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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 33-93302
AM GENERAL CORPORATION
(Exact name of registrant as specified in its charter)
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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
required 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 such
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 and non-voting common equity
stock held by non-affiliates of the registrant is $0. Nine hundred shares of the
registrant's common stock, par value $.01 per share, are outstanding as of
January 29, 1999.
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 10
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 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE. 47
PART III 48
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. 48
ITEM 11. EXECUTIVE COMPENSATION. 49
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. 52
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 52
PART IV 54
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K 54
SIGNATURES 58
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PART I
ITEM 1. BUSINESS
AM General Corporation and its wholly owned subsidiaries, AM General Sales
Corporation and Chippewa Corporation (collectively, the "Company" or "AM
General" ) is the largest supplier of light Tactical Wheeled Vehicles ("TWVs")
for the Department of Defense ("DoD"). AM General (including predecessors) has a
history of over 50 years of successfully competing for government procurement
contracts. AM General is the designer and sole manufacturer of the High Mobility
Multipurpose Wheeled Vehicle ("HUMVEE "(R) or "HUMMER"(R)), which it sells to
the US and foreign military services and to industrial and retail users through
its commercial dealer network. From the introduction of the HUMMER/HUMVEE in
1984 and through October 31, 1998, the Company has delivered 126,032 HUMVEEs in
a variety of configurations to the DoD for use by the US Armed Forces, 22,072
HUMVEEs to the military services of 40 foreign countries, and 6,402 Commercial
HUMMERs. In fiscal 1998, the Company sold 4,145 HUMMER/HUMVEEs. In addition to
HUMMER/HUMVEEs, the Company also remanufactures and modernizes used military
vehicles and markets both technical support services and spare parts.
The Company classifies its operations into five business lines: (i) US and
Foreign Military HUMVEEs, (ii) Commercial HUMMERs, (iii) Remanufacturing -
Extended Service Program ("ESP"), (iv) Spare Parts Logistics Operations ("SPLO")
and (v) Systems Technical Support ("STS"). Reference is hereby made to
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") contained elsewhere herein, in which the Company's net sales
are summarized by business lines.
The Company recorded an $8.3 million net loss for fiscal 1998. Included in the
loss is a $5.3 million pre-tax restructuring charge in connection with the
anticipated closure of the ESP facility. On September 15, 1998, the Company
issued a notice under the Worker Adjustment and Retraining Notification ("WARN")
Act to the employees at the ESP facility advising them that the Company had
insufficient orders to keep the plant in operation. Subsequent to that notice,
the Company received orders that extended production through April 19, 1999 at
the current production rate. On January 21, 1999 the Company issued another
notice under the WARN Act to the employees at the ESP facility advising the
employees that the facility would be closing in April of 1999.
All of the Company's issued and outstanding capital stock is owned by The Renco
Group, Inc. ("Renco") which is 97.9% owned by trusts established by Mr. Ira Leon
Rennert, the Chairman and sole director of the Company and Renco for himself and
members of his family. As a result of such ownership, Mr. Rennert controls the
Company.
The Company was incorporated in Delaware in 1991, and its executive offices are
located at 105 North Niles Avenue, South Bend, Indiana 46617, telephone number:
(219) 284-2907.
BUSINESS LINES
Military HUMVEE
Since its introduction in 1984, the HUMVEE has been sold to US and foreign
militaries pursuant to contracts having firm fixed prices. Therefore, the
Company assumes full risk of producing and delivering the specified number of
vehicles for a fixed-price.
The HUMVEE has been upgraded since its introduction with improved components and
added features. During 1994, the Company developed and produced a new series of
HUMVEE models known as the A1-
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Series which incorporated an increase in the payload capacity and various other
enhancements. In 1995, the Company began production of an A2 Series under
contracts with the DoD including the X001 Contract which is the Company's
current contract with the DoD. See MD&A.
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 at least the same number of HUMVEEs that were produced and
delivered during fiscal 1998 (approximately 2,700 units) but significantly less
than were required under prior contracts. However, the volume reduction has been
partially offset by significantly higher unit prices received in fiscal 1998.
TACOM has indicated that the US Armed Forces will require HUMVEE purchases
beyond the year 2020 and currently has no plan to change the HUMVEE's mission
requirements. Further, the US Marines have asked for and received permission to
accelerate delivery of its approximately 17,000-unit HUMVEE requirement. Should
the US Marines obtain the necessary funding and accelerate this schedule, the
production rate for HUMMER/HUMVEEs would likely increase beyond the current
production rate of 16.5 units per day as early as fiscal year 2000.
The US Army has formed an Integrated Process Team ("IPT") to study the future
generation of Light Tactical Vehicles ("LTV"). Members of the IPT consist of
representatives from some of the major automotive manufacturing companies,
including a representative of the Company. The purpose of the IPT is to
establish the requirements for the next generation of LTV's. Senior members of
the Army have decided that the LTV must meet the current mission profile of the
HUMVEE. As a member of the IPT, the Company's representative will be working
closely with the team to insure that all future requirements are met. Management
believes that the next generation LTV will be an upgraded HUMVEE.
As of October 31, 1998, the Company had a total US military backlog of 247
military HUMVEEs valued at $12.0 million compared to 139 HUMVEEs valued at $9.1
million at October 31, 1997.
INTERNATIONAL SALES. Since November 1986, the Company has sold military HUMVEEs
to foreign nations, either directly to the foreign nation or through the US
Government's Foreign Military Sales ("FMS") program. The Company will continue
to capitalize on the HUMVEE's proven combat performance with the US Armed
Forces, the extensive offering of HUMVEE configurations and the Company's
technical and logistical support services to increase sales to foreign military
markets. To date, Taiwan, Saudi Arabia, Mexico, the United Arab Emirates and
Thailand have been the five largest of the Company's 40 international military
customers.
The Company sells HUMVEEs in various configurations to the military services of
foreign nations through the FMS program and its direct sales force and local
representatives. The FMS program is part of the US Government's security
assistance program, which provides equipment and services to more than 100
nations and international organizations. Funding is provided either directly by
the purchaser or with US-granted foreign aid credits or loans. As of October 31,
1998 and October 31, 1997, there were no significant FMS and direct sales
backlogs. In fiscal 1998, international military HUMVEE sales accounted for
approximately 9.2% of total HUMMER/HUMVEE unit sales and 9.6% of HUMMER/HUMVEE
net sales revenue. Management believes that foreign military services will
continue to purchase HUMVEEs because they are competitive in the market as
evidenced by the fact that it is the only light TWV being purchased in quantity
by the US military and they are the best vehicles available.
In fiscal 1997, the Company manufactured 231 HUMVEEs for a valued customer
seeking to acquire HUMVEEs under the FMS program (the "FMS Customer"). Due to
negotiation related difficulties in obtaining the order, these units remained in
finished goods inventory at October 31, 1998. As a result, the Company's
finished goods inventory was increased at October 31, 1997 and October 31, 1998
beyond normal operating levels. Moreover, such delay resulted in a higher than
expected level of borrowing by the Company under its revolving credit facility.
The Company continues to pursue an order with the FMS Customer for whom the
units were built; additionally, the Company has expanded its efforts to find
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alternative buyers. Management believes that the inventory will be sold in
fiscal 1999. 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 HUMVEE. The Company's engineering
staff has improved and adapted the military HUMVEE 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. Since 1992, the Company sold
6,402 Commercial HUMMERs through its network of approximately 89 domestic and
international dealerships and distributors. As of October 31, 1998, AM General
had a total backlog of 54 Commercial HUMMERs valued at $3.5 million compared to
52 valued at $2.8 million on October 31, 1997. In fiscal 1998, Commercial HUMMER
sales accounted for approximately 25.5% of total HUMMER/HUMVEE unit sales and
28.0% of HUMMER/HUMVEE net sales revenue.
Commercial HUMMERs are functionally equivalent to the A2 Series military HUMVEE
with modifications to comply with Federal Motor Vehicle Safety Standards
("FMVSS") for Class III (gross vehicle weight ("GVW") of 10,000 to 14,000
pounds) trucks and to satisfy commercial customer requirements relating to
safety, comfort and convenience. In addition to the standard HUMMER models,
Commercial HUMMERs have been configured as fire fighting and rescue vehicles,
ambulances, snowplowing vehicles; and to carry a variety of equipment and tools
such as man-lifts and backhoes.
The Company currently markets four models of the Commercial HUMMER, which
include two-passenger and four-passenger hard-tops, a four-door wagon and an
open-top sport model with suggested retail prices ranging from $65,000 to
$92,000, 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.
Additionally other customers include non-DoD government agencies such as Federal
Emergency Management, in addition to state and local fire, police and park
service departments.
The Company markets Commercial HUMMERs in the retail and fleet markets through a
network of dealers located throughout the United States and international
distributors primarily in the Middle East, South America and Canada. As of
October 31, 1998, the Company had approximately 46 domestic dealerships and 43
international distributors. Management intends to strengthen its Commercial
HUMMER distribution network by improving its dealer base.
To date, the Company has experienced modest sales in the fleet market. The
Company attributes the lack of fleet sales to various issues including
unit-selling price, lack of maintenance history on the vehicle, as well as
competitive products available to prospective customers. Given the magnitude of
the fleet market potential, management will continue to devote marketing
resources to penetrate the fleet market.
Since February 1995, the Company has issued eight recalls regarding design
problems with certain mechanical features of the Commercial HUMMER. The total
cost to the Company of the eight recalls is estimated to be approximately
$457,966 of which $354,940 has been incurred as of October 31, 1998. 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.
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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. That contract called
for the Company to rebuild and deliver remanufactured and modernized 2-1/2-ton
trucks by disassembling trucks provided by the DoD (the "ESP Contract"). The
Company 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. 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 50% less than that of a new vehicle. As of October 31,
1998, the Company had remanufactured and delivered 4,776 units to the DoD. When
the last unit is completed in April 1999, the Company will have delivered 5,483
remanufactured 2-1/2-ton vehicles to the US Army under this program.
Despite the economic advantage offered by the Company's re-manufactured 2-1/2
ton, the US Army has decided not to purchase any additional units beyond those
that are already on contract. Accordingly, the Company issued a WARN act notice
on January 21, 1999 to those employees affected by this decision advising them
that the facility will be closed. The last unit of production is scheduled to
occur on April 19, 1999 at which time production at the facility will cease and
plant closure operations will commence.
MEDIUM TACTICAL TRUCKS
On November 20, 1996, the Company was awarded a $6.9 million Phase I contract by
the DoD to build ten prototype vehicles for the Medium Tactical Truck
Remanufacture ("MTTR") program for the US Army and Marine Corp. A competitor was
awarded a similar contract. The Company delivered ten prototype vehicles for
testing purposes under the Phase I contract in August 1997 and submitted its
best and final proposal on November 30,1998. On December 18, 1998 the DoD
advised the Company that the contract had been awarded to the Company's
competitor.
On October 30, 1998, the Company was awarded a $2.4 million Phase I contract by
the DoD to build three prototype vehicles for the Family of Military Tactical
Vehicles ("FMTV") second source program for the US Army. A competitor was
awarded a similar contract. Under this contract, the Company is to produce two
new 5.0-ton vehicles and one new 2.5-ton vehicle for testing purposes. Upon
successful testing of the vehicles, the Company will be asked to submit a
production bid for approximately 700 vehicles to be built over three years. If
successful in winning this low-rate production contract which is expected to be
awarded in late 1999, upon its completion, the Company will be asked to compete
with the current FMTV contract manufacturer for a share of the following FMTV
multiyear contract.
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 1998, SPLO and STS accounted for approximately 12.9% and 3.2%,
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, including HUMMER/HUMVEEs, 2-1/2- and 5-ton trucks
and others. In addition, the Company provides expert training programs for
off-road driving, as well as training for vehicle maintenance and repairs.
STS is a full service engineering organization providing comprehensive technical
support and engineers to TACOM, with contracts on both wheeled and tracked
vehicles, including medium and heavy trucks and the HUMVEE. Services include
engineering, design and drafting, configuration and data management,
translation, and integrated logistics support.
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INDUSTRY
Since World War I, the US and foreign military forces have used TWVs for
transporting personnel, supplies and equipment in battlefield conditions. The
TWV fleet has evolved from numerous body styles and payloads to three basic
classifications - light (less than 2-1/2 tons), medium (2-1/2 ton and 5-ton) and
heavy (greater than 5 tons). Each of the three classifications serves basic
utility functions on the battlefield. Generally, commercial trucks are not
suited to military use or military procurement standards.
In the early 1980s, the US Army began its largest peacetime TWV fleet
modernization program in history. The escalation in US Army truck requirements
can be directly attributed to (i) a transition in the US Armed Forces' basic
fighting strategy and (ii) newly established roles for trucks as weapon system
platforms and as the transport component of medical, electronics and
intelligence systems. The US Armed Forces fighting doctrine has shifted from
"forward deployment" (i.e., maintaining large bases worldwide) in the Cold War
Era to "force projection" (e.g., the Gulf War) which calls for rapid deployment
and forced entry with fast moving main attacks on enemy fronts. As a result of
this fighting doctrine, the US Army established two major hardware initiatives
for ground attacks emphasizing speed and high mobility - the Bradley fighting
vehicle and the M1 Abrams main battle tank. At the time, no military trucks
(light, medium or heavy) existed that could match the expected speed and
mobility of the Bradley and Abrams vehicles. This led to the development of the
design specification for the HUMVEE. The HUMVEE is the only light TWV being
acquired in quantity by the US Armed Forces.
At the present time, the medium tactical wheeled fleet is in poor condition
measured by age and economic performance. As a result, the US Army commenced
modernizing its medium TWV fleet by procuring new 2-1/2-ton and 5-ton trucks,
and by obtaining remanufactured 2-1/2-ton vehicles through the Company under the
ESP program.
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. Despite the economic advantage offered by
the Company's re-manufactured 2-1/2 ton, the US Army has decided not to purchase
any additional units beyond those that are already on contract and the Company's
activities under this contract will cease in April 1999.
In an effort to accelerate the procurement of new 2-1/2 and 5-ton vehicles,
TACOM announced its intention to stage a competition for and award a second
source for the FMTV program. When selected in late 1999, the second source will
be awarded approximately 700 vehicles to produce over a three-year period. At
the conclusion of that contract, the second source will compete with the current
source for a share of the remaining program requirements; the winner of which
will receive the larger share of the following FMTV multiyear contract. As
discussed above, the Company intends to compete vigorously for the FMTV second
source award.
RESEARCH AND DEVELOPMENT
The Company believes that its technical expertise and engineering resources are
a competitive advantage, which has enabled the Company to successfully procure
business contracts with the US government. In addition to its STS operations,
which are dedicated to TACOM, the Company also maintains an independent research
and development ("R&D") department at its Livonia, Michigan facility to conduct
R&D activities.
MANUFACTURING PROCESS AND RAW MATERIALS
At the Company's Mishawaka, Indiana facility, HUMMER/HUMVEE vehicles are
manufactured on a highly automated truck-assembly production line. Major vehicle
components and parts are procured from outside vendors and delivered to the
Mishawaka facility. Stamped body parts are bonded, painted and treated for
corrosion protection either at a body shop located within the Mishawaka facility
or at outside vendors. HUMMER/HUMVEE chassis frames are assembled and joined
with engine components on a chassis assembly line. The addition of all other
body parts or trim (steering wheel, seats,
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windshields, grill, etc.) to the chassis and engine platform, as well as
painting operations, are conducted on separate assembly lines within the
facility. All HUMMER/HUMVEE vehicles, both military and commercial, undergo
testing before delivery to the customer.
Approximately 72.5% of the Company's cost of manufacturing HUMMER/HUMVEE
vehicles 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 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 HUMVEE for the US Armed Forces for more than
thirteen years, the Company believes that it is the dominant US manufacturer in
supplying light TWVs to the DoD and is one of only a few manufacturers on a
worldwide basis. Management believes that the HUMMER/HUMVEE offers enhanced
mobility and dependability at a lower cost than any of its international
competitors.
The Company's Commercial HUMMER competes as a highly specialized vehicle within
an established, competitive four-wheel drive vehicle marketplace. There are a
number of domestic and foreign manufacturers of four-wheel drive vehicles, which
have recognized models and 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 Company is in competition for the FMTV second source contract to be awarded
in late 1999. The Company anticipates a very high level of competition for this
award. The Company's competitor is an experienced manufacturer of tactical
wheeled vehicles and contractor with TACOM.
Competition in SPLO is highly fragmented among a large number of small
independent suppliers and selected original equipment manufacturers.
SEASONALITY AND PAYMENT
The Company's business is generally not seasonal. The Company builds military
vehicles subject to fixed- price medium and long term contracts. Therefore, the
Company assumes full risk of producing and delivering the specified number of
vehicles for a fixed price, normally with a specific delivery schedule. Payments
are usually due thirty days after delivery, except in the case of direct
international sales, for which payment is received shortly after shipment
pursuant to letters of credit opened by the customer in favor of the Company at
the time of the placement of the order.
Export sales to unaffiliated customers represent a significant portion of the
Company's total net sales. See notes 1(a) and 16 of the notes to Consolidated
Financial Statements contained herein. Currency and economic problems in certain
parts of the world may adversely impact future export volume.
Payment for sales to Commercial HUMMER dealers are generally obtained within
five days of delivery. Units wholesaled to dealers are subject to either
voluntary or mandatory repurchase agreements. Such agreements either permit or
require the Company to repurchase, at not more than dealer cost, new, unsold
units in the dealers' inventories in the event of repossession by the dealers'
floorplan lenders. At October 31, 1998, the mandatory repurchase agreements
covered 82 Commercial HUMMERs with a total value at dealer cost of $5.9 million.
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Since export sales are priced in US dollars, the Company does not expect any
material adverse impact in connection with the introduction of the Euro
currency.
EMPLOYEES
As of October 31, 1998, the Company had 437 salaried employees and 857 hourly
employees. Of the 1,294 employees, 231 provide general administrative services
including legal, finance, human resources, and other corporate functions. All of
the Company's hourly employees are represented by the International Union,
United Automobile, Aerospace and Agricultural Implement Workers of America
("UAW"). The Company's labor contract for the Mishawaka HUMMER/HUMVEE and SPLO
operations which expired in September 1998 was re-negotiated and ratified by 83%
of those members that voted. The current labor agreement expires in September of
2001. The Company believes that its relations with employees are satisfactory.
As a result of the WARN notice issued on January 21, 1999, the Company
anticipates that the number of employees will be reduced by 277 hourly and 23
salaried employees when the ESP plant is closed.
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ITEM 2. PROPERTIES
The Company operates two manufacturing facilities and five support locations
which include its headquarters in South Bend, Indiana, as well as sales,
warehouse, training, engineering, and other non-manufacturing operations.
The Company's principal manufacturing facility is the HUMMER/HUMVEE plant,
situated on approximately 96 acres in Mishawaka, Indiana. The major tooling and
materials handling equipment, assembly lines, robotics and computer controls
involved in the manufacture of HUMMER/HUMVEE vehicles are located at the
Mishawaka facility. The HUMMER/HUMVEE facility has a single shift capacity of
between 50 and 70 units per day depending on the model configuration of orders
currently being received by the Company. The Company reduced the production rate
from 25 to 16.5 units per day effective February 3, 1997. See MD&A
The Commercial HUMMER finishing facility is also located in Mishawaka, adjacent
to the HUMMER/HUMVEE plant. Mishawaka is also the site of a one-mile,
asphalt-paved test track. Additionally, the Company's SPLO operations are
located in Mishawaka at a separate facility.
The Company maintains a dedicated remanufacturing facility in South Bend for its
ESP operations. The Company increased capacity at its ESP plant from 5 to 7
remanufactured vehicles per day. This facility is presently operating at 6.2
units per day and will continue to do so until April 19, 1999 when the last unit
will be manufactured and all production at the facility will cease. Shortly
thereafter, plant closure operations will commence.
The Company operates a test track in South Bend located near the ESP facility,
which had been leased by the Company. The Company exercised its option to
purchase the test track for a nominal amount. The acquired property was
immediately transferred to the Chippewa Corporation ("Chippewa"), a wholly owned
subsidiary of the Company, and leased by the Company from Chippewa. Prior to the
purchase, the Company conducted environmental testing of the site, the
conclusions of which indicated little if any contamination occurring during its
occupancy. The Company has offered and the environmental agencies have accepted
a plan by which the Company will provide assistance in the remediation of the
adjacent properties. The remediation effort is not anticipated to have a
material adverse impact on the Company's financial condition. Chippewa has
agreed to participate in the state of Indiana's Voluntary Remediation Program
for the pre-RICRA lagoons located on Chippewa's property.
In March 1997, the Company notified UAW Local #555 officials and the salaried
employees at the Stamping and Assembly Plant in Indianapolis that, based on
current and expected levels of business, it was closing the plant. In September
1997, the Company closed the facility. The machinery and equipment at the
facility were sold at auction at a guaranteed price of $2.8 million. In July
1998, the land and building were sold for $1.2 million to a local developer. 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 from unrelated
third parties except for the Mishawaka Commercial HUMMER finishing facility and
the test track in Mishawaka which the Company owns and the South Bend test track
which is leased by the Company from the Chippewa Corporation, a wholly owned
subsidiary of the Company.
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ITEM 3. LEGAL PROCEEDINGS
US ARMY PRICING CLAIM
On January 27, 1995, the Company received a final decision from the US Army
asserting a claim against the Company for approximately $6.3 million plus
interest from January 27, 1995 under the R034 Contract which was entered into in
1983. The claim was increased by $1.7 million in October 1996 to cover option
quantities omitted from the original claim.
The US Army asserts that the Company failed to submit accurate, complete, and
current cost or pricing data in the pricing of that contract and that such
failure increased the negotiated contract price by the amount of the claim.
On December 18, 1995, the Company through its legal counsel filed a motion for
summary judgment with respect to the claim. The Company's motion raised only one
of the Company's affirmative defenses to the Government's claim. If successful,
this affirmative defense would have completely offset the Government's claim and
would have resolved the case without need for further proceedings. The
Government responded by filing its own summary judgment motion, arguing that,
given the factual circumstances, the relevant case law precludes the Company
from pursuing this particular affirmative defense.
On November 10, 1998, the Board denied the Company's motion and granted the
Government's motion. The ruling precludes the Company from arguing this
particular affirmative defense throughout the remainder of the proceedings
before the Board. The Company is free to argue all other affirmative defenses.
The Board's summary judgment ruling is subject to appeal, but not until after
the trial before the Board is completed.
The case is currently set for trial on September 14, 1999. The parties may take
discovery until August 3, 1999. The parties are discussing the possibility of
resolving this dispute through an alternate dispute resolution procedure wherein
the parties would have the dispute decided by an arbitrator(s). In the meantime,
the Government is auditing the Company's submission of conventional offsets.
These offsets will nearly match the amount of the Government's claim. The
Government's audit should be completed by April 1999.
If settlement discussions are unsuccessful, the Company believes that it will
prevail in the litigation. However, there can be no assurance as to the outcome
of such litigation, and an adverse decision on the claim could have a material
adverse effect on the Company.
DJ-5 LITIGATION
In December 1998, an action was instituted in the United States District Court
for the Southern District of West Virginia against the Company by the
administrator of the estate of a woman who suffered fatal injuries while driving
a DJ-5 vehicle. The action seeks damages of $5 million.
The DJ-5 driven by the decedent was manufactured, according to the complaint in
1974. The Company was not incorporated until 1991. The Company has never
manufactured or sold DJ-5 vehicles or parts for such vehicles.
In the purchase agreement pursuant to which the Company purchased certain of the
assets and assumed certain of the liabilities in April 1992 from a former AM
General Corporation, in the Chapter 11 proceeding of that company and its
parent, it was expressly provided that the Company was not acquiring any DJ-5
assets of the former company nor assuming any DJ-5 liabilities of the former
company. This
-11-
<PAGE>
agreement was approved by an order of the United States Bankruptcy Court for the
Southern District of New York, which authorized the sale, that being the Court
which had jurisdiction over the Chapter 11 proceedings of the former company and
its parent.
Accordingly, the Company disclaims any liability on account of this matter.
BREACH OF CONTRACT
On December 30, 1991, Dial Machine & Tool, Inc. filed a complaint in the Starke
County, Indiana Circuit Court alleging breach of Purchase Order Agreements by
the Company's predecessor. The plaintiff asserts that it was forced into
bankruptcy as the result of the alleged breach. The plaintiff seeks compensatory
damages of $744,103 and punitive damages of $10,000,000. The judge suggested the
parties mediate this dispute. The parties are engaged in settlement
negotiations.
HMMWV PRODUCT LIABILITY CLAIM
On May 11, 1998, the family of a deceased Army Sergeant filed a complaint
against AM General and the company that supplies seat belts for the HMMWV. The
complaint was filed in the U.S. District Court for the District of Colorado. The
complaint alleges that the Sergeant's seat belt released and allowed him to be
thrown from the HMMWV while it was rolling over after leaving the road and
traveling into a ditch. The Sergeant was a passenger in the vehicle, and died
from his injuries. The complaint claims that the seat belt was defectively
designed and that proper warnings were not issued. The Company has alleged the
government contractor's defense as an affirmative defense and intends to file a
summary judgment motion seeking to resolve the claims against the Company on
that basis. A settlement conference is scheduled for February 2, 1999. If the
settlement conference is unsuccessful, the Company will file its summary
judgment motion. The summary judgment motion will be resolved by April 8, 1999.
If the Company not successful on its summary judgment the case will proceed to
trial. The Company expects to prevail in a trial on the merits. While the
outcome of any jury trial is uncertain, the Company does not anticipate that an
adverse decision would have a material adverse effect on the Company.
AGE DISCRIMINATION CLAIM
William Wilson filed an age discrimination suit against the Company on February
21, 1995 in the United States District Court for the Northern District of
Indiana asserting that his termination in March 1994 was the result of age
discrimination. A jury verdict against the Company was entered on the issue as
to discrimination under the Age Discrimination in Employment Act, but in favor
of the Company on the issue of willfulness. The jury awarded Mr. Wilson $238,902
in back-pay. The court awarded Mr. Wilson the following additional amounts:
$13,604 in pre-judgement interest; $160,194 in front pay; and $56,890 in
attorney's fees. The Company accrued the jury award and has appealed the
judgement. The appellate court heard oral arguments in February 1998. As of
January 1999, the appellate court had not issued its decision on the Company's
appeal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders.
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
There is no established public trading market for the Company's common stock. As
of January 29, 1999, the Company had one stockholder. The Company paid no
dividends on its common stock in fiscal 1997 and 1998. The payment of and
amounts of dividends are restricted by the Company's long-term debt agreements.
See note 8 of the Consolidated Financial Statements contained herein.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following table sets forth certain summary financial and other data of the
Company for each of the years in the five-year period ended October 31, 1998.
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>
Fiscal Year Ended
October 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------
(dollars in millions)
Statement of Operations Data
- ----------------------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 392.8 468.2 462.4 411.7 454.4
Gross Profit (a) 48.5 43.2 42.9 56.0 65.4
Depreciation and Amortization 13.2 12.7 16.8 15.8 15.1
Selling, General and Administrative Expenses 27.7 26.2 37.3 36.3 38.5
Special termination benefits - 0.1 3.2 - -
Plant Closing/Restructuring charges 5.2 3.5 - - -
Operating Income (Loss) (b) 2.4 0.7 (14.4) 3.8 11.6
Interest Expense, Net 12.8 13.2 13.9 10.7 8.2
Income Tax Expense (Benefit) (2.1) (3.0) (8.7) (0.4) 3.0
Income (Loss) before Extraordinary Item (8.3) (9.5) (19.6) (6.5) 0.4
Extraordinary Item, net of Income Taxes of $1.75 - - - 3.0 -
---------------------------------------------------------------
Net Income (Loss) $ (8.3) (9.5) (19.6) (3.5) 0.4
Balance Sheet Data
- ------------------
Working Capital $ 56.1 55.9 87.9 98.1 2.5
Property Plant and Equipment, net 41.7 44.9 56.5 62.8 64.6
Total Assets 314.8 316.3 373.2 372.7 295.5
LTV Creditor Trust Obligations - - - - 43.3
Total Debt (c) 82.2 83.2 126.9 126.9 51.4
LTV Creditor Trust Stock (d) - - - - 6.4
Stockholder's Equity (Deficit) (34.1) (25.5) (16.0) 3.6 13.2
</TABLE>
(a) Gross Profit represents net sales less cost of sales (excluding depreciation
and amortization).
(b) Operating Income represents earnings before interest and provision (benefit)
for income taxes.
(c) Total Debt includes the revolving credit facility, the discounted value of
the LTV Creditor Trust Obligations, Senior Notes issued at acquisition and the
12 7/8% Senior Notes due 2002 issued in 1995 (the "Refinancing").
(d) 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 TWV's for the DoD. The Company is
the original designer and sole manufacturer of the HUMMER/HUMVEE. The Company
also sells HUMVEEs to foreign military services through the DoD's FMS program
and on a direct sale basis. In 1993, the Company began selling to industrial and
retail users through its commercial dealer network.
From 1990 through October 31, 1997, AM General sold 49,797 HUMVEEs under its A1
Series program with the DoD. All production under that contract was completed by
April 30, 1996 at which time 768 vehicles were produced for a certain FMS
customer and remained in finished inventory. In the fourth quarter of fiscal
1996, 167 of the vehicles were sold and the balance of 601 vehicles were sold in
January 1997.
From November 1, 1993 through May 7, 1995, the Company's HUMMER/HUMVEE
production rate was approximately 47 units per day, including 35 units per day
for the US Military and its FMS customers. On May 8, 1995, the Company reduced
its HUMMER/HUMVEE production rate to 25 units per day due to lower US and
international military demand. On February 3, 1997, the Company further reduced
its HUMMER/HUMVEE production rate from 25 to 16.5 units per day due to continued
lower international military demand.
The Company began producing the latest generation of military HUMVEEs, the A2
Series, in August 1995. On December 23, 1995, the Company entered into a new
multi-year annual requirements contract for A2 Series HUMVEEs known as the X001
Contract which provides a mechanism for the US Army to procure at least 2,350
HUMVEEs annually for the next five years. The X001 contract, however, does not
require the Army to purchase the vehicles as funding for each of the respective
years must be appropriated via the annual Defense Budget. Through December 1998,
a total of 10,573 vehicles have been ordered on the X001 Contract. The FY99
Defense Bill currently contains the necessary funding for the fourth 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, 1998, a total of 4,776 trucks have been remanufactured and
delivered to the US government at a total contract value of $283 million. Work
under this contract is expected to be completed in April 1999.
The Company accounted for the base portion and contractual options of the ESP
Contract on the Estimate At Completion ("EAC") basis which recognizes estimated
profits in the same percentage as revenues are recognized over the term of the
contract. Estimated contract costs and profits are reviewed periodically and
adjustments recorded as necessary. Revenue under the short term follow-on ESP
contracts is recorded when specific contract terms are fulfilled and title
passes by either delivery or acceptance, with cost of sales recognized based
upon unit cost.
In an effort to accelerate the procurement of new 2-1/2 and 5-ton vehicles,
TACOM announced its intention to stage a competition for and award a second
source for the FMTV program. When selected in late 1999, the second source will
be awarded approximately 700 vehicles to produce over a three-year period. At
the conclusion of that contract, the second source will compete with the current
source for a share of the remaining program requirements; the winner of which
will receive the larger share of the following FMTV multiyear contract. The
Company intends to compete vigorously for the FMTV second source award.
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<PAGE>
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED OCTOBER 31, 1998 ("FISCAL 1998") COMPARED WITH TWELVE MONTHS
ENDED OCTOBER 31, 1997 ("FISCAL 1997")
<TABLE>
<CAPTION>
AM General Corporation and Subsidiary
Table of Net Revenues and HUMMER/HUMVEE Unit Sales Information
( in millions, except unit information)
Fiscal Year Ended
October 31,
------------------------ %
1998 1997 Change Change
------------------------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales
- ---------
HUMMER/HUMVEEs
US Military $ 152.7 159.7 (7.0) (4.4)%
International (1) 23.5 64.0 (40.5) (63.3)%
Commercial 68.5 80.1 (11.6) (14.5)%
----------- --------- ---------
Total HUMMER/HUMVEEs 244.7 303.8 (59.1) (19.5)%
ESP 85.0 77.3 7.7 10.0%
SPLO 50.7 51.0 (0.3) (0.6)%
STS 12.4 36.1 (23.7) (65.7)%
----------- --------- ---------
Total Net Sales $ 392.8 468.2 (75.4) (16.1)%
HUMMER/HUMVEE Unit Sales
- ------------------------
US Military 2,706 2,664 42 1.6%
International (1) 380 1,196 (816) (68.2)%
Commercial 1,059 1,276 (217) (17.0)%
----------- --------- ---------
Total HUMMER/HUMVEEs 4,145 5,136 (991) (19.3)%
HUMMER/HUMVEE Average Unit Selling Prices
- -----------------------------------------
US Military $ 56,432 59,947 (3,515) (5.9)%
International (1) 61,892 53,512 8,380 15.7%
Commercial 64,665 62,774 1,890 3.0%
Total HUMMER/HUMVEEs 59,036 59,151 (115) (0.2)%
</TABLE>
(1) Includes FMS and Direct International Sales
-16-
<PAGE>
NET SALES
The decrease in net sales was due primarily to lower international military,
STS, Commercial HUMMER and US Military sales partially offset by higher ESP
sales. SPLO sales were essentially the same as the prior year. International
military sales were lower than the prior year due to continued softness in the
international market for HUMVEEs partially offset by higher average selling
prices. Further, the Company was unable to obtain a firm order for 231 units
included in its finished goods inventory. Had this inventory been sold in fiscal
1998, the shortfall in sales would not have been as significant. The Company
continues to pursue an order with the FMS customer for whom the units were
built; additionally, the Company has expanded its efforts to find alternative
buyers. Management believes that the inventory will be sold in fiscal 1999. STS
sales were lower in fiscal 1998 due to higher than normal sales in fiscal 1997
primarily attributed to Phase I contract revenues in connection with the MTTR
truck program, the delivery of technical data package drawings in connection
with the ESP program and the delivery of technical manuals translated for a FMS
customer. The decrease in Commercial HUMMER sales is attributed to lower demand
partially offset by higher selling prices due to a general price increase.
The decrease in US Military HUMVEE sales is primarily attributed to a higher
concentration of less expensive models partially offset by the sale of
additional units. ESP sales were higher primarily due to higher negotiated
selling prices in connection with additional units added and delivered at the
completion of the base and option requirements of the initial contract.
AVERAGE HUMMER/HUMVEE UNIT SELLING PRICES
Average HUMMER/HUMVEE unit selling prices for all HUMMER/HUMVEEs in fiscal 1998
were essentially the same as fiscal 1997. Higher average selling prices for
international HUMVEEs and Commercial HUMMERS were offset by a lower average
selling price for US Military HUMVEEs.
Average selling prices for the US Military decreased 5.9% over fiscal 1997 due
primarily to a higher concentration of basic and less expensive HUMVEE models in
fiscal 1998 than in 1997. Average HUMVEE unit selling prices for international
sales increased 15.7% primarily due to the less expensive 601 A1 HUMVEEs sold to
the FMS customer during 1997. Commercial HUMMER average unit-selling prices
increased 3.0% primarily due to a general price increase.
GROSS PROFIT
Gross profit was $48.5 million for fiscal 1998, an increase of $5.3 million from
gross profit of $43.2 million for fiscal 1997. The Company's gross profit margin
for fiscal 1998 was 12.3%, an increase of 3.0% over fiscal 1997 gross profit
margin of 9.3%. The change in gross profit is primarily attributed to higher
gross profit in connection with the final accounting for the initial ESP program
and higher gross profit in connection with negotiated selling prices for
additional ESP units partially offset by lower US Military HUMVEE gross profit
due to model mix, lower FMS and international HUMVEE gross profit due to fewer
units sold and lower Commercial HUMMER gross profit due to higher sales
incentives, fewer units and higher warranty costs.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $13.2 million for fiscal 1998, an
increase of $.5 million or 3.9% over depreciation and amortization expense of
$12.7 million for fiscal 1997. The increase was primarily due to higher
depreciation expense in connection with the write down of ESP assets in
anticipation of the plant closing in April of 1999 partially offset by lower
tooling amortization expense in connection with the Expanded Capacity Vehicle
HUMVEE which was fully amortized in fiscal 1997 and lower depreciation expense
in connection with reduced capital spending.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expense was $27.7 million for
fiscal 1998, an increase of $1.5 million or 5.7% from SG&A expense of $26.2
million for fiscal 1997. The increase was primarily due to higher engineering
expense in connection with the MTTR bid.
-17-
<PAGE>
PLANT CLOSING/RESTRUCTURING CHARGES
During fiscal 1998, the Company recorded $5.2 million in connection with plant
closing costs anticipated for the ESP facility. Due to a lack of orders for the
remanufactured 2-1/2-ton, the Company issued a WARN act notice on January 21,
1999 and will close the facility in April of 1999. The $5.2 million charge
includes all known costs related to closing the facility but does not include a
provision for any gain on curtailment of Other Post Employment Benefit expense
in connection with the plant closure. Any related gain will be recorded in
fiscal 1999 when the plant closure is substantially complete.
During fiscal 1997, the Company recorded $3.5 million of restructuring charges
in connection with the reduction in the HUMMER/HUMVEE production rate, a
reduction in the Company's salaried workforce and outsourcing of the component
parts manufactured at the Company's Indianapolis Stamping Facility.
OPERATING INCOME (LOSS)
The Company had operating income of $2.4 million for fiscal 1998, an increase of
$1.7 million from operating income of $.7 million in fiscal 1997. The
improvement in operating income was primarily due to higher gross margin and
lower depreciation and amortization expense partially offset by higher
restructuring charges and higher SG&A expense.
INTEREST INCOME AND EXPENSE
Interest expense for fiscal 1998 was $13.2 million, a decrease of $.3 million or
2.2% from interest expense of $13.5 million for fiscal 1997. Average debt
outstanding for fiscal 1998 was $99.3 million at a weighted average interest
rate of 12.2%. Average debt outstanding for fiscal 1997 was $102.3 million at a
weighted average interest rate of 12.1%. The decrease in average debt
outstanding is primarily due to lower borrowings under its revolving credit
facility reflecting the overall reduction in inventory levels primarily due to
the reduction in finished goods inventory. See "Liquidity and Capital
Resources". Interest income remained essentially the same between the two years.
INCOME TAX BENEFIT
Income tax benefit was recorded at the statutory rate adjusted for permanent
differences primarily resulting from the amortization of goodwill. Income tax
benefit was a credit of $2.1 million for fiscal 1998, a decrease of $.9 million
from an income tax benefit of $3.0 million for fiscal 1997. The decrease in
income tax benefit was due to the increase of taxable income primarily
attributed to higher operating income as discussed above.
NET LOSS
The net loss for fiscal 1998 was $8.3 million, a reduction of $1.2 million from
a net loss of $9.5 million in fiscal 1997. As discussed above, the reduction in
net loss is primarily due to the improvement in operating income and lower net
interest expense partially offset by a lower income tax benefit.
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<PAGE>
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED OCTOBER 31, 1997 ("FISCAL 1997") COMPARED WITH TWELVE MONTHS
ENDED OCTOBER 31, 1996 ("FISCAL 1996")
<TABLE>
<CAPTION>
AM General Corporation and Subsidiary
Table of Net Revenues and HUMMER/HUMVEE Unit Sales Information
( in millions, except unit information)
Fiscal Year Ended
October 31,
----------------------------- %
1997 1996 Change Change
---------- ---------
<S> <C> <C> <C> <C>
Net Sales
HUMMER/HUMVEEs
US Military $ 159.7 169.9 (10.2) (6.0)
International (1) 64.0 87.2 (23.2) (26.6)
Commercial 80.1 75.6 4.5 6.0
---------- -------- ---------
Total HUMMER/HUMVEEs 303.8 332.7 (28.9) (8.7)
ESP 77.3 71.3 6.0 8.4
SPLO 51.0 39.0 12.0 30.8
STS 36.1 19.4 16.7 86.1
---------- -------- ---------
Total Net Sales $ 468.2 462.4 5.8 1.3
HUMMER/HUMVEE Unit Sales
US Military 2,664 3,200 (536) (16.8)
International (1) 1,196 1,370 (174) (12.7)
Commercial 1,276 1,404 (128) (9.1)
---------- -------- ---------
5,136 5,974 (838) (14.0)
Total HUMMER/HUMVEEs
HUMMER/HUMVEE Average Unit Selling Prices
US Military $ 59,947 53,094 6,853 12.9
International (1) 53,512 63,650 (10,138) (15.9)
Commercial 62,774 53,846 8,928 16.6
Total HUMMER/HUMVEEs 59,151 55,691 3,460 6.2
</TABLE>
(1) Includes FMS and Direct International Sales
-19-
<PAGE>
NET SALES
The increase in net sales was due primarily to the increase in STS, SPLO, ESP
and Commercial HUMMER sales partially offset by lower direct international and
US Military sales. The increase in STS sales is primarily attributed to the
Phase I contract revenues in connection with the MTTR truck re-manufacturing
program, the delivery of technical data package drawings in connection with the
ESP program and the delivery of technical manuals translated for a FMS customer.
The increase in SPLO sales is primarily attributed to an increase in US
Government Military spare parts contracts in connection with the Company's
continued focus on this segment of its business. The increase in ESP sales is
attributed to the delivery of more units in the current fiscal year than were
delivered in the prior fiscal year. The increase in Commercial HUMMER sales is
attributed to the increase in average selling prices due to a general price
increase and lower sales incentives.
The decrease in direct international HUMVEE sales is attributed to continued
softness in the demand for light tactical vehicles. The decrease in US Military
HUMVEE sales is primarily attributed to fewer units sold due to the change in
the production rate because of lower unit orders from the military partially
offset by higher unit selling prices. The higher unit selling prices are
attributed to engineering changes in connection with the A2 Series HUMVEE.
AVERAGE HUMMER/HUMVEE UNIT SELLING PRICES
Average HUMMER/HUMVEE unit selling prices for all HUMMER/HUMVEEs increased 6.3%
from fiscal 1996 primarily due to increases in the average selling price for US
Military HUMVEEs and Commercial HUMMERs partially offset by a reduction in the
average selling price of direct international units. Average selling prices for
the US Military increased 12.9% over fiscal 1996 due primarily to higher selling
prices in connection with engineering changes for the A2 Series HUMVEE sold
under the X001 Contract. Average HUMVEE unit selling prices for international
sales decreased 15.9% primarily due to a higher priced model mix in fiscal 1996
which included highly modified vehicles for one direct international customer.
Commercial HUMMER average unit selling prices increased 16.6% primarily due to
lower sales incentives, a general price increase and a sales mix of more
expensive models.
GROSS PROFIT
Gross profit was $43.2 million for fiscal 1997, an increase of $.3 million from
gross profit of $42.9 million for fiscal 1996. The Company's gross profit margin
for fiscal 1997 remained the same as that for fiscal 1996 at 9.3%. The change in
gross margin is primarily attributed to improved gross margins with respect to
US Military HUMVEE sales, an improvement in Commercial HUMMER gross margins and
an improvement in US Military spare parts sales partially offset by higher costs
in connection with unabsorbed overhead costs due to the reduction in the
HUMMER/HUMVEE production line rate.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $12.7 million for fiscal 1997, a
decrease of $4.1 million or 24.4% over depreciation and amortization expense of
$16.8 million for fiscal 1996. The decrease was primarily due to lower tooling
amortization expense in connection with the A2 Series HUMVEE which was fully
amortized in the prior year, reduced depreciation expense associated with
reduced capital spending and lower tooling amortization in connection with the
reduction in the unit production rate from 25 to 16.5 units per day.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative ("SG&A") expense was $26.2 million for
fiscal 1997, a decrease of $11.1 million or 29.8% from SG&A expense of $37.3
million for fiscal 1996. The decrease was primarily due to lower expenses in
connection with merchandising and sales promotions, lower expenses resulting
from the Company's restructuring plan and lower independent research and
development expense with respect to the MTTR program.
SPECIAL TERMINATION BENEFITS
In connection with modifications in its labor agreement in fiscal 1996, the
Company offered special retirement benefits to certain hourly employees who met
specific service requirements. The Company recorded special
-20-
<PAGE>
charges of $.1 million in fiscal 1997 and $3.2 million in fiscal 1996 to reflect
the enhanced special termination benefits for pension and health care related
costs.
RESTRUCTURING CHARGES
During fiscal 1997, the Company recorded $3.5 million of charges in connection
with its restructuring plan; the objective of which was to significantly reduce
the Company's variable and fixed costs, including corporate overhead.
Specifically, in February 1997, the Company reduced its HUMMER/HUMVEE production
rate from 25 to 16.5 units per day to better match unit production with sales.
The Company reduced its salaried workforce by 139 employees and its hourly
workforce by 209 employees. Additionally, the Company outsourced the production
of certain components, closed its Indianapolis Stamping Plant and relocated its
Washington D.C. office. There were no restructuring charges recorded in fiscal
1996.
OPERATING INCOME (LOSS)
The Company had operating income of $.7 million for fiscal 1997, an increase of
$15.1 million from an operating loss of $14.4 million for fiscal 1996. The
improvement in operating income was primarily due to lower SG&A expense, lower
depreciation and amortization expense, lower charges in connection with special
termination benefits and higher gross profit, partially offset by the
restructuring charge.
INTEREST INCOME AND EXPENSE
Interest expense for fiscal 1997 was $13.5 million, a decrease of $3.0 million
or 18.2% from interest expense of $16.5 million for fiscal 1996. Average debt
outstanding for fiscal 1997 was $102.3 million at a weighted average interest
rate of 12.1%. Average debt outstanding for fiscal 1996 was $128.6 million at a
weighted average interest rate of 12.8%. The decrease in average debt
outstanding is primarily due to the overall reduction in inventory levels
primarily due to the completion of the sale of 601 units to an FMS customer
during the first quarter of fiscal 1997. See "Liquidity and Capital Resources".
Interest income decreased by $2.3 million primarily due to the higher level of
interest income in fiscal 1996 in connection with the acceptance by the DoD and
the FMS Customer of interest expense associated with the units held in
inventory.
INCOME TAX BENEFIT
Income tax benefit was recorded at the statutory rate adjusted for permanent
differences primarily resulting from the amortization of goodwill. Income tax
benefit was a credit of $3.0 million for fiscal 1997, a decrease of $5.7 million
from an income tax benefit of $8.7 million for fiscal 1996. The decrease in
income tax benefit was due to the increase of taxable income primarily
attributed to higher operating income as discussed above.
NET LOSS
The net loss for fiscal 1997 was $9.5 million, a reduction of $10.1 million from
a net loss of $19.6 million in fiscal 1996. As discussed above, the improvement
in net loss is primarily due to the improvement in operating income and lower
net interest expense partially offset by a lower income tax benefit.
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<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 1992 from cash
provided by operating activities and borrowings under its revolving credit
facility.
Cash provided by operating activities was $7.1 million for fiscal 1998 compared
to $38.7 million in fiscal 1997. The primary sources of cash flow in fiscal 1998
resulted from reductions in inventory, non-cash charges to operating income
including depreciation, amortization and non-cash postretirement expenses, an
increase in restructuring charges net of cash payments and an increase in
accrued expenses. Cash flow provided from operations was partially offset by an
increase in accounts receivable, reductions in accounts payable and other
liabilities and funding the Company's net loss.
Accounts receivable levels at the end of fiscal 1998 were $21.5 million higher
than levels at the end of fiscal 1997 primarily due to higher than normal sales
at the end of the fiscal year and an increase of $8.4 in connection with
unbilled receivables for the A2 HUMVEE. These unbilled receivables represent
work performed by the Company for which a contract modification with the DoD has
not yet been finalized.
Accounts payable levels at the end of fiscal 1998 were $1.3 million lower than
levels at the end of fiscal 1997. Notwithstanding this reduction, accounts
payable increased $8.0 million in connection with liabilities for contract
modifications with the DoD which have not been finalized. Management anticipates
completion of the contract modifications with DoD in fiscal 1999 and when
completed will result in a cash receipt of $2.9 million.
Net inventory levels at the end of fiscal 1998 were $71.6 million or $15.7
million lower than net inventory levels of $87.3 million at end of fiscal 1997.
The reduction in inventory is primarily attributed to the reduction of US
Military HUMVEEs and Commercial HUMMER finished goods and in-process raw
materials.
For fiscal 1998, the Company spent $4.5 million on capital expenditures
primarily for the Company's Enterprise Resource Planning ("ERP") project and
tooling costs in connection with vehicle production, as compared to $2.4 million
for fiscal 1997. The Company expects an increase in total capital expenditures
over that during fiscal 1998 of approximately $3.0 million in fiscal 1999. Part
of the projected increase of capital is attributable to the Company's ERP
project which will be used to convert the Company's information systems to Year
2000 compliant systems. The Company anticipates that all capital requirements
will be funded from operating cash flow and availability under the revolving
credit facility.
Management anticipates that cash flow from operations as well as availability
under its revolving credit facility will be sufficient to finance the Company's
liquidity needs for the foreseeable future. The unused availability under the
revolving credit facility as of October 31, 1998 was $44.7 million.
Management continues to search for new business opportunities to improve
operating performance and liquidity. The Company has been actively engaged in
expanding its existing commercial product lines, developing military prototype
vehicles and competing for new military contracts, seeking international
co-production opportunities and acquiring other businesses.
The Company's revolving credit facility has a maximum borrowing limit of $60
million, is secured by eligible inventories and receivables, as defined in the
applicable loan and security agreement, and expires on October 31, 2001. As of
October 31, 1998, the Company had borrowings of $7.8 million outstanding under
the revolving credit facility. As of January 20, 1999, the Company's loan
balance under the revolving credit facility was $1.0 million. The decrease in
the revolver from October 31, 1998 reflects a decrease in its accounts
receivable.
The revolving credit agreement contains numerous covenants and prohibitions that
will impose limitations on the liquidity of the Company, including requirements
that the Company satisfy certain financial ratios and limitations on the
incurrence of additional indebtedness.. The indenture governing the outstanding
12-7/8% Senior Notes also imposes limitations on the incurrence of additional
indebtedness. The ability of the Company to meet its debt service requirements
and to comply with such covenants will be dependent upon future operating
-22-
<PAGE>
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.
YEAR 2000 BUSINESS MATTERS
The Year 2000 problem is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a major system
failure or miscalculations.
In September 1997, the Company formed an internal committee to perform a
comprehensive review of its computer systems, the purpose of which was to
identify the systems that could be affected by the "Year 2000" issue. The
committee evaluated three alternatives including fixing the defective code
internally, outsourcing the project to a third party or purchasing new software.
Factors affecting the committee's decision included the cost benefit analysis of
fixing the code versus replacing the software with newer and more cost effective
technology. Upon completion of its review, the committee reached a conclusion
and recommended that the Company purchase and implement new software.
In June 1998, the committee reached a consensus on its choice of software and
the implementation consultant and management approved its recommendation. The
committee began the implementation process in July 1998. At October 31, 1998 the
project was completed with respect to design and at January 21, 1999 the project
is in the configuration stage. By March 1999, the project is anticipated to be
in the testing stage with completion of the project scheduled for June 1999.
Based on recent cost estimates the project is estimated to cost approximately
$5.4 million. The Company does not believe that such costs will have a material
adverse impact on the Company's financial condition.
The risks associated with such a project are significant. To mitigate such
risks, the Company has purchased state of the art software and has hired a
nationally known information technology consulting group to assist in the
implementation of the software. Additionally, the Company has assigned internal
resources to assist in the implementation.
With an expected completion date for the project in June of 1999, the Company
believes that it has ample time to recover from any time delays that might
occur. In the unlikely event that the new software is not operational in time
for the year 2000, the Company has developed a contingency plan that includes
implementing certain programs for some of its more critical in-house systems and
installing other software that will temporarily fix other systems.
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 1992, such effects have not been
material to the Company.
The Company's business generally is not seasonal except for a scheduled two-week
plant closure during July to accommodate annual maintenance requirements.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments
of an Enterprise and Related Information". The Statement is applicable to public
entities and is effective for fiscal years beginning after December 15, 1997.
SFAS 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders.
The Company will adopt SFAS 131 in fiscal 1999. Upon adoption, reclassification
of financial statements for earlier periods may be required.
-23-
<PAGE>
In April 1998, the AICPA Accounting Standards Executive committee issued
Statement of Position 98-5, Reporting on the Costs of Start-up Activities (SOP
98-5). SOP 98-5 is applicable to all non-governmental entities and requires that
costs of start-up activities, including organization costs, be expensed as
incurred. All start-up costs previously capitalized are required to be fully
amortized effective with adoption of SOP 98-5. Except for certain specified
investment companies, SOP 98-5 is effective for financial statements for fiscal
years beginning after December 15, 1998. Restatement of previously issued
financial statements is not permitted. Except for certain specified investment
companies, initial application of the SOP should be as of the beginning of the
fiscal year in which the SOP is first adopted and should be reported as the
cumulative effect of a change in accounting principle as described in APB
Opinion No. 20, Accounting Changes. The Company plans to adopt SOP 98-5 in its
fiscal year 2000 and has estimated that it will result in a cumulative effect
expense of $1.1 million.
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 orders; volume of international and commercial orders for
HUMMER/HUMVEEs; the outcome of the FMTV competition; the outcome of pending
litigation; the loss of any significant customers; the loss of any major
supplier; and the availability of qualified personnel.
-24-
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index To Financial Statements
- -------------------------------------------------------------------------------
PAGE
Independent Auditors' Report 26
Consolidated Balance Sheets as of October 31, 1998 and 1997 27
Consolidated Statements of Operations
For the years ended October 31, 1998, 1997, and 1996 28
Consolidated Statements of Stockholder's Deficit and Comprehensive
Income (Loss) For the years ended October 31, 1998, 1997, and 1996 29
Consolidated Statements of Cash Flows
For the years ended October 31, 1998, 1997, and 1996 30
Notes to Consolidated Financial Statements 31
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<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AM General Corporation:
We have audited the consolidated financial statements of AM General Corporation
and subsidiaries 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 subsidiaries as of October 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended October 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Indianapolis, Indiana
December 11, 1998
-26-
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
October 31, 1998 and 1997
(Dollar amounts in thousands, except share information)
<TABLE>
<CAPTION>
----------- ----------
ASSETS 1998 1997
----------- ----------
<S> <C> <C>
Current assets:
Cash $ 2,687 1,190
Accounts receivable, net 74,211 52,661
Inventories 71,613 87,299
Prepaid expenses and other assets 1,170 2,802
Deferred income taxes 6,746 6,198
---------- ----------
Total current assets 156,427 150,150
Income taxes receivable 1,585 1,379
Property, plant, and equipment, net 41,684 44,920
Deferred income taxes 26,113 24,354
Goodwill, net 79,298 83,585
Other assets 9,658 11,870
---------- ----------
$ 314,765 316,258
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Current liabilities:
Accounts payable $ 32,494 33,784
Accrued expenses 67,869 60,510
---------- ----------
Total current liabilities 100,363 94,294
Long-term debt 82,156 83,195
Postretirement benefits other than pensions, noncurrent portion 154,362 150,702
Other liabilities, noncurrent portion 11,930 13,570
---------- ----------
Total liabilities 348,811 341,761
---------- ----------
Stockholder's deficit:
8% cumulative preferred stock, $1,000 par value. Authorized
10,000 shares; issued and outstanding 5,000 shares 5,000 5,000
Common stock, $.01 par value. Authorized 1,000 shares;
issued and outstanding 900 shares -- --
Paid-in capital 1,000 1,000
Accumulated deficit (39,818) (31,503)
Accumulated other comprehensive loss - minimum pension liability (228) --
---------- ----------
Total stockholder's deficit (34,046) (25,503)
Commitments and contingencies (notes 6 and 14)
---------- ----------
$ 314,765 316,258
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
-27-
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended October 31, 1998, 1997, and 1996
(Dollar amounts in thousands, except share information)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Net sales $ 392,785 468,173 462,406
---------- ---------- ---------
Cost and expenses:
Cost of sales 344,327 424,967 419,476
Depreciation and amortization 13,166 12,713 16,609
Selling, general, and administrative expenses 27,712 26,178 37,256
(Gain) loss on sale of equipment (11) (6) 255
Special termination benefits -- 152 3,246
Plant closing and restructuring charges 5,231 3,495 --
---------- ---------- ---------
Income (loss) before interest and income taxes 2,360 674 (14,436)
Interest income 327 280 2,596
Interest expense (13,163) (13,508) (16,454)
---------- ---------- ---------
Loss before income taxes (10,476) (12,554) (28,294)
Income tax benefit (2,161) (3,013) (8,683)
---------- ---------- ---------
Net loss $ (8,315) (9,541) (19,611)
========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
-28-
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholder's Deficit and
Comprehensive Income (Loss) For the years
ended October 31, 1998, 1997, and 1996
(Dollar amounts in thousands, except share information)
<TABLE>
<CAPTION>
TOTAL
8% ACCUMULATED STOCK-
CUMULATIVE OTHER HOLDER'S
PREFERRED COMMON PAID-IN COMPREHENSIVE ACCUMULATED EQUITY
STOCK STOCK CAPITAL INCOME (LOSS) DEFICIT (DEFICIT)
--------- ------ ------- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1995 $ 5,000 -- 1,000 (82) (2,351) 3,567
Comprehensive loss:
Net loss -- -- -- -- (19,611) (19,611)
Minimum pension -- -- -- 82 -- 82
---------
Total comprehensive loss (19,529)
-------- ------ ------- -------------- --------- ---------
Balance at October 31, 1996 5,000 -- 1,000 -- (21,962) (15,962)
Net loss -- -- -- -- (9,541) (9,541)
-------- ------ ------- -------------- --------- ---------
Balance at October 31, 1997 5,000 -- 1,000 -- (31,503) (25,503)
Comprehensive loss:
Net loss -- -- -- -- (8,315) (8,315)
Minimum pension -- -- -- (228) -- (228)
---------
Total comprehensive loss (8,543)
-------- ------ ------- -------------- --------- ---------
Balance at October 31, 1998 $ 5,000 -- 1,000 (228) (39,818) (34,046)
======== ====== ======= ============== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
-29-
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows For
the years ended October 31, 1998, 1997, and 1996
(Dollar amounts in thousands, except share information)
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net cash provided by operating activities (note 19) $ 7,113 38,663 10,081
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of equipment 15 2,818 6
Capital expenditures (4,535) (2,431) (5,216)
-------- -------- --------
Net cash provided by (used in) investing activities (4,520) 387 (5,210)
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreement (1,096) (43,727) 856
Principal payments on 12-7/8% senior notes -- -- (1,000)
-------- -------- --------
Net cash used in financing activities (1,096) (43,727) (144)
Net change in cash 1,497 (4,677) 4,727
Cash and cash equivalents at beginning of year 1,190 5,867 1,140
-------- -------- --------
Cash and cash equivalents at end of year $ 2,687 1,190 5,867
======== ======== ========
Supplemental disclosure of cash items:
Interest paid $ 12,145 12,416 10,553
Taxes paid 495 453 474
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
-30-
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
- ------------------------------------------------------------------------------
(1)SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
(A) DESCRIPTION OF BUSINESS
The primary business of AM General Corporation (the Company) is to
manufacture Hummer(R) vehicles at its plant 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 1999). 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 forty-six domestic
dealers and forty-three international distributors at October 31,
1998. The Company also refurbishes two and one-half ton trucks,
the Extended Service Program (ESP), for the Department of Defense;
such arrangement extends into April, 1999 (See also note 16).
The mix of sales for each of the years in the three year period
ended October 31, 1998 is as indicated in the following analysis:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Hummer(R) vehicles:
DoD 39% 33% 37%
FMS (foreign military sales) 2 14 12
International direct 4 1 7
Commercial 17 17 16
ESP 21 18 16
Service parts and other 17 17 12
</TABLE>
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
subsidiaries, AM General Sales Corporation and Chippewa
Corporation. All significant intercompany balances and
transactions have been eliminated in consolidation.
(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 initial
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 initial ESP contract which was
completed in June, 1998, 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 initial ESP contract. The costs attributed to units delivered
under the initial ESP contract are based on the estimated average
cost of all units expected to be produced. Inventories relating to
the short-term, follow-on ESP contracts are stated at the lower of
standard cost or market. Standard cost approximates first-in,
first-out cost.
-31-
<PAGE>
(E) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation on
plant and equipment is calculated on the straight-line method over
the estimated useful lives of the assets commencing in the year
subsequent to acquisition. Leasehold improvements are amortized
over the shorter of the lease terms or estimated useful lives of
the assets using the straight-line method.
Useful lives for property, plant, and equipment are as follows:
Buildings 40 years
Machinery, equipment,
and fixtures 10 to 12 years
Vehicles 5 years
Dealer signage 10 years
Tooling Units expected to be produced
(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 $27,862 and $23,575 at
October 31, 1998 and 1997, respectively. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can
be recovered through undiscounted future operating cash flows. The
amount of goodwill impairment, if any, is measured based on
projected discounted future operating cash flows. The assessments
of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
(G) OTHER ASSETS
The costs of the noncompete covenant and deferred loan costs
(included in other assets, see note 5) are amortized on a
straight-line basis over their estimated useful lives. The
amortization of deferred loan costs is included in interest
expense.
(H) ACCOUNTS PAYABLE
The Company utilizes a cash management system which incorporates a
zero balance disbursement account funded as checks are presented
for payment. Accounts payable includes checks issued in excess of
book balance of $5,246 and $5,621 at October 31, 1998 and 1997,
respectively.
(I) REVENUE RECOGNITION
Revenue under U.S. Government and foreign military fixed-price
production contracts relating to the sale of Hummer(R) vehicles is
recorded when specific contract terms are fulfilled and title
passes by either delivery or acceptance, with cost of sales
recognized based upon unit cost. Revenue under sales of commercial
Hummer(R) vehicles is recorded when vehicles are shipped and title
passes to dealers.
Revenue under cost-reimbursement contracts is recorded as costs
are incurred and includes estimated earned fees in the proportion
that costs incurred to date bear to total estimated costs. The
fees under certain Government contracts may be increased or
decreased in accordance with cost or performance incentive
provisions which measure actual performance against established
targets or other criteria. Such incentive fee awards or penalties
are included in revenue at the time when realization is probable
and the amounts can be reasonably determined. Estimated losses on
long-term contracts are recorded when identified.
-32-
<PAGE>
Sales and related cost of sales applicable to the fixed-price,
initial 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). Revenue under the
short-term, follow-on ESP contracts is recorded when specific
contract terms are fulfilled and title passes by either delivery
or acceptance, with cost of sales recognized based upon unit cost.
(J) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. Research
and development costs amounted to $4,444, $1,856 and $5,643 for
the years ended October 31, 1998, 1997 and 1996, respectively.
(K) INCOME TAXES
The Company and its subsidiaries are included in the consolidated
Federal income tax return of The Renco Group, Inc. (the Parent).
Federal income taxes are provided on a separate company basis and
remitted to the Parent in accordance with the tax sharing
agreement between the Company and its Parent. Under the tax
sharing agreement with The Renco Group, Inc., the Company will not
benefit from any net operating loss carryforwards unless the net
operating loss carryforward is generated by temporary differences
for Federal income tax purposes.
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted Federal and state tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
(L) PENSION AND OTHER POSTRETIREMENT PLANS
The Company has defined benefit pension plans covering
substantially all of its employees. Benefits for salaried
employees are accumulated each year at 1-1/2% of the participant's
base salary for that year, up to the social security integration
base plus 2-1/4% of any base salary in excess of the social
security integration base for that same year. Benefits for hourly
employees are based on a negotiated rate per years of service. The
Company's policy is to fund the maximum amount allowable under the
Government cost accounting standards.
The Company has defined contribution 401(k) savings plans for all
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
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<PAGE>
financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
(N) IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If
such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(2) ACCOUNTS RECEIVABLE
Components of accounts receivable are as follows:
<TABLE>
<CAPTION>
OCTOBER 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Receivables from the U.S. Government
under long-term contracts:
Amounts billed or billable $ 35,237 22,142
Recoverable costs accrued--not billed 1,806 2,289
Unrecovered costs subject to future
negotiation 25,768 17,327
Commercial customers--amounts billed:
Foreign 4,552 3,044
Dealers 3,537 3,322
Service parts 32 21
Other receivables 3,629 4,866
-------- --------
74,561 53,011
Less allowance for doubtful accounts (350) (350)
-------- --------
$ 74,211 52,661
======== ========
</TABLE>
Recoverable costs accrued--not billed--are comprised principally of
revenue amounts recognized on deliveries under contracts which were not
billable at the balance sheet date due to the timing provisions under
the related contracts.
Unrecovered costs subject to future negotiation primarily includes
revenues recognized on contracts under which changes were directed by
customers. Prices for these changes and for other related contract
claims are currently being negotiated with the customers.
Substantially all billed and unbilled receivables are expected to be
collected within the next 12 months.
-34-
<PAGE>
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Finished goods $ 29,982 42,528
Service parts 16,946 16,451
Extended Service Program--Production costs of goods
currently in process 4,095 4,574
Raw materials, supplies, and work in progress 27,859 28,153
-------- --------
78,882 91,706
Less allowance for inventory obsolescence (7,269) (4,407)
-------- --------
$ 71,613 87,299
======== ========
</TABLE>
(4) PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Land $ 1,115 917
Buildings 2,921 2,911
Machinery, equipment, and fixtures 22,840 21,890
Leasehold improvements 9,050 8,856
Vehicles 3,019 3,092
Construction in progress 2,590 69
Dealer signage 375 342
Tooling 58,292 57,689
-------- --------
100,202 95,766
Less accumulated depreciation and amortization (58,518) (50,846)
-------- --------
$ 41,684 44,920
======== ========
</TABLE>
Tooling, net of related amortization, of $10,098 and $10,668 at October
31, 1998 and 1997, respectively, was required for vehicles being sold to
the general public. This tooling is being amortized over 20,000
commercial units expected to be sold which at the current rate of
production will extend for another 14 years.
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<PAGE>
(5)OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
OCTOBER 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Noncompete covenant, net $ 3,602 4,631
Deferred loan costs, net:
Senior notes due 2002 2,870 3,690
Revolving line-of-credit 67 208
Preproduction cost, net:
Commercial vehicles for the general public 1,129 1,192
Extended service program -- 74
Performance bonds 1,506 1,566
Other 484 509
-------- --------
$ 9,658 11,870
======== ========
</TABLE>
The noncompete covenant resulted from the acquisition of the Hummer(R)
business on April 30, 1992, and is being amortized over ten years.
Accumulated amortization was $6,690 and $5,661 at October 31, 1998 and
1997, respectively. Deferred loan costs were incurred in connection with
the revolving line-of-credit and the senior notes due 2002 and are being
amortized over three and seven years, respectively. Accumulated
amortization was $3,636 and $2,675 at October 31, 1998 and 1997,
respectively. Deferred loan costs include a $2,000 fee paid to The Renco
Group, Inc. for services and assistance provided in connection with the
amendment of the revolving line-of-credit and the issuance of senior
notes due 2002.
Preproduction cost represents cost incurred prior to the production of
the related vehicle and includes labor and overhead relating to
developing production facilities. These costs are being amortized over
the 20,000 estimated units to be sold to the general public. Accumulated
amortization was $1,480 and $1,407 at October 31, 1998 and 1997,
respectively.
(6) LEASES
The Company has several noncancelable operating leases for substantial
portions of the Company's plant and office facilities and machinery and
equipment. Leased plant and office facilities generally contain renewal
options. Rental expense for operating leases (except those with lease
terms of a month or less that were not renewed) for the years ended
October 31, 1998, 1997 and 1996 aggregated approximately $5,388, $5,040,
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, 1998 are:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31 AMOUNT
---------------------- --------
<S> <C>
1999 $ 3,482
2000 394
2001 8
2002 --
-------
Total minimum lease payments $ 3,884
=======
</TABLE>
-36-
<PAGE>
(7) ACCRUED EXPENSES
Components of accrued expenses are as follows:
<TABLE>
<CAPTION>
OCTOBER 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Modifications payable $ 22,656 14,654
Current portion of other post employment
benefits 6,000 5,000
Interest on senior notes 4,819 4,819
Warranty 4,373 5,219
Pension liability 4,293 420
Plant closing and restructuring reserve 4,058 1,927
Wages, bonuses, and payroll taxes 3,529 3,606
Taxes other than on income 3,045 2,772
Sales incentives 2,951 2,204
Vacation 2,945 2,977
Insurance 2,375 2,327
Purchase requirements 682 1,290
Management fee due to Renco Group, Inc. 100 100
Excess of estimated average production cost
of ESP units expected to be produced over the
cost of delivered units -- 7,103
Accrued loss on engineering contracts -- 1,301
Other 6,043 4,791
-------- --------
$ 67,869 60,510
======== ========
</TABLE>
(8)LONG-TERM DEBT
Long-term debt consists of:
<TABLE>
<CAPTION>
OCTOBER 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Revolving line-of-credit, interest at prime
plus 1-3/4%, 10.0% and 10.25% at October 31,
1998 and 1997, respectively, payable in
full on October 31, 1999 $ 7,854 8,950
12-7/8% senior notes due 2002, discounted $402
to yield 13%, interest payable semi-annually
on May 1 and November 1
74,302 74,245
-------- --------
82,156 83,195
Less current maturities of long-term debt -- --
-------- --------
$ 82,156 83,195
======== ========
</TABLE>
-37-
<PAGE>
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, 1997, the
amount that was available was approximately $31,839; approximately
$44,685 is available at October 31, 1998. The Agreement is secured by a
first lien on all of the Company's accounts receivable, inventories and
certain other assets. 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. Subsequent to October 31,
1998, the Company signed an amendment to its revolving credit agreement
to extend the term to October 30, 2001, and to reduce the interest rate
on outstanding borrowings to prime plus 3/4%. Accordingly, the amounts
outstanding under the revolving line of credit at October 31, 1998, have
been classified as long-term debt.
The senior notes are unsecured and are redeemable at a premium at the
Company's option after May 1, 1999 and at the face amount after May 1,
2001. The Company will be obligated to offer to repurchase senior notes
at a price of 101% of the face amount if there is a change in control or
if at the end of each twelve month period ended April 30, the Company
has excess cash flow, as defined. During fiscal 1996, senior notes with
a face amount of $1,000 were repurchased as a result of an offer
required because of excess cash flow, as defined, for the twelve-month
period ended April 30, 1996. In fiscal 1998 and 1997, the Company was
not required to repurchase any bonds.
The various debt agreements contain restrictions on mergers, incurring
additional debt or liens, making investments, selling assets or making
payments such as dividends, stock repurchases, or debt prepayments and
payments of any kind to affiliates. The revolving credit agreement also
contains various financial covenants such as working capital and net
worth. At October 31, 1998, the Company was in compliance with all the
financial covenants.
Under the most restrictive covenant in any agreement, no amount was
available for payment of dividends at October 31, 1998 and 1997.
The Company's outstanding letters of credit totaled $6,663 and $4,505 at
October 31, 1998 and 1997, respectively. Of this amount, $4,261 and
$4,470 at October 31, 1998 and 1997, respectively, were securing advance
deposits received from customers for foreign sales and other cash
collateralized letters of credit. The cash received has been pledged as
security for the letters of credit.
(9) OTHER LIABILITIES
<TABLE>
<CAPTION>
OCTOBER 31
-------------------
1998 1997
-------- --------
<S> <C> <C>
Pension liability $ 6,252 8,587
Other 5,678 4,983
-------- --------
$ 11,930 13,570
======== ========
</TABLE>
(10) 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, 1998 and 1997 were $1,400 and $1,000,
respectively. The shares have no voting rights on any matter, except as
specifically required by law.
The preferred shares are redeemable by the Company at its option,
subject to compliance with long-term debt covenants, at the par value
thereof plus any accrued and unpaid dividends. Preferred shares have
preference in liquidation or dissolution of the Company over common
shares to the extent of the par value of the preferred shares plus any
accrued and unpaid dividends thereon.
-38-
<PAGE>
(11) INCOME TAX
Total income taxes were allocated as follows:
<TABLE>
<CAPTION>
OCTOBER 31
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income from continuing operations $ (2,161) (3,013) (8,683)
Stockholder's equity, for minimum
pension liability (140) -- 50
-------- -------- --------
$ (2,301) (3,013) (8,633)
======== ======== ========
</TABLE>
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
OCTOBER 31
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ (206) 2,643 (832)
State 212 953 473
Deferred:
Federal (1,904) (6,088) (7,667)
State (263) (521) (657)
-------- -------- --------
$ (2,161) (3,013) (8,683)
======== ======== ========
</TABLE>
Income tax expense (benefit) 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
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $ (3,666) (4,394) (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 (34) 98 (349)
Foreign sales corporation effect -- (172) 30
Other, net 39 (45) 39
-------- -------- --------
$ (2,161) (3,013) (8,683)
======== ======== ========
</TABLE>
-39-
<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, 1998, 1997, and 1996 are presented below:
<TABLE>
<CAPTION>
OCTOBER 31
--------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts receivable $ 133 133 151
Inventory obsolescence reserve 2,762 1,675 1,407
Compensated absences, principally due to
accrual for financial reporting purposes 1,119 1,131 1,299
Accrued warranty 2,537 2,826 2,868
Pension liability 3,895 3,263 2,007
Postretirement benefits other than pensions 60,938 59,167 58,949
Other accruals 5,050 7,079 3,178
Other 151 171 209
-------- -------- --------
Total gross deferred tax assets 76,585 75,445 70,068
Less valuation allowance 38,348 38,348 38,348
-------- -------- --------
Net deferred tax assets 38,237 37,097 31,720
-------- -------- --------
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation 5,318 6,213 7,730
Reduced costs inventoried for tax purposes
pursuant to the Tax Reform Act of 1986 60 332 --
Other -- -- 47
-------- -------- --------
Total gross deferred liabilities 5,378 6,545 7,777
-------- -------- --------
Net deferred asset 32,859 30,552 23,943
Less current portion 6,746 6,198 3,455
-------- -------- --------
Noncurrent portion $ 26,113 24,354 20,488
======== ======== ========
</TABLE>
There was no change in the valuation allowance for the years ended
October 31, 1998, 1997 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, 1998. The amount of the
deferred tax asset considered realizable, however, could be reduced if
estimates of future taxable income are reduced.
-40-
<PAGE>
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.
(12) 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, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------------------------- ----------------------------
PLANS WITH PLANS WITH PLANS WITH PLANS WITH
ASSETS IN OBLIGATIONS IN ASSETS IN OBLIGATIONS IN
EXCESS OF EXCESS OF EXCESS OF EXCESS OF
OBLIGATIONS ASSETS OBLIGATIONS ASSETS
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 43,854 72,782 97,253 9,808
Service cost 1,154 1,354 2,620 155
Interest cost 3,197 5,381 7,362 811
Actuarial (gain) loss 2,391 4,991 3,301 638
Amendments -- 5,332 -- --
Benefits paid (2,032) (4,888) (5,784) (693)
(Gain) loss due to curtailments -- (758) (137) 880
Special termination benefits -- -- 72 350
-------- ------- -------- -------
Benefit obligations at end of year
48,564 84,194 104,687 11,949
-------- ------- -------- -------
</TABLE>
<TABLE>
<CAPTION>
1998 1997
--------------------------- ----------------------------
PLANS WITH PLANS WITH PLANS WITH PLANS WITH
ASSETS IN OBLIGATIONS IN ASSETS IN OBLIGATIONS IN
EXCESS OF EXCESS OF EXCESS OF EXCESS OF
OBLIGATIONS ASSETS OBLIGATIONS ASSETS
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
CHANGE IN PLAN ASSETS
Fair value of plan assets at
beginning of year 54,120 73,186 101,013 7,849
Actual return on plan assets 7,965 10,552 22,966 1,707
Employer contribution -- 1,572 -- 248
Benefits paid (2,032) (4,888) (5,784) (693)
-------- ------- -------- -------
Fair value of plan assets at end of
year 60,053 80,422 118,195 9,111
-------- ------- -------- -------
Funded status 11,489 (3,772) 13,508 (2,838)
Unrecognized prior service cost -- 7,111 4,399 --
Unrecognized net actuarial loss (12,327) (13,046) (23,955) (121)
-------- ------- -------- -------
Net amount recognized $ (838) (9,707) (6,048) (2,959)
======== ======= ======== =======
</TABLE>
-41-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Amounts recognized in the statement
of financial position consist of:
Accrued benefit liability $ (838) (9,339) (6,048) (2,960)
Accumulated other
comprehensive income -- (368) -- --
-------- ------- -------- -------
Net amount recognized $ (838) (9,707) (6,048) (2,960)
======== ======= ======== =======
WEIGHTED-AVERAGE ASSUMP-TIONS AS OF
OCTOBER 31
Discount rate 7.00% 7.00% 7.50% 7.50%
Expected return on plan assets 8.50% 8.50% 8.50% 8.50%
Rate of compensation increase 5.00% 5.00% 5.00% 5.00%
</TABLE>
<TABLE>
<CAPTION>
1998 1997
--------------------------- ----------------------------
PLANS WITH PLANS WITH PLANS WITH PLANS WITH
ASSETS IN OBLIGATIONS IN ASSETS IN OBLIGATIONS IN
EXCESS OF EXCESS OF EXCESS OF EXCESS OF
OBLIGATIONS ASSETS OBLIGATIONS ASSETS
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT
COST
Service cost $ 1,153 1,354 2,620 155
Interest cost 3,197 5,381 7,362 811
Expected return on plan assets (4,182) (5,634) (8,331) (657)
Recognized actuarial gain (232) (157) (165) --
Amortization of prior service cost
-- 662 703 73
Curtailment gain -- (758) (137) --
Amortization of prior service cost
on curtailment -- 1,958 -- 791
Charge for special termination
benefits -- -- 72 350
-------- ------- -------- -------
Net periodic benefit cost $ (64) 2,806 2,124 1,523
======== ======= ======== =======
</TABLE>
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 $325, $380 and $340 for the years ended October 31,
1998, 1997 and 1996, respectively.
(13) 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.
-42-
<PAGE>
The following table presents the related amounts recognized in the
Company's consolidated balance sheets at October 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 129,335 125,620
Service cost 1,868 2,039
Interest cost 9,485 9,600
Amendments 614 --
Special termination benefits -- 80
Gain due to curtailments -- (4,791)
Actuarial loss 15,477 1,878
Benefits paid (5,619) (5,091)
--------- ---------
Benefit obligation at end of year 151,160 129,335
Unrecognized prior service cost (614) --
Unrecognized net gain 9,816 26,367
--------- ---------
Accrued benefit cost $ 160,362 155,702
========= =========
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 1,868 2,039
Interest cost 9,485 9,600
Special termination benefits -- 80
Amortization of unrecognized net gain (1,075) (1,268)
--------- ---------
Net periodic benefit cost $ 10,278 10,451
========= =========
</TABLE>
For measurement purposes, a 7.5% annual rate of increase in the per
capita cost of covered benefits was assumed for fiscal 1998 and 1997;
the rate was assumed to decrease gradually to 5.5% by the year 2003 and
remain at that level thereafter.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.00% and 7.50% at October 31,
1998 and 1997.
The health care cost trend rate assumption has a significant effect on
the amounts reported. For example, increasing the assumed health care
cost trend rates by one percentage point in each year would increase the
accumulated postretirement benefit obligation as of October 31, 1998 by
$22,189 and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost would increase for the year
ended October 31, 1998 by $2,004. Decreasing the assumed health care
cost trend rates by one percentage point in each year would decrease the
accumulated postretirement benefit obligation by $17,908 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost would decrease for the year ended October
31, 1998 by $1,452.
(14) 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 $8.0 million, including the
impact of option vehicles, plus interest from January 27, 1995. The
claim relates to costs incurred under a prior Hummer(R) contract.
Although the
-43-
<PAGE>
parties have held discussions, they have been unable to resolve the
matter. The Company has appealed the U.S. Army's final decision to the
Armed Services Board of Contract Appeals. The U.S. Army has agreed to
defer collection of the amount claimed until 30 days after final
decision on the Company's appeal. The Company believes it has defenses
and sufficient offsets to the U.S. Army's claim and intends to pursue
the appeal vigorously. Management of the Company believes that the
ultimate liability, if any, resulting from such claims would not
materially affect the financial position of the Company.
The Company, in the ordinary course of business, is the subject of or
party to various pending or threatened litigation. While it is not
possible to predict with certainty the outcome of these matters,
management of the Company believes that any liabilities resulting from
such litigation would not materially affect the financial position of
the Company.
Payment for sales to commercial Hummer(R) dealers are generally obtained
within five days of delivery by drafts issued against the dealers'
wholesale floorplan accounts. Units wholesaled by the Company under
these accounts are subject to either voluntary or mandatory repurchase
agreements between the Company and four wholesale floorplan creditors.
Such agreements either permit or require the Company to repurchase, at
not more than dealer cost, new, unsold units in the dealers' inventories
in the event of repossession by the dealers' wholesale floorplan
lenders. At October 31, 1998 and 1997, the mandatory repurchase
agreements covered Hummers(R) with a total value at dealer cost of
$5,907 and $7,148, respectively. The Company has not repurchased any
vehicles under these arrangements.
The Company has arranged for a nationwide retail leasing program through
an independent leasing company and has entered into an agreement with
respect to this lease program which requires the Company to repurchase
commercial Hummers(R) leased under this program for specified residual
values in the event that the lessees or Hummer(R) dealers do not
purchase the vehicles for the specified residual values. At October 31,
1998, there were 19 active Hummer(R) leases with a total residual value
of $652.
In the ordinary course of business, the Company has entered into
contractual commitments related to purchases of materials, capital
expenditures, and leases.
(15) RELATED-PARTY TRANSACTIONS
During the years ended October 31, 1998, 1997 and 1996, the Company
incurred management fees to The Renco Group, Inc. of $1,200, $1,200 and
$1,200, respectively; $100 of which is included in accrued expenses at
October 31, 1998 and October 31, 1997. Under the current management
consultant agreement between the Company and The Renco Group, Inc., the
monthly fee to Renco is $100 with the potential for additional amounts
dependent on the Company achieving certain levels of earnings.
(16) BUSINESS AND CREDIT CONCENTRATIONS
The Company's largest customer is the United States Department of
Defense. The Department of Defense accounted for 75%, 79% and 74% of the
Company's sales for the years ended October 31, 1998, 1997 and 1996,
respectively. At October 31, 1998, 1997 and 1996, accounts receivable
with the Department of Defense were $62,811, $41,758 and $46,721,
respectively.
Export sales to unaffiliated foreign customers, including sales to
friendly foreign nations, were $42,509, $80,951 and $107,033 for the
years ended October 31, 1998, 1997 and 1996, respectively.
The Company's business is significantly impacted by the United States
defense budget. As the U.S. continues to reduce budget allocations for
defense expenditures, sales are adversely affected. Foreign sales are
dependent on periodic receipt of a relatively few, individually
significant contracts and are negatively impacted by a reduction in
foreign demand or material adverse changes in the U.S. Government
foreign military sales program. The commercial market is impacted by the
general economy and interest rates. Changes in the marketplace of any of
the above may significantly effect management's estimates and the
Company's performance.
-44-
<PAGE>
The Company is dependent upon certain vendors for the manufacture of
significant components of its Hummer(R) vehicles and two and one-half
ton ESP trucks, including engines and body components. If these vendors
were to become unwilling or unable to continue to manufacture these
products in required volumes, the Company would have to identify and
qualify acceptable alternative vendors. The inability to develop
alternate sources, if required in the future, could result in delays or
reductions in product shipments. However, the Company has not
experienced any significant problems relative to timeliness, quality or
availability of sole-sourced products. All of the Company's hourly
employees are represented by the International Union, United Automobile,
Aerospace and Agricultural Implement Workers of America ("UAW") under
one of two collective bargaining agreements. Certain employees in the
Company's remanufacturing operations (approximately 30% of the hourly
employees) are included in a collective bargaining agreement expiring in
September 2005 while the remaining 70% of the hourly employees are
included in a collective bargaining agreement expiring in September,
2001.
(17) PLANT CLOSING AND RESTRUCTURING
The Company completed production under its initial ESP contract in July
1998 and received additional orders to continue production through April
1999. However, the U.S. Government has decided not to purchase any
additional units beyond those that are already on contract. The last
unit of production will occur on April 19, 1999, at which time
production at the facility will cease and plant closure operations will
commence. Accordingly, the Company has recorded a plant closing charge
of $5,231 for the year ended October 31, 1998. The major components of
the plant closing charge are $2,958 of severance benefits for 277 hourly
and 23 salaried employees, $1,200 of additional pension expense due to
curtailment of certain defined benefit pension plans, and $1,073 of
plant shutdown and other charges. Included in accrued expenses at
October 31, 1998, is the remaining plant closing reserve of $4,058. Upon
completion of the plant closing, the Company expects to recognize a gain
of approximately $7,800 on curtailment of the Company's other
postretirement benefit plan due to the workforce reduction.
In recent years, the Company has also experienced reductions in the U.S.
defense budget for Hummer(R) vehicles, reduced direct international
sales of Hummer(R) vehicles, and lower sales volume and higher costs
than expected in the commercial Hummer(R) vehicle program. In order to
address these issues which impact operating results and liquidity, the
Company reduced its Hummer(R) vehicle production rate in February, 1997,
from 25 to 16.5 units per day, eliminated certain corporate overhead
positions, outsourced production of certain components and closed its
stamping plant, resulting in a restructuring charge of $3,495 for the
year ended October 31, 1997. The major components of the restructuring
charge were $2,820 for employee severance costs, $1,141 of additional
pension expense due to curtailment of certain defined benefit pension
plans, a $2,597 write-down to fair value of property, plant and
equipment to be disposed of and $1,353 of plant shutdown and other
charges. These costs were partially offset by a $4,416 gain on
curtailment of the Company's other postretirement benefit plan due to
the workforce reduction. The stamping facility equipment was sold during
fiscal 1997. Included in prepaid expenses and other assets at October
31, 1997, is $1,144 which represents the property and plant of the
stamping facility at its fair value less costs to sell. The Company sold
the facility during fiscal 1998. Included in accrued expenses at October
31, 1997, was the remaining restructuring reserve of $1,927, related
primarily to severance benefits.
(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 the fair value
of the senior notes at October 31, 1998 and 1997, was approximately
$74,300 and $80,500, respectively, based on management's informal
discussions with an investment banker which makes a market in the senior
notes.
-45-
<PAGE>
(19) RECONCILIATION OF NET LOSS TO NET CASH PROVIDED BY OPERATING ACTIVITIES
The reconciliation of net loss to net cash provided by operating
activities for the years ended October 31, 1998, 1997 and 1996 follows:
<TABLE>
<CAPTION>
OCTOBER 31
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (8,315) (9,541) (19,611)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Plant closing and restructuring
charges 5,231 3,495 --
Less plant closing and restructuring
payments (2,412) (720) --
Depreciation and amortization of
plant and equipment 7,835 7,378 11,278
Other amortization 6,292 6,371 6,436
Increase (decrease) in allowance for
doubtful accounts -- (48) (188)
Increase (decrease) in inventory
reserve 2,862 705 203
Deferred income taxes (2,307) (6,609) (8,274)
Discount accretion of debt 57 57 62
Noncash other postretirement cost 4,660 5,359 6,150
Loss (gain) on sale of equipment (11) (6) 255
Change in assets and liabilities:
Accounts receivable (21,551) 4,513 (4,250)
Inventories 12,756 33,782 1,422
Prepaid expenses 489 17 (26)
Other assets 208 549 3,247
Accounts payable (1,290) (25,428) 1,015
Accrued expenses 4,175 15,235 13,921
Income taxes (489) 3,278 (619)
Other liabilities (1,077) 276 (940)
-------- -------- --------
Net cash provided by
operating activities $ 7,113 38,663 10,081
======== ======== ========
</TABLE>
-46-
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None
-47-
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following table lists the director and executive officers of the Company as
of January 29, 1999:
Name Age Position
- ------------------- --- -----------------------------------------------
Ira Leon Rennert 64 Chairman and sole Director of the Company
James A. Armour 55 President and Chief Executive Officer
Edmond L. Peters 54 Senior Vice President, Procurement and Business
Development
Adare Fritz 52 Senior Vice President, Operations
Robert J. Gula 52 Senior Vice President, Engineering and Product
Development
Paul J. Cafiero 45 Vice President and Chief Financial Officer
Francis R. Scharpf 60 Vice President, Medium Truck Programs and
Business Development
Ira Leon Rennert has been the Chairman and sole Director of the Company since
1991.the acquisition of the HUMMER/HUMVEE business in 1992 (the "Acquisition")
and has been Chairman, Chief Executive Officer and principal shareholder of
Renco (including predecessors) since its first acquisition in 1975. Renco holds
controlling interests in a number of manufacturing and distribution concerns
operating in businesses not competing with the Company including WCI Steel, Inc.
and Renco Metals, Inc.
James A. Armour has been President and Chief Executive Officer of the Company
since April 30, 1992 when the Company acquired the HUMMER/HUMVEE business. Prior
thereto, Mr. Armour was President of the former AM General Corporation since
November 1988 and held various other positions prior thereto, including Vice
President and HUMVEE Program Manager, Corporate Director, Quality Assurance, and
Vice President, Materials and Quality Assurance. Mr. Armour has been with the
Company and its predecessor companies for the past 26 years. Prior thereto, Mr.
Armour held various positions with American Motors Corporation and Ford Motor
Company.
Edmond L. Peters has been Senior Vice President Procurement and Business
Development since November 1, 1997. Mr. Peters previously held the position of
Senior Vice President, Contracts Materials and Washington Operations since
October 1, 1996 and Vice President, Contracts & Subcontracts since April 30,
1992. Mr. Peters previously held the position of Director-Purchasing. Mr.
Peters has been with the Company and its predecessor companies for the past 14
years.
Adare Fritz has been Senior Vice President, Operations since April 30, 1992.
Mr. Fritz previously held the position of Vice President, Operations. Mr. Fritz
has been with the Company and its predecessor companies for the past 30 years.
Robert J. Gula has been Senior Vice President, Engineering and Product
Development since November 1, 1997. Mr. Gula previously held the position of
Vice President, Engineering since April 30, 1992. Mr. Gula has been with the
Company and its predecessor companies for the past 27 years. Prior to joining
AM General, Mr. Gula held technical positions within several engineering
services and automotive manufacturing companies.
Paul J. Cafiero has been Vice President and Chief Financial Officer since May 1,
1997. Mr. Cafiero previously held the position of Corporate Controller since
April 30, 1992. Mr. Cafiero previously held the position of Assistant
Controller. Mr. Cafiero has been with the Company and its predecessor companies
for the past 14 years.
-48-
<PAGE>
Francis R. Scharpf has been Vice President, Medium Truck Programs and Business
Development since June 1, 1998. On March 18, 1996, he was named Executive
Assistant to the President and CEO. Prior to this, he held various positions
involving program management and business planning. Mr. Scharpf has been with
the Company and its predecessor companies for the past sixteen years. Before
joining AM General, Mr. Scharpf was a career military officer having served in
the US Army in various command positions.
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, 1998, 1997, and 1996 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 COMPENSATION TABLE
ANNUAL COMPENSATION
-----------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS COMPENSATION (3) COMPENSATION
- ----------------------------------------- --------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Ira Leon Rennert (1) 1998 - - - $1,200,000
Chairman and Sole Director 1997 - - - $1,200,000
1996 - - - $1,100,000
James A. Armour 1998 $250,000 250,000 70,657 -
President & Chief Executive 1997 $250,000 250,000 48,925 -
1996 250,000 - 55,461 -
Officer
Edmund L. Peters 1998 175,000 60,000 (2) -
Sr. Vice President, 1997 135,000 60,000 23,937 -
Procurement 1996 130,000 25,000 26,870 -
Adare Fritz 1998 135,000 60,000 19,903 -
Senior Vice President, 1997 135,000 40,000 25,320 -
Operations 1996 135,000 - 25,356 -
Robert J. Gula 1998 155,000 60,000 24,902 -
Sr. Vice President, Engineering & 1997 130,000 40,000 35,684 -
Product Development 1996 130,000 - 22,884 -
Paul J. Cafiero 1998 125,000 40,000 (2) -
Vice President and Chief 1997 105,897 25,000 (2) -
Financial Officer 1996 93,539 - (2) -
</TABLE>
-49-
<PAGE>
(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 1998, Renco received a management fee
of $1,200,000 from the Company.
(2) Value of perquisites and other personal benefits did not exceed the
lesser of $50,000 or 10% of total salary and bonus per Named Executive
Officer.
(3) Consisting principally of Company paid expenses for cars, clubs, travel
and other expenses.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company had no compensation committee during the fiscal year ended October
31, 1998. The sole member of the board of directors was Mr. Rennert. The
compensation for the Named Executive Officers for fiscal 1998 was fixed by their
employment agreements and their Net Worth Appreciation Agreements and
consultation between the Chairman of the Board and the President.
During fiscal 1998, no executive officer of the Company, served (a) as a member
of the compensation committee (or other board committee performing equivalent
functions or, in the absence of any such committee, the entire board of
directors) of another entity, one of whose executive officers served on the
Company's board of directors, (b) as a director of another entity, one of whose
executive officers served on the Company's board of directors or (c) as a member
of the compensation committee (or other board committee performing equivalent
functions or, in the absence of any such committee, the entire board of
directors) of another entity, one of whose executive officers served as a
Director of the Company.
EMPLOYMENT AGREEMENTS
Mr. Armour, Mr. Fritz, Mr. Peters, Mr. Gula, Mr. Cafiero and Mr. Scharpf are
each employed under employment agreements which, pursuant to the terms thereof,
continue until October 31, 1998 and from year to year thereafter unless
terminated by either party with 30 days' prior written notice. The compensation
arrangements as of November 1, 1998 are as follows:
Mr. Armour-Minimum annual salary of $250,000 plus an annual bonus of $100,000
for each fiscal year in which the Company shall not have incurred a net loss
before the bonus payments to all Named Executive Officers and charges for
non-cash postretirement benefits other than pensions.
Mr. Fritz-Minimum annual salary of $135,000 plus an annual bonus of $40,000
subject to the same conditions as applicable to Mr. Armour.
Mr. Peters-Minimum annual salary of $175,000 plus an annual bonus of $60,000
subject to the same conditions as applicable to Mr. Armour.
Mr. Gula-Minimum annual salary of $155,000 plus an annual bonus of $40,000
subject to the same conditions as applicable to Mr. Armour.
Mr. Cafiero-Minimum annual salary of $125,000 plus an annual bonus of $25,000
subject to the same conditions as applicable to Mr. Armour.
Mr. Scharpf-Minimum annual salary of $102,000 plus an annual bonus of $25,000
subject to the same conditions as applicable to Mr. Armour.
Four former officers, three of whose employment terminated in December 1996 and
January 1997, received their contractual compensation through the expiration of
their contracts in October 1997.
-50-
<PAGE>
NET WORTH APPRECIATION AGREEMENTS
The Named Executive Officers and one other officer are each parties to
agreements ("Net Worth Appreciation Agreements") with the Company, where, upon
termination of each person's employment with the Company, he will be entitled to
receive a fixed percentage of the cumulative net income (available for common
stock as defined in such agreements) of the Company from a base date until the
end of the fiscal quarter preceding the date of termination. Such amount is
payable without interest in 40 equal quarterly installments commencing three
months after the date of termination of employment. Because of the net loss in
fiscal 1997 and 1998, the amounts payable to each contract holder at October 31,
1998 have been reduced to zero.
-51-
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Renco owns all of the outstanding capital stock of the Company. Certain trusts
established by Mr. Rennert for his benefit and for the benefit of certain
members of his family holds 97.9% of the capital stock of Renco. Mr. Rennert is
Chairman of Renco and of the Company and may be deemed to be the beneficial
owner of the Company's capital stock. The address of Renco and of Mr. Rennert is
The Renco Group, Inc., 30 Rockefeller Plaza, New York, NY 10112. No other
executive officer of the Company has any ownership interest in the Company.
By virtue of Renco's ownership of all the outstanding shares of capital stock of
the Company, and Mr. Rennert's ownership of a majority of the capital stock of
Renco, Mr. Rennert is in a position to control actions that require the consent
of a majority of the holders of the Company's outstanding shares of capital
stock, including the election of the board of directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Management Agreement
Renco provides management services to the Company under a management agreement
(the "Management Agreement"). Such services include operational consulting,
budget review, income tax consulting and contracting for insurance under master
policies. Pursuant to the Management Agreement effective as of April 1, 1995,
Renco provides such services to the Company for an annual management fee equal
to $1.2 million. Additionally, Renco will receive an annual fee for each fiscal
year, commencing with fiscal 1995, equal to the excess, if any, of (i) ten
percent (10%) of the Company's consolidated net income before deductions for
federal and state income taxes, fees associated with the Management Agreement
and expenses related to the Company's Net Worth Appreciation Agreements, over
(ii) the aggregate annual management fee of $1.2 million.
The Management Agreement provides that the Company shall not make any payment
thereunder which would violate any of its agreements with respect to any of its
outstanding indebtedness. Annual payments by the Company in excess of $1.2
million under the Management Consultant Agreement must comply with the
restricted payments covenant of the Indenture governing the Senior Notes.
Management fees are paid monthly in arrears in installments of $100,000. The
Company paid management fees of $1.2 million to Renco in the year ended October
31, 1998.
Insurance Sharing Program
To obtain the advantages of volume, Renco purchases certain insurance coverage
for its subsidiaries, including the Company, and the actual cost of such
insurance, without markup, is reimbursed by the covered subsidiaries. The major
areas of the Company's insurance coverage obtained under the Renco programs are
fidelity and special crime insurance The premiums for fidelity and special crime
insurance are allocated by Renco substantially as indicated in the underlying
policies. In fiscal 1998, the Company incurred costs of approximately $44,639
under the Renco insurance program. The Company believes that its insurance costs
under this program were less than it would have incurred if it had obtained its
insurance directly.
Tax Sharing Agreement.
Through fiscal year ended October 31, 1998 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
-52-
<PAGE>
accounting for tax and financial reporting purposes. As of October 31, 1998, AM
General had no net operating tax loss carryforwards. As of October 31, 1998, AM
General had a long term receivable for income taxes of $1.6 million under this
agreement, representing estimated tax payments made by the Company to Renco in
excess of the Company's actual tax liability.
For periods subsequent to October 31, 1998 AM General will file its own
consolidated federal and state income tax returns.
Other
The 5,000 outstanding shares of Preferred Stock of the Company, all of which is
held by Renco, are 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.
-53-
<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:
- ------------------------------------------------------------------------------
Page
----
Independent Auditors' Report................................... 26
Consolidated Statements of Operations for the years ended
October 31, 1998, 1997 and 1996........................... 27
Consolidated Balance Sheets as of October 31, 1998 and 1997.... 28
Consolidated Statements of Stockholder's Equity for the years
ended October 31, 1998, 1997 and 1996..................... 29
Consolidated Statements of Cash Flows for the years ended
October 31, 1998, 1997 and 1996........................... 30
Notes to Consolidated Financial Statements..................... 31 through 46
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.
-54-
<PAGE>
(a) 3. Listing of Exhibits
Exhibit No. Description
----------- ------------------------------------------------------
*3.1 Certificate of Incorporation of Ren Acquisition Corp.,
filed with the Delaware Secretary of State on November
26, 1991.
*3.2 Certificate of Amendment, changing name to AM General
Corporation, filed on April 30, 1992.
*3.3 Bylaws.
*4.1 Indenture dated as of April 27, 1995 between AM General
Corporation as Issuer and Shawmut Bank Connecticut,
National Association as Trustee relative to $75,500,000
in principal amount of 12-7/8% Senior Notes due 2002,
with form of Series A Senior Note annexed as Exhibit A
and form of Series B Senior Note annexed as Exhibit B.
*10.1 Loan and Security Agreement dated as of April 30, 1992
between Congress Financial Corporation and AM General
Corporation, and amendments 1 through 8 thereto.
****10.1.1 Amendment No. 9 dated June 26, 1996 to Loan and Security
Agreement, dated as of April 30, 1992 between Congress
Financial Corporation and AM General Corporation
*****10.1.2 Amendment No. 10 dated August 22, 1996 to Loan and
Security Agreement, dated as of April 30, 1992 between
Congress Financial Corporation and AM General
Corporation
*****10.1.3 Amendment No. 11 dated December 17, 1996 to Loan and
Security Agreement, dated April 30, 1992 between
Congress Financial Corporation and AM General
Corporation.
*****10.1.4 Amendment No. 12 dated March 14, 1997 to Loan and
Security Agreement, dated April 30, 1992 between
Congress Financial Corporation and AM General
Corporation.
******10.1.5 Amendment No. 13 dated dated October 30,1998 to Loan and
Security Agreement, dated April 30, 1992 between
Congress Financial Corporation and AM General
Corporation.
*10.2 Employment Agreement with James A. Armour, dated May 1,
1992, as supplemented December 16, 1993 and September 1,
1994.
*10.3 Employment Agreements dated May 1, 1992 as supplemented
December 16, 1993 with:
Adare Fritz
Gary L. Wuslich
Robert J. Gula
Edmond L. Peters
**10.3.1 Supplement No. 2, dated February 16, 1995, to Employment
Agreements of Messrs. Fritz, Wuslich, Gula and Peters.
10.3.2 Employment Agreement with Paul J. Cafiero, dated May 1,
1997
-55-
<PAGE>
Exhibit No. Description
----------- ------------------------------------------------------
*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 agreement with Edmond L. Peters
dated as of February 1, 1995
10.6.2 Net worth appreciation agreement with Paul J. Cafiero
dated May 1, 1997
*10.7 Management Consultant Agreement effective as of April 1,
1995 with The Renco Group, Inc.
*10.9 Deferred Payment Agreement dated May 5, 1995 between the
United States of America and the Corporation.
**10.10 Letter Agreement dated 23 December 1994 between the
Company and Department of the Army-Tank-Automotive and
Armaments Command (technical schedules omitted).
**10.11 Lease dated September 11, 1984 between Amland
Properties, Inc. and AM General Corporation.
**10.12 Lease dated May 12, 1989 between Niles/Washington
Associates Limited and AM General Corporation.
**10.13 Lease dated January 1, 1989 between WF Associates
Limited Partnership and AM General Corporation as
amended August 23, 1989, July 30, 1993 and December 31,
1993.
**10.14 Lease dated September 17, 1993 between Indiana GRQ, Inc.
and AM General Corporation.
**10.15 Lease dated July 25, 1984 between Oppenheimer Livonia
Associates and AM General Corporation.
**10.16 Intentionally Omitted
**10.17 Commercial lease dated April 28, 1992 between Amland
Corporation and Ren Acquisition Corp.
***10.18 Contract dated December 14, 1995 between the Company and
the Department of the Army-Tank -Automotive and
Armaments Command (technical schedules omitted)
*****10.19 Commercial lease dated November 6, 1997 between the
Company and Chippewa Corporation
21 Subsidiaries of Registrant.
*Filed with the Registration Statement No. 33-93302
filed June 9, 1995.
**Filed with Amendment No. 1 to Registration Statement
No. 33-93302 filed August 9, 1995
*** Filed with Company's Form 10-K, No. 33-93302, filed
January 28, 1996.
**** Filed with Company's Form 10-Q, No. 33-93302, filed
September 16, 1996.
***** Filed with Company's Form 10-K, No. 33-93302,
filed January 29, 1997
******Filed with Company's Form 10-K No. 33-93302, filed
January 29, 1999
-56-
<PAGE>
(b) No reports on Form 8-K were filed by the registrant during the last quarter
of the period covered by this report.
-57-
<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, 1999.
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, 1999.
Signature Title
--------- -----
/s/ Ira Leon Rennert Chairman and sole Director
- ----------------------------------
Ira Leon Rennert
/s/ James A. Armour President and Chief Executive Office
- ---------------------------------- (Principal Executive Officer)
James A. Armour
/s/ Paul J. Cafiero Vice President and Chief Financial Officer
- ---------------------------------- (Principal Financial and Accounting Officer)
Paul J. Cafiero
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.
-58-
<PAGE>
EXHIBIT 10.1.5
AMENDMENT NO. 13 TO LOAN AND SECURITY AGREEMENT
-----------------------------------------------
AM GENERAL CORPORATION
105 North Niles Avenue
South Bend, Indiana 46634-7025
As of October 30, 1998
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 13, 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, Amendment No. 10 to Loan and Security Agreement, dated
August 22, 1996, Amendment No. 11 to Loan and Security Agreement, dated December
17, 1996 and Amendment No. 12 to Loan and Security Agreement, dated March 14,
1997 (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 (a) extend the term of the Financing
Agreements to October 30, 2001 and (b) reduce the Interest Rate by one (1%)
percent. Lender is willing to consent and 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.
-----------
(a) Amendment to Definition. Effective as of January 1, 1999, all
references to the term "Interest Rate" in the Loan Agreement and each such
reference is hereby amended to mean a rate of three-quarters (3/4%) percent per
annum in excess of the Prime Rate or, upon an Event of Default or termination or
non-renewal hereof, a rate two and three-quarters (2 3/4%) percent per annum in
excess of the Prime Rate except that in the event that the outstanding amount of
the Loans or Letter of Credit Accommodations exceed the amounts available under
the Lending Formulas, the lending sublimits set forth in Sections 2.1(d) or
2.2(f) of the Loan Agreement or the Maximum Credit, as applicable, the Interest
Rate shall mean, in Lender's discretion, a rate of two and three-quarters
(2 3/4%) percent per annum in excess of the Prime Rate as to the amount of any
such excess(es), whether or not such excess(es) arise or are made with or
without Lender's knowledge or consent and whether made before or after an Event
of Default.
(b) Interpretation. 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 Lending Formula.
-------------------------
Section 2.1(a)(vi) of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:
"(vi) [Intentionally omitted.]"
3. Effective Date; Termination Fee.
-------------------------------
(a) Section 9.1(a) of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:
"(a) This Agreement and the other Financing Agreements shall
become effective as of the date set forth on the first page hereof and
shall continue in full force and effect for a term ending October 30, 2001
(the "Renewal Date"), and from year to year thereafter, unless sooner
terminated pursuant to the terms hereof."
(b) Section 9.1(f) of the Loan Agreement is hereby deleted in its
entirety and replaced with the following:
"(f) If Lender terminates this Agreement or the other Financing
Agreements upon the occurrence of an Event of Default or at the request of
Borrower prior to the end of the then current term of this Agreement and
the other Financing Agreements, in view of the impracticality and extreme
difficulty of ascertaining actual damages and by mutual agreement of the
parties
- 2 -
<PAGE>
as to a reasonable calculation of Lender's lost profits as a result
thereof, Borrower hereby agrees to pay to Lender, upon the effective date
of such termination, an early termination fee in an amount equal to:
(i) two (2%) percent of the Maximum Credit, if such
termination is effective on or prior to October 30, 2000;
(ii) one (1%) percent of the Maximum Credit, if such
termination is effective after October 30, 2000 but prior to October 30,
2001.
Such early termination fee shall be presumed to be the amount of damages
sustained by said early termination and Borrower agrees that it is
reasonable under the circumstances currently existing. The early
termination fee provided for in this Section 9.1 shall be deemed included
in the Obligations."
4. Fee. In addition to all other fees, charges, interest and expenses
payable by AM General to Lender under the Loan Agreement and the other Financing
Agreements, AM General 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 AM General's loan account maintained by Lender.
5. Additional Representations and Warranties. AM General 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 AM General:
(a) No Event of Default or act, condition or event which with notice
or passage of time or both would constitute any 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 AM General
and is in full force and effect as of the date hereof and the agreements and
obligations of AM General contained herein constitute legal, valid and binding
obligations of AM General enforceable against AM General 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 addition conditions precedent:
- 3 -
<PAGE>
(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 the 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.
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 between AM General and Lender.
Very truly yours,
AM GENERAL CORPORATION
By:
-----------------------------
Title: Vice President
--------------------------
[SIGNATURES CONTINUED ON NEXT PAGE]
- 4 -
<PAGE>
ACKNOWLEDGED:
AM GENERAL SALES CORPORATION
By:
-----------------------------
Title: Vice President
--------------------------
AGREED:
CONGRESS FINANCIAL CORPORATION
By:
-----------------------------
Title: First Vice President
--------------------------
- 5 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> OCT-31-1998 OCT-31-1997
<PERIOD-START> NOV-01-1997 NOV-01-1996
<PERIOD-END> OCT-31-1998 OCT-31-1997
<CASH> 2,687 1,190
<SECURITIES> 0 0
<RECEIVABLES> 74,561 53,011
<ALLOWANCES> (350) (350)
<INVENTORY> 71,613 87,299
<CURRENT-ASSETS> 156,427 150,150
<PP&E> 100,202 95,766
<DEPRECIATION> 58,518 50,846
<TOTAL-ASSETS> 314,765 316,258
<CURRENT-LIABILITIES> 100,363 94,294
<BONDS> 74,301 74,245
0 0
5,000 5,000
<COMMON> 0 0
<OTHER-SE> (34,046) (25,503)
<TOTAL-LIABILITY-AND-EQUITY> 314,765 316,258
<SALES> 392,785 468,173
<TOTAL-REVENUES> 392,785 468,173
<CGS> 344,327 425,119
<TOTAL-COSTS> 390,425 467,499
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 12,836 13,228
<INCOME-PRETAX> (10,476) (12,554)
<INCOME-TAX> (2,161) (3,013)
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (8,315) (9,541)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
