- --------------------------------------------------------------------------------
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, 2001
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 (574)237-6222
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 No X
---
Note: The registrant files pursuant to an indenture, but is not otherwise
subject to Section 13 or 15(d) filing requirements.
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, 2002.
Documents Incorporated by reference: None.
- --------------------------------------------------------------------------------
1
TABLE OF CONTENTS
PART I 3
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II 13
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. 13
Item 6. Selected Financial Data. 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations. 14
Item 7a. Quantitative and Qualitative Disclosures about Market Risk. 23
Item 8. Financial Statements and Supplementary Data. 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 51
PART III 52
Item 10. Directors and Executive Officers of the Registrant. 52
Item 11. Executive Compensation. 54
Item 12. Security Ownership of Certain Beneficial Owners and Management. 57
Item 13. Certain Relationships and Related Transactions. 57
PART IV 59
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. 59
SIGNATURES 64
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", "H1" or
"Current Vehicle"). From the introduction of the HUMMER/HUMVEE in 1984 and
through October 31, 2001, the Company has delivered 134,580 HUMVEEs in a variety
of configurations to the DoD for use by the US Armed Forces, 25,294 HUMVEEs to
the military services of 50 foreign countries, and 9,480 HUMMERs. In fiscal
2001, the Company sold 5,670 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 (the "Trademark") is owned by GM and licensed to the
Company to brand the H1 for the duration of the Company's agreement with GM to
assemble a new HUMMER model (the "H2" or the "New Vehicle"), 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) GEP Engine, 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 segment.
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, 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 common 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:
(574) 237-6222.
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.
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. Delivery of vehicles ordered under this contract was completed in April
2001. The Company successfully negotiated a new follow-on A2 production
contract, known as the S001 contract, which was awarded on November 6, 2000.
This is a sole source firm-fixed price contract calling for first year
production of 2,861 HUMVEEs, subject to government funding. The contract
includes six option years ending on June 1, 2007 with delivery of vehicles to be
complete by December 7, 2007. Each option year provides the Government a
mechanism to procure up to 150% of first year production. If all option years on
the contract are exercised, approximately 30,000 vehicles
3
valued at $2.1 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.
As of October 31, 2001, the Company had a total US military backlog of 572
HUMVEEs valued at $36.5 million compared to 394 HUMVEEs valued at $34.4 million
at October 31, 2000.
As of January 18, 2001, the Company has outstanding orders from the US Armed
Forces for the procurement of 2,587 vehicles. These vehicles are on contract and
scheduled for production through August 2002. The Company anticipates it will
complete delivery of these vehicles during the fourth quarter of fiscal 2002.
The Company anticipates the US Government will continue to exercise their option
to procure vehicles under the S001 contract and that the number of vehicles put
on contract during fiscal 2002 will exceed the number of HUMVEEs that were
produced and delivered to the DoD in fiscal 2001 (3,607 units).
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 intends to 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,
Israel, Saudi Arabia, Mexico, and the United Arab Emirates have been the five
largest of the Company's 50 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,
2001, the Company had an FMS backlog of 128 units valued at $13.6 million
compared to 183 units valued at $13.9 million at October 31, 2000. As of October
31, 2001, the Company had a direct sales backlog of 509 units valued at $51.7
million compared to 213 units valued at $25.4 million at October 31, 2000. In
fiscal 2001, international military HUMVEE sales accounted for approximately
22.2% of total HUMMER/HUMVEE unit sales and 24.4% 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.
HUMVEE Engineering
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, 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 should 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 engineering contract with the DoD
valued at $11.5 million. This contract (the "A4 Modernization") provides the
Government with a mechanism to explore its future HUMVEE design requirements.
The Government may integrate engineering changes developed under this contract
and selected technology advancements into the current A2 Series HUMVEE. Based on
these engineering changes, the Company built and delivered seven prototype
vehicles for Company
4
testing during July and August 2001. In accordance with the provisions of the
contract, the Company will build and deliver 10 pilot vehicles for government
testing by the fourth quarter of 2002. The Company will provide technical
support during all phases of government testing. In addition, the Company's STS
operation will prepare the engineering drawings related to the design of the
vehicles. Work under this contract began at the time of award and is expected to
be completed by October 2002.
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, personal, 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 9,480 HUMMERs through its network of approximately 64 domestic and
international dealerships and distributors. Over the past several years, demand
for HUMMERs has declined steadily in the international markets. As a result, the
Company began closing its international distributorships during fiscal 2001. As
of October 31, 2001, the Company had only two outstanding contracts with
international distributors, both of which expired on December 31, 2001.
As of October 31, 2001, AM General had a total backlog of 172 HUMMERs valued at
$11.1 million compared to 27 valued at $1.8 million on October 31, 2000. In
fiscal 2001, HUMMER sales accounted for approximately 14.2% of total
HUMMER/HUMVEE unit sales and 16.3% of HUMMER/HUMVEE net sales revenue.
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 and personal use 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 two HUMMER models, an open-top sport model
and a four-door wagon with suggested base retail prices ranging from $102,000 to
$113,000. The Company provides customer service, spare parts and warranties to
its commercial and personal use customers through its dealer network.
Under the terms of the GM Transaction, all qualified dealers must transition to
GM dealerships by March 1, 2002. The Company is working closely with GM to
determine which dealers qualify. This transition process has resulted in certain
dealers voluntarily terminating their dealerships and transferring their
existing inventory to new dealerships signing with GM. The Company anticipates
that GM will sign on an additional 75 new dealerships by the third quarter of
fiscal 2002, increasing the network total to 155 dealerships. For fiscal 2002,
the Company anticipates sales volumes will approximate the number of vehicles
sold during fiscal 2001.
The commercial market consists of individuals, government agencies and
industrial users located in the US which require or desire the HUMMER's enhanced
off-highway mobility, durability and payload capacity. Targeted customers
include private individuals, 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 and US Border Patrol, in addition to state and local fire,
police and park service departments.
Since February 1995, the Company has issued nine recalls (none in fiscal 2001)
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
$701,691 of which $633,603 has been incurred as of October 31, 2001. 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 2001, the HUMMER/HUMVEE segment accounted for approximately 74.6% of
the Company's 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. 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 remanufactured units beyond those
included in the base contract plus exercised options. Accordingly, on April 19,
1999 the Company ceased production under the ESP contract after remanufacturing
and delivering 5,483 units to the US Army and other customers.
At the present time, the medium tactical wheeled fleet is in poor condition
measured by age and economic performance. As a result, the US Army commenced
modernizing its medium TWV fleet by procuring new 2-1/2-ton and 5-ton trucks. In
an effort to accelerate the procurement of these vehicles, TACOM announced its
intention to stage a full and open competition for the next Family of Medium
Tactical Vehicles ("FMTV") multi-year production contract scheduled to be
awarded in 2003. The Company has assessed the acquisition plan as it currently
exists and has determined that it does not represent a viable business
opportunity, and unless such plan changes, the Company will not compete for this
award.
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 2001, SPLO accounted for approximately 15.8% of the Company's 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, including
HUMMER/HUMVEEs, 2-1/2- and 5-ton trucks and other vehicles not manufactured by
AM General. 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 of service manuals, and
integrated logistics support. In fiscal 2001, the STS/Other segment accounted
for 3.2 % of the Company's net sales.
GEP Engine Segment
On June 11, 1999, the Company acquired a license to build the 6.5 liter diesel
engine and certain assets from GM Powertrain, a division of GM. The agreement
provides that GM's internal parts distributor, Service Parts Operation, will
purchase all of its requirements for new 6.5 liter diesel long-block and
short-block engines from the Company's General Engine Products subsidiary
("GEP") for a period of 10 years. GM's military division, Military Vehicle
Operation, currently purchases certain of its spare parts requirements for these
engines from GEP. 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 have been
received from producers of specialty and delivery van companies. GEP is
currently assembling all of the 6.5 liter diesel engines for the Company.
6
In August 2000, GEP contracted with GM to perform testing and general repair
services on 17,305 engines previously assembled by GM. As of October 31, 2001,
the Company has performed testing of 8,305 engines for GM under this contract
generating revenues of $3.2 million. The Company anticipates it will complete
work under this contract during the third quarter of 2002.
In fiscal 2001, the Engine segment accounted for approximately 6.4% of the
Company's net sales.
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 has designed and engineered, and
will certify and release in the summer of 2002 the H2, a new generation vehicle
bearing the Trademark and retain the Company to assemble H2s over a seven and
one half year period effective with the release of the H2. 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 H2. The
Company will assemble, at GM's request, H2s, 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 H2 in the summer
of 2002. GM has not committed to any specific minimum annual number of H2s.
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 H2s 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 included the Company's assignment of the Trademark to GM. GM,
in turn, granted the Company a limited license that allows the Company to use
the Trademark in connection with the HUMMER for the duration of the H2 Assembly
Agreement but not thereafter. Except for the Assembly Fee on the H2 and its
derivatives, the Company will not receive any other payments from GM in
connection with GM's use of the Trademark on the H2 or other use.
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 (the "GM Loan"). The proceeds of the GM Loan are being used to
finance (i) the engineering and construction of a new structure, (ii) the
purchase of certain machinery and equipment, and (iii) substantially 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 H2 (collectively, the "New Facility"). At October 31, 2001, the
balance of the GM Loan, net of unamortized discount of $4.9 million, was $165.8
million.
To repay the GM Loan, the Company will repay to GM a pre-agreed portion of the
Assembly Fee received for assembling each H2. If H2s 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 H2. 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 H2 until the
GM Loan is fully repaid and the lien is satisfied.
Following delivery of the first 10,000 H2s to GM, GM will have the annual option
on November 1 of each year to convert all or any part of the unpaid balances, if
any, on the GM Loan into an equity
7
interest in the Company of not more than 40% of the voting stock of the Company
pursuant to certain terms and conditions for 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 and present anti-terrorism
operations) 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.
The Army leadership unveiled the Army Vision in October 1999, which defines how
the Army will meet the Nation's requirements today and into the future. This
Vision drives the Army's transformation from legacy forces (current systems)
through interim forces and toward an objective force. The goal of the objective
force is to be more strategically responsive and dominant at every point on the
spectrum of military operations than the legacy force. Through all these phases,
the HMMWV has been included as the backbone of the Army's LTV fleet. The HMMWV
approaches all the required characteristics of an objective force: responsive,
deployable, agile, versatile, lethal, survivable, and sustainable.
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, GEP 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 72% 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
8
orders periodically for certain component requirements throughout the year and
is only obligated to purchase components for which it has placed orders. 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, 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 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. Since export sales are
priced in US dollars, the Company does not expect any material adverse impact
from foreign currency fluctuations.
Payments from HUMMER dealers are generally obtained within five days of
delivery. Units wholesaled to dealers are subject to either a voluntary or
mandatory repurchase agreement. Such an agreement either permits or requires 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. Effective January 24, 2001, AM General and GM signed an addendum to the
mandatory repurchase agreement limiting AM General's outstanding liability to a
maximum of $8.5 million at any given time. At October 31, 2001 the Company was
subject to the maximum contingent liability under the agreement. This agreement
expires on December 31, 2004 at which time the terms of the original repurchase
agreement will continue in full force and effect.
9
Employees
As of October 31, 2001, the Company had 590 salaried employees, which included
79 H2 employees and 26 GEP employees. The Company also had 969 hourly employees,
which included 115 H2 employees and 67 GEP employees. Of the 1,559 employees,
306 provide general administrative services including legal, finance, human
resources, and other corporate functions. During October 2001, the Company
signed a new labor contract for the Mishawaka HUMMER/HUMVEE and SPLO operations
which expires in September of 2006. All of the Company's hourly employees at
these operations are represented by the International Union, United Automobile,
Aerospace and Agricultural Implement Workers of America ("UAW"). The Company has
a separate labor contract for the Company's GEP facility that expires in June of
2006. The hourly employees at the GEP 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. The Company anticipates salaried and hourly employment levels for
the H2 project will reach 168 and 890, respectively, by the end of fiscal 2002.
Production is scheduled to begin in the spring of 2002 at which point salaried
and hourly employment levels would be approximately 145 and 499, respectively.
The Company has a separate labor contract for the employees at 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.
10
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. The
major tooling and materials handling equipment, assembly lines, robotics and
computer controls involved in the manufacture of HUMMER/HUMVEE vehicles are
located at this 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 HUMMER finishing facility,
the New Facility, and a one-mile asphalt-paved test track are located adjacent
to the HUMMER/HUMVEE plant. Construction of the New Facility began in August
2000 and is proceeding on schedule. These facilities, situated on approximately
96 acres in Mishawaka, Indiana, are each owned 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, commencing February 17, 2001, 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.
11
Item 3. Legal Proceedings
DCAA Claim
Since early 2001, the Company has been participating in alternative dispute
resolution ("ADR") activities with the government in a mutual attempt to resolve
an issue involving the applicability of certain Government accounting
regulations and the compliance with those regulations of an accounting
allocation adopted by the Company in 1995. The Government contracting officer
issued a decision on August 23, 2001, asserting that the Company's accounting
allocation is not compliant with the regulations and that the Government has
paid an additional $18 million under several HUMVEE production contracts with
the Army. The decision demands repayment of this amount plus interest of $5.8
million.
The Company has appealed the Government's decision and intends to continue the
ADR procedures. In the event the dispute is not resolved by ADR, the Company
intends to contest the Government's claim vigorously. The Company believes it
will eventually prevail and accordingly has not accrued any liability with
respect to this 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 Beanstalk Group, Inc. v. AM General Corporation
On August 28, 2000, the Beanstalk Group (now a subsidiary of Ford Motor Company)
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 AM
General 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 AM General. In its
lawsuit, Beanstalk claims that AM General breached the Representation Agreement
when AM General assigned the HUMMER trademark to General Motors; that AM General
breached its duty of "good faith and fair dealing;" and that AM General has been
"unjustly enriched." Beanstalk also claims that General Motors has breached the
Agreement and interfered with the contractual relationship between Beanstalk and
AM General. Beanstalk's Complaint sought compensatory damages of more than $30
million dollars. AM General and GM filed their motion to dismiss Beanstalk's
Complaint on September 24, 2000. Beanstalk filed a Motion for Summary Judgment
on its breach of contract claims against AM General. On March 30, 2001, the
trial judge granted AM General and GM's Motion to dismiss, denied Beanstalk's
Summary Judgment Motion, and entered a judgment dismissing all of Beanstalk's
claims. On May 1, 2001, Beanstalk appealed the trial judge's decision to the
U.S. Court of Appeals for the Seventh Circuit. The Seventh Circuit heard oral
argument on January 7, 2002, and will likely issue an opinion on the appeal
within the next few months. AM General anticipates that it will eventually
prevail in this litigation. AM General does not believe that an adverse ruling
from the Seventh Circuit will have a material adverse effect on the Company.
Trademark Dispute with DaimlerChrysler
On February 13, 2001, AM General and General Motors filed a declaratory judgment
action in the U.S. District Court for the Northern District of Indiana in South
Bend against DaimlerChrysler Corporation ("Daimler") after GM and Daimler
exhausted efforts to informally resolve Daimler's claims that the grill design
on the H2 prototype vehicle infringes on Daimler's Jeep trademark grill design.
Daimler filed a counterclaim against AM General and General Motors claiming
infringement and seeking a preliminary injunction preventing General Motors and
AM General from producing the H2 with its current grill design. Daimler also
claims that AM General breached a licensing agreement that required AM General
to obtain Daimler's permission before transferring the HUMMER grill design
trademark to GM. Daimler claims that the licensing agreement was part of the
1983 stock purchase agreement between American Motors Corporation and LTV, in
which LTV acquired the "Old AM General" assets from American Motors. The parties
are now engaged in discovery. The Court has scheduled a hearing on
DaimlerChrysler's Motion for Preliminary Injunction for February 2002. If the
case is not resolved as a result of the hearing it will go to trial in December
2002. A final decision by the District Court on this claim that is adverse to AM
General or General Motors will have a material adverse effect on the Company.
12
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, 2001.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established public trading market for the Company's common stock. As
of January 29, 2002, the Company had one stockholder. The Company paid no
dividends on its common stock in fiscal 2001 and 2000. 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.
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, 2001.
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,
---------------------------------------------------------------
2001 2000 1999 1998 1997
---------------------------------------------------------------
(dollars in millions)
Statement of Operations Data
Net Sales $549.8 448.2 348.2 392.8 468.2
Gross Profit (a) 89.3 64.6 37.4 48.5 43.2
Depreciation and Amortization 15.3 12.3 10.9 13.2 12.7
Selling, General and Administrative Expenses 41.2 32.1 31.2 27.7 26.2
Plant Closing/Restructuring and special termination
costs (benefits) - (0.5) (2.7) 5.2 3.6
Operating Income (Loss) (b) 32.8 20.7 (2.0) 2.4 0.7
Interest Expense, Net 12.0 13.5 11.1 12.8 13.2
Income Tax Expense (Benefit) 11.2 4.2 (2.9) (2.1) (3.0)
Income (Loss) before Accounting Change 9.6 3.0 (10.2) (8.3) (9.5)
Accounting Change, Net of Income Taxes (c) - (0.7) - - -
----------------------------------------------------------
Net Income (Loss) 9.6 2.3 (10.2) (8.3) (9.5)
Balance Sheet Data
Working Capital Surplus (deficiency) (d) (7.1) 64.0 61.4 56.1 55.9
Property Plant and Equipment, net 236.6 73.9 43.9 41.7 44.9
Total Assets 542.0 380.6 325.8 314.8 316.3
Debt:
Revolving Credit Facility 27.9 28.9 24.9 7.9 9.0
12-7/8% Senior Notes 47.5 67.9 67.9 74.3 74.2
GM Loan 165.8 11.5 - - -
Other Debt 6.6 7.1 - - -
Stockholder's Deficit (33.3) (41.2) (44.1) (34.1) (25.5)
(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) Fiscal year 2001 working capital includes the 12-7/8% Senior Notes
(the "Notes") due 2002 classified as a current liability as they mature
May 1, 2002.
13
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.
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 completed delivery of
vehicles ordered under this contract in 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 first year
production of 2,861 HUMVEEs, subject to government funding. 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.
For fiscal 2002, the Company anticipates the US Government will continue to
exercise their option to procure vehicles under the S001 contract and that the
number of vehicles put on contract during fiscal 2002 will exceed the number of
HUMVEEs that were produced and delivered to the DoD in fiscal 2001 (3,607
units).
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, 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.
14
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.
GEP Engine Segment
On June 11, 1999, the Company acquired a license to build the 6.5 liter diesel
engine and certain assets from GM Powertrain, a division of GM. The agreement
provides that GM's internal parts distributor, Service Parts Operation, will
purchase all of its requirements for new 6.5 liter diesel long-block and
short-block engines from the Company's GEP subsidiary for a period of 10 years.
H2 Segment
On December 21, 1999, the Company concluded a series of agreements with GM
pursuant to which GM has designed, engineered, and will 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. Construction of the New
Facility began in August 2000 and is proceeding on schedule. The Company expects
to begin assembling the H2 for GM in the spring of 2002 at the New Facility in
Mishawaka, Indiana.
15
Results of Operations
Year Ended October 31, 2001 ("fiscal 2001") Compared with the Year Ended
October 31, 2000 ("fiscal 2000")
Analysis of Net Revenues and Unit Sales Information
- ---------------------------------------------------
(in millions, except unit information)
Fiscal Year Ended
October 31
----------------- %
2001 2000 Change Change
----------------- ------ --------
Net Sales
- ---------
HUMMER/HUMVEEs $ 410.0 $ 359.7 $ 50.3 14.0%
SPLO 87.0 71.6 15.4 21.5
STS/Other 17.8 12.1 5.7 47.1
GEP Engine 68.5 4.8 63.7 1,327.1
Inter-Segment (33.5) -- (33.5) --
------- ------- ------ -------
Total Net Sales $ 549.8 $ 448.2 $101.6 22.7%
HUMMER/HUMVEE Unit Sales 5,670 5,351 319 6.0%
HUMMER/HUMVEE Average Unit Selling Prices $72,310 $67,221 $5,089 7.6%
Consolidated net sales were $549.8 million in fiscal 2001, an increase of $101.6
million, or 22.7% from $448.2 million in fiscal 2000. All segments experienced
an increase in net sales.
HUMMER/HUMVEE segment net sales were $410.0 million in fiscal 2001, an increase
of $50.3 million, or 14.0% from $359.7 million in fiscal 2000. The increase in
net sales is primarily due to selling 721 more HUMVEE's due to higher US
Military demand and higher average unit selling prices for the segment partially
offset by selling 402 fewer HUMMERs. HUMMER/HUMVEE average unit selling prices
for fiscal 2001 increased 7.6% over fiscal 2000 levels primarily due to selling
a higher concentration of more expensive military models to both the US
Government and international customers, which included the sale of 424 ambulance
models in 2001. Also contributing to the higher average unit selling prices are
higher HUMVEE prices pursuant to the new S001 contract and a general price
increase on model year 2001 HUMMERs.
SPLO segment net sales were $87.0 million in fiscal 2001, an increase of $15.4
million, or 21.5% from $71.6 million in fiscal 2000. The increase in net sales
is primarily attributable to increased US Government military orders in fiscal
2001. US Government orders increased in fiscal 2001 primarily due to significant
stock buys at the close of a five year service parts contract and increased
operating tempo of US military detachments assigned on peacekeeping missions,
primarily Bosnia and Kosovo.
STS/Other segment net sales were $17.8 million in fiscal 2001, an increase of
$5.7 million, or 47.1% from $12.1 million in fiscal 2000. The increase in net
sales is primarily due to work performed on the US Government A4 contract,
partially offset by lower HUMVEE engineering hours and reduced HUMMER trademark
royalties.
GEP Engine segment net sales were $68.5 million, including $33.5 million to the
HUMMER/HUMVEE segment in fiscal 2001. GEP began operations during the third
quarter of 2000 and sold only 1,756 engines for the year compared to 7,860
engines for fiscal 2001.
The inter-segment sales of ($33.5) million represents the elimination of
inter-company engine sales from GEP to the Company's HUMMER/HUMVEE segment
during fiscal 2001.
16
Analysis of Consolidated Gross Profit
- -------------------------------------
(in millions, except unit information)
Fiscal Year Ended
October 31,
------------------------------------ %
2001 % 2000 % Change Change
------- ---- ------ ----- ------- -------
Gross Profit
- ------------
HUMMER/HUMVEEs $ 69.6 17.0% $ 54.7 15.2 $ 14.9 27.2%
SPLO 12.7 14.6 8.7 12.1 4.0 46.0
STS/Other 1.6 9.0 3.5 28.7 (1.9) (54.3)
GEP Engine 17.3 25.3 (.7) (13.7) 18.0 -
H2 (11.4) - (1.6) - (9.8) (612.5)
Inter-segment (0.5) (1.5) - - (0.5) -
------- ---- ------ ----- ----- ------
Total Gross Profit $ 89.3 16.2% $ 64.6 14.4% $24.7 38.2%
Consolidated gross profit was $89.3 million in fiscal 2001, an increase of $24.7
million, or 38.2% from $64.6 million in fiscal 2000. The Company's consolidated
gross profit percentage for fiscal 2001 was 16.2% compared to 14.4% in fiscal
2000. The increase in gross profit is primarily attributable to first full year
gross profit for the GEP Engine segment and improved gross profit in the
HUMMER/HUMVEE and SPLO segments, partially offset by start-up costs in
connection with the H2 program and lower gross profit in the STS/Other segment.
HUMMER/HUMVEE segment gross profit was $69.6 million in fiscal 2001, an increase
of $14.9 million, or 27.2% from $54.7 million in fiscal 2000. The segment gross
profit percentage was 17.0% in fiscal 2001 compared to 15.2% in fiscal 2000. The
increase in gross profit is primarily attributable to the sale of 721 more
HUMVEE units, higher average unit selling prices, improved fixed cost absorption
in connection with the increase in average unit production from 22.0 to 24.4
units per day during fiscal 2000 and 2001 respectively, and lower variable
manufacturing and warranty costs. These increases in gross profit were partially
offset by selling 402 fewer HUMMER units during fiscal 2001.
SPLO segment gross profit was $12.7 million in fiscal 2001, an increase of $4.0
million, or 46.0% from $8.7 million in fiscal 2000. The segment gross profit
percentage for fiscal 2001 was 14.6% compared to 12.1% for fiscal 2000. The
increase in gross profit is primarily due to increased sales of more profitable
HUMVEE spare parts and improved fixed cost absorption in connection with higher
sales volumes.
STS/Other segment gross profit was $1.6 million in fiscal 2001, a decrease of
$1.9 million, or 54.3% from $3.5 million in fiscal 2000. The segment gross
profit percentage for fiscal 2001 was 9.0% compared to 28.7% for fiscal 2000.
Gross profit in fiscal 2000 was higher than normal due to an engineering
contract in connection with the Family of Medium Tactical Vehicles program and
other engineering contracts, all of which were completed during fiscal 2000. The
decrease in gross profit was partially offset by gross profit from revenues
earned during fiscal 2001 in connection with the A4 contract.
GEP Engine segment gross profit was $17.3 million in fiscal 2001, an increase of
$18.0 million from a loss of ($0.7) million if fiscal 2000. The segment gross
profit percentage for fiscal 2001 was 25.3% compared to a loss of 13.7% for
fiscal 2000. The increase in gross profit is primarily due to the recognition of
full year gross profit from sales in fiscal 2001 compared to primarily start-up
costs during fiscal 2000.
The H2 segment incurred start-up costs of $11.4 million in fiscal 2001 in
connection with the new H2 project, primarily for training of new employees,
compared to $1.6 million incurred in fiscal 2000. The third quarter of 2000
represents the first quarter start-up costs were recognized on this project.
The inter-segment amount of ($0.5) million represents the elimination of gross
profit on inter-company engine sales from GEP to the Company's HUMMER/HUMVEE
segment which remained in inventory at the end of fiscal 2001.
17
Analysis and Management Discussion on non-segment information
- -------------------------------------------------------------
Depreciation and Amortization
Depreciation and amortization expense was $15.3 million for fiscal 2001, an
increase of $3.0 million or 24.4% over depreciation and amortization expense of
$12.3 million for fiscal 2000. The increase is primarily attributable to higher
tooling amortization in connection with the increase in unit production, and
higher depreciation expense associated with the capital expenditures made during
fiscal 2000 for the HUMMER/HUMVEE and GEP manufacturing facilities.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense was $41.2 million for
fiscal 2001, an increase of $9.1 million or 28.4% from SG&A expense of $32.1
million for fiscal 2000. The increase is due to increased marketing expenses,
higher wage and benefits expenses, GEP engineering expenses in connection with
2004 vehicle emission certification, and higher management fees. This increase
was partially offset by lower professional services expenses during fiscal 2001.
Income before Interest and Income Taxes
The Company recorded income before interest and income taxes for fiscal 2001 of
$32.8 million, an increase of $12.1 million from income before interest and
income taxes of $20.7 million in fiscal 2000. The increase in income before
interest and income taxes is primarily attributable to the higher gross profit
described above, partially offset by higher S,G&A and depreciation and
amortization expenses.
Interest Income and Expense
Interest expense for fiscal 2001 was $12.5 million, a decrease of $1.3 million
or 9.4% from interest expense of $13.8 million in fiscal 2000. This decrease was
primarily due to lower debt levels in connection with the Company's revolving
credit facility during 2001 and higher interest expense in fiscal 2000 due to a
payment made to the Holders of the Notes for their consent to the GM Transaction
and a one time payment to TACOM in connection with a contract modification,
partially offset by higher interest expense in connection with a state tax
assessment (the "State Tax Assessment"). Average debt outstanding for fiscal
2001, exclusive of the non-interest bearing GM Loan, was $ 84.6 million and
$96.6 million for fiscal 2001 and fiscal 2000, respectively. The weighted
average interest rate was 11.8% and 11.9% in fiscal 2001 and fiscal 2000,
respectively. The reduced borrowing under the Company's revolving credit
facility was due to higher net income and lower working capital requirements,
primarily due to reductions in inventory and accounts receivable. Interest
income increased by $0.1 million during fiscal 2001. During fiscal 2001 the
Company capitalized $2.6 million of interest due to a beneficial conversion
feature in connection with the GM Loan.
Income Tax (Expense) Benefit
Income tax expense was recorded at the statutory rate adjusted for permanent
differences primarily resulting from the amortization of goodwill and the State
Tax Assessment. Income tax expense for fiscal 2001 was $11.2 million, an
increase of $7.0 million from income tax expense of $4.2 million for fiscal
2000.
Net Income
The Company reported net income for fiscal 2001 of $9.6 million, an increase of
$7.3 million from net income of $2.3 million in fiscal 2000. As discussed above,
the increase in net income is primarily due to higher gross profits and lower
interest expense during fiscal 2001, partially offset by higher income tax, SG&A
and depreciation and amortization expenses. Net income during fiscal 2000 was
impacted by a $0.7 million, net of tax, one-time charge in connection with a
change in accounting principle for start-up costs.
18
Year Ended October 31, 2000 ("fiscal 2000") Compared with the Year 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
GEP 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
HUMMER/HUMVEE Average Unit Selling Prices $ 67,221 $61,745 $ 5,476 8.9%
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.
GEP 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.
19
Analysis of Consolidated Gross Profit
- -------------------------------------
(in millions, except unit information)
Fiscal Year Ended
October 31,
---------------------------------- %
2000 % 1999 % Change Change
----- ----- ------ ----- ------- -------
Gross Profit
- ------------
HUMMER/HUMVEEs $54.7 15.2% $ 22.7 9.6 $ 32.0 141.0%
Medium Trucks - - 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
GEP Engine (0.7) (13.7) (0.7) - - -
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 14.4% 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 $32.0 million, or 141.0% to $54.7
million in fiscal 2000 compared to fiscal 1999. The segment's gross profit
margin was 15.2% 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 GEP 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.
20
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 $0.7 million, net of tax, 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.
21
Liquidity and Capital Resources
The Company's liquidity requirements result from capital investments, the
repayment of the senior notes ($47.5 million, due May 1, 2002), 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 $33.2 million for fiscal 2001. The
primary sources of cash flow in fiscal 2001 resulted from decreases in inventory
and accounts receivable, net income, an increase in pension obligations, and
non-cash charges to operating income including depreciation, amortization and
non-cash postretirement expenses. Cash flows provided by operations was
partially offset by decreases in accounts payable, income taxes payable and
accrued expenses, and an increase in deferred income taxes.
Accounts receivable levels at the end of fiscal 2001 were $4.0 million lower
than levels at the end of fiscal 2000 primarily due to a reduction in unbilled
receivables for the A2 HUMVEE and reduced receivables from dealers. The
remaining unbilled receivables represent work performed by the Company for which
a contract modification with the DoD has not yet been finalized. The Company
expects these contract modifications to be completed during fiscal 2002. The
decrease in accounts receivable was partially offset by increased receivables
from GEP customers
Net inventory levels at the end of fiscal 2001 were $79.0 million or $20.8
million lower than net inventory levels of $99.8 million at end of fiscal 2000.
The decrease in inventory is primarily attributed to lower raw materials,
finished goods, SPLO inventory, and manufacturing work-in-process, partially
offset by higher GEP inventory. Raw material levels decreased $8.1 million
primarily due to the utilization of unique parts required to support the more
expensive ambulance models manufactured during the year, a firmer production
schedule, and the implementation of lean manufacturing principles. Finished
Goods inventory decreased $5.0 million primarily due to lower commercial HUMMER
units. SPLO inventory decreased $4.2 million primarily due to the shipment of
excess inventory on hand at the end of fiscal year 2000. Manufacturing
work-in-process decreased $4.1 million due to maintaining a firmer production
schedule resulting in better availability of parts. The inventory reserve
increased $1.5 million. These decreases in inventory were partially offset by a
$2.1 million increase in GEP inventory due to increased production in fiscal
2001.
Accounts payable levels at the end of fiscal 2001 were $12.6 million lower than
levels at the end of fiscal 2000. The decrease in accounts payable is primarily
attributed to a higher level of uncleared checks reclassified to accounts
payable at the end of fiscal 2000.
In fiscal 2001, the Company spent $172.4 million on capital expenditures
primarily for the construction of the New Facility ($160.8 million), and for the
acquisition of machinery and equipment and tooling in connection with vehicle
production, information systems, and certain other machinery and equipment
($11.6 million). The Company anticipates incurring capital expenditures in
fiscal 2002 of approximately $92.0 million; $72.0 million of which is in
connection with the construction of the New Facility. Proceeds from the GM Loan
will be used to fund these capital expenditures. Additionally, the Company
anticipates it will spend approximately $20.0 million on vendor tooling,
machinery and equipment, information systems, and other capital requirements.
The Company anticipates that these capital requirements will be funded from
operating cash flow and availability under the revolving credit facility.
The Company has been actively engaged in expanding its engine assembly business,
developing military prototype vehicles, competing for international military
contracts, and seeking international co-production opportunities.
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, 2001, the Company
had borrowings of $27.9 million outstanding under the Company's revolving credit
facility. As of January 23, 2002, the Company's loan balance under the revolving
credit facility was $11.6 million and unused availability was $16.9 million.
22
Management anticipates that cash flow from operations as well as availability
under its revolving credit facility, proceeds from the GM Loan, and other
permitted sources will be sufficient to finance the Company's operating
liquidity needs for fiscal 2002. Management is currently exploring the Company's
options with respect to its long-term financing needs.
The Company's senior notes totaling $47.5 million mature and are payable on
May 1, 2002. The Company is currently negotiating with several financial
institutions to borrow sufficient funds to retire the senior notes. Management
believes that this debt will be refinanced by the scheduled maturity date or
sooner. Based on discussions with potential lenders, the Company's 2001 cash
flows would support the level of debt included in this refinancing within the
current parameters of other such loans for companies of similar size and credit
worthiness. Based on its current level of business, management believes that the
Company's cash flow is sufficient to amortize this level of debt without
significant levels of new business. Additionally, the H2 agreement with GM
provides the potential for significant additional cash flows. Although no
assurances can be given, management believes it will be able to obtain an
adequate credit facility on acceptable terms. Failure to obtain sufficient funds
to retire the senior notes could have a material adverse effect on the Company.
The 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.
Impact of Recently Issued Accounting Standards
In July 2001, the FASB issued Statements No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill, noting that any
purchase price allocable to an assembled workforce may not be accounted for
separately. Statement 142 will require that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of Statements
142. Statements 142 will also require that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with FAS
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141 immediately and
will adopt Statements 142 effective November 1, 2001. Furthermore, goodwill and
intangible assets determined to have an indefinite useful life acquired in a
purchase business combination completed after June 30, 2001, but before
Statement 142 is adopted in full will not be amortized, but will continue to be
evaluated for impairment in accordance with the appropriate pre-Statement 142
accounting literature. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be amortized and
tested for impairment in accordance with the appropriate pre-Statement 142
accounting requirements prior to the adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combination, and to make any necessary reclassifications
in order to conform with the new criteria in Statement 141 for recognition apart
from goodwill. Upon adoption of Statement 142, the Company will be required to
reassess the useful lives and residual values of all intangible assets acquired,
and make any necessary amortization period adjustments by the end of the first
interim period after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
Statement 142 within the first interim period. Any impairment loss will be
measured as of the date of adoption and recognized as the cumulative effect of a
charge in accounting principle in the first interim period.
In connection with Statement 142's transitional goodwill impairment evaluation,
the Statement will require the Company to perform an assessment of whether there
is an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and determine the
carrying value of each reporting unit by assigning the assets and liabilities,
including the existing goodwill and intangible assets, to those reporting units
as of the date of adoption. The Company will then have up to six months from the
date of adoption to determine the fair value of each reporting unit and compare
it to the reporting unit's carrying amount. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the reporting
unit's goodwill may be impaired and the Company must perform the second step of
the transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no longer than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings.
As of October 31, 2001, the Company has unamortized goodwill in the amount of
$66,439 which is subject to the transition provisions of Statements 141 and 142.
Because of the extensive effort needed to comply with adopting Statements 141
and 142, it is not practicable to reasonably estimate the impact of adopting
these Statements on the Company's financial statements at the date of this
report, including whether it will be required to recognize any transitional
impairment losses as the cumulative effect of a change in accounting principle.
In June 2001, the Financial Accounting Standards Board issued Statement No. 143,
Accounting for Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) normal use of the asset.
Statement No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if a
reasonable estimate of fair value can be made. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement.
The Company is required to adopt the provisions of Statement No. 143 for the
quarter ending January 31, 2003. To accomplish this, the Company must identify
all legal obligations for asset retirement obligations, if any, and determine
the fair value of these obligations on the date of adoption. The determination
of fair value is complex and, if applicable, will require the Company to gather
market information and develop cash flow models. Additionally, the Company will
be required to develop processes to track and monitor these obligations. Because
of the effort necessary to comply with the adoption of Statement No. 143, it is
not practicable for management to estimate the impact of adopting this Statement
at the date of this report.
In August 2001, the Financial Accounting Standards Board issued FASB Statement
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(Statement 144), which supersedes both FASB Statements No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
(Statement 121) and the accounting and reporting provisions of APB Opinion No.
30, Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions (Opinion 30), for the disposal of a segment of a
business (as previously defined in that Opinion). Statement 144 retains the
fundamental provisions in Statement 121 for recognizing and measuring impairment
losses on long-lived assets held for use and long-lived assets to be disposed of
by sale, while also resolving significant implementation issues associated with
Statement 121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for impairment,
establishes criteria for when a long-lived asset is held for sale, and
prescribes the accounting for a long-lived asset that will be disposed of other
than by sale. Statement 144 retains the basic provisions of Opinion 30 on how to
present discontinued operations in the income statement but broadens that
presentation to include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under Statement 144
will never result in a write-down of goodwill. Rather, goodwill is evaluated for
impairment under Statement No. 142, Goodwill and Other Intangible Assets.
The Company is required to adopt Statement 144 no later than the fiscal year
ended October 31, 2003. Management does not expect the adoption of Statement 144
for long-lived assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under Statement 144 is
largely unchanged from Statement 121. The provisions of the Statement for assets
held for sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal activities.
Therefore, management cannot determine the potential effects that adoption of
Statement 144 will have on the Company's financial statements.
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 H2 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.
23
Item 8. Financial Statements and Supplementary Data
Index To Financial Statements
Page
Independent Auditors' Report 25
Consolidated Balance Sheets as of October 31, 2001 and 2000 26
Consolidated Statements of Operations
For the Years Ended October 31, 2001, 2000, and 1999 27
Consolidated Statement of Stockholder's Deficit and Comprehensive Income (Loss)
For the Years Ended October 31, 2001, 2000, and 1999 28
Consolidated Statement of Cash Flows
For the Years Ended October 31, 2001, 2000, and 1999 29
Notes to Consolidated Financial Statements 30
24
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 auditing standards generally accepted
in the United States of America. 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, 2001 and 2000, and the results of
their operations and their cash flows for each of the years in the three-year
period ended October 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
KPMG, LLP
Indianapolis, Indiana
December 14, 2001
25 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
October 31, 2001 and 2000
(Dollar amounts in thousands, except share information)
Assets 2001 2000
------------- --------------
Current assets:
Cash $ 3,608 6,444
Accounts receivable, net 82,952 86,904
Inventories 79,050 99,810
Prepaid expenses and other assets 1,331 1,237
Income tax receivable 616 0
Deferred income taxes 8,795 6,444
------------- --------------
Total current assets 176,352 200,839
Income taxes receivable 4,713 4,752
Property, plant, and equipment, net 236,623 73,993
Deferred income taxes 34,688 27,407
Goodwill, net 66,439 70,725
Intangible pension asset 22,035 105
Other assets 1,111 2,807
------------- --------------
$ 541,961 380,628
============= ==============
Liabilities and Stockholder's Deficit
Current liabilities:
Accounts payable $ 47,508 60,105
Accrued expenses 71,351 70,600
Income taxes payable 3,721 5,539
Current maturities of long-term debt 60,946 610
------------- --------------
Total current liabilities 183,526 136,854
Long-term debt 186,878 114,806
Postretirement benefits other than pensions, noncurrent portion 165,817 164,641
Pension, noncurrent portion 33,436 -
Other liabilities, noncurrent portion 5,591 5,557
------------- --------------
Total liabilities 575,248 421,858
------------- --------------
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 8,552 1,542
Accumulated deficit (38,208) (47,772)
Accumulated other comprehensive loss - minimum pension liability (8,631) -
------------- --------------
Total stockholder's deficit (33,287) (41,230)
Commitments and contingencies (notes 6 and 14)
------------- --------------
$ 541,961 380,628
============= ==============
See accompanying notes to consolidated financial statements.
26 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the years ended October 31, 2001, 2000 and 1999
(Dollar amounts in thousands)
2001 2000 1999
--------------- --------------- ---------------
Net sales $ 549,809 448,200 348,187
--------------- --------------- ---------------
Cost and expenses:
Cost of sales 460,474 383,644 310,774
Depreciation and amortization 15,311 12,290 10,881
Selling, general, and administrative expenses 41,183 32,047 31,203
Plant closing and restructuring -- (492) (2,664)
--------------- --------------- ---------------
Income (loss) before interest and income taxes 32,841 20,711 (2,007)
Interest income 446 257 389
Interest expense (12,484) (13,771) (11,508)
--------------- --------------- ---------------
Income (loss) before income taxes and cumulative
effect of accounting change 20,803 7,197 (13,126)
Income tax expense (benefit) 11,239 4,207 (2,877)
--------------- --------------- ---------------
Income (loss) before cumulative effect of
accounting change 9,564 2,990 (10,249)
Cumulative effect of accounting change, net of
income tax benefit of $375 -- (695) --
--------------- --------------- ---------------
Net income (loss) 9,564 2,295 (10,249)
Minimum pension, net of income taxes (8,631) -- 228
--------------- --------------- ---------------
Net comprehensive income (loss) $ 933 2,295 (10,021)
=============== =============== ===============
See accompanying notes to consolidated financial statements.
27 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholder's Deficit and Comprehensive Income (Loss)
For the years ended October 31, 2001, 2000 and 1999
(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, 1998 $ 5,000 -- 1,000 (228) (39,818) (34,046)
Minimum pension -- -- -- 228 -- 228
Net loss -- -- -- -- (10,249) (10,249)
------------- ----------- ---------- ------------------- ------------- ----------
Balance at October 31, 1999 5,000 -- 1,000 -- (50,067) (44,067)
Long-term debt conversion -- -- 542 -- -- 542
option
Net income -- -- -- -- 2,295 2,295
------------- ----------- ---------- ------------------- ------------- ----------
Balance at October 31, 2000 5,000 -- 1,542 -- (47,772) (41,230)
Long-term debt conversion -- -- 7,010 -- -- 7,010
option
Minimum Pension -- -- -- (8,631) -- (8,631)
Net income -- -- -- -- 9,564 9,564
------------- ----------- ---------- ------------------- ------------- ----------
Balance at October 31, 2001 $ 5,000 -- 8,552 (8,631) (38,208) (33,287)
============= =========== ========== =================== ============= ==========
See accompanying notes to consolidated financial statements.
28 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended October 31, 2001, 2000 and 1999
(Dollar amounts in thousands)
2001 2000 1999
------------- ------------ ------------
Net cash provided by (used in) operating activities (note 20) $ 33,235 19,275 (4,369)
------------- ------------ ------------
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment 20 66 8
Capital expenditures (172,623) (37,024) (7,760)
------------- ------------ ------------
Net cash used in investing activities (172,603) (36,958) (7,752)
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreement (872) 3,863 17,093
Borrowing of long-term debt 158,772 19,490 --
Repayments of long-term debt (21,118) (307) (6,578)
Financing fees (250) -- --
------------- ------------ ------------
Net cash provided by financing activities 136,532 23,046 10,515
Net change in cash (2,836) 5,363 (1,606)
Cash and cash equivalents at beginning of year 6,444 1,081 2,687
------------- ------------ ------------
Cash and cash equivalents at end of year $ 3,608 6,444 1,081
============= ============ ============
Supplemental disclosure of cash items:
Interest paid $ 11,774 10,856 12,145
Income taxes paid 18,032 97 495
============= ============ ============
See accompanying notes to consolidated financial statements.
29 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 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 firm-fixed price
contract with a base year plus six option years ending June 2007.
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, 2001 is as indicated in the following analysis:
2001 2000 1999
------------- ------------- -------------
Hummer(R)/Humvee(R)vehicles 74 % 80 % 68 %
ESP -- -- 13
Service parts and other 19 19 19
Engines 7 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.
30 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(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 certain 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 $7,552 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.
31 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(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
$40,721 and $36,435 at October 31, 2001 and 2000, 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. See note 19.
(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 $4,519 and $16,033 at October 31, 2001 and 2000,
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.
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
32 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
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 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 $7,143, $5,137 and $4,129 for
the years ended October 31, 2001, 2000 and 1999, respectively.
(l) Income Taxes
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. The Company files 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.
(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
33 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
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 accounting principles
generally accepted in the United States of America. 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.
34 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
(2)Accounts Receivable
Components of accounts receivable are as follows:
October 31
---------------------------
2001 2000
------------ --------------
Receivables from the U.S. Government under
long-term contracts:
Amounts billed or billable $ 35,479 38,677
Recoverable costs accrued-not billed 2,039 2,411
Unrecovered costs subject to future negotiation 9,621 16,733
Commercial customers-amounts billed:
Foreign 21,065 16,893
Dealers 740 2,462
Service parts -- 363
Engines 10,610 4,715
Other receivables 3,848 5,175
------------ --------------
83,402 87,429
Less allowance for doubtful accounts (450) (525)
------------ --------------
$ 82,952 86,904
============ ==============
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.
(3)Inventories
Inventories consist of the following:
October 31
----------- ------------
2001 2000
----------- ------------
Finished goods $ 22,346 27,105
Service parts 19,511 23,407
Raw materials, supplies, and work in progress 37,193 49,298
----------- ------------
79,050 99,810
=========== ============
35 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
(4)Property, Plant, and Equipment
Property, plant, and equipment consist of the following:
October 31
---------------------------
2001 2000
------------- -------------
Land $ 2,000 2,000
Buildings 10,798 8,145
Machinery, equipment, and fixtures 43,455 35,285
Leasehold improvements 10,053 9,420
Vehicles 6,904 6,091
Construction in progress 177,311 21,356
Dealer signage 469 457
Tooling 65,027 60,997
------------- -------------
316,017 143,751
Less accumulated depreciation and amortization (79,394) (69,758)
------------- -------------
$ 236,623 73,993
============= =============
Included in construction in progress is $176,648 related to the
construction of the H2 facility (see note 1(b)). During 2001, the
Company capitalized $2,568 in interest in connection with the
construction of the H2 assembly facility.
(5)Other Assets
Other assets consist of the following:
October 31
---------------------------
2001 2000
---------------------------
Noncompete covenant, net $ 515 1,544
Deferred loan costs, net 451 1,096
Other 145 167
---------------------------
$ 1,111 2,807
===========================
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 $9,777 and
$8,748 at October 31, 2001 and 2000, respectively. Deferred loan
costs were incurred primarily in connection with the senior notes
due 2002 and are being amortized over seven years. During 2001,
the Company incurred an additional $250 in loan costs associated
with its revolving credit agreement. These costs are being
amortized over the term of the agreement. Accumulated amortization
was $5,640 and $4,745 at October 31, 2001 and 2000, 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.
36 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
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. 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.
(6)Leases
The Company has several noncancelable operating leases for
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, 2001, 2000 and 1999
aggregated approximately $4,405, $4,584, and $5,365, respectively.
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) as of October 31,
2001 are:
Year ending October 31 Amount
-------------------------- --------------
2002 $ 3,720
2003 3,405
2004 2,687
2005 2,617
2006 2,632
Thereafter 3,065
--------------
$ 18,126
==============
(7)Accrued Expenses
Components of accrued expenses are as follows:
October 31
------------------------------------
2001 2000
------------------------------------
Contract modifications payable $ 8,548 15,243
Current portion of other post employment benefits 9,000 6,800
Interest on senior notes 3,057 4,377
Warranty 8,709 6,532
Pension liability 3,472 3,509
Wages, bonuses, vacations and payroll taxes 11,671 8,838
Taxes other than on income 3,645 4,960
Sales incentives 3,777 5,266
Insurance 3,202 2,919
Customer deposits 4,550 5,899
Other 11,720 6,257
-------------------------------------
71,351 70,600
=====================================
37 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
(8)Long-term Debt
Long-term debt consists of:
October 31
---------------------------
2001 2000
------------- -------------
Revolving line-of-credit, interest at prime plus 3/4%, 6.75% and
10.25% at October 31, 2001 and 2000, respectively $ 27,938 28,810
12-7/8% senior notes due 2002, originally discounted $402 to yield
13%, interest payable semi-annually on May 1 and November 1 47,462 67,910
Non-interest bearing loan from General Motors Corporation, net
of discount of $4,920 (see note 1(b)) 165,799 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 4,544 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 2,081 2,367
------------- -------------
247,824 115,416
Less current maturities of long-term debt 60,946 610
------------- -------------
$ 186,878 114,806
============= =============
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, 2001 and 2000 was approximately
$15,126 and $10,700, respectively. The Agreement is secured by a
first lien on all of the Company's accounts receivable,
inventories and certain other assets. Interest is due monthly;
there is a monthly commitment fee of one-half of 1% on the unused
credit commitment and a prepayment penalty for early termination.
The revolving credit agreement expires October 30, 2004.
The senior notes are unsecured and are redeemable at the Company's
option at the face amount. The Company was obligated to offer to
repurchase senior notes at a price of 101% of the face amount if
there was a change in control or if at the end of each twelve
month period ended April 30, the Company had excess cash flow, as
defined. During fiscal 2001 and 1999, senior notes with a face
amount of $20,507 and $6,513, respectively, were repurchased as a
result of an offer required because of excess cash flow, as
defined, for the twelve-month periods ended April 30, 2001 and
1999. In fiscal 2000, 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.
38 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
Under the most restrictive covenant in any agreement, no amount
was available for payment of dividends at October 31, 2001 and
2000.
The Company's outstanding letters of credit totaled $9,486 and
$5,812 at October 31, 2001 and 2000, respectively. Of this amount,
$8,336 and $4,962 at October 31, 2001 and 2000, 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:
2002 $ 60,946
2003 34,635
2004 65,631
2005 37,625
2006 33,212
Thereafter 15,775
--------------
$ 247,824
==============
(9)Maturity of Senior Notes
The Company's senior notes totaling $47,462 mature and are payable
on May 1, 2002. The Company is currently negotiating with several
financial institutions to borrow sufficient funds to retire the
senior notes. Although no assurances can be given, management
believes it will be able to obtain an adequate credit facility on
acceptable terms. Failure to obtain sufficient funds to retire the
senior notes could have a material adverse effect on the Company.
(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, 2001 and 2000 were $2,600 and
$2,200, 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 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.
39 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
(11) Income Tax
Total income taxes were recorded as follows:
October 31
----------------------------
2001 2000 1999
-------- -------- --------
Income from continuing operations $ 11,239 4,207 (2,877)
Cumulative effect of accounting change -- (375) --
Stockholder's deficit, for minimum
pension liability (5,273) -- 140
-------- -------- --------
$ 5,966 3,832 (2,737)
======== ======== ========
Income tax expense (benefit) consists of:
October 31
----------------------------
2001 2000 1999
-------- -------- --------
Current:
Federal $ 11,461 4,208 (3,168)
State 4,137 877 169
Deferred:
Federal (3,890) (1,107) 15
State (469) (146) 107
-------- -------- --------
$ 11,239 3,832 (2,877)
======== ======== ========
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
---------------------------
2001 2000 1999
------- -------- --------
Computed "expected" tax expense (benefit) $ 7,281 2,519 (4,594)
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 2,384 475 179
Foreign sales corporation effect -- (340) --
Other, net 74 53 38
------- -------- --------
$11,239 3,832 (2,877)
======= ======== ========
40 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(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, 2001 and 2000 are presented below:
October 31
------------------
2001 2000
-------- --------
Deferred tax assets:
Allowance for doubtful accounts receivable $ 171 199
Inventory obsolescence reserve 2,188 1,578
Compensated absences, principally due to accrual
for financial reporting purposes 1,310 1,205
Accrued warranty 4,137 3,321
Pension liability 5,641 793
Postretirement benefits other than pensions 66,299 65,019
Other accruals 6,250 5,186
Other 94 133
-------- --------
Total gross deferred tax assets 86,090 77,434
Less valuation allowance 38,348 38,348
-------- --------
Net deferred tax assets 47,742 39,086
-------- --------
Deferred tax liabilities:
Plant and equipment, principally due to
differences in depreciation 3,900 4,938
Reduced costs inventoried for tax purposes
pursuant to the Tax Reform Act of 1986 359 297
-------- --------
Total gross deferred liabilities 4,259 5,235
-------- --------
Net deferred asset 43,483 33,851
Less current portion 8,795 6,444
-------- --------
Noncurrent portion $ 34,688 27,407
======== ========
There was no change in the valuation allowance for the years ended October
31, 2001, 2000 and 1999. 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, 2001. The amount of the
deferred tax asset considered realizable, however, could be reduced if
estimates of future taxable income are reduced.
41 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
At October 31, 2001 and 2000, the Company has a long-term receivable of
$4,713 due from the Parent for Federal income tax payments made to the
Parent in excess of the Company's tax liability.
(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, 2001 and 2000:
2001 2000
---------- ---------
Change in benefit obligation
Benefit obligation at beginning of year $ 143,200 127,894
Service cost 3,043 2,949
Interest cost 11,596 10,534
Actuarial (gain) loss 18,748 (2,586)
Amendments 7,138 13,352
Benefits paid (9,483) (8,943)
---------- ---------
Benefit obligations at end of year $ 174,242 143,200
========== =========
Change in plan assets
Fair value of plan assets at beginning of year $ 160,065 159,356
Actual return on plan assets (21,544) 3,589
Employer contribution 5,872 6,063
Benefits paid (9,483) (8,943)
---------- ---------
Fair value of plan assets at end of year 134,910 160,065
---------- ---------
Funded status (39,332) 16,865
Unrecognized prior service cost 22,078 17,322
Unrecognized net actuarial loss (gain) 16,285 (37,591)
---------- ---------
Net amount recognized $ (969) (3,404)
========== =========
Amounts recognized in the statement of financial
position consist of:
Intangible asset $ 22,035 105
Accrued benefit liability (36,908) (3,509)
Accumulated other comprehensive income 13,904 --
---------- ---------
Net amount recognized $ (969) (3,404)
========== =========
42 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
2001 2000
------------- -------------
Weighted-average assumptions as of October 31
Discount rate 7.25% 8.00%
Expected return on plan assets 8.50% 8.50%
Rate of compensation increase 5.00% 5.00%
Components of net periodic benefit cost
Service cost $ 3,043 2,949
Interest cost 11,596 10,534
Expected return on plan assets (12,680) (12,308)
Recognized actuarial gain (905) (1,801)
Amortization of prior service cost 2,383 2,134
------------- -------------
Net periodic benefit cost $ 3,437 1,508
============= =============
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 $365, $322 and
$310 for the years ended October 31, 2001, 2000 and 1999,
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.
43 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
The following table presents the related amounts recognized in the
Company's consolidated balance sheets at October 31, 2001 and 2000:
2001 2000
---------- ----------
Change in benefit obligation
Benefit obligation at beginning of year $ 139,450 143,116
Service cost 2,094 1,896
Interest cost 10,972 10,451
Actuarial (gain) loss 46,661 (9,220)
Benefits paid (8,413) (6,793)
---------- ----------
Benefit obligations at end of year 190,764 139,450
Unrecognized prior service cost (468) (516)
Unrecognized net gain (loss) (15,479) 32,507
---------- ----------
Accrued benefit cost $ 174,817 171,441
========== ==========
Components of net periodic benefit cost
Service cost $ 2,094 1,896
Interest cost 10,971 10,451
Prior service cost recognized 49 49
Amortization of unrecognized net gain (1,325) (1,266)
---------- ----------
Net periodic benefit cost $ 11,789 11,130
========== ==========
For measurement purposes, a 9% annual rate of increase in the per
capita cost of hospital and other general medical benefits and a 13%
annual rate of increase in prescription drug costs was assumed for
fiscal 2001. These rates were assumed to decrease gradually to 5% over
eight and twelve years, respectively. Dental and vision expenses and
Medicare Part B premiums are expected to increase by 5% annually. A
6.5% annual rate of increase in the per capita cost of covered
benefits was assumed for fiscal 2000; 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 7.25% and 8.0% at October 31,
2001 and 2000.
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,
2001 by $27,259 and the aggregate of the service and interest cost
components of net periodic postretirement benefit cost would increase
for the year ended October 31, 2001 by $1,883. Decreasing the assumed
health care cost trend rates by one percentage point in each year
would decrease the accumulated postretirement benefit obligation by
$22,260 and the aggregate of the service and interest cost components
of net periodic postretirement benefit cost would decrease for the
year ended October 31, 2001 by $1,532.
44 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
(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.
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. Since early 2001, the
Company has been participating in alternative dispute resolution
("ADR") activities with the government in a mutual attempt to resolve
this issue. The Government contracting officer issued a decision on
August 23, 2001, asserting that the Company's accounting allocation is
not compliant with the regulations and that the Government has paid an
additional $18 million under several HUMVEE production contracts with
the Army. The decision demands repayment of this amount plus interest
of $5.8 million.
The Company has appealed the Government's decision and intends to
continue the ADR procedures. In the event the dispute is not resolved
by ADR, the Company intends to contest the Government's claim
vigorously. The Company believes it will eventually prevail and
accordingly has not accrued any liability with respect to this 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.
Payment from 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 a voluntary or mandatory repurchase agreement
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, 2001 and 2000, the Company's contingent
liabilities with respect to the mandatory repurchase agreement totaled
$8,500 and $21,707, 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 year ended October 31, 2001, the Company incurred annual
management fees to the Parent of $2,323; $1,223 of which is included
in accrued expenses at October 31, 2001. During the years ended
October 31, 2000 and 1999, the Company incurred annual management fees
to the Parent of $1,200; $100 of which is included in accrued expenses
at October 31, 2000. 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.
45 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
(16) Business and Credit Concentrations
The Company's largest customer is the DoD, which accounted for 56%,
59% and 70% of the Company's sales for the years ended October 31,
2001, 2000 and 1999, respectively. At October 31, 2001, 2000 and 1999,
accounts receivable with the DoD were $45,567, $55,614 and $59,752,
respectively.
Export sales to foreign customers, including sales to friendly foreign
nations, were $91,257, $125,619 and $31,014 for the years ended
October 31, 2001, 2000 and 1999, respectively. Included in these
amounts are export sales to Israel in the amount of $37,341 and
$72,300 for the years ended October 31, 2001 and 2000, respectively.
The Company's business is significantly impacted by the United States
defense budget. If the U.S. reduces budget allocations for defense
expenditures, sales could be adversely affected. Foreign sales are
dependent on periodic receipt of a relatively few, individually
significant contracts and are negatively impacted by a reduction in
foreign demand or material adverse changes in the U.S. Government
foreign military sales program. The commercial market is impacted by
the general economy and interest rates. Changes in the marketplace of
any of the above may significantly affect management's estimates and
the Company's performance.
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, 2006. 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 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 recognized restructuring gains 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.
46 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
The fair value of the Company's long-term debt is estimated by
discounting the future cash flows of each instrument at rates
currently offered to the Company for similar debt instruments of
comparable maturities by the Company's bankers. The fair value of
long-term debt at October 31, 2001 and 2000 was $220,194 and $114,039,
respectively.
(19) Impact of Recently Issued Accounting Standards
In July 2001, the FASB issued Statement No. 141, Business
Combinations, and Statement No. 142, Goodwill and Other Intangible
Assets. Statement 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001 as
well as all purchase method business combinations completed after June
30, 2001. Statement 141 also specifies criteria intangible assets
acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill, noting that any purchase
price allocable to an assembled workforce may not be accounted for
separately. Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 will also require that
intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with FAS Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
The Company is required to adopt the provisions of Statement 141
immediately and will adopt Statement 142 effective November 1, 2001.
Furthermore, goodwill and intangible assets determined to have an
indefinite useful life acquired in a purchase business combination
completed after June 30, 2001, but before Statement 142 is adopted in
full will not be amortized, but will continue to be evaluated for
impairment in accordance with the appropriate pre-Statement 142
accounting literature. Goodwill and intangible assets acquired in
business combinations completed before July 1, 2001 will continue to
be amortized and tested for impairment in accordance with the
appropriate pre-Statement 142 accounting requirements prior to the
adoption of Statement 142.
Statement 141 will require upon adoption of Statement 142, that the
Company evaluate its existing intangible assets and goodwill that were
acquired in a prior purchase business combination, and to make any
necessary reclassifications in order to conform with the new criteria
in Statement 141 for recognition apart from goodwill. Upon adoption of
Statement 142, the Company will be required to reassess the useful
lives and residual values of all intangible assets acquired, and make
any necessary amortization period adjustments by the end of the first
interim period after adoption. In addition, to the extent an
intangible asset is identified as having an indefinite useful life,
the Company will be required to test the intangible asset for
impairment in accordance with the provisions of Statement 142 within
the first interim period. Any impairment loss will be measured as of
the date of adoption and recognized as the cumulative effect of a
change in accounting principle in the first interim period.
47 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
In connection with Statement 142's transitional goodwill impairment
evaluation, the Statement will require the Company to perform an
assessment of whether there is an indication that goodwill is impaired
as of the date of adoption. To accomplish this, the Company must
identify its reporting units and determine the carrying value of each
reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units as
of the date of adoption. The Company will then have up to six months
from the date of adoption to determine the fair value of each
reporting unit and compare it to the reporting unit's carrying amount.
To the extent a reporting unit's carrying amount exceeds its fair
value, an indication exists that the reporting unit's goodwill may be
impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must
compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of
it's assets (recognized and unrecognized) and liabilities in a manner
similar to a purchase price allocation in accordance with Statement
141, to its carrying amount, both of which would be measured as of the
date of adoption. This second step is required to be completed as soon
as possible, but no later than the end of the year of adoption. Any
transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement
of operations.
As of October 31, 2001, the Company has unamortized goodwill in the
amount of $66,439 which is subject to the transition provisions of
Statements 141 and 142. Because of the extensive effort needed to
comply with adopting Statements 141 and 142, it is not practicable to
reasonably estimate the impact of adopting these Statements on the
Company's financial statements at the date of this report, including
whether it will be required to recognize any transitional impairment
losses as the cumulative effect of a change in accounting principle.
In June 2001, the Financial Accounting Standards Board issued
Statement No. 143, Accounting for Asset Retirement Obligations, which
addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The standard applies to legal
obligations associated with the retirement of long-lived assets that
result from the acquisition, construction, development and (or) normal
use of the asset.
Statement No. 143 requires that the fair value of a liability for an
asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The fair
value of the liability is added to the carrying amount of the
associated asset and this additional carrying amount is depreciated
over the life of the asset. The liability is accreted at the end of
each period through charges to operating expense. If the obligation is
settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement.
The Company is required to adopt the provisions of Statement No. 143
for the quarter ending January 31, 2003. To accomplish this, the
Company must identify all legal obligations for asset retirement
obligations, if any, and determine the fair value of these obligations
on the date of adoption. The determination of fair value is complex
and, if applicable, will require the Company to gather market
information and develop cash flow models. Additionally, the Company
will be required to develop processes to track and monitor these
obligations. Because of the effort necessary to comply with the
adoption of Statement No. 143, it is not practicable for management to
estimate the impact of adopting this Statement at the date of this
report.
In August 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (Statement 144), which supersedes both FASB
Statement No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of (Statement 121) and the
accounting and reporting provisions of APB Opinion No. 30, Reporting
the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions (Opinion 30), for the disposal of a
segment of a business (as previously defined in that Opinion).
Statement 144 retains the fundamental provisions in Statement 121 for
recognizing and measuring impairment losses on long-lived assets held
for use and long-lived assets to be disposed of by sale, while also
resolving significant implementation issues associated with Statement
121. For example, Statement 144 provides guidance on how a long-lived
asset that is used as part of a group should be evaluated for
impairment, establishes criteria for when a long-lived asset is held
for sale, and prescribes the accounting for a long-lived asset that
will be disposed of other than by sale. Statement 144 retains the
basic provisions of Opinion 30 on how to present discontinued
operations in the income statement but broadens that presentation to
include a component of an entity (rather than a segment of a
business). Unlike Statement 121, an impairment assessment under
Statement 144 will never result in a write-down of goodwill. Rather,
goodwill is evaluated for impairment under Statement No. 142, Goodwill
and Other Intangible Assets.
48 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
The Company is required to adopt Statement 144 no later than the
fiscal year ended October 31, 2003. Management does not expect the
adoption of Statement 144 for long-lived assets held for use to have a
material impact on the Company's financial statements because the
impairment assessment under Statement 144 is largely unchanged from
Statement 121. The provisions of the Statement for assets held for
sale or other disposal generally are required to be applied
prospectively after the adoption date to newly initiated disposal
activities. Therefore, management cannot determine the potential
effects that adoption of Statement 144 will have on the Company's
financial statements.
(20) 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).
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):
2001
----------------------------------------------------------------------------------------------
HUMMER/ Medium STS/ Inter-
HUMVEE Trucks SPLO Other Engines H2 Segment Total
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net sales $ 410.0 -- 87.0 17.8 68.5 -- (33.5) 549.8
Gross profit 69.6 -- 12.7 1.6 17.3 (11.4) (0.5) 89.3
2000
----------------------------------------------------------------------------------------------
HUMMER/ Medium STS/ Inter-
HUMVEE Trucks SPLO Other Engines H2 Segment 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/ Inter-
HUMVEE Trucks SPLO Other Engines H2 Segment 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
49 (Continued)
AM GENERAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
October 31, 2001 and 2000
(Dollar amounts in thousands)
(21) Cash Flows From Operations
The reconciliation of net loss to net cash provided by (used in) operating
activities for the years ended October 31, 2001, 2000 and 1999 follows:
October 31
---------------------------------
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income (loss) $ 9,564 2,295 (10,249)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Plant closing and restructuring -- (492) (2,664)
Less plant closing and restructuring payments -- (344) (1,895)
Depreciation and amortization of
plant and equipment 9,980 6,959 5,551
Other amortization 6,226 6,062 6,252
Provision for doubtful accounts 276 175 --
Deferred income taxes (9,632) (1,253) 261
Accretion of debt discount 2,636 108 56
Noncash other postretirement cost 3,376 4,338 6,741
Loss (gain) on sale of equipment (7) (19) 23
Change in assets and liabilities:
Accounts receivable 3,676 (9,998) (2,869)
Inventories 20,760 (15,338) (12,971)
Prepaid expenses (94) (253) 185
Other assets 45 5,359 1,752
Accounts payable (12,597) 22,680 4,931
Accrued expenses (1,413) (523) 7,081
Income taxes (2,434) 5,073 (3,095)
Pension 2,839 (4,555) --
Other liabilities 34 (999) (3,459)
--------- --------- ---------
Net cash provided by (used in)
operating activities $ 33,235 19,275 (4,369)
========= ========= =========
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 29, 2002:
Name Age Position
- ------------------- --- ---------------------------------------------------------------
Ira Leon Rennert 67 Chairman and sole Director of the Company
James A. Armour 58 President and Chief Executive Officer
Edmond L. Peters 57 Senior Vice President, Procurement and Business Development
Paul J. Cafiero 48 Senior Vice President and Chief Financial Officer
Ricky R. Smith 43 Vice President, Manufacturing Engineering and Special Projects
Robert J. Gula 55 Senior Vice President, Engineering and Product Development
Kevin D. O'Rear 38 Vice President and General Counsel
Walter R. Botich 52 Vice President, Quality Assurance
Gary A. Tull 61 Vice President, Washington Operations
Gary L. Wuslich 56 Vice President, Human Resources
Francis R. Scharpf 63 Vice President, Medium Truck Programs and Business Development
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. and Doe Run Resources, Inc. Mr. Rennert is
Chairman of the Board of Renco Metals, Inc., and its principal subsidiary,
Magnesium Corporation of America, which filed for relief under Chapter 11 of the
Bankruptcy Code with the United States Bankruptcy Court for the Southern
District of New York on August 2, 2001. Mr. Rennert is also Chairman of the
Board and, through a corporation, sole stockholder of Lodestar Holdings, Inc.,
and it's principal subsidiary, Lodestar Energy, Inc., which consented to the
entry of orders for relief under Chapter 11 by the United States Bankruptcy
Court for the Eastern District of Kentucky on April 27, 2001.
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, Vice President, Materials and Quality
Assurance and Corporate Director, Quality Assurance. Mr. Armour has been with
the Company and its predecessor companies for the past 29 years, including
positions with American Motors Corporation. Prior thereto, Mr. Armour held
various positions with 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 17 years.
Paul J. Cafiero has been Senior Vice President and Chief Financial Officer since
March 5, 2001. Mr. Cafiero previously held the position of Vice President and
Chief Financial Officer since May 1, 1997 and 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
17 years.
Ricky R. Smith has been Vice President, H2 Operations and Special Projects since
November 1, 2000. In that role, Mr. Smith serves as the lead executive in all
operational issues involving the H2 assembly plant and its operations.
Previously he held the positions of Vice President, Manufacturing Engineering
and Special Projects and Director, Manufacturing Engineering and Plant Manager
for the Mishawaka operations. Mr. Smith has been with the Company and its
predecessor companies for the past 21 years.
52
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 30 years. Prior to joining AM
General, Mr. Gula held technical positions within several engineering services
and automotive manufacturing companies.
Kevin D. O'Rear joined the Company as its Vice President and General Counsel on
November 1, 2001. Prior to joining the Company, Mr. O'Rear was a Partner at
Baker & Daniels. Mr. O'Rear was also an Associate Attorney with Jones, Day,
Reavis, & Pogue out of Cleveland, Ohio. Mr. O'Rear is a graduate of the
University of Notre Dame and has earned his juris doctorate from the University
of Virginia Law School.
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
19 years. Prior to joining AM General, Mr. Botich held managerial and technical
positions with other automotive supplier companies.
Gary A. Tull was appointed Vice President, Washington Operations on February 5,
2001. Mr. Tull has been with the Company since January 2000. Prior to joining
the Company, Mr. Tull held senior positions with the U.S. Army Material Command
where he was a member of the Senior Executive Service for the past ten years.
Gary L. Wuslich has been Vice President, Human Resources for over seven years.
Mr. Wuslich has also held the position of Director, Human Resources. Mr. Wuslich
has been with the Company and its predecessor for the past 32 years.
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 19 years. Before joining
AM General, Mr. Scharpf was a career military officer having served in the US
Army in various command positions.
53
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, 2001, 2000, and 1999 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 (2)
- ------------------------------------ ---------------------------------------------------------------------------
Ira Leon Rennert (1) 2001 - - - $2,323,000
Chairman and Sole Director 2000 - - - $1,200,000
1999 - - - $1,200,000
James A. Armour (3) 2001 $500,000 500,000 412,335 -
President & Chief Executive 2000 $413,464 250,000 74,702 -
Officer 1999 $250,000 250,000 46,078 -
Edmond L. Peters 2001 225,000 100,000 64,585 -
Sr. Vice President, 2000 196,154 100,000 35,631 -
Procurement 1999 175,000 100,000 30,235 -
Paul J. Cafiero 2001 211,609 100,000 65,961 -
Sr. Vice President and Chief 2000 165,892 75,000 51,440 -
Financial Officer 1999 125,000 100,000 26,014 -
Ricky R. Smith
Vice President, Manufacturing 2001 198,385 100,000 36,666 -
Engineering and Special 2000 124,139 60,000 18,605 -
Assignments 1999 113,388 40,000 13,968 -
Robert J. Gula 2001 205,000 75,000 41,753 -
Sr. Vice President, Engineering 2000 176,154 75,000 29,302 -
& Product Development 1999 155,000 40,000 28,134 -
(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 2001, Renco received a management fee of $1,200,000 from the
Company.
(2) Consisting principally of Company paid expenses for cars, clubs, travel and
other expenses.
(3) Other Annual Compensation of $412,335 includes $267,882 of compensation
that is required to be reported for FICA tax purposes only (of which
$230,000 represents a one-time adjustment made under the Company's Excess
Plan due to plan changes made in 2000) and does not represent cash
compensation received by Mr. Armour during fiscal 2001. IRS regulations
require that the value of such a benefit under a non-qualified
retirement plan be considered as compensation for FICA purposes. The
remainder of the $412,335, or $144,453, consisted principally of Company
paid expenses for cars, clubs, travel and other expenses.
54
Compensation Committee Interlocks and Insider Participation
The Company had no compensation committee during the fiscal year ended October
31, 2001. The sole member of the board of directors was Mr. Rennert. The
compensation for the Named Executive Officers for fiscal 2001 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 2001, 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 and Mr. Scharpf are each employed under employment agreements which,
pursuant to the terms thereof, continue from year to year unless terminated by
either party with 30 days' prior written notice. Beyond this written contract,
Mr. Rennert and Mr. Armour have a clear understanding that Mr. Armour is
committed to remaining with the Company for several years.
Mr. Peters, Mr. Cafiero, Mr. Smith, Mr. Gula, Mr. O'Rear, Mr. Botich, Mr. Tull
and Mr. Wuslich are each employed under employment agreements which, pursuant to
the terms thereof, continue until October 31, 2004 and from year to year
thereafter unless terminated by either party with 90 days' prior written notice.
The compensation arrangements as of November 1, 2001 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 program, before bonus payments made under all executive
employment agreements and charges for non-cash postretirement benefits other
than pensions.
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. Cafiero-Minimum annual salary of $225,000 plus an annual bonus of $100,000
subject to the same conditions as applicable to Mr. Armour.
Mr. Smith-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 $75,000
subject to the same conditions as applicable to Mr. Armour.
Mr. O'Rear-Minimum annual salary of $150,000 plus an annual bonus of $50,000
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.
Mr. Tull-Minimum annual salary of $135,000 plus an annual bonus of $25,000
subject to the same conditions as applicable to Mr. Armour.
Mr. Wuslich-Minimum annual salary of $125,000 plus an annual bonus of $30,000
subject to the same conditions as applicable to Mr. Armour.
Mr. Scharpf-Minimum annual salary of $115,000 plus an annual bonus of $40,000
subject to the same conditions as applicable to Mr. Armour.
55
Net Worth Appreciation Agreements
The Named Executive Officers, one other officer, and two former officers 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. As of
October 31, 2001 the Company has accrued $0.1 million with respect to these
agreements.
Retirement Plans
The Company maintains two salaried retirement plans.
First, the AMG Retirement Plan is a defined benefit plan that is IRS qualified
and fully funded. Excluding GEP, the plan is extended to all salaried employees.
The AMG Retirement Plan calculates an annual accrual of 1.5% of each employee's
annual income (as defined in the plan), up to the Social Security Special "Old
Law" Wage Base (maximum earnings of $170,000 in 2001) 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
- ---------------------------------------------------------------------------------------------------------
Retirement at age 65
--------------------------
Earliest Benefit at
Service Annual Retirement Early Service Annual
Named Executive Age Years* Income Age Retirement** Years Benefit
- ---------------------------------------------------------------------------------------------------------
J.A. Armour 58 29 $988,100 58 $70,307 36 $121,960
E.L. Peters 58 16 313,100 60 51,824 23 82,252
R.J. Gula 55 30 268,100 55 55,787 40 141,024
P.J. Cafiero 48 17 313,100 58 69,654 34 137,368
R.R. Smith 43 20 313,100 53 48,769 41 170,559
* - As of January 1, 2002
** - Assumes 5% annual increase in base pay and bonus
Does not reflect permitted increase in the maximum compensation limit due
to EGTRRA
56
Second, the AM General Corporation 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 Excess Plan is not funded. Benefits provided
under the plan are payable only upon retirement at age 65 or older, death or
disability.
AM General Corporation Excess Plan
- -------------------------------------------------------------------------------------
Retirement at age 65
---------------------------
Service Annual Service Annual
Named Executive Age Years* Income** Years Benefit
- -------------------------------------------------------------------------------------
J.A. Armour 58 29 $988,100 36 $372,204
E.L. Peters 58 16 313,100 23 52,752
R.J. Gula 55 30 268,100 40 43,634
P.J. Cafiero 48 17 313,100 34 93,188
R.R. Smith 43 20 313,100 41 124,707
* - As of January 1, 2002
** - Assumes 5% annual increase in base pay and bonus
Does not reflect the permitted increase in the AMG Retirement Plan maximum
compensation limit due to EGTRRA
Item 12. Security Ownership of Certain Beneficial Owners and Management
Renco owns all of the outstanding capital stock of the Company, subject to the
option to GM described in Item 1. 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, 2004, 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, 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.
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.
57
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 incurred management fees of $2.3 million to Renco in the year ended
October 31, 2001.
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 $.8 million directly
with insurance premium finance companies. In fiscal 2001, the Company incurred
costs of approximately $1.1 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, 2001, the
Company had no net operating tax loss carryforwards. As of October 31, 2001, 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.
58
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 25
Consolidated Balance Sheets as of October 31, 2001 and 2000 26
Consolidated Statements of Operations for the years ended
October 31, 2001, 2000 and 1999 27
Consolidated Statements of Stockholder's Deficit and Comprehensive
Income (Loss) for the years ended
October 31, 2001, 2000, and 1999 28
Consolidated Statements of Cash Flows for the years ended
October 31, 2001, 2000, and 1999 29
Notes to Consolidated Financial Statements 30 through 50
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.
59
(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. (a)
3.2 Certificate of Amendment, changing name to AM General
Corporation, filed on April 30, 1992. (a)
3.3 Bylaws. (a)
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. (a)
4.1.1 Amendment No. 1 dated as of December 21, 1999 to the Indenture
between AM General Corporation as Issuer and State Street Bank
and Trust Company as Trustee dated as of April 27, 1995 (m)
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). (f)
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. (a)
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. (d)
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. (e)
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. (e)
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. (e)
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. (g)
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. (h) 10.2 Employment
Agreement with James A. Armour, dated May 1, 1992, as
supplemented December 16, 1993 and September 1, 1994. (a)
10.2.1 Supplement No. 3, dated February 24, 2000, to Employment
Agreement of James A. Armour. (j)
60
Exhibit No. Description
- --------------- ---------------------------------------------------------------
10.3 Employment Agreements dated May 1, 1992 as supplemented
December 16, 1993 with: (a)
Adare Fritz
Gary L. Wuslich
Robert J. Gula
Edmond L. Peters
10.3.1 Supplement No. 2, dated February 16, 1995, to Employment
Agreements of Messrs. Fritz, Wuslich, Gula and Peters. (b)
10.3.2 Employment Agreement with Paul J. Cafiero, dated May 1, 1997.
(f)
10.3.3 Supplement No. 4, dated May 15, 2000, to Employment Agreement
of Robert J. Gula. (k)
10.3.4 Supplement No. 4, dated May 15, 2000, to Employment Agreement
of Edmond L. Peters. (k)
10.3.5 Supplement No. 4, dated May 15, 2000, to Employment Agreement
of Paul J. Cafiero. (k)
10.3.6 Employment agreements dated November 1, 2001 with: (o)
Edmond L. Peters
Paul J. Cafiero
Ricky R. Smith
Robert J. Gula
Kevin D. O'Rear
Walter R. Botich
Gary Tull
Gary L. Wuslich
10.6 Net worth appreciation agreements dated May 1, 1992 with: (a)
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 (b)
10.6.2 Net worth appreciation agreement with Paul J. Cafiero dated
May 1, 1997. (f)
10.7 Management Consultant Agreement effective as of April 1, 1995
with The Renco Group, Inc. (a)
10.9 Deferred Payment Agreement dated May 5, 1995 between the
United States of America and the Corporation. (a)
10.10 Letter Agreement dated 23 December 1994 between the Company
and Department of the Army-Tank-Automotive and Armaments
Command (technical schedules omitted). (b)
10.11 Lease dated September 11, 1984 between Amland Properties, Inc.
and AM General Corporation. (b)
61
Exhibit No. Description
- --------------- ---------------------------------------------------------------
10.12 Lease dated May 12, 1989 between Niles/Washington Associates
Limited and AM General Corporation. (b)
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. (b)
10.14 Lease dated September 17, 1993 between Indiana GRQ, Inc. and
AM General Corporation. (b)
10.15 Lease dated July 25, 1984 between Oppenheimer Livonia
Associates and AM General Corporation. (b)
10.16 Intentionally Omitted
10.17 Commercial lease dated April 28, 1992 between Amland
Corporation and Ren Acquisition Corp. (b)
10.18 Contract dated December 14, 1995 between the Company and the
Department of the Army-Tank -Automotive and Armaments Command
(technical schedules omitted) (c)
10.19 Commercial lease dated November 6, 1997 between the Company
and Chippewa Corporation. (e)
10.20 Lease dated June 30, 1999 between Amland Properties, Inc. and
AM General Corporation. (h)
10.21 Lease dated January 1, 1999 between Holladay Mishawaka, LLC
and AM General Corporation. (h)
10.22 Master Agreement dated December 21, 1999 between AM General
Corporation and General Motors Corporation. (h)
10.23 Assignment Agreement dated December 21, 1999 between AM
General Corporation and General Motors Corporation. (h)
10.24 H2 Assembly Agreement dated December 21, 1999 between AM
General Corporation and General Motors Corporation. (h)
10.25 Management Services Agreement dated December 21, 1999 between
AM General Corporation and General Motors Corporation. (h)
10.26 Trademark License Agreement dated December 21, 1999 between AM
General Corporation and General Motors Corporation. (h)
10.27 Promissory Note dated December 21, 1999 between AM General
Corporation and General Motors Corporation. (h)
10.28 Security Agreement dated December 21, 1999 between AM General
Corporation and General Motors Corporation. (h)
62
Exhibit No. Description
- --------------- ---------------------------------------------------------------
10.29 Right of Access Agreement dated December 21, 1999 between AM
General Corporation and General Motors Corporation. (h)
10.30 HUMVEE Trademark Agreement dated December 21, 1999 between AM
General Corporation and General Motors Corporation. (h)
10.31 Royalty Sharing Agreement dated December 21, 1999 between AM
General Corporation and General Motors Corporation. (h)
10.32 Joint Review Board Agreement dated December 21, 1999 between
AM General Corporation and General Motors Corporation. (h)
10.33 Equity Conversion Agreement dated December 21, 1999 between AM
General Corporation and General Motors Corporation. (h)
10.34 Lease dated October 6, 1999 between Dayton Sunrise Partners
and AM General Corporation. (i)
10.35 Contract dated August 18, 2000 between the Company and Lamb
Technicon Body & Assembly Systems (technical schedules
omitted). (k)
10.36 Term Promissory Note dated June 5, 2000 between 1st Source
Bank and AM General Corporation. (k)
10.37 Loan and Security Agreement dated as of January 24, 2001
between Congress Financial Corporation and AM General
Corporation. (l)
10.37.1 Amendment No 1 dated April 19, 2001 to Loan and Security
Agreement, dated January 24, 2001 between Congress Financial
Corporation and AM General Corporation. (n)
21 Subsidiaries of Registrant.
(a) Filed with the Registration Statement No. 33-93302 filed
June 9, 1995.
(b) Filed with Amendment No. 1 to Registration Statement No.
33-93302 filed August 9, 1995
(c) Filed with Company's Form 10-K, No. 33-93302, filed
January 28, 1996.
(d) Filed with Company's Form 10-Q, No. 33-93302, filed
September 16, 1996.
(e) Filed with Company's Form 10-K, No. 33-93302, filed
January 29, 1997.
(f) Filed with the Company's Form 10-K, No. 33-93302, filed
January 29, 1998
(g) Filed with Company's Form 10-K No. 33-93302, filed January
29, 1999.
(h) Filed with Company's Form 10-K No. 33-93302 filed January
31, 2000.
(i) Filed with Company's Form 10-Q, No. 33-93302 filed March
16, 2000.
(j) Filed with Company's Form 10-Q, No. 33-93302 filed June
14, 2000.
(k) Filed with Company's Form 10-Q, No. 33-93302 filed
September 14, 2000.
(l) Filed with Company's Form 10-K No. 33-93302 filed January
29, 2001
(m) Filed with Company's Form 10-Q No. 33-93302 filed March
13, 2001
(n) Filed with Company's Form 10-Q No. 33-93302 filed June 14,
2001
(o) Filed with Company's Form 10-K No. 33-93302 filed January
29, 2002
63
(b) The Company filed Current Report on Form 8-K, dated August 22, 2001,
reporting the repurchase of $20.5 million of aggregate principal amount of the
Company's 12.875% Senior Notes at a premium of $0.2 million, plus accrued
interest of $0.8 million. The repurchase satisfies the Mandatory Purchase Offer
provision of the Indenture governing AM General's Notes dates as of April 27,
1995.
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, 2002.
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, 2002.
Signature Title
--------- -----
/s/ Ira Leon Rennert Chairman and sole Director
- ---------------------------------------
Ira Leon Rennert
/s/ James A. Armour President and Chief Executive Officer
- --------------------------------------- (Principal Executive Officer)
James A. Armour
/s/ Paul J. Cafiero Senior Vice President and Chief Financial Officer
- --------------------------------------- (Principal Financial and Accounting Officer)
Paul J. Cafiero
Supplemental Information to be Furnished With Reports Filed Pursuant to Section
15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to
Section 12 of the Act.
No annual report to security holders covering the registrant's last
fiscal year and no proxy statement, form of proxy or other proxy soliciting
material with respect to any annual or other meeting of security holders has
been nor will be sent to security holders.
64