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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, 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)
--------------------------
DELAWARE 35-1852615
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or 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: 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. 1,000 shares of the registrant's common stock, par
value $.01 per share, is outstanding as of January 29, 1997.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
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TABLE OF CONTENTS
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PART I 3
ITEM 1. BUSINESS 3
ITEM 2. PROPERTIES 9
ITEM 3. LEGAL PROCEEDINGS 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 12
PART II 13
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. 13
ITEM 6. SELECTED FINANCIAL DATA. 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 23
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE. 52
PART III 53
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. 53
ITEM 11. EXECUTIVE COMPENSATION. 54
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. 56
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 56
PART IV 58
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K 58
SIGNATURES 61
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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. Since its inception in 1984, the Company has delivered 120,820
HUMMERs in a variety of configurations to the DoD for use by the US Armed
Forces, 20,513 HUMMERs to the military services of 31 foreign countries, and
4,089 Commercial HUMMERs. In fiscal 1996, the Company sold 5,974 HUMMERs. In
addition to HUMMERs, 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 operations: (i) US and
Foreign Military HUMMERs, (ii) Commercial HUMMERs, (iii) Remanufacturing, (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 $19.6 million net loss for fiscal 1996. The loss included
a special charge during the third quarter associated with the Company's Estimate
at Completion ("EAC") for its Extended Service Program ("ESP" program) (the
"EAC Adjustment") as part of its remanufacturing program, a special charge for
costs in connection with certain early retirement benefits and lower gross
margins on the Commercial HUMMER due to higher sales incentives and an increased
rate of accruing for warranty costs. (see MD&A.)
The Company is presently implementing a comprehensive cost reduction plan to
significantly reduce the Company's variable and fixed costs, including corporate
overhead. Specifically, in February 1997, the Company will reduce its HUMMER
production rate from 25 to 16.5 units per day to better match unit production
with sales. Moreover, the Company is reducing its salaried workforce by
approximately 100 employees and its hourly workforce by 183 employees.
Additionally, certain operations and facilities will be consolidated and
eliminated, among which could include the Company's Indianapolis Stamping Plant.
Management anticipates such cost reductions will be implemented throughout
fiscal 1997. (See MD&A.)
All of the Company's issued and outstanding capital stock is owned by The Renco
Group, Inc. ("Renco") which is 95.9% 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. Renco established
the Company in 1991.
The Company was incorporated in Delaware in 1991 to effect the acquisition (see
Item 6) and its executive offices are located at 105 North Niles Avenue, South
Bend, Indiana 46617, (219) 284-2899.
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BUSINESS LINES
Military HUMMER
Since its introduction in 1984, the HUMMER has been sold to the US and foreign
militaries pursuant to contracts which have firm fixed prices. Therefore, the
Company assumes full risk of producing and delivering the specified number of
vehicles for a fixed-price.
The HUMMER has been upgraded since its introduction with improved components and
added features. During 1994, the Company developed and produced a new series of
HUMMER models known as the A1 Series (the "A1" program) which incorporated an
increase in the payload capacity and various other enhancements. After
completion of the A1, the Company began development and production of an A2
Series (the "A2" program) under contracts with the DoD including the X001
Contract which is the Company's current contract with the DoD. (See MD&A)
Domestic Sales; Government Contracts. Based upon currently available information
from the Tank, Automotive and Armaments Command ("TACOM"), which is an
administrative agent for the US Army, management expects that the US Armed
Forces will require substantially fewer HUMMERs 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 1996 and to be
received in fiscal 1997. Due to the lower volumes, the prices of military
HUMMERs sold to the US and foreign governments have increased significantly.
TACOM has indicated that the US Armed Forces will require HUMMER purchases
beyond the year 2000 and currently has no plan to change the HUMMER's mission
requirements.
The US Army is investigating the feasibility of upgrading the performance
specifications of the HUMMER with respect to Federal Motor Vehicle Safety
Standard ("FMVSS") requirements. Such an upgrade would cause a change in the
current HUMMER performance specifications beyond those encompassed in the A2
program.
As of October 31, 1996, the Company had a total US military backlog of 268
military HUMMERs compared to 883 at October 31, 1995. 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 HUMMERs
to foreign nations, either directly or through the DoD's Foreign Military Sales
("FMS") program. The Company will continue to capitalize on the HUMMER's proven
combat performance with the US Armed Forces, the extensive offering of HUMMER
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 ("UAE") and Kuwait have been the five largest
of the Company's 31 international military customers.
The Company sells HUMMERs in various configurations to the military services of
foreign nations through its 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,
1996, there were no significant FMS and direct sales backlogs compared with a
direct sales backlog of 308 as of October 31, 1995. In fiscal 1996,
international military HUMMER sales accounted for approximately 22.9% of total
HUMMER unit sales and 18.8% of net sales. Management believes that foreign
military services will continue to purchase HUMMERs because they are the only
light TWV being purchased in quantity by the US military.
In fiscal 1995, the Company manufactured 768 HUMMERs for a particular customer
sponsored by the FMS program. Due to contractual difficulties with TACOM and 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 beyond normal operating levels. Moreover, such delay resulted
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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.
Subsequently, the remaining 601 units have been sold to the FMS Customer (See
MD&A - Liquidity and Capital Resources).
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, the 576 in fiscal 1993, 756 in fiscal 1994,
1,241 in fiscal 1995 and 1,404 in fiscal 1996 primarily through its network of
approximately 72 domestic and international dealerships and distributors. As of
October 31, 1996, AM General had a total backlog of 94 Commercial HUMMERs
compared to 52 on October 31, 1995. In fiscal 1996, Commercial HUMMER sales
accounted for approximately 23.5% of total HUMMER unit sales and 16.3% of net
sales.
Commercial HUMMERs are functionally equivalent to the A2 military HUMMER with
modifications to comply with FMVSS standards for Class III (gross vehicle weight
("GVW") of 10,000 to 14,000 pounds) trucks and to satisfy commercial customer
requirements relating to comfort and convenience. In addition to the standard
HUMMER models, Commercial HUMMERs have been configured as fire-fighting and
rescue vehicles, ambulances, snow-plowing vehicles; and to carry a variety of
equipment and tools such as manlifts and backhoes.
Since February 1995, the Company has issued three recalls regarding design
problems with certain mechanical features of the Commercial HUMMER. The total
cost to the Company of the three recalls is estimated to be approximately
$360,000 of which $191,000 has been incurred as of October 31, 1996. 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 commercial models of the 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 the Federal Emergency Management
Agency. 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 US and international distributors
primarily in the Middle East, South America and Canada. As of October 31, 1996
the Company had approximately 48 domestic dealerships and 24 international
distributors. Management intends to increase its Commercial HUMMER distribution
network to approximately 65 domestic dealers and 30 international distributors
during fiscal 1997.
To date, the Company has not experienced significant 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
successfully penetrate the fleet market.
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REMANUFACTURING
The Company entered the remanufacture and modernization market in September
1993, upon being awarded the contract for the DoD's ESP program. In particular,
the contract specifies that the Company 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, 1996, the Company remanufactured and sold 1,834
units to the DoD. As of October 31, 1996, the US Army had exercised options for
1,005 additional remanufactured trucks which accounts for the increase in the
contract value from $154 million which represents 2,483 units to $202 million or
3,488 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 30% 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 10 prototype
vehicles for the Medium Tactical Truck Remanufacture program ("MTTR") 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. Prototypes
are scheduled for delivery for test in August 1997. The Company anticipates the
DoD will award the final contract to the manufacturer of its choice in late
1998.
In addition to the MTTR, other rebuild opportunities are expected to include the
HUMMER, 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 1996, SPLO and STS accounted for approximately 8.4% and 4.2%,
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, 2-1/2- and 5-ton trucks, commercial buses 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 TACOM, with contracts on both wheeled and tracked
vehicles, including medium and heavy trucks, the HUMMER, 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
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heavy (greater than 5 tons). Each of the three fleets serve 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 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 HUMMER.
The HUMMER 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. is 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.
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 TACOM, the Company also maintains an independent research
and development ("R&D") department at its Livonia, Michigan facility to conduct
R&D activities. As part of its ongoing cost reduction analysis, the Company is
investigating reducing certain of its R&D capabilities.
MANUFACTURING PROCESS AND RAW MATERIALS
At the Company's Mishawaka, Indiana facility, HUMMER vehicles are manufactured
on a highly automated truck-assembly production line. Sub-assembly of vehicle
components and stamping of aluminum and steel vehicle parts are performed at the
Company's Indianapolis stamping plant.
In addition to stamped parts from the Indianapolis plant, major vehicle
components and parts are sourced 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 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 vehicles, both military and
commercial, undergo testing before delivery to the customer.
Approximately 65% of the Company's cost of manufacturing HUMMER vehicles
consists 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
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include 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 HUMMER 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 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
no competition 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. 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 firm 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 represents 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.
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 and unsold
units in the dealers' inventories in the event of repossession by the dealers'
floorplan lenders. At October 31, 1996, the mandatory repurchase agreements
covered 109 Commercial HUMMERs with a total value at dealer cost of $6.6
million.
EMPLOYEES
As of October 31, 1996, the Company had 591 salaried employees and 1,146 hourly
employees. Of the 1,737 employees, 349 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 and SPLO
operations expires in September 1998. The Company believes that its relations
with employees are satisfactory.
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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.
The Company is presently implementing a comprehensive cost reduction plan to
significantly reduce the Company's variable and fixed costs, including corporate
overhead. Specifically, the Company is reducing its salaried worforce by
approximately 100 employees and its hourly workforce by 183 employees.
Additionally, certain operations and facilities will be consolidated and
eliminated, among which could include the Company's Indianapolis Stamping Plant.
Management anticipates such cost reductions will be implemented throughout
fiscal 1997. (See MD&A).
ITEM 2. PROPERTIES
The Company operates three 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 plant, situated on
approximately 96 acres in Mishawaka. The major tooling and materials handling
equipment, assembly lines, robotics and computer controls involved in the
manufacture of HUMMER vehicles are located at the Mishawaka facility. The HUMMER
facility has a single shift capacity of 100 units per day and is presently
operating at 25 units per day. The Company plans to reduce 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 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 also leases a test track in South Bend located near the ESP
facility. The Company has recently exercised its option to purchase the test
track for a nominal amount.
The Company maintains a separate stamping facility in Indianapolis for aluminum
and steel vehicle body parts used in the production of HUMMERs, as well as for
sub-assemblies for other vehicles. Presently, the Indianapolis facility which
covers nine acres is operating at 50% of its rated capacity.
On January 22, 1997, the Company notified UAW Local #555 officials and the
salaried employees at the Indianapolis Stamping and Assembly Plant that, based
on current and expected levels of business, it was contemplating closing the
Indianapolis plant within the next four to six months. A final decision on the
Indianapolis plant closure will be made within the next few weeks. (See MD&A)
The Company's STS and R&D operations are located in Livonia, Michigan which is
approximately 28 miles from TACOM's facility. In addition to providing
convenience to its primary customer, TACOM, the personnel at the Livonia
facility act as a liaison between the Company's management in South Bend and
TACOM.
The Company considers its facilities and equipment generally to be in good
operating condition. All of the Company's facilities are leased except for the
Mishawaka Commercial HUMMER finishing facility, the Mishawaka test track and the
Indianapolis stamping facility which the Company owns.
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As part of the Company's ongoing cost reduction program, the consolidation and
elimination of certain other facilities is being investigated. At this stage, no
determination has been made as to the specifics of the cost reduction efforts.
(See MD&A)
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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. The US Army then
increased its claim by $1.7 million to cover option quantities from its
original claim.
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 1997, 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 (ADR) procedure wherein the Parties 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. One such 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 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.
11
<PAGE>
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. The plaintiffs in the
state court actions have appealed the grant of the preliminary injunction to the
US District Court for the Southern District of New York.
PRODUCT RECALL
Since February 1995, the Company has issued three recalls regarding design
problems with certain mechanical features of the Commercial HUMMER. The total
cost to the Company of the three recalls is estimated to be approximately
$360,000 of which $191,000 has been incurred as of October 31, 1996. 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.
BREACH OF CONTRACT
On December 30, 1991, Dial Machine & Tool, Inc. filed a complaint in the Starke
County 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.
DISCRIMINATION CLAIMS
The Company is involved in various legal proceedings relating to claims of
alleged discrimination on the basis of age, race and/or gender, the outcomes of
which are not expected to have a material adverse effect on the Company.
GOVERNMENT INVESTIGATION
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.
The Company was subsequently subpoenaed to furnish documents in connection with
the investigation and has complied with the subpoena.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Security Holders during the fourth
quarter of fiscal 1996.
12
<PAGE>
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, 1997, the Company had one stockholder. The Company paid no dividends
on its common stock in fiscal 1995 and 1996. 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.
13
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain summary financial and other data of the
Company as of and for the fiscal years ended October 31, 1996, 1995, 1994 and
1993, and the six months ended October 31, 1992, and for the Company's
predecessor as of and for the four months ended April 30, 1992. The Company
acquired substantially all of the assets of a former AM General Corporation from
LTV, Inc. ("LTV") on April 30, 1992 (the "Acquisition"). Financial data as of
and for the four months ended April 30, 1992 are for period during which the
former company was a subsidiary of LTV and therefor are not comparable in
certain respects to the financial data for subsequent periods during which the
Company has been a subsidiary of Renco. 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.
<TABLE>
<CAPTION>
Predecessor Company
Company (a)
-------------- ------------------------------------------------------
Four Months Six Months
Ended Ended Year Ended
April 30, October 31, October 31,
-------------- ------------- ---------------------------------------
1992 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
(dollars in millions)
Statement of Operations Data
Net Sales $179.8 $237.6 $572.9 $454.4 $411.7 $462.4
Gross Profit (b) 25.6 32.5 76.4 65.4 56.0 39.7
Depreciation and Amortization 1.8 8.1 17.7 15.1 15.8 16.8
Selling, General and Administrative
Expenses 12.5 17.5 37.4 38.5 36.3 37.3
Operating Income (Loss) (c) 11 6.9 20.3 11.6 3.8 (14.4)
Interest Expense, Net - 6.1 10.4 8.2 10.7 13.9
Income Tax Expense (Benefit) - 1.2 4.1 3.0 (0.4) (8.7)
Income (Loss) before Extraordinary Item 11 -0.4 5.8 0.4 (6.5) (19.6)
Extraordinary Item, net of Income
Taxes of $1.75 - - - - 3.0 -
Net Income (Loss) $ 11.0 ($0.4) $ 5.8 $ 0.4 ($3.5) (19.6)
Balance Sheet Data
Working Capital $109.9 $ 25.4 $ 16.7 $ 2.5 $ 98.1 $ 87.9
Property Plant and Equipment, net 22.7 70.2 66.5 64.6 62.8 56.5
Total Assets 252 324.2 301.4 295.5 372.7 373.2
LTV Creditor Trust Obligations - 51.2 46.6 43.3 - -
Total Debt (d) 0.5 108.6 71.2 51.4 126.9 126.9
LTV Creditor Trust Stock (e) - 4.4 5.3 6.4 - -
Stockholders Equity (Deficit) $ 6.6 $ 8.6 $ 12.4 $ 13.2 $ 3.6 (16.0)
</TABLE>
(a) Prior to the Acquisition, the Company's predecessor operated as a subsidiary
of LTV.
(b) Gross Profit represents net sales less cost of sales (excluding depreciation
and amortization).
(c) Operating Income represents earnings before interest and provision (benefit)
for income taxes.
(d) 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").
For the six months ended October 31, 1992, Total Debt includes a note of
$4,950 paid to LTV on April 30, 1993. See the Company's audited consolidated
financial statements and related notes thereto included elsewhere herein.
(e) Represents a put obligation of the Company to repurchase the LTV Creditor
Trust Stock which was purchased in the Refinancing.
14
<PAGE>
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.
The Company also sells HUMMERs 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, 1996, AM General sold 49,196 HUMMERs 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 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 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. On February 3, 1997, the Company will further reduce its HUMMER
production rate from 25 to 16.5 units per day due to continued lower
international demand.
The Company began producing the latest generation of military HUMMERs, the A2
series, in August 1995. On December 23, 1995, the Company entered into a new
multi-year annual requirements contract for A2 HUMMERs known as the X001
Contract which provides a mechanism for the US Army to procure at least 2,350
HUMMERs 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 December 1996,
a total of 4,256 vehicles have been ordered on the X001 Contract. The FY97
Defense Bill currently contains the necessary funding for the second 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, 1996, a total of 1,834 trucks have been remanufactured and sold
to the US government. As of October 31, 1996, the US Army had exercised options
for 1,005 additional remanufactured trucks which accounts for the increase in
the contract value from $154 million which represents 2,483 units to $202
million which represents 3,488 units.
The Company accounts for the ESP Contract on the 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 remanufacturing program for approximately 13,000 5-ton and 7-
ton vehicles, a program valued at approximately $1.8 billion. Prototypes are
scheduled for delivery for test in August 1997. The Company believes the DoD
will award the final contract to the manufacturer of its choice in late 1998.
15
<PAGE>
RESULTS OF OPERATIONS
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 Unit Sales Information
(in millions, except unit information)
<TABLE>
<CAPTION>
Fiscal Year Ended
October 31,
------------------------ %
1995 1996 Change Change
------------ --------- ---------- --------
<S> <C> <C> <C> <C>
Net Sales
HUMMERs
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 HUMMERs 304.3 332.7 28.4 9.3
ESP 33.2 71.3 38.1 114.8
SPLO 49.8 39.0 (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 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 HUMMERs 7,515 5,974 (1,541) -20.5
============ ========= =======
HUMMER Average Unit Selling Prices
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 HUMMERs 40,492 55,691 15,199 37.5
</TABLE>
(1) Includes FMS and Direct International Sales
16
<PAGE>
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 HUMMER sales is primarily attributed to the higher
unit selling prices for A2 HUMMERs which the Company began selling in the fourth
quarter of 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.
The unchanged direct International HUMMER military sales is primarily attributed
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 HUMMER 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 UNIT SELLING PRICES
Average HUMMER unit selling prices for all HUMMERs increased 37.5% from fiscal
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 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 TACOM for the A2 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") HUMMER variants. Average HUMMER 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 $39.7 million for fiscal 1996, a decrease of $16.3 million or
29.1% from gross profit of $56.0 million for fiscal 1995. The Company's gross
profit margin declined from 13.6% for fiscal 1995 to 8.6% for fiscal 1996. The
decrease includes the EAC Adjustment, early retirement termination costs, 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.
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.
During fiscal 1996 the Company increased the rate of accruing for warranty
costs. Also, the Company incurred higher sales incentive costs in connection
with its Commercial HUMMER marketing efforts.
17
<PAGE>
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
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.
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.
(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.
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.
18
<PAGE>
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED OCTOBER 31, 1995 ("FISCAL 1995") COMPARED WITH TWELVE MONTHS
ENDED OCTOBER 31, 1994 ("FISCAL 1994")
<TABLE>
<CAPTION>
AM General Corporation and Subsidiary
Table of Net Revenues and HUMMER Unit Sales Information
( in millions, except unit information)
Fiscal Year Ended
October 31,
----------------- %
1994 1995 Change Change
------- ----- ------ ------
<S> <C> <C> <C> <C>
Net Sales
HUMMERs
US Military $ 254.2 155.1 (99.1) -39.0
International (1) 106.1 86.6 (19.5) -18.4
Commercial 36.7 62.5 25.8 70.3
------- ----- ------
Total HUMMERs 397.0 304.3 (92.7) -23.4
ESP 0.7 33.2 32.5 4642.9
SPLO 35.2 49.8 14.6 41.5
STS 21.5 24.5 3.0 14.0
------- ----- ------
Total Net Sales $ 454.4 411.7 (42.7) -9.4
HUMMER Unit Sales
US Military 8,060 4,196 (3,864) -47.9
International (1) 2,491 2,078 (413) -16.6
Commercial 756 1,241 485 64.2
------- ----- ------
Total HUMMERs 11,307 7,515 (3,792) -33.5
HUMMER Average Unit Selling Prices
US Military $31,538 36,964 5,425 17.2
International (1) 42,593 41,675 (919) -2.2
Commercial 48,545 50,363 1,818 3.7
Total HUMMERs 35,111 40,492 5,381 15.3
</TABLE>
(1) Includes FMS and Direct International Sales
19
<PAGE>
Net Sales
The decline in net sales was due primarily to the lower production and sales of
military HUMMERs as a result of the substantial completion of production under
the C0998 Contract and the lower requirements of the R021 Contract.
Additionally, HUMMERs produced for the FMS Customer and one large direct
international sale during the third and fourth quarters which require the
completion of FMS sales contracts and further processing remained in the
Company's inventory at year end. Partially offsetting the decline in military
HUMMER sales was an increase in Commercial HUMMER sales due to the Company's
continued marketing efforts and the development of its Commercial Dealer
network.
The overall decrease in HUMMER net sales was partially offset by sales increases
in ESP, SPLO and STS. During fiscal 1995, the Company sold 579 remanufactured
units compared to 9 units during fiscal 1994. The increase in SPLO sales was
primarily due to higher US Military sales.
Average HUMMER Unit Selling Prices
During fiscal 1995, average HUMMER unit selling prices for all HUMMERs increased
15.3% from fiscal 1994 primarily due to a significant increase in average
selling prices for US Military HUMMERs under the Company's new R021 Contract.
Similar price increases have been obtained in the multi-year requirements
Contract, X001. Commercial HUMMER average unit selling prices increased 3.7%
primarily due to price increases in the third quarter of 1995 and price
discounts offered toward the end of fiscal 1994.
Gross Profit
Gross profit was $56.0 million for fiscal 1995, a decrease of $9.4 million or
14.4% from gross profit of $65.4 million for fiscal 1994. The decline was
primarily due to lower US Military and International HUMMER sales. Gross profit
margin declined from 14.4% in fiscal 1994 to 13.6% in fiscal 1995 due to a
lesser proportion of military HUMMERs and higher HUMMER unit costs in the 1995
period.
Depreciation and Amortization
Depreciation and amortization expense was $15.8 million for fiscal 1995, an
increase of $.7 million or 4.5% over depreciation and amortization expense of
$15.1 million for fiscal 1994. This increase was primarily due to recent capital
expenditures.
Selling, General and Administrative
SG&A expense was $36.3 million for fiscal 1995, a decrease of $2.2 million or
5.7% from SG&A expense of $38.5 million for fiscal 1994. The decrease in expense
was primarily due to lower engineering expenses and the impact of the Company's
SG&A cost reductions, offset by higher Commercial selling expenses.
Interest Income and Expense
Interest expense for fiscal 1995 was $12.4 million, an increase of $ 3.8 million
or 44.1% from interest expense of $8.6 million for fiscal 1994. Average debt
outstanding for fiscal 1995 was $99.4 million at a weighted average interest
rate of 12.45%. Average debt outstanding for fiscal 1994 was $80.7 million at a
weighted average interest rate of 10.7%. 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 $1.3 million primarily due
to the acceptance by the DoD and the FMS Customer of interest expense associated
with the 768 units held in inventory.
20
<PAGE>
INCOME TAX EXPENSE (BENEFIT)
Income tax expense was recorded at the statutory rate adjusted for permanent
differences primarily resulting from the amortization of goodwill. Income tax
expense was a credit of $.4 million for fiscal 1995, a decrease of $3.4 million
from income tax expense of $3.0 million for fiscal 1994. The decrease in income
tax expense was primarily due to the reduction of operating income.
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 1994.
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 $10.0 million for fiscal 1996 compared
to a deficit of $43.7 million in fiscal 1995. The key factors affecting cash
flow from operating activities were changes in operating results and working
capital requirements. The primary sources of cash flow in fiscal 1995 and fiscal
1996 resulted from non-cash charges to operating income including depreciation,
amortization and non-cash postretirement expenses, as well as an increase in
accounts payable and other accrued expenses. Cash flow provided from operations
was partially offset by increases in accounts receivables and inventory, as well
as funding the Company's net loss.
Accounts receivable levels at the end of fiscal 1996 and fiscal 1995 were higher
than normal due to higher than normal sales in the latter part of each year.
Such increase also reflects slower than usual disbursements from the US
government payment office.
Inventory levels remained high due to the continued delay in shipment of 601
HUMMERs built for the FMS Customer. Subsequent to the fiscal 1996 year end,
these units were shipped in the first quarter of fiscal 1997, thus reducing
inventory levels. The higher level of inventory has required the Company to
borrow up to the maximum amount available under the Revolving Credit Facility.
In addition, the Company has delayed payment to certain vendors. The Company's
liquidity has significantly improved due to the sale, the cash receipt of which
was received on January 29, 1997.
For fiscal 1996, the Company spent $5.2 million on capital expenditures
primarily for tooling for vehicle production, as compared to $8.1 million for
fiscal 1995. The Company expects total capital expenditures in fiscal 1997 to be
approximately $4.9 million to be funded from operating cash flow and
availability under the Revolving Credit Facility.
Management has developed a plan to improve the Company's operating results and
financial liquidity. The plan will include a reduction in the HUMMER production
rate on its manufacturing line, as well as a significant reduction in corporate
overhead costs. Specifically, the HUMMER line rate will be 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. As of the end of
fiscal 1996, the Company has no significant orders for direct international
customers. The Company does not anticipate any further reductions in the HUMMER
line rate for fiscal 1997. In the fourth quarter of fiscal 1996, the Company
increased the production rate on its ESP manufacturing line from 5 units per day
to 6.2 units per day.
21
<PAGE>
The Company is presently implementing a comprehensive cost reduction plan to
significantly reduce the Company's variable and fixed costs, including corporate
overhead. Specifically, the Company is reducing its salaried worforce by
approximately 100 employees and its hourly workforce by 183 employees.
Additionally, certain operations and facilities will be consolidated and
eliminated, among which could include the Company's Indianapolis Stamping Plant.
Management anticipates such cost reductions will be implemented throughout
fiscal 1997.
Management anticipates that cash flow from operations as impacted by the reduced
HUMMER line rate and overhead structure, as well as availability under its
Revolving Credit Facility will be sufficient to finance the Company's liquidity
needs for the foreseeable future.
The Company's Revolving Credit Facility has a maximum borrowing limit of $60
million, is secured by eligible inventories and receivables, as defined therein,
and expires on April 30, 1998. As of October 31, 1996, the Company had
borrowings of $52.7 million outstanding under the Revolving Credit Facility.
The Revolving Credit Facility 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. Because of the net loss experienced by
the Company, the Revolving Credit Facility has been amended to reduce certain
financial covenants so that the Company was in compliance with the amended
covenants at October 31, 1996. The Indenture governing the outstanding 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, which will be subject to financial, economic, political,
competitive and other factors affecting the Company, many of which are beyond
its control.
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 1995, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The Statement
is applicable to all entities, both public and private, and is effective for
fiscal years beginning after December 15, 1995. The Statement provides
guidelines for recognition of impairment losses related to long-lived assets and
certain intangibles and related goodwill for (1) assets to be held and used and
(2) assets to be disposed of.
The Company will adopt SFAS 121 in accordance with the Statement's effective
date. Adoption of this Statement is not expected to have a material impact on
the Company's financial position, results of operations or liquidity.
22
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
AM GENERAL CORPORATION AND SUBSIDIARY
Index To Financial Statements
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Statements of Operations for the years ended
October 31, 1994, 1995 and 1996.................................... 24
Consolidated Balance Sheets as of October 31, 1995 and 1996.......... 25
Consolidated Statements of Stockholder's Equity for the years ended
October 31, 1994, 1995 and 1996.................................... 26
Consolidated Statements of Cash Flows for the years ended
October 31, 1994, 1995 and 1996.................................... 27
Notes to Consolidated Financial Statements........................... 28 through 50
Independent Auditors' Report......................................... 51
</TABLE>
23
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year ended October 31
---------------------
1994 1995 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $454,363 411,683 462,406
- -----------------------------------------------------------------------------------------
Cost and expenses:
Cost of sales 388,922 355,724 419,476
Depreciation and amortization 15,125 15,811 16,609
Selling, general, and administrative expenses 38,502 36,253 37,256
Loss on sale of equipment 178 102 255
Special termination benefits - - 3,246
- -----------------------------------------------------------------------------------------
Income (loss) before interest, income taxes and
extraordinary item 11,636 3,793 (14,436)
Interest income 405 1,707 2,596
Interest expense (8,625) (12,370) (16,454)
- -----------------------------------------------------------------------------------------
Income (loss) before income taxes and extraordinary item 3,416 (6,870) (28,294)
Income tax expense (benefit) 3,015 (435) (8,683)
- -----------------------------------------------------------------------------------------
Income (loss) before extraordinary item 401 (6,435) (19,611)
Extraordinary item, net of income taxes - 2,965 -
- -----------------------------------------------------------------------------------------
Net income (loss) $ 401 (3,470) (19,611)
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
(Dollar amounts in thousands, except share information)
<TABLE>
<CAPTION>
October 31
----------
ASSETS 1995 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash $ 1,140 5,867
Accounts receivable, net 52,688 57,126
Inventories 123,359 121,710
Prepaid expenses 1,648 1,675
Income taxes receivable 3,360 --
Deferred income taxes 1,341 3,455
- ---------------------------------------------------------------------------------------
Total current assets 183,536 189,833
Income taxes receivable -- 4,023
Property, plant, and equipment, net 62,762 56,463
Deferred income taxes 14,327 20,488
Goodwill, net 92,157 87,871
Other assets 19,900 14,504
- ---------------------------------------------------------------------------------------
$372,682 373,182
- ---------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
- ---------------------------------------------------------------------------------------
Current liabilities:
Accounts payable 58,196 59,212
Accrued expenses 27,249 42,714
- ---------------------------------------------------------------------------------------
Total current liabilities 85,445 101,926
Long-term debt 126,947 126,865
Postretirement benefits other than pensions, noncurrent portion 145,483 150,134
Other liabilities, noncurrent portion 11,240 10,219
- ---------------------------------------------------------------------------------------
Total liabilities 369,115 389,144
- ---------------------------------------------------------------------------------------
Stockholder's equity (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
Minimum pension liability (82) --
Accumulated deficit (2,351) (21,962)
- ----------------------------------------------------------------------------------------
Total stockholder's equity (deficit) 3,567 (15,962)
Commitments and contingencies (notes 7 and 15)
- ----------------------------------------------------------------------------------------
$372,682 373,182
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Stockholder's Equity
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Total
8% Retained stock-
cumulative Minimum earnings holder's
preferred Common Paid-in pension (accumulated equity
stock stock capital liability deficit) (deficit)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1993 $ 9,000 -- 1,000 (1,650) 4,095 12,445
Net income -- -- -- -- 401 401
Minimum pension -- -- -- 1,410 -- 1,410
Obligation for put accretion -- -- -- -- (1,061) (1,061)
- ------------------------------------------------------------------------------------------------------
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)
- ------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flow
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Year ended October 31
---------------------
1994 1995 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net cash provided by (used in) operating activities (note 19) $ 32,208 (47,721) 10,081
- --------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of equipment 6 -- 6
Capital expenditures (8,127) (8,101) (5,216)
- --------------------------------------------------------------------------------------------
Net cash used in investing activities (8,121) (8,101) (5,210)
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreement (12,008) 43,712 856
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 (6,782) (29,657) --
Principal payments on 12-7/8% senior notes -- -- (1,000)
Principal payments on senior note (4,500) -- --
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 (23,290) 55,450 (144)
- --------------------------------------------------------------------------------------------
Net change in cash 797 (372) 4,727
Cash and cash equivalents at beginning of year 715 1,512 1,140
- --------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 1,512 1,140 5,867
- --------------------------------------------------------------------------------------------
Supplemental disclosure of cash items
Interest paid 4,022 12,350 10,553
Taxes paid 1,409 -- 474
- --------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE>
(1) Summary of Significant Accouning Policies and Practices
(a) Description of Business
The primary business of AM General Corporation (the Company) is to
manufacture Hummer(R) vehicles, in two plants located 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 1997). 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 48 domestic dealers and 24
international distributors at OctoberE31, 1996. 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
March 1998. (See also note 17).
The mix of sales for each of the years in the three year period ended
October 31, 1996 is as indicated in the following analysis:
<TABLE>
<CAPTION>
October 31
----------
1994 1995 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Hummer(R) vehicles:
DoD 56% 38% 37%
FMS (foreign military sales) 8 8 12
International direct 16 13 7
Commercial 8 15 16
ESP - 9 16
Service parts and other 12 17 12
- -------------------------------------------------------------------------------
</TABLE>
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.
28
<PAGE>
(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, 1996.
(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.
(f) Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets of the Hummer(R) and related businesses acquired on April 30,
1992, is amortized on a straight-line basis over 25 years. Accumulated
amortization was $10,715, $15,002 and $19,289 at October 31, 1994, 1995,
and 1996, 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 Assests
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.
29
<PAGE>
(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 $7,611
and $6,641 at October 31, 1995 and 1996, 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 actual 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).
(J) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Research and
development costs amounted to $8,736, $5,594 and $5,643 for the years ended
October 31, 1994, 1995 and 1996, 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.
30
<PAGE>
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 nonunion
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.
(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.
31
<PAGE>
(N) IMPAIRMENT OF LONG-LIVED ASSETS
The Company intends to adopt the provisions of SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on November 1, 1996. 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 exceed
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. Adoption of
this Statement is not expected to have a material impact on the Company's
financial position, results of operations, or liquidity.
(2) REFINANCING
On April 27, 1995, the Company issued $75,500 of Senior Notes due 2002.
Proceeds were used as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
<S> <C>
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
===============================================================================
</TABLE>
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.
32
<PAGE>
(3) Accounts Receivable
Components of accounts receivable are as follows:
<TABLE>
<CAPTION>
October 31
----------
1995 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Receivables from the U. S. Government under
long-term contracts:
Amounts billed or billable $31,278 37,365
Recoverable costs accrued - not billed 5,830 4,662
Unrecovered costs subject to future negotiation 2,707 4,694
Commercial customers - amounts billed:
Foreign 4,238 4,666
Dealers 3,082 2,432
Service parts 285 31
Other receivables 5,854 3,674
- -----------------------------------------------------------------------------
53,274 57,524
Less allowance for doubtful accounts (586) (398)
- -----------------------------------------------------------------------------
$52,688 57,126
- -----------------------------------------------------------------------------
</TABLE>
Recoverable costs accrued - not billed - were 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.
33
<PAGE>
(4) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
October 31
----------
1995 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Finished goods $ 67,710 73,128
Service parts 12,077 14,784
Extended Service Program:
Inventory costs net of amounts attributed to
revenues recognized to date 10,072 3,748
Progress billings - -
Raw materials, supplies, and work in progress 36,999 33,752
- ---------------------------------------------------------------------------
126,858 125,412
Less allowance for inventory obsolescence (3,499) (3,702)
- ---------------------------------------------------------------------------
$123,359 121,710
===========================================================================
</TABLE>
Finished goods inventory includes approximately $38,000 and $22,000 at
October 31, 1995 and 1996, respectively, of military Hummers(R) produced
for two friendly foreign nations. The sale of these vehicles has been
subject to various delays; however, management currently believes the sales
of these vehicles will be completed in the first quarter of fiscal 1997.
The increase in finished goods inventory resulted in the use of all
available funds on the Company's revolving line-of-credit (see note 9).
Inventory costs related to the Extended Service Program consists of:
<TABLE>
<CAPTION>
October 31
----------
1995 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Production costs of goods currently in process $ 5,366 3,748
Excess of production cost of delivered units over
the estimated average cost of all units expected
to be produced 4,706 -
- ---------------------------------------------------------------------------
$10,072 3,748
===========================================================================
</TABLE>
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. During fiscal 1996, estimates of total contract costs were
increased because of the exercise of option vehicles by the Department of
Defense, a revised labor agreement, and other items. The net effect was a
reduction in the anticipated profit on the contract, the cumulative effect
of which was recognized in fiscal 1996. 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).
34
<PAGE>
(5) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following:
<TABLE>
<CAPTION>
October 31
----------
1995 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,498 1,498
Buildings 4,337 4,558
Machinery, equipment, and fixtures 27,260 29,184
Leasehold improvements 8,388 8,635
Vehicles 4,234 3,380
Construction in progress 303 191
Dealer signage 287 292
Tooling 53,460 56,305
- ---------------------------------------------------------------------------
99,767 104,043
Less allowance for depreciation and amortization (37,005) (47,580)
- ---------------------------------------------------------------------------
$ 62,762 56,463
===========================================================================
</TABLE>
Tooling, net of related amortization, of $10,599 and $10,665 at October 31,
1995 and 1996, 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:
<TABLE>
<CAPTION>
October 31
----------
1995 1996
- ---------------------------------------------------------------------------
<S> <C> <C>
Noncompete covenant, net $ 6,690 5,661
Deferred loan costs, net:
Senior notes due 2002 5,425 4,510
Revolving line-of-credit 538 323
Preproduction cost, net:
Commercial vehicles for the general public 1,413 1,283
Extended service program 2,069 897
Performance bonds - 1,441
Intangible pension asset 3,056 275
Prepaid pension cost 692 -
Organizational cost, net 15 5
Other 2 109
- ---------------------------------------------------------------------------
$19,900 14,504
===========================================================================
</TABLE>
35
<PAGE>
The noncompete covenant resulted from the acquisition of the Hummer(R)
business on April 30, 1992, and is being amortized over ten years. 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. 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.
(7) LEASES
The Company has several noncancelable operating leases for substantial
portions of the CompanyOs 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,
1994, 1995 and 1996 aggregated approximately $5,960, $5,919 and $5,060,
respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of October 31,
1996 are:
<TABLE>
<CAPTION>
Year ending
October 31 Amount
- ---------------------------------------------------------------------------
<S> <C>
1997 $ 5,040
1998 4,661
1999 3,636
2000 411
Thereafter -
- ---------------------------------------------------------------------------
Total minimum lease payments $13,748
===========================================================================
</TABLE>
36
<PAGE>
(8) ACCRUED EXPENSES
Components of accrued expenses are as follows:
<TABLE>
<CAPTION>
October 31
----------
1995 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Modifications payable $ 2,955 5,831
Warranty 2,546 5,233
Current portion of other post employment benefits 3,500 5,000
Interest on senior notes -- 4,796
Vacation 3,136 3,418
Taxes other than on income 2,647 3,290
Sales incentives 3,181 3,257
Wages, bonuses, and payroll taxes 3,395 3,151
Excess of estimated average production cost of ESP
units expected to be produced over the cost of
delivered units (note 4) -- 2,859
Insurance 1,153 1,634
Purchase requirements 1,761 884
Rent 422 420
Training 160 227
Import cost 416 202
Management fee due to Renco Group, Inc. -- 100
Severance cost 56 --
Other 1,921 2,412
- ------------------------------------------------------------------------------
$27,249 42,714
- ------------------------------------------------------------------------------
</TABLE>
37
<PAGE>
(9) LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
October 31
----------
1995 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Revolving line-of-credit, interest at prime plus 1-3/4%,
payable in full on April 30, 1998 $ 51,821 52,677
12-7/8% senior notes due 2002, discounted $402 to yield
13%, interest payable semi-annually on May 1 and
November 1 75,126 74,188
- -----------------------------------------------------------------------------------------
126,947 126,865
Less current maturities of long-term debt -- --
- -----------------------------------------------------------------------------------------
$126,947 126,865
- -----------------------------------------------------------------------------------------
</TABLE>
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, 1995 and 1996, the
Company had borrowed substantially all amounts available under the
aforementioned percentages. 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.
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, 1996, the Company was not in compliance with the net worth
requirement. Subsequent to year end, the revolving credit agreement was
amended to reduce the required amount of net worth. At October 31, 1996,
the Company was in compliance with the amended net worth requirement.
Under the most restrictive covenant in any agreement, no amount was
available for payment of dividends at October 31, 1995 and 1996.
38
<PAGE>
The Company's outstanding letters of credit totaled $9,583 and $4,487 at
October 31, 1995 and 1996, respectively. Of this amount, $9,090 and $4,470
at October 31, 1995 and 1996, 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
<TABLE>
<CAPTION>
October 31
------------------
1995 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Pension liability $ 6,121 5,882
Deferred compensation 1,122 279
Other 3,997 4,058
- --------------------------------------------------------------------------------
$11,240 10,219
- --------------------------------------------------------------------------------
</TABLE>
(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, 1995 and 1996 were $200 and $600, 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:
<TABLE>
<CAPTION>
October 31
-----------------------------
1994 1995 1996
<S> <C> <C> <C>
- --------------------------------------------------------------------------------
Income from continuing operations $3,015 (435) (8,683)
Extraordinary item 1,750
Stockholders' equity, for minimum pension
liability 864 97 50
- --------------------------------------------------------------------------------
$3,879 1,412 (8,633)
- --------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
Income tax expense (benefit) attributable to income before extraordinary
item consists of:
<TABLE>
<CAPTION>
October 31
-----------------------
1994 1995 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------
Current:
Federal $2,454 (1,382) (832)
State 28 322 473
Deferred 533 625 (8,324)
- ----------------------------------------------------------------------------------
$3,015 (435) (8,683)
==================================================================================
</TABLE>
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:
<TABLE>
<CAPTION>
October 31
-----------------------
1994 1995 1996
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------
Computed "expected" tax expense (benefit) $1,195 (2,404) (9,903)
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 352 294 (349)
Foreign sales corporation effect (85) 17 30
Other, net 53 158 39
- ----------------------------------------------------------------------------------
$3,015 (435) (8,683)
===================================================================================
</TABLE>
40
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
October 31, 1994, 1995, and 1996 are presented below:
<TABLE>
<CAPTION>
October 31
----------
1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts receivable $ 165 223 151
Inventory obsolescence reserve 1,546 1,330 1,407
Additional costs inventoried for tax purposes pursuant
to the Tax Reform Act of 1986 227 187 --
Compensated absences, principally due to accrual
for financial reporting purposes 1,212 1,192 1,299
Accrued warranty 2,008 1,731 2,868
Pension liability 3,349 2,326 2,007
Postretirement benefits other than pensions 54,115 56,906 58,949
Other accruals 3,297 2,298 3,178
Other 1,126 245 209
- ------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 67,045 66,438 70,068
Less valuation allowance 38,348 38,348 38,348
- ------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 28,697 28,090 31,720
- ------------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation 7,506 8,978 7,730
Pension asset 2,986 1,424 --
Other 898 2,020 47
- ------------------------------------------------------------------------------------------------------------------
Total gross deferred liabilities 11,390 12,422 7,777
- ------------------------------------------------------------------------------------------------------------------
Net deferred asset 17,307 15,668 23,943
Less current portion 1,381 1,341 3,455
- ------------------------------------------------------------------------------------------------------------------
Noncurrent portion $15,926 14,327 20,488
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
41
<PAGE>
There was no change in the valuation allowance for the years ended October
31, 1994, 1995 and 1996. 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, 1996.
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.
42
<PAGE>
(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, 1995:
<TABLE>
<CAPTION>
Plans with Plans with
assets in obligations
excess of in excess of
obligations assets
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $33,599 48,539
- --------------------------------------------------------------------------------
Accumulated benefit obligation $35,426 61,001
- --------------------------------------------------------------------------------
Projected benefit obligation 39,055 61,001
Plan assets at fair value 41,406 54,880
- --------------------------------------------------------------------------------
Plan assets in excess of (less than) projected
benefit obligation 2,351 (6,121)
Unrecognized prior service cost -- 6,676
Unrecognized net (gain) loss (1,659) (3,488)
Additional liability required -- (3,188)
- --------------------------------------------------------------------------------
Pension cost prepaid (accrued) $ 692 (6,121)
- --------------------------------------------------------------------------------
</TABLE>
43
<PAGE>
The Defined Benefit Plans' funded status and amounts recognized in the
Company's consolidated balance sheet at October 31, 1996 are as follows:
<TABLE>
<CAPTION>
Plans with Plans with
assets in obligations
excess of in excess of
obligations assets
- -------------------------------------------------------------------------------
<S> <C> <C>
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)
- -------------------------------------------------------------------------------
</TABLE>
In accordance with SFAS No. 87, Pensions, the Company has recognized a
minimum liability equal to unfunded accumulated benefit obligations. To the
extent of unrecognized prior service cost, this amount has been recognized
as an intangible asset, and the balance is reported as a separate component
of stockholders' equity, net of tax effect.
44
<PAGE>
Defined Benefit Plans' assets include primarily marketable securities.
Net pension cost for the years ended October 31, 1994, 1995 and 1996
includes the following components:
<TABLE>
<CAPTION>
October 31
----------
1994 1995 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 3,168 2,792 3,085
Interest cost on projected benefit obligation 6,306 6,950 7,422
Actual return on plan assets (184) (17,980) (15,311)
Net amortization and deferral (5,968) 12,138 9,146
- ----------------------------------------------------------------------------------------
Net pension cost $ 3,322 3,900 4,342
========================================================================================
</TABLE>
Assumptions used in accounting for the pension plan as of October 31, 1994,
1995, and 1996 are:
<TABLE>
<CAPTION>
October 31
----------
1994 1995 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rates 8.25% 7.50% 7.75%
Rates of increase in compensation levels 7.25% 5.00% 5.00%
Expected long-term rate of return on assets 8.50% 8.50% 8.50%
========================================================================================
</TABLE>
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, 1996 and increase the unrecognized net gain
for the year ended October 31, 1996 by $10,990. 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, 1996 and
decrease the unrecognized net gain for the year ended October 31, 1996 by
$620. 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, 1996 by $820.
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
$40, $152 and $340 for the years ended October 31, 1994, 1995 and 1996,
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.
45
<PAGE>
Employees must have committed to the program by November 30, 1996 and
retired no later than December 1, 1996. At October 31, 1996, 64 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. Accrual for the 3 employees electing the
program in November 1996, aggregating approximately $152, will be 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.
The following table presents the related amounts recognized in the
Company's consolidated balance sheets at October 31, 1995 and 1996:
<TABLE>
<CAPTION>
October 31
----------
1995 1996
- -----------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $ 63,806 57,726
Fully eligible active plan participants 27,259 20,025
Other active plan participants 51,336 42,340
- -----------------------------------------------------------------------------
142,401 120,091
Unrecognized net gain 6,582 35,043
- -----------------------------------------------------------------------------
148,983 155,134
Current portion (3,500) (5,000)
- -----------------------------------------------------------------------------
Noncurrent portion $145,483 150,134
- -----------------------------------------------------------------------------
</TABLE>
46
<PAGE>
Net periodic postretirement benefit cost for the years ended October 31,
1994, 1995 and 1996 includes the following components:
<TABLE>
<CAPTION>
October 31
----------
1994 1995 1996
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ 3,528 2,656 2,410
Interest cost 9,966 9,701 8,533
Amortization of unrecognized net gain (985) (1,841)
- ----------------------------------------------------------------------------
Net periodic postretirement benefit cost $13,494 11,372 9,102
============================================================================
</TABLE>
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 8.5% at October 31, 1994, 7.75 at
October 31, 1995 and 1996.
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, 1996 by
$19,795. The aggregate of the service and interest cost components of net
periodic postretirement benefit cost would increase for the year ended
October 31, 1996 by $2,065.
(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(R) 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.
47
<PAGE>
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,
1995 and 1996, the mandatory repurchase agreements covered Hummers(R) with
a total value at dealer cost of $5,295 and $6,574, 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, 1996, there were 27
active Hummer(R) leases with a total residual value of $940.
In the ordinary course of business, the Company has entered into
contractual commitments related to purchases of materials, capital
expenditures, and leases.
(16) RELATED-PARTY TRANSACTIONS
During the years ended October 31, 1994, 1995 and 1996, the Company
incurred management fees to The Renco Group, Inc. OF $720, $960 AND $1,200,
RESPECTIVELY; $100 OF WHICH IS INCLUDED IN ACCRUED EXPENSES AT OCTOBER 31,
1996. UNDER A MANAGEMENT CONSULTANT AGREEMENT EFFECTIVE APRIL 1, 1995,
BETWEEN THE COMPANY AND THE RENCO GROUP, INC., THE COMPANY AGREED TO
INCREASE THE MONTHLY FEE TO RENCO TO $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, CREDIT CONCENTRATIONS AND LIQUIDITY
The Company's largest customer is the United States Department of Defense.
The Department of Defense accounted for 73%, 68% and 74% of the Company's
sales for the years ended October 31, 1994, 1995 and 1996, respectively. At
October 31, 1994, 1995 and 1996, accounts receivable with the Department of
Defense were $21,109, $39,815 and $46,721, respectively.
48
<PAGE>
Export sales to unaffiliated foreign customers, including sales to friendly
foreign nations, were $123,163, $103,631 and $107,033 for the years ended
October 31, 1994, 1995 and 1996, respectively. For the year ended
October 31, 1994, the government of Mexico accounted for 13% of the
Company's sales.
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 has experienced reductions in the U. S. defense budget for
Hummer(R) vehicles, reduced direct international sales of Hummer(R)
vehicles, a reduction in the anticipated profit on the ESP contract, and
lower sales volume and higher costs than expected in the commercial
Hummer(R) vehicle program. The Company incurred net losses for the two
years ended October 31, 1996, and had an accumulated deficit of $21,962 at
that date. In order to maintain its production rate during fiscal 1996, the
Company requested and received approval to produce approximately 1,200
Hummer(R) vehicles for the DoD in advance of original delivery
requirements. The continued delay in the sale of vehicles to a friendly
foreign nation and continued high commercial and military finished goods
inventory levels have resulted in the use of all available funds on the
Company's revolving line of credit. The Company had to obtain an amendment
to its revolving credit agreement in order to be in compliance with the
minimum net worth covenant.
In order to address these issues which impact operating results and
liquidity, management plans to aggressively pursue additional Hummer(R)
vehicle sales, reduce overhead costs and reduce its Hummer(R) vehicle
production rate to more accurately match the rate of anticipated incoming
orders. The Company also plans to pursue follow-on contracts for its
current two and one-half ton ESP program and additional contracts to
refurbish other military vehicles. The Company is one of two finalists
awarded a contract to build prototype vehicles for a major refurbishment
contract. Management believes reduction of inventory levels, including
specifically completion of the sale of the vehicles to a friendly foreign
nation (see note 4) will provide sufficient liquidity to allow the Company
to meet its obligations as they come due and completion of management's
plans will enable the Company to ultimately return to operating
profitability. If these efforts are unsuccessful, the Company may need to:
(1) obtain additional sources of funds to meet its liquidity requirements;
(2) reevaluate whether impairment of the Company's goodwill and other long-
lived assets has occurred; and (3) reevaluate the adequacy of its valuation
allowance for deferred tax assets.
(18) 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 fair value of the senior
notes at October 31, 1996, is approximately
49
<PAGE>
$69,300 based on management's informal discussions with an investment
banker which makes a market in the senior notes.
(19) RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The reconciliation of net income (loss) to net cash provided by (used in)
operating activities for the years ended October 31, 1994, 1995 and 1996
follows:
<TABLE>
<CAPTION>
October 31
-----------
1994 1995 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 401 (3,470) (19,611)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization of plant and
equipment 9,798 10,486 11,278
Other amortization 6,398 6,396 6,436
Increase (decrease) in allowance for doubtful
accounts 85 151 (188)
Increase (decrease) in inventory reserve 461 (569) 203
Deferred income taxes 1,397 1,638 (8,274)
Discount accretion of debt 3,498 1,576 62
Noncash other postretirement cost 10,529 7,315 6,150
Loss (gain) on sale of equipment 178 102 255
Change in assets and liabilities:
Accounts receivable 6,360 (19,768) (4,250)
Inventories (4,545) (69,754) 1,422
Prepaid expenses 688 (188) (26)
Other assets (7,470) 8,403 3,247
Accounts payable (2,017) 22,792 1,015
Due to related parties (939) (419) -
Accrued expenses 567 (5,850) 13,921
Income taxes 1,379 (534) (619)
Other liabilities 5,440 (6,028) (940)
- ------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities $32,208 (47,721) 10,081
================================================================================================
</TABLE>
50
<PAGE>
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, 1995 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended October 31, 1996, in conformity with generally accepted accounting
principles.
December 19, 1996
51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
52
<PAGE>
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, 1997:
<TABLE>
<CAPTION>
Name Age Position
- --------------------------------------------------------------------------------
<S> <C> <C>
Ira Leon Rennert 62 Chairman and sole Director of the Company
James A. Armour 53 President and Chief Executive Officer
Adare Fritz 50 Senior Vice President, Operations
Edmond L. Peters 52 Senior Vice President Contracts, Materials & Washington
Operations
Robert J. Gula 50 Vice President, Engineering and Product Development
Jack Tingley 53 Vice President, Commercial Sales and Marketing
</TABLE>
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. Mr. Rennert is Chairman of the
Board, and Renco is majority stockholder, of Covert Marine, Inc., a wholesale
distributor of recreational boating equipment in Kansas City, Missouri. An order
for relief for Covert Marine, Inc. was entered on October 23, 1992 under Chapter
11 of the Bankruptcy Code by the United States Bankruptcy Court for the Western
District of Missouri. The Company has never had any business relationship with
Covert Marine, 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 HUMMER 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 24 years. Prior thereto, Mr. Armour held various positions with
American Motors Corporation and Ford Motor Company.
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 26 years.
Edmond L. Peters has been Senior Vice President Contracts, Materials &
Washington Operations since October 1, 1996. Mr. Peters previously held the
position of 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 13 years.
Robert J. Gula has been Senior Vice President, Engineering and Product
Development since February, 1995. 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 26 years. Prior to joining AM
General, Mr. Gula held technical positions within several engineering services
and automotive manufacturing companies.
Jack Tingley joined the Company as Vice President, Commercial Sales and
Marketing in September, 1996. Prior to joining AM General, Mr. Tingley was Vice
President, Sales and Marketing at Holiday Rambler Division of Monaco Coach.
Prior thereto, Mr. Tingley held various positions in the truck industry, with
Mercedes Benz Truck, Freightliner and Mitsubishi-Fuso Truck of America.
53
<PAGE>
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, 1996, 1995 and 1994 to the Company's chief executive officer and its
four other highest paid executive officers (excluding Mr. Rennert, the "Named
Executive Officers").
<TABLE>
<CAPTION>
SUMMARY ANNUAL COMPENSATION
- ----------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION
-----------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND POSITION FISCAL YEAR SALARY BONUS COMPENSATION COMPENSATION
- ----------------- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ira Leon Rennert (1) 1996 - - - $1,100,000
Chairman and Sole Director 1995 - - - 960,000
1994 - - - 720,000
James A. Armour 1996 $250,000 - $55,461 -
President & Chief Executive 1995 248,846 $100,000 40,627 -
Officer 1994 200,000 104,400 36,240 -
Paul R. Schuchman 1996 165,000 - 37,965 -
Executive Vice President 1995 165,000 50,000 31,321 -
& Chief Financial Officer 1994 157,500 53,452 (2) -
Adare Fritz 1996 135,000 - 25,356 -
Senior Vice President, 1995 135,000 40,000 26,250 -
Operations 1994 130,000 42,852 (2) -
Jeffrey C. Wright 1996 130,000 - 33,858 -
Senior Vice President, Worldwide 1995 130,000 30,000 26,776 -
Marketing & Strategic Planning 1994 130,000 32,860 21,540 -
Robert J. Gula 1996 130,000 - 22,884 -
Vice President, Engineering & 1995 125,385 25,000 21,423 -
Product Development 1994 115,000 27,530 18,994 -
</TABLE>
(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 1996, Renco received a management fee of $1,100,000
from the Company. Since October 1996, Renco has agreed to defer current
payment of management fees, which are being accrued by the Company.
(2) Value of benefits did not exceed the lesser of $50,000 or 10% of total
salary and bonus per Named Executive Officer.
54
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company had no compensation committee during the fiscal year ended October
31, 1996. The sole member of the board of directors was Mr. Rennert. The
compensation for the Named Executive Officers for fiscal 1996 was fixed by their
employment agreements and their Net Worth Appreciation Agreements.
During fiscal 1996, 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 and Mr. Gula are each employed under employment
agreements which, pursuant to the terms thereof, continue until October 31, 1997
and from year to year thereafter unless terminated by either party with 30 days'
prior written notice. The compensation arrangements provided for by those
agreements 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 $135,000 plus an annual bonus of $40,000
subject to the same conditions as applicable to Mr. Armour.
Mr. Gula-Minimum annual salary of $130,000 plus an annual bonus of $25,000
subject to the same conditions as applicable to Mr. Armour.
Mr. Tingley-Minimum annual salary of $115,000 plus an annual bonus of $25,000
subject to the same conditions as applicable to Mr. Armour.
Four former officers, including Mr. Schuchman and Mr. Wright, whose employment
terminated in December 1996 and January 1997, will nevertheless continue to
receive their contractual compensation through the expiration of their contracts
in October 1997.
NET WORTH APPRECIATION AGREEMENTS
The Named Executive Officers except for Mr. Tingley and four other officers 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 his
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 1996, the amounts payable to each
contract holder at October 31, 1996 is lower than the amount that would have
been payable at October 31, 1995. The reductions for Messrs. Armour, Schuchman,
Fritz, Wright and Gula were $467,199, $186,879, $93,440, $46,720 and $46,720,
respectively. The maximum payable by the Company had all contract holders
retired at October 31, 1996, and their respective maximum percentages had
vested, would have been approximately $.5 million.
55
<PAGE>
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 95.9%
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.
In the year ended October 31, 1996, the Company paid management fees to Renco in
the amount of $1,100,000. Management fees are paid in monthly installments of
$100,000. Since October 1996, Renco has agreed to defer current payment of
management fees, which are being accrued by the Company.
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.
56
<PAGE>
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, 1996, AM General had a long term
receivable for income taxes of $4.0 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.
57
<PAGE>
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:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Page
----
<S> <C>
Consolidated Statements of Operations for the years ended
October 31, 1994, 1995 and 1996.................................... 24
Consolidated Balance Sheets as of October 31, 1995 and 1996.......... 25
Consolidated Statements of Stockholder's Equity for the years ended
October 31, 1994, 1995 and 1996.................................... 26
Consolidated Statements of Cash Flows for the years ended
October 31, 1994, 1995 and 1996.................................... 27
Notes to Consolidated Financial Statements........................... 28 through 50
Independent Auditors' Report......................................... 51
</TABLE>
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.
58
<PAGE>
<TABLE>
<CAPTION>
(a) 3. Listing of Exhibits
Exhibit No. Description
- ------------ ----------------------------------------------------------------
<S> <C>
*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 By-Laws.
*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 as of 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:
Paul R. Schuchman
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. Schuchman, Fritz, Wuslich, Gula and
Peters.
*10.4 Employment Agreement with Thomas R. MacDougall dated
June 1, 1993 as supplemented December 16, 1993.
*10.5 Employment Agreement with Jeffrey C. Wright dated June 1, 1993
as supplemented December 16, 1993.
*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
**10.6.1 Net worth appreciation agreements dated as of February 1, 1995
with:
Edmond L. Peters
Jeffrey C. Wright
*10.7 Management Consultant Agreement effective as of April 1, 1995
with The Renco Group, Inc.
*10.8 Receipt and Release dated April 27, 1995 from (LTV) Aerospace
Creditors Trust.
</TABLE>
59
<PAGE>
Exhibit No. Description
- ----------- ---------------------------------------------------------------
*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)
*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 the Company's Form 10-K, No.33-93302, filed January
28, 1996
****Filed with the Company's Form 10-Q, No.33-93302, filed September
16, 1996
(b) No reports on form 8-k were filed by the registrant during the last quarter
of the period covered by this report.
60
<PAGE>
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, 1997.
AM GENERAL CORPORATION
By: /s/ James A. Armour
------------------------
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, 1997.
Signature Title
--------- -----
/s/ Ira Leon Rennert Chairman and sole Director
- -------------------------
Ira Leon Rennert
/s/ James A. Armour President and Chief Executive Officer
- ------------------------- (Principal Executive, Financial and
James A. Armour 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.
61
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -------------------------------------------------------------------
<S> <C>
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 as of April 30, 1992, between Congress Financial
Corporation and AM General Corporation.
</TABLE>
<PAGE>
Copy: Roger Fay - RENCO
(9/19/96)
AMENDMENT NO. 10 TO LOAN AND SECURITY AGREEMENT
-----------------------------------------------
AM GENERAL CORPORATION
105 North Niles Avenue
South Bend, Indiana 46634-7025
As of August 22, 1996
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Congress Financial Corporation ("Lender") and AM General Corporation,
formerly known as Ren Acquisition Corp. ("AM General") have entered into certain
financing arrangements pursuant to the Loan and Security Agreement, dated as of
April 30, 1992, between Lender and AM General, as amended pursuant to Amendment
No. 1 to Loan and Security Agreement, dated July 10, 1992, Amendment No. 2 to
Loan and Security Agreement, dated October 27, 1992, Amendment No. 3 to Loan and
Security Agreement, dated September 15, 1993, Amendment No. 4 to Loan and
Security Agreement, dated November 10, 1994, Amendment No. 5 to Loan and
Security Agreement, dated December 14, 1994, Amendment No. 6 to Loan and
Security Agreement, dated February 23, 1995, Amendment No. 7 to Loan and
Security Agreement, dated April 25, 1995, Amendment No. 8 to Loan and Security
Agreement, dated April 27, 1996, and Amendment No. 9 to Loan and Security
Agreement, dated April 26, 1996 (as amended hereby and as the same may hereafter
be further amended, modified, supplemented, extended, renewed, restated or
replaced, the "Loan Agreement," and together with all agreements, documents and
instruments at any time executed and/or delivered in connection therewith or
related thereto, collectively, the "Financing Agreements").
AM General has requested that Lender temporarily increase the limit on the
amount of Loans with respect to Eligible Inventory which may be made from
$30,000,000 to $45,000,000. Lender is willing to agree to the foregoing, subject
to the terms and conditions contained herein.
In consideration of the foregoing, and other good and valuable
consideration, the respective agreements and covenants contained herein, the
adequacy and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
<PAGE>
1. Definitions. For purposes of this Amendment, unless otherwise defined
-----------
herein, all terms used herein shall have the respective meanings assigned to
such terms in the Loan Agreement.
2. Inventory Sublimit.
------------------
(a) Notwithstanding anything to the contrary contained in Section
2.1(d) of the Loan Agreement, effective as of the date hereof and ending on
October 31, 1996, the aggregate unpaid principal amount of the Loans with
respect to Eligible Inventory pursuant to Section 2.1(a) of the Loan Agreement,
regardless of the Value of Eligible Inventory at any time, shall not exceed
$45,000,000 (the "Inventory Sublimit"), except in Lender's discretion; provided,
--------
that, (i) if, at any time on or before October 31, 1996, Borrower shall sell
- ----
approximately one hundred sixty-seven (167) Hummers pursuant to the Foreign
Military Sales Program of the United States Department of Defense under Case
JCZ, dated June 28, 1996, between the United States Government and the
Government of Thailand, then the Inventory Sublimit shall be reduced
automatically and without further action by $3,000,000 and (ii) in addition to
and not in limitation of the preceding clause (i), if, at any time on or before
October 31, 1996, Borrower shall sell approximately six hundred one (601)
Hummers pursuant to the Foreign Military Sales Program of the United States
Department of Defense under Case JCX, dated May 30, 1996, between the United
States Government and the Government of Thailand, then the Inventory Sublimit
shall be reduced automatically and without further action by $12,000,000. In any
event, the Inventory Sublimit shall be reduced automatically and without further
action to $30,000,000 as of and after the close of business on October 31, 1996.
(b) Without limiting any of the rights of Lender pursuant to the Loan
Agreement or otherwise, upon any reduction of the Inventory Sublimit as provided
in Section 2(a) above, but in any event as of the close of business on October
31, 1996, regardless of the amounts of Eligible Inventory, Borrower agrees
absolutely and unconditionally, without demand and automatically to make a
payment to Lender in respect of the Loans in an amount equal to the excess, if
any, of the aggregate unpaid principal amount of the Loans with respect to
Eligible Inventory in excess of the principal amounts of the Inventory Sublimit
as so reduced. Each such payment in respect of the Loans pursuant to this
Section 2(b) shall be without premium or penalty, except to the extent that the
outstanding balance of the Loans after such payment may result in any fee under
Section 2.5(c) of the Loan Agreement. All interest accrued on the principal
amount of the Loans paid pursuant to this Section 2(b) shall be paid, or may be
charged by Lender to the loan account(s) of Borrower, at Lender's option, on the
date of such payment.
-2-
<PAGE>
3. Amendment Fee. In addition to all other fees, charges, interest and
-------------
expenses payable by Borrower to Lender under the Loan Agreement and the other
Financing Agreements, Borrower shall pay to Lender a fee for entering into this
Amendment in the amount of $25,000, which amount is fully earned and payable as
of the date hereof and may be charged directly to the loan account(s) of
Borrower.
4. Additional Representations and Warranties. Borrower and AMGSC each
-----------------------------------------
represents, warrants and covenants with and to Lender as follows, which
representations, warranties and covenants are continuing and shall survive the
execution and delivery hereof, and the truth and accuracy of, or compliance with
each, together with the representations, warranties and covenants in the other
Financing Agreements, being a continuing condition of the making of Loans by
Lender to Borrower:
(a) The failure of Borrower to comply with the covenants, conditions
and agreements contained herein or in any other agreement, document or
instrument at any time executed and/or delivered by Borrower with, to or in
favor of Lender shall constitute an Event of Default under the Financing
Agreements.
(b) No Event of Default or act, condition or event which with notice
or passage of time or both would constitute an Event of Default exists or has
occurred as of the date of this Amendment (after giving effect to the amendments
to the Financing Agreements made by this Amendment).
(c) This Amendment has been duly executed and delivered by Borrower
and AMGSC and is in full force and effect as of the date hereof and the
agreements and obligations of Borrower and AMGSC contained herein constitute
legal, valid and binding obligations of Borrower and AMGSC enforceable against
Borrower and AMGSC in accordance with their respective terms.
(d) Borrower agrees to deliver true, correct and complete copies of
the Government Contracts to be entered into by Borrower in connection with the
sale of Hummers for ultimate delivery to the Government of Thailand referred to
in Section 2(a) hereof.
5. Conditions to Effectiveness of Amendment. The effectiveness of the
----------------------------------------
other provisions of this Amendment shall be subject to the satisfaction of each
of the following additional conditions precedent:
(a) Lender shall have received an executed original or executed
original counterparts of this Amendment (as the case may be) duly authorized,
executed and delivered by the respective party or parties hereto;
- 3 -
<PAGE>
(b) all requisite corporate action and proceedings in connection
with this Amendment shall be in form and substance satisfactory to Lender, and
Lender shall have received all information and copies of all documents,
including, without limitations, records of requisite corporate action and
proceedings which Lender may have reasonably requested in connection therewith,
such documents where requested by Lender or its counsel to be certified by
appropriate corporate officers or work governmental authorities; and
(c) no Event of Default shall exist or have occurred and no event
shall have occurred or exist which with notice or passage of time or both would
constitute an Event of Default.
6. Effect of this Amendment. Except as modified pursuant hereto, no other
------------------------
changes or modifications to the Financing Arrangements are intended or implied
and in all other respects the Financing Agreements are hereby specifically
ratified, restated and confirmed by all the parties hereto as of the effective
date hereof. To the extent of any conflict between the terms of this Amendment
and the other Financing Agreements, the terms of this Amendment shall control.
The Loan Agreement and this Amendment shall be read and construed as one
agreement.
7. Further Assurances. The parties hereto shall execute and deliver such
------------------
additional documents and take such additional action as may be necessary or
desirable to effectuate the provisions and purposes of this Amendment.
8. Governing Law. The rights and obligations hereunder of each of the
-------------
parties hereto shall be governed by and interpreted and determined in accordance
with the internal substantive laws of the State of New York.
9. Binding Effect. This Amendment shall be binding upon and inure to the
--------------
benefit of each of the parties hereto and their respective successors and
assigns.
10. Counterparts. This Amendment may be executed in all number of
------------
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
- 4 -
<PAGE>
Please sign the enclosed counterpart of this Amendment in the space
provided below whereupon this Amendment as so accepted by Lender, shall become a
binding agreement among Borrower, AMGSC and Lender.
Very truly yours,
AM GENERAL CORPORATION
By: /s/ P. R. Schuchman
-------------------------
Title: Executive V.P.
-----------------------
ACKNOWLEDGED:
AM GENERAL SALES CORPORATION
By: /s/ P. R. Schuchman
-------------------------
Title: Vice President
-----------------------
AGREED:
CONGRESS FINANCIAL CORPORATION
By: /s/ Janet S. Last
-------------------------
Title: Vice President
-----------------------
- 5 -
<PAGE>
AMENDMENT NO. 11 TO LOAN AND SECURITY AGREEMENT
-----------------------------------------------
AM GENERAL CORPORATION
105 North Niles Avenue
South Bend, Indiana 46634-7025
December 17, 1996
Congress Financial Corporation
1133 Avenue of the Americas
New York, New York 10036
Gentlemen:
Congress Financial Corporation ("Lender") and AM General Corporation,
formerly known as Ren Acquisition Corp. ("AM General") have entered into certain
financing arrangements pursuant to the Loan and Security Agreement, dated as of
April 30, 1992, between Lender and AM General, as amended pursuant to Amendment
No. 1 to Loan and Security Agreement, dated July 10, 1992, Amendment No. 2 to
Loan and Security Agreement, dated October 27, 1992, Amendment No. 3 to Loan and
Security Agreement, dated September 15, 1993, Amendment No. 4 to Loan and
Security Agreement, dated November 16, 1994, Amendment No. 5 to Loan and
Security Agreement, dated December 14, 1994, Amendment No. 6 to Loan and
Security Agreement, dated February 23, 1995, Amendment No. 7 to Loan and
Security Agreement, dated April 25, 1995, Amendment No. 8 to Loan and Security
Agreement, dated April 27, 1995, Amendment No. 9 to Loan and Security Agreement,
dated June 26, 1996, and Amendment No. 10 to Loan and Security Agreement, dated
as of August 22, 1996 (as amended hereby and as the same may hereafter be
further amended, modified, supplemented, extended, renewed, restated or
replaced, the "Loan Agreement," and together with all agreements, documents and
instruments at any time executed and/or delivered in connection therewith or
related thereto, collectively, the "Financing Agreements").
AM General has requested that Lender waive the existing default under the
net worth covenant and amend the existing net worth covenant. Lender is willing
to agree to the foregoing, subject to the terms and conditions contained herein.
In consideration of the foregoing, and other good and valuable
consideration, the respective agreements and covenants contained herein, the
adequacy and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
<PAGE>
1. Definitions. For purposes of this Amendment, unless otherwise defined
-----------
herein, all terms used herein shall have the respective meanings assigned to
such terms in the Loan Agreement.
2. Waiver.
------
(a) Lender hereby waives the Event of Default arising as a result of
the failure of Borrower to maintain the Consolidated Adjusted Net Worth for the
period on and prior to October 31, 1996 in the amounts required under Section
6.12 of the Loan Agreement.
(b) Lender has not waived and is not by this Amendment waiving, and
has no intention of waiving any other Event of Default, which may have occurred
prior to the date hereof, or may be continuing on the date hereof or any Event
of Default which may occur after the date hereof (whether the same or similar to
the Event of Default referred to in Section 2(a) above or otherwise) and Lender
reserves the right, in its discretion, to exercise any or all of its rights and
remedies arising under the Financing Agreements applicable law or otherwise as a
result of any other Event of Default which may have occurred prior to the date
hereof, or are continuing on the date hereof or any Event of Default which may
occur after the date hereof (whether the same or similar to the Events of
Default described in Section 2(a) above or otherwise). The waiver contained in
Section 2(a) above shall not constitute a waiver of any Event of Default arising
as a result of the failure of Borrower to comply with Section 6.12 of the Loan
Agreement at any time after October 31, 1996.
3. Net Worth. Effective as of November 1, 1996, Section 6.12 of the Loan
---------
Agreement is hereby deleted in its entirety and the following substituted
therefor:
"6.12 Net Worth. Borrower and its Subsidiaries shall, at all times,
---------
maintain a Consolidated Adjusted Net Worth of not less than $41,000,000."
4. Fee. In addition to all other fees, charges, interest and expenses
---
payable by Borrower to Lender under the Loan Agreement and the other Financing
Agreements, Borrower hereby agrees to pay to Lender a fee for this Amendment in
an amount equal to $50,000, which amount shall be payable simultaneously with
the execution hereof, and which amount is fully earned as of the date hereof,
and may be charged directly to Borrower's loan account maintained by Lender.
5. Additional Representations and Warranties. Borrower and AMGSC each
-----------------------------------------
represents, warrants and covenants with and to Lender as follows, which
representations, warranties and covenants are continuing and shall survive the
execution and delivery hereof, and the truth and accuracy of, or compliance
- 2 -
<PAGE>
with each, together with the representations, warranties and covenants in the
other Financing Agreements, being a continuing condition of the making of Loans
by Lender to Borrower:
(a) No Event of Default or act, condition or event which with notice
or passage of time or both would constitute an Event of Default exists or has
occurred as of the date of this Amendment (after giving effect to the amendments
to the Financing Agreements made by this Amendment).
(b) This Amendment has been duly executed and delivered by Borrower
and AMGSC and is in full force and effect as of the date hereof and the
agreements and obligations of Borrower and AMGSC contained herein constitute
legal, valid and binding obligations of Borrower and AMGSC enforceable against
Borrower and AMGSC in accordance with their respective terms.
6. Conditions to Effectiveness of Amendment. The effectiveness of the
----------------------------------------
other provisions of this Amendment shall be subject to the satisfaction of each
of the following additional conditions precedent:
(a) Lender shall have received an executed original or executed
original counterparts of this Amendment (as the case may be) duly authorized,
executed and delivered by the respective party or parties hereto;
(b) no Event of Default shall exist or have occurred and no event
shall have occurred or exist which with notice or passage of time or both would
constitute an Event of Default.
7. Effect of this Amendment. Except as modified pursuant hereto, no other
------------------------
changes or modifications to the Financing Arrangements are intended or implied
and in all other respects the Financing Agreements are hereby specifically
ratified, restated and confirmed by all the parties hereto as of the effective
date hereof. To the extent of any conflict between the terms of this Amendment
and the other Financing Agreements, the terms of this Amendment shall control.
The Loan Agreement and this Amendment shall be read and construed as one
agreement.
8. Further Assurances. The parties hereto shall execute and deliver such
-----------------
additional documents and take such additional action as may be necessary or
desirable to effectuate the provisions and purposes of this Amendment.
9. Governing law. The rights and obligations hereunder of each of the
-------------
parties hereto shall be governed by and interpreted and determined in accordance
with the internal substantive laws of the State of New York.
-3-
<PAGE>
10. Binding Effect. This Amendment shall be binding upon and inure to the
--------------
benefit of each of the parties hereto and their respective successors and
assigns.
11. Counterparts. This Amendment may be executed in any number of
------------
counterparts, but all of such counterparts shall together constitute but one and
the same agreement. In making proof of this Amendment, it shall not be necessary
to produce or account for more than one counterpart thereof signed by each of
the parties hereto.
Please sign the enclosed counterpart of this Amendment in the space
provided below whereupon this Amendment as so accepted by Lender, shall become a
binding agreement among Borrower, AMGSC and Lender.
Very truly yours,
AM GENERAL CORPORATION
By: /s/ Roger Fay
--------------------
Title: Vice President
-----------------
ACKNOWLEDGED:
AM GENERAL SALES CORPORATION
BY: /s/ Roger Fay
---------------------
Title: Vice President
-----------------------
AGREED;
CONGRESS FINANCIAL CORPORATION
By: /S/ Josiphine Norris
---------------------
Title: Vice President
-----------------------
-4-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> OCT-31-1995 OCT-31-1996
<PERIOD-START> NOV-01-1995 NOV-01-1995
<PERIOD-END> OCT-31-1995 OCT-31-1996
<CASH> 1,140 5,867
<SECURITIES> 0 0
<RECEIVABLES> 53,274 57,524
<ALLOWANCES> (586) (398)
<INVENTORY> 123,359 121,710
<CURRENT-ASSETS> 183,536 189,833
<PP&E> 99,767 104,043
<DEPRECIATION> (37,005) (47,580)
<TOTAL-ASSETS> 372,682 373,182
<CURRENT-LIABILITIES> 85,445 101,926
<BONDS> 75,126 74,188
0 0
5,000 5,000
<COMMON> 0 0
<OTHER-SE> (1,433) (20,962)
<TOTAL-LIABILITY-AND-EQUITY> 372,682 373,182
<SALES> 411,683 462,406
<TOTAL-REVENUES> 411,683 462,406
<CGS> 355,724 419,476
<TOTAL-COSTS> 407,890 476,842
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 10,663 13,858
<INCOME-PRETAX> (6,870) (28,294)
<INCOME-TAX> (435) (8,683)
<INCOME-CONTINUING> (6,435) (19,611)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 2,965 0
<CHANGES> 0 0
<NET-INCOME> (3,470) (19,611)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
