<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 July 31, 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 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 filing requirements for the
past 90 days. Yes X No
---
900 shares of the registrant's common stock, par value $.01 per share, are
outstanding as of September 14, 1998.
Documents Incorporated by reference: None.
1
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AM General Corporation
Form 10-Q
Quarter Ended July 31, 1998
<TABLE>
<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 July 31, 1998 ("third quarter of 1998")
compared to Three Months Ended July 31, 1997
("third quarter of 1997") 9
Nine Months Ended July 31, 1998 ("first nine months of 1998")
compared to Nine Months Ended July 31, 1997
("first nine months of 1997") 12
Liquidity and Capital Resources 15
Year 2000 Business Matters 16
Forward-Looking Statements 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
</TABLE>
2
<PAGE>
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>
- --------------------------------------------------------------------------------
October 31, July 31,
Assets 1997 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
(unaudited)
Current assets:
Cash $ 1,190 1,629
Accounts receivable, net 52,661 54,868
Inventories 87,299 86,187
Prepaid expenses 2,802 1,373
Deferred income taxes 6,198 6,622
- --------------------------------------------------------------------------------
Total current assets 150,150 150,679
Income taxes receivable 1,379 4,460
Property, plant, and equipment, net 44,920 43,200
Deferred income taxes 24,354 24,839
Goodwill, net 83,585 80,370
Other assets 11,870 10,173
- --------------------------------------------------------------------------------
$316,258 313,721
- --------------------------------------------------------------------------------
Liabilities and Stockholder's Deficit
- --------------------------------------------------------------------------------
Current liabilities:
Accounts payable 33,784 28,724
Accrued expenses 60,510 64,905
- --------------------------------------------------------------------------------
Total current liabilities 94,294 93,629
Long-term debt, excluding current maturities 83,195 91,289
Postretirement benefits other than pensions,
noncurrent portion 150,702 154,453
Other liabilities, excluding current maturities 13,570 10,356
- --------------------------------------------------------------------------------
Total liabilities 341,761 349,727
- --------------------------------------------------------------------------------
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) (42,006)
- --------------------------------------------------------------------------------
Total stockholder's deficit (25,503) (36,006)
Commitments and contingencies
- --------------------------------------------------------------------------------
$316,258 313,721
- --------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(Dollar amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
------------------ ------------------
1997 1998 1997 1998
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $94,215 92,053 $366,005 275,347
- -------------------------------------------------------------------------------
Cost and expenses:
Cost of sales 86,750 82,166 328,953 251,462
Depreciation and amortization 3,122 2,746 9,934 8,444
Selling, general, and
administrative expenses 6,309 6,745 20,697 19,990
Restructuring charges 54 0 9,104 0
- -------------------------------------------------------------------------------
Income/(Loss) before interest and
income taxes (2,020) 396 (2,683) (4,549)
Interest income (57) (87) (165) (228)
Interest expense 2,989 3,256 10,292 9,976
- -------------------------------------------------------------------------------
Loss before income taxes (4,952) (2,773) (12,810) (14,297)
Income tax benefit 1,344 561 3,595 3,794
- -------------------------------------------------------------------------------
Net loss $(3,608) (2,212) $ (9,215) (10,503)
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Nine Months Ended
July 31,
-------------------
1997 1998
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,215) (10,503)
Adjustments to reconcile net loss to
net cash provided by (used in ) operating activities:
Restructuring charges 9,104 0
less Restructuring payments (1,270) (2,121)
Depreciation and amortization of plant and equipment 5,931 4,446
Other amortization 4,779 4,737
Decrease in allowance for doubtful accounts (48) 0
Increase in inventory reserve 1,733 690
Deferred income taxes (6,787) (909)
Amortization of bond discount 43 43
Noncash other postretirement cost 3,970 3,751
Gain on sale of equipment (5) (10)
Change in assets and liabilities:
Accounts receivable 15,305 (2,207)
Inventories 37,945 427
Prepaid expenses (249) 285
Other assets 102 175
Accounts payable (37,360) (5,059)
Accrued expenses 5,844 5,920
Income taxes 3,145 (3,333)
Other liabilities 2,312 (2,356)
- -------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 35,279 (6,024)
- -------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of equipment 17 1,145
Capital expenditures (1,805) (2,734)
- -------------------------------------------------------------------------------
Net cash used in investing activities (1,788) (1,589)
- -------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit
agreement (36,664) 8,052
- -------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (36,664) 8,052
- -------------------------------------------------------------------------------
Net change in cash (3,173) 439
Cash and cash equivalents at beginning of period 5,867 1,190
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,694 1,629
- -------------------------------------------------------------------------------
Supplemental disclosure of cash items
Interest paid $ 11,871 11,592
Taxes paid 180 448
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
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 nine-month period ended July 31, 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 for the year ended
October 31, 1997.
Note 2. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
July 31,
October 31, 1998
1997 (Unaudited)
----------- -----------
<S> <C> <C>
Finished Goods $42,528 43,189
Service Parts 16,451 17,959
Extended Service Program
Production costs of goods currently
in process 4,574 3,023
Raw Materials, supplies and work in progress 28,153 27,116
------- ------
91,706 91,287
Less allowance for inventory obsolescence (4,407) (5,100)
------- ------
Total $87,299 86,187
======= ======
</TABLE>
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
AM General 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 High Mobility Multipurpose Wheeled Vehicle ("HUMVEE"), which
it sells to the US and foreign military services. The Company sells HUMVEEs to
foreign military services ("FMS") through the DoD's FMS program and on a direct
sale basis. In 1993, the Company began selling a modified version of the HUMVEE
("HUMMER") to industrial and retail users through its commercial dealer network.
In 1994, the Company began remanufacturing 2.5 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 production rate to 25 units per day due to lower US and international
military demand. On February 3, 1997, the Company reduced its production rate
from 25 to 16.5 units per day due to continued lower military demand.
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 the FMS customer
in the first quarter of 1997, all units produced under the A-1 Series program
have been sold.
The Company began producing the latest generation of military HUMVEEs, the A2
series, in August 1995 under a contract for 1,201 units known as the R021
Contract. On December 23, 1995, the Company entered into a new multi-year annual
requirements contract for A2 HUMVEEs known as the X001 Contract which provides a
mechanism for the US Army to procure at least 2,350 HUMVEEs annually through the
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 via
the annual Defense Budget. Through July 31, 1998, a total of 8,979 vehicles have
been ordered on the X001 Contract. The pending FY99 Defense Bill currently
contains the necessary funding for the fourth year of this contract.
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 July 31, 1998 the Company has manufactured and delivered
all of the base and option trucks to the US government under this contract.
The Company accounted for the base and option vehicles under the ESP Contract on
the Estimate at Completion ("EAC") basis, which recognized estimated profits in
the same percentage as revenues were recognized over the term of the contract.
Estimated contract costs and profits were reviewed periodically and adjustments
recorded as necessary. All known adjustments have been recorded.
During the first nine months of 1998, the Company successfully completed the
addition of 585 vehicles and negotiated a higher per unit selling price. The
Company does not account for these units on an EAC basis.
With the addition of these vehicles, the Company is assured of stable production
through the middle of November 1998 at the current production rate. Additional
units for 1999 production will be dependent upon the 1999 US Defense Bill
currently in discussion.
7
<PAGE>
Due to anticipated delays in the passage of the 1999 Defense Bill, the Company
foresees a potential break in production at the Company's ESP facility. The
Company is unable at this time to estimate the duration of such a break in
production.
In compliance with the Worker Adjustment and Retraining Notification (WARN) Act,
the Company is in the process of notifying the employees at the ESP facility of
the possible break in production. Should there be a long term break in
production, it would have a material adverse impact on the Company's results of
operation and its financial condition.
Further, should sufficient additional units not be authorized under the 1999
Defense Bill, it would also have a material adverse impact on the Company's
results of operation and its financial condition.
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 8,168 trucks including options. The
Company's competitor is an experienced manufacturer of tactical wheeled vehicles
for the DoD; accordingly, the Company anticipates a very high level of
competition for this award. On September 14, 1998 the Company submitted its bid
to the DoD for the MTTR contract. The Company believes the DoD will award the
final contract to the manufacturer of its choice in late 1998.
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
<PAGE>
Three Months Ended July 31, 1998 ("third quarter of 1998") compared to
Three Months Ended July 31, 1997 ("third quarter of 1997")
AM General Corporation and Subsidiary
TABLE OF NET SALES AND HUMVEE/HUMMER
UNIT SALES INFORMATION
(in millions, except unit information)
(unaudited)
<TABLE>
<CAPTION>
Three
Months Ended
July 31, %
1997 1998 Change Change
-------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Net sales
HUMVEE/HUMMERs
US Military $ 33.1 37.9 4.8 14.5%
International (1) 4.1 2.3 (1.8) (43.9)%
Commercial 17.9 15.8 (2.1) (11.7)%
-------------- --------------- ---------------
Total HUMVEE/HUMMERs 55.1 56.0 0.9 1.6%
ESP 17.7 19.5 1.8 10.2%
SPLO 11.4 12.9 1.5 13.2%
STS 10.0 3.6 (6.4) (64.0)%
-------------- --------------- ---------------
Total net sales $ 94.2 92.0 (2.2) (2.3)%
============== =============== ===============
HUMVEE/HUMMER Unit Sales
US Military 549 602 53 9.7%
International (1) 83 34 (49) (59.0)%
Commercial 280 239 (41) (14.6)%
-------------- --------------- ---------------
Total HUMVEE/HUMMERs 912 875 (37) (4.1)%
HUMVEE/HUMMER Average Unit
Selling Prices
US Military $ 60,262 62,957 2,695 4.5%
International (1) 49,349 67,647 18,298 37.1%
Commercial 63,757 66,109 2,352 3.7%
Total 60,417 64,000 3,583 5.9%
</TABLE>
(1) Includes FMS and Direct International Sales
9
<PAGE>
Net Sales
The decrease in net sales was due primarily to lower STS, Commercial HUMMER and
International Military HUMVEE sales partially offset by higher US Military
HUMVEE, ESP and SPLO sales. The decrease in STS sales is due to higher sales in
the third quarter of 1997 in connection with the delivery of the ESP technical
data package and sales in connection with the Phase I award of the MTTR
contract. The decrease in Commercial HUMMER sales is attributed to a decline in
HUMMER unit sales partially offset by an increase in unit selling prices due to
more expensive vehicle options and a general price increase. The decrease in
International HUMVEE sales is due to the overall softness in the international
market.
US Military HUMVEE sales increased primarily due to an increase in unit
deliveries, higher average unit selling prices which is attributed to the sale
of more expensive models and an increase in revenues in connection with
engineering changes directed by the US Military.
The increase in ESP sales is primarily due to the delivery of units with higher
average unit selling prices. These units were added to the ESP contract at a
higher negotiated selling price rather than at the lower contract option selling
price. The increase in SPLO sales is primarily attributed to higher deliveries
of US military orders.
Average HUMVEE/HUMMER Unit Selling Prices
Average unit selling prices for all models increased by 5.9% from the third
quarter of 1997 primarily due to higher unit selling prices for all models.
Average unit selling prices for the US Military increased 4.5% over the third
quarter of 1997 due primarily to a higher ratio of more expensive models and
higher selling prices due to an annual economic price adjustment. Commercial
HUMMER average unit selling prices increased 3.7% primarily due to price
increases on the 1998 model and a reduction of sales incentives. Average unit
selling prices for International HUMVEEs increased 37.1% due to the sale of a
higher proportion of more expensive models.
Gross Profit
Gross profit was $9.9 million for the third quarter of 1998, an increase of $2.4
million or 32.0% from gross profit of $7.5 million for the third quarter of
1997. The Company's gross profit margin increased from 7.9% in the third quarter
of 1997 to 10.7% in the third quarter of 1998. The increase in gross profit is
primarily due to higher gross profit in connection with the delivery of 107 of
the 585 ESP vehicles added to the ESP contract. Additionally, US Military gross
profits increased due to the sale of more expensive models and the higher gross
profit in connection with the A2 series HUMVEE engineering changes. The increase
in gross profit was partially offset by a reduction in STS gross profit due to
the higher level of STS sales in the third quarter of 1997.
Depreciation and Amortization
Depreciation and amortization expense was $2.7 million for the third quarter of
1998, a decrease of $.4 million or 12.9% from depreciation and amortization
expense of $3.1 million for the third quarter of 1997. The decrease was
primarily due to lower amortization of ESP related tooling.
Selling, General and Administrative
Selling, general and administrative (SG&A) expense was $6.7 million for the
third quarter of 1998, an increase of $.4 million or 6.3% from SG&A expense of
$6.3 million for the third quarter of 1997. The increase is primarily attributed
to higher IR&D related costs in connection with the Phase I contract for MTTR.
10
<PAGE>
Operating Income/(Loss)
Operating income for the third quarter of 1998 was $.4 million an increase of
$2.4 million or 120% from an operating loss of $2.0 million for the third
quarter of 1997. The improvement is primarily attributed to higher gross profit
and lower depreciation expense partially offset by higher SG&A expense.
Interest Income and Expense
Interest expense for the third quarter of 1998 was $3.3 million, an increase of
$.3 million or 10% from interest expense of $3.0 million for the third quarter
of 1997. Average debt outstanding during the third quarter of fiscal 1998 was
$98.6 million at a weighted average interest rate of 12.2%. Average debt
outstanding during the third quarter of fiscal 1997 was $86.7 million at a
weighted average interest rate of 12.6%.
Interest income during the third quarter of 1998 was $.1 million which was
unchanged from the third quarter of 1997.
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 $.5 million for the third quarter of 1998, a decrease of $.8 million
from income tax benefit of $1.3 million for the third quarter of 1997. The
decrease in income tax benefit was due to the decrease in taxable loss.
Net Loss
As discussed above, the decrease in net loss was primarily due to higher
operating income partially offset by higher interest expense and a lower income
tax benefit.
11
<PAGE>
Nine Months Ended July 31, 1998 ("first nine months of 1998") compared to
Nine Months Ended July 31, 1997 ("first nine months of 1997")
AM General Corporation and Subsidiary
TABLE OF NET SALES AND HUMVEE/HUMMER
UNIT SALES INFORMATION
( in millions, except unit information)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
------------------------ %
1997 1998 Change Change
--------- --------- ---------- -------
<S> <C> <C> <C> <C>
Net sales
HUMVEE/HUMMER
US Military $ 141.0 114.1 (26.9) (19.1)%
International (1) 52.0 4.9 (47.1) (90.6)%
Commercial 56.9 48.0 (8.9) (15.6)%
--------- --------- ---------
Total HUMVEE/HUMMERs 249.9 167.0 (82.9) (33.2)%
ESP 55.5 59.8 4.3 7.7%
SPLO 35.4 36.9 1.5 4.2%
STS 25.2 11.6 (13.6) (54.0)%
--------- --------- ---------
Total net sales $ 366.0 275.3 (90.7) (24.8)%
========= ========= =========
HUMVEE/HUMMER Unit Sales
US Military 2,329 2,060 (269) (11.5)%
International (1) 1,011 78 (933) (92.3)%
Commercial 929 726 (203) (21.8)%
--------- --------- ---------
Total HUMVEE/HUMMERs 4,269 2,864 (1,405) (32.9)%
HUMVEE/HUMMER Average Unit
Selling Prices
US Military $ 60,541 55,388 (5,153) (8.5)%
International (1) 51,523 62,821 11,298 21.9%
Commercial 61,200 66,116 4,916 8.0%
Total HUMVEE/HUMMERs 58,549 58,310 (239) (0.4)%
</TABLE>
(1) Includes FMS and Direct International Sales
12
<PAGE>
Net Sales
The decrease in net sales was due primarily to lower demand for US and
International Military HUMVEE and Commercial HUMMER sales. Further, the decrease
in International Military HUMVEE sales is primarily attributed to the sale of
the 601 units for the FMS customer in the first nine months of 1997.
STS sales were lower due to higher sales in the first nine months of 1997 in
connection with Phase I MTTR contract sales and the delivery of the ESP
Technical Data Package. ESP sales were higher primarily due to the delivery of
trucks with higher negotiated selling prices. SPLO sales were higher due to
higher US Military sales.
Average HUMVEE/HUMMER Unit Selling Prices
Average unit selling prices for all models decreased slightly by .4% from the
first nine months of 1997 primarily due to lower average unit selling prices for
US Military HUMVEEs partially offset by higher unit selling prices for
Commercial HUMMERs and International HUMVEEs. Average unit selling prices for US
Military HUMVEEs decreased 8.5% over the first nine months of 1997 due primarily
to a higher ratio of more expensive models sold in the first nine months of
1997. Commercial HUMMER average unit selling prices increased 8.0% primarily due
to a price increase on the 1998 model and lower sales incentives. Average unit
selling prices for International HUMVEEs increased by 21.9% primarily due to the
sale of higher priced A2 HUMVEEs sold in the first nine months of 1998 as
compared to a higher proportion of lower priced HUMVEEs sold during the first
nine months of 1997.
Gross Profit
Gross profit was $23.9 million for the first nine months of 1998, a decrease of
$13.1 million or 35.4% from gross profit of $37.0 million for the first nine
months of 1997. The decrease in gross profit is primarily due to the overall
decrease in sales and the gross profit in connection with the 601 units sold to
the FMS Customer in the first nine months of 1997. The Company's gross profit
rate declined from 10.1% in the first nine months of 1997 to 8.7% in the first
nine months of 1998 primarily due to a higher proportion of lower gross profit
related revenues.
Depreciation and Amortization
Depreciation and amortization expense was $8.4 million for the first nine months
of 1998, a decrease of $1.5 million or 15.1% over depreciation and amortization
expense of $9.9 million for the first nine months of 1997. The decrease was
primarily due to lower depreciation expense with respect to the Indianapolis
stamping plant which was closed in 1997 and lower amortization of tooling during
the first nine months of 1998 in connection with the completion of the base and
option ESP trucks and the reduction in unit production from 25 to 16.5 units per
day which began at the beginning of the second quarter of 1997.
Selling, General and Administrative
Selling, general and administrative (SG&A) expense was $20.0 million for the
first nine months of 1998, a decrease of $.7 million or 3.4% from SG&A expense
of $20.7 million for the first nine months of 1997. The decrease is primarily
attributed to lower advertising costs.
Restructuring Charge
In anticipation of continued softness in the demand for Military HUMVEEs,
primarily International, the Company implemented a plan to improve its operating
results and financial liquidity during the first nine months of 1997. The plan
consisted of 1) a reduction in the HUMVEE/HUMMER production rate, 2) a reduction
in corporate overhead costs, and 3) a cost review of Indianapolis Stamping Plant
parts based on reduced HUMVEE/HUMMER volumes.
13
<PAGE>
Effective February 3, 1997, the HUMVEE/HUMMER production line rate was reduced
from 25 to 16.5 units per day. During the first nine months of 1997, the Company
recorded special charges of $7.5 million in connection with its decision to
close the Indianapolis Stamping Plant and $1.6 million with respect to employee
layoff costs in connection with its plan to reduce fixed and corporate overhead
costs. There were no comparable costs recorded by the Company during the first
nine months of 1998.
Operating Loss
The Company reported an operating loss of $4.5 million for the first nine months
of 1998, an increase of $1.8 million or 66.7% from an operating loss of $2.7
million for the first nine months of 1997. The increase in operating loss is
primarily attributed to lower gross profits partially offset by the $9.1 million
Restructuring charge recorded in the first nine months of 1997 and lower SG&A
and amortization expense during the first nine months of 1998.
Interest Income and Expense
Interest expense for the first nine months of 1998 was $10.0 million, a decrease
of $.3 million or 2.9% from interest expense of $10.3 million for the first nine
months of 1997. Average debt outstanding during the first nine months of 1998
was $99.5 million at a weighted average interest rate of 12.2%. Average debt
outstanding during the first nine months of 1997 was $104.5 million at a
weighted average interest rate of 12.5%.
Interest income during the first nine months of 1998 was $.2 million which was
unchanged from interest income during the first nine months of 1997.
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 $3.8 million for the first nine months of 1998, an increase of $.2
million from income tax benefit of $3.6 million for the first nine months of
1997. The increase in income tax benefit was due to the increase in taxable
loss.
Net Loss
As discussed above, the increase in net loss was primarily due to lower
operating income partially offset by lower net interest expense and a higher
income tax benefit.
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 its inception in
1992 with cash provided by operating activities and borrowings under its
Revolving Credit Facility.
Cash used in operating activities was $6.0 million for the first nine months of
1998 compared to cash provided by operating activities of $35.3 million for the
first nine months of 1997. The key factors affecting cash flow from operating
activities were the net loss reduced by non-cash charges to operating income
including depreciation, amortization and non-cash postretirement expenses,
decreases in accounts payable and increases in accounts receivable.
Accounts receivable levels at the end of the first nine months of 1998 were
$54.9 million, an increase of $2.2 million or 4.2% from accounts receivable of
$52.7 million at the end of the prior fiscal year. The increase in accounts
receivable is primarily due to higher unbilled contract modifications due to A2
series HUMVEE directed engineering changes.
Inventory levels at the end of the first nine months of 1998 were $86.2 million,
a reduction of $1.1 million or 1.3% from inventory levels of $87.3 at the end of
the prior fiscal year. The improvement in inventory is due to the reduction of
ESP related raw materials partially offset by slightly higher levels of finished
goods. Included in the finished goods inventory are 231 completed A2 series
HUMVEE units for an FMS customer. Management anticipates that these units will
be on contract and delivered by the end of the first quarter of 1999. When the
units are delivered for sale the finished goods inventory will decrease by
approximately $12 million.
During the first nine months of 1998, the Company spent $2.7 million on capital
expenditures primarily for year 2000 compliant software, machinery and equipment
and tooling for vehicle production, as compared to $1.8 million during the first
nine months of 1997. During the first nine months of 1998, capital expenditures
were offset by $1.1 million of proceeds from the sale of assets with respect to
the Company's former Indianapolis stamping facility. There were no significant
asset sales in the first nine months of 1997. The Company expects its remaining
capital expenditures in fiscal 1998 to be funded from operating cash flow and
availability under the Revolving Credit Facility.
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 July 31, 1998, the Company had borrowings
of $17.0 million outstanding and approximately $23.7 million of excess
availability under the Revolving Credit Facility. When the 231 A2 series HUMVEE
units described above have been sold and the revenues are received therefrom,
the loan balance will be reduced by approximately $16.0 million.
The ability of the Company to meet its debt service requirements and to comply
with its loan 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
<PAGE>
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 and
recommend a solution. The committee made a review of the Company's current
systems and evaluated three alternatives which included 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
cost effective technology. Upon completion of its review, the committee reached
a conclusion and recommended that the Company purchase and implement new
software.
The committee focused on a company wide solution and selected the market leaders
offering such software. Further, the committee narrowed its search to software
that specialized in the aerospace and defense industries. From October 1997
through June 1998 the committee participated in software demonstrations and
evaluated proposals for implementation from a variety of information technology
consultants. In June, 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.
The Company anticipates the project will conclude in May 1999. Costs in
connection with the implementation will not have a material adverse impact on
the Company.
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 HUMVEE/HUMMERs; 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.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Listing of Exhibits
Exhibit Number 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.
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: September 14, 1998 AM GENERAL CORPORATION
Registrant
By _________________________
Paul J. Cafiero
Vice President and
Chief Financial Officer
Duly authorized officer and
principal financial officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1997
<PERIOD-START> NOV-01-1997 NOV-01-1996
<PERIOD-END> JUL-31-1998 JUL-31-1997
<CASH> 1,629 2,694
<SECURITIES> 0 0
<RECEIVABLES> 55,218 42,219
<ALLOWANCES> (350) (350)
<INVENTORY> 86,187 82,211
<CURRENT-ASSETS> 150,679 137,308
<PP&E> 98,338 96,441
<DEPRECIATION> 55,138 50,213
<TOTAL-ASSETS> 313,721 307,226
<CURRENT-LIABILITIES> 93,629 74,124
<BONDS> 74,287 74,231
0 0
5,000 5,000
<COMMON> 0 0
<OTHER-SE> (42,006) (31,177)
<TOTAL-LIABILITY-AND-EQUITY> 313,721 307,226
<SALES> 275,347 366,005
<TOTAL-REVENUES> 275,347 366,005
<CGS> 251,462 328,953
<TOTAL-COSTS> 279,896 368,688
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 10,204 10,127
<INCOME-PRETAX> (14,297) (12,810)
<INCOME-TAX> (3,794) (3,595)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (10,503) (9,215)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
