<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 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)
---------------------
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 Form 10-K or any amendment to
Form 10-K. X
---
The aggregate market value of the voting stock held by non-affiliates of the
registrant is $0. 1,000 shares of the registrant's common stock, par value $.01
per share, is outstanding as of September 15, 1997.
Documents Incorporated by reference: None.
1
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AM General Corporation
Form 10-Q
Quarter Ended July 31, 1997
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS. 8
Three Months Ended July 31, 1997 ("third quarter of 1997") compared to
Three Months Ended July 31, 1996 ("third quarter of 1996") 10
Nine Months Ended July 31, 1997 ("first nine months of 1997") compared to
Nine Months Ended July 31, 1996 ("first nine months of 1996") 13
Liquidity and Capital Resources 16
Forward-Looking Statements 18
PART II - OTHER INFORMATION 18
ITEM 1. LEGAL PROCEEDINGS 18
AGE DISCRIMINATION MATTER
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AM General Corporation and Subsidiary
Consolidated Balance Sheets
(Dollar amounts in thousands, except share information)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
July 31, October 31,
Assets 1997 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
(unaudited)
Current assets:
Cash $ 2,694 5,867
Accounts receivable, net 41,869 57,126
Inventories 82,211 121,710
Prepaid expenses 4,588 1,675
Deferred income taxes 5,946 3,455
- ------------------------------------------------------------------------------------------------------------------
Total current assets 137,308 189,833
Income taxes receivable 1,412 4,023
Property, plant, and equipment, net 46,228 56,463
Deferred income taxes 24,784 20,488
Goodwill, net 84,656 87,871
Other assets 12,838 14,504
- ------------------------------------------------------------------------------------------------------------------
$ 307,226 373,182
- ------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholder's Deficit
- ------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 21,852 59,212
Accrued expenses 51,694 42,670
Income taxes payable 578 44
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 74,124 101,926
Long-term debt, excluding current maturities 90,244 126,865
Postretirement benefits other than pensions, noncurrent portion 154,104 150,134
Other liabilities, excluding current maturities 13,931 10,219
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 332,403 389,144
- ------------------------------------------------------------------------------------------------------------------
Stockholder's deficit:
8% cumulative preferred stock, $1,000 par value. Authorized 10,000
shares; issued and outstanding 5,000 shares 5,000 5,000
Common stock, $.01 par value. Authorized, issued and outstanding 900 shares - -
Paid-in capital 1,000 1,000
Accumulated deficit (31,177) (21,962)
- ------------------------------------------------------------------------------------------------------------------
Total stockholder's deficit (25,177) (15,962)
Commitments and contingencies
- ------------------------------------------------------------------------------------------------------------------
$ 307,226 373,182
- ------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
</TABLE>
3
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(Dollar amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
--------------------- ---------------------
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $94,215 95,262 $366,005 338,932
- -----------------------------------------------------------------------------------------------------------
Cost and expenses:
Cost of sales 86,750 91,295 328,953 303,213
Depreciation and amortization 3,122 4,100 9,934 14,042
Selling, general, and administrative 6,309 9,767 20,697 26,704
expenses
Restructuring charges 54 - 9,104 -
- -----------------------------------------------------------------------------------------------------------
Loss before interest and income taxes (2,020) (9,900) (2,683) (5,027)
Interest income (57) (785) (165) (2,536)
Interest expense 2,989 4,111 10,292 12,290
- -----------------------------------------------------------------------------------------------------------
Loss before income taxes (4,952) (13,226) (12,810) (14,781)
Income tax benefit 1,344 4,476 3,595 4,097
- -----------------------------------------------------------------------------------------------------------
Net loss $(3,608) (8,750) $ (9,215) (10,684)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Nine Months Ended
July 31,
-----------------------------------
1997 1996
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (9,215) (10,684)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Restructuring charges 9,104 -
less Restructuring payments (1,270) -
Depreciation and amortization of plant and equipment 5,931 10,048
Other amortization 4,779 4,782
Decrease in allowance for doubtful accounts (48) (236)
Increase (decrease) in inventory reserve 1,733 (174)
Deferred income taxes (6,787) (4,280)
Amortization of bond discount 43 43
Noncash other postretirement cost 3,970 3,355
(Gain)/Loss on sale of equipment (5) 31
Change in assets and liabilities:
Accounts receivable 15,305 15,880
Inventories 37,945 5,469
Prepaid expenses (249) (940)
Other assets 102 (331)
Accounts payable (37,360) (21,371)
Accrued expenses 5,844 8,559
Income taxes 3,145 (291)
Other liabilities 2,312 (529)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 35,279 9,331
- -----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of equipment 17 4
Capital expenditures (1,805) (3,538)
- -----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,788) (3,534)
- -----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net repayments under line-of-credit agreement (36,664) (4,117)
Principal payments on senior note - -
- -----------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (36,664) (4,117)
- -----------------------------------------------------------------------------------------------------------------
Net change in cash (3,173) 1,680
Cash and cash equivalents at beginning of period 5,867 1,140
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,694 2,820
- -----------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash items
Interest paid $ 11,871 8,995
Taxes paid 180 473
- -----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
</TABLE>
5
<PAGE>
AM General Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statement presentation.
In the opinion of management, all adjustments, including normal recurring
accruals and the restructuring accrual discussed in footnote 4, considered
necessary for a fair presentation have been included. Operating results for the
nine month period ended July 31, 1997 are not necessarily indicative of the
results that may be expected for the year ending October 31, 1997.
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, 1996.
Note 2. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
July 31,
1997 October 31,
(Unaudited) 1996
------------------ ----------------
<S> <C> <C>
Finished Goods $ 34,881 73,128
Service Parts 17,671 14,784
Extended Service Program
Production costs of goods currently
in process 4,440 3,748
Raw Materials, supplies and work in progress 30,654 33,752
------------------ ----------------
87,646 125,412
Less allowance for inventory obsolescence (5,435) (3,702)
------------------ ----------------
Total $ 82,211 121,710
================== ================
</TABLE>
Note 3. Reclassifications
Certain reclassifications have been made to previously reported cost
and expenses to conform to the presentation contained herein.
Note 4. Restructuring Charge
In anticipation of continued softness in the demand for Military HUMVEEs,
primarily International, the Company implemented a plan to improve its operating
results and financial liquidity. The plan consists of 1) a reduction in the
HUMVEE/HUMMER production rate, 2) a reduction in corporate overhead costs, and
3) a cost review of Indianapolis Stamping Plant parts based on reduced
HUMVEE/HUMMER volumes.
6
<PAGE>
Effective February 3, 1997, the HUMVEE/HUMMER production line rate was reduced
from 25 to 16.5 units per day.
During the first nine months of 1997, the Company recorded a $1.6 million
restructuring charge to recognize the costs of a salary and hourly workforce
reduction of 143 employees. Through the end of the first nine months of 1997,
$1.0 million has been charged against this reserve. The Company anticipates that
most of these costs will be paid by the end of fiscal 1997.
In March of 1997, the Company made a formal announcement of its decision to
close the Indianapolis Stamping Plant. This plant supplies parts for the
HUMVEE/HUMMER manufacturing facility and to a lesser degree, the Extended
Service Program truck remanufacturing facility. The exit plan includes the
winding up of production activities by the end of the fiscal year, the
outsourcing of parts to existing stamping sources, a workforce reduction, and
the disposal of the facility. The Company recorded a $7.5 million restructuring
charge in the second quarter to recognize these costs. The components of this
charge include: $3.4 million for the plant disposal; $3.0 million for personnel
reductions; and $1.1 million for plant shutdown and other charges. The charge
for personnel reductions includes the recognition of $1.4 million in additional
pension liability and a $1.6 million charge for severance benefits. Not recorded
at this time are certain curtailment gains in connection with deferred benefit
costs. These gains will be recorded as plant personnel are released. Charges
against this reserve have been $.3 million through the first nine months of
1997.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
AM General is the largest supplier of light tactical wheeled vehicles for the
Department of Defense ("DoD"). The Company is the original designer and sole
manufacturer of the High Mobility Multipurpose Wheeled Vehicle ("HUMVEE"), which
it sells to the US and foreign military services. The Company also sells HUMVEEs
to foreign military services ("FMS") through the DoD's FMS program and on a
direct sale basis. In 1993, the Company began selling a modified version of the
HUMVEE ("HUMMER") to industrial and retail users through its commercial dealer
network. In 1994, the Company began remanufacturing 2.5 ton medium tactical
vehicles under the Army's Extended Service Program ("ESP")
RESTRUCTURING
In anticipation of continued softness in the demand for Military HUMVEEs,
primarily International, the Company designed and implemented a comprehensive
three phased plan to improve its operating results and financial liquidity. The
plan includes a reduction in the HUMVEE/HUMMER production rate, a significant
reduction in corporate overhead costs and a review of the impact on operating
costs at the Indianapolis Stamping Plant assuming the reduced vehicle production
rate. In connection with this plan, the Company recorded special charges of $1.4
million, $7.6 million and $.1 million during the first, second and third
quarters of 1997, respectively, for a total of $9.1 million. ("Restructuring
Charges").
Effective February 3, 1997, the HUMVEE/HUMMER line rate was reduced from 25 to
16.5 units per day with an average of 12.5 units per day for the US Military and
its FMS customers and 4 units per day for commercial customers.
The Company also implemented a comprehensive cost reduction plan of each of its
business lines. The objective of such plan is to significantly reduce the
Company's variable and fixed costs, including corporate overhead. Specifically,
the Company reduced its salaried and hourly workforce in January 1997 by 143
employees and anticipates further reductions to its hourly workforce over the
next several months. Additionally, certain operations and facilities will be
consolidated and eliminated. Included in the above mentioned Restructuring
Charge is $1.6 million in connection with this portion of the plan.
During the second quarter of 1997, the Company reached a decision to close its
Indianapolis Stamping Plant and outsource this product as part of the cost
reduction plan. In connection with this decision, the Company recorded as part
of the above mentioned Restructuring Charge, a charge of $7.5 million in the
second quarter of 1997. The Company's management anticipates that all production
activity at the plant will cease by the end of the fiscal year. In accordance
with generally accepted accounting principles, the Restructuring Charge was
recorded when the decision to close the plant had been finalized and
communicated. Total Restructuring Charges recorded in the first nine months of
fiscal 1997 was $9.1 million. Not recorded at this time are certain curtailment
gains in connection with deferred benefit costs. These gains will be recorded as
plant production activity winds down and plant personnel are released.
During the third quarter of 1997 the Company entered into a purchase agreement
with an auctioneer to sell for a guaranteed amount substantially all the
machinery and equipment at the Indianapolis facility. Under the terms of this
agreement, the Company received a deposit in July of 1997 and is to receive the
balance of the guaranteed amount five weeks prior to the auction date which is
planned for early December. The Company and the auctioneer will share in any
proceeds in excess of the guaranteed amount.
8
<PAGE>
HUMVEE/HUMMERs
From November 1, 1993 through May 7, 1995, the Company's HUMVEE/HUMMER
production rate was approximately 47 units per day including 35 units per day
for the US Military and its FMS customers. On May 8, 1995 the Company reduced
its production rate to 25 units per day due to lower US and international
military demand. On February 3, 1997, the Company reduced its production rate
from 25 to 16.5 units per day due to continued lower military demand.
From 1990 through January 31, 1997, AM General sold 49,797 HUMVEEs under its A1
Series program with the DoD. With the sale of 601 vehicles to the FMS customer
in the first quarter of 1997, all units produced under the A-1 Series program
have been sold.
The Company began producing the latest generation of military HUMVEEs, the A2
series, in August 1995 under a contract for 1,201 units known as the R021
Contract. On December 23, 1995, the Company entered into a new multi-year annual
requirements contract for A2 HUMVEEs known as the X001 Contract which provides a
mechanism for the US Army to procure at least 2,350 HUMVEEs annually for the
next five years. The contract, however, does not require the Army to purchase
the vehicles as funding for each of the respective years must be appropriated
via the annual Defense Budget. Through July 31, 1997, a total of 5,746 vehicles
have been ordered on the X001 Contract. Management anticipates that additional
vehicles scheduled to be ordered in the fourth quarter will be on contract and
delivered by the end of the fiscal year. The pending FY98 Defense Bill currently
contains the necessary funding for the third year of this contract.
REMANUFACTURING
Extended Service Program ("ESP")
In September 1993, the Company was awarded the ESP Contract, the first multiyear
contract to teardown and remanufacture aging 2-1/2-ton military trucks under the
ESP program. Approximately three old trucks are completely disassembled-certain
parts are reworked, others are scrapped and specific new parts are added-for
every two remanufactured vehicles under this contract. As of July 31, 1997 a
total of 2,909 trucks have been remanufactured and re-delivered to the US
government.
The Company accounts for the ESP Contract on the Estimate at Completion ("EAC")
basis of accounting which recognizes estimated profits in the same percentage as
revenues are recognized over the term of the contract (the "Booking Rate").
Estimated contract costs and profits are reviewed periodically and adjustments
recorded as necessary. During the third quarter of fiscal 1996, the Company
lowered its Booking Rate in accordance with this periodic review of contract
costs, the result of which reduced the amount of gross profit previously
recorded for the ESP Contract. The Company has performed a review of the Booking
Rate as of the third quarter of fiscal 1997. In accordance with this review, the
Company made no adjustments to the Booking Rate.
Medium Tactical Truck Remanufacture ("MTTR")
On November 10, 1996, the Company was awarded $6.9 million on a Phase I contract
by the DoD to design, produce and test 10 prototype vehicles for the US Army and
Marines. A competitor was awarded a similar contract. At the conclusion of the
Phase I competition, both competitors will be asked to quote on a Phase II
contract for the production and delivery of approximately 13,000 5-ton and 7 ton
vehicles, a program valued at approximately $1.8 billion. The Company delivered
its prototypes for test in August 1997. The current DoD plan targets the award
of the Phase II production contract in late 1998.
SPARE PARTS LOGISTICS OPERATION ("SPLO") and SYSTEMS TECHNICAL SUPPORT ("STS")
The Company's SPLO operation sells after-market parts and support services for
vehicles manufactured by the Company. Its STS operation performs engineering
services related to the Company's military trucks and certain other military
vehicles.
9
<PAGE>
Three Months Ended July 31, 1997 ("third quarter of 1997") compared to
Three Months Ended July 31, 1996 ("third quarter of 1996")
<TABLE>
<CAPTION>
AM General Corporation and Subsidiary
TABLE OF NET REVENUES AND HUMVEE/HUMMER
UNIT SALES INFORMATION
(in millions, except unit information)
(unaudited)
Three Months Ended
July 31,
----------------------------- %
1997 1996 Change Change
------------ ------------ ----------------------------------
<S> <C> <C> <C> <C>
Net sales
HUMVEE/HUMMERs
US Military $ 33.1 40.4 (7.3) (18.1)%
International (1) 4.1 6.7 (2.6) (38.8)%
Commercial 17.9 18.4 (0.5) (2.7)%
------------ ------------ ----------------
Total HUMVEE/HUMMERs 55.1 65.5 (10.4) (15.9)%
ESP 17.7 15.5 2.2 14.4%
SPLO 11.5 9.6 1.9 19.8%
STS 10.0 4.7 5.3 113.9%
------------ ------------ ----------------
Total net sales $ 94.3 95.3 (1.0) (1.0)%
============ ============ ================ =============
HUMVEE/HUMMER Unit Sales
US Military 549 807 (258) (32.0)%
International (1) 83 105 (22) (21.0)%
Commercial 280 340 (60) (17.6)%
---------------- -------------
Total HUMVEE/HUMMERs 912 1,252 (340) (27.2)%
============ ============ ================ =============
HUMVEE/HUMMER Average Unit
Selling Prices
US Military $ 60,262 50,057 10,205 20.4%
International (1) 49,349 63,705 (14,356) (22.6)%
Commercial 63,757 54,218 9,539 17.6%
Total 60,417 52,331 8,086 15.5%
</TABLE>
(1) Includes FMS and Direct International Sales
Net Sales
The decrease in net sales was due primarily to lower vehicle sales of US
Military and International HUMVEEs and Commercial HUMMERs, offset partially by
higher STS, ESP and SPLO sales. The decrease in US Military HUMVEE sales is
primarily attributed to lower unit sales partially offset by higher unit selling
price of Military HUMVEEs during the third quarter of 1997 compared with the
unit selling
10
<PAGE>
price of HUMVEEs in the third quarter of 1996. The increase in the unit selling
price of Military HUMVEEs is attributed to a higher concentration of the more
expensive A2 HUMVEEs sold in the third quarter of 1997 under the Company's X001
contract. The decrease in International Military HUMVEE sales is primarily
attributed to a general decline in International Military HUMVEE orders.
The decrease in Commercial HUMMER sales is attributed to a decline in HUMMER
unit sales partially offset by an increase in unit selling prices due to more
expensive vehicle options and a general price increase.
The increase in STS sales is primarily attributed to the delivery of the ESP
Technical Data Package and the addition of the MTTR contract. The increase in
ESP sales is primarily due to an increase in the units delivered. The increase
in SPLO sales is primarily attributed to timing differences of US military
orders.
Average HUMVEE/HUMMER Unit Selling Prices
Average unit selling prices for all models increased by 15.5% from the third
quarter of 1996 primarily due to higher unit selling prices for US Military
HUMVEEs and Commercial HUMMERs. Average unit selling prices for the US Military
increased 20.4% over the third quarter of 1996 due primarily to a higher ratio
of more expensive models and higher selling prices due to an annual economic
price adjustment. Commercial HUMMER average unit selling prices increased 17.6%
primarily due to price increases on the 1997 model and a reduction of sales
incentives. Average unit selling prices for International HUMVEEs declined due
to more expensive models delivered in the third quarter of 1996.
Gross Profit
Gross profit was $7.5 million for the third quarter of 1997, an increase of $3.5
million or 87.5% from gross profit of $4.0 million for the third quarter of
1996. The Company's gross profit margin increased from 4.2% in the third quarter
of 1996 to 7.9% in the third quarter of 1997. The increase in gross profit is
primarily due to the prior year third quarter EAC adjustment and improved
Commercial HUMMER gross profit primarily due to higher unit selling prices and
lower manufacturing costs. This was partially offset by lower US Military HUMVEE
gross profit due to the sale of fewer units at lower gross profits primarily due
to higher unabsorbed factory overhead in the third quarter of 1997 due to the
change in production from 25 units to 16.5 units per day.
Depreciation and Amortization
Depreciation and amortization expense was $3.1 million for the third quarter of
1997, a decrease of $1.0 million or 24.4% from depreciation and amortization
expense of $4.1 million for the third quarter of 1996. The decrease was
primarily due to lower amortization of US Military A2 tooling and the reduction
in unit production from 25 to 16.5 units per day effective on February 3, 1997.
Selling, General and Administrative
Selling, general and administrative (SG&A) expense was $6.3 million for the
third quarter of 1997, a decrease of $3.5 million or 35.8% from SG&A expense of
$9.8 million for the third quarter of 1996. The decrease is primarily attributed
to the Company's cost reduction plan implemented at the end of the first quarter
of 1997. (See "Restructuring" and Note 4 of "Notes to Consolidated Financial
Statements")
Restructuring Charge
During the third quarter of 1997, the Company recorded additional charges of $.1
million in connection with its plan to reduce corporate overhead costs as part
of its overall restructuring plan (see "Restructuring" and Note 4 of "Notes to
Consolidated Financial Statements"). Additionally, the Company continues to
implement various aspects of its plan to close the Indianapolis Stamping Plant
by the end of the fiscal year. There were no comparable costs recorded by the
Company during the third quarter of 1996.
Operating Loss
The Company reported an operating loss of $2.0 million for the third quarter of
1997, an improvement in operating results of $7.9 million from an operating loss
of $9.9 million for the third quarter of 1996. The improvement is primarily
attributed to the special charge in connection with the change in the Booking
11
<PAGE>
Rate for the ESP contract recorded in the third quarter of 1996 and lower SG&A
and amortization expense during the third quarter of 1997.
Interest Income and Expense
Interest expense for the third quarter of 1997 was $3.0 million, a decrease of
$1.1 million or 26.9% from interest expense of $4.1 million for the third
quarter of 1996. Average debt outstanding during the third quarter of fiscal
1997 was $86.7 million at a weighted average interest rate of 12.6%. Average
debt outstanding during the third quarter of fiscal 1996 was $129.1 million at a
weighted average interest rate of 11.7%.
Interest income decreased by $.7 million in the third quarter of 1997 primarily
due to higher interest income in the third quarter of 1996 in connection with
the acceptance by the DoD and the FMS Customer of interest expense associated
with the delay in the sale of certain 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 $1.3 million for the third quarter of 1997, a decrease of $3.1
million from income tax benefit of $4.4 million for the third quarter of 1996.
The decrease in income tax benefit was due to the increase of taxable income.
Net Loss
As discussed above, the decrease in net loss was primarily due to the special
charge in the third quarter of 1996 in connection with the ESP Booking Rate,
lower SG&A and amortization expense, lower net interest expense partially offset
by lower income tax benefit.
12
<PAGE>
Nine Months Ended July 31, 1997 ("first nine months of 1997") compared to
Nine Months Ended July 31, 1996 ("first nine months of 1996")
AM General Corporation and Subsidiary
TABLE OF NET REVENUES AND HUMVEE/HUMMER
UNIT SALES INFORMATION
(in millions, except unit information)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
July 31,
----------------------------------- %
1997 1996 Change Change
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales
HUMVEE/HUMMER
US Military $ 141.0 133.6 7.4 5.6%
International (1) 52.1 56.8 (4.7) (8.3)%
Commercial 56.9 54.0 2.9 5.4%
--------------- -------------- ---------------
Total HUMVEE/HUMMERs 249.9 244.4 5.6 2.3%
ESP 55.5 52.5 3.0 5.8%
SPLO 35.4 26.6 8.8 33.1%
STS 25.2 15.5 9.7 62.6%
--------------- -------------- ---------------
Total net sales $ 366.0 338.9 27.1 8.0%
=============== ============== ===============
HUMVEE/HUMMER Unit Sales
US Military 2,329 2,515 (186) (7.4)%
International (1) 1,011 846 165 19.5%
Commercial 929 998 (69) (7.0)%
--------------- -------------- ---------------
Total HUMVEE/HUMMERs 4,269 4,359 (90) (2.1)%
=============== ============== ===============
HUMVEE/HUMMER Average Unit
Selling Prices
US Military $ 60,541 53,107 7,434 14.0%
International (1) 51,523 67,169 (15,646) (23.3)%
Commercial 61,200 54,087 7,113 13.2%
Total HUMVEE/HUMMERs 58,549 56,061 2,487 4.5%
</TABLE>
(1) Includes FMS and Direct International Sales
Net Sales
The increase in net sales was due primarily to higher US Military HUMVEE,
Commercial HUMMER, SPLO, STS and ESP sales offset partially by lower
International Military HUMVEE sales. The increase in US Military HUMVEE sales
is primarily attributed to the higher unit selling price during the first nine
months of 1997 compared with the unit selling price during the first nine months
of 1996. The increase in
13
<PAGE>
the unit selling price of Military HUMVEEs is attributed to a higher
concentration of the more expensive A2 models sold in the second and third
quarters of 1997 under the Company's X001 contract. The increase in Commercial
HUMMER sales is attributed to higher unit selling prices due to price increases
on the 1997 model, lower sales incentives and more expensive vehicle options.
The increase in SPLO sales is primarily attributed to timing differences in US
military orders. The increase in STS sales is primarily attributed to the
addition of the MTTR contract and the delivery of the ESP Technical Data
Package.
The decrease in International Military HUMVEE sales is primarily attributed to
the decline in overall International Military HUMVEE sales partially offset by
the sale of the 601 units for the FMS customer.
Average HUMVEE/HUMMER Unit Selling Prices
Average unit selling prices for all models increased by 4.5% from the first nine
months of 1996 primarily due to higher unit selling prices for US Military
HUMVEEs and Commercial HUMMERs offset by lower unit selling prices for
International HUMVEEs. Average unit selling prices for US Military HUMVEEs
increased 14.0% over the first nine months of 1996 due primarily to a higher
ratio of more expensive models and a recognition of appropriate pricing for
certain modifications for a particular model (the "Vehicle Pricing Adjustment").
This Vehicle Pricing Adjustment, recorded in the second quarter of 1997, related
to units delivered in the last quarter of fiscal 1996 ($.8 million) and in the
first quarter of fiscal 1997 ($1.3 million). Commercial HUMMER average unit
selling prices increased 13.2% primarily due to a price increase on the 1997
model, lower sales incentives, and a higher ratio of current versus prior model
year vehicle sales in the first nine months of 1997. Average unit selling prices
for International HUMVEEs decreased by 23.3% primarily due to a higher
concentration of lower priced A1 HUMVEEs sold to the FMS Customer during the
first nine months of 1997.
Gross Profit
Gross profit was $37.0 million for the first nine months of 1997, an increase of
$1.3 million or 3.7% from gross profit of $35.7 million for the first nine
months of 1996. The increase in gross profit is primarily due to the overall
increase in sales, the Vehicle Pricing Adjustment and higher gross profit in
connection with the sale of the 601 units to the FMS Customer partially offset
by lower absorption of HUMVEE/HUMMER plant costs due to the reduction in units
produced. The Company's gross profit rate declined from 10.5% in the first nine
months of 1996 to 10.1% in the first nine months of 1997 primarily due to an
increase in lower gross margin revenues.
Depreciation and Amortization
Depreciation and amortization expense was $9.9 million for the first nine months
of 1997, a decrease of $4.1 million or 29.3% over depreciation and amortization
expense of $14.0 million for the first nine months of 1996. The decrease was
primarily due to lower amortization of US Military tooling for the A2 HUMVEE
during the first nine months of 1997 and the reduction in unit production from
25 to 16.5 units per day which began at the beginning of the second quarter of
1997.
Selling, General and Administrative
Selling, general and administrative (SG&A) expense was $20.7 million for the
first nine months of 1997, a decrease of $6.0 million or 22.5% from SG&A expense
of $26.7 million for the first nine months of 1996. The decrease is primarily
attributed to the Company's cost reduction plan implemented at the end of the
first quarter of 1997. (See "Restructuring" and Note 4 of "Notes to Consolidated
Financial Statements").
Restructuring Charge
During the first nine months of 1997, the Company implemented certain aspects of
its restructuring plan (see "Restructuring" and Note 4 of "Notes to Consolidated
Financial Statements"). Specifically, the Company recorded a special charge of
$7.5 million in connection with its decision to close the Indianapolis Stamping
Plant and $1.6 million with respect to employee layoff
14
<PAGE>
costs in connection with its plan to reduce fixed and corporate overhead costs.
There were no comparable costs recorded by the Company during the first nine
months of 1996.
Operating Loss
The Company reported an operating loss of $2.7 million for the first nine months
of 1997, an improvement of $2.3 million from an operating loss of $5.0 million
for the first nine months of 1996. The improvement is primarily attributed to
higher gross profit and lower SG&A and amortization expense substantially offset
by the $9.1 million Restructuring charge.
Interest Income and Expense
Interest expense for the first nine months of 1997 was $10.3 million, a decrease
of $2.0 million or 16.3% from interest expense of $12.3 million for the first
nine months of 1996. Average debt outstanding during the first nine months of
1997 was $104.5 million at a weighted average interest rate of 12.5%. Average
debt outstanding during the first nine months of 1996 was $128.5 million at a
weighted average interest rate of 11.8%. The decrease in average debt
outstanding is primarily due to the reduction of the average revolving loan
balance by $23.0 million and the repurchase of $1.0 million of the Company's
12.875% Senior Notes in the fourth quarter of 1996.
Interest income decreased by $2.4 million in the first nine months of 1997
primarily due to higher interest income in the first nine months of 1996 in
connection with the acceptance by the DoD and the FMS Customer of interest
expense associated with the 768 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 $3.6 million for the first nine months of 1997, a
decrease of $.5 million from income tax benefit of $4.1 million for the first
nine months of 1996. The decrease in income tax benefit was due to the increase
in taxable income.
Net Loss
As discussed above, the decrease in net loss was primarily due to higher gross
profit, lower SG&A and amortization expense partially offset by the
Restructuring charges, higher net interest expense and lower income tax benefit.
15
<PAGE>
Liquidity and Capital Resources
The Company's liquidity requirements result from capital investments, working
capital requirements, postretirement health care and pension funding, interest
expense, and, to a lesser extent, principal payments on its indebtedness. The
Company has met these requirements in each fiscal year since its inception in
1992 with cash provided by operating activities and borrowings under its
Revolving Credit Facility.
Cash provided by operating activities was $35.3 million for the first nine
months of 1997 compared to $9.3 million for the first nine months of 1996. The
key factors affecting the change in cash flow from operating activities were
decreases in inventory partially offset by a reduction in accounts payable.
Other factors include non-cash charges to operating income including the
Restructuring Charges, depreciation, amortization and non-cash postretirement
expenses.
Accounts receivable levels at the end of the first nine months of 1997 were
$41.9 million, a reduction of $15.2 million or 26.7% from accounts receivable of
$57.1 million at the end of the prior fiscal year. The reduction in accounts
receivable is primarily due to the reduced level of sales in July due to the
plant shut down in comparison with the higher level of sales in October.
Inventory levels at the end of the first nine months of 1997 were $82.2 million,
a reduction of $39.5 million or 32.5% from inventory levels of $121.7 at the end
of the prior fiscal year. The improvement in inventory is largely attributed to
the reduction of $38.2 million of finished goods, primarily due to the sale of
601 HUMVEEs for the FMS Customer during the first quarter of 1997 and a
reduction of 371 units for the US Military and 85 Commercial HUMMER units.
During the first nine months of 1997, the Company spent $1.8 million on capital
expenditures primarily for tooling for vehicle production, as compared to $3.5
million during the first nine months of 1996. The Company expects total capital
expenditures in fiscal 1997 of approximately $4.9 million to be funded from
operating cash flow and availability under the Revolving Credit Facility.
At the outset of fiscal 1997, the Company designed a comprehensive three phased
plan to improve its operating results and financial liquidity. The plan includes
a reduction in the HUMVEE/HUMMER production rate, a significant reduction in
corporate overhead costs and a review of the impact on operating costs at the
Indianapolis Stamping Plant assuming the reduced production rate (see
"Restructuring" and Note 4 of "Notes to Consolidated Financial Statements").
Effective February 3, 1997, the HUMVEE/HUMMER line rate was reduced from 25 to
16.5 units per day with an average of 12.5 units per day for the US Military and
its FMS customers and 4 units per day for commercial customers.
The Company also implemented a comprehensive cost reduction plan of each of its
business lines. The objective of such plan is to significantly reduce the
Company's variable and fixed costs, including corporate overhead. Specifically,
the Company reduced its salaried and hourly workforce in January 1997 by 143
employees and anticipates further reductions to its hourly workforce over the
next several months. Additionally, during the third quarter, the Company closed
its offices in Arlington, Virginia and continues to review opportunities to
consolidate or eliminate other facilities. During the first nine months of 1997,
the Company recorded special charges of $1.6 million in connection with this
plan.
Upon completion of its review of operating costs affecting the Indianapolis
Stamping Plant, the Company reached a decision to close the plant and outsource
the parts to existing stamping sources. On March 7, the Company announced to
local union officials and plant personnel its intention to close the
Indianapolis Stamping Plant by the end of the fiscal year. In accordance with
this decision, the Company recorded a special charge of $7.5 million during the
second quarter of 1997.
16
<PAGE>
Management anticipates that cash flow from operations as impacted by the reduced
HUMVEE/HUMMER line rate, cost savings from the lower overhead structure, the
future cost savings associated with outsourcing the Indianapolis Plant stampings
as well as the availability under its Revolving Credit Facility will be
sufficient to finance the Company's liquidity needs for the foreseeable future.
The Company's Revolving Credit Facility has a maximum borrowing limit of $60
million, is secured by eligible inventories and receivables, as defined therein,
and expires on October 31, 1999. As of July 31, 1997, the Company had borrowings
of $16.0 million outstanding and approximately $25.5 million of excess
availability under the Revolving Credit Facility. During the third quarter,
the revolving loan balance increased from $1.9 million at the end of the second
quarter of 1997 to $16.0 million at the end of the third quarter of 1997. The
increase of $14.1 million is primarily due to a reduction of accounts payable
which is primarily due to lower liabilities in connection with the annual plant
shut down in July and a higher level of uncleared checks at the end of the
second quarter than there were at the end of the third quarter. It is the
Company's practice to record uncleared checks as accounts payable.
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, which will be subject to financial, economic,
political, competitive and other factors affecting the Company, many of which
are beyond its control.
Forward-Looking Statements
This report includes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, which involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions; funding
for government HUMVEE and ESP orders; volume of international and commercial
orders for HUMVEE/HUMMERs; the outcome of the MTTR competition; the outcome of
pending litigation; the loss of any significant customers; the loss of any major
supplier; and the availability of qualified personnel.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
AGE DISCRIMINATION MATTER
On October 23, 1996, a jury in the United States District Court for
the Northern District of Indiana entered a jury verdict for plaintiff Wilson
and against AM General in the amount of $238,902 in Wilson's age discrimination
case. The court, on August 15, 1997, denied AM General's post-trial motions to
vacate the judgment, and in addition, granted plaintiff's post-trial motions
awarding him front pay in the amount of $160,194, prejudgment interest of
$13,604, and attorneys' fees and costs in the amount of $56,890. On August 25,
1997, the court entered final judgment against AM General in the total amount of
$469,590. On September 11, 1997, AM General filed a bond with the Court in the
amount of $550,000 to stay execution of the judgment. AM General intends to file
a notice of appeal to ask the United States Court of Appeals for the Seventh
Circuit to reverse the entry of judgment. The appeal is expected to take
approximately a year to complete.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
27 Financial Data Schedule
(b) Reports on Form 8-K. Registrant did not file any reports on Form 8-K
during the quarter for which this report is filed.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: September 15, 1997 AM GENERAL CORPORATION
Registrant
By /s/ Paul J. Cafiero
----------------------
Paul J. Cafiero
Vice President and
Chief Financial Officer
Duly authorized officer and
principal financial officer
20
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<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> OCT-31-1997 OCT-31-1996
<PERIOD-START> NOV-01-1996 NOV-01-1995
<PERIOD-END> JUL-31-1997 JUL-31-1996
<CASH> 2,694 2,820
<SECURITIES> 0 0
<RECEIVABLES> 42,219 37,394
<ALLOWANCES> (350) (350)
<INVENTORY> 82,211 117,982
<CURRENT-ASSETS> 137,308 166,260
<PP&E> 96,630 103,563
<DEPRECIATION> (50,402) (47,264)
<TOTAL-ASSETS> 307,226 347,939
<CURRENT-LIABILITIES> 74,124 72,635
<BONDS> 74,235 74,179
0 0
5,000 5,000
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<TOTAL-LIABILITY-AND-EQUITY> (307,226) 347,939
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<TOTAL-REVENUES> 366,005 338,932
<CGS> 328,953 303,213
<TOTAL-COSTS> 368,688 343,959
<OTHER-EXPENSES> 0 0
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<INTEREST-EXPENSE> 10,292 12,290
<INCOME-PRETAX> (12,810) (14,781)
<INCOME-TAX> (3,595) (4,097)
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<DISCONTINUED> 0 0
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<NET-INCOME> (9,215) (10,689)
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