SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 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: 33-93302
AM General Corporation
(Exact name of registrant as specified in its charter)
_____________________
Delaware 35-1852615
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
105 North Niles Avenue
South Bend, Indiana 46617
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (219) 284-2907
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
1,000 shares of the registrant's common stock, par value $.01 per share, are
outstanding as of June 14, 1999.
AM GENERAL CORPORATION
Form 10-Q
Quarter Ended April 30, 1999
PART I - FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 7
HUMVEE/HUMMERs 7
Medium Trucks 7
Spare Parts Logistics Operation ("SPLO") and Systems Technical Support ("STS") 8
Three Months Ended April 30, 1999 ("second quarter of 1999") compared to Three Months Ended April 30,
1998 ("second quarter of 1998") 9
Six Months Ended April 30, 1999 ("first six months of 1999") compared to Six Months Ended April 30,
1998 ("first six months of 1998") 12
Liquidity and Capital Resources 15
Year 2000 Business Matters 16
Forward-Looking Statements 16
PART II - OTHER INFORMATION 17
ITEM 1. LEGAL PROCEEDINGS 17
Age Discrimination Claim 17
DJ-5 Litigation 17
HMMWV Product Liability Claims 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar amounts in thousands, except share information)
April 30, October 31,
Assets 1999 1998
- ------------------------------------------------------------------------------------------------------
(unaudited)
Current assets:
Cash $ 13,390 2,687
Accounts receivable, net 58,568 74,211
Inventories 71,326 71,613
Prepaid expenses 957 1,170
Deferred income taxes 6,781 6,746
- ------------------------------------------------------------------------------------------------------
Total current assets 151,022 156,427
Income taxes receivable 364 1,585
Property, plant, and equipment, net 41,936 41,684
Deferred income taxes 26,826 26,113
Goodwill, net 77,155 79,298
Other assets 7,147 9,658
- ------------------------------------------------------------------------------------------------------
$ 304,450 314,765
- ------------------------------------------------------------------------------------------------------
Liabilities and Stockholder's Deficit
- ------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 27,223 32,494
Accrued expenses 69,872 67,869
- ------------------------------------------------------------------------------------------------------
Total current liabilities 97,095 100,363
Long-term debt 74,330 82,156
Postretirement benefits other than pensions, noncurrent portion 157,718 154,362
Other long-term liabilities 10,639 11,930
- ------------------------------------------------------------------------------------------------------
Total liabilities $ 339,782 348,811
- ------------------------------------------------------------------------------------------------------
Stockholder's deficit:
8% cumulative preferred stock, $1,000 par value. Authorized 10,000
shares; issued and outstanding 5,000 shares. $ 5,000 5,000
Common stock, $.01 par value. Authorized, issued and
outstanding 900 shares. 0 0
Paid-in capital 1,000 1,000
Accumulated deficit (41,104) (39,818)
Minimum pension liability (228) (228)
- ------------------------------------------------------------------------------------------------------
Total stockholder's deficit (35,332) (34,046)
- ------------------------------------------------------------------------------------------------------
$ 304,450 314,765
- ------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
3
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollar amounts in thousands)
(unaudited)
- ------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
April 30, April 30,
------------------- ------------------
1999 1998 1999 1998
- ------------------------------------------------------------------------------------------------------
Net sales $103,258 102,621 190,895 183,294
- ------------------------------------------------------------------------------------------------------
Cost and expenses:
Cost of sales 89,134 93,094 165,833 169,296
Depreciation and amortization 2,891 2,879 5,632 5,698
Selling, general, and administrative expenses 7,019 6,547 14,887 13,245
Restructuring/plant closing (401) 0 (401) 0
- ------------------------------------------------------------------------------------------------------
Earnings/(loss) before interest and income taxes 4,615 101 4,944 (4,945)
Interest income 179 98 253 141
Interest expense (2,707) (3,354) (5,724) (6,720)
- ------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 2,087 (3,155) (527) (11,524)
Income tax (expense) benefit (1,218) 687 (759) 3,233
- ------------------------------------------------------------------------------------------------------
Net income (loss) $ 869 (2,468) (1,286) (8,291)
- ------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
4
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
(unaudited)
- ----------------------------------------------------------------------------------------------------------------------
Six Months Ended
April 30,
----------------------------
1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (1,286) (8,291)
Adjustments to reconcile net loss to
Net cash provided by operating activities:
Restructuring/plant closing charges (401) 0
Restructuring payments (292) (1,077)
Depreciation and amortization of plant and equipment 2,966 3,033
Other amortization 3,187 3,211
Increase (decrease) in inventory reserve (496) 216
Deferred income taxes (747) (565)
Noncash other postretirement cost 3,355 2,553
(Gain)/Loss on sale of equipment 0 (11)
Change in assets and liabilities:
Accounts receivable 15,643 491
Inventories 780 2,100
Prepaid expenses 212 659
Other assets 1,495 143
Accounts payable (5,270) (4,547)
Accrued expenses 2,106 1,563
Income taxes 1,410 (3,068)
Other liabilities (889) (676)
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 21,773 (4,266)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of equipment 0 14
Capital expenditures (3,216) (951)
- ----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,216) (937)
- ----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreement (7,854) 7,362
- ----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (7,854) 7,362
- ----------------------------------------------------------------------------------------------------------------------
Net change in cash 10,703 2,159
Cash and cash equivalents at beginning of period 2,687 1,190
- ----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 13,390 3,349
- ----------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash items
Interest paid $ 5,146 6,174
Taxes paid 96 400
- ----------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
5
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes to consolidated financial statements required by generally accepted
accounting principles for complete financial statement presentation.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month period ended April 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
October 31, 1999.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant's Annual Report on Form 10-K for
the year ended October 31, 1998.
Note 2. Inventories
Inventories consisted of the following:
April 30, October 31,
1999 1998
(Unaudited)
Finished Goods $ 34,478 29,982
Service Parts 17,840 16,946
Extended Service Program
Production costs of goods currently 1,541 4,095
in process
Raw Materials, supplies and work in progress 24,240 27,859
----------- ----------
78,099 78,882
Less allowance for inventory obsolescence (6,773) (7,269)
----------- ----------
Total $ 71,326 71,613
=========== ==========
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
AM General Corporation ("AM General" or the "Company") is the largest supplier
of light tactical wheeled vehicles for the Department of Defense ("DoD"). The
Company is the original designer and sole manufacturer of the HUMVEE/HUMMER. The
Company also sells HUMVEEs to foreign military services through the DoD's
Foreign Military Sales ("FMS") program and on a direct sale basis. In 1993, the
Company began selling to industrial and retail users through its commercial
dealer network. In 1994, the Company began selling remanufactured 2-1/2-ton
medium tactical vehicles under the Army's Extended Service Program ("ESP"). On
April 19, 1999 the Company ceased production under the ESP contract.
On June 11, 1999 the Company and GM Powertrain, a division of General Motors
Corporation, announced an agreement whereby the Company will assume GM
Powertrain's 6.5 liter diesel engine business. Under terms of the agreement, the
Company will take over production of the 6.5 liter diesel engine as GM
Powertrain's plant in Moraine, Ohio phases out production of that engine next
year. GM Powertrain will provide assistance to AM General in getting this
project started and the assembly process validated. The Company anticipates
beginning low-rate production in April 2000.
AM General uses the GM Powertrain 6.5 liter diesel in both its Military HUMVEE
and Commercial HUMMER vehicles. General Motors' applications include some vans,
pickups and medium duty trucks. The agreement provides that AM General will
continue to supply service engines to GM's internal parts distributor, Service
Parts Operation (SPO), for a period of ten years. In addition, AM General will
build engines for its own requirements as well as those of other customers that
use the engine.
HUMVEE/HUMMERs
US Military
The Company began producing the latest generation of Military HUMVEEs, the A2
Series, in August 1995. On December 23, 1995, the Company entered into a multi-
year annual requirements contract for A2 Series HUMVEEs known as the X001
Contract which provided a mechanism for the US Army to procure at least 2,350
HUMVEEs annually through fiscal year 2000. The contract, however, does not
require the Army to purchase the vehicles as funding for each of the respective
years must be appropriated pursuant to the annual Defense Budget. Through April
30, 1999, a total of 12,089 vehicles have been ordered on the X001 Contract. The
FY99 Defense Bill contains the necessary funding for the expected 1999
production.
Commercial
In response to higher demand for new model year HUMMERs from its dealer network,
the Company increased the production of Commercial HUMMERs in February 1999 from
4 to 5.5 vehicles per day resulting in a new production rate of 18 HUMVEE/HUMMER
vehicles per day.
In May, 1999, the Company and General Motors Acceptance Corporation ("GMAC")
concluded negotiations under which GMAC will offer to existing HUMMER dealers
its Smartlease program for new 1999 model year HUMMERs. Under this arrangement,
GMAC will accept lease contracts for HUMMERs through its local GMAC offices.
The Company will have no financial obligations with respect to residual risk in
connection with this program.
Medium Trucks
Remanufacturing
On September 15, 1998, the Company issued a notice under the Worker Adjustment
and Retraining Notification ("WARN") Act to the employees at the ESP facility
advising them that the Company had insufficient orders to keep the plant in
operation. Subsequent to that notice, the Company received orders that extended
production through April 19, 1999. The Company delivered 5,515 remanufactured 2-
1/2-ton medium tactical vehicles to the US Army and other customers under the
ESP program. The Company ceased production on April 19, 1999 and closed the
facility effective May 28, 1999.
7
FMTV
On October 30, 1998, the Company was awarded a $2.4 million Phase I contract by
the DoD to build three prototype vehicles for the Family of Military Tactical
Vehicles ("FMTV") second source program for the US Army. A competitor was
awarded a similar contract. Under this contract, the Company will produce two
new 5.0-ton vehicles and one new 2.5-ton vehicle for testing purposes. Upon
successful testing of the vehicles, the Company will be asked to submit a
production bid for approximately 500 to 1,000 vehicles to be built over three
years. A contract award is expected in mid-year 2000. If successful in winning
this low-rate production contract, the Company will be asked to compete with the
current FMTV contract manufacturer for a share of the following FMTV multiyear
contract.
Spare Parts Logistics Operation ("SPLO") and Systems Technical Support ("STS")
The Company's SPLO operation sells after-market parts and support-services for
vehicles manufactured by the Company. Its STS operation performs engineering
services related to the Company's military trucks and certain other military
vehicles.
8
Three Months Ended April 30, 1999 ("second quarter of 1999") compared to Three
Months Ended April 30, 1998 ("second quarter of 1998")
AM GENERAL CORPORATION AND SUBSIDIARIES
Table of Net Revenues and HUMVEE/HUMMER Unit Sales Information
(in millions, except unit information)
Three months ended
April 30, %
----------------------------
1999 1998 Change Change
---- ---- ------ ------
Net Sales
HUMVEE/HUMMERs
US Military 41.9 46.9 (5.0) (10.7%)
International (1) 1.4 1.8 (0.4) (22.2%)
Commercial 19.9 16.3 3.6 22.1%
-------------------------------------
Total HUMVEE/HUMMERs 63.2 65.0 (1.8) (2.8%)
ESP 22.8 21.2 1.6 7.5%
SPLO 13.8 13.2 0.6 4.5%
STS/Other 3.5 3.2 0.3 5.5%
-------------------------------------
Total Net Sales 103.3 102.6 0.6 .6%
HUMVEE/HUMMER Unit Sales
US Military 782 876 (94) (10.7%)
International (1) 9 26 (17) (65.4%)
Commercial 280 240 40 16.7%
-------------------------------------
Total HUMVEE/HUMMERs 1,071 1,142 (71) (6.2%)
HUMVEE/HUMMER Average Unit Selling Prices
US Military 53,633 53,564 69 .1%
International (1) 158,667 67,385 91,282 135.5%
Commercial 71,018 67,829 3,189 4.7%
Total HUMVEE/HUMMERs 59,061 56,877 2,184 3.8%
(1) Includes FMS and direct international sales
9
Net Sales
The increase in net sales was primarily due to higher Commercial HUMMER, ESP,
SPLO and STS Engineering sales partially offset by lower US Military HUMVEE and
International sales. Further, the Company remained unable to obtain a firm
order for 231 units included in its finished goods inventory. The Company
continues to pursue an order with the FMS customer for whom the units were
built. The FMS customer has indicated its intention to purchase the units by
formally requesting from the US Government an offer to begin negotiations.
Management believes these negotiations will conclude and the units will be sold
in fiscal 2000.
The increase in Commercial HUMMER sales is primarily attributable to the sale of
units originally scheduled for shipment in the first quarter of 1999. The
temporary delay in shipment was due to receiving non-conforming parts from a
supplier. ESP sales increased despite lower volume primarily due to higher
negotiated selling prices in connection with additional units added and
delivered at the completion of the base and option requirements of the initial
contract.
Average HUMVEE/HUMMER Unit Selling Prices
The combined average unit selling price for all HUMVEE/HUMMERs increased 3.8%
from the second quarter of 1998 to the second quarter of 1999. Under the X001
Contract with the United States Army Tank-Automotive and Armaments Command
("TACOM"), prices for HUMVEE models are fixed and subject to inflation. The
average unit selling price of US Military HUMVEEs increased by only .1% from the
second quarter of 1998. The average unit selling price of International HUMVEEs
increased by 135.5% primarily due to ambulance equipment added to units
previously sold and higher average selling prices on FMS units sold during the
quarter. Commercial HUMMER average unit selling prices increased 4.7% primarily
due to a general price increase on model year 1999 units and selling a higher
concentration of more expensive units.
Gross Profit
Gross profit was $14.1 million for the second quarter of 1999, an increase of
$4.6 million or 48.3% from gross profit of $9.5 million for the second quarter
of 1998. The Company's gross profit margin rose from 9.3% in the second quarter
of 1998 to 13.7% in the second quarter of 1999.
The change in gross profit is primarily attributed to higher ESP gross profit
due to higher negotiated selling prices, a higher proportion of more profitable
HUMVEE units sold to the US Military during the second quarter of 1999, and
slightly better performance by STS Engineering, partially offset by lower gross
profit on Commercial HUMMER sales and SPLO sales for the second quarter of 1999.
Depreciation and Amortization
Depreciation and amortization expense was $2.9 million for the second quarter of
1999, which is consistent with the second quarter of 1998.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense was $7.0 million for the
second quarter of 1999, an increase of $.5 million or 7.2% from SG&A expense of
$6.5 million for the second quarter of 1998. The increase is primarily
attributed to increased engineering effort on STS contracts.
Earnings before Interest and Income Taxes
The Company recorded earnings before interest and income taxes for the second
quarter of 1999 of $4.6 million, an increase of $4.5 million from earnings
before interest and income taxes of $.1 million for the second quarter of 1998.
The increase in earnings before interest and income taxes is attributed
primarily to the higher gross profit described above and a non-recurring
adjustment to the plant closing reserve for the ESP facility partially offset by
higher SG&A.
10
Interest Income and Expense
Interest expense for the second quarter of 1999 was $2.7 million, a decrease of
$.7 million or 19.3% from interest expense of $3.4 million for the second
quarter of 1998. Average debt outstanding during the second quarter of 1999 was
$75.0 million at a weighted average interest rate of 12.8%. Average debt
outstanding during the second quarter of fiscal 1998 was $95.7 million at a
weighted average interest rate of 12.6%. The decrease in average debt
outstanding is primarily due to the reduction in borrowings under the Company's
revolving credit facility, which is primarily due to the reduction in accounts
receivable and inventories and improved earnings before interest and income
taxes. Interest income increased from $.1 million in the second quarter on 1998
to $.2 million in the second quarter of 1999 primarily due to investing excess
cash in short term investments.
Income Tax Expense
Income tax expense was recorded at the statutory rate adjusted for permanent
differences primarily resulting from the amortization of goodwill. Income tax
expense was $1.2 million for the second quarter of 1999, an increase of $1.9
million from income tax benefit of $.7 million for the second quarter of 1998.
The increase in income tax expense was due to a higher taxable income.
Net Income (Loss)
The Company recorded net income for the second quarter of 1999 of $.9 million,
an increase of $3.4 million from a net loss of $2.5 million in the second
quarter of 1998. The increase in net income is primarily due to higher earnings
before interest and taxes along with lower interest expense, partially offset by
higher income tax expense.
11
Six Months Ended April 30, 1999 ("first six months of 1999") compared to Six
Months Ended April 30, 1998 ("first six months of 1998")
AM GENERAL CORPORATION AND SUBSIDIARIES
Table of Net Revenues and HUMVEE/HUMMER Unit Sales Information
(in millions, except unit information)
Six months ended
April 30, %
-------------------
1999 1998 Change Change
---- ---- ------ ------
Net Sales
HUMVEE/HUMMERs
US Military 77.8 76.1 1.7 2.2%
International (1) 4.0 2.7 1.3 48.1%
Commercial 30.9 32.2 (1.3) (4.0%)
----------------------------
Total HUMVEE/HUMMERs 112.6 111.0 1.6 1.4%
ESP 45.6 40.3 5.3 13.2%
SPLO 26.5 23.9 2.6 10.9%
STS/Other 6.1 8.1 (2.0) (24.7%)
----------------------------
Total Net Sales 190.9 183.3 7.6 4.1%
HUMVEE/HUMMER Unit Sales
US Military 1,428 1,458 (30) (2.1%)
International (1) 41 44 (3) (6.8%)
Commercial 448 487 (39) (8.0%)
----------------------------
Total HUMVEE/HUMMERs 1,917 1,989 (72) (3.6%)
HUMVEE/HUMMER Average Unit Selling Prices
US Military 54,443 52,237 2,206 4.2%
International (1) 98,415 60,795 37,620 61.9%
Commercial 68,848 66,049 2,799 4.2%
Total HUMVEE/HUMMERs 58,750 55,808 2,942 5.3%
(1) Includes FMS and direct international sales
12
Net Sales
The increase in net sales was primarily due to higher ESP, SPLO, US Military
HUMVEE, and International sales partially offset by lower STS and Commercial
HUMMER sales. Further, the Company remained unable to obtain a firm order for
231 units included in its finished goods inventory. The Company continues to
pursue an order with the FMS customer for whom the units were built. The FMS
customer has indicated its intention to purchase the units by formally
requesting from the US Government an offer to begin negotiations. Management
believes these negotiations will conclude and the units will be sold in fiscal
2000.
ESP sales increased despite lower volume primarily due to higher negotiated
selling prices in connection with additional units added and delivered at the
completion of the base and option requirements of the initial contract. SPLO
sales increased primarily due to higher Commercial HUMMER parts sales and going
into fiscal year 1999 with a higher backlog of US Government business compared
to fiscal year 1998. The increase in US Military HUMVEE sales is primarily
attributable to selling a higher concentration of more expensive models.
Commercial HUMMER sales decreased due to vehicle shipments scheduled for the
first six months of 1999 being delayed and shipped in May. The temporary delay
in shipment was due to receiving non-conforming parts from a supplier.
Additionally, prior year Commercial HUMMER sales were higher due to a higher
volume of end of model year close out sales.
Average HUMVEE/HUMMER Unit Selling Prices
The combined average unit selling price for all HUMVEE/HUMMERs during the first
six months of 1999 increased 5.3% from the first six months of 1998. Under the
X001 Contract with the United States Army Tank-Automotive and Armaments Command
("TACOM"), prices for HUMVEE models are fixed and subject to inflation. The
average unit selling price of US Military HUMVEEs increased by 4.2% from the
second quarter of 1998 primarily due to a negotiated price escalation and a
higher ratio of more expensive models sold in the first six months of 1999. The
average unit selling price of International HUMVEEs increased by 61.9% primarily
due to ambulance equipment added to units previously sold and higher average
selling prices on FMS units sold during the first six months of 1999.
Commercial HUMMER average unit selling prices increased 4.2% primarily due to a
general price increase on model year 1999 units and selling a higher
concentration of more expensive units.
Gross Profit
Gross profit was $25.1 million for the first six months of 1999, an increase of
$11.1 million or 79.0% from gross profit of $14.0 million for the first six
months of 1998. The Company's gross profit margin rose from 7.6% in the first
six months of 1998 to 13.1% in the first six months of 1999.
The change in gross profit is primarily attributed to higher ESP gross profit
due to higher negotiated selling prices and a higher proportion of more
profitable HUMVEE units sold to the US Military during the first six months of
1999, partially offset by lower Commercial HUMMER gross profit.
Depreciation and Amortization
Depreciation and amortization expense was $5.6 million for the first six months
of 1999, a decrease of $.1 million or 1.2% from depreciation and amortization
expense of $5.7 million for the first six months of 1998. The decrease is
directly attributable to closing the ESP facility.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense was $14.9 million for the
first six months of 1999, an increase of $1.7 million or 12.4% from SG&A expense
of $13.2 million for the first six months of 1998. The increase is primarily
attributed to non-recurring engineering costs and increased bid and proposal
costs in connection with potential STS contracts.
13
Earnings/Loss before Interest and Income Taxes
The Company recorded earnings before interest and income taxes for the first six
months of 1999 of $4.9 million, an increase of $9.8 million from a loss before
interest and income taxes of $4.9 million for the first six months of 1998. The
increase in earnings before interest and income taxes is attributed primarily to
the higher gross profit described above and a non-recurring adjustment to the
plant closing reserve for the ESP facility partially offset by higher SG&A.
Interest Income and Expense
Interest expense for the first six months of 1999 was $5.7 million, a decrease
of $1.0 million or 14.8% from interest expense of $6.7 million for the first six
months of 1998. Average debt outstanding during the first six months of 1999
was $79.3 million at a weighted average interest rate of 12.7%. Average debt
outstanding during the first six months of fiscal 1998 was $95.2 million at a
weighted average interest rate of 12.1%. The decrease in average debt
outstanding is primarily due to the reduction in borrowings under the Company's
revolving credit facility, which is primarily due to the reduction in accounts
receivable and inventories and improved earnings before interest and income
taxes. Interest income increased from $.1 million during the first six months
of 1998 to $.2 million during the first six months of 1999 primarily due to
paying off the revolving credit facility and investing excess cash in short term
investments.
Income Tax Expense
Income tax expense was recorded at the statutory rate adjusted for permanent
differences primarily resulting from the amortization of goodwill. Income tax
expense was $0.8 million for the first six months of 1999, an increase of $4.0
million from income tax benefit of $3.2 million for the first six months of
1998. The increase in income tax expense was due to higher taxable income.
Net Loss
As discussed above, the reduction in net loss was primarily due to higher
earnings before interest and income taxes along with lower interest expense
partially offset by higher income tax.
14
Liquidity and Capital Resources
The Company's liquidity requirements result from capital investments, working
capital requirements, postretirement health care and pension funding, interest
expense, and, to a lesser extent, principal payments on its indebtedness. The
Company has met these requirements in each fiscal year since 1992 from cash
provided by operating activities and borrowings under its revolving credit
facility.
Cash generated by operating activities was $21.8 million for the six months
ended April 30, 1999 compared to cash used by operating activities of $4.3
million for the six months ended April 30, 1998. The primary sources of cash
flow during the first six months of 1999 were reductions in accounts receivable,
inventory and other assets, an increase in accrued expenses and non-cash charges
to earnings before interest and income taxes including depreciation,
amortization and non-cash postretirement expenses. Cash flow provided from
operations was partially offset by reductions in accounts payable and other
liabilities, as well as funding the Company's net loss.
Accounts receivable levels at April 30, 1999 were $15.6 million lower than
levels at the end of fiscal 1998 primarily due to higher than normal vehicle
sales in the latter part of fiscal 1998 partially offset by higher unbilled
receivables at April 30, 1999 in connection with US Government directed
modifications of A2 series HUMVEEs and higher STS receivables.
Inventory levels at April 30, 1999 were slightly lower than levels at the end of
the prior fiscal year primarily due to lower raw materials and in-process
inventory, and lower obsolescence reserves. The decrease in inventory is
partially offset by higher SPLO inventory and finished goods. Included in the
finished goods inventory at October 31, 1998 and at April 30, 1999 are 231
HUMVEEs that were built for an FMS customer in the fourth quarter of fiscal
1997. Contract negotiations are continuing with the customer with the eventual
sale of the units expected to occur during fiscal 2000.
During the first six months of 1999, the Company spent $3.2 million on capital
expenditures primarily on the implementation of a new enterprise resource
planning system, tooling for vehicle production, and machinery and equipment, as
compared to $1.0 million during the first six months of 1998. Additional
expenditures for the system and other capital expenditures are expected to
amount to $4.9 million for the remainder of fiscal 1999. Additionally, in
connection with the Company's announcement of the 6.5 liter diesel engine
project, the Company expects to incur approximately $7.0 million of capital
expenditures. The Company anticipates that operating cash flow and availability
under the revolving credit facility will be adequate to fund capital
expenditures for fiscal 1999.
Under the Mandatory Purchase Offer provision of the Indenture for the 12.875%
Senior Notes dated as of April 27, 1995 (the "Indenture") the Company is
required to calculate Excess Cash Flow for each twelve month period beginning
May 1 and ending April 30. The Company made its calculation of Excess Cash
Flow, which indicates there is $6.5 million of Excess Cash Flow for the twelve-
month period ending April 30, 1999. In compliance with the provision of the
Indenture, on June 14, 1999 the Company advised the Trustee there will be an
offer to purchase $6.5 million of the 12.875% Senior Notes at a price equal to
101% of the principal amount plus any accrued and unpaid interest. The Company
intends to fund the purchases, if any, with a combination of cash flow from
operating activities and the revolving credit facility.
The Company's revolving credit facility has a maximum borrowing limit of $60
million, is secured by a first lien on all of the Company's accounts receivable,
inventories and certain other assets, as defined therein, and expires on October
30, 2001. As of April 30, 1999, the Company had no borrowings outstanding and
approximately $42.2 million of availability under the revolving credit facility.
The ability of the Company to meet its debt service requirements and to comply
with debt covenants will be dependent upon future operating performance and
financial results of the Company, which will be subject to financial, economic,
political, competitive and other factors affecting the Company, many of which
are beyond its control.
15
Year 2000 Business Matters
The Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations.
In September 1997, the Company formed an internal committee to perform a
comprehensive review of its computer systems, the purpose of which was to
identify the systems that could be affected by the "Year 2000" issue. The
committee evaluated three alternatives including fixing the defective code
internally, outsourcing the project to a third party or purchasing new software.
Factors affecting the committee's decision included the cost benefit analysis of
fixing the code versus replacing the software with newer and more effective
technology. Upon completion of its review, the committee reached a conclusion
and recommended that the Company purchase and implement new software.
In June 1998, the committee reached a consensus on its choice of software and
the implementation consultant and management approved its recommendation. The
committee began the implementation process in July 1998. At October 31, 1998
the project was completed with respect to design and at January 21, 1999 the
project was in the configuration stage. During April 1999, the project was in
the testing stage and is scheduled to be completed in July 1999.
Based on recent cost estimates the project is estimated to cost approximately
$6.4 million, of which $4.6 million has been incurred through April 30, 1999.
The Company does not believe that such costs will have a material adverse impact
on the Company's financial condition.
The risks associated with such a project are significant. To mitigate such
risks, the Company has purchased state of the art software and has hired a
nationally known information technology consulting group to assist in the
implementation of the software. Additionally, the Company has assigned internal
resources to assist in the implementation.
With an expected completion date for the project in July 1999, the Company
believes that it has ample time to accommodate for any time delays that might
occur. In the unlikely event that the new software is not operational in time
for the year 2000, the Company has developed a contingency plan that includes
implementing certain programs for some of its more critical in-house systems and
installing other software that will temporarily fix other systems.
Forward-Looking Statements
This report includes "forward-looking statements," which involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions; funding
for US Military HUMVEE orders; volume of US Government, international and
commercial orders for HUMMER/HUMVEEs and other products; the outcome of pending
litigation; the loss of any significant customers; the loss of any major
supplier; and the availability of qualified personnel. These forward-looking
statements speak only as of the date of this report. The Company expressly
disclaims any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstance on which any forward-looking statement is based.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Age Discrimination Claim
William Wilson filed an age discrimination claim against the Company on
February 21, 1995 in the United States District Court for the Northern
district of Indiana asserting that his termination in March 1994 was the
result of age discrimination. A jury verdict against the Company was entered
on the issue as to discrimination under the Age Discrimination in Employment
Act, but in favor of the Company on the issue of willfulness. The jury
awarded Mr. Wilson approximately $470,000 plus the appellate attorney fees
and post judgment interest. The Company appealed the judgment. The appellate
court heard oral arguments in February 1998 and affirmed the trial court's
judgment in May 1999. The trial court approved the plaintiff's request for an
award of $24,838.94 in appellate attorney's fees and expenses. This amount
was added to the judgment. The parties are currently litigating tax
withholding issues related to payment of the judgment. The Company has
accrued for the amounts awarded to Mr. Wilson.
DJ-5 Litigation
In December 1998, the Company was served with a complaint alleging that a
West Virginia woman was killed when the DJ-5 she was driving rolled over. The
West Virginia complaint was filed in the U.S. District Court for the Southern
District of West Virginia. The complaint claimed that, during the rollover,
the decedent's seat back reclined, she slid under the seat belt, and then
flew out the rear door of the vehicle. The complaint further alleged that the
vehicle's seat back, seat belt, and rear door hinge were defectively designed
and manufactured, and that these defects caused the decedent's death. The
decedent's estate sought $5,000,000 in damages.
Like the vehicles involved in previous DJ-5 cases, the allegedly defective
vehicle in the West Virginia case was not manufactured by the Company. It was
manufactured by the former AM General which was owned by LTV. In the purchase
agreement pursuant to which the Company purchased certain of the assets and
assumed certain of the liabilities in April 1992 from a former AM General
Corporation, in the Chapter 11 proceeding of that company and its parent, it
was expressly provided that the Company was not acquiring any DJ-5 assets of
the former company nor assuming any DJ-5 liabilities of the former company.
This agreement was approved by an order of the United States Bankruptcy Court
for the Southern District of New York, which authorized the sale, that being
the Court which had jurisdiction over the Chapter 11 proceedings of the
former company and its parent.
On March 1, 1999 the West Virginia Federal Court on motion of the plaintiff
dismissed the Company from the action without prejudice.
Accordingly, the Company disclaims any liability on account of this matter.
The plaintiff is now pursuing a claim against the manufacturer of the
allegedly defective seat. The Company has not yet been named as a party in
that litigation. If a claim is asserted against the Company, the Company will
assert that the order of the Bankruptcy Court referred to above shields it
from liability in respect to this matter.
HMMWV Product Liability Claims
On May 11, 1998, the family of a deceased Army Sergeant filed a claim against
AM General and the company that supplies seat belts for the HMMWV. The
complaint was filed in the U.S. District Court for the District of Colorado.
The complaint alleges that the Sergeant's seat belt released and allowed him
to be thrown from the HMMWV while it was rolling over after leaving the road
and traveling into a ditch. The Sergeant was a passenger in the vehicle, and
died from his injuries. The complaint claims that the seat belt was
defectively designed and that proper warnings were not issued. The Company
alleged the government contractor's defense as an affirmative defense and
prepared a summary judgment motion seeking to resolve the claims against the
Company on that basis. A settlement conference was held on February 2, 1999.
It was unsuccessful. The Company's lawyers filed the Company's motion for
summary judgment which is now pending a ruling by the Court. While awaiting
the Court's ruling, the plaintiff initiated new settlement negotiations with
the Company. If these new settlement negotiations are unsuccessful and the
Company loses its motion for summary judgment, the case will proceed to
trial. The Company expects to prevail in a trial on the merits; however, the
outcome of any jury trial is uncertain and an adverse decision could have a
material adverse effect on the Company.
17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description
- ----------------- ------------------------------------------------
27 Financial Data Schedule
(b) Reports on Form 8-K. Registrant did not file any reports on Form 8-K during
the quarter for which this report is filed.
18
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.
Date: June 14, 1999 AM GENERAL CORPORATION
Registrant
By /s/ Paul J. Cafiero
------------------------------------
Paul J. Cafiero
Vice President and
Chief Financial Officer
Duly authorized officer and
principal financial and accounting
officer
19
EXHIBIT INDEX
Exhibit No. Description
- ----------------- ------------------------------------------------
27 Financial Data Schedule
20