SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2000
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 incorporation (IRS Employer Identification No.)
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
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
Nine hundred shares of the registrant's common stock, par value $.01 per share,
is outstanding as of March 16, 2000.
AM General Corporation
Form 10-Q
Quarter Ended January 31, 2000
PART I - FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 7
GENERAL 7
HUMVEE/HUMMER Segment 7
Medium Truck Segment 8
SPLO Segment 8
STS/Other Segment 8
Engine Segment 8
Results of Operations 9
Liquidity and Capital Resources 12
Year 2000 Business Matters 12
Forward-Looking Statements 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
PART II - OTHER INFORMATION 14
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar amounts in thousands, except share information)
January 31, October 31,
Assets 2000 1999
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(unaudited)
Current assets:
Cash $ 718 1,081
Accounts receivable, net 71,525 77,081
Inventories 87,842 84,589
Prepaid expenses 1,605 984
Deferred income taxes 6,210 6,210
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Total current assets 167,900 169,945
Income taxes receivable 4,752 4,752
Property, plant, and equipment, net 43,928 43,858
Deferred income taxes 26,388 26,388
Goodwill, net 73,940 75,012
Other assets 4,322 5,838
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$ 321,230 325,793
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Liabilities and Stockholder's Deficit
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Current liabilities:
Accounts payable $ 41,582 37,425
Accrued expenses 70,379 71,163
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Total current liabilities 111,961 108,588
Long-term debt 89,363 92,805
Postretirement benefits other than pensions, noncurrent portion 161,583 160,403
Other long-term liabilities 7,105 8,064
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Total liabilities $ 370,012 369,860
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Stockholder's deficit:
8% cumulative preferred stock, $1,000 par value. Authorized 10,000
shares; issued and outstanding 5,000 shares. $ 5,000 5,000
Common stock, $.01 par value. Authorized, issued and
outstanding 900 shares. 0 0
Paid-in capital 1,000 1,000
Accumulated deficit (54,782) (50,067)
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Total stockholder's deficit (48,782) (44,067)
Commitments and contingencies
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$ 321,230 325,793
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See accompanying notes to consolidated financial statements
3
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollar amounts in thousands)
(unaudited)
- ------------------------------------------------------------------------------------------------------------------
Three Months Ended
January 31,
-----------------------------------------------
2000 1999
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Net sales $ 91,391 87,637
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Cost and expenses:
Cost of sales 79,837 76,699
Depreciation and amortization 3,223 2,741
Selling, general, and administrative expenses 7,933 7,868
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Earnings before interest and income taxes 398 329
Interest income 85 74
Interest expense (4,128) (3,017)
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Loss before income taxes and cumulative effect of accounting (3,645) (2,614)
change
Income tax benefit - (459)
- ------------------------------------------------------------------------------------------------------------------
Loss before cumulative effect of accounting change (3,645) (2,155)
Cumulative effect of accounting change (1,070) -
- ------------------------------------------------------------------------------------------------------------------
Net loss $ (4,715) (2,155)
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See accompanying notes to consolidated financial statements
4
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
(unaudited)
- ---------------------------------------------------------------------------------------------------------------------------
Three Months
Ended
January 31,
---------------------------------------
2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (4,715) (2,155)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Restructuring payments - (91)
Depreciation and amortization of plant and equipment 1,890 1,408
Other amortization 1,528 1,618
Increase (decrease) in inventory reserve 115 (297)
Deferred income taxes - (210)
Noncash other postretirement cost 1,180 1,678
Cumulative effect of change in accounting principle 1,071 -
Gain on sale of equipment (6) -
Change in assets and liabilities:
Accounts receivable 5,556 12,680
Inventories (3,368) (2,504)
Prepaid expenses (620) (151)
Other assets - (91)
Accounts payable 4,157 (1,314)
Accrued expenses (785) (2,965)
Income taxes - (305)
Other liabilities (957) (172)
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Net cash provided by operating activities 5,046 7,129
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Cash flows from investing activities:
Proceeds from sale of equipment 6 -
Capital expenditures (1,960) (1,149)
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Net cash used in investing activities (1,954) (1,149)
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Cash flows from financing activities:
Net repayments under line-of-credit agreement (3,455) (7,854)
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Net cash used in financing activities (3,455) (7,854)
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Net change in cash (363) (1,874)
Cash and cash equivalents at beginning of period 1,081 2,687
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Cash and cash equivalents at end of period $ 718 813
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Supplemental disclosure of cash items
Interest paid $ 6,127 5,129
Taxes paid - 56
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See accompanying notes to consolidated financial statements
5
AM General Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes to consolidated financial statements required by generally accepted
accounting principles for complete financial statement presentation.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended January 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
October 31, 2000.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant's Form 10-K.
Note 2. Inventories
Inventories consisted of the following:
January 31,
2000 October 31,
(Unaudited) 1999
------------------ -----------------
Finished Goods $ 23,297 30,010
Service Parts 21,931 20,850
Raw Materials, supplies and work in progress 49,181 40,181
------------------ -----------------
94,409 91,041
Less allowance for inventory obsolescence (6,567) (6,452)
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Total $ 87,842 84,589
================== =================
Note 3. Change in Accounting Principle
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 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 adopted SOP 98-5 in the first quarter of fiscal
2000 and incurred a cumulative effect expense of $1.1 million.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
AM General Corporation ("AM General" or the "Company") is the largest supplier
of light tactical wheeled vehicles for the Department of Defense ("DoD"). The
Company is the original designer and sole manufacturer of the High Mobility
Multipurpose Wheeled Vehicle ("HMMWV" or "HUMVEE"(R). The Company also sells
HUMVEEs to foreign military services through the DoD's Foreign Military Sales
("FMS") program and on a direct sale basis. In 1993, the Company began selling a
commercial version of the HUMVEE under the registered trademark HUMMER(R) to
industrial and retail users through its commercial dealer network. In December
1999, the Company entered into a series of agreements discussed below, with
General Motors Corporation ("GM") pursuant to which, among other things, it
transferred the HUMMER trademark to GM.
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. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the
Company is providing management discussion on net sales, unit sales and gross
margin for these business segments. 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.
HUMVEE/HUMMER Segment
HUMVEE
The Company began producing the latest generation of military HUMVEEs, the A2
Series, in August 1995. On December 23, 1995, the Company entered into a multi-
year annual requirements contract for A2 Series HUMVEEs known as the X001
Contract which provided a mechanism for the US Army to procure at least 2,350
HUMVEEs annually through fiscal year 2000. The contract, however, does not
require the Army to purchase the vehicles as funding for each of the respective
years must be appropriated pursuant to the annual Defense Budget. Through
January 31, 2000, a total of 14,396 vehicles have been ordered on the X001
Contract. The FY00 Defense Bill contains the necessary funding for the expected
fiscal year 2000 production.
The X001 contract expires at the end of the current fiscal year. The US Army's
long-term acquisition plan for its Light Tactical Vehicle fleet includes
developing an upgraded version of the HUMVEE which will be known as the A4
Series HUMVEEs. The plan further calls for the continuation of the current
production contract to allow sufficient time to develop the A4 Series and award
a production contract. The Company anticipates that negotiations on the follow-
on contract will conclude by September 2000.
In the second quarter of fiscal year 2000, the Company expects to finalize
negotiations with an international customer who is seeking to acquire 896
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 mid-March, 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 January 31, 2000. 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. Twenty-four (24) of these
units were sold to another foreign customer in February 2000. The FMS Customer
has indicated its intention to purchase the remaining 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. All signatures required by the customer's
procurement office have been obtained and the order has been sent to the Defense
Security Assistance Agency for further processing. It is anticipated that a
contract for the order will be signed and the units delivered by the end of the
current fiscal year.
HUMMER
On December 21, 1999, the Company concluded a series of agreements with GM ("the
GM Transaction") through which the Company intends to more fully utilize the
widespread recognition of the HUMMER name to generate incremental cash flow.
Pursuant to the terms of the GM 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
7
over a seven and one half year period. As part of the GM Transaction, the
Company assigned the Trademark to GM. Reference is hereby made to the GM
Agreements filed as exhibits to the Company's Form 10-K filed with the
Securities and Exchange Commission on January 31, 2000. The Company expects to
begin assembling the New Vehicle for GM in approximately April 2002.
In response to higher demand for new model year HUMMERs from its dealer network,
and to the international customer order referred to above, the Company is
increasing the production of HUMMERs in March 2000 from 5.5 to 6 vehicles per
day resulting in a new production rate of 24 HUMMER/HUMVEE vehicles per day.
Medium Truck Segment
On April 19, 1999, the Company completed production of 2-1/2 ton trucks under
the Extended Service Program ("ESP") contract. The results of operations for
the first quarter of 1999 include unit sales of 354 vehicles under this
contract.
The Army/DoD is developing, at Congressional direction, an acquisition
strategy/program to facilitate full and open competition for a new Family of
Medium Tactical Trucks ("FMTV") multi-year production contract that will be
awarded to a single contractor. Phase I (Prototype and 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
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, including HUMMER/HUMVEEs, 2-1/2 and 5-ton trucks and others.
STS/Other Segment
The Company's STS operation provides technical support and engineers to the
Army's Tank, Automotive and Armaments Command ("TACOM"). Services include
engineering, design and drafting, configuration and data management,
translation, and integrated logistics support. During the first three months of
fiscal 2000, the Company's STS engineering group completed work on the Army's
Second Source FMTV Phase I contract. This contract has since been replaced by a
new acquisition strategy. See "Medium Truck Segment".
Engine Segment
The Company acquired its 6.5 liter diesel engine business from GM Powertrain, a
division of GM on June 11, 1999. Under terms of the agreement, the Company has
a license to produce and sell the 6.5 liter engine for a period of ten (10)
years. The agreement further provides that GM's internal parts distributor,
Service Parts Operation, will purchase all service requirements for this engine
from AM General for the term of the agreement. 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.
The results of operations for the first quarter of fiscal year 2000 include
start-up costs associated with launching the plant and validating the assembly
process.
8
Results of Operations
Three Months Ended January 31, 2000 ("first quarter of 2000") compared to Three
Months Ended January 31, 1999 ("first quarter of 1999")
Analysis of Net Sales and Unit Sales Information
- ------------------------------------------------
(in millions, except unit information)
Three months ended
January 31, %
--------------------
2000 1999 Change Change
------- ------- ------ ------
Net Sales
HUMMER/HUMVEEs $ 75.9 $ 49.4 $ 26.5 53.6%
Medium Trucks - 22.8 (22.8) (100.0)
SPLO 12.6 12.7 (0.1) (0.8)
STS/Other 2.9 2.7 .2 7.4
------- ------- ------ ------
$ 91.4 $ 87.6 $ 3.8 4.3%
------- ------- ------ ------
HUMVEE/HUMMER Unit Sales 1,226 846 380 44.9%
HUMVEE/HUMMER Average Unit Selling Prices $61,909 $58,392 $3,517 6.0%
Consolidated net sales increased $3.8 million, or 4.3% to $91.4 million in the
first quarter of fiscal 2000 compared to fiscal 1999. The increase in net sales
was due primarily to higher HUMMER/HUMVEE sales partially offset by lower sales
in connection with the completion of the ESP contract in fiscal year 1999.
HUMMER/HUMVEE segment net sales increased $26.5 million, or 53.6% to $75.9
million in the first quarter of fiscal 2000 compared to fiscal 1999. The
increase in net sales is primarily due to higher US Armed Forces requirements
and increased demand for International HUMVEEs and Commercial HUMMERs. Higher
average unit selling prices also contributed to the increase in net sales.
HUMMER/HUMVEE average unit selling prices in the first quarter of fiscal 2000
increased 6.0% over fiscal 1999 levels. The increase is attributable to a
negotiated price escalation on US Military HUMVEEs, a general price increase on
model year 2000 HUMMERs, and a proportionate increase in sales of more expensive
HUMMER models.
There were no Medium Truck segment net sales in the first quarter of fiscal 2000
due to the completion of the ESP contract in fiscal 1999. Segment net sales for
the first quarter of fiscal 1999 included $22.8 million of ESP contract revenue.
SPLO segment net sales decreased $.1 million, or .8% to $12.6 million in the
first quarter of fiscal 2000 compared to fiscal 1999. The decrease in net sales
is primarily attributable to lower demand for HUMMER parts.
STS/Other segment net sales increased $.2 million, or 7.4% to $2.9 million in
the first quarter of fiscal 2000 compared to fiscal 1999. The increase in net
sales is primarily due to a final billing on the closing out of the FMTV Second
Source Phase I contract.
9
Analysis of Consolidated Gross Profit
- -------------------------------------
(in millions, except unit information)
Three months ended
January 31, %
----------------------------------------------------
2000% % 1999% % Change Change
----- - ----- - ------------ ----------
Gross Profit
HUMMER/HUMVEEs $ 9.3 12.3% $ 5.3 10.7% $ 4.0 75.5%
Medium Trucks - - 4.1 18.0 (4.1) (100.0)
SPLO 1.4 11.1 1.1 8.7 0.3 27.3
STS/Other 1.2 41.4 0.4 14.8 0.8 200.0
Engine (0.3) - - - (0.3) (100.0)
---------------------------------------------------- ------------ ----------
$11.6 12.7% $10.9 12.5% $ 0.7 6.4%
Consolidated gross profit increased $0.7 million, or 6.4% to $11.6 million in
the first quarter of fiscal 2000 compared to fiscal 1999. The Company's
consolidated gross profit margin for the first quarter of fiscal 2000 was 12.7%
compared to 12.5% in fiscal 1999. The decrease is primarily attributable to
reduced gross margin in the Medium Truck segment due to the completion of the
ESP program partially offset by improved gross profit in the HUMMER/HUMVEE and
STS/Other segments.
HUMMER/HUMVEE segment gross profit increased $4.0 million, or 75.5% to $9.3
million in the first quarter of fiscal 2000 compared to fiscal 1999. The
segment gross profit margin was 12.3% in the first quarter of fiscal 2000
compared to 10.7% in fiscal 1999. The increase in gross profit is primarily
attributable to higher sales volumes in connection with increased military
requirements and stronger commercial market demands.
There was no Medium Truck segment gross profit in the first quarter of fiscal
2000 due to the completion of the ESP contract in fiscal 1999. The results of
operations for the first quarter of fiscal 1999 included $4.1 million of gross
profit from the ESP contract. The segment gross profit margin was 18.2% in the
first quarter of 1999.
SPLO segment gross profit increased $0.3 million, or 27.3% to $1.4 million in
the first quarter of fiscal 2000 compared to fiscal 1999. The segment gross
profit margin for the first quarter of 2000 was 11.1% compared to 8.7% in fiscal
1999. The increase in gross profit margin is directly related to selling a
higher concentration of more profitable HUMVEE spare parts, partially offset by
reduced sales and higher warehousing expense.
STS/Other segment gross profit increased $0.8 million, or 200.0% to $1.2 million
in the first quarter of fiscal 2000 compared to fiscal 1999. The segment gross
profit margin for the first quarter of 2000 was 41.4% compared to 14.1% in
fiscal 1999. The increase is primarily due to the Company's FMTV Phase I
contract.
Engine segment gross profit was ($0.3) million in the first quarter of fiscal
2000 primarily due to start-up costs in connection with the new Franklin, Ohio
manufacturing facility.
Analysis and Management Discussions on Non-Segment Information
- --------------------------------------------------------------
Depreciation and Amortization
Depreciation and amortization expense was $3.2 million for the first quarter of
2000, an increase of $.5 million or 18.5% from $2.7 million for the first
quarter of 1999. The increase is primarily attributable to higher tooling
amortization costs directly related to increased production volumes in fiscal
2000 and the amortization of costs incurred in fiscal 1999 in connection with
the implementation of a new Enterprise Resource Planning system ("ERP").
10
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses remained unchanged at $7.9
million for the first quarters of fiscal 2000 and 1999. SG&A for the first
quarter of fiscal 2000 includes $0.3 million related to the start-up of the 6.5
liter engine plant.
Earnings before Interest and Income Taxes
The Company recorded earnings before interest and income taxes for the first
quarter of fiscal 2000 of $0.4 million, an increase of $0.1 million from income
before interest and income taxes of $.3 million in fiscal 1999. The increase in
earnings before interest and income taxes is primarily attributable to higher
gross margin partially offset by higher depreciation and amortization expense.
Interest Income and Expense
Interest expense for the first quarter of 2000 was $4.1 million, an increase of
$1.1 million or 36.7% from $3.0 million for the first quarter of 1999. Average
debt outstanding during the first quarter of 2000 was $97.1 million at a
weighted average interest rate of 11.8%. Average debt outstanding during the
first quarter of fiscal 1999 was $88.0 million at a weighted average interest
rate of 12.4%. The increase in average debt outstanding is primarily due to
higher borrowings under the Company's revolving credit facility primarily due to
the increase in raw material inventory levels, partially offset by the $6.4
million reduction in the Company's 12 7/8 Senior Notes in connection with the
excess cash flow buy-back in fiscal 1999. The increase in interest expense was
due primarily to a fee paid to the Holders of the 12 7/8% Senior Notes for their
consent to the GM Transaction and interest expense paid to TACOM in connection
with a contract modification. Interest income remained unchanged at $0.1
million.
Income Tax Benefit
As of October 31, 1999 the Company had utilized all of its available loss
carryback and therefore there was no income tax benefit recorded for the first
quarter of fiscal 2000. The income tax benefit was $0.5 million for the first
quarter of fiscal 1999 and was recorded at the statutory rate adjusted for
permanent differences primarily resulting from the amortization of goodwill.
Cumulative Effect of Accounting Change
The Company incurred a charge of $1.1 million for the cumulative effect of
adopting AICPA Statement of Position 98-5 related to start-up activities and
organization costs. See Note 3 to Consolidated Financial Statements for
additional information.
Net Loss
The net loss for the first quarter of fiscal 2000 was $4.7 million, an increase
of $2.5 million from a net loss of $2.2 million in the first quarter of fiscal
1999. As discussed above, the increase in net loss was primarily due to the
one-time charge in connection with a change in accounting principle, higher
interest expense in the first quarter of fiscal 2000 and the unavailability of a
loss carryback in fiscal 2000.
11
Liquidity and Capital Resources
The Company's liquidity requirements result from capital investments, working
capital requirements, debt service obligations, postretirement health care and
pension funding, interest expense, and, to a lesser extent, principal payments
on its indebtedness. The Company has met these requirements in each fiscal year
since 1992 from cash provided by operating activities and borrowings under its
revolving credit facility.
Cash provided by operating activities was $5.0 million for the three months
ended January 31, 2000 compared to $7.1 million for the three months ended
January 31, 1999. The key factors affecting cash flow from operating activities
during the first three months of 2000 were reductions in accounts receivable and
other assets and an increase in accounts payable partially offset by the net
loss, an increase in inventory, and reductions in accrued expenses. Other
factors include non-cash charges to operating income including depreciation,
amortization and non-cash postretirement expenses.
Accounts receivable levels at January 31, 2000 were $6.3 million lower than
levels at the end of the prior fiscal year primarily due to higher than normal
receivables at the end of fiscal 1999 in connection with military vehicles sold
at the end of the year.
Net inventory levels at January 31, 2000 were $3.3 million higher than levels at
the end of the prior fiscal year due to higher raw material and SPLO inventory
partially offset by lower finished goods inventory. Raw material inventory
levels were intentionally increased beyond normal operating levels during the
conversion to a new ERP system to assure uninterrupted production, and to a
lesser extent to mitigate the effects of any vendor related Year 2000 problems.
The parts will be consumed in the second quarter of fiscal 2000 and raw material
will return to normal levels.
During the first three months of fiscal 2000, the Company spent $1.9 million on
capital expenditures primarily on data equipment, leasehold improvements, vendor
tooling, and expenditures in connection with the 6.5 liter diesel engine
project, as compared to $1.1 million during the three months ended January 31,
1999. The Company anticipates additional capital expenditures in fiscal 2000 of
approximately $99.4 million of which $84.0 million is in connection with the
construction of the New Vehicle assembly facility and will be funded with the
proceeds of a GM loan. The Company anticipates it will incur additional capital
expenditures of approximately $10.3 million on vendor tooling, machinery and
equipment, vehicles and other capital requirements. These capital requirements
will be funded from operating cash flow and availability under the revolving
credit facility, and other permitted financing sources. The Company anticipates
it will spend approximately $5.1 million on the acquisition of the HUMMER/HUMVEE
manufacturing facility for which it has a financing commitment from a local
bank.
To repay the GM Loan, the Company will pay to GM a pre-agreed portion of the
assembly fee received for assembling each New Vehicle. If New Vehicles are
ordered and assemble at the forecasted rate, the GM Loan would be repaid within
seven and one half years after the release of the New Vehicle
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 therein, and expires on October
30, 2001. As of January 31, 2000, the Company had borrowings outstanding of
$21.5 million and approximately $6.2 million of availability under this
facility.
The Revolving Credit Agreement contains numerous covenants and prohibitions that
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.
Year 2000 Business Matters
To date, the Company has not experienced any significant Year 2000 related
computer problems. The Company continues to monitor its computer applications
but does not anticipate any problems will arise relevant to the Year 2000 issue.
12
Forward-Looking Statements
This report includes "forward-looking statements," within the meaning of the
Private Securities Litigation Reform Act of 1955, 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; 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 3. 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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Nevada Product Liability Case
In February 2000, the Company settled the previously reported product liability
case, instituted in Clark County, Nevada in 1995, based on an accident
involving an M35 Truck (a two-and-a-half ton military truck). The settlement
amount will be paid by the Company's liability insurance carriers.
Castellon v AM General
On December 13, 1999, former employee Oscar Castellon filed a complaint in US
District Court in South Bend, Indiana. The complaint alleges that, after
Castellon was discharged for theft, the Company refused to reinstate him
because of his race (Hispanic) and national origin. The Company has retained
counsel. Counsel has filed a motion to dismiss Castellon's complaint.
Castellon's counsel has requested an indefinite continuance because of his
(counsel's) ongoing treatment for heart problems. The Company expects to
eventually prevail in this case.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description
- ------------------- -----------------------------------------------------------------------
10.34 Lease dated October 6, 1999 between Dayton Sunrise Partners, L.P.
and AM General Corporation
27 Financial Data Schedule
(b) Reports on Form 8-K. Registrant did not file any reports on Form 8-K during
the quarter for which this report is filed.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 16, 1999 AM GENERAL CORPORATION
Registrant
By /s/ Paul J. Cafiero
--------------------------------
Paul J. Cafiero
Vice President and
Chief Financial Officer
Duly authorized officer and
principal financial and accounting
officer
EXHIBIT INDEX
16
Exhibit No. Description
- ------------------- -----------------------------------------------------------------------
10.34 Lease dated October 6, 1999 between Dayton Sunrise
Partners, L.P. and AM General Corporation.
27 Financial Data Schedule
17