<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended April 30, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file Number: 33-93302
AM General Corporation
(Exact name of registrant as specified in its charter)
____________________________
Delaware
(State or other jurisdiction of incorporation or organization)
35-1852615
(IRS Employer Identification No.)
105 North Niles Avenue
South Bend, Indiana 46617
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (219) 284-2907
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant; (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to filing requirements for the
past 90 days. Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of 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 June 14, 1997.
Documents Incorporated by reference: None.
1
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AM General Corporation
Form 10-Q
Quarter Ended April 30, 1997
<TABLE>
<S> <C> <C>
PART I - FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets
as of April 30, 1997 (unaudited) and October 31, 1996 (audited) 3
Consolidated Statements of Operations
For the three and six months ended April 30, 1997 (unaudited) and April 30, 1996 (unaudited) 4
Consolidated Statements of Cash Flows
For the six months ended April 30, 1997 (unaudited) and April 30, 1996 (unaudited) 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 8
Three Months Ended April 30, 1997 ("second quarter of 1997") compared to Three Months Ended April 30, 1996 ("second
quarter of 1996") 10
Six Months Ended April 30, 1997 ("first six months of 1997") compared to Six Months Ended April 30, 1996 ("first six months
of 1996") 13
Liquidity and Capital Resources 16
Forward-Looking Statements 17
PART II - OTHER INFORMATION 18
ITEM 1. LEGAL PROCEEDINGS 18
Breach of Contract 18
Environmental Matter 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AM General Corporation and Subsidiary
Consolidated Balance Sheets
(Dollar amounts in thousands, except share information)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
April 30, October 31,
Assets 1997 1996
- -----------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 1,841 5,867
Accounts receivable, net 42,979 57,126
Inventories 82,569 121,710
Prepaid expenses 4,049 1,675
Deferred income taxes 5,820 3,455
- -----------------------------------------------------------------------------------------------------------------
Total current assets 137,258 189,833
Income taxes receivable 558 4,023
Property, plant, and equipment, net 47,440 56,463
Deferred income taxes 24,439 20,488
Goodwill, net 85,728 87,871
Other assets 13,201 14,504
- -----------------------------------------------------------------------------------------------------------------
$ 308,624 373,182
- -----------------------------------------------------------------------------------------------------------------
Liabilities and Stockholder's Deficit
- -----------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 35,855 59,212
Accrued expenses 50,433 42,670
Income taxes payable 661 44
- -----------------------------------------------------------------------------------------------------------------
Total current liabilities 86,949 101,926
Long-term debt, excluding current 76,084 126,865
maturities
Postretirement benefits other than 152,643 150,134
pensions, noncurrent portion
Other liabilities, excluding current 14,517 10,219
maturities
- -----------------------------------------------------------------------------------------------------------------
Total liabilities 330,193 389,144
- -----------------------------------------------------------------------------------------------------------------
Stockholder's deficit:
8% cumulative preferred stock, $1,000 par value. Authorized 10,000 shares;
issued and outstanding 5,000 shares 5,000 5,000
Common stock, $.01 par value. Authorized, issued and outstanding 900 shares - -
Paid-in capital 1,000 1,000
Accumulated deficit (27,569) (21,962)
- -----------------------------------------------------------------------------------------------------------------
Total stockholder's deficit (21,569) (15,962)
Commitments and contingencies
- -----------------------------------------------------------------------------------------------------------------
$ 308,624 373,182
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
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AM GENERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Operations
(Dollar amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
----------------------- ------------------------
1997 1996 1997 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 130,862 $ 124,622 $ 271,790 $ 243,670
- -------------------------------------------------------------------------------------------------------
Cost and expenses:
Cost of sales 117,452 108,041 241,607 211,938
Depreciation and amortization 3,311 4,857 6,811 9,942
Selling, general, and administrative expenses 6,316 8,739 14,984 16,917
Restructuring charges 7,641 - 9,051 -
- -------------------------------------------------------------------------------------------------------
Income (loss) before interest and income taxes (3,858) 2,985 (663) 4,873
Interest income 52 845 108 1,752
Interest expense (3,248) (3,965) (7,303) (8,179)
- -------------------------------------------------------------------------------------------------------
Loss before income taxes (7,054) (135) (7,858) (1,554)
Income tax (benefit) expense (2,282) 451 (2,251) 380
- -------------------------------------------------------------------------------------------------------
Net loss $ (4,772) $ (586) $ (5,607) $ (1,934)
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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AM GENERAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Six Months Ended
April 30,
------------------------
1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,607) (1,934)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Restructuring charges 9,051 -
less Restructuring payments (663) -
Depreciation and amortization of plant and equipment 4,142 7,279
Other amortization 3,188 3,188
Decrease in allowance for doubtful accounts (48) (236)
Increase (decrease) in inventory reserve 1,229 (475)
Deferred income taxes (6,317) (1,129)
Amortization of bond discount 28 29
Noncash other postretirement cost 2,509 2,407
(Gain)/Loss on sale of equipment (5) 19
Change in assets and liabilities:
Accounts receivable 14,195 9,112
Inventories 38,046 2,760
Prepaid expenses 168 (691)
Other assets 258 (633)
Accounts payable (23,357) (16,510)
Accrued expenses 4,152 8,763
Income taxes 4,083 1,148
Other liabilities 2,898 38
- --------------------------------------------------------------------------------------
Net cash provided by operating activities 47,950 13,135
- --------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of equipment 17 4
Capital expenditures (1,183) (2,601)
- --------------------------------------------------------------------------------------
Net cash used in investing activities (1,166) (2,597)
- --------------------------------------------------------------------------------------
Cash flows from financing activities:
Net repayments under line-of-credit agreement (50,810) (5,289)
Principal payments on senior note - -
- --------------------------------------------------------------------------------------
Net cash used in financing activities (50,810) (5,289)
- --------------------------------------------------------------------------------------
Net change in cash (4,026) 5,249
Cash and cash equivalents at beginning of period 5,867 1,140
- --------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,841 6,389
- --------------------------------------------------------------------------------------
Supplemental disclosure of cash items
Interest paid $ 6,757 2,731
Taxes paid 116 361
- --------------------------------------------------------------------------------------
</TABLE>
5
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AM General Corporation and Subsidiary
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statement presentation.
In the opinion of management, all adjustments, including normal recurring
accruals and the restructuring accrual discussed in footnote 4, considered
necessary for a fair presentation have been included. Operating results for the
six month period ended April 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending October 31, 1997.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant's Form 10-K for the year ended
October 31, 1996.
Note 2. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
April 30,
1997 October 31,
(Unaudited) 1996
------------ -----------
<S> <C> <C>
Finished Goods $35,761 73,128
Service Parts 16,336 14,784
Extended Service Program
Production costs of goods currently
in process 3,619 3,748
Raw Materials, supplies and work in progress 31,784 33,752
------------ -----------
87,500 125,412
Less allowance for inventory obsolescence (4,931) (3,702)
------------ -----------
Total $82,569 121,710
============ ===========
</TABLE>
Note 3. Reclassifications
Certain reclassifications have been made to previously reported cost and
expenses to conform to the presentation contained herein.
Note 4. Restructuring Charge
In anticipation of continued softness in the demand for Military HUMVEEs,
primarily International, the Company implemented a plan to improve its operating
results and financial liquidity. The plan consists of 1) a reduction in the
HUMVEE/HUMMER production rate, 2) a reduction in corporate overhead costs, and
3) a cost review of Indianapolis Stamping Plant parts based on reduced
HUMVEE/HUMMER volumes.
6
<PAGE>
Effective February 3, 1997, the HUMVEE/HUMMER production line rate was reduced
from 25 to 16.5 units per day.
During the first six months of 1997, the Company recorded a $1.5 million
restructuring charge to recognize the costs of a salary and hourly workforce
reduction of 143 employees. Through the end of the first six months of 1997,
$.6 million has been charged against this reserve. The Company anticipates that
these costs will be paid by the end of fiscal 1997.
In March of 1997, the Company made a formal announcement of its decision to
close the Indianapolis Stamping Plant. This plant supplies parts for the
HUMVEE/HUMMER manufacturing facility and to a lesser degree, the Extended
Service Program truck remanufacturing facility. The exit plan includes the
winding up of production activities by the end of the fiscal year, the
outsourcing of parts to existing stamping sources, a workforce reduction, and
the disposal of the facility. The Company recorded a $7.5 million restructuring
charge in the second quarter to recognize these costs. The components of this
charge include: $3.4 million for the plant disposal; $3.0 million for personnel
reductions; and $1.1 million for plant shutdown and other charges. The charge
for personnel reductions includes the recognition of $1.4 million of Accelerated
Pension Expense and a $1.6 million charge for severance benefits. Not recorded
at this time are certain curtailment gains in connection with deferred benefit
costs. These gains will be recorded as plant personnel are released. Charges
against this reserve have been minimal through the end of the second quarter of
fiscal 1997.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
AM General is the largest supplier of light tactical wheeled vehicles for the
Department of Defense ("DoD"). The Company is the original designer and sole
manufacturer of the High Mobility Multipurpose Wheeled Vehicle ("HUMVEE"), which
it sells to the US and foreign military services. The Company also sells HUMVEEs
to foreign military services ("FMS") through the DoD's FMS program and on a
direct sale basis. In 1993, the Company began selling a modified version of the
HUMVEE ("HUMMER") to industrial and retail users through its commercial dealer
network. In 1994, the Company began selling remanufactured 2.5 ton medium
tactical vehicles under the Army's Extended Service Program ("ESP")
RESTRUCTURING
In anticipation of continued softness in the demand for Military HUMVEEs,
primarily International, the Company designed and implemented a comprehensive
three phased plan to improve its operating results and financial liquidity. The
plan includes a reduction in the HUMVEE/HUMMER production rate, a significant
reduction in corporate overhead costs and a review of the impact on operating
costs at the Indianapolis Stamping Plant assuming the reduced vehicle production
rate. In connection with this plan, the Company recorded special charges of $1.4
million during the first quarter of 1997 and $7.6 million during the second
quarter of 1997 ("Restructuring Charges").
Effective February 3, 1997, the HUMVEE/HUMMER line rate was reduced from 25 to
16.5 units per day with an average of 12.5 units per day for the US Military and
its FMS customers and 4 units per day for commercial customers.
The Company also implemented a comprehensive cost reduction plan of each of its
business lines. The objective of such plan is to significantly reduce the
Company's variable and fixed costs, including corporate overhead. Specifically,
the Company reduced its salaried and hourly worforce in January 1997 by 143
employees and anticipates further reductions of 130 to its hourly workforce
throughout the remainder of the year. Additionally, certain operations and
facilities will be consolidated and eliminated. During the first six months of
1997, the Company recorded a Restructuring Charge of $1.5 million in connection
with this portion of the plan.
During the second quarter of 1997, the Company reached a decision to close its
Indianapolis Stamping Plant and outsource this product as part of the cost
reduction plan. In connection with this decision, the Company recorded a
Restructuring Charge of $7.5 million in the second quarter of 1997. The
Company's management anticipates that all production activity at the plant will
cease by the end of the fiscal year. In accordance with generally accepted
accounting principles, the Restructuring Charge was recorded when the decision
to close the plant had been finalized and communicated. Not recorded at this
time are certain curtailment gains in connection with deferred benefit costs.
These gains will be recorded as plant production activity winds down and plant
personnel are released.
HUMVEE/HUMMERs
From November 1, 1993 through May 7, 1995, the Company's HUMVEE/HUMMER
production rate was approximately 47 units per day including 35 units per day
for the US Military and its FMS customers. On May 8, 1995 the Company reduced
its production rate to 25 units per day due to lower US and international
military demand. On February 3, 1997, the Company reduced its production rate
from 25 to 16.5 units per day due to continued lower military demand.
8
<PAGE>
From 1990 through January 31, 1997, AM General sold 49,797 HUMVEEs under its A1
Series program with the DoD. With the sale of 601 vehicles to the FMS customer
in the first quarter of 1997, all units produced under the A-1 Series program
have been sold.
The Company began producing the latest generation of military HUMVEEs, the A2
series, in August 1995 under a contract for 1,201 units known as the R021
Contract. On December 23, 1995, the Company entered into a new multi-year annual
requirements contract for A2 HUMVEEs known as the X001 Contract which provides a
mechanism for the US Army to procure at least 2,350 HUMVEEs annually for the
next five years. The contract, however, does not require the Army to purchase
the vehicles as funding for each of the respective years must be appropriated
via the annual Defense Budget. Through April 30, 1997, a total of 5,722 vehicles
have been ordered on the X001 Contract. The pending FY98 Defense Bill currently
contains the necessary funding for the third year of this contract.
REMANUFACTURING
Extended Service Program ("ESP")
In September 1993, the Company was awarded the ESP Contract, the first multiyear
contract to teardown and remanufacture aging 2-1/2-ton military trucks under the
ESP program. Approximately three old trucks are completely disassembled -certain
parts are reworked, others are scrapped and specific new parts are added- for
every two remanufactured vehicles under this contract. As of April 30, 1997 a
total of 2,571 trucks have been remanufactured and sold to the US government.
The Company accounts for the ESP Contract on the Estimate at Completion ("EAC")
basis of accounting which recognizes estimated profits in the same percentage as
revenues are recognized over the term of the contract (the "Booking Rate").
Estimated contract costs and profits are reviewed periodically and adjustments
recorded as necessary. During the third quarter of fiscal 1996, the Company
lowered its Booking Rate in accordance with this periodic review of contract
costs, the result of which reduced the amount of gross profit previously
recorded for the ESP Contract.
Medium Tactical Truck Remanufacture ("MTTR")
On November 10, 1996, the Company was awarded $6.9 million on a Phase I contract
by the DoD to design, produce and test 10 prototype vehicles for the US Army and
Marines. A competitor was awarded a similar contract. At the conclusion of the
Phase I competition, both competitors will be asked to quote on a Phase II
contract for the production and delivery of approximately 13,000 5-ton and 7 ton
vehicles, a program valued at approximately $1.8 billion. Prototypes are
scheduled for delivery for test in August 1997. The current DoD plan targets the
award of the Phase II production contract in late 1998.
SPARE PARTS LOGISTICS OPERATION ("SPLO") and SYSTEMS TECHNICAL SUPPORT ("STS")
The Company's SPLO operation sells after-market parts and support services for
vehicles manufactured by the Company. Its STS operation performs engineering
services related to the Company's military trucks and certain other military
vehicles.
9
<PAGE>
Three Months Ended April 30, 1997 ("second quarter of 1997") compared to Three
Months Ended April 30, 1996 ("second quarter of 1996")
AM General Corporation and Subsidiary
Table of Net Revenues and HUMVEE/HUMMER Unit Sales Information
(in millions, except unit information)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
April 30,
-----------------------------
%
1997 1996 Change Change
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales
HUMVEE/HUMMERs
US Military $ 51.7 46.3 5.4 11.6%
International (1) 14.9 26.2 (11.3) (43.2)%
Commercial 21.8 17.8 4.0 22.5%
--------- --------- ----------
Total 88.4 90.3 (1.9) (2.1)%
ESP 20.1 18.0 2.1 11.6%
SPLO 13.7 10.5 3.2 30.4%
STS 8.7 5.8 2.9 49.4%
--------- --------- ---------
Total net sales 130.9 124.6 6.3 5.0%
========= ========= =========
HUMVEE/HUMMER
Unit Sales
US Military 831 872 -41 (4.7)%
International (1) 214 384 -170 (44.3)%
Commercial 360 319 41 12.9%
------------ ------------ ---------
Total 1,405 1,575 -170 (10.8)%
HUMVEE/HUMMERs
Average Unit Selling Prices
US Military $62,178 53,085 9,093 17.1%
International (1) 69,570 68,224 1,346 2.0%
Commercial 60,731 55,702 5,029 9.0%
All Models 62,933 57,306 5,627 9.8%
</TABLE>
(1) Includes FMS and Direct International Sales
Net Sales
The increase in net sales was due primarily to higher US Military HUMVEEs and
Commercial HUMMERs, SPLO, STS and ESP sales offset partially by lower
International Military HUMVEE sales. The increase in US Military HUMVEE sales
is primarily attributed to the higher unit selling price of Military HUMVEEs
during the second quarter of 1997 compared with the unit selling price of
HUMVEEs in the second quarter of 1996. The increase in the unit selling price
of Military HUMVEEs is attributed to a higher concentration of the more
expensive A2 HUMVEEs sold in the second quarter of 1997 under the Company's X001
contract. The increase in Commercial HUMMER sales is attributed to
10
<PAGE>
an increase in demand and an overall higher unit selling price due to more
expensive vehicle options and a general price increase. The increase in SPLO
sales is primarily attributed to timing differences of US military orders. The
increase in STS sales is primarily attributed to the addition of the MTTR
contract.
The decrease in International Military HUMVEE sales is primarily attributed to a
general decline in International Military HUMVEE orders.
Average HUMVEE/HUMMER Unit Selling Prices
Average unit selling prices for all models increased by 9.8% from the second
quarter of 1996 primarily due to higher unit selling prices for US Military
HUMVEEs. Average unit selling prices for the US Military increased 17.1% over
the second quarter of 1996 due primarily to a higher ratio of more expensive
models and a recognition of appropriate pricing for certain modifications for a
particular model (the "Vehicle Pricing Adjustment"). This Vehicle Pricing
Adjustment, recorded in the second quarter of 1997, related to units delivered
in the last quarter of fiscal 1996 ($.8 million) and in the first quarter of
fiscal 1997 ($1.3 million). Commercial HUMMER average unit selling prices
increased 9.0% primarily due to price increases on the 1997 model, a reduction
of sales incentives and a higher ratio of current versus prior model year
vehicle sales in the second quarter of 1997.
Gross Profit
Gross profit was $13.4 million for the second quarter of 1997, a decrease of
$3.2 million or 19.3% from gross profit of $16.6 million for the second quarter
of 1996. The Company's gross profit margin declined from 13.3% in the second
quarter of 1996 to 10.2% in the second quarter of 1997. The decrease was
primarily due to lower ESP gross profit due to the lower Booking Rate and lower
absorption of HUMMER plant related costs due to the reduction of HUMVEE/HUMMER
unit production partially offset by the Vehicle Pricing Adjustment.
Depreciation and Amortization
Depreciation and amortization expense was $3.3 million for the second quarter of
1997, a decrease of $1.5 million or 31.2% from depreciation and amortization
expense of $4.8 million for the second quarter of 1996. The decrease was
primarily due to lower amortization of US Military tooling for the A-2 HUMVEE
during the second quarter of 1997. This tooling was amortized during the second
quarter of 1996 under a prior HUMVEE A-2 contract.
Selling, General and Administrative
Selling, general and administrative (SG&A) expense was $6.3 million for the
second quarter of 1997, a decrease of $2.4 million or 27.6% from SG&A expense of
$8.7 million for the second quarter of 1996. The decrease is primarily
attributed to the Company's cost reduction plan implemented at the end of the
first quarter of 1997. (See "Restructuring")
Restructuring charge
During the second quarter of 1997, the Company implemented specific aspects of
its restructuring plan (see "Restructuring"). Specifically, the Company recorded
a special charge of $7.5 million in connection with its decision to close the
Indianapolis Stamping Plant and $.1 million with respect to employee layoff
costs in connection with its plan to reduce corporate overhead costs. There were
no comparable costs recorded by the Company during the second quarter of 1996.
Operating Loss
The Company reported an operating loss of $3.8 million for the second quarter of
1997, a decrease of $6.8 million from operating income of $3.0 million for the
second quarter of 1996. The decrease in operating income is primarily attributed
to the Restructuring charge and lower gross profit partially offset by lower
SG&A costs and lower depreciation and amortization expense.
11
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Interest Income and Expense
Interest expense for the second quarter of 1997 was $3.2 million, a decrease of
$.7 million or 17.5% from interest expense of $4.0 million for the second
quarter of 1996. Average debt outstanding during the second quarter of fiscal
1997 was $96.9 million at a weighted average interest rate of 12.23%. Average
debt outstanding during the second quarter of fiscal 1996 was $125.3 million at
a weighted average interest rate of 11.77%.
The revolving loan balance was $1.9 million at the end of the second quarter of
1997 a reduction of $44.7 million from the $46.6 million balance at the end of
the second quarter of 1996 due to the reduction of finished goods inventory.
(see Liquidity)
Interest income decreased by $.8 million in the second quarter of 1997 primarily
due to higher interest income in the second quarter of 1996 in connection with
the acceptance by the DoD and the FMS Customer of interest expense associated
with the delay in the sale of certain inventory.
Income Tax (Benefit)/Expense
Income tax benefit/expense was recorded at the statutory rate adjusted for
permanent differences primarily resulting from the amortization of goodwill.
Income tax benefit was a credit of $2.3 million for the second quarter of 1997,
a decrease of $2.7 million from income tax expense of $.4 million for the second
quarter of 1996. The decrease in income tax expense was due to the decrease of
taxable income.
Net Loss
As discussed above, the increase in net loss was primarily due to the
Restructuring charge, lower gross profit and higher net interest expense
partially offset by lower income tax, SG&A and depreciation and amortization
expense.
12
<PAGE>
Six Months Ended April 30, 1997 ("first six months of 1997") compared to Six
Months Ended April 30, 1996 ("first six months of 1996")
<TABLE>
<CAPTION>
AM General Corporation and Subsidiary
Table of Net Revenues and HUMVEE/HUMMER Unit Sales Information
(in millions, except unit information)
(unaudited)
Six Months Ended
April 30,
-----------------------
%
1997 1996 Change Change
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net sales
HUMVEE/HUMMERs
US Military $ 107.9 93.2 14.7 15.8%
International (1) 48.0 50.1 (2.1) (4.2)%
Commercial 39.0 35.5 3.5 9.9%
--------- --------- ---------
Total 194.9 178.8 16.1 9.0%
ESP 37.7 37.0 0.7 1.9%
SPLO 24.0 17.0 7.0 40.9%
STS 15.2 10.8 4.4 41.0%
Total net sales 271.8 243.6 28.2 11.6%
========= ========= =========
HUMVEE/HUMMER
Unit Sales
US Military 1,780 1,708 72 4.2%
International (1) 928 741 187 25.2%
Commercial 649 658 (9) (1.4)%
--------- --------- ---------
Total 3,357 3,107 250 8.0%
HUMVEE/HUMMER
Average Unit Selling Prices
US Military $60,608 54,549 6,059 11.1%
International (1) 51,718 67,660 (15,942) (23.6)%
Commercial 60,092 54,020 6,072 11.2%
All Models 58,051 57,564 487 0.8%
</TABLE>
(1) Includes FMS and Direct International Sales
Net Sales
The increase in net sales was due primarily to higher US Military HUMVEE,
Commercial HUMMER, SPLO, STS and ESP sales offset partially by lower
International Military HUMVEE sales. The increase in US Military HUMVEE sales
is primarily attributed to the higher unit selling price during the first six
months of 1997 compared with the unit selling price during the first six months
of 1996. The increase in the unit selling price of Military HUMVEEs is
attributed to a higher concentration of the more expensive A2 models sold in the
second quarter of 1997 under the Company's X001 contract. The increase in
13
<PAGE>
Commercial HUMMER sales is attributed to higher unit selling prices due to price
increases on the 1997 model, lower sales incentives and more expensive vehicle
options. The increase in SPLO sales is primarily attributed to timing
differences in US military orders. The increase in STS sales is primarily
attributed to the addition of the MTTR contract.
The decrease in International Military HUMVEE sales is primarily attributed to
the decline in overall International Military HUMVEE sales partially offset by
the sale of the 601 units for the FMS customer.
Average HUMVEE/HUMMER Unit Selling Prices
Average unit selling prices for all models increased by .8% from the first six
months of 1996 primarily due to higher unit selling prices for US Military
HUMVEEs and Commercial HUMMERs offset by lower unit selling prices for
International HUMVEEs. Average unit selling prices for US Military HUMVEEs
increased 11.1% over the first six months of 1996 due primarily to a higher
ratio of more expensive models and the Vehicle Pricing Adjustment. Commercial
HUMMER average unit selling prices increased 11.2% primarily due to a price
increase on the 1997 model, lower sales incentives, a higher ratio of current
versus prior model year vehicle sales in the first six months of 1997 and model
year price increases. Average unit selling prices for International HUMVEEs
decreased by 23.6% primarily due to a higher concentration of lower priced A1
HUMVEEs sold to the FMS Customer during the first six months of 1997.
Gross Profit
Gross profit was $30.2 million for the first six months 1997, a decrease of $1.5
million or 4.7% from gross profit of $31.7 million for the first six months
1996. The Company's gross profit declined from 13.0% in the first six months
1996 to 11.2% in the first six months 1997. The decrease was primarily due to
lower ESP gross profit primarily due to the change in the Booking Rate, lower
absorption of HUMVEE/HUMMER plant costs due to the reduction in units produced
partially offset by the Vehicle Pricing Adjustment and higher gross profit in
connection with the sale of the 601 units to the FMS Customer.
Depreciation and Amortization
Depreciation and amortization expense was $6.8 million for the first six months
1997, a decrease of $3.1 million or 31.3% over depreciation and amortization
expense of $9.9 million for the first six months 1996. The decrease was
primarily due to lower amortization of US Military tooling for the A-2 HUMVEE
during the first six months 1997. This tooling was amortized during the first
six months 1996 under a prior HUMVEE A-2 contract.
Selling, General and Administrative
Selling, general and administrative (SG&A) expense was $15.0 million for the
first six months 1997, a decrease of $1.9 million or 11.2% from SG&A expense of
$16.9 million for the first six months 1996. The decrease is primarily
attributed to the Company's cost reduction plan implemented at the end of the
first quarter of 1997. (See "Restructuring").
Restructuring charge
During the first six months of 1997, the Company implemented specific aspects of
its restructuring plan (see "Restructuring"). Specifically, the Company recorded
a special charge of $7.5 million in connection with its decision to close the
Indianapolis Stamping Plant and $1.5 million with respect to employee layoff
costs in connection with its plan to reduce fixed and corporate overhead costs.
There were no comparable costs recorded by the Company during the first six
months of 1996.
14
<PAGE>
Operating Loss
The Company reported an operating loss of $.7 million for the first six months
1997, a decrease of $5.5 million from operating income of $4.8 million for the
first six months 1996. The decrease in operating income is primarily attributed
to the Restructuring charge and lower gross profit partially offset by lower
SG&A costs and lower depreciation and amortization expense.
Interest Income and Expense
Interest expense for the first six months 1997 was $7.3 million, a decrease of
$.9 million or 11.0% from interest expense of $8.2 million for the first six
months of 1996. Average debt outstanding during the first six months of 1997 was
$113.4 million at a weighted average interest rate of 11.9%. Average debt
outstanding during the first six months of 1996 was $128.2 million at a weighted
average interest rate of 11.78%.
Interest income decreased by $1.6 million in the first six months 1997 primarily
due to higher interest income in the first six months 1996 in connection with
the acceptance by the DoD and the FMS Customer of interest expense associated
with the 768 units held in inventory.
Income Tax (Benefit)/Expense
Income tax benefit/expense was recorded at the statutory rate adjusted for
permanent differences primarily resulting from the amortization of goodwill.
Income tax benefit was a credit of $2.2 million for the first six months 1997, a
decrease of $2.6 million from income tax expense of $.4 million for the first
six months 1996. The decrease in income tax expense was due to the decrease of
taxable income.
Net Loss
As discussed above, the increase in net loss was primarily due to the
Restructuring charges, lower gross profit and higher net interest expense
partially offset by lower income tax, depreciation and amortization and SG&A
expense.
15
<PAGE>
Liquidity and Capital Resources
The Company's liquidity requirements result from capital investments, working
capital requirements, postretirement health care and pension funding, interest
expense, and, to a lesser extent, principal payments on its indebtedness. The
Company has met these requirements in each fiscal year since its inception in
1992 with cash provided by operating activities and borrowings under its
Revolving Credit Facility.
Cash provided by operating activities was $47.9 million for the first six months
of 1997 compared to $13.1 million for the first six months of 1996. The key
factors affecting cash flow from operating activities were decreases in
inventory and accounts receivable partially offset by a reduction in accounts
payable. Other factors include non-cash charges to operating income including
the Restructuring Charges, depreciation, amortization and non-cash
postretirement expenses.
Accounts receivable levels at the end of the first six months of 1997 were
slightly lower than levels at the end of the first six months of 1996 primarily
due to the timely processing and acceptance of prompt payment discount terms by
the government payment office.
Inventory levels at the end of the first six months of 1997 were $83.0 million,
a reduction of $38.7 million or 31.8% from inventory levels of $121.7 at the end
of the prior fiscal year. The improvement in inventory is attributed to the
reduction of $37.4 million of finished goods, primarily due to the sale of 601
HUMVEEs for the FMS Customer during the first quarter of 1997 and by 363 units
for the US Military. Additionally, the Company reduced its Commercial HUMMER
finished goods inventory by 24 units in conjunction with increased sales and
marketing efforts through its worldwide network of dealers and distributors.
During the first six months of 1997, the Company spent $1.2 million on capital
expenditures primarily for tooling for vehicle production, as compared to $2.6
million during the first six months of 1996. The Company expects total capital
expenditures in fiscal 1997 of approximately $4.9 million to be funded from
operating cash flow and availability under the Revolving Credit Facility.
At the outset of fiscal 1997, the Company designed a comprehensive three phased
plan to improve its operating results and financial liquidity. The plan includes
a reduction in the HUMVEE/HUMMER production rate, a significant reduction in
corporate overhead costs and a review of the impact on operating costs at the
Indianapolis Stamping Plant assuming the reduced production rate.
Effective February 3, 1997, the HUMVEE/HUMMER line rate was reduced from 25 to
16.5 units per day with an average of 12.5 units per day for the US Military and
its FMS customers and 4 units per day for commercial customers.
The Company also implemented a comprehensive cost reduction plan of each of its
business lines. The objective of such plan is to significantly reduce the
Company's variable and fixed costs, including corporate overhead. Specifically,
the Company reduced its salaried and hourly workforce in January 1997 by 143
employees and anticipates further reductions of 130 to its hourly workforce
throughout the remainder of the year. Additionally, certain operations and
facilities will be consolidated and eliminated. During the first six months of
1997, the Company recorded special charges of $1.5 million in connection with
this plan.
Upon completion of its review of operating costs affecting the Indianapolis
Stamping Plant, the Company reached a decision to close the plant and outsource
the parts to existing stamping sources. On March 7, the Company announced to
local union officials and plant personnel its intention to close the
Indianapolis Stamping Plant by the end of the fiscal year. In accordance with
this decision, the Company recorded a special charge of $7.5 million during the
second quarter of 1997.
16
<PAGE>
Management anticipates that cash flow from operations as impacted by the reduced
HUMVEE/HUMMER line rate, cost savings from the lower overhead structure, the
future cost savings associated with outsourcing the Indianapolis Plant stampings
as well as the availability under its Revolving Credit Facility will be
sufficient to finance the Company's liquidity needs for the foreseeable future.
The Company's Revolving Credit Facility has a maximum borrowing limit of $60
million, is secured by eligible inventories and receivables, as defined therein,
and expires on October 31, 1999. As of April 30, 1997, the Company had
borrowings of $1.9 million outstanding and approximately $39 million of excess
availability under the Revolving Credit Facility.
The ability of the Company to meet its debt service requirements and to comply
with such covenants will be dependent upon future operating performance and
financial results of the Company, which will be subject to financial, economic,
political, competitive and other factors affecting the Company, many of which
are beyond its control.
Forward-Looking Statements
This report includes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995, which involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions;
funding for government HUMVEE and ESP orders; volume of international and
commercial orders for HUMVEE/HUMMERs; the outcome of the MTTR competition; the
outcome of pending litigation; the loss of any significant customers; the loss
of any major supplier; and the availability of qualified personnel.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. A
pre-trial conference has been scheduled by the Starke County Circuit Court
for October 1, 1997 and a jury trial for November 5, 1997. The Company
believes that the plaintiff's claims have no merit and intends to
vigorously defend itself in this matter.
Environmental Matter
The Company has been named as a third party defendant in a lawsuit
regarding Rumpke of Indiana, Inc. v. Cummins Engine Company, Inc. et al.,
v. Monsanto Company et al. The plaintiff, Rumpke, purchaser of Uniontown
Landfill in Jackson County, Indiana brought this action in the Indianapolis
Division of the United States District Court for the Southern District of
Indiana on October 28, 1994. The plaintiff seeks to recover environmental
investigation and cleanup costs under the Federal Comprehensive
Environmental Response Compensation and Liability Act from Cummins Engine
Company, Inc. and other alleged generators of waste (collectively
"Cummins") allegedly sent by Cummins to the Seymour Recycling Corporation
Site in Seymour, Indiana ("Seymour Site"), which waste was allegedly
transshipped to the Uniontown Landfill. On or about April 30, 1997, Cummins
notified Monsanto Company and other parties including the Company that
Cummins had filed a third party action seeking recovery for damages,
response costs, attorney fees, declaratory and equitable relief in respect
to claims asserted against Cummins by Rumpke or otherwise in connection
with the Uniontown Landfill and/or the Seymour Site. The Company's
predecessor is alleged to have disposed of waste materials at the Seymour
Site.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K. Registrant did not file any reports on Form 8-K
during the quarter for which this report is filed.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 14, 1997
AM GENERAL CORPORATION
Registrant
By_________________________
Paul J. Cafiero
Vice President and
Chief Financial Officer
Duly authorized officer and
principal financial officer
20
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<FISCAL-YEAR-END> OCT-31-1997 OCT-31-1996
<PERIOD-START> NOV-01-1996 NOV-01-1995
<PERIOD-END> APR-30-1997 APR-30-1996
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<PP&E> 95,955 102,267
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