______________________________________________________________________________
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, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file Number: 33-93302
AM General Corporation
(Exact name of registrant as specified in its charter)
______________________
Delaware 35-1852615
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
105 North Niles Avenue
South Bend, Indiana 46617
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (219) 284-2907
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
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 31, 2000.
Documents Incorporated by reference: None.
________________________________________________________________________________
TABLE OF CONTENTS
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PART I 3
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
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 7a. Quantitative and Qualitative Disclosures About Market Risk 25
Item 8. Financial Statements and Supplementary Data 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 53
PART III 54
Item 10. Directors and Executive Officers of the Registrant. 54
Item 11. Executive Compensation. 55
Item 12. Security Ownership of Certain Beneficial Owners and Management. 59
Item 13. Certain Relationships and Related Transactions. 59
PART IV 61
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 61
SIGNATURES 65
2
PART I
Item 1. Business
AM General Corporation, with its wholly owned subsidiaries, AM General Sales
Corporation, Chippewa Corporation, and General Engine Products, Inc.
(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 ("HMMWV"
or"HUMVEE "(R)), which it sells to the US and foreign military services. The
Company is the designer and sole manufacturer of a commercial version of the
HUMVEE which it sells to industrial and retail users through its commercial
dealer network under the registered trademark HUMMER (R) ("HUMMER" or "Current
Vehicle"). From the introduction of the HUMMER/HUMVEE in 1984 and through
October 31, 1999, the Company has delivered 128,480 HUMVEEs in a variety of
configurations to the DoD for use by the US Armed Forces, 22,387 HUMVEEs to the
military services of 40 foreign countries, and 7,466 HUMMERs. In fiscal 1999,
the Company sold 3,827 HUMMER/HUMVEEs. From 1994 through April 1999, the
Company also sold remanufactured 2 1/2-ton medium tactical vehicles under the
Army's Extended Service Program ("ESP"). In addition to HUMMER/HUMVEEs, the
Company also markets both technical support services and spare parts.
The Company classifies its operations into five business segments: (i)
HUMMER/HUMVEEs, (ii) Medium Trucks, (iii) Spare Parts Logistics Operations
("SPLO"), (iv) Systems Technical Support ("STS")/Other, and (v) Engines.
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 and gross profit are summarized by business lines.
The Company closed its Extended Service Program ("ESP") facility in May 1999
upon completion of the ESP program.
The 6.5 liter diesel engine produced by General Motors Corporation ("GM") is the
only engine currently available for production of both the HUMMER and HUMVEE
vehicles. In late 1998, GM Powertrain, a division of GM, announced its
intention to discontinue all production of this engine in the year 2000. The
Company was unsuccessful in acquiring an alternative engine supply, due
primarily to the booming light truck market. On June 11, 1999 the Company
acquired from GM Powertrain its 6.5 liter diesel engine business (the "Engine
Agreement"). Under terms of the Engine Agreement, the Company will begin
production of the 6.5 liter diesel engine as GM Powertrain's plant in Moraine,
Ohio phases out production of that engine in fiscal year 2000 and GM Powertrain
will provide assistance to AM General in launching the plant and validating the
assembly process. The Engine Agreement provides a license to produce and sell
the 6.5 liter engine for a period of ten (10) years. The Company anticipates
beginning low-rate production in July 2000 and full production by the first
quarter of 2001 at a new, leased facility in Franklin, Ohio (See "Engine
Segment").
GM currently uses this engine in some vans, pickup and medium duty trucks. The
Engine Agreement provides that GM's internal parts distributor, Service Parts
Operation ("SPO"), will purchase all service requirements for this engine from
AM General, for a period of ten years. The Company plans to continue using the
6.5 liter engine in production of both its HUMMER and HUMVEE vehicles for many
years. In addition, orders are expected from producers of specialty and delivery
van companies. The Company anticipates that it will be profitable and will
generate annual revenue of approximately $49.0 million, excluding inter-company
sales of $26.0 million, when full production levels are achieved in fiscal 2001.
On December 21, 1999, the Company concluded a series of agreements ("the GM
Transaction") with GM through which the Company intends to more fully utilize
the widespread recognition of the HUMMER name to generate incremental revenues
and cash flow. Pursuant to the terms of the Transaction, GM will design,
engineer, certify and release a new generation vehicle (the "New Vehicle")
bearing the HUMMER trademark (the "Trademark") and retain the Company to
assemble New Vehicles over a seven and one half year period. As part of the GM
Transaction, the Company assigned the Trademark to GM. See "The GM Transaction"
hereafter in this Item 1 for more information as to the Transaction.
All of the Company's issued and outstanding capital stock is owned by The Renco
Group, Inc. ("Renco"). Renco is owned by trusts established by Mr. Ira Leon
Rennert, the Chairman and sole director of the Company and Renco,
3
for himself and members of his family. As a result of such ownership, Mr.
Rennert indirectly controls the Company. See "The AM General and General Motors
Agreements" for the option of GM, on certain conditions, to acquire up to 40.0%
of the stock of the Company for an amount determined at the time of exercise of
options pursuant to previously established procedures. Should the Company and GM
fail to agree on a value, the GM Transaction agreements contain a provision in
which an independent third party will assist in the valuation.
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
HUMMER/HUMVEE Segment
HUMVEE
Since its introduction in 1984, the HUMVEE has been sold to US and foreign
militaries pursuant to contracts having firm fixed prices. The Company
therefore 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. In 1995, the Company began production of an A2 Series HUMVEE
under the X001 contract with the DoD. The X001 contract expires on October 31,
2001 and therefore the Company will begin negotiating a follow on contract in
early 2000. See MD&A.
Domestic Sales; Government Contracts.
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In 1997, the US Army formed an Integrated Process Team ("IPT") to determine a
cost effective plan that a) manages the current Light Tactical Vehicle ("LTV")
fleet and defines annual procurement requirements, b) explores recapitalization
opportunities as the fleet ages, c) provides for technology insertion on future
production vehicles, and d) establishes the performance requirements (i.e.
mission profile) for future LTVs.
As a result of the IPT, the US Army published its approved, long-term
acquisition plan for the LTV fleet in January 1999, which includes the
following: 1) the performance capability of future LTVs must be equal to or
better than the current mission profile of the HUMVEE, 2) the US Armed Forces
will continue to procure HUMVEEs beyond the year 2020, 3) the US Army will
continue to explore the feasibility of remanufacturing older HUMVEEs for certain
missions as a cost effective alternative to new vehicles - these vehicles, if
approved, would be designated as A3 Series HUMVEEs, 4) the US Army will develop
an upgraded version of the HUMVEE with selected technology insertions which will
be known as A4 Series HUMVEEs, 5) there will be no new starts in production, 6)
the current production contract with AM General will be extended to provide
sufficient time to develop the A4 Series and award a production contract, and 7)
there will not be a break in fielding (i.e. deliveries to users) resulting from
the transition from A2 to A4 production.
The solicitation for the Phase I Prototype and Test (PAT) contract for the A3
Series HUMVEE has not been released as yet. The US Army expects to release it
within the next three to six months. The company is prepared to aggressively
compete for this business.
The Company and the US Army are currently negotiating an Independent Research &
Development ("IR&D") contract for the development of the upgraded A4 Series
HUMVEE. Negotiations are expected to be completed within the second quarter.
The US Marine Corp. decided to replace its entire fleet of approximately 17,000
HUMVEEs with new vehicles as part of the LTV Acquisition Strategy. The US
Marines received permission and the necessary funding to accelerate its
acquisition plan from completion by 2007 to be finished by 2005. This
accelerated plan went into effect last year.
Based upon currently available information from the US Army, management expects
that the US Armed Forces will procure in fiscal 2000 at least the same number of
HUMVEEs that were produced and delivered in fiscal 1999 (approximately 2,500
units).
4
As of October 31, 1999, the Company had a total US military backlog of 252
HUMVEEs valued at $14.0 million compared to 247 HUMVEEs valued at $12.0 million
at October 31, 1998. The Company is currently delivering vehicles ahead of
schedule.
International Sales.
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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,
1999 and October 31, 1998, there were no significant FMS and direct sales
backlogs. In fiscal 1999, international HUMVEE sales accounted for
approximately 8.2% of total HUMMER/HUMVEE unit sales and 9.0% 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.
In the 2/nd/ quarter of fiscal year 2000, the Company expects to finalize
negotiations with an international customer who is seeking to acquire 964
vehicles to be produced and delivered in fiscal 2000. In anticipation of this
order, along with heightened demand for HUMMERs, the Company is increasing the
production rate of HUMMER/HUMVEEs from the current rate of 18 units per day to
24 in late February, 2000.
In fiscal 1997, the Company manufactured 231 HUMVEEs for a foreign 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, 1999 and 1998. As a result, the
Company's finished goods inventory was increased 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. The FMS Customer
has indicated its intention to purchase the units by formally requesting from
the US Government an offer to begin negotiations. The order received US
Congressional approval and the contract has been forwarded to the FMS Customer
for execution. Management now believes these units will be sold before the end
of the current fiscal year. See MD&A- Liquidity and Capital Resources.
HUMMER
In October 1992, the Company broadened the market for the HUMVEE by developing
and introducing a commercial version, the HUMMER. The Company's engineering
staff has improved and adapted the HUMVEE for industrial and commercial use by
adding an array of options and additional comfort, convenience and sport utility
features. Management believes the 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 has sold 7,466
HUMMERs through its network of approximately 89 domestic and international
dealerships and distributors. As of October 31, 1999, AM General had a total
backlog of 250 HUMMERs valued at $16.3 million compared to 54 valued at $3.5
million on October 31, 1998. In fiscal 1999, HUMMER sales accounted for
approximately 27.8% of total HUMMER/HUMVEE unit sales and 32.3% of
HUMMER/HUMVEE net sales revenue.
Off road, 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,
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.
5
The Company currently manufactures five HUMMER models, which include two-
passenger and four-passenger hard-tops, a four-door wagon, an open-top sport
model and a newly designed slant back with suggested base retail prices ranging
from $69,000 to $92,000. 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.
Since February 1995, the Company has issued eight recalls regarding design
problems with certain mechanical features of the HUMMER. The total cost to the
Company of the eight recalls is estimated to be approximately $351,063 of which
$329,047 has been incurred as of October 31, 1999. 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 HUMMER
sales.
In fiscal 1999, the HUMMER/HUMVEE segment accounted for approximately 67.9% of
net sales.
The GM Transaction
On December 21, 1999, the Company executed a series of agreements with GM
through which the Company intends to more fully utilize the widespread
recognition of the HUMMER name to generate incremental revenues and cash flow.
Pursuant to the terms of the GM Transaction, GM will design, engineer, certify
and release the New Vehicle bearing the Trademark and retain the Company to
assemble New Vehicles over a seven and one half year period effective with the
release of the New Vehicle. As part of the Transaction, the Company assigned
the Trademark to GM. GM will be responsible for providing all component parts,
materials and vendor tooling for the New Vehicle. The Company will assemble, at
GM's request, New Vehicles, according to agreed-upon specifications, for a
specified fixed fee (the "Assembly Fee") which varies with sales volumes. The
Company will have the right to assemble GM's requirements, up to the first
40,000 units annually. GM expects to release the New Vehicle in fiscal year
2002. GM has not committed to any specific minimum annual number of New
Vehicles. Reference is hereby made to the GM Agreements filed as exhibits to
this report.
The Company launched the HUMMER in 1992 and believes that the business
prospects for the HUMMER are limited with respect to demand, price and
profitability. The Company believes that annual sales levels of the HUMMER are
not likely to grow substantially beyond levels reached in 1999 given the
Company's limited resources. The Transaction presented the Company with an
opportunity to generate greater revenues and cash flow from the commercial use
of the Trademark by assigning the Trademark to GM and in return being contracted
by GM to be the primary assembler of the New Vehicle.
The Company believes that GM's resources and expertise in the design,
marketing and distribution of automobiles and trucks should result in the sale
of a significantly greater number of New Vehicles with the opportunity for
substantially greater manufacturing revenues and cash flow than have been
achieved by the Company in manufacturing and selling the HUMMER. The Company
further believes that the Transaction presents the Company with an opportunity
to improve the Company's financial results.
The Company's existing manufacture and design rights with respect to the
HUMMER and the HUMVEE will remain unchanged, except that the Company's use of
the Trademark on the HUMMER will be through license ending at the conclusion of
the assembly arrangement hereinafter discussed instead of ownership. GM became
the exclusive provider of global marketing and distribution support services for
the HUMMER effective January 3, 2000.
The GM Transaction includes the Company's execution of an exclusive and
irrevocable assignment of the Trademark in favor of GM. GM, in turn, has
granted the Company a limited license that allows the Company to use the
Trademark in connection with the HUMMER for the duration of the New Vehicle
Assembly Agreement but not thereafter. Except for the Assembly Fee on the New
Vehicle and its derivatives, the Company will not receive any other payments
from GM in connection with GM's use of the Trademark.
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With respect to the assembly facility for the New Vehicle, GM will
lend the Company an amount currently anticipated to exceed $200 million through
a non-interest bearing loan (the "GM Loan"). The proceeds of the GM Loan will be
used to finance (i) the engineering and construction of a new structure, (ii)
the purchase of certain machinery and equipment, and (iii) all other costs
(except for the cost of the time dedicated to the project by the Company's
management and employees) required for the Company to become prepared to
assemble the New Vehicle (collectively, the "New Facility").
To repay the GM Loan, the Company will repay to GM a pre-agreed
portion of the Assembly Fee received for assembling each New Vehicle. If New
Vehicles are ordered and assembled at the forecasted rate, the GM Loan would be
repaid within seven and one half years after the release of the New Vehicle.
Except as provided above, the Company is not required to repay the outstanding
balance of the GM Loan but it may elect to do so at any time. GM will have a
lien on the building and machinery and equipment purchased with the proceeds of
the GM Loan to secure its repayment. In accordance with the terms of the GM
Transaction, the Company is prohibited from using the New Facility for any
purpose other than assembly of the New Vehicle until the GM Loan is fully repaid
and the lien is satisfied.
On an annual basis, GM will have the option to convert all or any part
of the unpaid balances, if any, on the GM Loan into an equity interest in the
Company of not more than 40% of the voting stock of the Company for an amount
determined at the time of exercise of options pursuant to previously established
procedures. Should the Company and GM fail to agree on a value, the GM
Transaction agreements contain a provision in which an independent third party
will assist in the valuation.
Medium Truck Segment
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.
Despite the economic advantage offered by the Company's re-manufactured 2-1/2
ton trucks, the US Army decided not to purchase any additional units beyond
those included in the base contract plus exercised options. Accordingly, on
April 19, 1999 the Company ceased production under the ESP contract. As of that
date, the Company had remanufactured and delivered 5,483 units to the US Army
and other customers.
On October 30, 1998, the Company was awarded a $2.4 million Phase I contract by
the U.S. Army to build three pre-production vehicles for the Family of Military
Tactical Vehicles ("FMTV") second source program. A competitor was awarded a
similar contract. On July 13, 1999 the Company delivered two new 5.0-ton
vehicles and one new 2.5-ton vehicle for Government testing purposes. All three
vehicles successfully completed the government required testing twenty three
days ahead of schedule. However, due to Congressional direction, the FMTV Second
Source Program was canceled. The Army/DOD is now developing (at Congressional
direction) a new acquisition strategy/program to facilitate full and open
competition for the next FMTV multi-year production contract that will be
awarded to a single contractor. Phase I (Prototype & test) contract award (for
up to three contractors) is projected for November 2000 with a subsequent Phase
II (Production) award to a single contractor in 2002. The Company has and will
continue to actively and aggressively participate in all phases of the FMTV
program.
SPLO Segment
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 sales.
In fiscal 1999, SPLO accounted for approximately 14.8% of net sales.
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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/Other Segment
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. In fiscal 1999, the STS/Other
segment accounted for 4.3% of net sales.
On September 15, 1999 the Company was awarded a multi-year contract covering
systems technical support for the HMMWV Family of Vehicles. The contract
consists of a base year level of effort with four follow-on option years. The
total potential value of this contract if all options are exercised is
approximately $26.8 million.
Engine Segment
The 6.5 liter diesel engine produced by GM is the only engine currently
available for production of both the HUMMER and HUMVEE vehicles. In late 1998,
GM Powertrain, a division of GM, announced its intention to discontinue all
production of this engine in the year 2000. The Company was unsuccessful in
acquiring an alternative engine supply, due primarily to the booming light truck
market. On June 11, 1999 the Company acquired from GM Powertrain its 6.5 liter
diesel engine business. Under terms of the Engine Agreement, the Company will
begin production of the 6.5 liter diesel engine as GM Powertrain's plant in
Moraine, Ohio phases out production of that engine in fiscal year 2000 and GM
Powertrain will provide assistance to AM General in launching the plant and
validating the assembly process. The Engine Agreement provides a license to
produce and sell the 6.5 liter engine for a period of ten (10) years. The
Company anticipates beginning low-rate production in July 2000 and full
production by the first quarter of 2001 at a new, leased facility in Franklin,
Ohio.
GM currently uses this engine in some vans, pickup and medium duty trucks. The
Engine Agreement provides that GM's internal parts distributor, SPO, will
purchase all service requirements for this engine from AM General, for a period
of ten years. The Company plans to continue using the 6.5 liter engine in
production of both its HUMMER and HUMVEE vehicles for many years. In addition,
orders are expected from producers of specialty and delivery van companies. The
Company anticipates that it will be profitable and will generate annual revenue
of approximately $49.0 million, excluding inter-company sales of $26.0 million,
when full production levels are achieved in fiscal 2001.
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
8
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. In
an effort to accelerate the procurement of these vehicles, TACOM announced its
intention to stage a full and open competition for the next FMTV multi-year
production contract scheduled to be awarded in 2002. As discussed above, the
Company intends to compete vigorously for the FMTV 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 ("IR&D") department at its Livonia, Michigan facility to conduct
IR&D activities.
Manufacturing Process and Raw Materials
At the Company's Mishawaka, Indiana facility, HUMMER/HUMVEE vehicles are
manufactured on an 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, 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 undergo
testing before delivery to the customer.
Approximately 68.8% 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 20% of the
Company's total purchased materials are currently supplied by various divisions
of GM. These materials include engines, transmissions and steering 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
fourteen 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 HUMVEE offers enhanced mobility
and dependability at a lower cost than any of its international competitors.
The Company's 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 HUMMER offers off-
highway mobility and durability far beyond the capabilities of competing trucks,
which are designed primarily for on-highway use. As noted above, GM expects to
release a New Vehicle under the HUMMER trademark in fiscal 2002.
As previously mentioned, the Company is in competition for the next FMTV multi-
year production contract to be awarded in mid 2002. The Company anticipates a
very high level of competition for this award. The Company's competitors are
experienced manufacturers of tactical wheeled vehicles and contractors with
TACOM.
Competition in SPLO is highly fragmented among a large number of small
independent suppliers and selected original equipment manufacturers.
9
The market in which the Company competes for STS contracts consists of six major
competitors and a growing number of smaller specialty engineering firms. The
Company believes its engineering expertise, full service design and testing
services, and close proximity to its primary customer (TACOM) have enabled it to
remain very competitive with other engineering organizations.
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 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, 1999, the mandatory repurchase agreements covered 83
HUMMERs with a total value at dealer cost of $6.8 million.
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, 1999, the Company had 419 salaried employees and 655 hourly
employees. Of the 1,074 employees, 262 provide general administrative services
including legal, finance, human resources, and other corporate functions. The
Company's current labor contract for the Mishawaka HUMMER/HUMVEE and SPLO
operations expires in September of 2001. All of the Company's hourly employees
at these operations are represented by the International Union, United
Automobile, Aerospace and Agricultural Implement Workers of America ("UAW"). The
Company believes that its relations with employees are satisfactory.
A new labor agreement has been negotiated for the 6.5 liter diesel engine plant
in anticipation that hourly employees will be represented by the International
Union of Electrical Workers ("IUE"). The Company expects employment levels will
reach 85 hourly employees and 20 salaried employees by fiscal year 2002.
A new labor agreement has been negotiated in connection with the GM Transaction.
The new agreement was ratified in August 1999 and will expire in September 2009.
All of the hourly employees will be represented by the UAW.
10
Item 2. Properties
The Company operates one manufacturing facility 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 Company presently
owns approximately 40 acres and occupies the remaining 56 acres through a lease
agreement. In June 1999 the Company negotiated a new lease agreement which
includes an option for the Company to purchase the property at a pre-negotiated
price. In connection with the GM Transaction, the Company intends to purchase
the property in fiscal 2000 on which it intends to locate the New Facility. 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. In response to higher demand
for new model HUMMERs from its dealer network, the Company increased the
production of HUMMERs in February 1999 from 4 to 5.5 vehicles per day resulting
in a new production rate of 18 HUMMER/HUMVEE vehicles per day. The Company plans
to further increase the line rate to 24 units per day in February 2000 to meet
growing demand in the international HUMVEE market. See MD&A
The 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 leases a facility in South Bend that was utilized for the ESP
operations from 1994 through April, 1999. The current leasing arrangement allows
the Company to lease the facility on a month to month basis. The Company
continues to lease the facility in anticipation of being awarded future
remanufacturing projects.
The Company operates a test track in South Bend located near the ESP facility.
The property is owned by the Chippewa Corporation ("Chippewa"), a wholly owned
subsidiary of the Company, and leased by Chippewa to the Company. Environmental
testing performed on the site indicates sources of contamination which occurred
prior to the Company's ownership of the property. The Company is currently
providing assistance to environmental agencies in the remediation of
contamination found on adjacent properties. The remediation effort is not
anticipated to have a material adverse impact on the Company's financial
condition. Chippewa is participating in the state of Indiana's Voluntary
Remediation Program for the pre-RECRA lagoons located on Chippewa's property.
The Company leases its STS and IR&D facilities 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 announced in August that it selected Franklin, Ohio as the site for
the new engine business. A developer commenced construction of the new facility
which was approximately 85% complete at January 29, 2000. The Company
anticipates that it will negotiate a multiyear operating lease with respect to
this facility and take possession in late February.
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 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 Chippewa.
11
Item 3. Legal Proceedings
US Army Pricing Claim
The previously reported pricing claim by the US Army relating to the Company for
approximately $8.0 million plus interest from January 27, 1995 was settled in
October 1999 for $125,000.
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.
Nevada Product Liability Case
The Company is also defending a product liability case based on an accident
involving an M35 Truck (a two-and-a-half ton military truck). The Complaint was
filed in October 1995 in Clark County, Nevada. It alleges that the truck's
brakes were defective, failed, and caused an accident resulting in severe
injuries to an Air Force Sergeant. The Company filed a motion for summary
judgment based on the Government Contractor's defense. The trial judge denied
the motion. The case is currently scheduled for trial in February 2000. The
Company expects to prevail in this case; however, the outcome of any jury trial
is uncertain and an adverse decision could have a material adverse effect on the
Company.
Age Discrimination Claim
The previously reported age discrimination claim asserted by William Wilson
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 has been fully resolved by the payment by
the Company of $494,839. The judgment has been satisfied and the case is now
closed.
Defense Contract Audit Agency Claim
See Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations for information as to a $25.3 million overcharge claim
made by the Defense Contract Audit Agency in July 1996.
Item 4. Submission of Matters to a Vote of Security Holders
On December 17, 1999, the Company successfully concluded a solicitation for the
consents of holders of the Company's 12 7/8 Senior Notes, Due 2002, (the
"Notes") to an amendment to the Indenture governing such Notes. Such amendment
amended, solely for purposes of consummating the GM Transaction, provisions
concerning (i) limitations on indebtedness; (ii) limitations on liens; (iii)
limitations on asset sales and (iv) calculation of the fixed charge coverage
rate. The Company received consent with respect to $63,548 million aggregate
principal amount of Notes out of the total $67,987 aggregate principal amount of
Notes outstanding. The Company required the consent of 75% in aggregate
principal amount of Notes outstanding in order to approve such amendment.
On December 21, 1999, Renco, as sole stockholder of the Company, executed a
written consent, in lieu of meeting of stockholders, to the entry by the Company
into the Transaction with GM.
On January 5, 2000, Renco, as sole stockholder of the Company, executed a
written consent, in lieu of meeting of stockholders, to the re-election of Mr.
Rennert as Chairman of the Board and sole director of the Corporation.
12
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 31, 2000, the Company had one stockholder. The Company paid no
dividends on its common stock in fiscal 1999 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.
13
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, 1999.
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.
Fiscal Year Ended
October 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------------
(dollars in millions)
Statement of Operations Data
- ----------------------------
Net Sales $348.2 $392.8 468.2 462.4 411.7
Gross Profit (a) 37.4 48.5 43.2 42.9 56.0
Depreciation and Amortization 10.9 13.2 12.7 16.8 15.8
Selling, General and Administrative Expenses 31.2 27.7 26.2 37.3 36.3
Special termination benefits - - 0.1 3.2 -
Plant Closing/Restructuring (2.7) 5.2 3.5 - -
Operating Income (Loss) (b) (2.0) 2.4 0.7 (14.4) 3.8
Interest Expense, Net 11.1 12.8 13.2 13.9 10.7
Income Tax Benefit (2.9) (2.1) (3.0) (8.7) (0.4)
Income (Loss) before Extraordinary Item (10.2) (8.3) (9.5) (19.6) (6.5)
Extraordinary Item, net of Income Taxes of $1.75 - - - - 3.0
-------------------------------------------------------------------------
Net Loss $(10.2) $ (8.3) (9.5) (19.6) (3.5)
Balance Sheet Data
- ------------------
Working Capital $ 61.4 $ 56.1 55.9 87.9 98.1
Property Plant and Equipment, net 43.9 41.7 44.9 56.5 62.8
Total Assets 325.8 314.8 316.3 373.2 372.7
Total Debt (c) 92.8 82.2 83.2 126.9 126.9
Stockholder's Equity (Deficit) (44.1) (34.1) (25.5) (16.0) 3.6
(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 and the 12 7/8% Senior
Notes due 2002 issued in 1995 (the "Refinancing").
14
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 1994 through April 19,
1999 the Company sold remanufactured 2 1/2 ton medium tactical vehicles under
the Army's ESP program.
In June, 1999 the Company acquired from GM Powertrain, a division of GM, GM
Powertrain's 6.5 liter diesel engine business. Under terms of the agreement, the
Company will begin production of the 6.5 liter diesel engine as GM Powertrain's
plant in Moraine, Ohio phases out production of that engine in fiscal year 2000.
GM Powertrain will provide assistance to AM General in getting this project
started and the assembly process validated. The Company anticipates beginning
low-rate production in July 2000 and full production by the first quarter of
2001.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
131, "Disclosures about Segments of an Enterprise and Related Information," in
the fourth quarter of fiscal 1999. In accordance with this standard, the Company
is providing management discussion on net sales, unit sales and gross margin for
the business segments identified below. Prior year financial information has
been restated to provide discussion on comparative data. Management discussion
relevant to other financial data will be presented on a consolidated basis only.
HUMMER/HUMVEE Segment
The Company began producing the latest generation of HUMVEEs, the A2 Series,
under a letter contract 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 following five years. Through December
1999, a total of 14,382 vehicles have been ordered on the X001 Contract. The F/Y
2000 Defense Bill currently contains the necessary funding for the expected 2000
production. In response to the F/Y 2000 Budget and higher international military
demand, the Company is increasing vehicle production of military vehicles from
the current rate of 12.5 vehicles per day to 18 in February 2000. Beginning at
the same time the Commercial vehicle line rate will be increased to 6 vehicles
per day (from the 5.5 rate established in February 1999) resulting in a new
total production rate of 24 HUMMER/HUMVEE vehicles per day.
In May, 1999 the Company and General Motors Acceptance Corporation (GMAC)
concluded negotiations under which GMAC will offer to existing HUMMER dealers
its Smartlease program for new 1999 and 2000 model year HUMMERs. Under this
agreement, GMAC will accept lease contracts for HUMMERs through its local GMAC
offices. The Company will have no financial obligations with respect to residual
risk in connection with this program.
See Item 1. Business - The GM Transaction for information as to agreements
concluded in December 1999 pursuant to which the Company has transferred the
Trademark to GM which will design and market a new generation of HUMMER vehicle
which, for a seven and one half year period effective with the release of the
New Vehicle anticipated to be in early to mid 2002, will be assembled for GM by
the Company.
Medium Truck Segment
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. Despite the economic advantages offered by this program,
the US Army decided not to purchase any additional units beyond those included
in the original contract. On April 19, 1999 the Company ceased production under
the ESP contract. As of that date, the Company had remanufactured and delivered
5,483 units to the DoD.
15
In an effort to accelerate the procurement of new 2-1/2 and 5-ton vehicles,
TACOM announced that it is developing a new acquisition program to facilitate
full and open competition for the next FMTV multi-year production contract. The
Company intends to compete vigorously for the new FMTV contract.
SPLO Segment
The Company's SPLO operation sells after-market parts and support services for
vehicles manufactured by the Company and for non-AM General manufactured
vehicles. In addition, the Company provides expert training programs for off-
road driving, as well as training for vehicle maintenance and repairs.
STS/Other Segment
The Company's STS operation performs engineering services related to the
Company's military trucks and certain other military vehicles. Services include
engineering, design and drafting, configuration and data management,
translation, and integrated logistics support.
Engine Segment
On June 11, 1999 the Company acquired from GM Powertrain, a division of General
Motors Corporation, GM Powertrain's 6.5 liter diesel engine business. Under
terms of the agreement, the Company will begin production of the 6.5 liter
diesel engine as GM Powertrain's plant in Moraine, Ohio phases out production of
that engine in fiscal year 2000. GM Powertrain will provide assistance to AM
General in getting this project started and the assembly process validated. The
Company anticipates beginning low-rate production in July 2000 and full
production by the first quarter of 2001.
Results of Operations
Twelve Months Ended October 31, 1999 ("fiscal 1999") Compared with Twelve Months
Ended October 31, 1998 ("fiscal 1998")
Analysis of Net Revenues and Unit Sales Information
- ---------------------------------------------------
(in millions, except unit information)
Fiscal Year Ended
October 31, %
-------------------
1999 1998 Change Change
------------------- -------- ---------
Net Sales
- ---------
HUMMER/HUMVEEs $ 236.3 $ 244.7 $ (8.4) (3.4)%
Medium Trucks 45.6 85.0 (39.4) (46.4)%
SPLO 51.4 50.7 0.7 1.4 %
STS/Other 14.9 12.4 2.5 20.2 %
------- -------- -------- ------
Total Net Sales $ 348.2 $ 392.8 $ (44.6) (11.4)%
HUMMER/HUMVEE Unit Sales 3,827 4,145 (318) (7.7)%
- ------------------------
HUMMER/HUMVEE Average Unit Selling Prices $ 61,745 $ 59,036 $ 2,709 4.6 %
- -----------------------------------------
16
Consolidated net sales decreased $44.6 million, or 11.4% to $348.2 million in
fiscal 1999 compared to fiscal 1998. The decrease in net sales was due primarily
to lower HUMMER/HUMVEE and ESP sales partially offset by higher SPLO and
STS/Other sales. Further, the Company remained unable to obtain a firm order for
231 units manufactured in fiscal 1997 and included in its finished goods
inventory. Had this inventory been sold in fiscal 1999, 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. The FMS Customer has
indicated its intention to purchase the units by formally requesting from the US
Government an offer to begin negotiations. The order received US Congressional
approval and the contract has been forwarded to the FMS Customer for execution.
Management now believes these units will be sold before the end of the current
fiscal year.
HUMMER/HUMVEE segment net sales decreased $8.4 million, or 3.4% to $236.3
million in fiscal 1999 compared to fiscal 1998. The decrease in net sales is
primarily due to lower HUMVEE requirements by the US Armed Forces and continued
softness in the international markets, partially offset by increased demand for
HUMMERs. Higher selling prices on all HUMMER/HUMVEE models further reduced the
unfavorable impact caused by fewer unit sales. Additionally, 1998 unit sales
exceeded 1999 levels primarily due to sales of vehicles produced in fiscal 1997
and sold in fiscal 1998. The 1999 average unit selling prices for HUMMER/HUMVEE
vehicles increased 4.6% over fiscal 1998 levels. This increase is attributable
to a negotiated price escalation on US Military HUMVEEs, the installation of
ambulance equipment on International HUMVEEs previously sold, and selling a
higher concentration of more expensive HUMMER models.
Medium Truck segment net sales decreased $39.4 million, or 46.4% to $45.6
million in fiscal 1999 compared to fiscal 1998. The decrease in sales is the
result of the completion of the ESP program.
SPLO segment net sales increased $0.7, or 1.4% to $51.4 million in fiscal 1999
compared to fiscal 1998. The increase in net sales is primarily attributable to
the corresponding increase in the number of HUMMER/HUMVEEs in service. The
Company believes that increasing demand for HUMMER/HUMVEE vehicles will create
strong growth in SPLO spare parts sales and training programs.
STS/Other segment net sales increased $2.5 million, or 20.2% to $14.9 million in
fiscal 1999 compared to fiscal 1998. The increase in net sales is primarily
attributable to Phase I contract revenues received in connection with the FMTV
Second Source Program. As previously mentioned, this program was cancelled in
fiscal year 1999.
Analysis of Consolidated Gross Profit
- -------------------------------------
(in millions, except unit information)
%
1999 % 1998 % Change Change
------------------- -------------------- -------- -------
Gross Profit
- ------------
HUMMER/HUMVEEs $22.7 9.6% $28.4 11.6 % $ (5.7) (20.0)%
Medium Truck 7.8 17.1 19.5 23.0 (11.7) (60.0)
SPLO 6.0 11.6 6.5 12.8 (0.5) (7.7)
STS/Other 1.6 10.7 (5.9) (47.6) 7.5 127.1
Engines (.7) - - - (.7) -
------------------ ------------------- ------- -----
Total Gross Profit $37.4 10.7 $48.5 12.3 $(11.1) (22.9)
Consolidated gross profit decreased $11.1 million, or 22.9% to $37.4 million in
fiscal 1999 compared to fiscal 1998. The Company's consolidated gross profit
margin for fiscal year 1999 was 10.7% compared to 12.3% in fiscal year 1998.
Fiscal 1999 results include six months of the Medium Truck segment due to the
completion of the ESP contract with the US Army, while fiscal 1998 results
include twelve months.
17
HUMMER/HUMVEE segment gross profit decreased $5.7 million, or 20.0% to $22.7
million in fiscal 1999 compared to fiscal 1998. The segment's gross profit
margin was 9.6% in fiscal 1999 compared to 11.6% in fiscal 1998. The reduction
in gross margin was primarily attributed to selling fewer HUMVEEs, higher
manufacturing costs in connection with parts shortages resulting from a major
supplier, and higher warranty costs.
Medium Truck segment gross profit decreased $11.7 million, or 60.0% to $7.8
million in fiscal 1999 compared to fiscal 1998. The segment's gross profit
margin was 17.8% in fiscal 1999 compared to 23.0% in fiscal 1998. The reduction
in gross profit is due to the completion of the ESP contract with the US Army.
SPLO segment gross profit decreased $.5 million, or 7.7% to $6.0 million in
fiscal 1999 compared to fiscal 1998. The segment's gross profit margin was
11.6% in fiscal 1999 compared to 12.8% in fiscal 1998. The reduction in profit
margin is directly related to an increase in the volume of less profitable
HUMVEE spare parts delivered during fiscal 1999. An increase in overhead
expense in fiscal year 1999 compared to fiscal year 1998 also resulted in lower
gross profit for fiscal year 1999.
STS/Other segment gross profit increased $7.5 million, or 127.1% to $1.6 million
in fiscal 1999 compared to fiscal 1998. The segment's gross profit margins for
fiscal year 1999 and 1998 were 10.7% and (47.6)%, respectively. Fiscal year
1998 gross margin was negatively impacted by increased long-term disability
costs and losses associated with the Company's decision to close the
Indianapolis stamping facility.
Engine segment gross profit was $(.7) million in fiscal year 1999 primarily due
to start-up costs in connection with the new Franklin Ohio manufacturing
facility.
Analysis and Management Discussion on non-segment information
- -------------------------------------------------------------
Depreciation and Amortization
Depreciation and amortization expense was $10.9 million for fiscal 1999, a
decrease of $2.3 million or 17.4% over depreciation and amortization expense of
$13.2 million for fiscal 1998. The decrease is primarily attributable to the
ESP plant closing. In fiscal 1998, the Company incurred a depreciation charge
to write down the valuation of plant assets in connection with the ESP plant
closing. Fiscal 1999 includes depreciation and tooling amortization through
April 1999, the date on which operations ceased.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense was $31.2 million for
fiscal 1999, an increase of $3.5 million or 12.6% from SG&A expense of $27.7
million for fiscal 1998. The Company incurred extensive professional fees in
connection with the GM Transaction and higher HUMMER marketing costs.
Plant Closing/Restructuring Gain
The Company recorded a $5.2 million charge in fiscal 1998 in connection with
plant closing costs anticipated for the ESP facility. Upon completion of the
plant closing in fiscal 1999, the Company recognized a gain of approximately
$2.7 million to reverse accrued severance benefits and other plant closing costs
due to lower than anticipated layoffs and other savings.
Income (Loss) before Interest and Income Taxes
The Company recorded a loss before interest and income taxes for fiscal year
1999 of $2.0 million, a decrease of $4.4 million from income before interest and
income taxes of $2.4 million in fiscal year 1998. The decrease in earnings
before interest and income taxes is primarily attributable to lower gross
profit, and higher SG&A expenses partially offset by lower depreciation expense.
Interest Income and Expense
Interest expense for fiscal 1999 was $11.5 million, a decrease of $1.7 million
or 12.9% from interest expense of $13.2 million for fiscal 1998. Average debt
outstanding for fiscal 1999 was $82.0 million at a weighted average interest
rate of 12.2%. Average debt outstanding for fiscal 1998 was $99.3 million at a
weighted average interest rate of 12.2%. The decrease in average debt
outstanding is primarily due to lower borrowings under the Company's
18
revolving credit facility reflecting an overall reduction in finished goods
inventory levels. 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 $2.9 million for fiscal 1999, an increase of $.7 million from an
income tax benefit of $2.2 million for fiscal 1998. The increase in income tax
benefit was due to the decrease of taxable income primarily attributable to
increased loss before income taxes as discussed above.
Net Loss
The net loss for fiscal 1999 was $10.2 million, an increase of $1.9 million from
a net loss of $8.3 million in fiscal 1998. As discussed above, the increase in
net loss is primarily due to a larger loss before interest and income taxes in
fiscal 1999 compared to fiscal 1998. This increase is partially offset by a
lower fiscal year 1999 interest expense and a larger income tax benefit.
19
Twelve Months Ended October 31, 1998 ("fiscal 1998") Compared with Twelve Months
Ended October 31, 1997 ("fiscal 1997")
Analysis of Net Revenues and Unit Sales Information
- ---------------------------------------------------
(in millions, except unit information)
Fiscal Year Ended
October 31, %
-------------------------------
1998 1997 Change Change
----------- ------------
Net Sales
HUMMER/HUMVEEs $ 244.7 $ 303.8 $ (59.1) (19.5)%
Medium Truck 85.0 77.3 7.7 10.0
SPLO 50.7 51.0 (0.3) (0.6)
STS/Other 12.4 36.1 (23.7) (65.7)
------------ ------------ --------------
Total Net Sales $ 392.8 $ 468.2 $ (75.4) (16.1)%
HUMMER/HUMVEE Unit Sales 4,145 5,136 (991) (19.3)%
HUMMER/HUMVEE Average Unit Selling Prices $ 59,036 $ 59,151 $ (115) (0.2)%
Consolidated net sales decreased $75.4 million, or 16.1% to $392.8 million in
fiscal 1999 compared to fiscal 1998. The decrease in net sales is primarily due
to lower HUMMER/HUMVEE and STS/OTHER sales partially offset by higher Medium
Truck sales.
HUMMER/HUMVEE segment net sales decreased $59.1 million, or 19.5% to $244.7
million in fiscal 1999 compared to fiscal 1998. Lower demand in the
international and HUMMER markets contributed to the significant reduction in
unit sales volumes. US Military demand remained strong, however the model mix
shifted to a higher concentration of less expensive units resulting in lower
overall revenues. Partially offsetting the reduction in international and
commercial demand was a higher concentration of more expensive units delivered
to international customers and a general price increase imposed on HUMMERs.
Medium Truck segment net sales increased $7.7 million, or 10.0% to $85.0 million
in fiscal 1998 compared to fiscal 1997. This increase in primarily attributed
to higher negotiated selling prices in connection with option units added and
delivered at the completion of the ESP contract.
SPLO segment net sales decreased $.3 million, or 0.6% to $50.7 million in fiscal
1998 compared to fiscal 1997. The slight downturn in sales is due to lower US
Government orders in fiscal year 1998.
STS/Other segment sales decreased $23.7 million, or 65.7% to $12.4 million in
fiscal 1998 compared to fiscal 1997. During fiscal year 1997, the Company was
aggressively competing for the Medium Tactical Vehicle Replacement ("MTVR")
contract with the US Army and recorded significant Phase I contract revenues in
connection with this program.
20
Analysis of Consolidated Gross Profit
- -------------------------------------
(in millions, except unit information)
%
1998 % 1997 % Change Change
--------------------- ------------------- -------- --------
Gross Profit
- ------------
HUMMER/HUMVEEs $28.4 11.6% $40.3 13.3% $(11.9) (29.5)%
Medium Truck 19.5 23.0 .2 .3 19.3 9650.0
SPLO 6.5 12.8 6.0 11.8 .5 8.3
STS/Other (5.9) (47.6) (3.3) (9.1) (2.6) (78.8)
--------------------- ------------------- -------- --------
Total Gross Profit $48.5 12.3 $43.2 9.2 $ 5.3 12.3%
Consolidated gross profit increased $5.3 million, or 12.3% to $48.5 million in
fiscal 1998 compared to fiscal 1997. The Company's consolidated gross profit
margin was 12.3% in fiscal 1998 compared to 9.2% in fiscal 1997. The increase
in gross profit is primarily attributable to better performance in the Medium
Truck segment partially offset by lower gross margins in HUMMER/HUMVEE and
STS/Other segments which was due to lower sales as discussed above.
HUMMER/HUMVEE segment gross profit decreased $11.9 million, or 29.5% to $28.4
million in fiscal 1998 compared to fiscal 1997. The segment's gross profit
margin was 11.6% in fiscal 1998 compared to 13.3% in fiscal 1997. In response
to lower demand for US Military HUMVEEs, the Company reduced the production line
rate from 25 vehicles per day to 16.5 per day in fiscal year 1998. The
reduction in volume resulted in unabsorbed overhead and lower gross margins.
Additionally, gross margin on HUMMERs was lower due to increased sales
incentives, lower volume and higher warranty costs.
Medium Truck segment gross profit increased $19.3 million, or 9,650.0% to $19.5
million in fiscal 1998 compared to fiscal 1997. The segment's gross profit was
23.0% in fiscal year 1998 compared to 0.3% in fiscal year 1997. The increase in
gross profit is primarily attributable to a cumulative effect accounting
adjustment to the ESP contract which the Company accounts for on the Estimate at
Completion method of accounting. Under this method, the Company periodically
estimates the gross profit at completion. The adjustment was the result of
management efforts to control manufacturing costs.
SPLO segment gross profit increased $.5 million, or 8.3% to $6.5 million in
fiscal 1998 compared to fiscal 1997. The segment's gross profit margin was
12.8% in fiscal 1998 compared to 8.3% in fiscal 1997. The increase in gross
profit is attributable to selling more profitable HUMVEE parts to international
military customers in 1998.
STS/Other segment gross profit decreased $2.6 million, or 78.8% to ($5.9)
million in fiscal 1998 compared to fiscal 1997. The segment's gross profit
margins for fiscal year 1998 and 1997 were (47.4)% and (9.1)%, respectively.
Fiscal year 1998 gross margin was negatively impacted by increased long-term
disability costs and losses in connection with the closing of the Indianapolis
stamping facility.
Analysis and Management Discussion on non-segment information
- -------------------------------------------------------------
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. The increase was partially
offset by lower tooling amortization expense in connection with the Expanded
Capacity Vehicle HUMVEE that was fully amortized in fiscal 1997 and lower
depreciation expense in connection with reduced capital spending.
21
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 MTVR bid.
Plant Closing/Restructuring Charges
During fiscal 1998, the Company recorded $5.2 million of charges in connection
with plant closing costs anticipated for the ESP facility. Due to lack of orders
for the remanufactured 2 1/2 ton, the Company ceased production at the ESP
facility on April 19, 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.
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
The Company had operating income of $2.4 million in fiscal 1998, an increase of
$1.7 million from an operating income of $.7 million in fiscal 1997. The
improvement in operating income was primarily due to higher gross margin
partially offset by higher depreciation and amortization expense, restructuring
charges and 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 was primarily due to lower borrowing under the Company's 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 $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 decrease in taxable loss 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.
22
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 used in operating activities was $4.4 million for fiscal 1999 compared to
cash provided by operating activities of $7.1 million in fiscal 1998. The
primary uses of cash flow in fiscal 1999 resulted from increases in accounts
receivable and inventory, reductions in income taxes payable and pension
obligations, and funding the Company's net loss. Cash flow used in operations
was partially offset by increases in accounts payable and accrued expenses,
reductions in other assets, and non-cash charges to operating income including
depreciation, amortization and non-cash postretirement expenses.
Accounts receivable levels at the end of fiscal 1999 were $2.9 million higher
than levels at the end of fiscal 1998 primarily due to the timing of sales at
the end of the fiscal year and an increase of $1.6 million 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. The Company expects the contract modifications to be
completed during fiscal 2000.
Accounts payable levels at the end of fiscal 1999 were $4.9 million higher than
levels at the end of fiscal 1998. The increase in accounts payable is primarily
attributed to higher working capital requirements at year end.
Net inventory levels at the end of fiscal 1999 were $84.6 million or $13.0
million higher than net inventory levels of $71.6 million at end of fiscal 1998.
The increase in inventory is primarily attributed to management's desire to
assure uninterrupted production during the conversion to the new Enterprise
Resource Planning ("ERP") system. Raw material inventory levels were
intentionally increased beyond normal levels to ensure availability of parts.
The parts will be consumed by February 2000 and raw material will return to
normal operating levels.
For fiscal 1999, the Company spent $7.8 million on capital expenditures
primarily on the implementation of a new ERP system, tooling costs in connection
with vehicle production, and machinery and equipment, as compared to $4.5
million for fiscal 1998. The Company anticipates incurring capital expenditures
for fiscal 2000 of approximately $107.3 million; $90.0 million of which is in
connection with the construction of the New Facility. These capital expenditures
will be funded from the proceeds of the GM Loan. In addition, the Company
anticipates it will spend approximately $5.1 million on the acquisition of the
HUMMER/HUMVEE manufacturing facility. The Company has secured a financing source
for the acquisition of this property. To ensure compliance with capital
expenditure covenants contained in the revolving credit facility, the Company
received an exemption for the construction of the New Facility and the purchase
of the existing HUMMER/HUMVEE facility. Additionally, the Company anticipates it
will spend approximately $12.2 million on vendor tooling, machinery and
equipment, and other capital requirements. The Company anticipates that these
capital requirements will be funded from operating cash flow, availability under
the revolving credit facility, and other permitted financing sources.
The Company anticipates capital expenditures in connection with the 6.5 liter
diesel engine project will approximate $.4 million in fiscal 2000. These
expenditures are primarily for non-production machinery and equipment and
leasehold improvements. The major tooling, conveyor systems, material handling
and testing equipment, and computer controls involved in the manufacture of
engines will be leased under an operating lease agreement from a third party.
The Company anticipates that additional capital requirements will be funded from
operating cash flow or availability under its current revolving credit facility.
With respect to the assembly facility for the New Vehicle, GM will lend the
Company an amount currently anticipated to exceed $200 million through a non-
interest bearing loan. The proceeds of the GM Loan will be used to finance the
New Facility.
To repay the GM Loan, the Company will repay to GM a pre-agreed portion of the
Assembly Fee received for assembling each New Vehicle. If New Vehicles are
ordered and assembled at the forecasted rate, the GM Loan would be repaid within
seven and one half years after the release of the New Vehicle. Except as
provided above,
23
the Company is not required to repay the outstanding balance of
the GM Loan but it may elect to do so at any time. GM will have a lien on the
building and machinery and equipment purchased with the proceeds of the GM Loan
to secure its repayment.
On an annual basis, GM will have the option to convert all or any part of the
unpaid balances, if any, on the GM Loan into an equity interest in the Company
of not more than 40% of the voting stock of the Company for an amount
determined at the time of exercise of options purusant to previously established
procedures. Should the Company and GM fail to agree on a value, the GM
Transaction agreements contain a provision in which an independent third party
will assist in the valuation.
Under the Mandatory Purchase Offer provision of the Indenture for the 12.875%
Senior Notes dated as of April 27, 1995 (the "Indenture") the Company is
required to calculate Excess Cash Flow for each twelve month period beginning
May 1 and ending April 30. The Company made its calculation of Excess Cash
Flow, which indicated there was $6.5 million of Excess Cash Flow for the twelve-
month period ending April 30, 1999. In compliance with the provision of the
Indenture, in August 1999 the Company repurchased $6.5 million of the 12.875%
Senior Notes at a price equal to 101% of the principal amount plus any accrued
and unpaid interest. The Company funded the purchases with a combination of
cash flow from operating activities and 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, 1999 was $12.2 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 a first lien on all of the Company's accounts receivable,
inventories and certain other assets, as defined in the applicable loan and
security agreement, and expires on October 30, 2001. As of October 31, 1999,
the Company had borrowings of $24.9 million outstanding under the revolving
credit facility. As of January 27, 2000, the Company's loan balance under the
revolving credit facility was $26.1 million.
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 Revolving Credit Agreement and Indenture were amended in
December to permit the GM Transaction. The ability of the Company to meet its
debt service requirements and to comply with such covenants will be dependent
upon future operating performance and financial results of the Company, which
will be subject to financial, economic, political, competitive and other factors
affecting the Company, many of which are beyond its control.
On July 16, 1996, the Company was cited by the Defense Contract Audit Agency
("DCAA") for noncompliance with Cost Accounting Standards as they relate to the
allocation of overhead expenses. DCAA issued a cost impact audit report dated
June 22, 1999 which asserted that the overhead allocation method used by the
Company resulted in a $25.3 million overcharge to the Government on vehicles
produced and delivered under the R021 and X001 contracts through March 31, 1999.
The Company maintains its position that its method of cost allocation is
consistent with cost accounting regulations. Further, the Company provided to
DCAA an analysis that indicates that the use of its overhead allocation method
allocates a lower portion of overhead costs to military vehicles than would be
allocated using other methods. The Company has entered into a teaming
arrangement with selected members of TACOM, DCAA and Defense Contract Management
Command ("DCMC") to arrive at a resolution. The Company has also submitted a
formal impact statement dated January 3, 2000 to the Government, which indicates
that the Government was not harmed by the Company's use of this overhead
allocation method. It further emphasizes that the overhead allocation method
used by the Company benefits the Government by reducing the price paid for
military vehicles. The Company plans to aggressively contest the Governments
position and believes it will prevail, however there can be no assurances as to
the final resolution. An adverse decision on this claim could have a material
adverse effect on the Company.
24
Year 2000 Business Matters
The Company began addressing the Year 2000 issue in September 1997. As a result
of management's timely reaction to this issue, the Company successfully
completed the implementation of its new ERP system and solved its Year 2000
issues. By September 1999 the Company had completed implementation of all its
critical business systems. To date, the Company has not experienced any
significant Year 2000 related computer problems.
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 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 US Military HUMVEE orders; volume of US Government, international and
commercial orders for HUMMER/HUMVEEs and other products; volume of orders for
6.5 liter diesel engines, the volume of orders for the New Vehicle in connection
with the GM Transaction, the ability to complete the New Facility within the
limits of the GM Loan, 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. These forward-looking
statements speak only as of the date of this report. The Company expressly
disclaims any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstance on which any forward-looking statement is based.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
market prices and rates. The Company is exposed to market risk from interest
rate changes primarily due to its revolving credit facility used for maintaining
liquidity, funding capital expenditures and expanding operations. The Company's
revolving credit facility bears interest at prime plus a negotiated margin,
therefore any borrowings outstanding will approximate fair market value at all
times. The Company believes fluctuations in interest rates will not have a
material adverse impact on its results of operations over the next year.
25
Item 8. Financial Statements and Supplementary Data
Index To Financial Statements
- --------------------------------------------------------------------------------
Page
Independent Auditors' Report 27
Consolidated Balance Sheets as of October 31, 1998 and 1997 28
Consolidated Statements of Operations
For the years ended October 31, 1998, 1997, and 1996 29
Consolidated Statements of Stockholder's Deficit and
Comprehensive Income (Loss)
For the years ended October 31, 1998, 1997, and 1996 30
Consolidated Statements of Cash Flows
For the years ended October 31, 1998, 1997, and 1996 31
Notes to Consolidated Financial Statements 32
26
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, 1999 and 1998, and the results of
their operations and their cash flows for each of the years in the three-year
period ended October 31, 1999, in conformity with generally accepted accounting
principles.
KPMG LLP
Indianapolis, Indiana
January 7, 2000
27
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
October 31, 1999 and 1998
(Dollars amounts in thousands, except share information)
Assets 1999 1998
------------- -------------
Current assets:
Cash $ 1,081 2,687
Accounts receivable, net 77,081 74,211
Inventories 84,589 71,613
Prepaid expenses and other assets 984 1,170
Deferred income taxes 6,210 6,746
------------- -------------
Total current assets 169,945 156,427
Income taxes receivable 4,752 1,585
Property, plant, and equipment, net 43,858 41,684
Deferred income taxes 26,388 26,113
Goodwill, net 75,012 79,298
Other assets 5,838 9,658
------------- -------------
$ 325,793 314,765
============= =============
Liabilities and Stockholder's Deficit
Current liabilities:
Accounts payable $ 37,425 32,494
Accrued expenses 71,163 67,869
------------- -------------
Total current liabilities 100,363
Long-term debt 92,805 82,156
Postretirement benefits other than pensions, noncurrent portion 160,403 154,362
Other liabilities, noncurrent portion 8,064 11,930
------------- -------------
Total liabilities 369,860 348,811
------------- -------------
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 (50,067) (39,818)
Accumulated other comprehensive loss - minimum pension liability -- (228)
------------- -------------
Total stockholder's deficit (44,067) (34,046)
Commitments and contingencies (notes 6 and 14)
------------- -------------
$ 325,793 314,765
============= =============
See accompanying notes to consolidated financial statements.
(Continued)
28
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended October 31, 1999, 1998, and 1997
(Dollar amounts in thousands)
1999 1998 1997
----------- ----------- -----------
Net sales $ 348,187 392,785 468,173
----------- ----------- -----------
Cost and expenses:
Cost of sales 310,774 344,327 424,967
Depreciation and amortization 10,881 13,166 12,713
Selling, general, and administrative expenses 31,203 27,701 26,172
Special termination benefits -- -- 152
Plant closing and restructuring (2,664) 5,231 3,495
----------- ----------- -----------
Income (loss) before interest and income taxes (2,007) 2,360 674
Interest income 389 327 280
Interest expense (11,508) (13,163) (13,508)
----------- ----------- -----------
Loss before income taxes (13,126) (10,476) (12,554)
Income tax benefit (2,877) (2,161) (3,013)
----------- ----------- -----------
Net loss $ (10,249) (8,315) (9,541)
=========== =========== ===========
See accompanying notes to consolidated financial statements.
29 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholder's Deficit and Comprehensive Income (Loss)
For the years ended October 31, 1999, 1998, and 1997
(Dollar amounts in thousands)
8% Accumulated Total
cumulative other stock-
preferred Common Paid-in comprehensive Accumulated holder's
stock stock capital income (loss) deficit deficit
------------- ------------- ------------- ------------- ------------- -------------
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 -- (39,818) (34,046)
Comprehensive loss:
Net loss -- -- -- -- (10,249) (10,249)
Minimum pension -- -- -- 228 -- 228
-------------
Total comprehensive loss (10,021)
------------- ------------- ------------- ------------- ------------- -------------
Balance at October 31, 1999 $ 5,000 -- 1,000 -- (50,067) (44,067)
============= ============= ============= ============= ============= =============
See accompanying notes to consolidated financial statements.
30 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended October 31, 1999,1998 and 1997
(Dollar amounts in thousands)
1999 1998 1997
----------- ----------- -----------
Net cash provided by (used in) operating activities (note 20) $ (4,369) 7,113 38,663
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 8 15 2,818
Capital expenditures (7,760) (4,535) (2,431)
----------- ----------- -----------
Net cash provided by (used in) investing activities (7,752) (4,520) 387
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreement 17,093 (1,096) (43,727)
Principal payments on 12-7/8% senior notes (6,578) -- --
----------- ----------- -----------
Net cash provided by (used in) financing activities 10,515 (1,096) (43,727)
Net change in cash (1,606) 1,497 (4,677)
Cash and cash equivalents at beginning of year 2,687 1,190 5,867
----------- ----------- -----------
Cash and cash equivalents at end of year $ 1,081 2,687 1,190
=========== =========== ===========
Supplemental disclosure of cash items:
Interest paid $ 10,856 12,145 12,416
Taxes paid 97 495 453
=========== =========== ===========
See accompanying notes to consolidated financial statements.
(Continued)
31
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(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)/Humvee(R) vehicles at its plant in Indiana.
Currently, the Company is manufacturing Humvee(R) vehicles for the
Department of Defense (DoD) under a multiple year requirements
contract extending through October 31, 2000 (with funds appropriated
through September 2000). The Company also sells Humvee(R) vehicles and
parts to friendly foreign nations through the DoD 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-five domestic dealers and forty-two international
distributors at October 31, 1999. The Company also refurbished two and
one-half ton trucks, the Extended Service Program (ESP), for the DoD
through April, 1999 (See also note 16).
In June 1999, the Company acquired General Motors Corporation's (GM)
6.5 liter diesel engine business. Production of these engines will
begin in July 2000. The Company uses the GM 6.5 liter diesel in both
its Humvee(R) and Hummer(R) vehicles. GM's applications include some
vans, pickup and medium duty trucks. The agreement provides that the
Company will continue to supply service engines to GM's internal parts
distributor, Services Parts Operation, for a period of ten years. In
addition, the Company will build engines for its own requirements as
well as those of other customers that use the engine.
The mix of sales for each of the years in the three year period ended
October 31, 1999 is as indicated in the following analysis:
All of the Company's common and preferred stock is owned by The Renco
Group, Inc. (the Parent).
1999 1998 1997
-------- -------- --------
Hummer(R)/Humvee(R) vehicles 68 % 62 % 65 %
ESP 13 21 18
Service parts and other 19 17 17
(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, Chippewa Corporation and General Engine
Products, Inc. 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.
32 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
(d) Inventories
Inventories are stated at the lower of standard cost or market.
Standard cost approximates first-in, first-out cost.
(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)/Humvee(R) and related businesses
acquired on April 30, 1992, is amortized on a straight-line basis over
25 years. Accumulated amortization was $32,148 and $27,862 at October
31, 1999 and 1998, 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 $3,969 and $5,246 at October 31, 1999 and 1998,
respectively.
33 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
(i) Revenue Recognition
Revenue under U.S. Government and foreign military fixed-price
production contracts relating to the sale of Humvee(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.
Sales and related cost of sales applicable to the fixed-price, initial
ESP contract were recognized as specific contract terms were fulfilled
under the percentage-of-completion method, measured on a units
produced basis. The initial ESP contract was completed in June 1998.
Revenue under the short-term, follow-on ESP contracts was recorded
when specific contract terms were fulfilled and title passed 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 $4,129, $4,444 and $1,856 for the years
ended October 31, 1999, 1998 and 1997, respectively.
(k) Income Taxes
Through the fiscal year ended October 31, 1998, the Company and its
subsidiaries were included in the consolidated Federal income tax
return of 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 Parent, 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. For the fiscal year ended October 31, 1999 and
thereafter, the Company will file its own consolidated Federal and
state income tax returns.
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.
34 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
(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 year
of service. The Company's policy is to fund the maximum amount
allowable under the U.S. 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 layoff or when working less than 40 compensated or available hours
as defined by this plan. This plan provides for integration with state
unemployment compensation programs.
The Company sponsors defined benefit health care plans for
substantially all retirees and employees. The Company measures the
costs of its obligation based on its best estimate. The net periodic
costs are recognized as employees render the services necessary to
earn the postretirement benefits.
(m) Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent liabilities to prepare these financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
(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.
35 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
(2) Accounts Receivable
Components of accounts receivable are as follows:
October 31,
-------------------
1999 1998
-------- --------
Receivables from the U.S. Government under
long-term contracts:
Amounts billed or billable $ 32,611 35,237
Recoverable costs accrued--not billed 1,939 1,806
Unrecovered costs subject to future negotiation 27,182 25,768
Commercial customers--amounts billed:
Foreign 5,297 4,552
Dealers 6,299 3,537
Service parts 303 32
Other receivables 3,800 3,629
-------- --------
77,431 74,561
Less allowance for doubtful accounts (350) (350)
-------- --------
$ 77,081 74,211
======== ========
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 customer.
Substantially all billed and unbilled receivables are expected to be
collected within the next 12 months.
36 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
(3) Inventories
Inventories consist of the following:
October 31
--------------------
1999 1998
-------- --------
Finished goods $ 30,010 $ 20,759
Service parts 20,850 16,946
Extended Service Program--Production costs
of goods currently in process -- 4,095
Raw materials, supplies, and work in progress 40,181 37,082
-------- --------
91,041 78,882
Less allowance for inventory obsolescence (6,452) (7,269)
-------- --------
$ 84,589 $ 71,613
======== ========
(4) Property, Plant, and Equipment
Property, plant, and equipment consist of the following:
October 31
--------------------
1999 1998
-------- --------
Land $ 1,114 $ 1,115
Buildings 2,940 2,921
Machinery, equipment, and fixtures 30,572 22,840
Leasehold improvements 9,242 9,050
Vehicles 2,954 3,019
Construction in progress 859 2,590
Dealer signage 411 375
Tooling 56,169 58,292
-------- --------
107,261 100,202
Less accumulated depreciation and amortization (63,403) (58,518)
-------- --------
$ 43,858 $ 41,684
======== ========
Tooling, net of related amortization, of $9,868 and $10,098 at October 31,
1999 and 1998, 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 10 years.
37 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
(5) Other Assets
Other assets consist of the following:
October 31
--------------------
1999 1998
-------- --------
Noncompete covenant, net $ 2,573 $ 3,602
Deffered loan costs, net:
Senior notes due 2002 1,827 2,870
Revolving line-of-credit -- 67
Preproduction cost, net:
Commercial vehicles for the general public 1,070 1,129
Performance bonds -- 1,506
Other 368 484
-------- --------
$ 5,838 $ 9,658
======== ========
The noncompete covenant resulted from the acquisition of the
Hummer(R)/Humvee(R) business on April 30, 1992, and is being amortized over
ten years. Accumulated amortization was $7,719 and $6,690 at October 31,
1999 and 1998, 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 $4,014 and $3,636 at October 31, 1999 and
1998, respectively. Deferred loan costs include a $2,000 fee paid to the
Parent 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 $1,539 and $1,480 at October 31, 1999 and 1998, 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,
1999, 1998 and 1997 aggregated approximately $5,365, $5,388, and $5,040,
respectively.
38 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of October 31,
1999 are:
Year ending October 31 Amount
---------------------- ----------
2000 $ 3,061
2001 2,770
2002 2,886
2003 2,946
2004 2,133
Thereafter 3,576
----------
Total minimum lease payments $ 17,372
==========
(7) Accrued Expenses
Components of accrued expenses are as follows:
October 31
----------------------
1999 1998
-------- --------
Modifications payable $ 27,733 22,656
Current portion of other post employment benefits 6,700 6,000
Interest on senior notes 4,377 4,819
Warranty 4,918 4,373
Pension liability 5,706 4,293
Plant closing and restructuring reserve 699 4,058
Wages, bonuses, and payroll taxes 3,029 3,529
Taxes other than on income 3,608 3,045
Sales incentives 2,163 2,951
Vacation 2,614 2,945
Insurance 2,968 2,375
Purchase requirements 132 682
Management fee due to the Parent 100 100
Other 6,416 6,043
-------- --------
$ 71,163 67,869
======== ========
39 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
(8) Long-term Debt
Long-term debt consists of:
October 31
-----------------------
1999 1998
---------- ----------
Revolving line-of-credit, interest at prime plus 3/4% and 1-3/4%
respectively, 9.0% and 10.0% at October 31, 1999
and 1998, respectively, payable in full on OCtober 30, 2001 $ 24,947 $ 7,854
12-7/8% senior notes due 2002, originally discounted $402 to
yield 13% interest payable semi-annually on May 1 and
November 1 67,858 74,302
--------- ---------
92,805 82,156
Less current maturities of long-term debt - -
--------- ---------
$ 92,805 82,156
========= =========
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. The amount that was available at
October 31, 1999 and 1998 was approximately $12,200 and $44,685,
respectively. 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.
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 1999, senior notes with a face amount
of $6,513 were repurchased as a result of an offer required because of
excess cash flow, as defined, for the twelve-month period ended April 30,
1999. 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, 1999, 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, 1999 and 1998.
40 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
The Company's outstanding letters of credit totaled $4,994 and $6,663 at
October 31, 1999 and 1998, respectively. Of this amount, $2,141 and $4,281
at October 31, 1999 and 1998, 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
October 31
---------------------
1999 1998
-------- --------
Pension liability $ 2,253 $ 6,252
Other 5,811 5,678
-------- --------
$ 8,064 $ 11,930
-------- --------
(10) Preferred Stock
The preferred stock of the Company, all of which is held by the Parent, is
entitled to receive cumulative preferential cash dividends at an annual
rate of 8%. Undeclared preferred stock dividends in arrears at October 31,
1999 and 1998 were $1,800 and $1,400, 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.
(11) Income Tax
Total income taxes were allocated as follows:
October 31
--------------------------------
1999 1998 1997
-------- -------- --------
Income from continuing operations $ (2,877) (2,161) (3,013)
Stockholder's deficit, for minimum
pension liability 140 (140) --
-------- -------- --------
$ (2,737) (2,301) (3,013)
======== ======== ========
41 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollars amounts in thousands)
Income tax expense (benefit) consists of:
October 31
-------------------------------------------
1999 1998 1997
---------- ----------- ------------
Current:
Federal $ (3,168) (206) 2,643
State 169 212 953
Deferred:
Federal 15 (1,904) (6,088)
State 107 (263) (521)
---------- ----------- ------------
$ (2,877) (2,161) (3,013)
========== =========== ============
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:
October 31
-------------------------------------------
1999 1998 1997
---------- ----------- ------------
Computed "expected" tax expense (benefit) $ (4,594) (3,666) (4,394)
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 179 (34) 98
Foreign sales corporation effect -- -- (172)
Other, net 38 39 (45)
---------- ----------- ------------
$ (2,877) (2,161) (3,013)
========== =========== ============
42 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollars amounts in thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at October
31, 1999 and 1998 are presented below:
October 31
------------------------
1999 1998
--------- ---------
Deferred tax assets: $ 133 133
Allowance for doubtful accounts receivable 2,447 2,762
Inventory obsolescence reserve
Compensated absences, principally due to accrual for
financial reporting purposes 991 1,119
Accrued warranty 2,709 2,537
Pension liability 2,435 3,895
Postretirement benefits other than pensions 63,374 60,938
Other accruals 4,054 5,050
Other 209 151
--------- ---------
Total gross deferred tax assets 76,352 76,585
Less valuation allowance 38,348 38,348
--------- ---------
Net deferred tax assets 38,004 38,237
--------- ---------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation 5,274 5,318
Reduced costs inventoried for tax purposes pursuant
to the Tax Reform Act of 1986 132 60
--------- ---------
Total gross deferred liabilities 5,406 5,378
--------- ---------
Net deferred asset 32,598 32,859
Less current portion 6,210 6,746
--------- ---------
Noncurrent portion $ 26,388 26,113
========= =========
43 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
There was no change in the valuation allowance for the years ended
October 31, 1999, 1998 and 1997. Subsequently realized 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, 1999. The amount of the deferred tax
asset considered realizable, however, could be reduced if estimates of
future taxable income are reduced.
Income taxes receivable represent amounts due from the Parent for Federal
income tax overpayments; it is anticipated such amount will be recovered
from the Parent as tax payments based on future taxable income are
required.
(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, 1999 and 1998:
1999 1998
---------- ----------
Change in benefit obligation
Benefit obligation at beginning of year $ 132,758 116,636
Service cost 2,945 2,508
Interest cost 9,149 8,578
Actuarial (gain) loss (9,280) 7,382
Amendments -- 5,332
Benefits paid (7,678) (6,920)
(Gain) loss due to curtailments -- (758)
---------- ----------
Benefit obligations at end of year $ 127,894 132,758
========== ==========
44 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
1999 1998
----------- -----------
Change in plan assets
Fair value of plan assets at beginning of year $ 140,475 127,306
Actual return on plan assets 22,247 18,517
Employer contribution 4,312 1,572
Benefits paid (7,678) (6,920)
----------- -----------
Fair value of plan assets at end of year 159,356 140,475
----------- -----------
Funded status 31,462 7,717
Unrecognized prior service cost 6,104 7,111
Unrecognized net actuarial (gain) (45,525) (25,373)
----------- -----------
Net amount recognized $ (7,959) (10,545)
=========== ===========
Amounts recognized in the statement of financial
position consist of:
Accrued benefit liability $ (7,959) (10,177)
Accumulated other comprehensive income -- (368)
----------- -----------
Net amount recognized $ (7,959) (10,545)
=========== ===========
Weighted-average assumption as of October 31
Discount rate 7.75% 7.00%
Expected return on plan assets 8.50% 8.50%
Rate of compensation increase 5.00% 5.00%
Components of net periodic benefit cost
Service cost $ 2,945 2,507
Interest cost (9,149) 8,578
Expected return on plan assets (10,532) (9,816)
Recognized actuarial gain (88) (389)
Amortization of prior service cost 1,007 662
Curtailment gain (386) (758)
Amortization of prior service cost on curtailment -- 1,958
----------- -----------
Net periodic benefit cost $ 2,095 2,742
=========== ===========
At October 31, 1999, the fair value of plan assets for all of the
Company's defined benefit plans exceeded the respective benefit
obligations. At October 31, 1998, the fair value of plan assets and
benefit obligations of plans with benefit obligations in excess of plan
assets were $80,422 and $84,194, respectively.
45 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
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
$310, $325 and $380 for the years ended October 31, 1999, 1998 and 1997,
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.
The following table presents the related amounts recognized in the
Company's consolidated balance sheets at October 31, 1999 and 1998:
1999 1998
---------- ----------
Change in benefit obligation
Benefit obligation at beginning of year $ 151,160 129,335
Service cost 2,305 1,868
Interest cost 10,357 9,485
Amendments -- 614
Actuarial (gain) loss (14,736) 15,477
Benefits paid (5,970) (5,619)
---------- ----------
Benefit obligations at end of year 143,116 151,160
Unrecognized prior service cost (565) (614)
Unrecognized net gain 24,552 9,816
---------- ----------
Accrued benefit cost $ 167,103 $ 160,362
========== ==========
Components of net periodic benefit cost
Service cost $ 2,305 $ 1,868
Interest cost 10,357 9,845
Prior service cost recognized 49 --
Amortization of unrecognized net gain -- (1,075)
---------- ----------
Net periodic benefit cost $ 12,711 10,278
========== ==========
For measurement purposes, a 7.0% and 7.5% annual rate of increase in the
per capita cost of covered benefits was assumed for fiscal 1999 and 1998,
respectively; the rate was assumed to decrease gradually to 5.5% by the
year 2003 and remain at that level thereafter.
46 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.75% and 7.00% at October 31, 1999
and 1998.
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, 1999 by
$19,675 and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost would increase for the year ended
October 31, 1999 by $2,132. Decreasing the assumed health care cost trend
rates by one percentage point in each year would decrease the accumulated
postretirement benefit obligation by $16,013 and the aggregate of the
service and interest cost components of net periodic postretirement benefit
cost would decrease for the year ended October 31, 1999 by $1,697.
(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.
In 1999, the Company settled, for $125, an approximately $8 million claim
made by the US Army in January 1995 under a contract entered into in 1983.
On July 16, 1996, the Company was cited by the Defense Contract Audit
Agency (DCAA) for noncompliance with Cost Accounting Standards as they
relate to the allocation of overhead expenses. DCAA issued a cost impact
audit report dated June 22, 1999 which asserted that the overhead
allocation method used by the Company resulted in a $25,300 overcharge to
the Government on vehicles produced and delivered under the R021 and X001
contracts through March 31, 1999. The Company maintains its position that
its method of cost allocation is consistent with cost accounting
regulations. The Company has entered into a teaming arrangement with
selected representatives of the DCAA and other government contracting
agencies to arrive at a resolution. The Company plans to aggressively
contest the findings of the DCAA report and believes it will prevail.
Accordingly, the Company has not accrued any liability associated with this
potential claim. However, there can be no assurances as to the final
resolution. An adverse decision on this claim could have a material adverse
effect on 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.
(Continued)
47
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
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,
1999 and 1998, the mandatory repurchase agreements covered Hummers(R) with
a total value at dealer cost of $6,797 and $5,907, respectively. The
Company has not repurchased any vehicles under these arrangements.
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, 1999, 1998 and 1997, the Company
incurred annual management fees to the Parent of $1,200; $100 of which is
included in accrued expenses at October 31, 1999 and October 31, 1998.
Under the current management consultant agreement between the Company and
the Parent, the monthly fee to the Parent 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 DoD, which accounted for 70%, 75% and
79% of the Company's sales for the years ended October 31, 1999, 1998 and
1997, respectively. At October 31, 1999, 1998 and 1997, accounts receivable
with the DoD were $61,732, $62,811 and $41,758, respectively.
Export sales to unaffiliated foreign customers, including sales to friendly
foreign nations, were $31,014, $42,509 and $80,951 for the years ended
October 31, 1999, 1998 and 1997, respectively.
The Company's business is significantly impacted by the United States
defense budget. If the U.S. reduces budget allocations for defense
expenditures, sales could be 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 affect management's estimates and the Company's performance.
(Continued)
48
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
The Company is dependent upon certain vendors for the manufacture of
significant components of its Hummer(R)/Humvee(R) vehicles. 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. The Company's hourly employees at the Mishawaka
Hummer(R)/Humvee(R) and SPLO operations are represented by the
International Union, United Automobile, Aerospace and Agricultural
Implement Workers of America ("UAW") with a collective bargaining agreement
expiring in September 2001. A new labor agreement (also with UAW) has been
negotiated in connection with the GM Transaction (see note 21). The new
agreement was ratified in August 1999 and will expire in September 2009.
The hourly employees for the new engine production facility will be
represented by the International Union of Electrical Workers ("IUE") and
upon recognition of the contract, the initial agreement will be for six
years.
(17) Plant Closing and Restructuring
The Company completed production under its ESP contract in April 1999 at
which time production at the facility ceased and plant closure operations
commenced. The Company recorded a plant closing charge of $5,231 in the
year ended October 31, 1998. The major components of the plant closing
charge were $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, 1999, is the
remaining plant closing reserve of $699. Upon completion of the plant
closing, the Company recognized a gain of approximately $2,664 due to
reversal of accrued severance benefits and other plant closing costs due to
lower than anticipated layoffs and other savings.
In recent years, the Company has also experienced reductions in the U.S.
defense budget for Humvee(R) vehicles, reduced direct international sales
of Humvee(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 Humvee(R)/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.
(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.
(Continued)
49
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
The revolving line-of-credit approximates fair value because the interest
rate fluctuates with prime. The Company's senior notes are not actively
traded. However, management believes the fair value of the senior notes at
October 31, 1999 and 1998, approximates the par value.
(19) Segment Reporting
The Company identifies segments based on management responsibility within
the organization. The Company classifies its operations into five business
segments: (i) HUMMER/HUMVEEs, (ii) Medium Trucks, (iii) Spare Parts
Logistics Operations (SPLO), (iv) Systems Technical Support (STS)/Other,
and (v) Engines. The HUMMER/HUMVEE classification includes US and Foreign
Military Humvees(R) and commercial Hummers(R).
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Management of the Company
does not prepare or review balance sheet information on a segment basis.
The Company measures segment profit as gross profit (sales less cost of
sales). A reconciliation of net sales and gross profit are as follows (in
millions):
1999
----------------------------------------------------------------------------------------------------------
HUMMER/ Medium STS/
HUMVEE Trucks SPLO Other Engines Total
---------------------- ---------- ---------- --------- ---------- ----------- ------------
Net sales $ 236.3 45.6 51.4 14.9 -- 348.2
Gross Profit 22.7 7.8 6.0 1.6 (0.7) 37.4
1998
----------------------------------------------------------------------------------------------------------
HUMMER/ Medium STS/
HUMVEE Trucks SPLO Other Engines Total
---------------------- ---------- ---------- --------- ---------- ----------- ------------
Net sales $ 244.7 85.0 50.7 12.4 -- 392.8
Gross Profit 28.4 19.5 6.5 (5.9) -- 48.5
1997
----------------------------------------------------------------------------------------------------------
HUMMER/ Medium STS/
HUMVEE Trucks SPLO Other Engines Total
--------------------- ---------- ---------- --------- ---------- ----------- ------------
Net sales $ 303.8 77.3 51.0 36.1 -- 468.2
Gross Profit 40.3 0.2 6.0 (3.3) -- 43.2
50 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollar amounts in thousands)
(20) Reconciliation of Net Loss to Net Cash Provided by (Used in) Operating
Activities
The reconciliation of net loss to net cash provided by operating
activities for the years ended October 31, 1999, 1998 and 1997 follows:
October 31
----------------------------------------
1999 1998 1997
---------- ---------- -----------
Cash flows from operating activities:
Net loss $ (10,249) (8,315) (9,541)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Plant closing and restructuring (2,664) 5,231 3,495
Less plant closing and restructuring
payments (1,895) (2,412) (720)
Depreciation and amortization of
plant and equipment 5,551 7,835 7,378
Other amortization 6,252 6,292 6,371
Decrease in allowance for
doubtful accounts -- -- (48)
Increase (decrease) in inventory reserve (817) 2,862 705
Deferred income taxes 261 (2,307) (6,609)
Discount accretion of debt 56 57 57
Noncash other postretirement cost 6,741 4,660 5,359
Loss (gain) on sale of equipment 23 (11) (6)
Change in assets and liabilities:
Accounts receivable (2,869) (21,551) 4,513
Inventories (12,154) 12,756 33,782
Prepaid expenses 185 489 17
Other assets 1,752 208 549
Accounts payable 4,931 (1,290) (25,428)
Accrued expenses 7,081 4,175 15,235
Income taxes (3,095) (489) 3,278
Other liabilities (3,459) (1,077) 276
--------- --------- ---------
Net cash provided by (used in)
operating activities $ (4,369) 7,113 38,663
========= ========= =========
51 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 1999 and 1998
(Dollars 31, 1999 and 1998)
(21) Subsequent Events
On December 21, 1999, the Company completed a series of agreements with
General Motors Corporation (GM) through which the Company intends to more
fully utilize the widespread recognition of the Hummer(R) name to
generate incremental revenues and cash flow (the GM Transaction).
Pursuant to the terms of the GM Transaction, GM will, design, engineer,
certify and release a new generation vehicle bearing the Hummer(R)
trademark (New Vehicle). GM has retained the Company to assemble the New
Vehicles for a specified fee which varies with sales volumes (Assembly
Agreement). The Company has the right to assemble GM's requirements, up
to the first 40,000 units annually for a seven and one half year period
effective with the release of the New Vehicle anticipated to be in 2002.
As part of the GM Transaction, the Company assigned the Hummer(R)
trademark and trade name to GM. However, GM has granted the Company a
limited license that allows the Company to continue using the Hummer(R)
trademark for its current vehicle for the duration of the Assembly
Agreement.
With respect to the assembly facility for the New Vehicle, GM will lend
the Company an amount currently anticipated to exceed $200 million
through a non-interest bearing loan for the engineering and construction
of a new production facility, the purchase of certain machinery and
equipment, and all other costs required for the Company to become
prepared to assemble the New Vehicle. In accordance with the terms of the
GM Transaction, the Company is prohibited from using the new facility for
any purpose other than assembly of the New Vehicle. To repay the loan,
the Company will pay to GM a pre-agreed portion of the fees received for
assembling each New Vehicle. The loan is secured by the building and
machinery and equipment purchased with the loan proceeds. Except as
provided above, the Company is not required to repay the outstanding
balance of the loan, but it may elect to do so at any time.
On an annual basis, GM will have the option to convert all or any part of
the unpaid balances, if any, on the GM Loan into an equity interest in
the Company of not more than 40% of the voting stock of the Company for
an amount determined at the time of exercise of options pursuant to
previously established procedures.
52 (Continued)
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
53
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 28, 2000:
Name Age Position
- ----------------------------------------------------------------------------------------------
Ira Leon Rennert 65 Chairman and sole Director of the Company
James A. Armour 56 President and Chief Executive Officer
Edmond L. Peters 55 Senior Vice President, Procurement and Business Development
Adare Fritz 53 Senior Vice President, Operations
Robert J. Gula 53 Senior Vice President, Engineering and Product Development
Paul J. Cafiero 46 Vice President and Chief Financial Officer
Francis R. Scharpf 61 Vice President, Medium Truck Programs and Business Development
Ricky R. Smith 41 Vice President, Manufacturing Engineering and Special Projects
Walter R. Botich 50 Vice President, Corporate Quality
Ira Leon Rennert has been the Chairman and sole Director of the Company since
1991. The Company acquired the HUMMER/HUMVEE business in 1992 (the
"Acquisition"). Mr. Rennert 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., Doe Run, Inc., Lodestar Holdings,
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 27 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 15
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 31 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 28 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 15 years.
54
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 17 years. Before joining
AM General, Mr. Scharpf was a career military officer having served in the US
Army in various command positions.
Ricky R. Smith has been Vice President, Manufacturing Engineering and Special
Projects since November 1, 1999. Previously he held the positions of Director,
Manufacturing Engineering and Plant Manager for the Mishawaka operations. Mr.
Smith has been with the Company and its predecessor companies for the past 19
years.
Walter R. Botich has been Vice President, Corporate Quality since November 1,
1999. Mr. Botich previously held the position of Director, Corporate Quality
since November 21, 1994 and Manager Quality Assurance since December 23, 1991.
Mr. Botich has been with the Company and its predecessor companies for the past
17 years. Prior to joining AM General, Mr. Botich held managerial and technical
positions with other automotive supplier companies.
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, 1999, 1998, and 1997 to the Company's chief executive officer and
its four other highest paid executive officers (excluding Mr. Rennert, the
"Named Executive Officers").
Summary Compensation Table
Annual Compensation
-------------------------------------
Other Annual All Other
Name and Principal Position Fiscal Year Salary Bonus Compensation (3) Compensation
- --------------------------------------------------- --------------------------------------------------------------
Ira Leon Rennert (1) 1999 - - - $1,200,000
Chairman and Sole Director 1998 - - - $1,200,000
1997 - - - $1,200,000
James A. Armour 1999 $250,000 250,000 46,078 -
President & Chief Executive 1998 $250,000 250,000 70,657 -
Officer 1997 $250,000 250,000 48,925 -
Edmund L. Peters 1999 175,000 100,000 30,235 -
Sr. Vice President, 1998 175,000 60,000 (2) -
Procurement 1997 135,000 60,000 23,937 -
Paul J. Cafiero 1999 125,000 100,000 26,014 -
Vice President and Chief 1998 125,000 40,000 (2) -
Financial Officer 1997 105,897 25,000 (2) -
Robert J. Gula 1999 155,000 40,000 8,134 -
Sr. Vice President, Engineering & 1998 155,000 60,000 4,902 -
Product Development 1997 130,000 40,000 5,684 -
55
Adare Fritz 1999 135,000 40,000 22,030 -
Senior Vice President, 1998 135,000 60,000 19,903 -
Operations 1997 135,000 40,000 25,320 -
(1) Mr. Rennert, the sole Director of the Company received no compensation
directly from the Company. Trusts established by Mr. Rennert, for his
benefit and for the benefit of certain members of his family, hold the
stock of Renco, which receives a management fee from the Company pursuant
to a management agreement (the "Management Consultant Agreement"). In
fiscal 1999, 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, 1999. The sole member of the board of directors was Mr. Rennert. The
compensation for the Named Executive Officers for fiscal 1999 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 1999, 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, 2000 and from year to year thereafter unless
terminated by either party with 30 days' prior written notice. The compensation
arrangements as of November 1, 1999 are as follows:
Mr. Armour-Minimum annual salary of $250,000 plus an annual bonus of $250,000
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 $100,000
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 $150,000 plus an annual bonus of $50,000
subject to the same conditions as applicable to Mr. Armour.
Mr. Scharpf-Minimum annual salary of $115,000 plus an annual bonus of $40,000
subject to the same conditions as applicable to Mr. Armour.
56
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.
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, 1998 and 1999, no amounts are payable to contract holders at
October 31, 1999.
Retirement Plans
The AMG Retirement Plan calculates an annual accrual of 1.5% of each employees
annual income (as defined in the plan), up to the Social Security Special "Old
Law" Wage Base (maximum earnings of $160,000.00 in 1999) plus 2.25% of defined
annual income in excess of the Wage Base. At retirement, the qualified salaried
employee's retirement benefit is equal to the accumulated annual accruals for
all years of service. This is referred to as a "Career Earnings" plan.
In January 2000, the Company approved changes in the Retirement Plan to 1)
expand the definition of income from base pay only to include base pay, shift
premium, overtime pay and bonuses, 2) increase the minimum lifetime benefit for
participants retiring with 30 or more years of service at age 65 or older from
$17.00 per month to $50.00 per month per year of service, and 3) to establish a
new "career earnings" accrual for all current salaried employees based on the
revised definition of annual income, the new minimum benefit, and their average
income for 1997, 1998 and 1999.
The definition of annual income and the increased minimum benefit are permanent
changes to the Retirement Plan. The recalculated career earnings represents a
one-time update only to accumulated annual accruals. Future annual accruals
will be based on career earnings going forward.
The Company maintains two salaried retirement plans. First, the AMG Retirement
Plan is a defined benefit plan which is ERISA qualified and fully funded. All
salaried employees are covered by this plan. Second, the AMG ERISA Excess Plan
provides benefits for those participants in the AMG Retirement Plan with income
in excess of the limitations of the Internal Revenue Code. The ERISA Excess
Plan is not funded.
AMG Retirement Plan ERISA Qualified
-----------------------------------
Current
--------------------------- Retirement @ age 65
Named Executive Age Service Annual Earliest Benefit at -------------------------
Years* Income Retirement Early Service Benefit**
Age Retirement Years
- ---------------------------------------------------------------------------------------------------------
J.A. Armour 56 27.3 $500,000 56 53,244.00 36.3 $123,576.00
E.L. Peters 56 14.2 275,000 60 50,844.00 23.2 81,696.00
R.J. Gula 53 28.5 195,000 53 44,640.00 40.5 142,428.00
P.J. Cafiero 46 15.6 200,000 58 70,860.00 34.6 140,820.00
A. Fritz 53 31.7 175,000 53 43,032.00 43.7 139,140.00
* - As of January 1, 2000
** - Assumes 5% annual growth based on actuarial assumptions
57
AMG ERISA Excess Plan - Unfunded
-----------------------------------
Current Retirement @ Age 65
------------------------------ ----------------------
Named Age Service Annual Service Benefit**
Executive Years* Income Years
- -----------------------------------------------------------------------------
J.A. Armour 56 27.3 $500,000 36.3 $271,080.00
E.L. Peters 56 14.2 275,000 23.2 53,208.00
R.J. Gula 53 28.5 195,000 40.5 33,288.00
P.J. Cafiero 46 15.6 200,000 34.6 10,656.00
A. Fritz 53 31.7 175,000 43.7 8,748.00
* - As of January 1, 2000
** - Assumes 5% annual growth based on actuarial assumptions
Benefits under this plan are accrued on the same basis as those under the ERISA
Qualified Plan. All benefits accrued under this plan are unfunded. Benefits
provided under the plan are payable only upon retirement at age 65 or older,
death or disability.
58
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Renco owns all of the outstanding capital stock of the Company. Trusts
established by Mr. Rennert for his benefit and for the benefit of certain
members of his family hold all 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 all 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") expiring October 31, 2001, subject to renewal for
additional terms of three years each, unless terminated by either party. 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, 1999.
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. Renco also purchased and administered certain insurance
exclusively for the Company of which the Company financed $.7 million directly
with insurance premium finance companies. In fiscal 1999, the Company incurred
costs of approximately $.8 million 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 the fiscal year ended October 31, 1998 AM General was included in the
consolidated federal and state income tax returns of the Renco Group. For the
fiscal year ended October 31, 1999 and thereafter AM General will file its own
consolidated federal and state income tax returns.
59
Under the terms of the tax sharing agreement with Renco, income taxes are
allocated to AM General on a separate return basis except that transactions
between AM General and Renco and its other subsidiaries are accounted for on a
cash basis and not on an accrual basis. AM General is not entitled to the
benefit of net tax loss carryforwards, unless such tax losses were a result of
timing differences between AM General's accounting for tax and financial
reporting purposes. As of October 31, 1999, AM General had no net operating tax
loss carryforwards. As of October 31, 1999, AM General had a long term
receivable for income taxes of $4.8 million under this agreement, representing
estimated tax payments made by the Company to Renco in excess of the Company's
actual tax liability.
Other
The 5,000 outstanding shares of Preferred Stock of the Company, all of which is
held by Renco, 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.
60
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......................................... 27
Consolidated Balance Sheets as of October 31, 1999 and 1998.......... 28
Consolidated Statements of Operations for the years ended
October 31, 1999, 1998 and 1997.................................... 29
Consolidated Statements of Stockholder's Equity for the years ended
October 31, 1999, 1998 and 1997.................................... 30
Consolidated Statements of Cash Flows for the years ended
October 31, 1999, 1998 and 1997.................................... 31
Notes to Consolidated Financial Statements........................... 32 through 52
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.
61
(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.
*******4.2 Form of Amendment No. 1 to the Indenture, dated as of April 27, 1995,
between AM General Corporation and Shawmut Bank Connecticut (now known
as Fleet National Bank).
*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 October 30,1998 to Loan and Security Agreement,
dated April 30, 1992 between Congress Financial Corporation and AM
General Corporation.
*******10.1.5 Amendment No. 14 dated December 21, 1999 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
62
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
*******10.20 Lease dated June 30, 1999 between Amland Properties, Inc. and AM General
Corporation.
*******10.21 Lease dated January 1, 1999 between Holladay Mishawaka, LLC and AM
General Corporation.
63
*******10.22 Master Agreement dated December 21, 1999 between AM General Corporation
and General Motors Corporation.
*******10.23 Assignment Agreement dated December 21, 1999 between AM General
Corporation and General Motors Corporation.
*******10.24 New Vehicle Assembly Agreement dated December 21, 1999 between AM
General Corporation and General Motors Corporation.
*******10.25 Management Services Agreement dated December 21, 1999 between AM General
Corporation and General Motors Corporation.
*******10.26 Trademark License Agreement dated December 21, 1999 between AM General
Corporation and General Motors Corporation.
*******10.27 Promissory Note dated December 21, 1999 between AM General Corporation
and General Motors Corporation.
*******10.28 Security Agreement dated December 21, 1999 between AM General
Corporation and General Motors Corporation.
*******10.29 Right of Access Agreement dated December 21, 1999 between AM General
Corporation and General Motors Corporation.
*******10.30 HUMVEE Trademark Agreement dated December 21, 1999 between AM General
Corporation and General Motors Corporation.
*******10.31 Royalty Sharing Agreement dated December 21, 1999 between AM General
Corporation and General Motors Corporation.
*******10.32 Joint Review Board Agreement dated December 21, 1999 between AM General
Corporation and General Motors Corporation.
*******10.33 Equity Conversion Agreement dated December 21, 1999 between AM General
Corporation and General Motors Corporation.
21 Subsidiaries of Registrant.
*******27 Financial Data Schedule
*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
*******Filed with Company's Form 10-K No. 33-93302 filed January 31, 2000
(b) No reports on Form 8-K were filed by the registrant during the last
quarter of the period covered by this report.
64
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on January 31, 2000.
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 31, 2000.
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.
65