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 October 3, 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 November 22, 1999
- ---------------------------- --------------------------------
Common Stock, $.01 Par Value 4,129,737 shares
METROTRANS CORPORATION
Quarterly Report on Form 10-Q
For the Quarter Ended October 3, 1999
Table of Contents
-----------------
Item Page
Number Number
- ------ ------
PART I. FINANCIAL INFORMATION
1. Financial Statements:
Consolidated Balance Sheets as of October 3, 1999 and
December 31, 1998................................................. 2
Consolidated Statements of Income for the three and nine months
ended October 3, 1999 and October 4, 1998......................... 3
Consolidated Statements of Cash Flows for the nine months ended
October 3, 1999 and October 4, 1998............................... 4
Notes to Consolidated Financial Statements........................ 5
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.................................. 17
5. Other Information................................................ 18
6. Exhibits and Reports on Form 8-K................................. 19
Signatures....................................................... 20
1
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
METROTRANS CORPORATION
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
October 3, December 31,
1999 1998
----------------- ----------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash........................................................................ $ 0 $ 0
Accounts receivable, net of allowance for doubtful accounts of $219 and $134
in 1999 and 1998, respectively............................................. 3,250 6,047
Current portion of net investment in sales-type leases...................... 71 256
Inventories................................................................. 24,081 39,628
Refundable income taxes..................................................... 214 2,229
Prepaid expenses and other.................................................. 1,941 1,192
-------- -------
Total current assets....................................................... 29,557 49,352
PROPERTY, PLANT AND EQUIPMENT, net........................................... 8,443 8,902
NET INVESTMENT IN SALES-TYPE LEASES.......................................... 115 130
INTANGIBLES.................................................................. 476 502
DEPOSITS AND OTHER........................................................... 428 415
-------- -------
$ 39,019 $59,301
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses....................................... $ 14,110 $24,587
Current portion of long-term debt........................................... 23,565 2,236
Customer deposits........................................................... 853 1,211
-------- -------
Total current liabilities.................................................. 38,528 28,034
-------- -------
LONG-TERM DEBT, net of current portion....................................... 1,514 16,076
-------- -------
OTHER NONCURRENT LIABILITIES................................................. 150 300
-------- -------
STOCKHOLDERS' 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 out-standing in 1999 and 1998, respectively.... 41 41
Additional paid-in capital.................................................. 10,824 10,673
Deferred compensation....................................................... (53) (105)
Retained earnings (deficit)................................................. (11,985) 4,282
-------- -------
(1,173) 14,891
-------- -------
$ 39,019 $59,301
======== =======
The accompanying notes are an integral part of these balance sheets.
2
METROTRANS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Data)
(Unaudited)
Three Months Ended Nine Months Ended
----------------------- -------------------------
October 3, October 4, October 3, October 4,
1999 1998 1999 1998
---------- ---------- ---------- ----------
NET REVENUE $15,185 $20,282 $ 52,407 $59,199
COST OF SALES 15,543 18,835 53,359 51,159
------- ------ -------- -------
Gross Profit (Loss) (358) 1,447 (952) 8,040
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 4,195 4,063 13,924 9,828
------- ------ -------- -------
Operating Income (Loss) (4,553) 2,616 (14,876) (1,788)
INTEREST EXPENSE, net 479 365 1,391 919
------- ------ -------- -------
INCOME (LOSS) BEFORE
INCOME TAXES (5,032) (2,981) (16,267) (2,707)
INCOME TAX PROVISION
(BENEFIT) 0 (1,170) 0 (1,063)
------- ------ -------- -------
NET INCOME (LOSS) $(5,032) $(1,811) $(16,267) $(1,644)
======= ======= ======== =======
NET INCOME (LOSS) PER COMMON SHARE
BASIC $ (1.22) $ (0.44) $(3.94) $ (0.40)
DILUTED $ (1.22) $ (0.44) $(3.94) $ (0.40)
======= ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES
BASIC 4,130 4,085 4,130 4,085
DILUTED 4,130 4,085 4,130 4,085
======= ======= ======= =======
The accompanying notes are an integral part of these statements.
3
METROTRANS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Nine Months Ended
-------------------------------
October 3, October 4,
1999 1998
----------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(16,267) $ (1,644)
-------- --------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 737 492
Compensation under restricted stock award 52 79
Changes in assets and liabilities:
Accounts receivable 2,797 (5,307)
Inventories 15,547 (10,524)
Other assets 1,279 (181)
Accounts payable and accrued expenses (10,477) 9,169
Customer deposits (358) 1,129
-------- --------
Total adjustments 9,577 (5,143)
-------- --------
Net cash (used in) provided by
operating activities (6,690) (6,787)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (278) (1,852)
Net decrease (increase) in property held for lease 0 25
Net decrease in investment in sales-type leases 200 830
-------- --------
Net cash (used in) investing activities (78) (997)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) under line of credit 0 0
Net increase (decrease) in collateralized borrowings 0 (711)
Net increase (decrease) in paid in capital 151 0
Net proceeds from issuance of common stock 0 9
Net borrowings (repayments) of long-term debt 6,617 8,436
Net cash provided by (used in) 6,768 7,734
financing activities -------- --------
INCREASE IN CASH 0 (50)
CASH AT BEGINNING OF PERIOD 0 50
--------
CASH AT END OF PERIOD $ 0 $ 0
======== ========
CASH PAID FOR INTEREST $ 1,391 $ 845
======== ========
CASH PAID FOR TAXES $ 0 $ 0
======== ========
The accompanying notes are an integral part of these statements.
4
METROTRANS CORPORATION
Notes to Consolidated Financial Statements
October 3, 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 nine months ended October
3, 1999 are not necessarily indicative of results that may be expected for the
full fiscal year.
2. Inventories
-----------
Inventories consist of (in thousands):
October 3, 1999 December 31, 1998
--------------- -----------------
Chassis awaiting conversion $ 2,660 $ 3,958
Raw materials 5,512 6,061
Work in process 2,451 2,937
Finished goods 10,696 19,888
Used vehicles 2,762 6,784
------- -------
$24,081 $39,628
5
3. Commitments and Contingencies
-----------------------------
The Company enters into various leasing arrangements with customers and
leasing companies. Certain leases 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 October 3, 1999 and December 31, 1998 was $17 million
and $15 million, respectively. During the nine months ended October 3, 1999, the
Company purchased buses for an aggregate amount of 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.
6
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. The company has entered into
certain forbearance agreements dated August 23, 1999, September 30, 1999 and
October 21, 1999, with the lender (the "Forbearance Agreements"), under which
the lender has agreed to forbear until December 31, 1999 from exercising its
rights and remedies under the amended facility with respect to the non-
compliance. Upon the expiration of the Forbearance Agreements, 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 would be
materially and adversely affected unless it were able to secure either new third
party financing under terms and conditions reasonably satisfactory to the
Company or new equity.
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. Also, subsequent to that and in concurrence with the
October 21, 1999 forbearance agreement which contains certain payment
requirements towards the reduction of the loan commitment, loan reductions were
made in the amounts of $1,080,000 and $500,000 respectively on November 3, 1999
and November 18, 1999. This principal pay down was accomplished with net sale
proceeds from the sale of certain non-essential assets as required by the
October 21, 1999 forbearance agreement. As of November 19, 1999, these
reductions have reduced the existing credit facility to approximately
$20,750,000.
7
The foregoing is not a complete description of the terms of the Forbearance
Agreements or the Fifth Amendment or the transactions contemplated thereby and
is subject to and qualified in its entirety by reference to the Forbearance
Agreements and the Fifth Amendment, which were previously filed as Exhibits with
the Company's Second Quarter 1999 Form 10-Q and Current Reports on Form 8-K.
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(R) 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(R) in 1990, the Eurotrans XLT(R) and the Classic II(R) in 1992, the
Classic Commuter(R) in 1993, the Legacy LJ by Metrotrans(TM) in 1996, the
Anthem(TM) in 1997, and the Classic XLT(TM) 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 third quarter of 1998.
9
Results of Operations
The Company's results for the first quarter and first nine 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 and third quarters of 1999, plans for significant
reductions in ongoing costs (manufacturing overhead, selling, general and
administrative costs) were implemented. In addition, further reductions in
direct labor personnel were accomplished and reorganization of the manufacturing
process initiated in second quarter was completed in the third quarter. The
total number of employees at October 3, 1999 was 256 as compared to 332 at July
4, 1999 and 374 at December 31, 1998. A review of cash, inventory and accounts
payable management has taken place during the third quarter and inventories and
accounts payable have been reduced significantly since 1998 year end ($15.5
million and $10 million respectively). The changes referred to above were
necessary and were facilitated by additional borrowings of $3.0 million in
April, 1999 and required the use of outside consultants as well as legal
advisors during the nine months of 1999 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. During the third quarter, additional organizational
changes were made to improve and streamline operations in the administrative and
financial departments, including further training of employees in the use of
existing financial software.
10
Irizar sales in the first nine months were less than originally planned,
and sales for the fourth quarter are also expected to be below the prior year
because of the Company's cash constraints and the continuation of corrective
actions on various mechanical problems which have occurred on certain Irizar
buses previously sold. Management anticipates additional discussions during the
fourth quarter with Irizar regarding future production and whether or not the
existing sales and distribution agreement between Irizar and the Company will be
continued.
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 (with some delays resulting from Ford's
production schedules), paying Ford dealers as agreed upon for current as well as
prior chassis deliveries. Negotiations between the Company and Ford Motor
Credit Corp. regarding a new credit facility expected to result in more
favorable repayment terms than were previously granted to the Company, were
halted by Ford Motor Credit Corp. pending the outcome of discussions between the
Company and its primary lender regarding the issues reflected in the current
forbearance agreement.
During September, 1999, the Company, in response to requests from its
primary lender for a more definitive strategic plan related to outstanding loan
balance repayment, instituted a three part action plan as follows:
a.) Identification of "non-strategic" assets which could be sold without
an adverse effect on the Company's market position or continuing
operations.
b.) Operation of the "continuing enterprise" using existing accounts
receivable collections as the primary source of working capital,
protecting the lender's collateral position.
c.) Engagement of an investment banking firm to identify potential
replacement lenders or equity investors to replace the lender's loan
position.
As part of the Company's "non-essential" assets sales, efforts were
continued to reduce the existing inventory of used buses (341 units at October
3, 1999 compared with 406 units at December 31, 1998). In recognition of the
need to more quickly reduce used bus inventory, and in recognition of increased
used bus market competition, the Company implemented a new marketing plan for
used buses. Select used bus inventory was moved out of the Bus Pro location in
McDonough, Georgia during third quarter 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, particularly in response to the Company's
major lender's requests for liquidation of these non-essential assets.
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 Nine Months Ended
----------------------- ----------------------
October 3, October 4, October 3, October 4,
1999 1998 1999 1998
--------- ---------- ---------- ----------
Net revenue........... 100.0% 100.0% 100.0% 100.0%
Cost of sales......... 102.4 92.9 101.8 86.4
------ ------ ------ ------
Gross profit (loss)... (2.4) 7.1 (1.8) 13.6
Selling, general and
administrative expenses 27.6 20.0 26.6 16.6
------ ------ ------ ------
Operating Income (Loss) (30.0) (12.9) (28.4) (3.0)
Interest expense...... 3.2 1.8 2.7 1.6
------ ------ ------ ------
Income (Loss)
before income taxes. (33.1) (14.7) (31.0) (4.6)
Income tax provision.. 0 (5.8) 0 (1.8)
------ ------ ------ ------
Net Income (33.1)% (8.9)% (31.0)% (2.8)%
====== ====== ====== ======
Net Revenue. Net revenue decreased 25.1% to $15.2 million for the quarter
ended October 3, 1999 from $20.3 million for the comparable prior year period
and decreased 11.5% to $52.4 million during the first nine months of 1999 from
$59.2 million over the same nine-month period in 1998.
The decrease in revenue in the third quarter of 1999 is primarily due to
inadequate cash flow and working capital. In the third quarter of 1998 (when the
Irizar coach was first introduced), 8 units were sold for $2.8 million, while
none were sold in the third quarter of 1999.
Unit sales in the third quarter of 1999 were 207 Classics, 3 Eurotrans and
5 Legacy LJ by Metrotrans buses. Irizar sales for the third quarter and the
first nine months decreased partially 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, and partially as a result of
the continuation of corrective actions on various mechanical problems with
certain of the Irizar buses previously sold. As a result, the sales backlog for
Irizars existing as of December 31, 1998 was dissipated and sales efforts during
the first nine months of 1999 have been very limited.
Used bus sales decreased in the third quarter from $1.7 million in 1998 to
$1.5 million in 1999 or a decrease of 11.8% and for the first nine months
decreased from $7.5 million to $4.9 million or 34.7%. The sales results of 1999
were lower in the three quarters of 1999 because of more competitive used bus
markets in 1999 versus the same time periods in 1998.
12
Production backlog at the end of the third quarter of 1999 was
approximately $22.9 million for buses to be manufactured in the U.S. This
compares with a backlog of approximately $26 million at the end of the third
quarter of 1998, exclusive of Irizar backlog at October 4, 1998 of $12 million.
There is no current firm backlog for Irizar buses but the Company is meeting
with certain key customers regarding future orders, pending their evaluation of
the corrective actions to various mechanical problems described earlier in this
summary.
Cost of Sales and Gross Profit. Gross profit loss was $358 thousand in
the third quarter of 1999 compared to a gross profit of $1.447 million in the
third quarter of 1998. For the first nine months of 1999, gross profit loss was
$952 thousand compared to a profit of $8.040 million for the same period in
1998.
The decrease in gross profit in the third quarter was due to a number of
factors including $1.8 million write down of Bus Pro used bus inventory,
reduction in new bus sales of $5.1 million (a 25.1% decrease), a $250 thousand
reserve for a project involving the sale of demonstration units and a $100
thousand reserve for a joint venture project in Mexico initiated in
1998. While sales were significantly lower in period comparison, other cost of
goods sold categories such as direct labor cost and overheads remained
relatively constant as a percent of sales.
Third quarter efforts to reduce manufacturing costs, including direct labor
and overhead and improving production throughput were offset by the net effect
of extraordinary items resulting in a gross profit loss of 2.4% for the quarter
and a 1.8% loss on the gross margin for the nine months ended October 3, 1999 as
compared to a profit for the nine months ended October 4, 1998 of 13.6%. The
decrease between years was caused by factors mentioned above and a 23.1%
decrease in sales from the previous quarter as well as manufacturing issues
previously discussed under "Results of Operations."
13
Selling, General and Administrative Expenses and Operating Income.
Selling, general and administrative expenses for the third quarter of 1999 were
approximately $4.2 million versus $4.1 million for the corresponding quarter in
1998. Included in the third quarter 1999 were $986,000 of expenses for
professional fees for legal counsel and lender-requested "management
turnaround" consultants which have been incurred during second and third
quarters, 1999. When compared to the same quarter for the prior year, the third
quarter net of these extraordinary expenses reflects a 21.0% decrease in
selling, general and administrative expense from the prior year. Additionally,
excluding the same comparable extraordinary expenses of $1.2 million from second
quarter 1999 and the $986,000 from third quarter 1999, reflects a $628,000
decrease in all other selling, general and administrative expenses from second
quarter to third quarter of 1999.
Selling, general and administrative expenses for the first nine months of
1999 were approximately $13.9 million or an increase of $4.1 million over the
prior year for the reasons described above. For the nine months ended October
3, 1999, total adjustments to carrying values of assets and provisions for
losses were $5.3 million, and professional fees totaled $2.6 million.
Interest Expense. Interest expense of $479,000 in the third quarter of
1999 increased 31.2% from $365,000 for the prior year's comparable quarter and
increased from $919,000 to $1,391,000 through the nine months ending October 3,
1999 as compared to the same time period in 1998. The increase for the quarter
primarily was the net result of 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, partially offset by a reduction in the amount of interest paid to Ford
Motor Credit Corporation for chassis held under its consignment pool agreement
in excess of an initial 90-day non-interest bearing period.
Liquidity and Capital Resources
Net cash used in operating activities during the nine months ended October
3, 1999 totaled $6.7 million compared with cash used in operating activities of
$6.8 million in the comparable 1998 period. Decreases in accounts receivable and
inventory of $2.8 million and $15.5 million, respectively, and a reduction by
$10.5 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. Please see Item 3 of Part II hereof for
a description of the Amended Facility.
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
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
October 3, 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.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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Michael Stucchio, on behalf of himself and all others similarly situated,
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and derivatively on behalf of the Nominal Defendant v. D. Michael Walden, M.
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Earl Meck, Randolph B. Stanley, Terri B. Hobbs, Patrick L. Flinn, William C.
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Pitt, III, George B. Mathews, Jr., and Metrotrans Corporation, United States
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District Court for the Northern District of Georgia, Atlanta Division, Case No.
1:99-CV-2157-WBH. On August 23, 1999, Plaintiff filed his Complaint in the
above-referenced action. Plaintiff's Complaint asserted the following claims
against the individual defendants derivatively, individually, as a class
representative: intentional breach of fiduciary duty, negligent breach of
fiduciary duty, unjust enrichment and usurpation of corporate opportunities.
Plaintiff filed his Complaint less than thirty (30) days after making a demand
on the Company under O.C.G.A. (S)14-2-742 that the Company file suit against the
individual defendants on the same claims set forth in Plaintiff's Complaint. In
response to Plaintiff's demand, the Company constituted a special litigation
committee to investigate and analyze Plaintiff's claims. The Company is required
to answer or otherwise respond to Plaintiff's Complaint on or before November
29, 1999.
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.
16
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. The company has entered into
certain forbearance agreements dated August 23, 1999, September 30, 1999 and
October 21, 1999, with the lender (the "Forbearance Agreements"), under which
the lender has agreed to forbear until December 31, 1999 from exercising its
rights and remedies under the amended facility with respect to the non-
compliance. Upon the expiration of the Forbearance Agreements, 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 would be
materially and adversely affected unless it were able to secure either new third
party financing under terms and conditions reasonably satisfactory to the
Company or new equity.
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. Also, subsequent to that and in concurrence with the
October 21, 1999 forbearance agreement which contains certain payment
requirements towards the reduction of the loan commitment, loan reductions were
made in the amounts of $1,080,000 and $500,000 respectively on November 3, 1999
and November 18, 1999. This principal pay down was accomplished with net sale
proceeds from the sale of certain non-essential assets as required by the
October 21, 1999 forbearance agreement. As of November 19, 1999, these
reductions have reduced the existing credit facility to approximately
$20,750,000.
17
Item 5. Other Information
Recent Events
Delisting of the Company's Stock on NASDAQ. On May 14, 1999, the Company
was notified by the administrative staff of NASDAQ AMEX that the Company's
Common Stock had 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). Subsequently, the Company was also notified that
it was no longer in compliance with the net tangible assets/market
capitalization/total assets & total revenue requirement, as set forth in NASDAQ
Marketplace Rules 4450 (a)(3) and 4450(b)(1) respectively. The Company
requested a hearing with NASDAQ representatives to review the Company's
continued listing which was scheduled for September 16, 1999, although not
participated in by Company representatives as there was no additional
information regarding the noted deficiencies which could be presented at this
hearing. Consequently, the Company's stock was delisted from the NASDAQ National
Market effective with the close of business on October 11, 1999 and price quotes
for the Company's common stock are now available on the OTC Bulletin Board.
Bus Pro, Inc. In an effort to redirect all available working capital to
the production of new vehicles under current customer orders, operations at this
subsidiary were curtailed at the beginning of October except for several sales
and administrative personnel whose efforts are necessary for the continued
disposition of used bus inventory.
South East Pennsylvania Transit Authority ("SEPTA") Contract. The Company
has been unable to provide sufficient resources for the production of vehicles
related to this contract. The Company's lender has restricted the use of
additional working capital for this program. Discussions regarding this matter
are on-going with the contract administrators of SEPTA as well as with
representatives of the company bonding the work required by this contract.
Management is seeking additional working capital in order to purchase from
vendors the chassis and materials necessary to continue production on this
contract. If the Company is unable to meet its obligations under this contract
with SEPTA, a default notice may be issued against the Company by SEPTA which
could have a material effect on the Company's financial condition and results of
operations.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
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27 Financial Data Schedule
(b) Reports on Form 8-K
Current Report on Form 8-K dated October 4, 1999 relating to the
Forbearance Agreement dated September 30, 1999 between the Registrant and
Bank of America, N.A.
Current Report on Form 8-K dated October 11, 1999 relating to the delisting
of the Registrant's common stock from the Nasdaq National Market.
Current Report on Form 8-K dated October 22, 1999 relating to the
Forbearance Agreement dated October 21, 1999 between the Registrant and
Bank of America, N.A.
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SIGNATURES
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: November 22, 1999
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
Chief Financial Officer
(Principal Financial and
Accounting Officer)
20