements for events or
circumstances after the date on which such statement is made. New factors
emerge from time to time, and it is not possible for Metrotrans Corporation
to predict all of such factors. Further, Metrotrans Corporation cannot
assess the impact of each such factor on its business or the extent to which
any factor, or combination of factors, may cause actual results to differ
materially from those contained in any forward-looking statements.
Overview
The Company was incorporated in 1982 for the purpose of designing,
manufacturing and marketing shuttle and mid-size buses. After the
introduction of the Classic( in 1986, the Company experienced significant
growth in unit sales and revenues but total unit sales have decreased over
the past three years, primarily due to a decrease in sales of Classic models
for transit use offset somewhat by the introduction of new products. The
Company's product development strategy is to design and introduce new
products after clearly identifying a market need based, in large part, on
suggestions made by existing and potential customers. This approach resulted
in the introduction of the Eurotrans( in 1990, the Eurotrans XLT( and the
Classic II( in 1992, the Classic Commuter( in 1993, the Legacy LJ by
Metrotrans( in 1996, the Anthem( in 1997, and the Classic XLT ( in 1998.
The Anthem (tm) product line is still under development and no sales have been
made. Metrotrans began exclusive marketing of the Irizar Century for North
America in 1997 with the first deliveries occurring in the second quarter of
1998.
9
Results of Operations
The Company's results for the first quarter and first six months of
operations were adversely affected by a number of factors, including a change
in management personnel involving The Mayflower Corporation plc ("Mayflower")
representatives who occupied key management positions in the Company from
November 1998 to February 1999 and the medical leave of D. Michael Walden,
Chairman and CEO. Mayflower also was obligated under its loan agreement with
the Company to lend it up to $15 million. As of December 31, 1998, the
Company had borrowed $1.9 million under this agreement and in January 1999
requested additional advances under the agreement. Mayflower refused to make
advances as required under the loan agreement and their personnel, who
occupied key management positions, left the Company. These two occurrences
caused significant problems for the Company, including liquidity problems.
The liquidity problems caused concern to customers, vendors and the financing
institutions, which provide financing for the Company's new bus sales. In
some cases, vendors slowed or stopped deliveries of parts and customers
deferred or cancelled orders. Accordingly, production schedules could not be
met, buses could not be delivered as planned, and production levels had to be
curtailed. As a result, the Company's margins and net income have decreased
significantly. The Company entered into an amended secured revolving credit
arrangement with its primary lender on April 12, 1999. In addition, due to
the illness of the Chairman of the Board and Chief Executive Officer, as well
as the departure of the Mayflower management team, it was necessary for the
Company to employ an interim Chief Executive Officer in March 1999. The
Company named a new permanent Chief Executive Officer in July 1999.
During the second quarter of 1999, plans for significant reductions in
ongoing costs (manufacturing overhead, selling, general and administrative
costs) were implemented. In addition, reductions in direct labor personnel
were accomplished and reorganization of the manufacturing process was
initiated and is expected to be completed in the third quarter. The total
number of employees at July 4, 1999 was 332 as compared to 374 at December
31, 1998. A review of cash, inventory and accounts payable management has
taken place during the second quarter and inventories and accounts payable
have been reduced significantly since year end ($11.8 million and $9.4
million respectively). The changes referred to above were necessary and were
facilitated by additional borrowings of $3.0 million and required the use of
outside consultants as well as legal advisors to deal with the numerous legal
(including Mayflower) and other operational matters which required immediate
and significant attention. See "Part II, Item I - Legal Proceedings" for
further information regarding litigation.
A review of the sales and internal organization was completed in late
July 1999 and a corporate-wide internal reorganization of Senior Management
was implemented at that time, as was the hiring of a new Chief Financial
Officer, Mr. David Brewer in August, 1999.
10
Irizar sales in the first six months were less than originally planned,
and sales for the third and fourth quarter are also expected to be below the
prior year primarily because of the Company's cash constraints. Management
is currently discussing with Irizar future production and sales issues. In
addition, the Company has met with Irizar representatives and our chassis
supplier (Spartan) and it's suppliers to determine the need for and type of
corrective action on various mechanical problems which have occurred on
certain Irizar buses previously sold. Customers have been notified of these
steps and corrective action will be taken on the buses beginning in the third
quarter.
Ford Motor Company (the Company's primary supplier for chassis) notified
the Company on May 21, 1999 that they were reviewing their payment terms with
the Company. The Company has satisfactorily concluded those discussions and
continues to receive all chassis ordered (but with some delays as a result of
Ford's production schedules), paying Ford dealers as agreed upon for current
as well as prior chassis deliveries. In addition, the Company is now
negotiating a new credit facility with Ford Motor Credit Corp which is
expected to result in more favorable repayment terms than were previously
granted to the Company.
In order to continue to reduce the existing inventory of used buses (406
units at December 31, 1998 compared with 341 units at July 4, 1999), and in
recognition of the increased competition, the Company has initiated a new
marketing plan for used buses. More used bus inventory will be moved out of
the Bus Pro location in McDonough, Georgia to various sales office locations
throughout the United States for direct selling from these regional offices.
Inventory carrying values were reduced to facilitate faster inventory
turnover of the used and demonstrator buses.
11
The following table sets forth, as a percentage of net revenue, the
relationship of selected items included in the Company's income statement for
the periods indicated.
Three Months Ended Six Months Ended
July 4, July 5, July 4, July 5,
1999 1998 1999 1998
Net revenue 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 96.8 80.9 102.6 83.1
Gross profit (loss) 3.2 19.1 (2.6) 16.9
Selling, general and
administrative expenses 25.3 12.5 25.1 14.8
Operating Income (Loss) (22.1) 6.6 (27.7) 2.1
Interest expense 2.4 1.2 2.5 1.4
Income (Loss)
before income taxes (24.5) 5.4 (30.2) 0.7
Income tax provision 0 2.1 0 0.3
Net Income (24.5)% 3.3 % (30.2)% 0.4%
Net Revenue. Net revenue decreased 13.7% to $19.8 million for the
quarter ended July 4, 1999 from $22.9 million for the comparable prior year
period and decreased 4.4% to $37.2 million during the first six months of
1999 from $38.9 million over the same six-month period in 1998.
The decrease in revenue in the second quarter of 1999 is primarily due
to the decrease in Irizar sales in that quarter. In the second quarter of
1998 (when the Irizar was first introduced), 11 units were sold for $3.6
million, while in the second quarter of 1999, only 2 Irizars were sold and
were higher than in the first quarter of 1999 when total manufactured sales
were 209 units.
Unit sales in the second quarter of 1999 of 263 Classics, 14 Eurotrans
and 12 Legacy LJ by Metrotrans were virtually the same as the second quarter
of the prior year.
Irizar sales for the second quarter and the first six months decreased
as a result of financing issues caused by Mayflower's refusal to fund it's
commitments which began during the last quarter of 1998 and continued through
the current quarter. As a result the sales backlog for Irizars existing as
of December 31, 1998 was dissipated and sales efforts were limited.
Used bus sales decreased in the second quarter from $2.9 million in 1998
to $2.2 million in 1999 or a decrease of 24.2% and for the first six months
decreased from $5.9 million to $3.4 million or 42.4%. The sales results of
1999 were lower in both quarters of 1999 because of more competitive used bus
markets in 1999.
12
Production backlog at the end of the second quarter of 1999 was
approximately $29 million for buses to be manufactured in the U.S. This
compares with a backlog of approximately $30 million at the end of the second
quarter of 1998, exclusive of Irizar backlog at July 5, 1998 of $13 million.
There is no current firm backlog for Irizar sales but the Company is meeting
with certain key customers regarding future orders.
Cost of Sales and Gross Profit. Gross profit declined to $624 thousand
in the second quarter of 1999 from $4.371 million in the second quarter of
1998. For the first six months of 1999, gross loss was $966 thousand
compared to a profit of $6.593 million for the same period in 1998.
The decrease in gross profit in the second quarter was due to a number
of factors including a decrease of approximately $700,000 on margin earned on
the Irizar sales in the second quarter of 1998 versus the second quarter of
1999 and the related decrease in finance income of $400,000 in 1999 on
financing fees earned on Irizar and other lease transactions in 1998. In
addition, approximately $3.6 million of manufactured buses sold in the second
quarter of 1999 were units manufactured in the fourth quarter of 1998 or in
some cases the first quarter of 1999 with virtually no gross profit. If
these 1999 second quarter sales had a margin similar to the margin realized
in the second quarter of 1998 (19%), the gross margin in the second quarter
of 1999 would have been increased by approximately $775,000. The reasons
these units carried no margin in the second quarter of 1999 were as a result
of the losses incurred in the prior two quarters.
During the second quarter, efforts were made to reduce manufacturing
costs, including direct labor and overhead and improving production
throughput. As a result, the gross profit for the second quarter (3.2%)
offset some of the loss reported in the first quarter resulting in a 2.6%
loss on the margin line for the six months ended July 4, 1999 as compared to
the profit for the six months ended July 5, 1998 of 16.9%. The decrease
between years was caused by the factors mentioned above for the second
quarter, and also because of the manufacturing issues discussed previously
under "Results of Operations." The total amount of new bus sales for the six
month period with little or no margin (as described above) was approximately
$10 million (approximately $1.9 million in lost margin).
In addition, because of the Company's need for liquidity and conversion
of receivables and inventory into cash, the Company has reduced its carrying
value of its used bus and demonstrator inventory by approximately $1.1
million in 1999 to facilitate more timely sales.
13
Selling, General and Administrative Expenses and Operating Income.
Selling, general and administrative expenses for the second quarter of 1999
were approximately $5.0 million or an increase of $2.1 million over the
corresponding quarter in 1998. Substantially all of the increases are due
to: (1) significant professional fees for counsel and "management turnaround"
consultants incurred because of significant litigation and operating and
financial issues ($0.9 million), (2) write-off of old receivables and other
assets, providing for lease guarantees from prior years sales where lessees
have or are expected to default on obligations the Company has guaranteed or
adjusting carrying values of assets ($1.3 million) and (3) severance pay and
contractual payments to employees no longer active with the Company ($0.2
million). These increases have been partially offset by other selling
expense reductions.
Selling, general and administrative expenses for the first six months of
1999 were approximately $9.4 million or an increase of $3.6 million over the
prior year for the reasons described above. For the six months ended July 4,
1999, the total adjustments to carrying values of assets and provisions for
losses were $2.6 million and professional fees totaled $1.5 million.
Interest Expense. Interest expense of $475,000 in the second quarter of
1999 increased 70.0% from $275,000 for the prior year's comparable quarter
and increased from $554,000 to $911,000 through the six months ending July 4,
1999 as compared to the same time period in 1998. The increase for the
quarter primarily was the net result of a reduction in the amount of interest
paid to Ford Motor Credit Corporation ("FMCC") for chassis held under its
consignment pool agreement in excess of an initial 90-day non-interest
bearing period, an increase in the overall rate of interest paid on
borrowings under terms of the revised revolving credit facility, and an
increase in the average balance outstanding under the facility during the
quarter.
Liquidity and Capital Resources
Net cash used in operating activities during the six months ended July
4, 1999 totaled $4.9 million compared with cash used in operating activities
of $4.1 million in the comparable 1998 period. Decreases in accounts
receivable and inventory of $11.8 million and $1.4 million, respectively, and
a reduction by a $9.2 million in accounts payable, were primarily responsible
for the cash used in operating activities during the period. The decrease in
inventory resulted primarily from the sales of finished goods inventory, a
reduction of raw materials and work in process inventory and net reductions
in the used bus and demonstrator inventory.
Under the Amended Facility, the Company is limited in Capital
Expenditures and will be required to use substantially all cash flow to fund
future operations and reduce outstanding debt.
The Company does not anticipate receiving any additional funding under
the Mayflower Agreement nor does the Company intend to repay the existing
$1.9 million advance made under the Mayflower Loan Agreement pending
resolution of the pending litigation between the parties.
14
Effective April 12, 1999, the Company entered into an amended secured
revolving credit facility (the "Amended Facility"). Under the Amended
Facility, the Company obtained a waiver of all defaults which existed under
the unsecured credit facility. The Amended Facility provides a commitment of
up to $23 million, an increase of $3 million. Interest under the Amended
Facility is at prime. In connection with the Amended Facility, the Company
has pledged a security interest in substantially all of its assets. The $23
million commitment is subject to certain automatic reductions, including
reductions related to decreases in the Company's level of inventory and an
automatic reduction on December 31, 1999 to $20 million. Under the Amended
Facility, the Company is subject to certain financial covenants, including a
restriction on total capital expenditures of $500,000 in any calendar year, a
prohibition on the payment of any cash dividends, as well as restrictions on
maximum inventory levels and other covenants related to net income and
tangible net worth.
As a result of the second quarter loss, as of July 4, 1999, the Company
was not in compliance with certain financial covenants contained in the
Amended Facility, including financial covenants related to the maintenance of
specified levels of tangible net worth and net income. As of August 18,
1999, the Company has entered into a forbearance agreement with the lender
(the "Forbearance Agreement"), under which the lender has agreed to forbear
until September 30, 1999 from exercising its rights and remedies under the
Amended Facility with respect to the non-compliance. Upon the expiration of
the Forbearance Agreement, unless the Company obtains a waiver of the
noncompliance, or is able to negotiate amended terms to the Amended Facility,
the lender will be entitled to exercise its rights and remedies under the
Amended Facility which include ceasing additional advances under the Amended
Facility and/or demanding payment in full of the outstanding borrowings under
the Amended Facility. If the lender were to take any of these actions, the
Company's operations and financial condition will be materially and adversely
affected unless it is able to secure new third party financing under terms
and conditions reasonably satisfactory to the Company. The Company is
currently in discussions with the lender regarding an amendment to the terms
of the Amended Facility.
Additionally, pursuant to the terms of the Amended Facility, in August
1999, the total commitment under the Amended Facility was automatically
reduced by approximately $670,000. The Company has entered into a Fifth
Amendment to the Company's credit facility (the "Fifth Amendment") which
contains a technical correction to the method used to determine the amount of
the August 1999 commitment reduction.
15
Year 2000 Issues. Like many other companies, the year 2000 computer
issue creates risks for the Company. If internal systems do not correctly
recognize and process date information beyond the year 1999, there could be
an adverse impact on the Company's operations. There are two other related
issues, which could also lead to incorrect calculations or failures; (i) some
systems' programming assigns special meaning to certain dates, such as
9/9/99, and (ii) the fact that the year 2000 is a leap year. The Company's
manufacturing and distribution operations are not critically dependent on any
mainframe, mini-computer or personal computer-based systems or software
applications. The Company is implementing a plan to modify its information
technology for the year 2000. During the past two years, the Company has
implemented a program designed to update its information systems. Although
the implementation of the program primarily is intended to provide better
operating systems and accounting, inventory and production controls, the
Company has been aware of the year 2000 issues in its selection of hardware
and software. The third party vendors that have supplied new hardware and
software have informed the Company that the new systems and software are year
2000 compliant. The Company has experienced some delays in the
implementation and integration of the new systems; although the Company has
completed and tested substantially all of the major systems which have been
made Y2K compliant and anticipates that the balance of existing systems will
made Y2K compliant and be operational prior to December 31, 1999. The cost
to complete this process is expected to be less than $25,000. As of July 4,
1999, the Company has incurred approximately $27,000 in year 2000 expenses.
The amount may increase as additional information is obtained to complete the
replacement and conversion process.
The Company is also assessing the impact of the year 2000 issue on its
major vendors and suppliers to determine the extent to which the Company is
vulnerable to those third parties' failure to remediate their own year 2000
issues. Based on information presently available, the Company does not
anticipate any material impact on its financial condition or results of
operations from the effect of the year 2000 issue or the Company's internal
systems or those of its major suppliers and customers. However, there can be
no guarantee that the systems of other companies on which the Company's
system rely will be brought to compliance, or that a failure to convert by
another company would not have a material adverse impact on the Company.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Jerry J. Schweiner v. Metrotrans Corporation, Superior Court for
Spalding, State of Georgia, Civil Action File No. 98-CV-1994. In November,
1998, the Company gave notice of termination of Jerry J. Schweiner's
employment with the Company. Mr. Schweiner had served as President and Chief
Operating Officer of the Company since April 1998. On December 29, 1998, Mr.
Schweiner filed a Complaint against the Company alleging that the Company
wrongfully terminated him in violation of his employment contract with the
Company. In July 1999, Mr. Schweiner and the Company, without either party
admitting liability, reached an agreement settling the lawsuit. In
connection with the settlement, the Company has agreed to pay Mr. Schweiner
$87,500.00 in six installments.
16
Metrotrans Corporation v. The Mayflower Corporation, plc, and Mayflower
(U.S. Holdings), Inc., United States District Court for the Northern District
of Georgia, Atlanta Division, Case No. 1:99-CV-0681-WBH. On March 15, 1999,
the Company filed a Complaint against Defendants Mayflower, and its
subsidiary, Mayflower (U.S. Holdings), Inc. In its Complaint, the Company
seeks compensatory damages in excess of $4,682,000, punitive damages, and
specific performance of the Mayflower Agreement and the Loan Agreement
between the Company and the Defendants based on theories of breach of
contract, quantum meruit, promissory estoppel, breach of fiduciary duty, and
fraudulent misrepresentation and concealment. The Company's Complaint is
based in part on the fact that Mayflower has refused to fund additional loans
to the Company under the Loan Agreement or to pay a fee for the Company's
provision of material assistance, at Mayflower's request, in connection with
Mayflower's acquisition of Dennis Group, plc. On April 14, 1999, the
Mayflower Defendants filed their Answer and Counterclaim, as well as a Motion
to Join Indispensable Parties seeking to add seven of the Company's current
or former officers or directors. The Company has opposed the Mayflower
Defendants' Motion to Join Indispensable Parties, but, before the Company was
able to respond to the Mayflower Defendants' Counterclaim, the Mayflower
Defendants filed an Amended Counterclaim. In the Amended Counterclaim, filed
May 3, 1999, the Mayflower Defendants seek either rescission of the Mayflower
Agreement and the Loan Agreement, or compensatory and punitive damages, based
on seven causes of action: securities fraud under Federal and Georgia law,
common law fraud, negligent misrepresentation, breach of contract and a
derivative claim for breach of fiduciary duties. On May 27, 1999, the
Company filed its Motion to Dismiss the Mayflower Defendants' Amended
Counterclaim. The Company's Motion is fully briefed, and the parties are
awaiting the Court's decision. In light of the Company's pending Motion to
Dismiss, the Court has entered into an order staying all discovery in the
case.
Demand Under O.C.G.A. 14-2-742. On July 29, 1999, Michael Stucchio,
one of the Company's shareholders, demanded through his counsel that the
Company file a lawsuit against certain individual officers and directors for
their alleged breaches of fiduciary duty and usurpation of corporate
opportunities. On August 10, 1999, the Board considered Mr. Stuccio's demand
and determined that it was in the best interests of the Company to constitute
a special litigation committee to investigate and evaluate the demand. The
special litigation committee will shortly begin its investigation.
17
The Company from time to time is a party to other legal proceedings
arising out of and incidental to the operations of the Company. However,
management does not anticipate that any of such other proceedings will have a
material adverse effect on its financial condition or results of operations.
The Company may be subject to product liability claims arising from the use
of its products. The Company maintains product liability insurance which it
currently considers adequate.
Item. 3. Default Upon Senior Securities
Effective April 12, 1999, the Company entered into an amended secured
revolving credit facility (the "Amended Facility"). Under the Amended
Facility, the Company obtained a waiver of all defaults which existed under
the unsecured credit facility. The Amended Facility provides a commitment of
up to $23 million, an increase of $3 million. Interest under the Amended
Facility is at prime. In connection with the Amended Facility, the Company
has pledged a security interest in substantially all of its assets. The $23
million commitment is subject to certain automatic reductions, including
reductions related to decreases in the Company's level of inventory and an
automatic reduction on December 31, 1999 to $20 million. Under the Amended
Facility, the Company is subject to certain financial covenants, including a
restriction on total capital expenditures of $500,000 in any calendar year, a
prohibition on the payment of any cash dividends, as well as restrictions on
maximum inventory levels and other covenants related to net income and
tangible net worth.
As a result of the second quarter loss, as of July 4, 1999, the Company
was not in compliance with certain financial covenants contained in the
Amended Facility, including financial covenants related to the maintenance of
specified levels of tangible net worth and net income. As of August 18,
1999, the Company has entered into a forbearance agreement with the lender
(the "Forbearance Agreement"), under which the lender has agreed to forbear
until September 30, 1999 from exercising its rights and remedies under the
Amended Facility with respect to the non-compliance. Upon the expiration of
the Forbearance Agreement, unless the Company obtains a waiver of the
noncompliance, or is able to negotiate amended terms to the Amended Facility,
the lender will be entitled to exercise its rights and remedies under the
Amended Facility which include ceasing additional advances under the Amended
Facility and/or demanding payment in full of the outstanding borrowings under
the Amended Facility. If the lender were to take any of these actions, the
Company's operations and financial condition will be materially and adversely
affected unless it is able to secure new third party financing under terms
and conditions reasonably satisfactory to the Company. The Company is
currently in discussions with the lender regarding an amendment to the terms
of the Amended Facility.
Additionally, pursuant to the terms of the Amended Facility, in August
1999, the total commitment under the Amended Facility was automatically
reduced by approximately $670,000. The Company has entered into a Fifth
Amendment to the Company's credit facility (the "Fifth Amendment") which
contains a technical correction to the method used to determine the amount of
the August 1999 commitment reduction.
18
Item 4. Submission of Matters to a Vote of Security Holders
The 1999 Annual Meeting of Stockholders of the Company was held on June
8, 1999. Proxies were solicited under Regulation 14A of the Securities
Exchange Act of 1934, as amended, with regard to the election of directors
named below to serve until the 2000 Annual Meeting of Stockholders. There
was no solicitation in opposition to any of the nominees listed in the proxy
statement, and all of the nominees were elected. Set forth below are the
results of the voting.
NOMINEES VOTES
For Withheld
Patrick L. Flinn 2,277,110 80,275
William C. Pitt III 2,277,110 80,275
D. Michael Walden 2,316,567 40,818
Item 5. Other Information
Recent Events
Effects of Continued Listing on NASDAQ. On May 14, 1999, the Company was
notified by the administrative staff of NASDAQ AMEX that the Company's Common
Stock has failed to maintain the minimum market value of public float in
accordance with NASDAQ Marketplace Rule 4450(a)(2). The Company was afforded
90 calendar days (up to August 16, 1999) in which to regain compliance with
Marketplace Rule 4450(a)(2). If the Company was unable to demonstrate
compliance by that date, the Company's securities may be delisted from
trading on the NASDAQ National Market. The Company has requested a hearing
with NASDAQ representatives to review the Company's continued listing and a
hearing is currently scheduled for September 16, 1999. In the event that the
Company's stock is delisted from the NASDAQ National Market, the Company
would apply to list the Common Stock on the NASDAQ SmallCap Market, the
American Stock Exchange, the OTC Bulletin Board or other quotation system or
exchange on which the Common Stock would qualify, until such time that the
Company is able to again qualify for listing on the NASDAQ National Market.
It is possible, however, that investors might react negatively to a delisting
from the NASDAQ National Market, which could adversely affect trading in the
Common Stock.
Employment of D. Michael Walden. The Company's founder, Chairman and
Chief Executive Officer, D. Michael Walden, has been on a medical leave since
March 3, 1999. As a result of the leave continuing for an indefinite period,
the Amended Employment Agreement between the Company and Mr. Walden and the
employment of Mr. Walden has terminated. Mr. Walden continues to serve as a
director of the Company, although he is no longer Chairman of the Board. As
previously announced, Henry J. Murphy served as interim Chief Executive
Officer through the end of the second quarter of 1999 when John G. Wallace
was hired as President and Chief Executive Officer.
19
Employment of John G. Wallace. On July 8, 1999, the Company hired John
G. Wallace as President and Chief Executive Officer under an employment
contract dated July 9, 1999.
Employment of David E. Brewer. On August 5, 1999, David E. Brewer was
hired as Vice President of Finance and Administration and Chief Financial
Officer.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report:
10.1 Employment Agreement, dated July 9, 1999, effective July 9, 1999,
between the Registrant and John G. Wallace. Mr. Wallace replaces Henry J.
Murphy who served as Interim Chief Executive Officer.
10.2 Forbearance Agreement dated August 23, 1999, between the Registrant and
Bank of America, N.A., successor to NationsBank, N.A.
10.3 Fifth Amendment to Loan Agreement dated August 18, 1999 between the
Registrant and NationsBank, N.A.
27 Financial Data Schedule
(b) No Current Reports on Form 8-K were filed by the Company during the
Quarter ended April 4, 1999:
20
SIGNATURE
Pursuant to the requirements 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.
METROTRANS CORPORATION
(Registrant)
Date: August 23, 1999 By: /s/ Henry J. Murphy
Henry J. Murphy
Principal Executive Officer
and Principal Financial
and Accounting Officer during the
reporting period)
By: /s/ John G. Wallace
John G. Wallace
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ David E. Brewer
David E. Brewer
Vice-President/Finance & Administration and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
21
INDEX OF EXHIBITS
Exhibit No.
10.1 Employment Agreement, dated July 9, 1999, effective July 9, 1999,
between the Registrant and John G. Wallace. Mr. Wallace replaces Henry J.
Murphy who served as Interim Chief Executive Officer.
10.2 Forbearance Agreement dated August 23, 1999, between the Registrant and
Bank of America, N.A., successor to NationsBank, N.A.
10.3 Fifth Amendment to Loan Agreement dated August 18, 1999 between the
Registrant and NationsBank, N.A.
27 Financial Data Schedule
22
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