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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended October 31, 1997
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)
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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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates of
the registrant is $0. One thousand shares of the registrant's common stock, par
value $.01 per share, are outstanding as of January 29, 1998.
Documents Incorporated by reference: None.
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TABLE OF CONTENTS
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PART I 1
Item 1. Business 1
Item 2. Properties 8
Item 3. Legal Proceedings 9
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II 12
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. 12
Item 6. Selected Financial Data. 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 14
Item 8. Financial Statements and Supplementary Data 25
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 54
PART III 55
Item 10. Directors and Executive Officers of the Registrant. 55
Item 11. Executive Compensation. 56
Item 12. Security Ownership of Certain Beneficial Owners and Management. 58
Item 13. Certain Relationships and Related Transactions. 58
PART IV 60
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 60
SIGNATURES 63
PART I
Item 1. Business
AM General Corporation and its wholly owned subsidiary, AM General Sales
Corporation, (collectively, the "Company" or "AM General" ) is the largest
supplier of light Tactical Wheeled Vehicles ("TWVs") for the Department of
Defense ("DoD"). AM General (including predecessors) has a history of over 50
years of successfully competing for government procurement contracts. AM General
is the designer and sole manufacturer of the High Mobility Multipurpose Wheeled
Vehicle ("HUMVEE "(R) or "HUMMER"(R)), which it sells to the US and foreign
military services and to industrial and retail users through its commercial
dealer network. From the introduction of the HUMMER/HUMVEE in 1984 and through
October 31, 1997, the Company has delivered 123,484 HUMVEEs in a variety of
configurations to the DoD for use by the US Armed Forces, 21,709 HUMVEEs to the
military services of 31 foreign countries, and 5,324 Commercial HUMMERs. In
fiscal 1997, the Company sold 5,136 HUMMERs. In addition to HUMMER/HUMVEEs, the
Company also remanufactures and modernizes used military vehicles and markets
both technical support services and spare parts.
The Company classifies its operations into five business lines: (i) US and
Foreign Military HUMVEEs, (ii) Commercial HUMMERs, (iii) Remanufacturing
Extended Service Program ("ESP") (iv) Spare Parts Logistics Operations ("SPLO")
and (v) Systems Technical Support ("STS"). Reference is hereby made to
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contained elsewhere herein, in which the Company's net sales
are summarized by business lines.
The Company recorded a $9.5 million net loss for fiscal 1997. The loss includes
pre-tax a charge of $3.5 million during the fiscal year in connection with the
Company's restructuring plan; the objective of which was to significantly reduce
the Company's variable and fixed costs, including corporate overhead.
Specifically, in February 1997, the Company reduced its HUMMER/HUMVEE production
rate from 25 to 16.5 units per day to better match unit production with sales.
The Company reduced its salaried workforce by 139 employees and its hourly
workforce by 209 employees. Additionally, the Company closed its Indianapolis
Stamping Plant and relocated its Washington D.C. office. See MD&A.
All of the Company's issued and outstanding capital stock is owned by The Renco
Group, Inc. ("Renco") which is 97.9% owned by Mr. Ira Leon Rennert, the Chairman
and sole director of the Company and Renco, and by trusts established by him for
himself and members of his family (but of which he is not a trustee). As a
result of such ownership, Mr. Rennert controls the Company. The Company acquired
the HUMMER/HUMVEE business in 1992. (the "Acquisition")
The Company was incorporated in Delaware in 1991, and its executive offices are
located at 105 North Niles Avenue, South Bend, Indiana 46617, telephone number:
(219) 284-2907.
Business Lines
Military HUMVEE
Since its introduction in 1984, the HUMVEE has been sold to US and foreign
militaries pursuant to contracts having firm fixed prices. Therefore, the
Company assumes full risk of producing and delivering the specified number of
vehicles for a fixed-price.
The HUMVEE has been upgraded since its introduction with improved components and
added features. During 1994, the Company developed and produced a new series of
HUMVEE models known as the A1 Series which incorporated an increase in the
payload capacity and various other enhancements. Subsequently, the Company began
production of an A2 Series under contracts with the DoD including the X001
Contract which is the Company's current contract with the DoD. See MD&A
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Domestic Sales; Government Contracts. Based upon currently available information
from the Tank, Automotive and Armaments Command ("TAACOM"), which is an
administrative agent for the US Army, management expects that the US Armed
Forces will require substantially fewer HUMVEEs than were required under prior
contracts. However, the Company expects the volume reduction to be partially
offset by the significantly higher unit prices received in fiscal 1997. Due to
the lower volumes, the prices of military HUMVEEs sold to the US and foreign
governments have increased significantly. TAACOM has indicated that the US Armed
Forces will require HUMVEE purchases beyond the year 2000 and currently has no
plan to change the HUMVEE's mission requirements. Additionally, the US Marines
have indicated an intention to purchase an annual requirement of HUMVEEs through
the year 2014.
The US Army has formed an Integrated Process Team ("IPT") to study the future
generation of Light Tactical Vehicles ("LTV"). Members of the IPT consist of
representatives from some of the major automotive manufacturing companies, among
which includes a representative of the Company. The purpose of the IPT is to
establish the requirements for the next generation of LTV's. Senior members of
the Army have decided that the LTV must meet the current mission profile of the
HUMVEE. As a member of the IPT, the Company's representative will be working
closely with the team to insure that all future requirements are met. Management
believes that the next generation LTV will be an upgraded HUMVEE.
The US Army is currently performing tests on a new up-armored HUMVEE model known
as the XM1114. The vehicle is in the final stages of testing and the results are
scheduled to be released in the summer of 1998. The Company anticipates
successful test results. Upon satisfactory completion of the tests, the Company
anticipates receiving orders from the US Army.
As of October 31, 1997, the Company had a total US military backlog of 139
military HUMVEEs valued at $9.1 million compared to 268 at October 31, 1996.
This reduction reflects the fact that the annual production required under the
existing contract is substantially lower than annual production under prior DoD
contracts. See MD&A.
International Sales. Since November 1986, the Company has sold military HUMVEEs
to foreign nations, either directly or through the US Government's Foreign
Military Sales ("FMS") program. The Company will continue to capitalize on the
HUMVEE's proven combat performance with the US Armed Forces, the extensive
offering of HUMVEE configurations and the Company's technical and logistical
support services to increase sales to foreign military markets. To date, Taiwan,
Saudi Arabia, Mexico, the United Arab Emirates and Kuwait have been the five
largest of the Company's 31 international military customers.
The Company sells HUMVEEs in various configurations to the military services of
foreign nations through the FMS program and its direct sales force and local
representatives. The FMS program is part of the US Government's security
assistance program, which provides equipment and services to more than 100
nations and international organizations. Funding is provided either directly by
the purchaser or with US-granted foreign aid credits or loans. As of October 31,
1997 and October 31, 1996, there were no significant FMS and direct sales
backlogs. In fiscal 1997, international military HUMVEE sales accounted for
approximately 23.3% of total HUMMER/HUMVEE unit sales and 21.1% of net
HUMMER/HUMVEE sales. Management believes that foreign military services will
continue to purchase HUMVEEs because they are competitive in the market as
evidenced by the fact that it is the only light TWV being purchased in quantity
by the US military and they are the best vehicles available.
In fiscal 1995, the Company manufactured 768 HUMVEEs for a particular customer
sponsored by the FMS program. Due to contractual difficulties with the specific
FMS customer (the "FMS Customer"), there were significant delays in the shipment
of these units. As a result, the Company's finished goods inventory was
increased at October 31, 1995 and October 31, 1996 beyond normal operating
levels. Moreover, such delay resulted in the Company borrowing the maximum
amount permitted under its Revolving Credit Facility. In October 1996, 167 of
such units were sold to the FMS Customer. In the first quarter of fiscal 1997,
the remaining 601 units were sold to the FMS Customer. See MD&A- Liquidity and
Capital Resources
2
Commercial HUMMERs
In October 1992, the Company broadened the market for the HUMMER by developing
and introducing a commercial version of the HUMMER. The Company's engineering
staff has improved and adapted the military HUMMER for industrial and commercial
use by adding an array of options and additional comfort, convenience and sport
utility features. Management believes the Commercial HUMMER's off-highway
performance and specifications exceed those of all other commercially available
four-wheel drive trucks and sport utility vehicles. The Company sold 112
Commercial HUMMERs in fiscal 1992, 576 in fiscal 1993, 756 in fiscal 1994, 1,241
in fiscal 1995, 1,404 in fiscal 1996 and 1,276 in fiscal 1997 primarily through
its network of approximately 86 domestic and international dealerships and
distributors. As of October 31, 1997, AM General had a total backlog of 52
Commercial HUMMERs valued at $2.8 million compared to 94 on October 31, 1996. In
fiscal 1997, Commercial HUMMER sales accounted for approximately 24.8% of total
HUMMER/HUMVEE unit sales and 26.4% of net HUMMER/HUMVEE sales.
Commercial HUMMERs are functionally equivalent to the A2 Series military HUMVEE
with modifications to comply with FMVSS for Class III (gross vehicle weight
("GVW") of 10,000 to 14,000 pounds) trucks and to satisfy commercial customer
requirements relating to safety, comfort and convenience. In addition to the
standard HUMMER models, Commercial HUMMERs have been configured as fire fighting
and rescue vehicles, ambulances, snowplowing vehicles; and to carry a variety of
equipment and tools such as man-lifts and backhoes.
Since February 1995, the Company has issued six recalls regarding design
problems with certain mechanical features of the Commercial HUMMER. The total
cost to the Company of the six recalls is estimated to be approximately $573,000
of which $303,000 has been incurred as of October 31, 1997. The Company reported
all recalls to the National Institute of Highway Traffic Safety. Management does
not expect that the recalls will have a material adverse effect on future
Commercial HUMMER sales.
The Company currently markets four models of the Commercial HUMMER, which
include two-passenger and four-passenger hard-tops, a four-door wagon and an
open-top sport model with suggested retail prices ranging from $52,000 to
$85,000, depending on options. The Company provides customer service, spare
parts and warranties to its commercial customers through its dealer network.
The commercial market consists of individuals, government agencies and
industrial users located in the US and overseas which require or desire the
HUMMER's enhanced off-highway mobility, durability and payload capacity.
Targeted customers include businesses engaged in the mining, electric utility,
fire and rescue, oil and gas exploration, and heavy construction industries as
well as non-DoD government agencies such as Federal Emergency Management, in
addition to state and local fire, police and park service departments.
The Company markets Commercial HUMMERs in the retail and fleet markets through a
network of dealers located throughout the United States and international
distributors primarily in the Middle East, South America and Canada. As of
October 31, 1997 the Company had approximately 52 domestic dealerships and 34
international distributors. Management intends to strengthen its Commercial
HUMMER distribution network by improving its dealer base.
To date, the Company has experienced modest sales in the fleet market. The
Company attributes the lack of fleet sales to various issues including unit-
selling price, lack of maintenance history on the vehicle, as well as
competitive products available to prospective customers. Given the magnitude of
the fleet market potential, management will continue to devote marketing
resources to penetrate the fleet market.
Remanufacturing
The Company entered the remanufacture and modernization market in September
1993, upon being awarded the contract for the DoD's Extended Service Program
("ESP" program). That contract called for
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the Company to rebuild and deliver remanufactured and modernized 2-1/2-ton
trucks by disassembling trucks provided by the DoD. The Company has entered into
this business in response to the US Government's declining defense budget and,
as a result thereof, the US Government's desire to remanufacture and modernize
existing vehicle fleets in lieu of procuring new vehicles. As of October 31,
1997, the Company remanufactured and delivered 3,321 units to the DoD. As of
October 31, 1997, the US Army had exercised options for 1,820 additional
remanufactured trucks which accounts for the increase in the contract value from
$154 million which represents 2,483 units to $245 million or 4,303 units. In the
US Army's tests, the Company's ESP trucks met or exceeded all requirements and
performed comparably to new US Army 2-1/2-ton trucks at a unit price of
approximately 40% less than that of a new vehicle.
The Company will pursue additional rebuild opportunities similar to the ESP
program where it can act as prime contractor to remanufacture and modernize
other aging military vehicles. The Company anticipates that Congress and the DoD
will continue to support the rebuild strategy as an economical means to
modernize its TWV fleet. In that regard, on November 20, 1996, the Company was
awarded a $6.9 million Phase I contract by the DoD to build ten prototype
vehicles for the Medium Tactical Truck Remanufacture ("MTTR") program for the US
Army and Marine Corp. A competitor was awarded a similar contract. These
awards are the first phase of a remanufacturing program for approximately 13,000
5-ton and 7-ton vehicles, a program valued at approximately $1.8 billion. The
Company delivered ten prototype vehicles for testing purposes under the Phase I
contract in August 1997. The DoD will award the final contract to the
manufacturer of its choice in late 1998. The Company anticipates a very high
level of competition for this award. The Company's competitor is an experienced
manufacturer of tactical wheeled vehicles and contractor with TAACOM.
In addition to the MTTR, other rebuild opportunities are expected to include the
HUMVEE, as well as other Company and non-Company manufactured military vehicles
as such vehicles age over the next decade.
SPLO and STS
Since the 1940s, the Company and its predecessor companies have sold more than 1
million vehicles. Management estimates that over 250,000 of these vehicles are
still in service, providing a large after-market base for potential SPLO and STS
sales. In fiscal 1997, SPLO and STS accounted for approximately 10.9% and 7.7%,
respectively, of net sales.
SPLO provides comprehensive after-market service, training and technical
publications for Company products on a worldwide basis. The services include
supplying spare parts for vehicles manufactured by the Company and for non-AM
General manufactured vehicles, including HUMMER/HUMVEEs, 2-1/2- and 5-ton trucks
and others. In addition, the Company provides expert training programs for off-
road driving, as well as training for vehicle maintenance and repairs.
STS is a full service engineering organization providing comprehensive technical
support and engineers to TAACOM, with contracts on both wheeled and tracked
vehicles, including medium and heavy trucks, the HUMVEE, the M1 Abrams tank, and
the M9 Armored Combat Earthmover. Services include engineering, design and
drafting, configuration and data management, translation, and integrated
logistics support.
Industry
Since World War I, the US and foreign military forces have used TWVs for
transporting personnel, supplies and equipment in battlefield conditions. The
TWV fleet has evolved from numerous body styles and payloads to three basic
classifications - light (less than 2-1/2 tons), medium (2-1/2 ton and 5-ton) and
heavy (greater than 5 tons). Each of the three classifications serves basic
utility functions on the battlefield. Generally, commercial trucks are not
suited to military use or military procurement standards.
In the early 1980s, the US Army began its largest peacetime TWV fleet
modernization program in history. The escalation in US Army truck requirements
can be directly attributed to (i) a transition in the US Armed Forces' basic
fighting strategy and (ii) newly established roles for trucks as weapon system
platforms and
4
as the transport component of medical, electronics and intelligence systems. The
US Armed Forces fighting doctrine has shifted from "forward deployment" (i.e.,
maintaining large bases worldwide) in the Cold War Era to "force projection"
(e.g., the Gulf War) which calls for rapid deployment and forced entry with fast
moving main attacks on enemy fronts. As a result of this fighting doctrine, the
US Army established two major hardware initiatives for ground attacks
emphasizing speed and high mobility - the Bradley fighting vehicle and the M1
Abrams main battle tank. At the time, no military trucks (light, medium or
heavy) existed that could match the expected speed and mobility of the Bradley
and Abrams vehicles. This led to the development of the design specification for
the HUMVEE. The HUMVEE is the only light TWV being acquired in quantity by the
US Armed Forces.
At the present time, the medium tactical wheeled fleet is in poor condition
measured by age and economic performance. As a result, the US Army is
modernizing its medium TWV fleet by procuring new 2-1/2-ton and 5-ton trucks,
and by implementing the ESP program through the Company to refurbish old 2-1/2-
ton vehicles.
AM General was the first company to be awarded a major remanufacturing contract
by the US Army and is currently the only company rebuilding 2-1/2 ton vehicles
for the US Army under its ESP program. The remanufacturing concept has received
widespread acceptance in the US Armed Forces and Congress. As such, the US Army
and Marine Corp. are sponsoring the MTTR program as discussed above to
remanufacture 5-ton and 7-ton trucks. The Company and a competitor were awarded
contracts to manufacture prototypes as discussed above for the MTTR contract.
In an effort to accelerate the procurement of new 2-1/2 and 5-ton vehicles,
TAACOM announced its intention to stage a competition for and award a second
source for the Family of Military Tactical Vehicle ("FMTV") program. When
selected in late 1998, the second source will be awarded a base number of
vehicles to manufacture. In 2003, the second source will compete with the
current source on the remaining program requirements; the winner of which will
be awarded 60% of the remaining program vehicles while the other will receive
40%. The Company intends to compete vigorously for the FMTV second source
award.
Research and Development
The Company believes that its technical expertise and engineering resources are
a competitive advantage, which has enabled the Company to successfully procure
business contracts with the US government. In addition to its STS operations,
which are dedicated to TAACOM, the Company also maintains an independent
research and development ("R&D") department at its Livonia, Michigan facility to
conduct R&D activities.
Manufacturing Process and Raw Materials
At the Company's Mishawaka, Indiana facility, HUMMER/HUMVEE vehicles are
manufactured on a highly automated truck-assembly production line. Major
vehicle components and parts are procured from outside vendors and delivered to
the Mishawaka facility. Stamped body parts are bonded, painted and treated for
corrosion protection either at a body shop located within the Mishawaka facility
or at outside vendors. HUMMER/HUMVEE chassis frames are assembled and joined
with engine components on a chassis assembly line. The addition of all other
body parts or trim (steering wheel, seats, windshields, grill, etc.) to the
chassis and engine platform, as well as painting operations, are conducted on
separate assembly lines within the facility. All HUMMER/HUMVEE vehicles, both
military and commercial, undergo testing before delivery to the customer.
Approximately 72.5% of the Company's cost of manufacturing HUMMER/HUMVEE
vehicles consist of components purchased from over 550 suppliers. Component
prices are generally negotiated annually based on, among other things, the
Company's expected manufacturing volume. The Company places orders periodically
for certain component requirements throughout the year and is only obligated to
purchase components for which it has placed orders. Approximately 23% of the
Company's total purchased materials are supplied by various divisions of General
Motors Corporation. These materials include
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engines, transmissions, steering and electronic components. The Company believes
that it has strong relationships with its suppliers and will continue to have a
stable supply of its purchased materials and components to meet future
production needs.
Competition
As the sole manufacturer of the HUMVEE for the US Armed Forces for more than
eleven years, the Company believes that currently it remains the dominant US
manufacturer in supplying light TWVs to the DoD and is one of only a few
manufacturers on a worldwide basis. Management believes that the HUMMER/HUMVEE
offers enhanced mobility and dependability at a lower cost than any of its
international competitors.
The Company's Commercial HUMMER competes as a highly specialized vehicle within
an established, competitive four-wheel drive vehicle marketplace. There are a
number of domestic and foreign manufacturers of four-wheel drive vehicles, which
have recognized models, established distribution, sales, service and warranty
administration systems in place. By virtue of its design, the Commercial HUMMER
offers off-highway mobility and durability far beyond the capabilities of
competing trucks, which are designed primarily for on-highway use. The Company's
commercial marketing efforts attempt to demonstrate and exploit this value in
order to penetrate the markets for Class II and Class III four-wheel drive
trucks.
The domestic and international markets for remanufacturing and modernization
services are not fully established. Presently, the Company believes that it has
established a strong competitive position for its 2-1/2-ton ESP program. The
Company is in competition with a competitor for the 5-ton and 7-ton MTTR
remanufacturing contract to be awarded in late 1998. The Company anticipates a
very high level of competition for this award. The Company's competitor is an
experienced manufacturer of tactical wheeled vehicles and contractor with
TAACOM. Competition in SPLO is highly fragmented among a large number of small
independent suppliers.
Seasonality and Payment
The Company's business is generally not seasonal. The Company builds military
vehicles subject to medium and long term contracts which have fixed prices.
Therefore, the Company assumes full risk of producing and delivering the
specified number of vehicles for a fixed price, normally with a specific
delivery schedule. Payments are usually due thirty days after delivery, except
in the case of direct international sales, for which payment is received shortly
after shipment pursuant to letters of credit opened by the customer in favor of
the Company at the time of the placement of the order.
Export sales to unaffiliated customers represent a significant portion of the
Company's total net sales. See notes 1(a) and 17 of the notes to Consolidated
Financial Statements contained herein. Currency and economic problems in
certain parts of the world may adversely impact future export volume.
Payment for sales to Commercial HUMMER dealers are generally obtained within
five days of delivery. Units wholesaled to dealers are subject to either
voluntary or mandatory repurchase agreements. Such agreements either permit or
require the Company to repurchase, at not more than dealer cost, new, unsold
units in the dealers' inventories in the event of repossession by the dealers'
floorplan lenders. At October 31, 1997, the mandatory repurchase agreements
covered 105 Commercial HUMMERs with a total value at dealer cost of $7.1
million.
Employees
As of October 31, 1997, the Company had 452 salaried employees and 937 hourly
employees. Of the 1,389 employees, 280 provide general administrative services
including legal, finance, human resources, and other corporate functions. All
of the Company's hourly employees are represented by the International Union,
United Automobile, Aerospace and Agricultural Implement Workers of America
("UAW"). The Company's labor contract for the Mishawaka HUMMER/HUMVEE and SPLO
operations expires in
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September 1998. The Company believes that its relations with employees are
satisfactory.
In a cooperative effort between labor and management employees, the Company
entered into an ESP labor contract in February 1993 which provided for reduced
pay and benefits, as well as less restrictive work rules. Subsequently, in May
1996, the Company and the UAW entered into a new nine-year labor agreement for
the ESP remanufacturing operation. Management believes that this new labor
agreement will make the Company more competitive in future remanufacturing
opportunities, including the MTTR contract.
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Item 2. Properties
The Company operates two manufacturing facilities and five support locations
which include its headquarters in South Bend, Indiana, as well as sales,
warehouse, training, engineering, and other non-manufacturing operations.
The Company's principal manufacturing facility is the HUMMER/HUMVEE plant,
situated on approximately 96 acres in Mishawaka, Indiana. The major tooling and
materials handling equipment, assembly lines, robotics and computer controls
involved in the manufacture of HUMMER/HUMVEE vehicles are located at the
Mishawaka facility. The HUMMER/HUMVEE facility has a single shift capacity of
between 50 and 70 units per day depending on the model configuration of orders
currently being received by the Company. The Company reduced the production
rate from 25 to 16.5 units per day effective February 3, 1997. See MD&A
The Commercial HUMMER finishing facility is also located in Mishawaka, adjacent
to the HUMMER/HUMVEE plant. Mishawaka is also the site of a one-mile, asphalt-
paved test track. Additionally, the Company's SPLO operations are located in
Mishawaka at a separate facility.
The Company maintains a dedicated remanufacturing facility in South Bend for its
ESP operations. The Company increased capacity at its ESP plant from 5 to 7
remanufactured vehicles per day. The Company is presently operating at 6.2
units per day.
The Company operates a test track in South Bend located near the ESP facility,
which had been leased by the Company. The Company exercised its option to
purchase the test track for a nominal amount and subsequently purchased the land
on November 6, 1997. The acquired property was immediately transferred to the
Chippewa Corporation ("Chippewa"), a wholly owned subsidiary of the Company, and
leased by the Company from Chippewa. Prior to the purchase, the Company
conducted environmental testing of the site, the conclusions of which indicated
little if any contamination occurring during its occupancy. Environmental
agencies are currently reviewing these and other test results. The Company does
not anticipate that the result of those tests will have a material adverse
effect on the Company.
In March 1997, the Company notified employees at the Indianapolis Stamping and
Assembly Plant that it was closing the Indianapolis plant. In September, the
Company closed the facility in Indianapolis that produced stampings for aluminum
and steel vehicle body parts used in the production of HUMMER/HUMVEEs, as well
as for sub-assemblies for other vehicles. Those parts produced at the facility
have been outsourced to various stamping suppliers currently producing parts for
the Company. The machinery and equipment at the facility were sold at auction at
a guaranteed price of $2.8 million. An agreement was reached on December 23,
1997 with respect to the sale of the land and building for $1.4 million to a
local developer. The sale is expected to close in February, 1998. See MD&A
The Company's STS and R&D operations are located in Livonia, Michigan, which is
approximately 28 miles from TAACOM's facility. In addition to providing
convenience to its primary customer, TAACOM, the personnel at the Livonia
facility act as a liaison between the Company's management in South Bend and
TAACOM.
The Company considers its facilities and equipment generally to be in good
operating condition. All of the Company's facilities are leased from unrelated
third parties except for the Mishawaka Commercial HUMMER finishing facility and
the test track in Mishawaka which the Company owns and the South Bend test track
which is leased by the Company from the Chippewa Corporation, a wholly owned
subsidiary of the Company.
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Item 3. Legal Proceedings
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 through its legal counsel filed a motion for
summary judgment with respect to the claim. As of January 1998, the Company had
not received a response to its Motion for Summary Judgment. The parties are
discussing the possibility of resolving this dispute through an alternate
dispute resolution procedure wherein the parties would have the dispute decided
by an arbitrator(s).
Although the Company believes that it will prevail in the litigation there can
be no assurance as to the outcome of such litigation. An adverse decision on
the claim could have a material adverse effect on the Company.
DJ-5 Litigation
In March 1996, the Company instituted an adversary proceeding in the United
States Bankruptcy Court for the Southern District of New York seeking a
preliminary and permanent injunction against the prosecution against the Company
of three state court actions, in Virginia, Texas and California, claiming
damages as a result of vehicular accidents allegedly involving DJ-5 postal
delivery vehicles sold by the US Government to private parties (the state court
plaintiffs in such actions being herein called the "DJ-5 plaintiffs"). One
state court action involves a fatality and the other two involve serious
personal injuries. The Company has never manufactured or sold DJ-5 vehicles or
any parts therefor, and the agreement, approved by the Bankruptcy Court,
pursuant to which the Company acquired certain assets and assumed certain
liabilities in April 1992 from a former AM General Corporation (herein with its
ultimate parent the LTV Corp. called "LTV") expressly provided that the Company
acquired no DJ-5 assets and assumed no DJ-5 liabilities (two additional actions
involving DJ-5 vehicles have since been commenced). Nevertheless, the DJ-5
plaintiffs have asserted a "successor liability" claim against the Company.
Also, in March 1996, LTV brought an adversary proceeding in the Bankruptcy Court
(the "LTV Action") seeking a preliminary and permanent
9
injunction against the prosecution against LTV of actions claiming damages as a
result of vehicular actions allegedly involving a DJ-5.
On May 1, 1996 the Bankruptcy Court entered a preliminary injunction in the
Company's action preliminarily enjoining the prosecution of the state court
actions against the Company and a preliminary injunction in the LTV Action
preliminarily enjoining the prosecution of the state court actions against LTV.
The Company's action for a permanent injunction and the LTV Action for a
permanent injunction continue. The DJ-5 plaintiffs appealed the grant of the
preliminary injunctions in the two actions to the United States District Court
for the Southern District of New York contending that the Bankruptcy Court
lacked jurisdiction to issue the preliminary injunctions. On September 30,
1997, the District Court issued its opinion and order affirming the jurisdiction
of the Bankruptcy Court to issue the preliminary injunctions. The DJ-5
plaintiffs have appealed the Order of the District Court to the United States
Court of Appeals for the Second Circuit, and the appeal is pending.
In October 1997, LTV moved in its proceeding in the Bankruptcy Court against the
DJ-5 plaintiffs for summary judgment against the DJ-5 plaintiffs pursuant to the
so-called "government contractor" defense (that the DJ-5's were manufactured
pursuant to government specifications and that therefore the manufacturer has
immunity from product liability claims).
In December 1997, the Company moved in its proceeding in the Bankruptcy Court
against the DJ-5 plaintiffs for an order declaring that if the government
contractor defense is applicable to LTV, the Company has no "successor company"
liability to the DJ-5 plaintiffs.
These last two motions are pending in the Bankruptcy Court.
Product Recall
In March 1995, the Company became aware of a problem with the Commercial HUMMER
accelerator and promptly reported the matter to the National Institute of
Highway Traffic Safety. The problem affects all non-turbo diesel engine
HUMMERs, (approximately 3,300 vehicles) and management estimates the cost of
this recall at $287,000. Management does not expect that the recall will have a
material adverse effect on future Commercial HUMMER sales.
Breach of Contract
On December 30, 1991, Dial Machine & Tool, Inc. filed a complaint in the Starke
County, Indiana Circuit Court alleging breach of Purchase Order Agreements by
the Company's predecessor. The plaintiff asserts that it was forced into
bankruptcy as the result of the alleged breach. The plaintiff seeks
compensatory damages of $744,103 and punitive damages of $10,000,000. The judge
suggested the parties mediate this dispute. The parties have agreed to a
mediator and mediation is scheduled for February 24, 1998.
Age Discrimination Claim
William Wilson filed an age discrimination suit 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
$238,902 in back pay. The court awarded Mr. Wilson the following additional
amounts: $13,604 in pre-judgement interest; $160,194 in front pay; and $56,890
in attorney's fees. The Company has appealed the judgement. The appellate
court has scheduled oral arguments for February 1998.
10
Government Investigation
In November 1990, the US Government informed the Company's predecessor that the
US Government was conducting an investigation of Electro Transfer System, Inc.
("ETS"), of South Bend, Indiana, a supplier of electrical wiring components for
the HUMMER/HUMVEE. In November 1991, the US Government and ETS informed the
predecessor that the engine harnesses previously supplied by ETS did not conform
with the applicable specifications. The predecessor took prompt corrective
action in November 1991 to prevent a continuation or recurrence of the
nonconforming condition.
In April 1996, the Company was informed by the US Government that the Company
was the subject of an investigation seeking to determine whether the
predecessor's employees were aware of the subcontractor's nonconformance. The
Company cooperated fully with the government investigation.
In October 1997, U.S. District Court Judge Robert L. Miller Jr. accepted a plea
agreement from ETS in which ETS agreed to plead guilty to one count of
defrauding the US Government and admitted that it manufactured and sold to the
predecessor non-conforming parts. On December 11, 1997 the Company was advised
by the US Government of its decision to discontinue the government investigation
in connection with the Company's subcontracts for wiring harnesses for military
vehicles.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders.
11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
There is no established trading market for the Company's common stock. As of
January 29, 1998, the Company had one stockholder. The Company paid no
dividends on its common stock in fiscal 1996 and 1997. The payment of and
amounts of dividends are restricted by the Company's long-term debt agreements.
See note 9 of the Consolidated Financial Statements contained herein.
12
Item 6. Selected Financial Data.
The following table sets forth certain summary financial and other data of the
Company for each of the years in the five year period ended October 31, 1997.
The financial data set forth below should be read in conjunction with the
Company's financial statements and the related notes thereto appearing elsewhere
herein and MD&A.
Fiscal Year Ended
October 31,
1993 1994 1995 1996 1997
(dollars in millions)
Statement of Operations Data
Net Sales 572.9 454.4 411.7 462.4 468.2
Gross Profit (b) 76.4 65.4 56.0 42.9 43.2
Depreciation and Amortization 17.7 15.1 15.8 16.8 12.7
Selling, General and Administrative Expenses 37.4 38.5 36.3 37.3 26.2
Special termination benefits - - - 3.2 0.1
Restructuring charges - - - - 3.5
Operating Income (Loss) (c) 20.3 11.6 3.8 (14.4) 0.7
Interest Expense, Net 10.4 8.2 10.7 13.9 13.2
Income Tax Expense (Benefit) 4.1 3.0 (0.4) (8.7) (3.0)
Income (Loss) before Extraordinary Item 5.8 0.4 (6.5) (19.6) (9.5)
Extraordinary Item, net of Income Taxes of - - 3.0 - -
Net Income (Loss) 5.8 0.4 (3.5) (19.6) (9.5)
Balance Sheet Data
Working Capital 16.7 2.5 98.1 87.9 55.9
Property Plant and Equipment, net 66.5 64.6 62.8 56.5 44.9
Total Assets 301.4 295.5 372.7 373.2 316.3
LTV Creditor Trust Obligations 46.6 43.3 - - -
Total Debt (d) 71.2 51.4 126.9 126.9 83.2
LTV Creditor Trust Stock (e) 5.3 6.4 - - -
Stockholder's Equity (Deficit) 12.4 13.2 3.6 (16.0) (25.5)
(a) Gross Profit represents net sales less cost of sales (excluding depreciation
and amortization).
(b) Operating Income represents earnings before interest and provision (benefit)
for income taxes.
(c) Total Debt includes the Revolving Credit Facility, the discounted value of
the LTV Creditor Trust Obligations, Senior Notes issued at acquisition and
the 12 7/8% Senior Notes due 2002 issued in April 1995 (the "Refinancing").
See the Company's audited consolidated financial statements and related
notes thereto included elsewhere herein.
(d) Represents a put obligation of the Company to repurchase the LTV Creditor
Trust Stock which was purchased in the Refinancing.
13
Item 7. 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
DoD. The Company is the original designer and sole manufacturer of the
HUMMER/HUMVEE. The Company also sells HUMVEEs to foreign military services
through the DoD's 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 1990 through October 31, 1997, AM General sold 49,797 HUMVEEs under its A1
Series program with the DoD. All production under that contract was completed by
April 30, 1996 at which time 768 vehicles produced for the one FMS Customer
remained in finished inventory. In the fourth quarter of fiscal 1996, 167 of the
vehicles were sold to the FMS Customer, and the balance of 601 vehicles were
sold in January 1997.
From November 1, 1993 through May 7, 1995, the Company's HUMMER/HUMVEE
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 HUMMER/HUMVEE production rate to 25 units per day due to lower US and
international military demand. On February 3, 1997, the Company further reduced
its HUMMER/HUMVEE production rate from 25 to 16.5 units per day due to continued
lower international military demand.
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 X001 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 December 1997,
a total of 7,277 vehicles have been ordered on the X001 Contract. The FY98
Defense Bill currently contains the necessary funding for the third year of this
contract.
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.
In September 1993, the Company was awarded the ESP Contract, the first multi-
year 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 October 31, 1997, a total of 3,321 trucks have been remanufactured and
delivered to the US government. As of October 31, 1997, the US Army had
exercised options for 1,820 additional remanufactured trucks which accounts for
the increase in the contract value from $154 million which represents 2,483
units to $245 million which represents 4,303 units.
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.
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 MTTR program for the US Army and
Marine Corp. A competitor was awarded a similar contract. These awards are the
first phase of a re-manufacturing program for approximately 13,000 5-ton and 7-
ton vehicles, a program valued at approximately $1.8 billion.
14
Prototypes were delivered for test in August 1997. The DoD will award the final
contract to the manufacturer of its choice in late 1998. The Company anticipates
a very high level of competition for this award. The Company's competitor is an
experienced manufacturer of tactical wheeled vehicles and contractor with
TAACOM.
15
Results of Operations
Twelve Months Ended October 31, 1997 ("fiscal 1997") Compared with Twelve Months
Ended October 31, 1996 ("fiscal 1996")
AM General Corporation and Subsidiary
Table of Net Revenues and HUMMER/HUMVEE Unit Sales Information
(in millions, except unit information)
Fiscal Year Ended
October 31, %
1996 1997 Change Change
Net Sales
HUMMER/HUMVEEs
US Military $ 169.9 159.7 (10.2) (6.0)
International (1) 87.2 64 (23.2) (26.6)
Commercial 75.6 80.1 4.5 6.0
Total HUMMER/HUMVEEs 332.7 303.8 (28.9) (8.7)
ESP 71.3 77.3 6.0 8.5
SPLO 39.0 51 12.0 30.8
STS 19.4 36.1 16.7 86.1
Total Net Sales $ 462.4 468.2 5.8 1.3
HUMMER/HUMVEE Unit Sales
US Military 3,200 2,664 (536) (16.8)%
International (1) 1,370 1,196 (174) (12.7)%
Commercial 1,404 1,276 (128) (9.2)%
Total HUMMER/HUMVEEs 5,974 5,136 (838) (14.1)%
HUMMER/HUMVEE Average Unit Selling
Prices
US Military $53,094 59,947 6,853 12.9%
International (1) 63,650 53,544 (10,106) (15.9)%
Commercial 53,846 62,774 8,928 16.6%
Total HUMMER/HUMVEEs 55,691 59,159 3,468 6.3%
(1) Includes FMS and Direct International Sales
16
Net Sales
The increase in net sales was due primarily to the increase in STS, SPLO, ESP
and Commercial HUMMER sales partially offset by lower direct international and
US Military sales. The increase in STS sales is primarily attributed to the
Phase I contract revenues in connection with the MTTR truck re-manufacturing
program, the delivery of technical data package drawings in connection with the
ESP program and the delivery of technical manuals translated for a FMS customer.
The increase in SPLO sales is primarily attributed to an increase in US
Government Military spare parts contracts in connection with the Company's
continued focus on this segment of its business. The increase in ESP sales is
attributed to the delivery of more units in the current fiscal year than were
delivered in the prior fiscal year. The increase in Commercial HUMMER sales is
attributed to the increase in average selling prices due to a general price
increase and lower sales incentives.
The decrease in direct international HUMVEE sales is attributed to continued
softness in the demand for light tactical vehicles. The decrease in US Military
HUMVEE sales is primarily attributed to fewer units sold due to the change in
the production rate because of lower unit orders from the military partially
offset by higher unit selling prices. The higher unit selling prices are
attributed to engineering changes in connection with the A2 Series HUMVEE.
Average HUMMER/HUMVEE Unit Selling Prices
Average HUMMER/HUMVEE unit selling prices for all HUMMER/HUMVEEs increased 6.3%
from fiscal 1996 primarily due to increases in the average selling price for US
Military HUMVEEs and Commercial HUMMERs partially offset by a reduction in the
average selling price of direct international units. Average selling prices for
the US Military increased 12.9% over fiscal 1996 due primarily to higher selling
prices in connection with engineering changes for the A2 Series HUMVEE sold
under the X001 Contract. Average HUMVEE unit selling prices for international
sales decreased 15.9% primarily due to a higher priced model mix in fiscal 1996
which included highly modified vehicles for one direct international customer.
Commercial HUMMER average unit selling prices increased 16.6% primarily due to
lower sales incentives, a general price increase and a sales mix of more
expensive models.
Gross Profit
Gross profit was $43.2 million for fiscal 1997, an increase of $.3 million from
gross profit of $42.9 million for fiscal 1996. The Company's gross profit
margin for fiscal 1997 remained the same as that for fiscal 1996 at 9.3%.
Changes within the attributes of gross profit resulted from the increased
selling prices of the average HUMMER/HUMVEE unit and in US Military spare parts
sales partially offset by higher costs in connection with unabsorbed overhead
costs due to the reduction in the HUMMER/HUMVEE production line rate.
Depreciation and Amortization
Depreciation and amortization expense was $12.7 million for fiscal 1997, a
decrease of $4.1 million or 24.4% over depreciation and amortization expense of
$16.8 million for fiscal 1996. The decrease was primarily due to lower tooling
amortization expense in connection with the A2 Series HUMVEE which was fully
amortized in the prior year, reduced depreciation expense associated with
reduced capital spending and lower tooling amortization in connection with the
reduction in the unit production rate from 25 to 16.5 units per day.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense was $26.2 million for
fiscal 1997, a decrease of $11.1 million or 29.8% from SG&A expense of $37.3
million for fiscal 1996. The decrease was
17
primarily due to lower expenses in connection with merchandising and sales
promotions, lower expenses resulting from the Company's restructuring plan and
lower independent research and development expense with respect to the MTTR
program.
Special Termination Benefits
In connection with modifications in its labor agreement in fiscal 1996, the
Company offered special retirement benefits to certain hourly employees who met
specific service requirements. The Company recorded special charges of $.1
million in fiscal 1997 and $3.2 million in fiscal 1996 to reflect the enhanced
special termination benefits for pension and health care related costs.
Restructuring Charges
During fiscal 1997, the Company recorded $3.5 million of charges in connection
with its restructuring plan; the objective of which was to significantly reduce
the Company's variable and fixed costs, including corporate overhead.
Specifically, in February 1997, the Company reduced its HUMMER/HUMVEE production
rate from 25 to 16.5 units per day to better match unit production with sales.
The Company reduced its salaried workforce by 139 employees and its hourly
workforce by 209 employees. Additionally, the Company outsourced the production
of certain components, closed its Indianapolis Stamping Plant and relocated its
Washington D.C. office. There were no restructuring charges recorded in fiscal
1996.
Operating Income (Loss)
The Company had operating income of $.7 million for fiscal 1997, an increase of
$15.1 million from an operating loss of $14.4 million for fiscal 1996. The
improvement in operating income was primarily due to lower SG&A expense, lower
depreciation and amortization expense, and lower charges in connection with
special termination benefits, partially offset by the restructuring charge.
Interest Income and Expense
Interest expense for fiscal 1997 was $13.5 million, a decrease of $3.0 million
or 18.2% from interest expense of $16.5 million for fiscal 1996. Average debt
outstanding for fiscal 1997 was $102.3 million at a weighted average interest
rate of 12.1%. Average debt outstanding for fiscal 1996 was $128.6 million at a
weighted average interest rate of 12.8%. The decrease in average debt
outstanding is primarily due to the overall reduction in inventory levels
primarily due to the completion of the sale of 601 units to the FMS Customer
during the first quarter of fiscal 1997. See "liquidity and Capital Resources".
Interest income decreased by $2.3 million primarily due to the higher level of
interest income in fiscal 1996 in connection with the acceptance by the DoD and
the FMS Customer of interest expense associated with the units held in
inventory.
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 a credit of $3.0 million for fiscal 1997, a decrease of $5.7 million
from an income tax benefit of $8.7 million for fiscal 1996. The decrease in
income tax benefit was due to the increase of taxable income primarily
attributed to higher operating income as discussed above.
Net Loss
The net loss for fiscal 1997 was $9.5 million, a reduction of $10.1 million from
a net loss of $19.6 million in fiscal 1996. As discussed above, the improvement
in net loss is primarily due to the improvement in operating income and lower
net interest expense partially offset by a lower income tax benefit.
18
Twelve Months Ended October 31, 1996 ("fiscal 1996") Compared with Twelve Months
Ended October 31, 1995 ("fiscal 1995")
AM General Corporation and Subsidiary
Table of Net Revenues and HUMMER/HUMVEE Unit Sales Information
(in millions, except unit information)
Fiscal Year Ended
October 31, %
1995 1996 Change Change
Net Sales
HUMMER/HUMVEEs
US Military 155.1 169.9 14.8 9.5%
International (1) 86.6 87.2 0.6 0.7
Commercial 62.5 75.6 13.1 21.0
Total HUMMER/HUMVEEs 304.3 332.7 28.4 9.3
ESP 33.2 71.3 38.1 114.8
SPLO 49.8 39 (10.8) (21.7)
STS 24.5 19.4 (5.1) (20.8)
Total Net Sales 411.7 462.4 50.7 12.3
HUMMER/HUMVEE Unit Sales
US Military 4,196 3,200 (996) (23.7)
International (1) 2,078 1,370 (708) (34.1)
Commercial 1,241 1,404 163 13.1
Total HUMMER/HUMVEEs 7,515 5,974 (1,541) (20.5)
HUMMER/HUMVEE
US Military 36,964 53,094 16,130 43.6
International (1) 41,675 63,650 21,975 52.7
Commercial 50,363 53,846 3,484 6.9
Total HUMMER/HUMVEEs 40,492 55,691 15,199 37.5
(1) Includes FMS and Direct International Sales
19
Net Sales
The increase in net sales was due primarily to the increase in ESP, US Military
and Commercial HUMMER sales which were partially offset by lower SPLO sales and
STS sales. Direct International sales were essentially unchanged. The increase
in ESP sales is attributed to the increased level of production and sales during
fiscal 1996 as compared to fiscal 1995 when the program was emerging from a
start up mode. During fiscal 1996, the Company sold 1,248 remanufactured units
compared to 579 units during fiscal 1995.
The increase in US Military HUMVEE sales is primarily attributed to the higher
unit selling prices for A2 Series HUMVEEs which the Company began selling in the
fourth quarter of fiscal 1995. The increase in Commercial HUMMER sales is
attributed to price increases and the Company's continued marketing and dealer
development efforts which resulted in an increase in the number of units sold.
Direct international HUMVEE military sales remain unchanged primarily due to the
continued low level of demand by foreign countries. The reduction in SPLO sales
is directly attributed to a large international delivery during fiscal 1995 and
the present low level of direct international HUMVEE sales. Direct International
vehicle contracts generally contain concurrent provisions for spare parts. The
decline in STS sales is primarily attributed to higher than normal sales during
fiscal 1995.
Average HUMMER/HUMVEE Unit Selling Prices
Average HUMMER/HUMVEE unit selling prices for all HUMMER/HUMVEEs increased 37.5%
from fiscal 1995 primarily due to a significant increase in the average selling
price for US Military and International units. Average HUMVEE unit selling
prices for the US Military increased 43.6% over fiscal 1995 due primarily to
higher negotiated selling prices for the X001 Contract. The higher average unit
selling prices are attributed to directed changes by the US Military and TAACOM
for the A2 SERIES model along with higher fixed overhead costs due to the
reduction in unit production. Additionally, sales during fiscal 1996 included
the higher priced Expanded Capacity Vehicle ("ECV") HUMVEE variants. Average
HUMVEE unit selling prices for international sales increased 52.7% primarily due
to a higher priced model mix which included highly modified vehicles for one
direct international customer. Commercial HUMMER average unit selling prices
increased 6.9% primarily due to the availability of additional options and a
2.5% increase in selling prices late in the 1995 model year followed by a 2.5%
increase for the 1996 model year. Both 1995 and 1996 models were sold during
fiscal 1996.
Gross Profit
Gross profit was $42.9 million for fiscal 1996, a decrease of $13.1 million or
23.4% from gross profit of $56.0 million for fiscal 1995. The Company's gross
profit margin declined from 13.6% for fiscal 1995 to 9.3% for fiscal 1996. The
decrease includes an adjustment to lower the Company's estimated profit at
completion for its ESP program (the "EAC Adjustment") and lower gross margins on
Commercial HUMMER sales due to higher warranty costs and increased sales
incentives.
The $7.6 million EAC Adjustment is due primarily to three factors: the exercise
of options for lower price vehicles, higher than projected manufacturing costs,
and the impact of the foregoing on internal cost allocations. The Company
allocates certain overhead costs to contracts based on, among other things,
direct labor. This has resulted in higher than anticipated allocations to the
ESP contracts due to the higher manufacturing costs required to produce the
vehicles now included in the EAC and, accordingly, lower allocation of these
overhead costs to other programs such as military and commercial HUMMERs. The
EAC Adjustment recorded reflects the cumulative cost to date and the estimate of
future costs, including those relating to the option vehicles.
20
During fiscal 1996 the Company recorded a charge of $3.3 million in connection
with higher than anticipated Commercial HUMMER warranty costs. Also, the Company
incurred higher sales incentive costs in connection with its Commercial HUMMER
marketing efforts.
Depreciation and Amortization
Depreciation and amortization expense was $16.8 million for fiscal 1996, an
increase of $1.0 million or 6.3% over depreciation and amortization expense of
$15.8 million for fiscal 1995. The increase was primarily due to higher
depreciation associated with recent capital additions and higher tooling
amortization associated with the increase in ESP production.
Selling, General and Administrative
SG&A expense was $37.3 million for fiscal 1996, an increase of $1.0 million or
2.8% from SG&A expense of $36.3 million for fiscal 1995. The increase was
primarily due to higher professional service and legal costs.
Special Termination Benefits
In connection with modifications in its labor agreement the Company offered
special retirement benefits to certain hourly employees who met specific service
requirements. The Company recorded a special charge of $3.2 million to reflect
the enhanced special termination benefits for pension and health care related
costs. There was no similar expense recorded in fiscal 1995.
Operating Income (Loss)
The Company had an operating loss of $14.4 million for fiscal 1996, a decrease
of $18.2 million from operating income of $3.8 million for fiscal 1995. The
decline in operating income was primarily due to the decrease in gross profits
as discussed above, the special termination benefits, higher depreciation and
amortization expense and higher SG&A expenses.
Interest Income and Expense
Interest expense for fiscal 1996 was $16.5 million, an increase of $4.1 million
or 33% from interest expense of $12.4 million for fiscal 1995. Average debt
outstanding for fiscal 1996 was $128.6 million at a weighted average interest
rate of 12.8%. Average debt outstanding for fiscal 1995 was $99.4 million at a
weighted average interest rate of 12.45%. The increase in average debt
outstanding is primarily due to the Company's use of cash to fund the net loss,
the increase in accounts receivable and the continued high level of inventory, a
substantial portion of which was produced in fiscal 1995 for the FMS Customer.
Also, the Company continued to incur interest expense on the unsold inventory in
connection with the finished goods inventory for the FMS Customer throughout
most of the fiscal year. See "-Liquidity and Capital Resources-. Interest income
increased by $.9 million primarily due to the acceptance by the DoD and the FMS
Customer of interest expense associated with the 768 units held in inventory.
Income Tax Expense (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 a credit of $8.7 million for fiscal 1996, an increase of $8.3
million from an income tax benefit of $.4 million for fiscal 1995. The increase
in income tax benefit was due to the reduction of taxable income primarily
attributed to the lower operating income as discussed above.
Income (Loss) Before Extraordinary Item
As discussed above, the net loss before the extraordinary item for fiscal 1996
compared to fiscal 1995 was primarily due to the operating loss in fiscal 1996
as opposed to an operating income in fiscal 1995 and higher net interest expense
partially offset by a higher income tax benefit.
21
Extraordinary Item
The Company recorded a $3.0 million extraordinary gain during fiscal 1995 in
connection with the early retirement of debt with the proceeds from the 12-7/8%
Senior Notes offering. The gain is net of all related expenses including federal
and state income taxes. There was no extraordinary item during fiscal 1996.
22
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 provided by operating activities was $38.7 million for fiscal 1997 compared
to $10.0 million in fiscal 1996. The key factors affecting cash flow from
operating activities were changes in operating income and working capital
requirements. The primary sources of cash flow in fiscal 1997 resulted from
reductions in inventory and accounts receivable, an increase in accrued expenses
and non-cash charges to operating income including depreciation, amortization
and non-cash postretirement expenses. Cash flow provided from operations was
partially offset by reductions in accounts payable and other liabilities, as
well as funding the Company's net loss.
Accounts receivable levels at the end of fiscal 1997 were $4.5 million lower
than levels at the end of fiscal 1996 primarily due to higher than normal
accounts receivable at the end of fiscal 1996 which was due to higher than
normal sales in the latter part of fiscal 1996 partially offset by higher
unbilled receivables at the end of fiscal 1997 in connection with US government
directed modifications of A2 SERIES HUMVEEs.
Net inventory levels at the end of fiscal 1997 were $87.3 million or $34.4
million lower than net inventory levels of $121.7 at end of fiscal 1996. The
reduction in inventory is primarily attributed to the reduction of finished
goods inventory and raw materials. The reduction in finished goods is primarily
due to the shipment of 601 HUMVEEs held in inventory for the FMS Customer at the
end of fiscal 1996 and sold in the first quarter of fiscal 1997.
For fiscal 1997, the Company spent $2.4 million on capital expenditures
primarily for tooling costs in connection with vehicle production, as compared
to $5.2 million for fiscal 1996 which included a higher than normal amount of
tooling in connection with the A2 SERIES HUMVEE. During fiscal 1997, the Company
sold the machinery and equipment at the Indianapolis facility and collected the
proceeds of $2.8 million. The Company expects an increase in total capital
expenditures over that during fiscal 1997 of between $3 and $5 million in fiscal
1998. Part of the increased use of capital is attributable to the Company's plan
to convert to information systems compliant with year 2000 requirements. The
Company anticipates that all capital requirements will be funded from operating
cash flow and availability under the Revolving Credit Facility.
Management anticipates that cash flow from operations 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 in the
Credit Agreement, and expires on October 31, 1999. As of October 31, 1997, the
Company had borrowings of $8.9 million outstanding under the Revolving Credit
Facility. As of January 23, 1998 the Company's loan balance under the Revolving
Credit Facility was $19.9 million. The increase in the revolver from October 31,
1997 reflects a temporary increase in finished goods inventory due to a delay in
contract negotiations for the delivery of certain HUMVEE units built for a
customer.
The Revolving Credit Agreement contains numerous covenants and prohibitions that
will impose limitations on the liquidity of the Company, including requirements
that the Company satisfy certain financial ratios and limitations on the
incurrence of additional indebtedness.. The indenture governing the outstanding
12-7/8% Senior Notes also imposes limitations on the incurrence of additional
indebtedness. The ability of the Company to meet its debt service requirements
and to comply with such covenants will be dependent upon future operating
performance and financial results of the Company,
23
which will be subject to financial, economic, political, competitive and other
factors affecting the Company, many of which are beyond its control.
Year 2000 Business Matters
The Company has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the "Year 2000" issue and is
developing an implementation plan to resolve the issue. 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.
The Company presently believes that, with modifications to existing software
and/or converting to new software, the Year 2000 problem will not pose
significant operational problems for the Company's computer systems as so
modified and/or converted. Costs in connection with such modifications and/or
conversion will not have a material adverse impact on the Company. However, if
such modifications and/or conversion are not completed timely, the Year 2000
problem may have a material adverse impact on the operations of the Company.
Inflation and Seasonality
In general, the Company's cost of sales and SG&A expenses are affected by
inflation and the effects of inflation may be experienced by the Company in
future periods. Management believes that since April 1992, such effects have not
been material to the Company.
The Company's business generally is not seasonal except for a scheduled two-week
plant closure during July to accommodate annual maintenance requirements.
Impact of New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income" and No. 131, "Disclosures about Segments of an Enterprise and Related
Information". The Statements are applicable to all entities, both public and
private, and are effective for fiscal years beginning after December 15, 1997.
SFAS 130 establishes standards for reporting and display of comprehensive income
and its components. All items that are required to be recognized under
accounting standards as components of comprehensive income must be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders.
The Company will adopt both Statements in fiscal 1999. Upon adoption,
reclassification of financial statements for earlier periods may be required.
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.
24
Item 8. Financial Statements and Supplementary Data
Index To Financial Statements
- --------------------------------------------------------------------------------
Page
----
Consolidated Statements of Operations for the years ended
October 31, 1995, 1996 and 1997................................... 26
Consolidated Balance Sheets as of October 31, 1996 and 1997........ 27
Consolidated Statements of Stockholder's Equity for the years ended
October 31, 1995, 1996 and 1997................................... 28
Consolidated Statements of Cash Flows for the years ended
October 31, 1995, 1996 and 1997................................... 29
Independent Auditors' Report....................................... 53
Notes to Consolidated Financial Statements......................... 26 through 52
25
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
Year ended October 31
---------------------
1995 1996 1997
- ----------------------------------------------------------------------------------------------------
Net sales $ 411,683 462,406 468,173
- ----------------------------------------------------------------------------------------------------
Cost and expenses:
Cost of sales 355,724 419,476 424,967
Depreciation and amortization 15,811 16,609 12,713
Selling, general, and administrative expenses 36,253 37,256 26,178
(Gain) loss on sale of equipment 102 255 (6)
Special termination benefits -- 3,246 152
Restructuring charges -- -- 3,495
- ----------------------------------------------------------------------------------------------------
Income (loss) before interest, income taxes and
extraordinary item 3,793 (14,436) 674
Interest income 1,707 2,596 280
Interest expense (12,370) (16,454) (13,508)
- ----------------------------------------------------------------------------------------------------
Loss before income taxes and extraordinary item (6,870) (28,294) (12,554)
Income tax benefit (435) (8,683) (3,013)
- ----------------------------------------------------------------------------------------------------
Loss before extraordinary item (6,435) (19,611) (9,541)
Extraordinary item, net of income taxes 2,965 -- --
- ----------------------------------------------------------------------------------------------------
Net loss $ (3,470) (19,611) (9,541)
- ----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
26
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
October 31
------------------
Assets 1996 1997
- -------------------------------------------------------------------------------
Current assets:
Cash $ 5,867 1,190
Accounts receivable, net 57,126 52,661
Inventories 121,710 87,299
Prepaid expenses and other assets 1,675 2,802
Deferred income taxes 3,455 6,198
- -------------------------------------------------------------------------------
Total current assets 189,833 150,150
Income taxes receivable 4,023 1,379
Property, plant, and equipment, net 56,463 44,920
Deferred income taxes 20,488 24,354
Goodwill, net 87,871 83,585
Other assets 14,504 11,870
- -------------------------------------------------------------------------------
$373,182 316,258
- -------------------------------------------------------------------------------
Liabilities and Stockholder's Deficit
- -------------------------------------------------------------------------------
Current liabilities:
Accounts payable 59,212 33,784
Accrued expenses 42,714 60,510
- -------------------------------------------------------------------------------
Total current liabilities 101,926 94,294
Long-term debt 126,865 83,195
Postretirement benefits other than pensions,
noncurrent portion 150,134 150,702
Other liabilities, noncurrent portion 10,219 13,570
- -------------------------------------------------------------------------------
Total liabilities 389,144 341,761
- -------------------------------------------------------------------------------
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
1,000 shares; issued and outstanding 900 shares -- --
Paid-in capital 1,000 1,000
Accumulated deficit (21,962) (31,503)
- -------------------------------------------------------------------------------
Total stockholder's deficit (15,962) (25,503)
Commitments and contingencies (notes 7 and 15)
- -------------------------------------------------------------------------------
$373,182 316,258
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
27
AM GENERAL CORPORATION AND SUBSIDIARY
Note to Consolidated Financial Statements
(Dollar amounts in thousands)
Total
8% Retained stock-
cumulative Minimum earnings holder's
preferred Common Paid-in pension (accumulated equity
stock stock capital liability deficit) (deficit)
- ---------------------------------------------------------------------------------------------------------
Balance at October 31, 1994 $ 9,000 -- 1,000 (240) 3,435 13,195
Net loss -- -- -- -- (3,470) (3,470)
Dividends -- -- -- -- (2,160) (2,160)
Minimum pension -- -- -- 158 -- 158
Obligation for put accretion -- -- -- -- (156) (156)
Purchase of 100 shares of common
stock -- -- -- -- -- --
Retirement of 4,000 shares of
preferred stock (4,000) -- -- -- -- (4,000)
- ---------------------------------------------------------------------------------------------------------
Balance at October 31, 1995 5,000 -- 1,000 (82) (2,351) 3,567
Net loss -- -- -- -- (19,611) (19,611)
Minimum pension -- -- -- 82 -- 82
- ---------------------------------------------------------------------------------------------------------
Balance at October 31, 1996 5,000 -- 1,000 -- (21,962) (15,962)
Net loss -- -- -- -- (9,541) (9,541)
- ---------------------------------------------------------------------------------------------------------
Balance at October 31, 1997 $ 5,000 -- 1,000 -- (31,503) (25,503)
- ---------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
28
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
Year ended October 31
---------------------
1995 1996 1997
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (note 20) $(47,721) 10,081 38,663
- -----------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of equipment -- 6 2,818
Capital expenditures (8,101) (5,216) (2,431)
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (8,101) (5,210) 387
- -----------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreement 43,712 856 (43,727)
Proceeds from issuance of senior note, net of expenses 69,275 -- --
Purchase of common stock and related put obligation (6,522) -- --
Repayment of LTV Creditors Trust obligations (29,657) -- --
Principal payments on 12-7/8% senior notes -- (1,000) --
Principal payments on closing note (15,198) -- --
Dividends paid (2,160) -- --
Retirement of preferred stock (4,000) -- --
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 55,450 (144) (43,727)
- -----------------------------------------------------------------------------------------------
Net change in cash (372) 4,727 (4,677)
Cash and cash equivalents at beginning of year 1,512 1,140 5,867
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,140 5,867 1,190
- -----------------------------------------------------------------------------------------------
Supplemental disclosure of cash items
Interest paid $ 12,350 10,553 12,416
Taxes paid -- 474 453
- -----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
29
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
(1) Summary of Significant Accounting Policies and Practices
(a) Description of Business
The primary business of AM General Corporation (the Company) is to
manufacture Hummer/(R)/ vehicles in Indiana. Currently, the Company is
manufacturing Hummer/(R)/ vehicles for the Department of Defense (DoD)
under a multiple year requirements contract extending through October 31,
2000 (with funds appropriated through September 1998). Such vehicles are
enhanced from the previous Hummer/(R)/ contract and carry a higher per unit
sales price. The Company also sells Hummer/(R)/ vehicles and parts to
friendly foreign nations through the Department of Defense or on a direct
basis. AM General Sales Corporation, a wholly-owned subsidiary of the
Company, sells Hummer/(R)/ vehicles to the general public through its
network of fifty-three domestic dealers and thirty-four international
distributors at October 31, 1997. Currently, the Company is refurbishing
two and one-half ton trucks under a contract, the Extended Service Program
(ESP), with the Department of Defense extending through June 1998. (See
also note 17).
The mix of sales for each of the years in the three year period ended
October 31, 1997 is as indicated in the following analysis:
- --------------------------------------------------------------
October 31
----------
1995 1996 1997
- --------------------------------------------------------------
Hummer/(R)/ vehicles:
DoD 38% 37% 33%
FMS (foreign military sales) 8 12 14
International direct 13 7 1
Commercial 15 16 17
ESP 9 16 18
Service parts and other 17 12 17
- --------------------------------------------------------------
Prior to April 27, 1995, all of the preferred and 90% of the Company's
common stock was owned by The Renco Group, Inc. The remaining 10% of the
common stock was beneficially owned by LTV Aerospace Creditors Liquidating
Trust (the Trust) as assignees of LTV Aerospace and Defense Company (LTV)
the parent company from whom the business was acquired in 1992. As part of
a refinancing discussed further in note 2, this remaining common stock
including the related put option was purchased from the Trust, so that
after April 27, 1995 all of the Company's common and preferred stock is
owned by The Renco Group, Inc.
(b) Principles of Consolidation
The consolidated financial statements include the financial statements of
AM General Corporation and its wholly-owned subsidiary, AM General Sales
Corporation. All significant intercompany balances and transactions have
been eliminated in consolidation.
30
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
(c) Cash Equivalents
For purposes of the consolidated statement of cash flows, the Company
considers all highly liquid investments with original maturities of three
months or less to be cash equivalents.
(d) Inventories
Inventories, other than inventoried costs related to the ESP contract, are
stated at the lower of standard cost or market. Standard cost approximates
first-in, first-out cost.
Inventoried costs relating to the ESP contract are stated at the actual
production cost, including factory overhead, incurred to date reduced by
amounts identified with revenue recognized on units delivered. General and
administrative costs are not included in inventories applicable to the ESP
contract. The costs attributed to units delivered under the ESP contract
are based on the estimated average cost of all units expected to be
produced. The Company's estimates of total contract costs are reviewed
periodically, however, the amounts the Company will ultimately realize
could differ from the amounts at October 31, 1997, if actual costs differ
from Company estimates or the production schedule is modified.
(e) Property, Plant, and Equipment
Property, plant, and equipment are stated at cost. Depreciation on plant
and equipment is calculated on the straight-line method over the estimated
useful lives of the assets commencing in the year subsequent to
acquisition. Leasehold improvements are amortized over the shorter of the
lease terms or estimated useful lives of the assets using the straight-line
method.
Useful lives for property, plant and equipment are as follows:
- -------------------------------------------------------------------------------
Buildings 40 years
Machinery, equipment, and fixtures 10 to 12 years
Vehicles 5 years
Dealer signage 10 years
Tooling Units expected to be produced
- -------------------------------------------------------------------------------
31
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
(f) Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets of the Hummer and related businesses acquired on April 30, 1992,
is amortized on a straight-line basis over 25 years. Accumulated
amortization was $19,289 and $23,575 at October 31, 1996 and 1997,
respectively. The Company assesses the recoverability of this intangible
asset by determining whether the amortization of the goodwill balance over
its remaining life can be recovered through undiscounted future operating
cash flows. The amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows. The assessments of the
recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved.
(g) Other Assets
The costs of the noncompete covenant and deferred loan costs (included in
other assets, see note 6) are amortized on a straight-line basis over their
estimated useful lives. The amortization of deferred loan costs is included
in interest expense.
(h) Accounts Payable
The Company utilizes a cash management system which incorporates a zero
balance disbursement account funded as checks are presented for payment.
Accounts payable includes checks issued in excess of book balance of $6,641
and $5,621 at October 31, 1996 and 1997, respectively.
(i) Revenue Recognition
Revenue under U.S. Government and foreign military fixed-price production
contracts relating to the sale of Hummer/(R)/ vehicles is recorded when
specific contract terms are fulfilled and title passes by either delivery
or acceptance, with cost of sales recognized based upon unit cost. Revenue
under sales of commercial Hummer/(R)/ vehicles is recorded when vehicles
are shipped and title passes to dealers.
Revenue under cost-reimbursement contracts is recorded as costs are
incurred and includes estimated earned fees in the proportion that costs
incurred to date bear to total estimated costs. The fees under certain
government contracts may be increased or decreased in accordance with cost
or performance incentive provisions which measure actual performance
against established targets or other criteria. Such incentive fee awards or
penalties are included in revenue at the time when realization is probable
and the amounts can be reasonably determined. Estimated losses on long-term
contracts are recorded when identified.
Sales and related cost of sales applicable to the fixed-price, ESP contract
are recognized as specific contract terms are fulfilled under the
percentage-of-completion method, measured on a units produced basis. See
also footnote 1(d).
32
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
(j) Research and Development
Research and development costs are expensed as incurred. Research and
development costs amounted to $5,594, $5,643 and $1,856 for the years ended
October 31, 1995, 1996 and 1997, respectively.
(k) Income Taxes
The Company and its subsidiary are included in the consolidated Federal
income tax return of The Renco Group, Inc. (the Parent). Federal income
taxes are provided on a separate company basis and remitted to the Parent
in accordance with the tax sharing agreement between the Company and its
Parent. Under the tax sharing agreement with The Renco Group, Inc., the
Company will not benefit from any net operating loss carryforwards unless
the net operating loss carryforward is generated by temporary differences
for Federal income tax purposes.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted Federal and state tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(l) Pension and Other Postretirement Plans
The Company has defined benefit pension plans covering substantially all of
its employees. Benefits for salaried employees are accumulated each year at
1-1/2% of the participant's base salary for that year, up to the social
security integration base plus 2-1/4% of any base salary in excess of the
social security integration base for that same year. Benefits for hourly
employees are based on a negotiated rate per years of service. The
Company's policy is to fund the maximum amount allowable under the
government cost accounting standards.
The Company has defined contribution 401(k) savings plans for all salaried
employees and substantially all hourly employees.
The Company has a welfare benefit plan which covers substantially all
hourly paid employees. The plan provides benefits to employees while on
layoffs or when working less than 40 compensated or available hours as
defined by this plan. This plan provides for integration with state
unemployment compensation programs.
The Company sponsors defined benefit health care plans for substantially
all retirees and employees. The Company measures the costs of its
obligation based on its best estimate. The net periodic costs are
recognized as employees render the services necessary to earn the
postretirement benefits.
33
AM GENERAL CORPORATION AND SUBSIDIARY
Note to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
(m) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent liabilities to prepare these financial statements in conformity
with generally accepted accounting principles. Actual results could differ
from those estimates.
(n) Impairment of Long-Lived Assets
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of. This Statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(2) Refinancing
On April 27, 1995, the Company issued $75,500 of Senior Notes due 2002.
Proceeds were used as follows:
- --------------------------------------------------------------------------------
Debt expenses $ 5,851
Debt discount 402
Reduction in the revolving line-of-credit 16,141
Retire adjustment note, profit participation agreement
and noncompete covenant 40,424
Acquire common stock and related put obligation 6,522
Payment of cumulative preferred stock dividends 2,160
Redemption of 4,000 shares of preferred stock 4,000
- --------------------------------------------------------------------------------
$ 75,500
- --------------------------------------------------------------------------------
The early retirement of the adjustment note, profit participation agreement
and noncompete covenant at a discount resulted in an extraordinary gain of
$4,715 which is included in the results of operations for the year ended
October 31, 1995, net of the related tax effect of $1,750.
34
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
(3) Accounts Receivable
Components of accounts receivable are as follows:
- -------------------------------------------------------------------------------
October 31
----------
1996 1997
- -------------------------------------------------------------------------------
Receivables from the U. S. Government under
long-term contracts:
Amounts billed or billable $37,365 22,142
Recoverable costs accrued--not billed 4,662 2,289
Unrecovered costs subject to future negotiation 4,694 17,327
Commercial customers--amounts billed:
Foreign 4,666 3,044
Dealers 2,432 3,322
Service parts 31 21
Other receivables 3,674 4,866
- -------------------------------------------------------------------------------
57,524 53,011
Less allowance for doubtful accounts (398) (350)
- -------------------------------------------------------------------------------
$57,126 52,661
- -------------------------------------------------------------------------------
Recoverable costs accrued--not billed--are comprised principally of revenue
amounts recognized on deliveries under contracts which were not billable at
the balance sheet date due to the timing provisions under the related
contracts.
Unrecovered costs subject to future negotiation primarily includes revenues
recognized on contracts under which changes were directed by customers.
Prices for these changes and for other related contract claims are
currently being negotiated with the customers.
Substantially all billed and unbilled receivables are expected to be
collected within the next 12 months.
35
AM GENERAL CORPORATION AND SUBSIDARY
Notes to Consoldiated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
(4) Inventories
Inventories consist of the following:
- --------------------------------------------------------------------------------
October 31
----------
1996 1997
- --------------------------------------------------------------------------------
Finished goods $ 73,128 42,528
Service parts 14,784 16,451
Extended Service Program--
Production costs of goods currently in process 3,748 4,574
Raw materials, supplies, and work in progress 33,752 28,153
- --------------------------------------------------------------------------------
125,412 91,706
Less allowance for inventory obsolescence (3,702) (4,407)
- --------------------------------------------------------------------------------
$121,710 87,299
- --------------------------------------------------------------------------------
As discussed in footnote 1(d), costs attributed to units delivered under
the ESP contract are based on the average cost of all units expected to be
produced. The excess of estimated average production cost of ESP units
expected to be produced over the cost of delivered units is included in
accrued expenses (see note 8).
(5) Property, Plant, and Equipment
Property, plant, and equipment consist of the following:
- --------------------------------------------------------------------------------
October 31
----------
1996 1997
- --------------------------------------------------------------------------------
Land $ 1,498 917
Buildings 4,558 2,911
Machinery, equipment, and fixtures 29,184 21,890
Leasehold improvements 8,635 8,856
Vehicles 3,380 3,092
Construction in progress 191 69
Dealer signage 292 342
Tooling 56,305 57,689
- --------------------------------------------------------------------------------
104,043 95,766
Less accumulated depreciation and amortization (47,580) (50,846)
- --------------------------------------------------------------------------------
$ 56,463 44,920
- --------------------------------------------------------------------------------
36
AM GENERAL CORPORATION AND SUBSIDARY
Notes to Consoldiated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
Tooling, net of related amortization, of $10,665 and $10,668 at October 31,
1996 and 1997, respectively, was required for vehicles being sold to the
general public. This tooling is being amortized over 20,000 commercial
units expected to be sold.
(6) Other Assets
Other assets consist of the following:
- --------------------------------------------------------------------------------
October 31
----------
1996 1997
- --------------------------------------------------------------------------------
Noncompete covenant, net $ 5,661 4,631
Deferred loan costs, net:
Senior notes due 2002 4,510 3,690
Revolving line-of-credit 323 208
Preproduction cost, net:
Commercial vehicles for the general public 1,283 1,192
Extended service program 897 74
Performance bonds 1,441 1,566
Intangible pension asset 275 --
Organizational cost, net 5 --
Other 109 509
- --------------------------------------------------------------------------------
$14,504 11,870
- --------------------------------------------------------------------------------
The noncompete covenant resulted from the acquisition of the Hummer
business on April 30, 1992, and is being amortized over ten years.
Accumulated amortization was $4,631 and $5,661 at October 31, 1996 and
1997, respectively. Deferred loan costs were incurred in connection with
the revolving line-of-credit and the senior notes due 2002 and are being
amortized over three and seven years, respectively. Accumulated
amortization was $1,639 and $2,674 at October 31, 1996 and 1997,
respectively. Deferred loan costs include a $2,000 fee paid to The Renco
Group, Inc. for services and assistance provided in connection with the
amendment of the revolving line-of-credit and the issuance of senior notes
due 2002.
Preproduction cost represents cost incurred prior to the production of the
related vehicle and includes labor and overhead relating to developing
production facilities. These costs are being amortized over the contract
life for the military vehicles and over the 20,000 estimated units to be
sold to the general public. Accumulated amortization was $493 and $1,407 at
October 31, 1996 and 1997, respectively.
37
AM GENERAL CORPORATION AND SUBSIDARY
Notes to Consoldiated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
(7) Leases
The Company has several noncancelable operating leases for substantial
portions of the Company's plant and office facilities and machinery and
equipment. Leased plant and office facilities generally contain renewal
options. Rental expense for operating leases (except those with lease terms
of a month or less that were not renewed) for the years ended October 31,
1995, 1996 and 1997 aggregated approximately $5,919, $5,060 and $5,040,
respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of October 31,
1997 are:
- --------------------------------------------------------------------------------
Year ending
October 31 Amount
- --------------------------------------------------------------------------------
1998 $5,075
1999 3,482
2000 394
2001 8
- --------------------------------------------------------------------------------
Total minimum lease payments $8,959
- --------------------------------------------------------------------------------
38
AM GENERAL CORPORATION AND SUBSIDARY
Notes to Consoldiated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
(8) Accrued Expenses
Components of accrued expenses are as follows:
- --------------------------------------------------------------------------------
October 31
----------
1996 1997
- --------------------------------------------------------------------------------
Modifications payable $ 5,831 14,654
Excess of estimated average production cost of ESP
units expected to be produced over the cost of
delivered units (note 4) 2,859 7,103
Warranty 5,233 5,219
Current portion of other post employment benefits 5,000 5,000
Interest on senior notes 4,796 4,819
Wages, bonuses, and payroll taxes 3,151 3,606
Vacation 3,418 2,977
Taxes other than on income 3,290 2,772
Insurance 1,634 2,327
Sales incentives 3,257 2,204
Restructuring reserve -- 1,927
Accrued loss on engineering contracts -- 1,301
Purchase requirements 884 1,290
Pension liability -- 420
Management fee due to Renco Group, Inc. 100 100
Other 3,261 4,791
- --------------------------------------------------------------------------------
$42,714 60,510
- --------------------------------------------------------------------------------
39
AM GENERAL CORPORATION AND SUBSIDARY
Notes to Consoldiated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
(9) Long-term Debt
Long-term debt consists of:
October 31
--------------
1996 1997
- --------------------------------------------------------------------------------
Revolving line-of-credit, interest at prime plus 1-3/4%,
payable in full on October 31, 1999 $ 52,677 8,950
12-7/8% senior notes due 2002, discounted $402 to yield
13%, interest payable semi-annually on May 1 and
November 1 74,188 74,245
- --------------------------------------------------------------------------------
126,865 83,195
Less current maturities of long-term debt
- --------------------------------------------------------------------------------
$126,865 83,195
- --------------------------------------------------------------------------------
The revolving credit agreement (the Agreement) permits the Company to
borrow amounts based on percentages of qualifying accounts receivable and
inventories up to a maximum of $60,000. At October 31, 1996, the Company
had borrowed substantially all amounts available under the aforementioned
percentages; approximately $31,839 is available at October 31, 1997. The
Agreement is secured by a first lien on all of the Company's accounts
receivable, inventories and general intangibles. Interest is due monthly;
there is a monthly commitment fee of one-half of 1% on the unused credit
commitment and a prepayment penalty for early termination.
The senior notes are unsecured and are redeemable at a premium at the
Company's option after May 1, 1999 and at the face amount after May 1,
2001. The Company will be obligated to offer to repurchase senior notes at
a price of 101% of the face amount if there is a change in control or if at
the end of each twelve month period ended April 30, the Company has excess
cash flow, as defined. During fiscal 1996, senior notes with a face amount
of $1,000 were repurchased as a result of an offer required because of
excess cash flow, as defined, for the twelve month period ended April 30,
1996. In fiscal 1997, the Company was not required to repurchase any bonds.
The various debt agreements contain restrictions on mergers, incurring
additional debt or liens, making investments, selling assets or making
payments such as dividends, stock repurchases, or debt prepayments and
payments of any kind to affiliates. The revolving credit agreement also
contains various financial covenants such as working capital and net worth.
At October 31, 1997, the Company was in compliance with all the financial
covenants.
Under the most restrictive covenant in any agreement, no amount was
available for payment of dividends at October 31, 1996 and 1997.
40
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
The Company's outstanding letters of credit totaled $4,487 and $4,505 at
October 31, 1996 and 1997, respectively. Of this amount, $4,470 and $4,470
at October 31, 1996 and 1997, respectively, were securing advance deposits
received from customers for foreign sales and other cash collateralized
letters of credit. The cash received has been pledged as security for the
letters of credit.
(10) Other Liabilities
- --------------------------------------------------------------------------------
October 31
----------
1996 1997
- --------------------------------------------------------------------------------
Pension liability $ 5,882 8,587
Deferred compensation 279 133
Other 4,058 4,850
- --------------------------------------------------------------------------------
$10,219 13,570
- --------------------------------------------------------------------------------
(11) Preferred Stock
The preferred stock of the Company, all of which is held by The Renco
Group, Inc., is entitled to receive cumulative preferential cash dividends
at an annual rate of 8%. Undeclared preferred stock dividends in arrears at
October 31, 1996 and 1997 were $600 and $1,000, respectively. The shares
have no voting rights on any matter, except as specifically required by
law.
The preferred shares are redeemable by the Company at its option, subject
to compliance with long-term debt covenants, at the par value thereof plus
any accrued and unpaid dividends. Preferred shares have preference in
liquidation or dissolution of the Company over common shares to the extent
of the par value of the preferred shares plus any accrued and unpaid
dividends thereon.
(12) Income Tax
Total income taxes were allocated as follows:
- --------------------------------------------------------------------------------
October 31
----------
1995 1996 1997
Income from continuing operations $ (435) (8,683) (3,013)
Extraordinary item 1,750 -- --
Stockholder's equity, for minimum pension
liability 97 50 --
- --------------------------------------------------------------------------------
$1,412 (8,633) (3,013)
- --------------------------------------------------------------------------------
41
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
Income tax expense (benefit) attributable to income before extraordinary
item consists of:
- --------------------------------------------------------------------------------
October 31
----------
1995 1996 1997
- --------------------------------------------------------------------------------
Current:
Federal $(1,382) (832) 2,643
State 322 473 953
Deferred
Federal 1,188 (7,667) (6,088)
State (563) (657) (521)
- --------------------------------------------------------------------------------
$ (435) (8,683) (3,013)
- --------------------------------------------------------------------------------
Income tax expense (benefit) attributable to income before extraordinary
item differed from the amounts computed by applying the U.S. Federal income
tax rate of 35% to pretax income as a result of the following:
- --------------------------------------------------------------------------------
October 31
----------
1995 1996 1997
- --------------------------------------------------------------------------------
Computed "expected" tax expense (benefit) $(2,404) (9,903) (4,394)
Increase (reduction) in income taxes
resulting from:
Amortization of goodwill 1,500 1,500 1,500
State income taxes, net of Federal
income tax benefit 294 (349) 98
Foreign sales corporation effect 17 30 (172)
Other, net 158 39 (45)
- --------------------------------------------------------------------------------
$ (435) (8,683) (3,013)
- --------------------------------------------------------------------------------
42
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at October
31, 1995, 1996, and 1997 are presented below:
- ---------------------------------------------------------------------------------------------------
October 31
----------
1995 1996 1997
- ---------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts receivable $ 223 151 133
Inventory obsolescence reserve 1,330 1,407 1,675
Additional costs inventoried for tax purposes pursuant
to the Tax Reform Act of 1986 187 - -
Compensated absences, principally due to accrual
for financial reporting purposes 1,192 1,299 1,131
Accrued warranty 1,731 2,868 2,826
Pension liability 2,326 2,007 3,263
Postretirement benefits other than pensions 56,906 58,949 59,167
Other accruals 2,298 3,178 7,079
Other 245 209 171
- ---------------------------------------------------------------------------------------------------
Total gross deferred tax assets 66,438 70,068 75,445
Less valuation allowance 38,348 38,348 38,348
- ---------------------------------------------------------------------------------------------------
Net deferred tax assets 28,090 31,720 37,097
- ---------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation 8,978 7,730 6,213
Reduced costs inventoried for tax purposes pursuant
to the Tax Reform Act of 1986 - - 332
Pension asset 1,424 - -
Other 2,020 47 -
- ---------------------------------------------------------------------------------------------------
Total gross deferred liabilities 12,422 7,777 6,545
- ---------------------------------------------------------------------------------------------------
Net deferred asset 15,668 23,943 30,552
Less current portion 1,341 3,455 6,198
- ---------------------------------------------------------------------------------------------------
Noncurrent portion $14,327 20,488 24,354
===================================================================================================
43
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
There was no change in the valuation allowance for the years ended October
31, 1995, 1996 and 1997. Subsequently recognized tax benefits relating to
the valuation allowance for deferred tax assets will be allocated to
goodwill. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income and tax planning strategies in
making this assessment. Based upon the level of historical taxable income
and projections for future taxable income over the periods which the
deferred tax assets are deductible, management believes it is more likely
than not the Company will realize the benefits of these deductible
differences, net of the existing valuation allowances at October 31, 1997.
The amount of the deferred tax asset considered realizable, however, could
be reduced in the near term if estimates of future taxable income are
reduced.
Income taxes receivable represent amounts due from The Renco Group, Inc.
for Federal income tax overpayments; it is anticipated such amount will be
recovered through reductions in future estimated tax payments based on
future taxable income.
44
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
(13) Pension Benefits
The Company has defined benefit pension plans (Defined Benefit Plans)
covering substantially all of its employees. The following table sets forth
the Defined Benefit Plans' funded status and amounts recognized in the
Company's consolidated balance sheet at October 31, 1996:
- --------------------------------------------------------------------------------
Plans with Plans with
assets in obligations
excess of in excess of
obligations assets
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $35,235 55,883
- --------------------------------------------------------------------------------
Accumulated benefit obligation $37,273 66,695
- --------------------------------------------------------------------------------
Projected benefit obligation 40,366 66,695
Plan assets at fair value 45,871 62,991
- --------------------------------------------------------------------------------
Plan assets in excess of (less than) projected
benefit obligation 5,505 (3,704)
Unrecognized prior service cost - 5,965
Unrecognized net (gain) loss (6,065) (7,308)
Additional liability required - (275)
- --------------------------------------------------------------------------------
Pension cost prepaid (accrued) $ (560) (5,322)
================================================================================
45
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
The Defined Benefit Plans' funded status and amounts recognized in the
Company's consolidated balance sheet at October 31, 1997 are as follows:
- --------------------------------------------------------------------------------
Plans with Plans with
assets in obligations
excess of in excess of
obligations assets
- --------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested benefit obligation $ 90,338 11,949
- --------------------------------------------------------------------------------
Accumulated benefit obligation $101,266 11,949
- --------------------------------------------------------------------------------
Projected benefit obligation 104,687 11,949
Plan assets at fair value 118,195 9,111
- --------------------------------------------------------------------------------
Plan assets in excess of (less than) projected
benefit obligation 13,508 (2,838)
Unrecognized prior service cost 4,399 -
Unrecognized net (gain) loss (23,955) (121)
- --------------------------------------------------------------------------------
Pension cost prepaid (accrued) $ (6,048) (2,959)
- --------------------------------------------------------------------------------
Defined Benefit Plans' assets consist primarily of marketable securities.
Net pension cost for the years ended October 31, 1995, 1996 and 1997
includes the following components:
- --------------------------------------------------------------------------------
October 31
----------
1995 1996 1997
- --------------------------------------------------------------------------------
Service cost - benefits earned during the year $ 2,792 3,085 2,775
Interest cost on projected benefit obligation 6,950 7,422 8,173
Actual return on plan assets (17,980) (15,311) (24,673)
Net amortization and deferral 12,138 9,146 16,297
- --------------------------------------------------------------------------------
Net pension cost $ 3,900 4,342 2,572
- --------------------------------------------------------------------------------
46
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
Assumptions used in accounting for the pension plan as of October 31, 1995,
1996, and 1997 are:
- --------------------------------------------------------------------------------
October 31
-----------
1995 1996 1997
- --------------------------------------------------------------------------------
Discount rates 7.50% 7.75% 7.50%
Rates of increase in compensation levels 5.00% 5.00% 5.00%
Expected long-term rate of return on assets 8.50% 8.50% 8.50%
- --------------------------------------------------------------------------------
The assumed rates used above have a significant effect on the amounts
reported. For example, increasing the assumed discount rates by one
percentage point in each year would decrease the projected benefit
obligation as of October 31, 1997 and increase the unrecognized net gain
for the year ended October 31, 1997 by $11,910. Increasing the assumed rate
of increase in compensation levels by one percentage point in each year
would increase the projected benefit obligation as of October 31, 1997 and
decrease the unrecognized net gain for the year ended October 31, 1997 by
$670. Increasing the expected long-term rate of return on assets by one
percentage point in each year would decrease the unrecognized net gain for
the year ended October 31, 1997 by $1,060.
Substantially all employees can participate in one of two defined
contribution plans sponsored by the Company. Hourly employees may deposit
the value of certain benefits and awards into their plan which the Company
then matches. Salaried employees may make contributions which the Company
matches at a rate of 50% to a maximum 3% of the employee's base
compensation. Company contributions charged to expense were approximately
$152, $340 and $380 for the years ended October 31, 1995, 1996 and 1997,
respectively.
In connection with modifications in its labor agreement, the Company
offered special retirement benefits to 126 hourly employees who were 55
years or older on November 30, 1996 and who meet other specific service
requirements. At October 31, 1996, sixty-four employees had accepted the
program; accordingly accruals of $3,246 to reflect the enhanced special
termination benefits for pension and health care plans were recorded as of
that date under provision of SFAS 88 and 106. Such amount is in addition to
the net pension and postretirement benefit costs reflected in notes 13 and
14. Also, three employees elected the program in November 1996, aggregating
$152, which was recorded in the first quarter of fiscal 1997.
(14) Other Postretirement Benefit Plans
In addition to the Company's defined benefit pension plans, the Company
sponsors defined benefit health care plans (Health Plans) that provide
postretirement medical and life insurance benefits to employees who meet
minimum age and service requirements. The Health Plans are noncontributory.
The Health Plans contain other cost-sharing features such as deductibles
and coinsurance. The Company's policy is to fund the cost of medical
benefits as incurred.
47
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
The following table presents the related amounts recognized in the
Company's consolidated balance sheets at October 31, 1996 and 1997:
- --------------------------------------------------------------------------------
October 31
----------
1996 1997
- --------------------------------------------------------------------------------
Accumulated postretirement benefit obligation:
Retirees $ 57,726 79,929
Fully eligible active plan participants 20,025 15,855
Other active plan participants 42,340 33,551
- --------------------------------------------------------------------------------
120,091 129,335
Unrecognized net gain 35,043 26,367
- --------------------------------------------------------------------------------
155,134 155,702
Current portion (5,000) (5,000)
- --------------------------------------------------------------------------------
Noncurrent portion $150,134 150,702
- --------------------------------------------------------------------------------
Net periodic postretirement benefit cost for the years ended October 31,
1995, 1996 and 1997 includes the following components:
- --------------------------------------------------------------------------------
October 31
----------
1995 1996 1997
- --------------------------------------------------------------------------------
Service cost $ 2,656 2,410 2,039
Interest cost 9,701 8,533 9,600
Amortization of unrecognized net gain (985) (1,841) (1,269)
- --------------------------------------------------------------------------------
Net periodic postretirement benefit cost $11,372 9,102 10,370
- --------------------------------------------------------------------------------
For measurement purposes, a 9.25% annual rate of increase in the per capita
cost of covered benefits was assumed for fiscal 1995 and 1996; the rate was
assumed to decrease gradually to 5.5% by the year 2002 and remain at that
level thereafter.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% at October 31, 1995 and 1996
and 7.50% at October 31, 1997.
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, increasing the assumed health care cost
trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of October 31, 1997 by
$20,694. The aggregate of the service and interest cost components of net
periodic postretirement benefit cost would increase for the year ended
October 31, 1997 by $2,149.
48
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
(15) Commitments and Contingencies
A portion of the Company's contracts and subcontracts contain terms which
provide for price adjustments. Such adjustments, if any, are not expected
to have a significant effect on the accompanying consolidated financial
statements.
The Company has received a final decision from the U.S. Army asserting a
claim against the Company for approximately $6.3 million plus interest from
January 27, 1995 under a prior Hummer contract. In October 1996, the U.S.
Army increased its claim by $1.7 million to reflect the impact of option
vehicles which were not included in its original claim. Although the
parties have held discussions, they have been unable to resolve the matter.
The Company has appealed the U.S. Army's final decision to the Armed
Services Board of Contract Appeals. The U.S. Army has agreed to defer
collection of the amount claimed until 30 days after final decision on the
Company's appeal. The Company believes it has defenses and sufficient
offsets to the U.S. Army's claim and intends to pursue the appeal
vigorously. Management of the Company believes that the ultimate liability,
if any, resulting from such claims would not materially affect the
financial position of the Company.
The Company, in the ordinary course of business, is the subject of or party
to various pending or threatened litigation. While it is not possible to
predict with certainty the outcome of these matters, management of the
Company believes that any liabilities resulting from such litigation would
not materially affect the financial position of the Company.
Payment for sales to commercial Hummer(R) dealers are generally obtained
within five days of delivery by drafts issued against the dealers'
wholesale floorplan accounts. Units wholesaled by the Company under these
accounts are subject to either voluntary or mandatory repurchase agreements
between the Company and four wholesale floorplan creditors. Such agreements
either permit or require the Company to repurchase, at not more than dealer
cost, new, unsold units in the dealers' inventories in the event of
repossession by the dealers' wholesale floorplan lenders. At October 31,
1996 and 1997, the mandatory repurchase agreements covered Hummers(R) with
a total value at dealer cost of $6,574 and $7,148, respectively. The
Company has not repurchased any vehicles under these arrangements.
The Company has arranged for a nationwide retail leasing program through an
independent leasing company and has entered into an agreement with respect
to this lease program which requires the Company to repurchase commercial
Hummers(R) leased under this program for specified residual values in the
event that the lessees or Hummer(R) dealers do not purchase the vehicles
for the specified residual values. At October 31, 1997, there were twenty
active Hummer(R) leases with a total residual value of $880.
In the ordinary course of business, the Company has entered into
contractual commitments related to purchases of materials, capital
expenditures, and leases.
49
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
(16) Related-party Transactions
During the years ended October 31, 1995, 1996 and 1997, the Company
incurred management fees to The Renco Group, Inc. of $960, $1,200 and
$1,200, respectively; $100 of which is included in accrued expenses at
October 31, 1996 and October 31, 1997. Under the current management
consultant agreement between the Company and The Renco Group, Inc., the
monthly fee to Renco is $100 with the potential for additional amounts
dependent on the Company achieving certain levels of earnings. The Company
paid a fee of $2,000 to The Renco Group, Inc. for services and assistance
provided in connection with the amendment of the revolving line-of-credit
and the issuance of the senior notes due 2002.
(17) Business and Credit Concentrations
The Company's largest customer is the United States Department of Defense.
The Department of Defense accounted for 68%, 74% and 79% of the Company's
sales for the years ended October 31, 1995, 1996 and 1997, respectively. At
October 31, 1995, 1996 and 1997, accounts receivable with the Department of
Defense were $39,815, $46,721 and $41,758, respectively.
Export sales to unaffiliated foreign customers, including sales to friendly
foreign nations, were $103,631, $107,033 and $80,951 for the years ended
October 31, 1995, 1996 and 1997, respectively.
The Company's business is significantly impacted by the United States
defense budget. As the U.S. continues to reduce budget allocations for
defense expenditures, sales are adversely affected. Foreign sales are
dependent on periodic receipt of a relatively few, individually significant
contracts and are negatively impacted by a reduction in foreign demand or
material adverse changes in the U.S. Government foreign military sales
program. The commercial market is impacted by the general economy and
interest rates. Changes in the marketplace of any of the above may
significantly effect management's estimates and the Company's performance.
The Company is dependent upon certain vendors for the manufacture of
significant components of its Hummer(R) vehicles and two and one-half ton ESP
trucks, including engines and body components. If these vendors were to become
unwilling or unable to continue to manufacture these products in required
volumes, the Company would have to identify and qualify acceptable alternative
vendors. The inability to develop alternate sources, if required in the future,
could result in delays or reductions in product shipments. However, the Company
has not experienced any significant problems relative to timeliness, quality or
availability of sole-sourced products. All of the Company's hourly employees are
represented by the International Union, United Automobile, Aerospace and
Agricultural Implement Workers of America ("UAW") under one of two collective
bargaining agreements. Certain employees in the Company's remanufacturing
operations (approximately 30% of the hourly employees) are included in a
collective bargaining agreement expiring in September 2005 while the remaining
70% of the hourly employees are included in a collective bargaining agreement
expiring in September, 1998.
50
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- --------------------------------------------------------------------------------
(18) Restructuring
The Company incurred net losses for the three years ended October 31, 1997,
and had an accumulated deficit of $31,503 at that date. The Company has
experienced reductions in the U.S. defense budget for Hummer(R) vehicles,
reduced direct international sales of Hummer(R) vehicles, and lower sales volume
and higher costs than expected in the commercial Hummer(R) vehicle program. In
order to address these issues which impact operating results and liquidity, the
Company reduced its Hummer(R) vehicle production rate in February, 1997, from 25
to 16.5 units per day, eliminated certain corporate overhead positions,
outsourced production of certain components and closed its stamping plant,
resulting in a restructuring charge of $3,495 for the year ended October 31,
1997. The Company is pursuing follow-on contracts for its current two and one-
half ton ESP contract which at current production levels will be completed in
June, 1998. The Company is also one of two finalists awarded a contract to build
prototype vehicles for a major refurbishment contract. The prototypes are
currently in testing by the U.S. Government and the production contract is
expected to be awarded in late 1998.
The major components of the restructuring charge were $2,820 for employee
severance costs, $1,141 of additional pension expense due to curtailment of
certain defined benefit pension plans, a $2,597 write-down to fair value of
property, plant and equipment to be disposed of and $1,353 of plant shutdown and
other charges. These costs were partially offset by a $4,416 gain on curtailment
of the Company's other postretirement benefit plan due to the workforce
reduction. The stamping facility equipment was sold during fiscal 1997. Included
in prepaid expenses and other assets is $1,144 which represents the property and
plant of the stamping facility at its fair value less costs to sell. The Company
anticipates selling the facility during fiscal 1998. Included in accrued
expenses is the remaining restructuring reserve of $1,927, related primarily to
severance benefits.
(19) Disclosures About the Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, income taxes receivable,
accounts payable and accrued expenses approximates fair value because of
the short maturity of these financial instruments.
The revolving line-of-credit approximates fair value because the interest
rate fluctuates with prime. Management believes the fair value of the
senior notes at October 31, 1996 and 1997, was approximately $69,300 and
$80,500, respectively, based on management's informal discussions with an
investment banker which makes a market in the senior notes.
51
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- -----------------------------------------------------------------------------------------------
(20) Reconciliation of Net Loss to Net Cash Provided by Operating Activities
The reconciliation of net loss to net cash provided by (used in) operating
activities for the years ended October 31, 1995, 1996 and 1997 follows:
- -----------------------------------------------------------------------------------------------
October 31
1995 1996 1997
- -----------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (3,470) (19,611) (9,541)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Restructuring charges -- -- 3,495
Less restructuring payments -- -- (720)
Depreciation and amortization of plant and
equipment 10,486 11,278 7,378
Other amortization 6,396 6,436 6,371
Increase (decrease) in allowance for
doubtful accounts 151 (188) (48)
Increase (decrease) in inventory reserve (569) 203 705
Deferred income taxes 1,638 (8,274) (6,609)
Discount accretion of debt 1,576 62 57
Noncash other postretirement cost 7,315 6,150 5,359
Loss (gain) on sale of equipment 102 255 (6)
Change in assets and liabilities:
Accounts receivable (19,768) (4,250) 4,513
Inventories (69,754) 1,422 33,782
Prepaid expenses (188) (26) 17
Other assets 8,403 3,247 549
Accounts payable 22,792 1,015 (25,428)
Due to related parties (419) -- --
Accrued expenses (5,850) 13,921 15,235
Income taxes (534) (619) 3,278
Other liabilities (6,028) (940) 276
- -----------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $(47,721) 10,081 38,663
- -----------------------------------------------------------------------------------------------
52
Independent Auditors' Report
The Board of Directors
AM General Corporation:
We have audited the consolidated financial statements of AM General Corporation
and Subsidiary as listed in the accompanying index to financial statements.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of AM General
Corporation and Subsidiary as of October 31, 1996 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended October 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
December 16, 1997
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
54
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table lists the directors and executive officers of the Company as
of January 29, 1998:
Name Age Position
- ------------------------------------------------------------------------------------
Ira Leon Rennert 63 Chairman and sole Director of the Company
James A. Armour 54 President and Chief Executive Officer
Edmond L. Peters 53 Senior Vice President, Procurement and Business Development
Adare Fritz 51 Senior Vice President, Operations
Robert J. Gula 51 Senior Vice President, Engineering and Product Development
Paul J. Cafiero 44 Vice President and Chief Financial Officer
Ira Leon Rennert has been the Chairman and sole Director of the Company since
the Acquisition and has been Chairman, Chief Executive Officer and principal
shareholder of Renco (including predecessors) since its first acquisition in
1975. Renco holds controlling interests in a number of manufacturing and
distribution concerns operating in businesses not competing with the Company
including WCI Steel, Inc. and Renco Metals, Inc.
James A. Armour has been President and Chief Executive Officer of the Company
since April 30, 1992. Prior to the Acquisition, Mr. Armour was President of the
former AM General Corporation since November 1988 and held various other
positions prior thereto, including Vice President and HUMVEE Program Manager,
Corporate Director, Quality Assurance, and Vice President, Materials and Quality
Assurance. Mr. Armour has been with the Company and its predecessor companies
for the past 25 years. Prior thereto, Mr. Armour held various positions with
American Motors Corporation and Ford Motor Company.
Edmond L. Peters has been Senior Vice President Procurement and Business
Development since November 1, 1997. Mr. Peters previously held the position of
Senior Vice President, Contracts Materials and Washington Operations since
October 1, 1996 and Vice President, Contracts & Subcontracts since April 30,
1992. Mr. Peters previously held the position of Director-Purchasing. Mr. Peters
has been with the Company and its predecessor companies for the past 14 years.
Adare Fritz has been Senior Vice President, Operations since April 30, 1992. Mr.
Fritz previously held the position of Vice President, Operations. Mr. Fritz has
been with the Company and its predecessor companies for the past 27 years.
Robert J. Gula has been Senior Vice President, Engineering and Product
Development since November 1, 1997. Mr. Gula previously held the position of
Vice President, Engineering since April 30, 1992. Mr. Gula has been with the
Company and its predecessor companies for the past 27 years. Prior to joining AM
General, Mr. Gula held technical positions within several engineering services
and automotive manufacturing companies.
Paul J. Cafiero has been Vice President and Chief Financial Officer since May 1,
1997. Mr. Cafiero previously held the position of Corporate Controller since
April 30, 1992. Mr. Cafiero previously held the position of Assistant
Controller. Mr. Cafiero has been with the Company and its predecessor companies
for the past 13 years.
55
Item 11. Executive Compensation.
The following table lists all cash compensation paid or accrued by the Company
for services rendered to it in all capacities during the fiscal years ended
October 31, 1997, 1996, and 1995 to the Company's chief executive officer and
its four other highest paid executive officers (excluding Mr. Rennert, the
"Named Executive Officers").
Summary Compensation Table
Annual Compensation
--------------------------------------------
Other Annual All Other
Name and Position Fiscal Year Salary Bonus Compensation (3) Compensation
- ----------------------------------- ---------------------------------------------------------------------------------
Ira Leon Rennert (1) 1997 - - - $1,200,000
Chairman and Sole Director 1996 - - - $1,100,000
1995 - - - 960,000
James A. Armour 1997 $250,000 250,000 48,925 -
President & Chief Executive 1996 250,000 - 55,461 -
Officer 1995 248,846 100,000 40,627 -
Edmund L. Peters 1997 135,000 60,000 23,937 -
Sr. Vice President, 1996 130,000 25,000 26,870 -
Procurement 1995 130,000 30,000 18,208 -
Adare Fritz 1997 135,000 40,000 25,320 -
Senior Vice President, 1996 135,000 - 25,356 -
Operations 1995 135,000 40,000 26,250 -
Robert J. Gula 1997 130,000 40,000 35,684 -
Sr. Vice President, Engineering & 1996 130,000 - 22,884 -
Product Development 1995 125,385 25,000 21,423 -
Paul J. Cafiero 1997 105,897 25,000 (2) -
Vice President and Chief 1996 93,539 - (2) -
Financial Officer 1995 80,004 10,000 (2) -
(1) Mr. Rennert, the sole Director of the Company received no compensation
directly from the Company. Mr. Rennert, together with certain trusts for
his benefit and for the benefit of certain members of his family, is the
principal shareholder of Renco, which receives a management fee from the
Company pursuant to a management agreement (the "Management Consultant
Agreement"). In fiscal 1997, Renco received a management fee of $1,200,000
from the Company.
(2) Value of perquisites and other personal benefits did not exceed the lesser
of $50,000 or 10% of total salary and bonus per Named Executive Officer.
(3) Consisting principally of Company paid expenses for cars, clubs, travel and
other expenses.
56
Compensation Committee Interlocks and Insider Participation
The Company had no compensation committee during the fiscal year ended October
31, 1997. The sole member of the board of directors was Mr. Rennert. The
compensation for the Named Executive Officers for fiscal 1997 was fixed by their
employment agreements and their Net Worth Appreciation Agreements and
consultation between the Chairman of the Board and the President.
During fiscal 1997, no executive officer of the Company, served (a) as a member
of the compensation committee (or other board committee performing equivalent
functions or, in the absence of any such committee, the entire board of
directors) of another entity, one of whose executive officers served on the
Company's board of directors, (b) as a director of another entity, one of whose
executive officers served on the Company's board of directors or (c) as a member
of the compensation committee (or other board committee performing equivalent
functions or, in the absence of any such committee, the entire board of
directors) of another entity, one of whose executive officers served as a
Director of the Company.
Employment Agreements
Mr. Armour, Mr. Fritz, Mr. Peters, Mr. Gula and Mr. Cafiero are each employed
under employment agreements which, pursuant to the terms thereof, continue until
October 31, 1998 and from year to year thereafter unless terminated by either
party with 30 days' prior written notice. The compensation arrangements as of
November 1, 1997 are as follows:
Mr. Armour-Minimum annual salary of $250,000 plus an annual bonus of $100,000
for each fiscal year in which the Company shall not have incurred a net loss
before the bonus payments to all Named Executive Officers and charges for non-
cash postretirement benefits other than pensions.
Mr. Fritz-Minimum annual salary of $135,000 plus an annual bonus of $40,000
subject to the same conditions as applicable to Mr. Armour.
Mr. Peters-Minimum annual salary of $175,000 plus an annual bonus of $60,000
subject to the same conditions as applicable to Mr. Armour.
Mr. Gula-Minimum annual salary of $155,000 plus an annual bonus of $40,000
subject to the same conditions as applicable to Mr. Armour.
Mr. Cafiero-Minimum annual salary of $125,000 plus an annual bonus of $25,000
subject to the same conditions as applicable to Mr. Armour.
Four former officers, three of whose employment terminated in December 1996 and
January 1997, received their contractual compensation through the expiration of
their contracts in October 1997.
Net Worth Appreciation Agreements
The Named Executive Officers and one other officer are each parties to
agreements ("Net Worth Appreciation Agreements") with the Company, where, upon
termination of each person's employment with the Company, he will be entitled to
receive a fixed percentage of the cumulative net income (available for common
stock as defined in such agreements) of the Company from a base date until the
end of the fiscal quarter preceding the date of termination. Such amount is
payable without interest in 40 equal quarterly installments commencing three
months after the date of termination of employment. Because of the net loss in
fiscal 1997, the amounts payable to each contract holder at October 31, 1996 has
been reduced to zero at October 31, 1997.
57
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Renco owns all of the outstanding capital stock of the Company. Mr. Rennert, who
together with certain trusts established by him (but of which he is not trustee)
for his benefit and for the benefit of certain members of his family holds 97.9%
of the capital stock of Renco, is Chairman of Renco and of the Company and may
be deemed to be the beneficial owner of the Company's capital stock. The address
of Renco and of Mr. Rennert is The Renco Group, Inc., 30 Rockefeller Plaza, New
York, NY 10112. No other executive officer of the Company has any ownership
interest in the Company.
By virtue of Renco's ownership of all the outstanding shares of capital stock of
the Company, and Mr. Rennert's ownership of a majority of the capital stock of
Renco, Mr. Rennert is in a position to control actions that require the consent
of a majority of the holders of the Company's outstanding shares of capital
stock, including the election of the board of directors.
Item 13. Certain Relationships and Related Transactions.
Management Agreement
Renco provides management services to the Company under a management agreement
(the "Management Agreement"). Such services include operational consulting,
budget review, income tax consulting and contracting for insurance under master
policies. Pursuant to the Management Agreement effective as of April 1, 1995,
Renco provides such services to the Company for an annual management fee equal
to $1.2 million. Additionally, Renco will receive an annual fee for each fiscal
year, commencing with fiscal 1995, equal to the excess, if any, of (i) ten
percent (10%) of the Company's consolidated net income before deductions for
federal and state income taxes, fees associated with the Management Agreement
and expenses related to the Company's Net Worth Appreciation Agreements, over
(ii) the aggregate annual management fee of $1.2 million.
The Management Agreement provides that the Company shall not make any payment
thereunder which would violate any of its agreements with respect to any of its
outstanding indebtedness. Annual payments by the Company in excess of $1.2
million under the Management Consultant Agreement must comply with the
restricted payments covenant of the Indenture governing the Senior Notes.
Management fees are paid monthly in arrears in installments of $100,000. The
Company paid management fees of $1.2 million to Renco in the year ended October
31, 1997.
Insurance Sharing Program
The company is included in a combined fidelity insurance policy covering all
Renco companies. The Company believes that the amount paid by it for such
policies was less than it would have paid had it obtained such policies on its
own.
58
Tax Sharing Agreement.
AM General is included in the consolidated federal income tax return of Renco.
Under the terms of the tax sharing agreement with Renco, income taxes are
allocated to AM General on a separate return basis except that transactions
between AM General and Renco and its other subsidiaries are accounted for on a
cash basis and not on an accrual basis. AM General is not entitled to the
benefit of net tax loss carryforwards, unless such tax losses were a result of
timing differences between AM General's accounting for tax and financial
reporting purposes. As of October 31, 1997, AM General had a long term
receivable for income taxes of $1.4 million under this agreement, representing
estimated tax payments made by the Company to Renco in excess of the Company's
actual tax liability.
Other
The 5,000 outstanding shares of Preferred Stock of the Company, all of which is
held by Renco, is entitled to receive cumulative preferential cash dividends at
an annual rate of 8% from May 1, 1995.
The Preferred Stock is redeemable by the Company at its option, subject to
compliance with long-term debt covenants, at the par value thereof plus any
accrued and unpaid dividends thereon. The Preferred Stock has preference in
liquidation or dissolution of the Company over common stock to the extent of the
par value of the Preferred Stock plus any accrued and unpaid dividends thereon.
59
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. and 2. List of Financial Statements and Financial Statement Schedules:
- --------------------------------------------------------------------------------
Page
----
Consolidated Statements of Operations for the years ended
October 31, 1995, 1996 and 1997.................................... 26
Consolidated Balance Sheets as of October 31, 1996 and 1997.......... 27
Consolidated Statements of Stockholder's Equity for the years ended
October 31, 1995, 1996 and 1997.................................... 28
Consolidated Statements of Cash Flows for the years ended
October 31, 1995, 1996 and 1997.................................... 29
Notes to Consolidated Financial Statements........................... 26
through 52
Independent Auditors' Report......................................... 53
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission have been omitted from this
Annual Report because they are not required, are not applicable, or the required
information is included in the consolidated financial statements or the notes
thereto.
60
(a) 3. Listing of Exhibits
Exhibit No. Description
- ----------- ------------------------------------------------------------------
*3.1 Certificate of Incorporation of Ren Acquisition Corp., filed with
the Delaware Secretary of State on November 26, 1991.
*3.2 Certificate of Amendment, changing name to AM General Corporation,
filed on April 30, 1992.
*3.3 Bylaws.
*4.1 Indenture dated as of April 27, 1995 between AM General
Corporation as Issuer and Shawmut Bank Connecticut, National
Association as Trustee relative to $75,500,000 in principal amount
of 12-7/8% Senior Notes due 2002, with form of Series A Senior
Note annexed as Exhibit A and form of Series B Senior Note annexed
as Exhibit B.
*10.1 Loan and Security Agreement dated as of April 30, 1992 between
Congress Financial Corporation and AM General Corporation, and
amendments 1 through 8 thereto.
****10.1.1 Amendment No. 9 dated June 26, 1996 to Loan and Security
Agreement, dated as of April 30, 1992 between Congress Financial
Corporation and AM General Corporation.
*****10.1.2 Amendment No. 10 dated August 22, 1996 to Loan and Security
Agreement, dated as of April 30, 1992 between Congress Financial
Corporation and AM General Corporation.
*****10.1.3 Amendment No. 11 dated December 17, 1996 to Loan and Security
Agreement, dated April 30, 1992 between Congress Financial
Corporation and AM General Corporation.
*****10.1.4 Amendment No. 12 dated March 14, 1997 to Loan and Security
Agreement, dated April 30, 1992 between Congress Financial
Corporation and AM General Corporation.
*10.2 Employment Agreement with James A. Armour, dated May 1, 1992, as
supplemented December 16, 1993 and September 1, 1994.
*10.3 Employment Agreements dated May 1, 1992 as supplemented December
16, 1993 with:
Adare Fritz
Gary L. Wuslich
Robert J. Gula
Edmond L. Peters
**10.3.1 Supplement No. 2, dated February 16, 1995, to Employment
Agreements of Messrs. Fritz, Wuslich, Gula and Peters.
10.3.2 Employment Agreement with Paul J. Cafiero, dated May 1, 1997.
*10.6 Net worth appreciation agreements dated May 1, 1992 with:
James A. Armour
Paul R. Schuchman
Adare Fritz
Kenneth M. Jordan
Gary L. Wuslich
Robert J. Gula
61
Exhibit No. Description
- ----------- ------------------------------------------------------------------
**10.6.1 Net worth appreciation agreement with Edmond L. Peters dated as of
February 1, 1995.
10.6.2 Net worth appreciation agreement with Paul J. Cafiero dated May 1,
1997.
*10.7 Management Consultant Agreement effective as of April 1, 1995 with
The Renco Group, Inc.
*10.9 Deferred Payment Agreement dated May 5, 1995 between the United
States of America and the Corporation.
**10.10 Letter Agreement dated 23 December 1994 between the Company and
Department of the Army-Tank-Automotive and Armaments Command
(technical schedules omitted).
**10.11 Lease dated September 11, 1984 between Amland Properties, Inc. and
AM General Corporation.
**10.12 Lease dated May 12, 1989 between Niles/Washington Associates
Limited and AM General Corporation.
**10.13 Lease dated January 1, 1989 between WF Associates Limited
Partnership and AM General Corporation as amended August 23, 1989,
July 30, 1993 and December 31, 1993.
**10.14 Lease dated September 17, 1993 between Indiana GRQ, Inc. and AM
General Corporation.
**10.15 Lease dated July 25, 1984 between Oppenheimer Livonia Associates
and AM General Corporation.
**10.16 Sublease dated June 11, 1992 between USAir, Inc. and AM General
Corporation.
**10.17 Commercial lease dated April 28, 1992 between Amland Corporation
and Ren Acquisition Corp.
***10.18 Contract dated December 14, 1995 between the Company and the
Department of the Army-Tank -Automotive and Armaments Command
(technical schedules omitted).
10.19 Commercial lease dated November 6, 1997 between the Company and
Chippewa Corporation.
21 Subsidiaries of Registrant.
*Filed with the Registration Statement No. 33-93302 filed June 9,
1995.
**Filed with Amendment No. 1 to Registration Statement No.
33-93302 filed August 9, 1995.
***Filed with Company's Form 10-K, No. 33-93302, filed January 28,
1996.
****Filed with Company's Form 10-Q, No. 33-93302, filed September
16, 1996.
*****Filed with Company's Form 10-K, No. 33-93302, filed January 29, 1997.
(b) No reports on Form 8-K were filed by the registrant during the last quarter
of the period covered by this report.
62
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Acts of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on January 29, 1998.
AM GENERAL CORPORATION
By:________________________
James A. Armour
President and Chief Executive Officer
Pursuant to the requirements of Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities indicated on January 29, 1998.
Signature Title
--------- -----
============================== Chairman and sole Director
Ira Leon Rennert
______________________________ President and Chief Executive Officer
James A. Armour (Principal Executive Officer)
______________________________ Vice President and Chief Financial
Paul J. Cafiero Officer (Principal Financial and
Accounting Officer)
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
No annual report to security holders covering the registrant's last fiscal
year and no proxy statement, form of proxy or other proxy soliciting material
with respect to any annual or other meeting of security holders has been nor
will be sent to security holders.
63