<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1996
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)
-----------------
<TABLE>
<S> <C>
Delaware 35-1852615
(State or other jurisdiction of incorporation or (I.R.S. Employer Identification No.)
organization)
105 North Niles Avenue
South Bend, Indiana 46617
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (219) 284-2907
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: 12 7/8% Senior Notes due 2002
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
---
Registrant company has no registered issue of equity securities.
Registrant has no registered issue of voting stock.
</TABLE>
<PAGE>
AM General Corporation
Form 10-Q
Quarter Ended April 30, 1996
PART I - FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets
as of October 31, 1995 (audited) and April 30, 1996 (unaudited) 3
Consolidated Statements of Operations
For the three and six months ended April 30, 1995 (unaudited) and
April 30, 1996 (unaudited) 4
Consolidated Statements of Cash Flows
For the six months ended April 30, 1995 (unaudited) and the six
months ended April 30, 1996 (unaudited) 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. 7
Three Months Ended April 30, 1996 ("second quarter of 1996") compared to
Three Months Ended April 30, 1995 ("second quarter of 1995") 8
Six Months Ended April 30, 1996 ("first six months of 1996") compared to
Six Months Ended April 30, 1995 ("first six months of 1995") 11
Liquidity and Capital Resources 14
PART II - OTHER INFORMATION 16
ITEM 1. LEGAL PROCEEDINGS 16
DJ-5 Litigation 16
---------------
Product Recall 16
--------------
Pending Government Investigation of Alleged Product Non-Conformity 16
------------------------------------------------------------------
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 18
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AM General Corporation and Subsidiary
Consolidated Balance Sheets
(Dollar amounts in thousands, except share information)
<TABLE>
<CAPTION>
October 31, April 30,
Assets 1995 1996
- - ---------------------------------------------------------------------
<S> <C> <C>
Current assets: (UNAUDITED)
Cash $ 1,140 6,389
Accounts receivable, net 52,688 43,812
Inventories 123,359 121,036
Prepaid expenses 1,648 2,340
Income taxes receivable 3,360 2,212
Deferred income taxes 1,341 1,111
- - ---------------------------------------------------------------------
Total current assets 183,536 176,900
Property, plant, and equipment, net 62,762 58,097
Deferred income taxes 14,327 15,686
Goodwill, net 92,157 90,014
Other assets 19,900 19,488
- - ---------------------------------------------------------------------
$372,682 360,185
- - ---------------------------------------------------------------------
Liabilities and Stockholder's Equity
- - ---------------------------------------------------------------------
Current liabilities:
Accounts payable 58,196 41,687
Accrued expenses 27,249 36,012
- - ---------------------------------------------------------------------
Total current liabilities 85,445 77,699
Long-term debt, excluding current maturities 126,947 121,687
Postretirement benefits other than
pensions, noncurrent portion 145,483 147,891
Other liabilities, excluding current
maturities 11,240 11,275
- - ---------------------------------------------------------------------
Total liabilities 369,115 358,552
Stockholder's equity:
8% cumulative preferred stock, $1,000
par value. Authorized 10,000 shares;
issued and outstanding 5,000 shares 5,000 5,000
Common stock, $.01 par value. Authorized,
issued and outstanding 900 shares - -
Paid-in capital 1,000 1,000
Minimum pension liability (82) (82)
Accumulated Deficit (2,351) (4,285)
- - ---------------------------------------------------------------------
Total stockholder's equity 3,567 1,633
- - ---------------------------------------------------------------------
$372,682 360,185
- - ---------------------------------------------------------------------
See accompanying notes to consolidated financial statements
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
AM GENERAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands)
(UNAUDITED)
Three Months Ended Six Months Ended
April 30, April 30,
----------------------------- ------------------------------
1995 1996 1995 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $128,288 $124,622 $238,200 $243,670
- - -----------------------------------------------------------------------------------------------------------------------------------
Cost and expenses:
Cost of sales 108,941 108,057 202,995 211,938
Depreciation and amortization 4,174 4,857 8,088 9,942
Selling, general, and administrative expenses 9,844 8,723 18,239 16,917
- - -----------------------------------------------------------------------------------------------------------------------------------
Income before interest and income taxes and extraordinary item 5,329 2,985 8,878 4,873
Interest Income 125 845 695 1,752
Interest Expense (2,559) (3,965) (4,715) (8,179)
- - -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and extraordinary item 2,895 (135) 4,858 (1,554)
Income tax expense 1,427 451 2,606 380
- - -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 1,468 (586) 2,252 (1,934)
Extraordinary item, net of income taxes of $1,750 2,965 - 2,965 -
- - -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 4,433 (586) 5,217 (1,934)
Obligation (benefit) for put accretion (133) - 156 -
- - -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) available to common stockholders $ 4,566 $ (586) $ 5,061 $ (1,934)
- - -----------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
</TABLE>
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
- - -------------------------------------------------------------------------------------------------------------
Six Months Ended
April 30,
------------------------------
1995 1996
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 5,217 (1,934)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization of plant and equipment 5,425 7,279
Other amortization 3,208 3,188
Increase (decrease) in allowance for doubtful accounts - (236)
Increase (decrease) in inventory reserve 715 (475)
Deferred income taxes (1,537) (1,129)
Debt Discount - 29
Discount accretion of debt 1,576 -
Noncash other postretirement cost 3,981 2,407
Loss on sale of equipment - 19
Change in assets and liabilities
Accounts receivable (31,378) 9,112
Inventories (28,662) 2,760
Prepaid expenses 950 (691)
Other assets (888) (633)
Accounts payable 5,782 (16,510)
Due to related parties (505) -
Accrued expenses 5,837 8,763
Income taxes 5,893 1,148
Other liabilities (3,017) 38
- - -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (27,402) 13,135
- - -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures, net (2,505) (2,597)
- - -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,505) (2,597)
- - -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreement 13,523 (5,289)
Proceeds from issuance of senior note, net of expenses 75,098 -
Principal payments on closing and adjustment notes (15,198) -
Repurchase of PUT Obligation (6,522) -
Repayment of LTV Creditor Trust Obligation (29,657) -
Dividends paid (2,160) -
Repurchase of preferred stock (4,000) -
- - -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 31,084 (5,289)
- - -------------------------------------------------------------------------------------------------------------
Net change in cash 1,177 5,249
Cash and cash equivalents at beginning of period 1,511 1,140
- - -------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,688 6,389
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statement presentation.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six month period ended April 30, 1996 are not
necessarily indicative of the results that may be expected for the year ending
October 31, 1996.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant's Form 10-K for the year ended
October 31, 1995.
NOTE 2. INVENTORIES
Inventories consisted of the following:
<TABLE>
<CAPTION>
APRIL 30,
OCTOBER 31, 1996
1995 (UNAUDITED)
----------- -----------
<S> <C> <C>
Finished Goods $ 67,710 $ 67,439
Service Parts 12,077 13,357
Extended Service Program
Costs Accumulated, net of amounts
attributed to revenues recognized to
date 10,072 10,613
Raw Materials, supplies and work in
progress 36,999 32,653
-------- --------
126,858 124,062
Less allowance for inventory shrinkage
and obsolescence (3,499) (3,026)
-------- --------
Total $123,359 $121,036
======== ========
</TABLE>
NOTE 3. RECLASSIFICATIONS
Certain reclassifications have been made to previously reported cost
and expenses to conform to the presentation contained herein.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
AM General Corporation ("the Company" or "AM General") is the largest supplier
of light tactical wheeled vehicles for the US Department of Defense ("DoD").
The Company is the original designer and sole manufacturer of the High Mobility
Multipurpose Wheeled Vehicle ("HUMVEE" or "HUMMER(R)"). The Company also sells
HUMMERs to foreign military services through the DoD's Foreign Military Sales
("FMS") program and on a direct sale basis. In 1993 the Company began selling
to industrial and retail users through its commercial dealer network.
From 1990 through April 30, 1996 AM General sold 49,028 HUMMERs under its
CO998 Contract with the DoD. All production under that contract was completed
by April 30, 1996 and 769 vehicles produced under the contract were in the
Company's finished inventory at that date, including 768 HUMMERs built for a
particular FMS Customer ("the FMS Customer"). Management expects that all 769
of these vehicles will be sold during the third quarter of fiscal 1996.
The Company began producing a new series of military HUMMERs, the A2 series,
in August, 1995 under a DoD contract for 1,201 units known as the R021 contract.
On December 23, 1995, the Company entered into a definitive multiple-year annual
requirements contract known as the X001 contract, under which the US Army is
expected to procure 2,350 HUMMERs annually for the next five years. Although the
US Army's 1995 Tactical Wheeled Vehicle Fleetbook, the last such document made
available by the Army, indicates that no HUMMER purchases were scheduled for the
years 1998 to 2001, the Army has acknowledged that the US Military will require
HUMMER purchases in those years.
From November 1, 1993 through May 7, 1995 the Company's HUMMER production rate
was approximately 47 units per day including 35 units per day for the US
Military and its FMS customers. On May 8, 1995 the Company reduced its HUMMER
production rate to 25 units per day due to lower US and international military
demand.
The Company's Service Parts and Logistics Operations ("SPLO") sells after-
market parts and support services for vehicles manufactured by the Company. Its
Systems Technical Support ("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 first remanufacture contract by
the US Army under the Extended Service Program (ESP). The five year, $154
million ESP contract specifies that the Company will rebuild and deliver a
minimum of 2,483 remanufactured and modernized 2-1/2-ton trucks by
disassembling approximately 3,727 old Company-manufactured trucks provided by
the DoD. Unit deliveries began in October of 1994 and are expected to be
completed in late 1998. To date, the US Army has exercised options for 520
units and has remaining options for an additional 1,299 units. If the US Army
exercises all remaining options, the maximum contract value will be
approximately $245 million.
7
<PAGE>
THREE MONTHS ENDED APRIL 30, 1996 ("SECOND QUARTER OF 1996") COMPARED TO THREE
MONTHS ENDED APRIL 30, 1995 ("SECOND QUARTER OF 1995")
AM GENERAL CORPORATION AND SUBSIDIARY
TABLE OF NET REVENUES AND HUMMER UNIT SALES INFORMATION
(IN MILLIONS, EXCEPT UNIT INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
------------------ %
1995 1996 Change Change
------- ------ ------ --------
<S> <C> <C> <C> <C>
Net sales
HUMMERs
US Military $ 62.1 46.3 (15.8) (25.4)%
International (1) 24.3 26.2 1.9 7.8 %
Commercial 17.8 17.8 0 0
------- ------ ------ ------
Total HUMMERs 104.2 90.3 (13.9) (13.4)%
ESP 5.3 18.0 12.7 239.6 %
SPLO 13.1 10.5 (2.6) (19.8)%
STS 5.7 5.8 .1 1.7 %
------- ------ ------ ------
Total net sales $ 128.3 124.6 (3.7) (2.9)%
======= ====== ====== ======
HUMMER Unit Sales
US Military 1,905 872 (1,033) (54.2)%
International (1) 605 384 (221) (36.5)%
Commercial 342 319 (23) (6.7)%
------- ------ ------ ------
Total HUMMERs 2,852 1,575 (1,277) (44.8)%
======= ====== ====== ======
HUMMERs Average Unit Selling Prices
US Military $32,596 53,085 20,489 62.8 %
International (1) 40,238 68,224 27,986 69.6 %
Commercial 51,892 55,702 3,810 7.3 %
------- ------ ------ ------
All HUMMERs $36,531 57,306 20,775 56.9 %
======= ====== ====== ======
</TABLE>
(1) Includes FMS and Direct International Sales
NET SALES
The decrease in net sales was due primarily to the decrease in US Military and
SPLO sales partially offset by increases in ESP and International sales.
Commercial HUMMER sales remained consistent with prior year sales. The increase
in ESP sales is attributed to the increased level of production and sales during
the second quarter of fiscal 1996 as compared to the second quarter of fiscal
1995 when the program was in a start up mode. The reduction in US military sales
is primarily attributed to the US military's present level of demand for
HUMMERs. The reduction in SPLO sales was primarily attributed to a large
international delivery in the second quarter of fiscal 1995 and the overall
decline in HUMMER unit deliveries.
8
<PAGE>
AVERAGE HUMMER UNIT SELLING PRICES
The average unit selling price for all HUMMERs increased 56.9% from the second
quarter of 1995 primarily due to a significant increase in the average selling
price for US Military and International units. Average HUMMER unit selling
prices for the US Military increased 62.8% over the second quarter of 1995 due
primarily to higher negotiated selling prices for the R021 and X001 contracts.
The higher average unit selling prices are attributed to higher material costs
for the A2 model along with higher fixed overhead costs due to the reduction in
unit production. Additionally, sales during the second quarter of 1996 included
HUMMER variants known as Expanded Capacity Vehicles ("ECVs") which sell at
prices substantially higher than other variants. Average HUMMER unit selling
prices for international sales increased 69.6% 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 7.3% due to
the availability of additional options such as the turbo-charged diesel engine
and a 2.5% increase in selling prices late in the 1995 model year followed by
2.5% and 2.3% increases for the 1996 model year. Both 1995 and 1996 models were
sold during the second quarter.
GROSS PROFIT
Gross profit was $16.6 million for the second quarter of 1996, a decrease of
$2.7 million or 13.9% from gross profit of $19.3 million for the second quarter
of 1995. The Company's gross profit margin declined from 15.1% in the second
quarter of 1995 to 13.3% in the second quarter of 1996. The decrease was
primarily due to the lower US military and International HUMMER sales attributed
to the reduction in HUMMER unit volume. Gross profit margins for US Military
and International HUMMER units are higher than those of Commercial and ESP
vehicles, and second quarter 1996 sales included a lower proportion of US
Military and International HUMMER sales in comparison to the second quarter of
1995. Additionally, the gross profit margin on Commercial HUMMERs was lower in
1996 due to higher warranty costs and increased sales incentives.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $4.9 million for the second quarter
of 1996, an increase of $.7 million or 16.7% over depreciation and amortization
expense of $4.2 million for the second quarter of 1995. The increase was
primarily due to new US Military tooling amortization for the ECV HUMMERs and
the new A2 series model in connection with the R021 and X001 contracts. By
agreement with the US Army, the A2 tooling costs are being amortized over the
1201 HUMMERs on the R021 contract, and future A2 models will not bear this cost.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expense was $8.7 million for the
second quarter of 1996, a decrease of $1.1 million or 11.2% from SG&A expense of
$9.8 million for the second quarter of 1995. The reduction is primarily due to
lower Commercial HUMMER advertising costs.
9
<PAGE>
Operating Income
Operating income for the second quarter of 1996 was $3.0 million, a
decrease of $2.3 million from operating income of $5.3 million for the second
quarter of 1995. The reduction in operating income is attributed to lower gross
margins, higher depreciation and amortization expense partially offset by lower
SG&A costs.
Interest Income and Expense
Net interest expense for the second quarter of 1996 was $3.1 million, an
increase of $.7 million or 29.2% from net interest expense of $2.4 million for
the second quarter of 1995. Average debt outstanding during the second quarter
of 1995 was $77.4 million at a weighted average interest rate of 11%. Average
debt outstanding during the second quarter of 1996 was $124.9 million at a
weighted average interest rate of 11.8%. The increase of $1.4 million in
interest expense is primarily due to higher average debt outstanding which is
primarily due to the increase in inventory in connection with the finished goods
inventory for the FMS Customer. (see "Liquidity and Capital Resources").
Interest income increased by $.7 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
Income tax expense was recorded at the statutory rate adjusted for
permanent differences primarily resulting from the amortization of goodwill.
Income tax expense was $.4 million for the second quarter of 1996, a decrease of
$1.0 million from income tax expense of $1.4 million for the second quarter of
1995. The decrease in income tax expense was due to the reduction of taxable
income.
Net Income (Loss)
As discussed above, the net loss in the second quarter of 1996 was
primarily due to lower operating income due to lower gross profit margin,
increased depreciation and amortization expense and higher net interest expense.
These were partially offset by lower selling, general and administrative
expenses and income taxes.
10
<PAGE>
SIX MONTHS ENDED APRIL 30, 1996 ("FIRST SIX MONTHS OF 1996") COMPARED TO SIX
MONTHS ENDED APRIL 30, 1995 ("FIRST SIX MONTHS OF 1995")
AM GENERAL CORPORATION AND SUBSIDIARY
TABLE OF NET REVENUES AND HUMMER UNIT SALES INFORMATION
(IN MILLIONS, EXCEPT UNIT INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
April 30,
----------------- %
1995 1996 Change Change
------- ------ ------ ------
<S> <C> <C> <C> <C>
Net sales
HUMMERs
US Military $ 112.4 93.2 (19.2) (17.1)%
International (1) 52.7 50.1 (2.6) (4.9)%
Commercial 28.4 35.5 7.1 25.2%
------- ------ ------
Total HUMMERs 193.5 178.8 (14.7) (7.6)%
ESP 7.7 37.0 29.3 380.5%
SPLO 25.0 17.0 (8.0) (32.0)%
STS 12.0 10.8 (1.2) (9.7)%
------- ------ ------
Total net sales $ 238.2 243.6 5.4 2.3%
======= ====== ======
HUMMER Unit Sales
US Military 3,452 1,708 (1,744) (50.5)%
International (1) 1,359 741 (618) (45.5)%
Commercial 550 658 108 19.6%
------- ------ ------
Total HUMMERs 5,361 3,107 (2,254) (42.0)%
======= ====== ======
HUMMERs Average Unit Selling Prices
US Military $32,561 54,549 21,988 67.5%
International (1) 38,779 67,660 28,881 74.5%
Commercial 51,636 54,020 2,384 4.6%
------- ------ ------
All HUMMERs $36,094 57,564 21,470 59.5%
======= ====== ======
</TABLE>
(1) Includes FMS and Direct International Sales
NET SALES
The increase in net sales was due primarily to the increase in ESP and
Commercial HUMMER sales which were partially offset by reductions in US military
and direct International HUMMER sales, SPLO sales and lower STS sales. The
increase in ESP sales is attributed to the increased level of production and
sales during the first six months of fiscal 1996 as compared to the first six
months of fiscal 1995 when the program was in a start up mode. The increase in
Commercial HUMMER sales is attributed to the Company's continued marketing
efforts and the development of its commercial dealer network and increased unit
prices which reflect additional options available in 1996 and selling price
increases. The reduction in US military sales is primarily attributed to the US
Military's present level of demand for HUMMER units.
11
<PAGE>
The increase in ESP net sales was partially offset by a decline in the SPLO
and STS sales. The significant reduction in SPLO sales was primarily
attributed to a large international delivery in the first six months of fiscal
1995 and the overall decline in HUMMER unit deliveries while the decline in STS
is primarily attributed to higher than normal sales during the first six months
of fiscal 1995.
AVERAGE HUMMER UNIT SELLING PRICES
Average Hummer unit selling prices for all HUMMERs increased 59.5% from the
first six months of 1995 primarily due to a significant increase in the average
selling price for US Military and international units. Average HUMMER unit
selling prices for the US Military increased 67.5% over the first six months of
1995 due primarily to higher negotiated selling prices for the R021 and X001
contracts. The higher average unit selling prices are attributed to higher
material costs for the A2 model along with higher fixed overhead costs due to
the reduction in unit production. Additionally, sales during the first six
months of 1996 included the higher priced ECV HUMMER variants. Average HUMMER
unit selling prices for international sales increased 74.5% 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
4.6% 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 the first six
months of 1996.
GROSS PROFIT
Gross profit was $31.8 million for the first six months of 1996, a decrease of
$3.4 million or 9.6% from gross profit of $35.2 million for the first six months
of 1995. The Company's gross profit margin declined from 14.8% in the first six
months of 1995 to 13.0% in the first six months of 1996. The decrease was
primarily due to the lower US military and international HUMMER sales attributed
to the reduction in HUMMER unit volume. Gross profit margins for US Military
and International HUMMER units are higher than those of Commercial and ESP
vehicles, and the first six months of 1996 sales included a lower proportion of
US Military and International sales in comparison to the first six months of
1995. Additionally, the gross profit margin on Commercial HUMMERs was lower in
1996 due to higher warranty costs and increased sales incentives.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $10.0 million for the first six
months of 1996, an increase of $1.9 million or 23.4% over depreciation and
amortization expense of $8.1 million for the first six months of 1995. The
increase was primarily due to new US Military tooling amortization for the ECV
HUMMERs and the new A2 series model in connection with the R021 and X001
contracts. By agreement with the US Army, the A2 tooling costs are being
amortized over the 1,201 HUMMERs on the R021 contract, and future A2 models will
not bear this cost.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative (SG&A) expense was $16.9 million for the
first six months of 1996, a decrease of $1.3 million or 7.1% from SG&A expense
of $18.2 million for the first six months of 1995. The reduction was primarily
due to lower engineering and travel expenses. The lower engineering expense
reflected the fact that certain engineering costs were recovered on an
international contract.
OPERATING INCOME
Operating income for the first six months of 1996 was $4.9 million, a decrease
of $4.0 million from operating income of $8.9 million for the first six months
of 1995. The reduction in operating income is attributed to lower gross margins
and higher depreciation and amortization expense which were partially offset by
lower SG&A costs.
INTEREST INCOME AND EXPENSE
Interest expense for the first six months of 1996 was $8.2 million, an
increase of $3.5 million or 74.4% from interest expense of $4.7 million for the
first six months of 1995. Average debt outstanding during the first six months
of fiscal 1995 was $72.9 million at a weighted average interest rate of 11%.
Average debt outstanding during the first six months of fiscal 1996 was $127.8
million at a weighted average interest rate of 11.9%. The increase in average
debt outstanding is primarily due to the increase in inventory in connection
with the finished goods inventory for the FMS Customer and inventory held for an
extended time period before delivery to a direct international customer. (see
"Liquidity and Capital Resources"). Interest income increased by $1.1 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
Income tax expense was recorded at the statutory rate adjusted for permanent
differences primarily resulting from the amortization of goodwill. Income tax
expense was $.4 million for the first six months of 1996, a decrease of $2.2
million from income tax expense of $2.6 million for the first six months of
1995. The decrease in income tax expense was due to the reduction of taxable
income.
NET INCOME (LOSS)
As discussed above, the net loss in the first six months of 1996 was primarily
due to lower operating income due to lower gross profit margin, increased
depreciation and amortization expense and higher net interest expense. These
were partially offset by lower selling, general and administrative expense and
income tax expense.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities during the first six months of
fiscal 1996 was $13.1 million compared to $27.4 million of cash used in
operating activities during the first six months of 1995. Cash provided from
operations in the first six months of fiscal 1996 was primarily due to non cash
charges to operations including depreciation, amortization and other post
employment benefits.
Finished inventories fell slightly during the first six months primarily due
to reductions in International and ESP units offset by increases in US Military
and Commercial HUMMER units. At the end of the first six months, the Company's
finished inventory continued to include the 768 HUMMERs built for the FMS
Customer which management expects will be sold by the end of the third quarter
of fiscal 1996. The Company's inventory of finished Commercial HUMMERs increased
significantly primarily due to the production of 96 units for two Commercial
distributors. Management expects both orders to be delivered by June of fiscal
1996. ESP finished goods inventory decreased slightly during the first six
months due to a slightly higher acceptance and delivery rate. Work-in-process
inventories decreased by $2.3 million primarily due to management initiatives
with respect to reducing inventory.
The accounts receivable balance at April 30, 1996 represents a normal level.
Unusually high sales in the latter part of October 1995 resulted in higher than
normal receivables at October 31, 1995.
Capital expenditures during the six months of 1996 were $2.6 million, compared
to capital expenditures of $2.5 million for the same period of 1995. The 1996
expenditures were primarily for tooling required for the production of
Commercial and military HUMMERs and the ESP program. The Company does not
anticipate any significant increase in capital expenditures.
The Company's primary source of liquidity for operations during the first six
months of 1996 was net cash provided from operating activities. During fiscal
1995 the Company increased its borrowings under the revolving credit facility
primarily to finance the increase in inventories. During the first six months
of fiscal 1996, the Company's net cash from operations was sufficient to provide
operating cash flow, fund capital expenditures and reduce the revolving credit
facility by a total of $5.3 million. Despite this improvement in liquidity,
inventory levels remain significantly higher than those considered acceptable.
When the excess finished goods inventory discussed above is sold, management
estimates a favorable impact on liquidity in the amount of approximately $41.0
million. At April 30, 1996 borrowings under the revolving credit facility
were $46.5 million.
The high level of inventory discussed above will require the Company to
continue to borrow up to the maximum amounts available under the Revolving
Credit Facility until the inventory described above is sold.
14
<PAGE>
The Company expects to continue HUMMER production at the rate of twenty-five
units per day, with an annual average of ten units per day for the US Army and
its FMS customers under contract X001, eight and one half units per day for
direct international customers and six and one half units per day for Commercial
customers. During the first six months of fiscal year 1996, the Company
produced an average of 18 HUMMERs per day for the US Army and FMS customers
(13, 2 and 3 units per day, respectively, under the X001, R021 and C0998
contracts) and 7 commercial HUMMERs per day. Only 13 HUMMERs were produced for
direct international military customers during the first six months of 1996.
The Company's ability to maintain the current production level for the balance
of the fiscal year is dependent upon obtaining new releases for additional units
under the X001 contract and new direct International and Commercial HUMMER
orders. A reduction of the production rate would increase unit costs, reduce
sales and earnings and negatively impact cash flow.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
DJ-5 LITIGATION
- - ---------------
Reference is made to Item 1 of the Company's report on Form 10-Q for the three
months ended January 31, 1996 reporting the institution by the Company of 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 claiming damages as
a result of vehicular accidents allegedly involving DJ-5 postal delivery
vehicles. As stated in such report the Company has never manufactured or sold
DJ-5 vehicles or any parts therefore, and the agreement, approved by the
Bankruptcy Court, pursuant to which the Company acquired certain assets and
assumed certain liabilities in April 1992 expressly provided that the Company
acquired no DJ-5 assets and assumed no DJ-5 liabilities.
On May 1, 1996 the Bankruptcy Court entered a preliminary injunction
preliminarily enjoining the prosecution of such actions against the Company.
The Company's action for a permanent injunction continues.
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 3,200 vehicles and management estimates the cost of this
recall at $250,000. Management does not expect that the recall will have a
material adverse effect on future commercial HUMMER sales.
PENDING GOVERNMENT INVESTIGATION OF ALLEGED PRODUCT NON-CONFORMITY
- - ------------------------------------------------------------------
In November 1990, the Government informed the Company's predecessor that the
Government was conducting an investigation of Electro Transfer System, Inc.
(ETS), of South Bend, Indiana, a supplier of electrical wiring components for
the Hummer. In November 1991, the 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 Government that the Company is
the subject of an investigation seeking to determine whether the predecessor's
employees were aware of the subcontractor's nonconformance. No further details
were supplied. The Company is cooperating fully with the Government
investigation and believes that the discrepancy had no material adverse effect
on the operation or serviceability of the vehicles delivered to the Government.
16
<PAGE>
ITEM 5. OTHER INFORMATION
In May, 1996 the Company and the United Auto Workers Local #5 signed a new
labor agreement which superseded the 1993 labor agreement covering the Company's
ESP operations. The new agreement also includes provisions which impact certain
aspects of the Company's HUMMER operations. Although the Company expects that
the new agreement will reduce its future operating costs, the agreement includes
early retirement incentives which , if accepted by all of the eligible
employees, could require the recognition of additional pension and other post-
retirement benefit liabilities of up to $6.7 million. The eligible employees
have until November 30, 1996 to exercise their retirement options. Through the
date of this report, 7% of the eligible employees had accepted the retirement
incentives.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K. Registrant did not file any reports on Form 8-K
during the quarter for which this report is filed.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 14, 1996 AM GENERAL CORPORATION
Registrant
/s/ Paul R. Schuchman
By ___________________________
Paul R. Schuchman
Executive Vice President
and Chief Financial Officer
Duly authorized officer and
principal financial officer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> OCT-31-1995 OCT-31-1996
<PERIOD-START> NOV-01-1994 NOV-01-1995
<PERIOD-END> OCT-31-1995 OCT-31-1996
<CASH> 1,140 6,389
<SECURITIES> 0 0
<RECEIVABLES> 53,274 44,512
<ALLOWANCES> (586) (350)
<INVENTORY> 123,359 121,036
<CURRENT-ASSETS> 183,536 176,900
<PP&E> 99,767 102,267
<DEPRECIATION> 37,005 44,170
<TOTAL-ASSETS> 372,682 360,185
<CURRENT-LIABILITIES> 85,445 77,699
<BONDS> 75,126 75,155
<COMMON> 0 0
0 0
5,000 5,000
<OTHER-SE> (1,433) (3,367)
<TOTAL-LIABILITY-AND-EQUITY> 372,682 360,185
<SALES> 238,200 243,670
<TOTAL-REVENUES> 238,200 243,670
<CGS> 202,995 211,938
<TOTAL-COSTS> 202,995 211,938
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,715 8,179
<INCOME-PRETAX> 4,858 (1,554)
<INCOME-TAX> 2,606 380
<INCOME-CONTINUING> 2,252 (1,934)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 2,965 0
<CHANGES> 0 0
<NET-INCOME> 5,217 (1,934)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
