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 July 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIESEXCHANGE 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 September 14, 1999.
AM GENERAL CORPORATION
Form 10-Q
Quarter Ended July 31, 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 8
Spare Parts Logistics Operation ("SPLO") and Systems Technical Support ("STS") 8
Three Months Ended July 31, 1999 compared to Three Months Ended July 31, 1998 9
Nine Months Ended July 31, 1999 compared to Nine Months Ended July 31, 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
US Army Pricing Claim 17
Humvee Product Liability Claims 18
Nevada Product Liability Case 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar amounts in thousands, except share information)
July 31, October 31,
Assets 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
(unaudited)
Current assets:
Cash $ 597 2,687
Accounts receivable, net 62,924 74,211
Inventories 77,663 71,613
Prepaid expenses 1,567 1,170
Deferred income taxes 6,700 6,746
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 149,451 156,427
Income taxes receivable 2,555 1,585
Property, plant, and equipment, net 42,516 41,684
Deferred income taxes 27,098 26,113
Goodwill, net 76,083 79,298
Other assets 6,650 9,658
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$ 304,353 314,765
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Liabilities and Stockholder's Deficit
- ------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 23,390 32,494
Accrued expenses 68,357 67,869
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 91,747 100,363
Long-term debt 84,227 82,156
Postretirement benefits other than pensions, noncurrent portion 159,395 154,362
Other long-term liabilities 9,827 11,930
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities $ 345,196 348,811
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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. - -
Paid-in capital 1,000 1,000
Accumulated deficit (46,615) (39,818)
Minimum pension liability (228) (228)
- ------------------------------------------------------------------------------------------------------------------------
Total stockholder's deficit (40,843) (34,046)
- ------------------------------------------------------------------------------------------------------------------------
$ 304,353 314,765
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See accompanying notes to consolidated financial statements
3
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited)
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Three Months Ended Nine Months Ended
July 31, July 31,
------------------------------ -------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
Net sales $ 72,124 92,053 263,019 275,347
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Cost and expenses:
Cost of sales 67,797 82,166 233,631 251,462
Depreciation and amortization 2,733 2,746 8,364 8,444
Selling, general, and administrative expenses 7,017 6,745 21,903 19,990
Restructuring/plant closing - - (401) -
- --------------------------------------------------------------------------------------------------------------------------------
Earnings/(loss) before interest and income taxes (5,423) 396 (478) (4,549)
Interest income 53 87 306 228
Interest expense (2,675) (3,256) (8,399) (9,976)
- --------------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (8,045) (2,773) (8,571) (14,297)
Income tax benefit 2,533 561 1,773 3,794
- --------------------------------------------------------------------------------------------------------------------------------
Net loss $ (5,512) (2,212) (6,798) (10,503)
- --------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated finiancial Statements
4
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
(unaudited)
===========================================================================================================================
Nine Months Ended
July 31,
-------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (6,798) (10,503)
Adjustments to reconcile net loss to
Net cash provided by operating activities:
Restructuring payments (999) (2,121)
Depreciation and amortization of plant and equipment 4,366 4,446
Other amortization 4,756 4,780
Increase (decrease) in inventory reserve (93) 690
Deferred income taxes (938) (909)
Noncash other postretirement cost 5,033 3,751
(Gain)/loss on sale of equipment 23 (10)
Change in assets and liabilities:
Accounts receivable 11,287 (2,207)
Inventories (5,952) 427
Prepaid expenses (397) 285
Other assets 1,510 175
Accounts payable (9,104) (5,059)
Accrued expenses 1,466 5,920
Income taxes (931) (3,333)
Other liabilities (2,122) (2,356)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 1,107 (6,024)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of equipment 8 1,145
Capital expenditures (5,234) (2,734)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,226) (1,589)
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Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreement 2,029 8,052
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 2,029 8,052
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Net change in cash (2,090) 439
Cash and cash equivalents at beginning of period 2,687 1,190
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 597 1,629
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Supplemental disclosure of cash items
Interest paid $ 10,063 11,592
Taxes paid 96 448
- --------------------------------------------------------------------------------------------------------------------- ------
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 nine-month period ended July 31, 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:
July 31, October 31,
1999 1998
(Unaudited)
Finished goods $ 38,951 29,982
Service parts 19,601 16,946
Extended Service Program
Production costs of goods currently
in process - 4,095
Raw materials, supplies and work in progress 26,287 27,859
------------------ -----------------
84,839 78,882
Less allowance for inventory obsolescence (7,176) (7,269)
------------------ -----------------
Total $ 77,663 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. From 1994 through April 1999, the Company sold remanufactured 2-
1/2-ton medium tactical vehicles under the Army's Extended Service Program
("ESP").
On June 11, 1999 the Company and GM Powertrain, a division of General Motors
Corporation, announced that the Company acquired GM Powertrain's 6.5 liter
diesel engine business. Under terms of the agreement, the Company will begin
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 and full production later that same year.
The Company 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.
The Company announced in August that it selected Franklin, Ohio as the site for
the new engine business. A developer commenced construction of the new facility
and the Company anticipates that it will soon enter into a multiyear operating
lease with respect to this facility.
On June 28, 1999 the Company and General Motors signed a non-binding memorandum
of understanding to explore future product, marketing and distribution
opportunities. With a final agreement GM will acquire the exclusive global
ownership of the HUMMER brand name world-wide, as well as assume responsibility
for marketing and distributing the HUMMER vehicles to retail and commercial
customers beginning in fiscal year 2000.
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 with the United States Army Tank - Automotive
and Armaments Command ("TACOM") for the A2 Series HUMVEEs known as the X001
Contract. This contract 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 July
31, 1999, a total of 12,358 vehicles have been ordered on the X001 Contract. The
FY99 Defense Bill contains the necessary funding for the expected 1999
production. With respect to FY00 funding, the Company anticipates that with the
passage of the 2000 Defense Bill, the funding for HUMVEEs in FY00 will exceed
that of FY99.
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.
7
Medium Trucks
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. On July 13, 1999 the Company delivered ahead of
schedule two new 5.0-ton vehicles and one new 2.5-ton vehicle for testing
purposes. Two of the three vehicles have completed all government required
testing. 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 July 31, 1999 compared to Three Months Ended July 31, 1998
AM GENERAL CORPORATION AND SUBSIDIARIES
Table of Net Sales and HUMVEE/HUMMER Unit Sales Information
(in millions, except unit information)
Three months ended
July 31, %
------------------------
1999 1998 Change Change
---- ---- ------ ------
Net Sales
HUMVEE/HUMMERs
US Military $ 30.1 37.9 (7.8) (20.6%)
International (1) .8 2.3 (1.5) (65.2%)
Commercial 24.9 15.8 9.1 57.6%
------------------------------------
Total HUMVEE/HUMMERs 55.8 56.0 (0.2) (0.4%)
ESP - 19.5 (19.5) (100.0%)
SPLO 11.4 12.9 (1.5) (11.6%)
STS/Other 4.9 3.6 1.3 36.1%
------------------------------------
Total Net Sales $ 72.1 92.0 (19.9) (21.6%)
HUMVEE/HUMMER Unit Sales
US Military 508 602 (94) (15.6%)
International (1) 10 34 (24) (70.6%)
Commercial 350 239 111 46.4%
------------------------------------
Total HUMVEE/HUMMERs 868 875 (7) (0.1%)
HUMVEE/HUMMER Average Unit Selling Prices
US Military $59,252 62,957 (3,705) (5.9%)
International (1) 80,000 67,647 12,353 18.3%
Commercial 71,143 66,109 5,034 7.6%
Total HUMVEE/HUMMERs $64,286 64,000 286 .4%
(1) Includes FMS and direct international sales
9
Net Sales
Net sales were $72.1 million for the third quarter of 1999, a decrease of $19.9
million or 21.6% from net sales of $592.0 million for the third quarter of 1998.
The decrease in net sales was primarily due to the end of the ESP program and
lower US Military HUMVEE, SPLO and International sales, partially offset by
higher Commercial HUMMER and STS Engineering sales. The Company remained unable
to obtain a firm order for 231 units produced in 1997 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 by
December 1999 and the units will be sold in fiscal 2000.
The decrease in ESP sales is due to the completion of the 2- 1/2 ton contract
with TACOM which ended in the second quarter of fiscal year 1999. The decrease
in US Military HUMVEE sales is due to the manufacture of 164 vehicles in the
third quarter of 1999 which were not on contract with the US Government (the
"Build Ahead Vehicles"). These vehicles were subsequently put on contract and
sold in August 1999. The increase in Commercial HUMMER sales is primarily due to
higher demand.
Average HUMVEE/HUMMER Unit Selling Prices
The combined average unit selling price for all HUMVEE/HUMMER's during the third
quarter of 1999 increased by .4% from the third quarter of 1998. The average
unit selling price of US Military HUMVEE's decreased by 5.9% from the third
quarter of 1998, primarily due to a higher proportion of more expensive models
in the third quarter of 1998, partially offset by an annual inflation factor
included in the X001 contract with TACOM. The average unit selling price of
International HUMVEE's increased by 18.3%, primarily due to increased option
requirements and a higher concentration of more expensive models. Commercial
HUMMER average unit selling prices increased by 7.6%, primarily due to a general
price increase on model year 1999 units and a higher concentration of more
expensive units.
Gross Profit
Gross profit was $4.3 million for the third quarter of 1999, a decrease of $5.6
million or 56.7% from gross profit of $9.9 million for the third quarter of
1998. The Company's gross profit margin decreased from 10.7% in the third
quarter of 1998 to 6.0% in the third quarter of 1999.
The change in gross profit is primarily due to the completion of the ESP 2 1/2
ton contract with the US Government in April 1999, lower US Government HUMVEE
unit sales due to the Build Ahead Vehicles and lower SPLO sales and margin
percentages. This was partially offset by increased STS Engineering and
International HUMVEE gross profit.
Depreciation and Amortization
Depreciation and amortization expense was $2.7 million for the third quarter of
1999, which was consistent with the third quarter of 1998.
Selling, General and Administrative
Selling, general and administrative ("SG&A) expense was $7.0 million for the
third quarter of 1999, an increase of $.3 million or 4.0% from SG&A expense of
$6.7 million for the third quarter of 1998. The increase is primarily attributed
to training associated with the implementation of an Enterprise Resource
Planning system, partially offset by reduced Independent Research & Development
Engineering expenses.
Earnings/(Loss) before Interest and Income Taxes
The Company recorded a loss before interest and income taxes for the third
quarter of 1999 of $5.4 million, a decrease of $5.8 million from earnings before
interest and income tax of $.4 million for the third quarter of 1998. The
decrease in earnings before interest and income taxes is attributed primarily to
the lower gross profit described above and slightly higher SG&A.
10
Interest Income and Expense
Interest expense for the third quarter of 1999 was $2.7 million, a decrease of
$.6 million or 18.2% from interest expense of $3.3 million for the third quarter
of 1998. Average debt outstanding during the third quarter of 1999 was $75.6
million at a weighted average interest rate of 12.8%. Average debt outstanding
during the third quarter of fiscal 1998 was $98.6 million at a weighted average
interest rate of 12.2%. 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.
Interest income of $.1 million in the third quarter of 1999 was consistent with
the third quarter of fiscal 1998.
Income Tax Benefit
Income tax benefit was recorded at the statutory rate adjusted for permanent
differences primarily resulting from amortization of goodwill. The income tax
benefit was $2.5 million for the third quarter of 1999, an increase of $2.0
million from the income tax benefit of $.5 million for the third quarter of
1998. The increase in the income tax benefit was due to the higher loss in the
third quarter of 1999.
Net Loss
The Company recorded a net loss for the third quarter of 1999 of $5.5 million,
an increase of $3.3 million from the net loss of $2.2 million in the third
quarter of 1998. The increase in the net loss is primarily due to lower earnings
before interest and taxes, partially offset by lower interest expense and a
higher income tax benefit.
11
Nine Months Ended July 31, 1999 compared to Nine Months Ended July 31, 1998
AM GENERAL CORPORATION AND SUBSIDIARIES
Table of Net Sales and HUMVEE/HUMMER Unit Sales Information
(in millions, except unit information)
Nine months ended
July 31, %
------------------------------
1999 1998 Change Change
---- ---- ------ ------
Net Sales
HUMVEE/HUMMERs
US Military $ 107.8 114.1 (6.3) (5.5%)
International (1) 4.8 4.9 (0.1) (2.0%)
Commercial 55.7 48.0 7.7 16.0%
--------------------------------------
Total HUMVEE/HUMMERs 168.3 167.0 1.3 0.8%
ESP 45.6 59.8 (14.2) (23.7%)
SPLO 37.9 36.9 1.0 2.7%
STS/Other 11.2 11.6 (0.4) (3.4%)
--------------------------------------
Total Net Sales $ 263.0 275.3 (12.3) (4.5%)
HUMVEE/HUMMER Unit Sales
US Military 1,936 2,060 (124) (6.0%)
International (1) 51 78 (27) (34.6%)
Commercial 798 726 72 9.9%
--------------------------------------
Total HUMVEE/HUMMERs 2,785 2,864 (79) (2.8%)
HUMVEE/HUMMER Average Unit Selling Prices
US Military $55,682 55,388 294 0.5%
International (1) 94,118 62,821 31,297 49.8%
Commercial 69,799 66,116 3,683 5.6%
Total HUMVEE/HUMMERs $60,431 58,310 2,121 3.6%
(1) Includes FMS and direct international sales
12
Net Sales
Net sales were $263.0 million for the first nine months of 1999, a decrease of
$12.3 million or 4.5% from net sales of $275.3 million for the first nine months
of 1998. The decrease in net sales was primarily due to the end of the ESP
program and lower US Military HUMVEE, STS Engineering and International HUMVEE
sales, partially offset by higher Commercial HUMMER and SPLO sales. The Company
remained unable to obtain a firm order for 231 units produced in 1997 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 by December 1999 and the units will be sold in fiscal
2000.
The decrease in ESP sales is due to the completion of the 2 1/2 ton contract
with TACOM which ended in the second quarter of fiscal year 1999. The increase
in Commercial HUMMER sales is due to higher demand and a higher unit selling
price on 1999 models. The decrease in US Military HUMVEE sales is due to the
Build Ahead Vehicles. SPLO sales increased primarily due to higher Commercial
HUMMER parts sales and higher US Government sales in fiscal 1999 due to higher
demand.
Average HUMVEE/HUMMER Unit Selling Prices
The combined average unit selling price for all HUMVEE/HUMMER's during the first
nine months of 1999 increased 3.6% from the first nine months of 1998. Under the
X001 Contract prices for HUMVEE models are fixed and subject to inflation. The
average unit selling price of US Military HUMVEE's increased .5% from 1998
primarily due to a negotiated price escalation, offset by selling a less
expensive model mix in 1999 compared to 1998. The average unit selling price of
International HUMVEE's increased by 49.8% primarily due to ambulance equipment
added to units previously sold and more expensive models of FMS units sold
during the first nine months of 1999. Commercial HUMMER average unit selling
prices increased 5.6% primarily due to a concentration of more expensive units
and a general model year 1999 price increase.
Gross Profit
Gross profit was $29.4 million for the first nine months of 1999, an increase of
$5.5 million or 23.0% from gross profit of $23.9 million for the first nine
months of 1998. The Company's gross profit margin rose from 8.7% in the first
nine months of 1998 to 11.2% in the first nine months of 1999.
The change in gross profit is primarily attributed to higher ESP gross profit,
due to higher negotiated selling prices in 1999 combined with aggressive cost
containment and the recording of a plant closing reserve in fiscal 1998. The
increase in gross profit was partially offset by lower Military HUMVEE gross
profit due to the Build Ahead Vehicles and lower Commercial HUMMER and SPLO
gross profit.
Depreciation and Amortization
Depreciation and amortization expense was $8.4 million for the first nine months
of 1999, which is consistent with the first nine months of 1998.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense was $21.9 million for the
first nine months of 1999, an increase of $1.9 million or 9.6% from SG&A expense
of $20.0 million for the first nine months of 1998. The increase is primarily
attributed to non-recurring engineering costs, increased bid and proposal costs
in connection with potential STS Engineering contracts and higher training costs
in connection with the implementation of a new Enterprise Resource Planning
system.
Loss before Interest and Income Taxes
The Company recorded a loss before interest and income taxes for the first nine
months of 1999 of $.5 million, a decrease of $4.1 million from a loss before
interest and income taxes of $4.6 million for the first nine months of 1998. The
decrease in loss before interest and income taxes is attributed primarily to the
higher gross profit described above, partially offset by higher SG&A expenses.
13
Interest Income and Expense
Interest expense for the first nine months of 1999 was $8.4 million, a decrease
of $1.6 million or 15.8% from interest expense of $10.0 million for the first
nine months of 1998. Average debt outstanding during the first nine months of
fiscal year 1999 was $75.6 million at a weighted average interest rate of 12.8%.
Average debt outstanding during the first nine months of fiscal 1998 was $99.5
million at a weighted average interest rate of 12.2%. 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 reduction in
accounts receivable and decreased loss before interest and income taxes.
Interest income increased from $.2 million during the first nine months of 1998
to $.3 million during the first nine months of 1999 primarily due to paying off
the revolving credit facility and investing excess cash in short term
investments.
Income Tax Benefit
Income tax benefit was recorded at the statutory rate adjusted for permanent
differences primarily resulting from the amortization of goodwill. Income tax
benefit was $1.8 million for the first nine months of 1999, a reduction of $2.0
million from an income tax benefit of $3.8 million for the first nine months of
1998. The reduction in the income tax benefit was due to the reduction of the
loss before income tax in fiscal year 1999 compared to fiscal year 1998.
Net Loss
As discussed above, the reduction in the net loss was primarily due to a lower
loss before interest and income taxes in the first nine months of 1999, compared
to the first nine months of fiscal 1998 and lower interest expense in 1999. This
was partially offset by a lower income tax benefit for the first nine months of
1999 compared to the first nine months of 1998.
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 $1.1 million for the nine months
ended July 31, 1999 compared to cash used by operating activities of $6.0
million for the nine months ended July 31, 1998. The primary sources of cash
flow during the first nine months of 1999 were reductions in accounts receivable
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 operating
activities was partially offset by increased inventories, a reduction in
accounts payable and other liabilities, as well as funding the Company's net
loss.
Accounts receivable levels at July 31, 1999 were $11.3 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 July 31, 1999 in connection with US Government directed modifications of A2
series HUMVEEs and higher STS receivables.
Inventory levels at July 31, 1999 were higher than levels at the end of the
prior fiscal year primarily due to unsold units in connection with the Build
Ahead Vehicles. The increase in inventory was partially offset by lower in-
process inventory. Included in the finished goods inventory at October 31, 1998
and at July 31, 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 nine months of 1999, the Company spent $5.2 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 $2.7 million during the first nine months of 1998. Additional
expenditures for the system and other capital expenditures are expected to
amount to $3.9 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, of which $0.7 will be incurred in fiscal 1999. The Company
anticipates that operating cash flow and availability under the revolving credit
facility will be adequate to fund future capital expenditures.
Under the Mandatory Purchase Offer provision of the Indenture for the 12.875%
Senior Notes (the "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 calculated $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 that it would offer to purchase $6.5 million of the Notes
at a price equal to 101% of the principal amount plus any accrued and unpaid
interest. On August 27, 1999 the Company funded such purchase with proceeds
from its 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 July 31, 1999, the Company had borrowings of $9.9 million
outstanding and approximately $23.0 million of excess availability under the
revolving credit facility. At September 10, 1999, the balance of the revolving
credit facility was $ 25.1 and the excess availability was $8.9. The increase in
the revolving credit facility and the decrease in availability are primarily due
to the $6.5 million Senior Note purchase as discussed above and an increase in
working capital requirements in connection with the Build Ahead Vehicles.
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 national and
international 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 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. Testing of the critical business systems began
in April 1999 and implementation of the compliant systems was completed on
September 7, 1999.
Based on recent cost estimates the project is estimated to cost approximately
$7.6 million, of which $5.3 million has been incurred through July 31, 1999. The
Company does not believe that such costs will have a material adverse impact on
the Company's financial condition.
Should the new software prove to be inoperable in time for the year 2000, the
Company will activate its contingency plans which includes implementing certain
programs for some of its more critical in-house systems and installing other
software that will temporarily fix other systems.
In the spring of 1999, the Company contacted all of its vendors with regard to
their preparation for the year 2000. As of September 14, 1999 the Company has
not been notified of any impending problems in connection with the year 2000
problem
Forward-Looking Statements
This report includes "forward-looking statements," within the meaning of the
Private Securities Litigation Reform Act of 1995 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; volume of orders for
6.5 liter diesel engines; 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 appellate affirmed the trial court's judgment in May 1999. The
trial court approved the plaintiff's request for an award of $24,839 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 paid the amounts awarded to Mr. Wilson in the third
quarter of 1999.
US Army Pricing Claim
On January 27, 1995, the Company received a final decision from the US Army
asserting a claim against the Company for approximately $6.3 million plus
interest from January 27, 1995 under the R034 Contract which was entered into in
1983. The claim was increased by $1.7 million in October 1996 to cover option
quantities omitted from the original claim.
The US Army asserts that the Company failed to submit accurate, complete, and
current cost or pricing data in the pricing of that contract and that such
failure increased the negotiated contract price by the amount of the claim. The
final decision demanded repayment of that amount within 30 days. The US Army
originally asserted a claim for approximately $30 million by an audit report
provided to the Company in July 1986. The Company responded in December 1986
denying liability and asserting an exemption from the requirement to submit cost
or pricing data. After evaluating the Company's response, the US Army provided a
revised audit report in November 1989 lowering the claim to approximately $15
million. The Company responded to the revised audit report resulting in the US
Army again lowering its claim to approximately $6.3 million.
Although the parties have held subsequent discussions, they have been unable to
resolve the matter. The Company has appealed the US Army's final decision to the
Armed Services Board of Contract Appeals (the "Board"). The US Army has agreed
to defer collection of the amount claimed until 30 days after final decision by
the Board on the Company's appeal. The Company believes the contract was exempt
from the requirement to submit cost or pricing data because the contract was
awarded on the basis of adequate price competition. Although the US Army admits
there were two competing offerors for the contract and further admits that the
US Army failed to prepare a price negotiation memorandum as would normally be
the case for cost-based negotiations, the US Army has disputed the exemption.
The Company also believes it has other defenses and offsets to the US Army's
claim and intends to pursue the appeal vigorously.
On December 18, 1995, the Company filed a motion for summary judgment with
respect to the claim. The Company's motion raised only one of the Company's
affirmative defenses to the Government's claim. If successful, this affirmative
defense would have completely offset the Government's claim and would have
resolved the case without need for further proceedings. The Government responded
by filing its own summary judgment motion, arguing that, given the factual
circumstances, the relevant case law precludes the Company from pursuing this
particular affirmative defense.
On November 10, 1998, the Board denied the Company's motion and granted the
Government's motion. The ruling precludes the Company from arguing this
particular affirmative defense throughout the remainder of the proceedings
before the Board. The Company is free to argue all other affirmative defenses.
The Board's summary judgment ruling is subject to appeal, but not until after
the trial before the Board is completed.
The case is currently set for trial in October 1999. The parties are currently
engaged in promising settlement discussions. If settlement discussions are
unsuccessful, the Company believes that it will prevail in the litigation.
However, there can be no assurance as to the outcome of such litigation, and an
adverse decision on the claim could have a material adverse effect on the
Company's financial condition.
17
Humvee 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 Humvee 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 Humvee 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 filed the motion
for summary judgment on March 17, 1999 which is now pending a ruling by the
Court. While awaiting the Court's ruling, the plaintiff initiated new settlement
negotiations with the Company which resulted in a settlement. The settlement
agreement and appropriate papers to dismiss the Company from the lawsuit are now
being prepared. The settlement amount will be covered by the Company's liability
insurer.
Nevada Product Liability Case
The Company is also defending a product liability case based on an accident
involving an M35 Truck (a two-and-a-half ton military truck). The complaint was
filed in October 1995 in Clark County, Nevada. It alleges that the truck's
brakes were defective, failed, and caused an accident resulting in severe
injuries to an Air Force Sergeant. The Company filed a motion for summary
judgment based on the Government Contractor's defense, but the trial judge
denied the motion. The case is currently scheduled for trial in November 1999.
The Company expects to prevail at trial. However, the outcome of any jury trial
is uncertain and, given the severity of the plaintiff's injuries, an adverse
decision could have a material adverse effect on the Company's financial
condition.
18
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.
19
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: September 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
20
EXHIBIT INDEX
Exhibit No. Description
----------------- ---------------------------------------------------
27 Financial Data Schedule
21