<PAGE>
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, 1998
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
(State or other jurisdiction of incorporation or organization)
35-1852615
(IRS Employer Identification No.)
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
1,000 shares of the registrant's common stock, par value $.01 per share, are
outstanding as of June 14, 1998.
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AM General Corporation
Form 10-Q
Quarter Ended April 30, 1998
<TABLE>
<CAPTION>
<S> <C>
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
Three Months Ended April 30, 1998 ("second quarter of 1998") compared to Three Months Ended April 30, 1997
("second quarter of 1997") 9
Six Months Ended April 30, 1998 ("first six months of 1998") compared to Six Months Ended April 30, 1997
("first six months of 1997") 12
Liquidity and Capital Resources 15
Forward-Looking Statements 15
PART II - OTHER INFORMATION 16
ITEM 1. LEGAL PROCEEDINGS 16
DJ-5 Litigation 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AM General Corporation and Subsidiary
Consolidated Balance Sheets
(Dollar amounts in thousands, except share information)
<TABLE>
<CAPTION>
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October 31, April 30,
Assets 1997 1998
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<S> <C> <C>
(unaudited)
Current assets:
Cash $ 1,190 3,349
Accounts receivable, net 52,661 52,169
Inventories 87,299 84,989
Prepaid expenses 2,802 2,213
Deferred income taxes 6,198 5,993
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Total current assets 150,150 148,713
Income taxes receivable 1,379 0
Property, plant, and equipment, net 44,920 42,830
Deferred income taxes 24,354 25,125
Goodwill, net 83,585 81,441
Other assets 11,870 14,859
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$ 316,258 312,968
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Liabilities and Stockholder's Deficit
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Current liabilities:
Accounts payable 33,784 29,237
Accrued expenses 60,510 60,790
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Total current liabilities 94,294 90,027
Long-term debt, excluding current maturities 83,195 90,585
Postretirement benefits other than pensions, noncurrent portion 150,702 153,255
Other liabilities, excluding current maturities 13,570 12,895
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Total liabilities 341,761 346,762
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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, $.01 par value. Authorized, issued and outstanding 900 shares 0 0
Paid-in capital 1,000 1,000
Accumulated deficit (31,503) (39,794)
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Total stockholder's deficit (25,503) (33,794)
Commitments and contingencies
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$ 316,258 312,968
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</TABLE>
See accompanying notes to consolidated financial statements
3
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AM GENERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(Dollar amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
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Three Months Ended Six Months Ended
April 30, April 30,
1997 1998 1997 1998
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<S> <C> <C> <C> <C>
Net sales $ 130,862 102,621 271,790 183,294
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Cost and expenses:
Cost of sales 117,478 93,094 241,680 169,296
Depreciation and amortization 3,311 2,879 6,812 5,698
Selling, general, and administrative 6,291 6,547 14,388 13,245
expenses
Restructuring charge 7,640 0 9,573 0
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Profit/(Loss) before interest and income taxes (3,858) 101 (663) (4,945)
Interest expense, net 3,196 3,256 7,195 6,579
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Loss before income taxes (7,054) (3,155) (7,858) (11,524)
Income tax benefit 2,282 687 2,251 3,233
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Net loss $ (4,772) (2,468) (5,607) (8,291)
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</TABLE>
See accompanying notes to consolidated financial statements
4
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AM GENERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
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Six Months Ended
April 30,
---------------------------------
1997 1998
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<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,607) (8,291)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Restructuring charges 9,050 0
less Restructuring payments (663) (1,077)
Depreciation and amortization of plant and equipment 4,142 3,033
Other amortization 3,216 3,211
Increase (decrease) in allowance for doubtful accounts (48) 0
Increase in inventory reserve 1,229 216
Deferred income taxes (6,317) (565)
Noncash other postretirement cost 2,509 2,553
(Gain)/Loss on sale of equipment (5) (11)
Change in assets and liabilities
Accounts receivable 14,195 491
Inventories 38,046 2,100
Prepaid expenses 168 659
Other assets 258 143
Accounts payable (23,357) (4,547)
Accrued expenses 2,753 1,563
Income taxes 4,083 (3,068)
Other liabilities 4,298 (676)
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Net cash provided by (used in) operating activities 47,950 (4,266)
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Cash flows from investing activities:
Proceeds from sale of equipment 17 14
Capital expenditures (1,183) (951)
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Net cash used in investing activities (1,166) (937)
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Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreement (50,810) 7,362
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Net cash provided by (used in) financing activities (50,810) 7,362
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Net change in cash (4,026) 2,159
Cash and cash equivalents at beginning of period 5,867 1,190
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Cash and cash equivalents at end of period $ 1,841 3,349
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Supplemental disclosure of cash items
Interest paid $ 6,757 6,174
Taxes paid 116 400
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</TABLE>
See accompanying notes to consolidated financial statements
5
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AM General Corporation and Subsidiary
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
footnotes required by generally accepted accounting principles for complete
financial statement presentation.
In the opinion of management, all adjustments (including normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month period ended April 30, 1998 are not
necessarily indicative of the results that may be expected for the year ending
October 31, 1998.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant's Form 10-K.
Note 2. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
April 30,
October 31, 1998
1997 (Unaudited)
--------------- ---------------
<S> <C> <C>
Finished Goods $ 42,528 40,963
Service Parts 16,451 19,162
Extended Service Program
Production costs of goods currently
in process 4,574 2,959
Raw Materials, supplies and work in progress 28,153 27,046
--------------- ---------------
91,706 90,130
Less allowance for inventory obsolescence (4,407) (5,141)
--------------- ---------------
Total $ 87,299 84,989
=============== ===============
</TABLE>
6
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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").
HUMVEE/HUMMERs
From November 1, 1993 through May 7, 1995, the Company's HUMVEE/HUMMER
production rate was approximately 47 units per day including 35 units per day
for the US Military and its FMS customers. On May 8, 1995, the Company reduced
its HUMVEE/HUMMER production rate to 25 units per day due to lower US and
international military demand. On February 3, 1997, the Company reduced its
HUMVEE/HUMMER production rate from 25 to 16.5 units per day in order to better
match production levels with current demand. Further, the Company reduced its
corporate overhead costs, outsourced its requirements for stamped parts and
closed its Indianapolis stamping facility.
From 1990 through January 31, 1997, AM General sold 49,797 HUMVEEs under its A1
Series program with the DoD. With the sale of 601 vehicles to an FMS customer in
the first quarter of 1997, all units produced under the A1 Series program have
been sold.
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 new
multi-year annual requirements contract for A2 Series HUMVEEs known as the X001
Contract which provides a mechanism for the US Army to procure at least 2,350
HUMVEEs annually for the next five years. 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, 1998, a total of 8,320 vehicles have been ordered on the X001 Contract. The
FY98 Defense Bill currently contains the necessary funding for the expected 1998
production. The proposed 1999 Defense Bill has been reviewed and management
anticipates that the final Bill will contain, at a minimum, the necessary
funding for the US Military at the current production level. Requirements for
FMS would be in addition to the requirements currently in the 1999 Defense Bill.
Management believes the current production rate of 16.5 units per day matches
the current demand for US Military and Commercial HUMVEE/HUMMERs.
Remanufacturing
In September 1993, the Company was awarded the Extended Service Program ("ESP")
Contract, the first multiyear contract to teardown and remanufacture aging
2-1/2-ton military trucks under the ESP program. Approximately three old trucks
are completely disassembled - certain parts are reworked, others are scrapped
and specific new parts are added - for every two remanufactured vehicles under
this contract. As of April 30, 1998 the Company has manufactured and delivered a
total of 4,069 trucks to the US government under this contract.
The Company accounts for the ESP Contract on the Estimate at Completion ("EAC")
basis, which recognizes estimated profits in the same percentage as revenues are
recognized over the term of the contract. Estimated contract costs and profits
are reviewed periodically and adjustments recorded as necessary.
7
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During the first six months of 1998, the Company successfully negotiated the
addition of 531 vehicles to the ESP Contract and anticipates the further
addition of another 79 vehicles. With the addition of these vehicles, the
Company is assured of stable production through the end of the fiscal year at
the current production rate. Additional units for 1999 production will be
dependent upon the 1999 US Defense Bill currently in discussion. Should
sufficient additional units not be authorized, it could have a material adverse
impact on the Company's results of operation and its financial condition.
In accordance with the Company's practice, the EAC was reviewed and the booking
rate was retroactively increased to give effect to current cost estimates and
the related impact of the current outlook for future orders.
On November 10, 1996, the Company was awarded a $6.9 million Phase I contract by
the DoD to build 10 prototype vehicles for the US Army and Marines' Medium
Tactical Truck Remanufacture program. A competitor was awarded a similar
contract. Prototypes were delivered for testing in August 1997 and testing was
concluded in April 1998. In May, the US Army advised the Company of its decision
to cancel the 5 ton portion of the MTTR program. The remaining 7-ton truck
requirement for the US Marines is for 8168 trucks including options. The
Company believes the DoD will award the final contract to the manufacturer of
its choice in late 1998. The Company's competitor is an experienced manufacturer
of tactical wheeled vehicles for TAACOM; accordingly, the Company anticipates a
very high level of competition for this award.
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
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Three Months Ended April 30, 1998 ("second quarter of 1998") compared to Three
Months Ended April 30, 1997 ("second quarter of 1997")
AM General Corporation and Subsidiary
Table of Net Revenues and HUMVEE/HUMMER Unit Sales Information
(in millions, except unit information)
<TABLE>
<CAPTION>
Three months ended
April 30,
----------------------------------------
%
1997 1998 Change Change
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales
HUMVEE/HUMMERs
US Military $ 51.7 46.9 (4.8) (9.3)%
International (1) 14.9 1.8 (13.1) (87.9)%
Commercial 21.9 16.3 (5.6) (25.6)%
------------- -------------- -------------
Total HUMVEE/HUMMERs 88.5 65.0 (23.5) (26.5)%
ESP 20.1 21.2 1.1 5.5%
SPLO 13.6 13.2 (0.4) (2.9)%
STS 8.7 3.3 (5.4) (62.1)%
------------- -------------- -------------
Total Net Sales $ 130.9 102.7 (28.2) (21.5)%
HUMVEE/HUMMER Unit Sales
US Military 831 876 45 5.4%
International (1) 214 26 (188) (87.9)%
Commercial 360 240 (120) (33.3)%
------------- -------------- -------------
Total HUMVEE/HUMMERs 1,405 1,142 (263) (18.7)%
HUMVEE/HUMMER Average Unit Selling Prices
US Military $ 62,176 53,564 (8,612) (13.9)%
International (1) 69,579 67,385 (2,195) (3.2)%
Commercial 60,731 67,829 7,099 11.7%
Total HUMVEE/HUMMERs 62,933 56,877 (6,057) (9.6)%
</TABLE>
(1) Includes FMS and Direct International
9
<PAGE>
Net Sales
The decrease in net sales was primarily due to lower HUMMER/HUMVEE and STS
sales. US Military and International HUMVEE and Commercial HUMMER sales were
affected by lower demand. Additionally, US Military HUMVEE sales were lower due
to a $2.1 million retroactive sales adjustment (the "Sales Adjustment") made in
the second quarter of 1997 and the sale of less expensive models during the
second quarter of 1998 partially offset by the sale of additional units.
During the fourth quarter of 1997, the Company produced 231 units for a customer
at an estimated selling price of $16 million which remained unsold at the end of
the second quarter due to delays in contract negotiations. Had these units been
sold in the second quarter of 1998 as expected, HUMVEE/HUMMER net sales would
have increased by approximately $16 million.
Average HUMVEE/HUMMER Unit Selling Prices
The combined average unit selling price for all HUMVEE/HUMMERs during the second
quarter of 1998 was lower than the combined average unit selling price during
the second quarter of 1997 primarily due to the reduction in the average unit
selling price of the US Military HUMVEE. The reduction in the average unit
selling price of US Military HUMVEEs was primarily due to the Sales Adjustment
made in the second quarter of 1997 and a higher proportion of less expensive
models sold in the second quarter of 1998. The reduction in the average unit-
selling price of International HUMVEEs was due to a higher proportion of less
expensive models in the second quarter of 1998. The average selling price of
Commercial HUMMERs increased due to a general price increase, a reduction of
sales incentives and the sale of more expensive models in the second quarter of
1998.
Gross Profit
Gross profit was $9.5 million for the second quarter of 1998, a decrease of $3.9
million or 29.1% from gross profit of $13.4 million for the second quarter of
1997. The Company's gross profit margin declined from 10.23% in the second
quarter of 1997 to 9.3% in the second quarter of 1998.
The change in gross profit is directly attributed to the change in net sales; in
particular, International HUMVEE sales. Furthermore, gross profit during the
second quarter of 1998 was lower than gross profit during the second quarter of
1997 due to the sale of a higher proportion of more profitable units to the US
Military during the second quarter of 1997. The Company's fiscal 1998 delivery
schedule includes the sale of similar units during the last two quarters of the
fiscal year. Moreover, the gross profit during the second quarter was lower
due to the Sales Adjustment recorded in the second quarter of 1997.
As discussed above in Net Sales, the Company was unable to sell 231 units built
at the end of the prior fiscal year due to contract delays. Had the Company
sold these vehicles during the second quarter of 1998, gross profit would have
increased by approximately by $3.0 million. Management expects to sell all of
these units in the first quarter of 1999.
Notwithstanding the foregoing, with the 16.5 unit per day production rate, and
the adverse consequences resulting from the timing differences on Net Sales as
discussed above, the Company's gross profit was reduced from the prior year
fiscal quarter.
Depreciation and Amortization
Depreciation and amortization expense was $2.9 million for the second quarter of
1998, a decrease of $.4 million or 12.1% from depreciation and amortization
expense of $3.3 million for the second quarter of 1997. The decrease was
primarily due to lower depreciation expense due to the sale of Indianapolis
assets and lower ESP tooling amortization expense due to complete amortization
of such tooling during the prior fiscal year.
10
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Selling, General and Administrative
Selling, general and administrative ("SG&A") expense was $6.5 million for the
second quarter of 1998, an increase of $.2 million or 3.2% from SG&A expense of
$6.3 million for the second quarter of 1997. The increase is primarily
attributed to an increase in Independent Research &Development related
engineering expenses.
Restructuring charge
During the second quarter of 1997 a pre-tax restructuring charge of $7.6 million
was recorded in connection with the Company's plan to close the Indianapolis
stamping facility and resource those parts to other suppliers. There was no
similar charge during the second quarter of fiscal 1998.
Operating Profit/Loss
The Company recorded an operating profit for the second quarter of 1998 of $.1
million, an increase of $4.0 million of operating profit from the operating loss
of $3.9 million for the second quarter of 1997. Of the change in operating
income, $7.6 million is attributed to the Restructuring charge in the second
quarter of 1997 as discussed above. Other factors affecting the change are lower
gross profits and higher SG&A expense partially offset by lower depreciation and
amortization expense.
Interest Income and Expense
Interest expense for the second quarter of 1998 was $3.3 million, an increase of
$.1 million or 3.1% from interest expense of $3.2 million for the second quarter
of 1997. Average debt outstanding during the second quarter of 1998 was $101.2
million at a weighted average interest rate of 12.1%. Average debt outstanding
during the second quarter of fiscal 1997 was $96.9 million at a weighted average
interest rate of 12.2%. Interest income remained unchanged at $.1 million.
Income Tax (Benefit) Expense
Income tax expense was recorded at the statutory rate adjusted for permanent
differences primarily resulting from the amortization of goodwill. Income tax
benefit was $.7 million for the second quarter of 1998, a decrease of $1.5
million from an income tax benefit of $2.2 million for the second quarter of
1997. The decrease in income tax benefit was due to the decreased loss.
Net Loss
As discussed above, the change in net loss was primarily due to an increase in
operating income partially offset by higher interest expense and a lower income
tax benefit.
11
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Six Months Ended April 30, 1998 ("first six months of 1998") compared to Six
Months Ended April 30, 1997 ("first six months of 1997")
AM General Corporation and Subsidiary
Table of Net Revenues and HUMVEE/HUMMER Unit Sales Information
(in millions, except unit information)
<TABLE>
<CAPTION>
Six months ended
April 30,
---------------------------------------
%
1997 1998 Change Change
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales
HUMVEE/HUMMERs
US Military $ 107.9 76.1 (31.8) (29.5)%
International (1) 48.0 2.7 (45.3) (94.4)%
Commercial 39.0 32.2 (6.8) (17.5)%
------------- ------------- -------------
Total HUMVEE/HUMMERs 194.9 111.0 (83.9) (43.0)%
ESP 37.7 40.3 2.6 6.9%
SPLO 24.0 23.9 (0.1) (0.4)%
STS 15.2 8.1 (7.1) (46.7)%
------------- ------------- -------------
Total Net Sales $ 271.8 183.3 (88.5) (32.6)%
HUMVEE/HUMMER Unit Sales
US Military 1,780 1,458 (322) (18.1)%
International (1) 928 44 (884) (95.3)%
Commercial 649 487 (162) (25.0)%
------------- ------------- -------------
Total HUMVEE/HUMMERs 3,357 1,989 (1,368) (40.8)%
HUMVEE/HUMMER Average Unit Selling Prices
US Military $ 60,608 52,237 (8,372) (13.8)%
International (1) 51,718 60,795 9,078 17.6%
Commercial 60,097 66,049 5,952 9.9%
Total HUMVEE/HUMMERs 58,052 55,808 (2,244) (3.9)%
</TABLE>
(1) Includes FMS and Direct International Sales including $25.3 million of net
sales and 601 units for the FMS Customer
12
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Net Sales
The decrease in net sales was primarily due to lower demand for International
and US Military HUMVEEs and for Commercial HUMMERs. STS sales were lower due to
unusually higher sales in the first six months of 1997. ESP sales were higher
primarily due to the delivery of more units.
International HUMVEE revenues were lower primarily due to a reduction in demand
and the sale of 601 units valued at $25.3 million to a specific FMS customer
(the "FMS Customer") during the first six months of 1997. Had these units been
sold when produced, the net sales for International HUMVEEs for the first six
months of 1997 would have been $22.7 million.
During the fourth quarter of 1997, the Company produced 231 units for one
customer at an estimated selling price of $16 million which remained unsold at
the end of the fiscal year due to delays in contract negotiations. Had these
units been sold in the first six months of 1998, HUMVEE/HUMMER net sales would
have increased by $16 million.
Average HUMVEE/HUMMER Unit Selling Prices
The combined average unit-selling price for all HUMVEE/HUMMERs during the first
six months of 1998 decreased by 3.9% from the first six months of 1997. The
average unit selling price of US Military HUMVEEs decreased by 13.8% from the
first quarter of 1997 primarily due to a higher ratio of less expensive models
sold in the first six months of 1998 than those that were sold during the first
six months of 1997. The average unit selling price of International HUMVEEs
increased by 17.6% primarily due to lower unit selling prices in connection with
the 601 HUMVEEs sold to the FMS Customer during the first six months of 1997.
Commercial HUMMER average unit selling prices increased 9.9% primarily due to
the sale of HUMMERs with reduced sales incentives, more expensive options and a
general price increase.
Gross Profit
Gross profit was $14.0 million for the first six months of 1998, a decrease of
$15.6 million or 52.7% from gross profit of $29.6 million for the first six
months of 1997. The Company's gross profit margin declined from 10.8% in the
first six months of 1997 to 7.6% in the first six months of 1998.
The change in gross profit is directly attributed to the change in net sales.
The primary factors affecting the change in gross profit include the decrease in
US Military and International HUMVEE unit volume, the higher ratio of more
profitable units sold in the first six months of 1997, the Sales Adjustment
recorded in the first six months of 1997 and the gross profit associated with
the sales of the 601 units to the FMS customer in the first six months of 1997.
The Company's fiscal 1998 delivery schedule includes the more profitable US
Military units during the last two quarters of the fiscal year.
As discussed above in Net Sales, the Company was unable to sell 231 units built
at the end of the prior fiscal year due to contract delays. Had the Company
sold these vehicles during the first six months of 1998, gross profit would have
increased by approximately by $3.0 million. Management expects to sell all of
these units in the first quarter of 1999.
Notwithstanding the foregoing, with the 16.5 unit per day production rate, and
the adverse consequences resulting from the timing differences on Net Sales as
discussed above, the Company's gross profit was reduced from the prior year.
Depreciation and Amortization
Depreciation and amortization expense was $5.7 million for the first six months
of 1998, a decrease of $1.1 million or 16.2% from depreciation and amortization
expense of $6.8 million for the first six months of 1997. The
13
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decrease was primarily due to lower amortization of HUMVEE/HUMMER tooling in
connection with the Company's plan to reduce the production rate from 25 to 16.5
units per day, lower depreciation expense due to the sale of Indianapolis assets
and lower ESP tooling amortization expense due to complete amortization of such
tooling during the prior fiscal year.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense was $13.2 million for the
first six months of 1998, a decrease of $1.2 million or 8.3% from SG&A expense
of $14.4 million for the first six months of 1997. The decrease is primarily
attributed to the Company's planned reduction in corporate overhead related
costs in conjunction with the cost reduction plan implemented in February 1997.
Restructuring charge
During the first six months of 1997 and in connection with its plan to reduce
the production rate, the Company announced its plans to reduce certain overhead
related costs. A restructuring charge of $9.1 million was recorded in
connection with this plan. There was no similar charge during the first six
months of fiscal 1998.
Operating Loss
The Company recorded an operating loss for the first six months of 1998 of $4.9
million, an increase of $4.2 million from an operating loss of $.7 million for
the first six months of 1997. The change in operating loss is primarily
attributed to the change in gross profit as discussed above and partially offset
by the restructuring charge in the first six months of 1997, lower depreciation
and amortization expense and lower SG&A expense.
Interest Income and Expense
Interest expense for the first six months of 1998 was $6.7 million, a decrease
of $.6 million or 8.2% from interest expense of $7.3 million for the first six
months of 1997. Average debt outstanding during the first six months of 1998
was $101.3 million at a weighted average interest rate of 12.16%. Average debt
outstanding during the first six months of fiscal 1997 was $113.4 million at a
weighted average interest rate of 11.95%. Interest income remained unchanged
at $.1 million.
Income Tax Benefit
Income tax expense was recorded at the statutory rate adjusted for permanent
differences primarily resulting from the amortization of goodwill. Income tax
benefit was $3.2 million for the first six months of 1998, an increase of $1.0
million from an income tax benefit $2.2 million for the first six months of
1997. The increase in income tax benefit was due to the decrease of taxable
income.
Net Loss
As discussed above, the change in net loss was primarily due to lower operating
income partially offset by lower interest and income tax expense.
14
<PAGE>
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 used by operating activities was $4.3 million for the six months ended
April 30, 1998 compared to cash generated by operating activities of $47.9
million for the six months ended April 30, 1997. The key factors affecting cash
flow from operating activities during the first six months of 1998 were the net
loss, decreases in accounts payable partially offset by a reduction in
inventory and accrued expenses. Other factors include non-cash charges to
operating income including depreciation, amortization and non-cash
postretirement expenses.
Accounts receivable levels at April 30, 1998 were essentially the same as levels
at the end of the prior fiscal year.
Inventory levels at April 30, 1998 were slightly lower than levels at the end
of the prior fiscal year. Included in the finished goods inventory at October
31, 1997 and at April 30, 1998 are 231 A2 Series HUMVEEs which were built for
one customer. These units are expected to be sold by the first quarter of 1999.
During the first six months of 1998, the Company spent $1.0 million on capital
expenditures primarily for tooling for vehicle production, as compared to $1.2
million during the first six months of 1997. The Company anticipates that
operating cash flow and availability under the Revolving Credit Facility will be
adequate to fund capital expenditures for fiscal 1998.
Management anticipates that cash flow from operations as impacted by the reduced
HUMVEE/HUMMER production rate and overhead structure, as well as availability
under its Revolving Credit Facility will be sufficient to finance the Company's
liquidity needs for the foreseeable future.
The Company's Revolving Credit Facility has a maximum borrowing limit of $60
million, is secured by eligible inventories and receivables, as defined therein,
and expires on October 31, 1999. As of April 30, 1998, the Company had
borrowings of $16.0 million outstanding and approximately $19.9 million of
availability under the Revolving Credit Facility. When the 231 A2 series units
described above have been sold and the revenues are received therefrom, the loan
balance will be reduced by $16.0 million.
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.
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 government HUMVEE and ESP orders; volume of international and commercial
orders for HUMMER/HUMVEEs; the outcome of the MTTR competition; the outcome of
pending litigation; the loss of any significant customers; the loss of any major
supplier; and the availability of qualified personnel.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DJ-5 Litigation
Reference is made to the information with respect to pending litigation relating
to vehicular accidents involving DJ-5 postal dispatcher vehicles (which had not
been made or sold by the Company) which was contained in item 3 of the Company's
Annual Report on Form 10-K for the year ended October 31, 1997.
In May, 1998, pursuant to agreement, the state court DJ-5 plaintiffs (in state
court actions in California, Virginia and Texas) dismissed with prejudice their
appeal from the order made May 1, 1996 of the United States Bankruptcy Court for
the Southern District of New York, affirmed on September 30, 1997 by the United
States District Court for the Southern District of New York, which had
preliminarily enjoined them from prosecuting their state court actions, and
consented that the preliminary injunction be made permanent, and on May 14, 1998
the Bankruptcy Court permanently enjoined the continued prosecution of the state
court actions. In connection therewith, the Company made a payment which it
does not deem to be material and the state court plaintiffs and the plaintiffs
in an action in Louisiana dismissed their respective state court actions and
delivered their general releases to the Company.
There are no actions pending against the Company in respect of DJ-5 vehicular
accidents.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(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.
17
<PAGE>
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, 1998 AM GENERAL CORPORATION
Registrant
By _________________________
Paul J. Cafiero
Vice President and
Chief Financial Officer
Duly authorized officer and
principal financial officer
18
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