________________________________________________________________________________
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, 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 (IRS Employer Identification No.)
incorporation or Organization)
105 North Niles Avenue
South Bend, Indiana 46617
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (219)284-2907
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-
The aggregate market value of the voting and non-voting common equity stock
held by non-affiliates of the registrant is $0. Nine hundred shares of the
registrant's common stock, par value $.01 per share, are outstanding as of
January 29, 2001.
Documents Incorporated by reference: None.
________________________________________________________________________________
1
TABLE OF CONTENTS
PART I 3
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 11
PART II 11
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters. 11
Item 6. Selected Financial Data. 12
Item 7. Management Discussion and Analysis of Financial Condition and
Results of Operations. 13
Item 7a. Quantitative and Qualitative Disclosures about Market Risk. 22
Item 8. Financial Statement and Supplementary Data. 23
Item 9. Changes in and Disagreements with Accountants and Financial
Disclosure. 50
PART III 51
Item 10. Directors and Executive Officers of the Registrant. 51
Item 11. Executive Compensation. 52
Item 12. Security Ownership of Certain Beneficial Owners and Management. 55
Item 13. Certain Relationships and Related Transactions. 55
PART IV 57
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K. 57
SIGNATURES 62
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, 2000, the Company has delivered 130,973 HUMVEEs in a variety of
configurations to the DoD for use by the US Armed Forces, 24,037 HUMVEEs to the
military services of 40 foreign countries, and 8,674 HUMMERs. In fiscal 2000,
the Company sold 5,351 HUMMER/HUMVEEs. In addition to HUMMER/HUMVEEs, the
Company also manufactures the 6.5 liter diesel engine used in the HUMMER/HUMVEE.
General Motors Corporation's ("GM") internal parts distributor, Service Parts
Operation, also purchases its service requirements for this engine from AM
General. The Company also markets both technical support services and spare
parts. The HUMMER trademark is owned by GM and licensed to the Company to brand
the vehicle for the duration of the Company's agreement with GM to assemble a
new HUMMER model (the "H2"), pursuant to a series of agreements with GM entered
into in December 1999 (the "GM Transaction").
The Company classifies its operations into six business segments: (i)
HUMMER/HUMVEEs, (ii) Medium Trucks, (iii) Spare Parts Logistics Operations
("SPLO"), (iv) Systems Technical Support ("STS") and Other, (v) Engines, and
(vi) H2. 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.
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, for himself
and members of his family. As a result of such ownership, Mr. Rennert indirectly
controls the Company. GM has the option, subject to 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. The
GM Transaction provides that, should the Company and GM fail to agree on a
value, 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.
Domestic Sales; Government Contracts
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 expired on December 14,
2000. The Company anticipates delivery of vehicles ordered under this contract
will be completed by April 2001. The Company successfully negotiated a new
follow-on A2 production contract that was awarded on November 6, 2000. This is a
sole source firm-fixed price contract calling for base year production of 2,861
HUMVEEs, subject to government funding. The fiscal 2001 federal budget includes
funding for the first year production plus 448 option vehicles. The contract
includes six option years ending on June 1, 2007 with delivery of vehicles to be
complete by December 7,
3
2007. If all option years on the contract are exercised, approximately 31,000
vehicles valued at $2.4 billion will be delivered under this contract.
Management believes this contract will provide continuing base line production
for the HUMVEE over the next several years. See MD&A.
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: a) the performance capability of future LTVs must be equal to or
better than the current mission profile of the HUMVEE, b) the US Armed Forces
will continue to procure HUMVEEs beyond the year 2020, c) 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, d) the US Army will develop
an upgraded version of the HUMVEE with selected technology insertions which will
be known as the A4 Series HUMVEEs, e) there will be no break in production, f)
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 g)
there will not be a break in deliveries to users resulting from the transition
from A2 to A4 production.
On August 7, 2000, the Company signed an A4 modernization design/development/
test/validation contract with the DoD valued at $11.5 million. This contract
provides the Government with a mechanism to explore its future HUMVEE design
requirements. Engineering changes developed under this contract will enable the
Government to direct the integration of selected technology advancements into
the current A2 Series HUMVEE. Based on these engineering changes, the Company
will build seven prototype vehicles for Company testing by June 15, 2001 and
will deliver 10 pilot vehicles for government testing by the first quarter of
2002. The Company will support all phases of government testing. In addition,
the Company's STS operation will prepare the engineering drawings related to the
design of the vehicles, the Technical Data Packages. Work under this contract is
expected to be completed by October 2, 2002.
The Company has received orders from the US Armed Forces for the procurement of
3,309 vehicles. As of January 29, 2001, these vehicles are on contract and
scheduled for production by the end of the fiscal year. The Company anticipates
it will complete delivery of these vehicles during the first quarter of fiscal
2002. The number of vehicles currently on contract exceeds the number of HUMVEEs
that were produced and delivered to the DoD in fiscal 2000 (approximately 3,000
units).
As of October 31, 2000, the Company had a total US military backlog of 394
HUMVEEs valued at $ 34.4 million compared to 252 HUMVEEs valued at $14.0 million
at October 31, 1999.
International Sales
Since November 1986, the Company has sold military HUMVEEs to foreign nations,
either directly to the foreign nation or through the US Government's Foreign
Military Sales ("FMS") program. The Company will continue to capitalize on the
HUMVEE's proven combat performance with the US Armed Forces, the extensive
offering of HUMVEE configurations and the Company's technical and logistical
support services to increase sales to foreign military markets. To date, Taiwan,
Saudi Arabia, Mexico, the United Arab Emirates and Thailand have been the five
largest of the Company's 40 international military customers.
The Company sells HUMVEEs in various configurations to the military services of
foreign nations through the FMS program and its direct sales force and local
representatives. The FMS program is part of the US Government's security
assistance program, which provides equipment and services to more than 100
nations and international organizations. Funding is provided either directly by
the purchaser or with US-granted foreign aid credits or loans. As of October 31,
2000 and October 31, 1999, there were no significant FMS and direct sales
backlogs. In fiscal 2000, international military HUMVEE sales accounted for
approximately 30.8% of total HUMMER/HUMVEE unit sales and 31.9% 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.
4
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 8,674
HUMMERs through its network of approximately 51 domestic and international
dealerships and distributors. As of October 31, 2000, AM General had a total
backlog of 27 HUMMERs valued at $1.8 million compared to 250 valued at $16.3
million on October 31, 1999. In fiscal 2000, HUMMER sales accounted for
approximately 22.6% of total HUMMER/HUMVEE unit sales and 25.7% 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.
The Company currently manufactures four HUMMER models, which include
two-passenger and four-passenger hard-tops, a four-door wagon, and an open-top
sport model with suggested base retail prices ranging from $76,000 to $95,000.
The Company provides customer service, spare parts and warranties to its
commercial customers through its dealer network.
During the fourth quarter of fiscal 2000, new vehicle inventories increased
throughout the Company's dealer network, primarily in connection with the
transition of Company dealerships to GM. Under the terms of the agreements with
GM (the "GM Transaction"), all qualified dealers must transition to GM
dealerships by fiscal year 2002. The Company is working closely with GM to
determine which dealers qualify. This transition process resulted in certain
dealers voluntarily terminating their dealerships and transferring their
existing inventory to new dealerships signing with GM. The receipt of these
vehicles, combined with wholesale deliveries from the Company and sluggish
retail activity during their start-up, caused inventory levels at these dealers
to remain high through the end of the fiscal year. Also contributing to the
increase in new vehicle inventory is the reduction in demand for HUMMERs in the
international markets. Demand has been insignificant over the past few years and
the Company has begun the process of closing its international dealerships. In
response to the increase in dealer inventories, the Company has committed
financial resources to assist the dealers in selling the vehicles they currently
have in stock. In response to the reduction in demand, the Company reduced the
daily production of HUMMERs from 6 vehicles per day to 4 on September 25, 2000.
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 nine recalls regarding design
problems with certain mechanical features of the HUMMER. The total cost to the
Company of the nine recalls is estimated to be approximately $641,296 of which
$599,479 has been incurred as of October 31, 2000. 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 2000, the HUMMER/HUMVEE segment accounted for approximately 80.3% of
net sales.
5
Medium Truck Segment
The Company entered the remanufacture and modernization market in September
1993, upon being awarded the contract for the DoD's Extended Service Program
("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 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. Due to Congressional direction, however, the FMTV Second
Source Program was canceled. The Army/DoD is now developing 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.
Initially, a contract award was scheduled for early fiscal year 2002. In
September 2000, the DoD announced that the production award would be moved out
to the second quarter of fiscal 2003. The Company has assessed the Army's
acquisition plan as it currently exists and has determined that it does not
represent a viable business opportunity. As a result, the Company has informed
the Army that, unless the plan is changed, it will not compete for the FMTV
contract. If the plan remains unchanged, the Company will not pursue the FMTV
contract and will focus its resources on the core competencies of the business,
including the successful launch of the H2 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 2000, SPLO accounted for approximately 16.0% of net sales.
SPLO provides comprehensive after-market service, training and technical
publications for Company products on a worldwide basis. The services include
supplying spare parts for vehicles manufactured by the Company and for non-AM
General manufactured vehicles, including HUMMER/HUMVEEs, 2-1/2- and 5-ton trucks
and others. In addition, SPLO 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 the US Army's Tank-Automotive and Armaments Command
("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 2000, the STS/Other segment accounted for 2.5% of
net sales.
6
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 diesel engine for a period of ten (10)
years. The agreement further provides that GM's internal parts distributor,
Service Parts Operation, will purchase all of its spare parts requirements for
that engine from the Company's General Engine Products subsidiary ("GEP") for
the term of the agreement. If adequate demand exists for this engine at the
conclusion of the agreement, the Company will renegotiate the license agreement
for additional years.
GM currently uses this engine in some vans, pickup and medium duty trucks. 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 this
new business segment will be profitable and will generate revenues of
approximately $80.0 million in fiscal 2001, including approximately $30.2
million of inter-company sales.
GEP began running low-rate initial production in August and achieved full-rate
production in December 2000. GEP is currently assembling and transferring to the
Company all of its 6.5 liter diesel engine requirements.
GEP has contracted with GM to perform testing and general repair services on
23,599 new engines to be sold by GM over the next two years. These services are
expected to generate an additional $9.1 million in revenue for GEP over the next
two years.
H2 Segment
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 H2 (the "New Vehicle"), a new generation vehicle bearing the
Trademark HUMMER 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.
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 military 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 HUMMER mark on the New Vehicle or
other use.
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 pursuant to certain
terms and conditions for an amount determined at a mutually agreed amount 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.
Industry
Since World War I, the US and foreign military forces have used TWVs for
transporting personnel, supplies and equipment in battlefield conditions. The
TWV fleet has evolved from numerous body styles and payloads to three basic
classifications - light (less than 2-1/2 tons), medium (2-1/2 ton and 5-ton) and
heavy (greater than 5 tons). Each of the three classifications serves basic
utility functions on the battlefield. Generally, commercial trucks are not
suited to military use or military procurement standards.
In the early 1980s, the US Army began its largest peacetime TWV fleet
modernization program in history. The escalation in US Army truck requirements
can be directly attributed to (i) a transition in the US Armed Forces' basic
fighting strategy and (ii) newly established roles for trucks as weapon system
platforms and as the transport component of medical, electronics and
intelligence systems. The US Armed Forces fighting doctrine has shifted from
"forward deployment" (i.e., maintaining large bases worldwide) in the Cold War
Era to "force projection" (e.g., the Gulf War) which calls for rapid deployment
and forced entry with fast moving main attacks on enemy fronts. As a result of
this fighting doctrine, the US Army established two major hardware initiatives
for ground attacks emphasizing speed and high mobility - the Bradley fighting
vehicle and the M1 Abrams main battle tank. At the time, no military trucks
(light, medium or heavy) existed that could match the expected speed and
mobility of the Bradley and Abrams vehicles. This led to the development of the
design specification for the HUMVEE. The HUMVEE is the only light TWV being
acquired in quantity by the US Armed Forces.
At the present time, the medium tactical wheeled fleet is in poor condition
measured by age and economic performance. As a result, the US Army commenced
modernizing its medium TWV fleet by procuring new
7
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 2003. As
discussed above, the Army's current acquisition plan does not represent a viable
business opportunity for the Company, and unless such plan changes, the Company
will not compete for this award.
Research and Development
The Company believes that its technical expertise and engineering resources are
a competitive advantage, which has enabled the Company to successfully procure
business contracts with the US government. In addition to its STS operations,
which are dedicated to TACOM, the Company also maintains an independent research
and development ("R&D") department at its Livonia, Michigan facility to conduct
R&D activities.
Manufacturing Process and Raw Materials
At the Company's Mishawaka, Indiana facility, HUMMER/HUMVEE vehicles are
manufactured on an automated truck-assembly production line. Major vehicle
components and parts are procured from outside vendors and delivered to the
Mishawaka facility. Engines are procured from the Company's wholly owned
subsidiary, General Engine Products, Inc., in Franklin, Ohio. 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 consist 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 10% of the
Company's total purchased materials are currently supplied by various divisions
of GM . These materials include 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
fifteen 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.
Competition in SPLO is highly fragmented among a large number of small
independent suppliers and selected original equipment manufacturers.
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,
8
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.
Payments 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, 2000, the mandatory repurchase agreements covered 249
HUMMERs with a total value at dealer cost of $21.7 million.
Since export sales are priced in US dollars, the Company does not expect any
material adverse impact from foreign currency fluctuations.
Employees
As of October 31, 2000, the Company had 471 salaried employees and 889 hourly
employees. Of the 1,360 employees, 277 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
current labor contract for the Company's GEP facility expires in June of 2006.
The hourly employees at this facility are represented by the International Union
of Electrical Workers ("IUE"). The Company believes that its relations with
employees are satisfactory.
The Company has implemented a comprehensive assessment, hiring, and training
plan for the H2 project that is currently underway. This plan will provide the
Company a mechanism to recruit, screen, hire and train new hires to work on the
H2 project during fiscal 2001. The Company anticipates salaried and hourly
employment levels for the H2 project will reach 99 and 205, respectively, by the
end of fiscal 2001. Production is scheduled to begin in April 2002 at which
point salaried and hourly employment levels would be approximately 170 and
1,350, respectively. The Company has a separate labor contract for the employees
at a new facility being built to house the H2 project (the "New Facility") that
expires in September of 2009. All of the Company's hourly employees at the New
Facility will be represented by the UAW.
9
Item 2. Properties
The Company operates three manufacturing facilities and six support locations
which include its headquarters in South Bend, Indiana, as well as sales, service
parts, 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 HUMMER finishing
facility and a one mile, asphalt-paved test track, both owned by the Company,
are also located in Mishawaka, adjacent to the HUMMER/HUMVEE plant. At the
beginning of 2000, the Company owned approximately 40 acres and occupied the
remaining 56 acres through a lease agreement. On June 9, 2000 the Company
exercised its option under the lease and purchased the remaining 56 acres for
approximately $5.2 million. This purchase transfers ownership of the
HUMMER/HUMVEE manufacturing facility to the Company and provides the land
necessary for the construction of the new H2 facility. Construction of the New
Facility began in August 2000 and is proceeding on schedule. The major tooling
and materials handling equipment, assembly lines, robotics and computer controls
involved in the manufacture of HUMMER/HUMVEE vehicles are located at the
Mishawaka facility. The HUMMER/HUMVEE facility has a single shift capacity of
between 50 and 70 units per day depending on the model configuration of orders
currently being received by the Company.
The Company's SPLO operations are located in Mishawaka at a separate, leased
facility.
The Company leases, on a month to month basis, a facility in South Bend that is
utilized for the manufacture of sub-assembly components used on HUMVEEs
configured as ambulances.
The Company operates a test track in South Bend located near the ambulance
facility. The property is owned by the Chippewa Corporation ("Chippewa"), a
wholly owned subsidiary of 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 R&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 leases its 6.5 liter diesel engine facility located in Franklin,
Ohio. This facility is a built to suit property tailored to the engine business.
The lease is for a term of 10 years and includes a purchase option allowing the
Company to purchase the facility within the first six months of the fifth lease
year.
The Company considers its facilities and equipment generally to be in good
operating condition.
10
Item 3. Legal Proceedings
Castellon v AM General
On December 13, 1999, former employee Oscar Castellon filed a complaint in US
District Court for the Northern District of Indiana, alleging that, after he was
discharged for theft, the Company refused to reinstate him because of his race
(Hispanic) and national origin. The Court ordered the parties to conduct a
Settlement Conference on May 9, 2001. If the parties cannot settle the case, it
will go to a jury trial in August 2001. The Company expects to eventually
prevail in this case.
Beanstalk v AM General
On August 28, 2000, the Beanstalk Group filed a breach of contract case against
AM General and General Motors in the U.S. District Court for the Northern
District of Indiana. Beanstalk and The Company have a "Representation Agreement"
that designates Beanstalk as the exclusive, non-employee, licensing agent for AM
General's trademarks. The agreement provides Beanstalk with 35% of any revenue
generated from trademark licensing agreements negotiated by Beanstalk on behalf
of the Company. In its lawsuit, Beanstalk claims that the Company breached the
Representation Agreement when the Company assigned the HUMMER trademark to
General Motors pursuant to the GM Transaction. Beanstalk also claims that
General Motors has breached the Agreement and interfered with the contractual
relationship between Beanstalk and the Company. Beanstalk's Complaint seeks
compensatory damages of more than $30 million dollars. The court has not yet
ruled on motions to dismiss filed by the Company and GM. Beanstalk filed a
motion for summary judgment on its breach of contract claims against the
Company. The Company's response to Beanstalk's motion was filed on January 19,
2001. The judge referred the case to the U.S. Magistrate Judge for a settlement
conference, which will likely be scheduled for March or April of 2001. The
Company does not believe that an adverse decision will have a material adverse
effect on the Company.
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 DCAA has updated its analysis and is now asserting a $20.2 million
overcharge, including interest, on vehicles delivered through May 31, 2000. The
Company maintains that its position with respect to its method of cost
allocation is consistent with cost accounting regulations. The Government
disagrees with the Company's position and has invited the Company to resolve the
dispute through Alternative Dispute Resolution ("ADR"). The Company must accept
or reject the Government's invitation by February 8, 2001. 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.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of Security Holders during the quarter ended
October 31, 2000.
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 28, 2001, the Company had one stockholder. The Company paid no
dividends on its common stock in fiscal 2000 and 1999. 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.
11
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, 2000.
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,
----------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------
(dollars in millions)
Statement of Operations Data
- ----------------------------
Net Sales $448.2 348.2 392.8 468.2 462.4
Gross Profit (a) 64.6 37.4 48.5 43.2 42.9
Depreciation and Amortization 12.3 10.9 13.2 12.7 16.8
Selling, General and Administrative Expenses 32.1 31.2 27.7 26.2 37.3
Special termination benefits - - - 0.1 3.2
Plant Closing/Restructuring (0.5) (2.7) 5.2 3.5 -
Operating Income (Loss) (b) 20.7 (2.0) 2.4 0.7 (14.4)
Interest Expense, Net 13.5 11.1 12.8 13.2 13.9
Income Tax Expense (Benefit) 4.2 (2.9) (2.1) (3.0) (8.7)
Income (Loss) before Accounting Change 3.0 (10.2) (8.3) (9.5) (19.6)
Accounting Change, Net of Income Taxes (c) (0.7) - - - -
----------------------------------------------------
Net Income (Loss) $ 2.3 (10.2) (8.3) (9.5) (19.6)
Balance Sheet Data
- ------------------
Working Capital $ 68.2 61.4 56.1 55.9 87.9
Property Plant and Equipment, net 73.9 43.9 41.7 44.9 56.5
Total Assets 376.4 325.8 314.8 316.3 373.2
Total Debt (d) 115.3 92.8 82.2 83.2 126.9
Stockholder's Equity (Deficit) (41.8) (44.1) (34.1) (25.5) (16.0)
(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) Cumulative effect of adopting AICPA Statement of Position 98-5 related to
start-up activities and organizational costs.
(d) Total Debt includes the revolving credit facility, the 12 7/8% Senior Notes
due 2002 issued in 1995 and the GM Loan.
12
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. In December 1999, the
Company entered into a series of agreements with GM pursuant to which, among
other things, it transferred the HUMMER trademark to GM. GM will use the HUMMER
trademark on the H2, which it plans to begin selling in 2002. The Company will
assemble the H2 for GM under a multi-year contract.
From February, 1999 to March 19, 2000, the Company's HUMMER/HUMVEE production
rate was 18 units per day, including 12.5 units per day for the US Military and
its FMS customers. On March 20, 2000, the Company increased its HUMMER/HUMVEE
production rate to 24 units per day in response to increased US and
international military demand. This production rate included 18 units per day
for the US Military and FMS customers. On September 25, 2000, the Company
changed the daily production mix to 20 Military and international HUMVEEs per
day and 4 commercial HUMMERs per day. This change was made to further
accommodate the increased demand for US Military and international HUMVEEs.
In June 2000, the Company purchased the previously leased HUMMER/HUMVEE
manufacturing facility located in Mishawaka, IN for $5.2 million.
The Company is providing management discussion on net sales, unit sales and
gross margin for the business segments identified below. 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 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 for the following five years. Through December
2000, a total of 16,131 vehicles have been ordered on the X001 Contract. The
X001 contract expired on December 14, 2000. The Company anticipates delivery of
vehicles ordered under this contract will be completed by April 2001. On
November 6, 2000, the Company entered into a new follow-on A2 production
contract known as the S001 contract. This is a sole source firm-fixed price
contract calling for base year production of 2,861 HUMVEEs, subject to
government funding. The fiscal 2001 budget includes funding for the first year
production plus 448 option vehicles. The contract includes six option years
ending on June 1, 2007 with delivery of vehicles to be complete by December 7,
2007. If all option years on the contract are exercised, approximately 31,000
vehicles valued at $2.4 billion will be delivered under this contract.
Management believes this contract will provide continuing production for the
HUMVEE over the next several years. The F/Y 2001 Defense Bill currently contains
the necessary funding for the expected 2001 production.
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.
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. As
previously indicated, the Company has assessed the Army's acquisition plan as it
currently exists and has determined that such plan does not represent a viable
business opportunity for the Company. As a result,
13
the Company has informed the Army that, unless the plan is changed, it will not
compete for the FMTV contract. If the plan remains unchanged, the Company will
not pursue the FMTV contract and will focus the Company's resources on the core
competencies of the Company's business, including the successful launch of the
H2 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. 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
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 diesel engine for a period of ten (10)
years. The agreement further provides that GM's internal parts distributor,
Service Parts Operation, will purchase all of its spare parts requirements for
that engine from GEP for the term of the agreement.
H2 Segment
On December 21, 1999, the Company concluded a series of agreements with GM
pursuant to which GM will design, engineer, certify and sell the H2 which will
be assembled for GM by the Company. Reference is hereby made to the agreements
with GM 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 H2 for GM in the spring of 2002 at the New Facility in Mishawaka,
Indiana. Construction costs of the New Facility are expected to exceed $200
million and will be funded through the GM Loan. Construction of the New Facility
began in August 2000 and is proceeding on schedule.
14
Results of Operations
Twelve Months Ended October 31, 2000 ("fiscal 2000") Compared with Twelve Months
Ended October 31, 1999 ("fiscal 1999")
Analysis of Net Revenues and Unit Sales Information
- ---------------------------------------------------
(in millions, except unit information)
Fiscal Year Ended
October 31, %
------------------------
2000 1999 Change Change
------------------------ -------------------
Net Sales
- ---------
HUMMER/HUMVEEs $ 359.7 $ 236.3 $ 123.4 52.2%
Medium Trucks - 45.6 (45.6) (100.0)%
SPLO 71.6 51.4 20.2 39.3%
STS/Other 12.1 14.9 (2.8) 18.8%
Engine 4.8 - 4.8 -
---------- ---------- -------------------
Total Net Sales $ 448.2 $ 348.2 $ 100.0 28.7%
HUMMER/HUMVEE Unit Sales 5,351 3,827 1,524 39.8%
Engine Unit Sales 1,756 - 1,756 -
HUMMER/HUMVEE Average Unit Selling Prices $ 67,221 $ 61,745 $ 5,476 8.9%
Engine Average Unit Selling Prices 2,733 - 2,733 -
Consolidated net sales increased $100.0 million, or 28.7% to $448.2 million in
fiscal 2000 compared to fiscal 1999. The increase in net sales was due primarily
to higher HUMMER/HUMVEE, SPLO and Engine sales partially offset by the
completion of the ESP contract in fiscal 1999, and lower STS/Other sales.
HUMMER/HUMVEE segment net sales increased $123.4 million, or 52.2% to $359.7
million in fiscal 2000 compared to fiscal 1999. The increase in net sales is
primarily due to higher demand for US Armed Forces and International HUMVEEs and
Commercial HUMMERs. An 8.9% increase in HUMMER/HUMVEE unit selling prices also
contributed to the increase in net sales. This 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 during fiscal 2000 due to the
completion of the ESP contract in fiscal 1999. Segment net sales for fiscal 1999
included $45.6 million of ESP contract revenue.
SPLO segment net sales increased $20.2 million, or 39.3% to $71.6 million in
fiscal 2000 compared to fiscal 1999. The increase in net sales is primarily
attributable to increased Government military orders in fiscal 2000.
STS/Other segment net sales decreased $2.8 million, or 18.8% to $12.1 million in
fiscal 2000 compared to fiscal 1999. Fiscal 1999 included higher than normal
revenues for translation manuals and Phase I contract revenues in connection
with the FMTV Second Source Program.
Engine segment net sales were $4.8 million in fiscal year 2000 which is the
first year sales are reported for the Franklin, Ohio manufacturing facility.
15
Analysis of Consolidated Gross Profit
- -------------------------------------
(in millions, except unit information)
%
2000 % 1999 % Change Change
---- ----- ---- ----- ------ ------
Gross Profit
- ------------
HUMMER/HUMVEEs $54.7 15.2% $22.7 9.6% $32.0 141.0%
Medium Truck - - 7.8 17.1 (7.8) (100.0)
SPLO 8.7 12.1 6.0 11.6 2.7 45.0
STS/Other 3.5 28.7 1.6 10.7 1.9 118.8
Engines (.7) (13.7) (.7) - - -
H2 (1.6) - - - (1.6) -
----- ------ ----- ---- ----- ------
Total Gross Profit $64.6 14.4% $37.4 10.7% $27.2 72.7%
Consolidated gross profit increased $27.7 million, or 74.1% to $65.1 million in
fiscal 2000 compared to fiscal 1999. The Company's consolidated gross profit
margin for fiscal year 2000 was 14.5% compared to 10.7% in fiscal year 1999. The
increase in gross profit is primarily attributable to increased gross profit in
the HUMMER/HUMVEE, SPLO and STS/Other segments, partially offset by lower gross
profit in the Medium Truck segment due to the completion of the ESP program, and
start-up costs in connection with the H2 segment.
HUMMER/HUMVEE segment gross profit increased $32.5 million, or 143.2% to $55.2
million in fiscal 2000 compared to fiscal 1999. The segment's gross profit
margin was 15.4% in fiscal 2000 compared to 9.6% in fiscal 1999. The increase in
gross margin is primarily attributable to higher sales volumes in connection
with increased military demand, a reduction in HUMMER/HUMVEE variable costs,
higher absorption of fixed manufacturing costs in connection with the increased
production line rate from 18 to 24 vehicles per day, and lower other
post-employment benefit expenses, partially offset by increased warranty expense
during fiscal 2000.
There was no Medium Truck segment gross profit during fiscal 2000 due to the
completion of the ESP contract with the US Army in fiscal 1999. The segment's
gross profit was $7.8 million, or 17.1% of net sales in fiscal 1999.
SPLO segment gross profit increased $2.7 million, or 45.0% to $8.7 million in
fiscal 2000 compared to fiscal 1999. The segment's gross profit margin was 12.1%
in fiscal 2000 compared to 11.6% in fiscal 1999. The increase in gross profit is
attributable to increased sales, efficiencies in connection with increased sales
volumes and a higher concentration of more profitable HUMVEE spare parts.
STS/Other segment gross profit increased $1.9 million, or 118.8% to $3.5 million
in fiscal 2000 compared to fiscal 1999. The segment's gross profit margins for
fiscal year 2000 was 28.7% compared to 10.7% in fiscal 1999. The increase is
primarily due to profit under the Company's FMTV Phase I contract, which was
closed out in the first quarter of fiscal 2000, partially offset by lower sales
for fiscal 2000 compared to 1999.
The engine segment incurred a loss of $(.7) million in fiscal years 2000 and
1999 primarily due to start-up costs in connection with the new Franklin Ohio
manufacturing facility.
The H2 segment incurred a loss of $(1.6) million in fiscal year 2000 primarily
due to start-up costs in connection with the new H2 project.
16
Analysis and Management Discussion on non-segment information
- -------------------------------------------------------------
Depreciation and Amortization
Depreciation and amortization expense was $12.3 million for fiscal 2000, an
increase of $1.4 million or 12.8% over depreciation and amortization expense of
$10.9 million for fiscal 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 1999 in connection with
the implementation of a new Enterprise Resource Planning system ("ERP").
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense was $32.1 million for
fiscal 2000, an increase of $.9 million or 2.9% from SG&A expense of $31.2
million for fiscal 1999. The increase is primarily due to higher corporate
travel and salary expenses in connection the start-up of the engine facility and
the new H2 project, and higher marketing costs in connection with the HUMMER.
Income (Loss) before Interest and Income Taxes
The Company recorded income before interest and income taxes for fiscal year
2000 of $20.7 million, an increase of $22.7 million from a loss before interest
and income taxes of $2.0 million in fiscal year 1999. The increase in income
before interest and income taxes is primarily attributable to the higher gross
profit described above, partially offset by higher selling, general and
administrative expenses and depreciation and amortization expense.
Interest Income and Expense
Interest expense for fiscal 2000 was $13.8 million, an increase of $2.3 million
or 20.0% from interest expense of $11.5 million for fiscal 1999. Average debt
outstanding for fiscal 2000 was $ 96.6 million at a weighted average interest
rate of 11.9%. Average debt outstanding for fiscal 1999 was $82.0 million at a
weighted average interest rate of 12.2%. The increase in average debt
outstanding is primarily due to higher borrowings under the Company's revolving
credit facility reflecting an overall increase in raw material inventory levels
and other financing in connection with the purchase of the HUMMER/HUMVEE
manufacturing facility during the third quarter of fiscal 2000. The increase in
interest expense was due primarily to increased borrowings under the Company's
revolving credit facility, a fee paid to the Holders of the Notes for their
consent to the GM Transaction and interest expense paid to TACOM in connection
with a contract modification partially offset by lower interest expense in
connection with the excess cash flow buy-back of the Company's Notes. See
"Liquidity and Capital Resources." Interest income remained essentially the same
between the two years.
Income Tax (Expense) Benefit
Income tax expense was recorded at the statutory rate adjusted for permanent
differences primarily resulting from the amortization of goodwill. Income tax
expense for fiscal 2000 was $3.8 million, an increase of $6.7 million from an
income tax benefit of $2.9 million for fiscal 1999.
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
organizational costs. See Note 5 to the Consolidated Financial Statements for
additional information.
Net Income (Loss)
Net income for fiscal 2000 was $2.3 million, an increase of $12.5 million from a
net loss of $10.2 million in fiscal 1999. As discussed above, the increase in
net income is primarily due to a higher gross profit partially offset by higher
income tax expense, interest expense, SG&A expense, depreciation and
amortization, and the one-time charge in connection with a change in accounting
principle.
17
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 Truck 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%
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. On May 19, 2000, the Company executed a
contract with the FMS Customer for whom the units were built and completed
delivery of these vehicles during the third quarter of 2000.
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.
18
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 (.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.
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.
19
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 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.
20
Liquidity and Capital Resources
The Company's liquidity requirements result from capital investments, working
capital, 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 $19.2 million for fiscal 2000. The
primary sources of cash flow from operating activities in fiscal 2000 resulted
from net income and non-cash charges to operating income including depreciation,
amortization and non-cash postretirement expenses.
Accounts receivable levels at the end of fiscal 2000 were $9.8 million higher
than levels at the end of fiscal 1999 primarily due to receivables in connection
with large HUMVEE shipments to an international customer at the end of the
fiscal year, other HUMMER/HUMVEE sales at the end of the fiscal year and GEP
receivables, partially offset by a reduction in unbilled receivables for the A2
HUMVEE and reduced receivables from dealers. The 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 2001.
Net inventory levels at the end of fiscal 2000 were $99.8 million or $15.2
million higher than net inventory levels of $84.6 million at end of fiscal 1999.
The increase in inventory is primarily attributed to higher raw materials, SPLO
inventory, GEP inventory and manufacturing work-in-process. Raw material levels
increased $8.9 million primarily due procedural difficulties in connection with
the transition to a new ERP system, expected inventory escalation due to the
increased production line rate in fiscal 2000, and an increase in the quantity
of unique parts required to support a more expensive international model mix.
SPLO inventory increased $4.0 million primarily due to the transition to the new
ERP system. The Company currently has orders for the excess inventory and
anticipates it will ship the parts early in fiscal 2001. GEP inventory increased
$3.0 million in connection with beginning production in fiscal 2000.
Manufacturing work-in-process increased $.7 million due to the increase in the
production line rate. The inventory reserve decreased $2.2 million. These
increases in inventory were partially offset by a $3.6 million reduction in
finished goods inventory consisting primarily of US Military vehicles.
Accounts payable levels at the end of fiscal 2000 were $22.7 million higher than
levels at the end of fiscal 1999. The increase in accounts payable is primarily
attributed to higher working capital requirements at year end.
For fiscal 2000, the Company spent $37.0 million on capital expenditures
primarily for the construction of the New Facility, which was approximately
$16.7 million, the acquisition of the HUMMER/HUMVEE manufacturing facility,
machinery and equipment in connection with the GEP manufacturing facility,
tooling costs in connection with vehicle production, and machinery and
equipment, as compared to $7.8 million for fiscal 1999. The Company anticipates
incurring capital expenditures for fiscal 2001 of approximately $188.3 million;
$169.4 million of which is in connection with the construction of the New
Facility and funded from the proceeds of the GM Loan. Additionally, the Company
anticipates it will spend approximately $18.9 million on vendor tooling,
machinery and equipment, and other capital requirements, including $1.7 million
in capital expenditures in connection with the 6.5 liter diesel engine facility.
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.
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 signed a new loan and security agreement on January 24, 2001. This
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, 2004. As of October 31, 2000, the Company
had borrowings of $28.8 million outstanding under the Company's previous
revolving credit facility. As of January 25, 2001, the Company's loan balance
under the Company's previous revolving credit facility was $ 21.9 million and
unused availability was $9.9 million.
21
Management anticipates that cash flow from operations as well as availability
under its new revolving credit facility, proceeds from the GM Loan, and other
permitted sources will be sufficient to finance the Company's liquidity needs
for fiscal 2001. Management is currently exploring the Company's options with
respect to its long-term financing needs.
The new Revolving Credit Agreement and the Indenture governing the outstanding
Notes, contain numerous financial covenants and prohibitions that impose
limitations on the Company's ability to incur indebtedness. The ability of the
Company to meet its debt service requirements and to comply with such covenants
will be dependent upon future operating performance and financial results of the
Company, which will be subject to financial, economic, political, competitive
and other factors affecting the Company, many of which are beyond its control.
Inflation and Seasonality
In general, the Company's cost of sales and SG&A expenses are affected by
inflation and the effects of inflation may be experienced by the Company in
future periods. Management believes that since 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.
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 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.
22
Item 8. Financial Statements and Supplementary Data
Index To Financial Statements
Page
Independent Auditors' Report 24
Consolidated Balance Sheets as of October 31, 1999 and 1998 25
Consolidated Statements of Operations
For the Years Ended October 31, 1999, 1998, and 1997 26
Consolidated Statement of Stockholder's Deficit and Comprehensive Income (Loss)
For the Years Ended October 31, 1999, 1998, and 1997 27
Consolidated Statement of Cash Flows
For the Years Ended October 31, 1999, 1998, and 1997 28
Notes to Consolidated Financial Statements 29
23
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
24
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
October 31, 2000 and 1999
(Dollar amounts in thousands, except share information)
1999 1998
Assets ----------- -----------
Current assets:
Cash $ 6,444 1,081
Accounts receivable, net 86,904 77,081
Inventories 99,810 84,589
Prepaid expenses and other assets 1,237 984
Deferred income taxes 6,444 6,210
----------- -----------
Total current assets 200,839 169,945
Income taxes receivable 4,752 4,752
Property, plant, and equipment, net 73,993 43,858
Deferred income taxes 27,407 26,388
Goodwill, net 70,725 75,012
Other assets 2,912 5,838
----------- -----------
380,628 325,793
=========== ===========
Liabilities and Stockholder's Deficit
Current liabilities:
Accounts payable $ 60,105 37,425
Accrued expenses 70,600 70,697
Income taxes payable 5,539 466
----------- -----------
Current maturities of long-term debt 610 --
----------- -----------
Total current liabilities 136,854 108,588
Long-term debt 114,806 92,805
Postretirement benefits other than pensions, noncurrent portion 164,641 160,403
Other liabilities, noncurrent portion 5,557 8,064
----------- -----------
Total liabilities 421,858 369,860
----------- -----------
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 1,542 1,000
Accumulated deficit (47,772) (50,067)
----------- -----------
Total stockholder's deficit (41,230) (44,067)
Commitments and contingencies (notes 6 and 14)
----------- -----------
$ 380,628 325,793
=========== ===========
See accompanying notes to consolidated financial statements.
25 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended October 31, 2000, 1999 and 1998
(Dollar amounts in thousands)
2000 1999 1998
------------ ------------ -------------
Net sales $ 448,200 348,187 392,785
------------ ------------ -------------
Cost and expenses:
Cost of sales 383,644 310,774 344,327
Depreciation and amortization 12,290 10,881 13,166
Selling, general, and administrative expenses 32,047 31,203 27,701
Plant closing and restructuring (492) (2,664) 5,231
------------ ------------ -------------
Income (loss) before interest and income taxes 20,711 (2,007) 2,360
Interest income 257 389 327
Interest expense (13,771) (11,508) (13,163)
------------ ------------ -------------
Income (loss) before income taxes and cumulative
effect of accounting change 7,197 (13,126) (10,476)
Income tax expense (benefit) 4,207 (2,877) (2,161)
------------ ------------ -------------
Income (loss) before cumulative effect of
accounting change 2,990 (10,249) (8,315)
Cumulative effect of accounting change, net of
Income tax benefit of $375 (695) -- --
------------ ------------ -------------
Net income (loss) $ 2,295 (10,249) (8,315)
============ ============ =============
See accompanying notes to consolidated financial statements.
26 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholder's Deficit and Comprehensive Income (Loss)
For the years ended October 31, 2000, 1999 and 1998
(Dollar amounts in thousands)
8% Accumulated Total
cumulative Other stock-
preferred Common Paid-in Comprehensive Accumulated holder's
stock stock capital Income deficit deficit
---------- -------- -------- --------------- ------------ ---------
Balance at October 31, 1997 $ 5,000 -- 1,000 -- (31,503) (25,503)
Comprehensive loss:
Net loss -- -- -- -- (8,315) (8,315)
Minimum pension -- -- -- (228) -- (228)
--------
Total comprehensive loss (8,543)
-------- ------- ------ -------------- ----------- --------
Balance at October 31, 1998 5,000 -- 1,000 (228) (39,818) (34,046)
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)
Long-term debt
conversion option -- -- 542 -- -- 542
Net income -- -- -- -- 2,295 2,295
-------- ------- ------ -------------- ----------- --------
Balance at October 31, 2000 $ 5,000 -- 1,542 -- (47,772) (41,230)
======== ======= ====== ============== =========== ========
See accompanying notes to consolidated financial statements.
(Continued)
27
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
For the years ended October 31, 2000, 1999, and 1998
(Dollar amounts in thousands)
2000 1999 1998
--------- ---------- ---------
Net cash provided by (used in) operating activities (note 20) $ 19,275 (4,369) 7,113
--------- ---------- ---------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 66 8 15
Capital expenditures (37,024) (7,760) (4,535)
--------- ---------- ---------
Net cash used in investing activities (36,958) (7,752) (4,520)
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreement 3,863 17,093 (1,096)
Borrowing of long-term debt 19,490 -- --
Repayments of long-term debt (307) (6,578) --
--------- ---------- ---------
Net cash provided by (used) in financing activities 23,046 10,515 (1,096)
Net change in cash 5,363 (1,606) 1,497
Cash and cash equivalents at beginning of year 1,081 2,687 1,190
--------- ---------- ---------
Cash and cash equivalents at end of year $ 6,444 1,081 2,687
========= ========== =========
Supplemental disclosure of cash items:
Interest paid $ 12,988 10,856 12,145
Taxes paid 12 97 495
========= ========== =========
See accompanying notes to consolidated financial statements.
(Continued)
28
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(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 with deliveries through April 2001. In November 2000, the
Company was awarded a sole source, firm-fixed price contract with a
base year plus six option years ending June 2007 (with funds
appropriated through September 2001). 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 domestic dealers and
international distributors. The Company also refurbished two and
one-half ton trucks, under the Extended Service Program (ESP), for
the DoD through April 1999.
In June 1999, the Company acquired General Motors Corporation's (GM)
6.5 liter diesel engine business. Production of these engines began
in July 2000 (with sales starting in August 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, 2000 is as indicated in the following analysis:
2000 1999 1998
-------- -------- --------
Hummer(R)/Humvee(R) vehicles 80% 68% 62%
ESP -- 13% 21%
Service parts and other 19% 19% 17%
Engines 1% -- --
All of the Company's common and preferred stock is owned by The Renco
Group, Inc. (the Parent).
(b) GM Transaction
On December 21, 1999, the Company completed a series of agreements
with GM through which the Company intends to more fully utilize the
widespread recognition of the Hummer(R) name to generate incremental
revenues, profits 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
(H2). GM has retained the Company to assemble the H2 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 H2 anticipated to be in 2002.
(Continued)
29
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollar amounts in thousands)
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. Under the terms of the GM Transaction, GM has
assumed responsibility for marketing the Hummer(R) vehicle and has
begun selling the Hummer(R) through its dealer network.
With respect to the assembly facility for the H2, 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 H2. 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 H2. To repay the
loan, the Company will pay to GM a pre-agreed portion of the fees
received for assembling each H2. 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.
Upon completion of assembly of 10,000 H2 units and on an annual basis
thereafter, 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. The exercise price of the
conversion option will be less than the fair value of the Company's
common stock. The value of this beneficial conversion feature has
been recorded as a $542 discount on the loan and a corresponding
increase in additional paid-in capital. The discount is being
amortized, utilizing the effective interest method, through the
earliest date at which GM obtains the right to convert the loan.
(c) 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.
(d) 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.
(e) Inventories
Inventories are stated at the lower of cost, determined using the
first-in, first-out (FIFO) method, or market.
(Continued)
30
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollar amounts in thousands)
(f) 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
(g) 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 $36,435 and $32,148 at
October 31, 2000 and 1999, 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.
(h) 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.
(i) 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 $16,033 and $3,969 at October 31, 2000 and 1999,
respectively.
(j) 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,
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.
(Continued)
31
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollar amounts in thousands)
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, with cost of sales recognized based upon unit cost.
Sales of engines and spare parts are recorded when title passes upon
shipment, with cost of sales recognized based upon unit cost.
(k) Research and Development
Research and development costs are expensed as incurred. Research and
development costs amounted to $5,137, $4,129 and $4,444 for the years
ended October 31, 2000, 1999 and 1998, respectively.
(l) 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.
(Continued)
32
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollar amounts in thousands)
(m) 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.
(n) 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.
(o) 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.
(Continued)
33
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollar amounts in thousands)
(2) Accounts Receivable
Components of accounts receivable are as follows:
October 31
----------------------
2000 1999
---------- ----------
Receivables from the U.S. Government under
long-term contracts:
Amounts billed or billable $ 43,392 32,611
Recoverable costs accrued-not billed 2,411 1,939
Unrecovered costs subject to future negotiation 16,733 27,182
Commercial customers-amounts billed:
Foreign 16,893 5,297
Dealers 2,462 6,299
Service parts 363 303
Other receivables 5,175 3,800
---------- ----------
87,429 77,431
Less allowance for doubtful accounts (525) (350)
---------- ----------
$ 86,904 77,081
========== ==========
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.
(Continued)
34
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollar amounts in thousands)
(3) Inventories
Inventories consist of the following:
October 31
--------------------
2000 1999
--------- ---------
Finished goods $ 27,105 30,010
Service parts 24,807 20,850
Raw materials, supplies, and work in progress 52,158 40,181
--------- ---------
104,070 91,041
Less allowance for inventory obsolescence (4,260) (6,452)
--------- ---------
$ 99,810 84,589
========= =========
(4) Property, Plant, and Equipment
Property, plant, and equipment consist of the following:
October 31
--------------------
2000 1999
--------- ---------
Land $ 2,000 1,114
Buildings 8,145 2,940
Machinery equipment, and fixtures 35,285 30,572
Leasehold improvements 9,420 9,242
Vehicles 6,091 2,954
Construction in progress 21,356 859
Dealer signage 457 411
Tooling 60,997 59,169
--------- ---------
143,751 107,261
Less accumulated depreciation and amortization (69,758) (63,403)
--------- ---------
$ 73,993 43,858
========= =========
Included in construction in progress is $12,699 related to the
construction of the H2 facility (see note 1(b)). Tooling, net of related
amortization, of $9,342 and $9,868 at October 31, 2000 and 1999,
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 8
years.
(Continued)
35
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollar amounts in thousands)
(5) Other Assets
Other assets consist of the following:
October 31
----------------------
2000 1999
---------- ----------
Noncompete covenant, net $ 1,544 2,573
Deferred loan costs, net 1,096 1,827
Preproduction cost, net -- 1,070
Other 271 368
---------- ----------
$ 2,911 5,838
========== ==========
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 $8,748 and $7,719 at October
31, 2000 and 1999, respectively. Deferred loan costs were incurred in
connection with the senior notes due 2002 and are being amortized over
seven years. Accumulated amortization was $4,745 and $4,014 at October
31, 2000 and 1999, 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 were being amortized over
the 20,000 estimated units to be sold to the general public.
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 $695, net of
related income taxes of $375.
(Continued)
36
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollar amounts in thousands)
(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, 2000, 1999 and 1998 aggregated approximately $4,584, $5,365,
and $5,388, respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of October 31,
2000 are:
Year ending October 31 Amount
------------------------ --------
2001 $ 3,700
2002 3,453
2003 3,480
2004 2,729
2005 2,583
Thereafter 5,923
--------
$ 21,868
========
(7) Accrued Expenses
Components of accrued expenses are as follows:
October 31
------------------
2000 1999
-------- -------
Contract modifications payable $ 15,243 27,733
Current portion of other post employment benefits 6,800 6,700
Interest on senior notes 4,377 4,377
Warranty 6,532 4,918
Pension liability 3,509 5,706
Plant closing and restructuring reserve -- 699
Wages, bonuses, vacations and payroll taxes 8,838 5,643
Taxes other than on income 4,960 3,608
Sales incentives 5,266 2,163
Insurance 2,919 2,968
Customer deposits 5,899 308
Other 6,257 5,874
-------- -------
$ 70,600 70,697
======== =======
(Continued)
37
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollar amounts in thousands)
(8) Long-term Debt
Long-term debt consists of:
October 31
------------------------
2000 1999
---------- ----------
Revolving line-of-credit, interest at prime plus 3/4%,
10.25% and 9.0% at October 31, 2000 and 1999,
respectively $ 28,810 24,947
12-7/8% senior notes due 2002, originally discounted
$402 to yield 13%, interest payable semi-annually
on May 1 and November 1 67,910 67,858
Non-interest bearing loan from General Motors
Corporation, net of discount of $486 (see note 1(b)) 11,460 --
Real estate mortgage, payable monthly at $64 plus
interest at 9.25% until June 5, 2005 when all unpaid
interest and principal will be due 4,869 --
Term loan for aircraft, payable monthly at $41 plus
interest at 9.25% until February 29, 2005 when
all unpaid interest and principal will be due 2,367 --
---------- --------
115,416 92,805
Less current maturities of long-term debt 610 --
---------- --------
$ 114,806 92,805
========== ========
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, 2000 and 1999 was approximately $10,700 and $12,200,
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. Subsequent to October 31, 2000, the Company signed an
amendment to its revolving credit agreement to extend the term to October
30, 2004. Accordingly, the amounts outstanding under the revolving line
of credit at October 31, 2000, have been classified as long-term debt.
(Continued)
38
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollars amounts in thousands)
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 2000 and 1998, 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, 2000, the Company was in violation of several of
its covenants; however, these violations were waived by the lender for
the period ended October 31, 2000.
Under the most restrictive covenant in any agreement, no amount was
available for payment of dividends at October 31, 2000 and 1999.
The Company's outstanding letters of credit totaled $5,812 and $4,994 at
October 31, 2000 and 1999, respectively. Of this amount, $2,141 and
$2,141 at October 31, 2000 and 1999, 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.
Following is a summary of scheduled future maturities of the long-term
debt at October 31, 2000:
2001 $ 610
2002 68,580
2003 12,197
2004 29,616
2005 4,413
---------
$ 115,416
=========
(9) Other Liabilities
October 31
------------------
2000 1999
-------- -------
Pension liability $ -- 2,253
Other 5,557 5,811
-------- -------
$ 5,557 8,064
======== =======
(Continued)
39
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollars amounts in thousands)
(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, 2000 and 1999 were $2,200 and $1,800, 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
----------------------------------
2000 1999 1998
--------- ------- ---------
Income from continuing operations $ 4,207 (2,877) (2,161)
Cumulative effect of accounting change (375) -- --
Stockholder's deficit, for minimum -- 140 (140)
pension liability
--------- ------- --------
$ 3,832 (2,737) (2,301)
========= ======= ========
Income tax expense (benefit) consists of:
October 31
----------------------------------
2000 1999 1998
--------- ------- ---------
Current:
Federal $ 4,208 (3,168) (206)
State 877 169 212
Deferred:
Federal (1,107) 15 (1,904)
State (146) 107 (263)
--------- ------- --------
$ 3,832 (2,877) (2,161)
========= ======= ========
(Continued)
40
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollars amounts in thousands)
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
--------------------------------
2000 1999 1998
-------- -------- --------
Computed "expected" tax expense (benefit) $ 2,519 (4,594) (3,666)
Cumulative effect of accounting change (375) -- --
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 475 179 (34)
Foreign sales corporation effect (340) -- --
Other, net 53 38 39
--------- -------- --------
$ 3,832 (2,877) (2,161)
========= ======== ========
(Continued)
41
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollar 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, 2000 and 1999 are presented below:
October 31
---------------------
2000 1999
---------- ---------
Deferred tax assets:
Allowance for doubtful accounts receivable $ 199 133
Inventory obsolescence reserve 1,578 2,447
Compensated absences, principally due to
accrual for financial reporting purposes 1,205 991
Accrued warranty 3,321 2,709
Pension liability 793 2,435
Postretirement benefits other than pensions 65,019 63,374
Other accruals 5,186 4,054
Other 133 209
-------- --------
Total gross deferred tax assets 77,434 76,352
Less valuation allowance 38,348 38,348
-------- --------
Net deferred tax assets 39,086 38,004
-------- --------
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation 4,938 5,274
Reduced costs inventoried for tax purposes
pursuant to the Tax Reform Act of 1986 297 132
-------- --------
Total gross deferred liabilities 5,235 5,406
-------- --------
Net deferred asset 33,851 32,598
Less current portion 6,444 6,210
-------- --------
Noncurrent portion $ 27,407 26,388
======== ========
(Continued)
42
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollar amounts in thousands)
There was no change in the valuation allowance for the years ended
October 31, 2000, 1999 and 1998. 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, 2000. The amount of the deferred tax
asset considered realizable, however, could be reduced if estimates of
future taxable income are reduced.
At October 31, 2000 and 1999, the Company has a long-term receivable of
$4,752 due from the Parent for Federal income tax overpayments.
(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, 2000 and 1999:
2000 1999
------------ ----------
Change in benefit obligation
Benefit obligation at beginning of year $ 127,894 132,758
Service cost 2,949 2,945
Interest cost 10,534 9,149
Actuarial (gain) loss (2,586) (9,280)
Amendments 13,352 --
Benefits paid (8,943) (7,678)
----------- ----------
Benefit obligations at end of year 143,200 127,894
=========== ==========
(Continued)
43
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollar amounts in thousands)
2000 1999
------------ -----------
Change in plan assets
Fair value of plan assets at beginning of year $ 159,356 140,475
Actual return on plan assets 3,589 22,247
Employer contribution 6,063 4,312
Benefits paid (8,943) (7,678)
----------- ----------
Fair value of plan assets at end of year 160,065 159,356
----------- ----------
Funded status 16,865 31,462
Unrecognized prior service cost 17,322 6,104
Unrecognized net actuarial loss (37,591) (45,525)
----------- ----------
Net amount recognized $ (3,404) (7,959)
=========== ==========
Amounts recognized in the statement of financial
position consist of:
Intangible asset $ 105 --
Accrued benefit liability (3,509) (7,959)
----------- ----------
Net amount recognized $ (3,404) (7,959)
=========== ==========
Weighted-average assumptions as of October 31
Discount rate 8.00% 7.75%
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 $ 2,949 2,945
Interest cost 10,534 9,149
Expected return on plan assets (12,308) (10,532)
Recognized actuarial gain (1,801) (88)
Amortization of prior service cost 2,134 1,007
Curtailment gain -- (386)
----------- ----------
Net periodic benefit cost $ 1,508 2,095
=========== ==========
At October 31, 2000, the benefit obligations of plans with no plan assets
were $1,238. At October 31, 1999, the fair value of plan assets for all
of the Company's defined benefit plans exceeded the respective benefit
obligations.
(Continued)
44
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(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
$312, $310 and $325 for the years ended October 31, 2000, 1999 and 1998,
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, 2000 and 1999:
2000 1999
---------- ----------
Change in benefit obligation
Benefit obligation at beginning of year $ 143,116 151,160
Service cost 1,896 2,305
Interest cost 10,451 10,357
Actuarial (gain) loss (9,220) (14,736)
Benefits paid (6,793) (5,970)
--------- --------
Benefit obligations at end of year 139,450 143,116
Unrecognized prior service cost (516) (565)
Unrecognized net gain 32,507 24,552
--------- --------
Accrued benefit cost $ 171,441 167,103
========= ========
Components of net periodic benefit cost
Service cost $ 1,896 2,305
Interest cost 10,451 10,357
Prior service cost recognized 49 49
Amortization of unrecognized net gain (1,266) --
--------- --------
Net periodic benefit cost $ 11,130 12,711
========= ========
(Continued)
45
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollar amounts in thousands)
For measurement purposes, a 6.5% and 7.0% annual rate of increase in the
per capita cost of covered benefits was assumed for fiscal 2000 and 1999,
respectively; the rate was assumed to decrease gradually to 5.0% by the
year 2003 and remain at that level thereafter.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 8.0% and 7.75% at October 31, 2000
and 1999.
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, 2000 by
$18,474 and the aggregate of the service and interest cost components of
net periodic postretirement benefit cost would increase for the year
ended October 31, 2000 by $1,905. Decreasing the assumed health care cost
trend rates by one percentage point in each year would decrease the
accumulated postretirement benefit obligation by $15,144 and the
aggregate of the service and interest cost components of net periodic
postretirement benefit cost would decrease for the year ended October 31,
2000 by $1,537.
(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 U.S. 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
this 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)
46
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(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, 2000 and 1999, the mandatory repurchase agreements covered
Hummers(R) with a total value at dealer cost of $21,707 and $6,797,
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, 2000, 1999 and 1998, the Company
incurred annual management fees to the Parent of $1,200; $100 of which is
included in accrued expenses at October 31, 2000 and October 31, 1999.
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 59%, 70%
and 75% of the Company's sales for the years ended October 31, 2000, 1999
and 1998, respectively. At October 31, 2000, 1999 and 1998, accounts
receivable with the DoD were $62,536, $61,732 and $62,811, respectively.
Export sales to unaffiliated foreign customers, including sales to
friendly foreign nations, were $125,619, $31,014 and $42,509 for the
years ended October 31, 2000, 1999 and 1998, respectively. Included in
these amounts are export sales to Israel in the amount of $72,300 for the
year ended October 31, 2000.
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)
47
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(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
1(b)). The new agreement was ratified in August 1999 and will expire in
September 2009. The hourly employees for the new engine production
facility are represented by the International Union of Electrical Workers
("IUE"). This agreement was effective in June 2000 and will expire in
June 2006.
(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, was the
remaining plant closing reserve of $836. The Company recognized a gain of
approximately $492 and $2,664 in 2000 and 1999, respectively, due to
reversal of accrued severance benefits and other plant closing costs due
to lower than anticipated layoffs and other savings.
(18) Disclosures About the Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, income taxes receivable,
accounts payable and accrued expenses approximates fair value because of
the short maturity of these financial instruments.
The revolving line-of-credit approximates fair value because the interest
rate fluctuates with prime. The Company's senior notes are not actively
traded. However, management believes the fair value of the senior notes
at October 31, 2000 and 1999, approximates the par value. The Company's
term loan and mortgage approximate fair value as the fixed interest rates
approximate fair market rates at October 31, 2000.
(19) Segment Reporting
The Company identifies segments based on management responsibility within
the organization. The Company classifies its operations into six business
segments: (i) HUMMER/HUMVEEs, (ii) Medium Trucks, (iii) Spare Parts
Logistics Operations (SPLO), (iv) Systems Technical Support (STS)/Other,
(v) Engines, and (vi) H2. The HUMMER/HUMVEE classification includes US
and Foreign Military Humvees(R) and commercial Hummers(R).
(Continued)
48
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2000 and 1999
(Dollar amounts in thousands)
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):
2000
--------------------------------------------------------------------------------------------------
HUMMER/ Medium STS/
HUMVEE Trucks SPLO Other Engines H2 Total
--------------- ------------ ---------- ---------- ----------- ---------- ----------------
Net sales $ 359.7 -- 71.6 12.1 4.8 -- 448.2
Gross profit 54.7 -- 8.7 3.5 (0.7) (1.6) 64.6
1999
--------------------------------------------------------------------------------------------------
HUMMER/ Medium STS/
HUMVEE Trucks SPLO Other Engines H2 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 H2 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
(Continued)
49
(20) Reconciliation of Net Loss to Net Cash Provided by (Used in) Operating
Activities
The reconciliation of net loss to net cash provided by (used in)
operating activities for the years ended October 31, 2000, 1999 and 1998
follows:
October 31
-----------------------------------------
2000 1999 1998
--------- ---------- ----------
Cash flows from operating activities:
Net loss $ 2,295 (8,315) (10,249)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Plant closing and restructuring (492) (2,664) 5,231
Less plant closing and restructuring
payments (344) (1,895) (2,412)
Depreciation and amortization of
plant and equipment 6,959 5,551 7,835
Other amortization 6,062 6,252 6,292
Increase in allowance for
doubtful accounts 175 -- --
Increase (decrease) in inventory reserve (2,192) (817) 2,862
Deferred income taxes (1,253) 261 (2,307)
Discount accretion of debt 108 56 57
Noncash other postretirement cost 4,338 6,741 4,660
Loss (gain) on sale of equipment (19) 23 (11)
Change in assets and liabilities:
Accounts receivable (9,998) (2,869) (21,551)
Inventories (13,146) (12,154) 12,756
Prepaid expenses (253) 185 489
Other assets 5,359 1,752 208
Accounts payable 22,680 4,931 (1,290)
Accrued expenses (5,078) 7,081 4,175
Income taxes 5,073 (3,095) (489)
Other liabilities (999) (3,459) (1,077)
--------- ---------- ----------
Net cash provided by (used in)
operating activities $ 19,275 (4,369) 7,113
========= ========== ==========
50
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
51
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, 2001:
Name Age Position
- -------------------------------------------------------------------------------------------------
Ira Leon Rennert 66 Chairman and sole Director of the Company
James A. Armour 57 President and Chief Executive Officer
Edmond L. Peters 56 Senior Vice President, Procurement and Business Development
Adare Fritz 54 Senior Vice President, Operations
Robert J. Gula 54 Senior Vice President, Engineering and Product Development
Paul J. Cafiero 47 Vice President and Chief Financial Officer
Francis R. Scharpf 62 Vice President, Medium Truck Programs and Business Development
Ricky R. Smith 42 Vice President, Manufacturing Engineering and Special Projects
Walter R. Botich 51 Vice President, Quality Assurance
Gary L. Wuslich 55 Vice President, Human Resources
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 ("CEO")
and principal shareholder of Renco (including predecessors) since its first
acquisition in 1975. Renco holds controlling interests in a number of
manufacturing and mining concerns operating in businesses not competing with the
Company including WCI Steel, Inc., Doe Run, Inc., and Renco Metals, Inc. Mr.
Rennert also serves as a Director of Lodestar Holdings, Inc. in which he
indirectly holds a controlling interest.
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 28 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 16 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 32 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 29 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 16 years.
52
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 18 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 20
years.
Walter R. Botich has been Vice President, Corporate Quality since November 1,
1999. Mr. Botich previously held the position of Director, Quality Assurance
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
18 years. Prior to joining AM General, Mr. Botich held managerial and technical
positions with other automotive supplier companies.
Gary L. Wuslich was appointed Vice President, Human Resources on November 1,
2000. Mr. Wuslich previously held the position of Director, Human Resources. Mr.
Wuslich has been with the Company and its predecessor for the past 31 years.
Prior to joining AM General, Mr. Wuslich held executive and managerial positions
with LTV Steel Company.
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, 2000, 1999, and 1998 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 Salary Bonus Compensation Compensation
Year (3)
- ---------------------------------- ----------------------------------------------------------------
Ira Leon Rennert (1) 2000 - - - $1,200,000
Chairman and Sole Director 1999 - - - $1,200,000
1998 - - - $1,200,000
James A. Armour 2000 $413,464 250,000 74,702 -
President & Chief Executive 1999 $250,000 250,000 46,078 -
Officer 1998 $250,000 250,000 70,657 -
Edmond L. Peters 2000 196,154 100,000 35,631 -
Sr. Vice President, 1999 175,000 100,000 30,235 -
Procurement 1998 175,000 60,000 (2) -
Paul J. Cafiero 2000 165,892 75,000 51,440 -
Vice President and Chief 1999 125,000 100,000 26,014 -
Financial Officer 1998 125,000 40,000 (2) -
Robert J. Gula 2000 176,154 75,000 29,302 -
53
Sr. Vice President, Engineering 1999 155,000 40,000 28,134 -
& Product Development 1998 155,000 60,000 24,902 -
Adare Fritz 2000 135,000 40,000 23,208 -
Senior Vice President, 1999 135,000 60,000 22,030 -
Operations 1998 135,000 40,000 19,903 -
(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 2000, 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, 2000. The sole member of the board of directors was Mr. Rennert. The
compensation for the Named Executive Officers for fiscal 2000 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 2000, 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, 2001 and from year to year thereafter unless
terminated by either party with 30 days' prior written notice. The compensation
arrangements as of November 1, 2000 are as follows:
Mr. Armour-Minimum annual salary of $500,000 plus an annual bonus of $250,000
for each fiscal year in which the Company shall not have incurred a net loss, as
determined by this plan, 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 $225,000 plus an annual bonus of $100,000
subject to the same conditions as applicable to Mr. Armour.
Mr. Gula-Minimum annual salary of $205,000 plus an annual bonus of $40,000
subject to the same conditions as applicable to Mr. Armour.
Mr. Cafiero-Minimum annual salary of $190,000 plus an annual bonus of $50,000
subject to the same conditions as applicable to Mr. Armour.
54
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.
Mr. Botich-Minimum annual salary of $135,000 plus an annual bonus of $40,000
subject to the same conditions as applicable to Mr. Armour.
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 losses in
fiscal 1997, 1998 and 1999, no amounts have been accrued, and accordingly no
amounts are payable to contract holders at October 31, 2000.
Retirement Plans
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.
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 in 2000) 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.
AMG Retirement Plan ERISA Qualified
------------------------------------------
Retirement @ age
65
Named Age Service Annual Earliest Benefit at Service Annual
Executive Years* Income** Retirement Early Years Benefit
Age Retirement
- ---------------------------------------------------------------------------------------------------------
J.A. Armour 57 28.2 $738,100 57 60,545 36.2 $122,239
E.L. Peters 57 15.2 313,100 60 54,017 23.2 85,462
R.J. Gula 54 29.5 268,100 54 49,137 40.5 141,331
P.J. Cafiero 47 16.5 253,100 58 69,879 34.5 138,205
A. Fritz 54 28.6 163,100 54 47,574 39.6 137,368
* - As of January 1, 2001
** - Assumes 5% annual growth based on actuarial assumptions
55
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 ERISA Excess Plan -
Unfunded
------------------------------
Retirement @ Age
65
---------------------
Named Age Service Annual Service Annual
Executive Years* Income** Years Benefit
- -------------------------------------------------------------
J.A. Armour 57 28.2 $738,100 36.2 $337,247
E.L. Peters 57 15.2 313,100 23.2 60,404
R.J. Gula 54 29.5 268,100 40.5 50,322
P.J. Cafiero 47 16.5 253,100 34.5 67,632
A. Fritz 54 28.6 163,100 39.6 7,427
* - As of January 1, 2001
** - 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.
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 the Management
Consultant 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
Consultant 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 Consultant Agreement and expenses related to
the Company's Net Worth Appreciation Agreements, over (ii) the aggregate annual
management fee of $1.2 million.
56
The Management Consultant 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 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, 2000.
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 2000, the Company incurred
costs of approximately $.9 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
Starting with the fiscal year ended October 31, 1999 and thereafter, the Company
files it's own consolidated Federal and state income tax returns. Through the
fiscal year ended October 31, 1998, the Company was included in the consolidated
Federal tax returns of Renco and the Ohio state income tax returns of those
Renco companies that do business in Ohio. Under the terms of the tax sharing
agreement with Renco, when AM General is part of a consolidated or combined
return with Renco, income taxes are allocated to the Company on a separate
return basis, except that transactions between the Company 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 the Company's
accounting for tax and financial reporting purposes. As of October 31, 2000, the
Company had no net operating tax loss carryforwards. As of October 31, 2000, the
Company 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.
57
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 24
Consolidated Balance Sheets as of October 31, 1999 and 1998 25
Consolidated Statements of Operations for the years ended
October 31, 1999, 1998 and 1997 26
Consolidated Statements of Stockholder's Equity for the years ended
October 31, 1999, 1998 and 1997 27
Consolidated Statements of Cash Flows for the years ended
October 31, 1999, 1998 and 1997 28
Notes to Consolidated Financial Statements 29 through 49
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission have been omitted from this
Annual Report because they are not required, are not applicable, or the required
information is included in the consolidated financial statements or the notes
thereto.
58
(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.
*******10.1.6 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.
*********10.2.1 Supplement No. 3, dated February 24, 2000, to Employment
Agreement of James A. Armour.
*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
59
Exhibit No. Description
-------------- -------------------------------------------------------------
**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
**********10.3.3 Supplement No. 4, dated May 15, 2000, to Employment
Agreement of Robert J. Gula
**********10.3.4 Supplement No. 4, dated May 15, 2000, to Employment
Agreement of Edmond L. Peters
**********10.3.5 Supplement No. 4, dated May 15, 2000, to Employment
Agreement of Paul J. Cafiero
*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.
60
Exhibit No. Description
-------------- -------------------------------------------------------------
***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.
*******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.
********10.34 Lease dated October 6, 1999 between Dayton Sunrise Partners
and AM General Corporation
61
Exhibit No. Description
------------ -------------------------------------------------------------------------------------------
**********10.35 Contract dated August 18, 2000 between the Company and Lamb
Technicon Body & Assembly Systems (technical schedules
omitted)
**********10.36 Term Promissory Note dated June 5, 2000 between 1/st/
Source Bank and AM General Corporation
***********10.37 Loan and Security Agreement dated as of January 24, 2001
between Congress Financial Corporation and AM General
Corporation.
21 Subsidiaries of Registrant.
*Filed with the Registration Statement No. 33-93302 filed June 9, 1995.
**Filed with Amendment No. 1 to Registration Statement No. 33-93302 filed August 9, 1995
*** Filed with Company's Form 10-K, No. 33-93302, filed January 28, 1996.
**** Filed with Company's Form 10-Q, No. 33-93302, filed September 16, 1996.
***** Filed with Company's Form 10-K, No. 33-93302, filed January 29, 1997.
******Filed with Company's Form 10-K No. 33-93302, filed January 29, 1999.
*******Filed with Company's Form 10-K No. 33-93302 filed January 31, 2000.
********Filed with Company's Form 10-Q, No. 33-93302 filed March 16, 2000.
*********Filed with Company's Form 10-Q, No. 33-93302 filed June 14, 2000.
**********Filed with Company's Form 10-Q, No. 33-93302 filed September 14, 2000.
***********Filed with Company's Form 10-K No. 33-93302 filed January 29, 2001
(b) No reports on Form 8-K were filed by the registrant during the last quarter
of the period covered by this report.
62
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 29, 2001.
AM GENERAL CORPORATION
By: /s/ James A. Armour
-------------------------
James A. Armour
President and Chief Executive Officer
Pursuant to the requirements of Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities indicated on January 29, 2001.
Signature Title
--------- -----
/s/ Ira Leon Rennert Chairman and sole Director
- -------------------------------------
Ira Leon Rennert
/s/ James A. Armour President and Chief Executive Office
- -------------------------------------
James A. Armour (Principal Executive Officer)
/s/ Paul J. Cafiero Vice President and Chief Financial Officer
- -------------------------------------
Paul J. Cafiero (Principal Financial and Accounting
Officer)
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
No annual report to security holders covering the registrant's last
fiscal year and no proxy statement, form of proxy or other proxy soliciting
material with respect to any annual or other meeting of security holders has
been nor will be sent to security holders.
63