SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2002
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
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.
Nine hundred shares of the registrant's common stock, par value $.01 per share,
are outstanding as of March 18, 2002.
AM General Corporation
Form 10-Q
Quarter Ended January 31, 2002
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS ..................................................... 3
Consolidated Balance Sheets ....................................................... 3
Consolidated Statements of Operations ............................................. 4
Consolidated Statements of Cash Flows ............................................. 5
Notes to Consolidated Financial Statements ........................................ 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .................................................... 10
General Discussion ................................................................ 10
Segment Discussion ................................................................ 10
Three Months Ended January 31, 2002 compared to Three Months Ended January 31, 2001 13
Liquidity and Capital Resources ................................................... 16
Forward-Looking Statements ........................................................ 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ............... 17
PART II. OTHER INFORMATION .............................................................. 18
ITEM 1. LEGAL PROCEEDINGS ........................................................ 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...................... 18
SIGNATURES ............................................................................... 19
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar amounts in thousands, except share information)
January 31,
Assets 2002 October 31,
Current assets: (unaudited) 2001
----------- -----------
Cash $ 12,727 3,608
Accounts receivable, net 54,286 82,952
Inventories 79,987 79,050
Prepaid expenses and other assets 1,106 1,947
Deferred income taxes 9,597 8,795
-------- --------
Total current assets 157,703 176,352
Income taxes receivable 4,713 4,713
Property, plant, and equipment, net 266,761 236,623
Deferred income taxes 36,912 34,688
Goodwill, net 66,439 66,439
Intangible pension asset 22,035 22,035
Other assets 706 1,111
-------- --------
$555,269 541,961
======== ========
Liabilities and Stockholder's Deficit
Current liabilities:
Accounts payable $ 47,669 47,508
Accrued expenses 67,189 71,351
Income taxes payable 4,694 3,721
Current maturities of long-term debt 68,782 60,946
-------- --------
Total current liabilities 188,334 183,526
Long-term debt 192,848 186,878
Postretirement benefits other than pensions, noncurrent portion 167,804 165,817
Pension, noncurrent portion 35,465 33,436
Other liabilities, noncurrent portion 5,329 5,591
-------- --------
Total liabilities 589,780 575,248
-------- --------
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 10,079 8,552
Accumulated deficit (40,959) (38,208)
Accumulated other comprehensive loss - minimum pension liability (8,631) (8,631)
-------- --------
Total stockholder's deficit (34,511) (33,287)
Commitments and contingencies
-------- --------
$555,269 541,961
======== ========
See accompanying notes to consolidated financial statements
3
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollar amounts in thousands)
(unaudited)
Three Months Ended
January 31,
------------------------
2002 2001
--------- ---------
Net sales $ 128,341 121,465
Cost and expenses:
Cost of sales 116,724 101,501
Depreciation and amortization 3,124 3,956
Selling, general, and administrative expenses 10,533 8,447
--------- ---------
Income (loss) before interest and income taxes (2,040) 7,561
Interest income 30 120
Interest expense (2,178) (3,491)
--------- ---------
Income (loss) before income taxes (4,188) 4,190
Income tax expense (benefit) (1,437) 2,035
--------- ---------
Net income (loss) $ (2,751) 2,155
========= =========
See accompanying notes to consolidated financial statements
4
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
(unaudited)
Three Months Ended
January 31,
---------------------
2002 2001
-------- ---------
Cash flows from operating activities:
Net income (loss) $ (2,751) 2,155
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization of plant and equipment 2,863 2,623
Other amortization 405 1,344
Deferred income taxes (3,026) (1,741)
Noncash other postretirement cost 1,987 1,235
Accretion of debt discount 1,700 190
Gain on sale of equipment (4) --
Change in assets and liabilities:
Accounts receivable 28,666 24,974
Inventories (937) (7,703)
Prepaid expenses 225 (711)
Other assets -- 2
Accounts payable 161 (13,715)
Accrued expenses (4,162) (2,198)
Income taxes 1,589 (221)
Pension 2,029 --
Other liabilities (262) (1,178)
-------- -------
Net cash provided by operating activities 28,483 5,056
-------- -------
Cash flows from investing activities:
Proceeds from sale of equipment 4 --
Capital expenditures (33,001) (31,022)
-------- -------
Net cash used in investing activities (32,997) (31,022)
-------- -------
Cash flows from financing activities:
Net repayments under line-of-credit agreement (20,630) (5,172)
Borrowing of long-term debt 34,424 33,333
Repayments of long-term debt (161) (146)
Financing fees -- (250)
-------- -------
Net cash provided by financing activities 13,633 27,765
-------- -------
Net change in cash 9,119 1,799
Cash and cash equivalents at beginning of period 3,608 6,444
-------- -------
Cash and cash equivalents at end of period $ 12,727 8,243
======== =======
Supplemental disclosure of cash items
Interest paid $ 3,544 5,478
Taxes paid -- 3,997
See accompanying notes to consolidated financial statements
5
AM General Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes to consolidated financial statements required by generally accepted
accounting principles for a complete financial statement presentation.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended January 31, 2002 are not
necessarily indicative of the results that may be expected for the year ending
October 31, 2002.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant's Form 10-K for the year ended
October 31, 2001.
Note 2. Accounts Receivable
Components of accounts receivable are as follows:
January 31,
2002 October 31,
(Unaudited) 2001
----------- -----------
Receivables from the U.S. Government under
long-term contracts:
Amounts billed or billable $ 22,598 35,479
Recoverable costs accrued-not billed 1,828 2,039
Unrecovered costs subject to negotiation 9,896 9,621
Commercial customers-amounts billed:
Foreign 7,697 21,065
Dealers 877 740
Service parts - -
Engines 8,868 10,610
Other receivables 3,002 3,848
----------- -----------
54,766 83,402
----------- -----------
Less allowance for doubtful accounts (480) (450)
----------- -----------
$ 54,286 82,952
============ ===========
6
Note 3. Inventories
Inventories consisted of the following:
January 31,
2002 October 31,
(Unaudited) 2001
----------- -----------
Finished Goods $23,090 22,346
Service Parts 20,589 19,511
Raw Materials, supplies and work in progress 36,308 37,193
------- -------
$79,987 79,050
======= =======
Note 4. Maturity of Senior Notes
The Company's senior notes totaling $47,462 mature and are payable on May 1,
2002. The Company is currently in negotiations 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.
Note 5. GM Transaction
On December 21, 1999, the Company executed a series of agreements with General
Motors Corporation ("GM") through which the Company intends to more fully
utilize the widespread recognition of the Hummer name to generate incremental
revenues, profits and cash flow (the "GM Transaction"). 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 Hummer
trademark (the "Trademark") and has retained the Company to assemble H2s over a
seven and one half year period effective with the release of the H2. As part of
the GM 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 has not committed to any
specific minimum annual number of H2s.
As part of the GM Transaction, GM licensed the Company to continue to use the
HUMMER trademark on the Current Vehicle for the duration of the assembly period.
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 January 31, 2002, the
balance of the GM Loan, net of unamortized discount of $4.8 million, was $195.6
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
7
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 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 pursuant to previously established procedures. Should
the Company and GM fail to agree on a value, the GM Transaction agreements
contain a provision in which an independent third party will assist in the
valuation. The 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 $9,079 discount on the GM Loan and a
corresponding increase in additional paid-in capital, of which $1,527 was
recorded during the quarter ended January 31, 2002. The discount is being
amortized through the earliest date at which GM obtains the right to convert the
loan. As of January 31, 2002, the Company has amortized $4,324 of the $9,079
discount, of which $1,691 was amortized during the first quarter of fiscal 2002.
Note 6. Accounting Standards
As of November 1, 2001, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets." This Standard
addresses financial accounting and reporting for acquired goodwill and other
intangible assets upon their acquisition and after they have been initially
recognized in the financial statements and supercedes APB Opinion No. 17,
"Intangible Assets." Under this Standard existing intangible assets will be
evaluated for possible impairment at the date of transition and periodically
thereafter. The Standard allows six months for performance of the initial
transition impairment assessment. In addition, goodwill and certain other
indefinite-lived intangible assets will no longer be amortized. The Company's
goodwill amortization expense has historically approximated $4,300 annually. The
Company is currently evaluating the impact of the initial transition impairment
assessment on its financial statements and results of operations. Assuming the
Company adopted this Standard on November 1, 2000, net income for the quarterly
period ending January 31, 2001 would have increased by $1,071.
The Financial Accounting Standards Board issued SFAS No. 143, "Accounting for
Asset Retirement Obligations," in August 2001. This Standard addresses financial
accounting and reporting obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs. It requires
companies to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred, which is adjusted to its
present value each period. In addition, companies must capitalize a
corresponding amount by increasing the carrying amount of the related long-lived
asset, which is depreciated over the useful life of the related asset. The
Company will adopt SFAS No. 143 on October 1, 2002 and does not expect that this
Standard will have a material effect on its consolidated financial statements or
results of operations.
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,
8
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.
Note 7. Segment Reporting
The Company identifies segments based on management responsibility within the
organization. The Company classifies its operations into five business segments:
(i) HUMMER/HUMVEEs, (ii) Spare Parts Logistics Operations (SPLO), (iii) Systems
Technical Support (STS)/Other, (iv) GEP, and (v) 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):
Three months ended January 31, 2001
------------------------------------------------------------------------
HUMMER/ STS/ Inter-
HUMVEE SPLO Other GEP H2 Segment Total
------------------------------------------------------------------------
Net sales $93.2 21.7 3.7 18.1 -- (8.4) 128.3
Gross profit 14.5 3.2 0.3 4.8 (11.1) (0.2) 11.5
Three months ended January 31, 2000
------------------------------------------------------------------------
HUMMER/ STS/ Inter-
HUMVEE SPLO Other GEP H2 Segment Total
------------------------------------------------------------------------
Net sales $95.0 18.3 4.5 9.9 -- (6.2) 121.5
Gross profit 15.9 2.8 0.4 2.0 (0.6) (0.5) 20.0
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
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 for the Department of Defense ("DoD"). The Company 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"). The HUMMER 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 H2s, pursuant to the GM Transaction entered into in December 1999.
The Company's wholly-owned subsidiary, General Engine Products, Inc. ("GEP")
manufactures, under a license agreement with GM running through 2009, the 6.5
liter diesel engine used in the HUMMER/HUMVEE. GM's internal parts distributor,
Service Parts Operation, also purchases its service requirements for this engine
from AM General. This "drop in" high performance engine is also a replacement
for older GM diesel V8s used for marine, military, commercial and industrial
applications.
The Company markets technical support services, spare parts and training and
technical publications through its Service Parts Logistics Operation ("SPLO")
and performs engineering services through its Systems Technical Support ("STS")
operation.
The Company classifies its operations into five business segments: (i)
HUMMER/HUMVEEs, (ii) SPLO, (iii) STS/Other, (iv) GEP and (v) H2.
HUMVEE/HUMMER Segment
HUMVEE
The Company began producing the latest generation of military HUMVEEs, the A2
Series, in August 1995. On December 23, 1995, the Company entered into a
multi-year annual requirements contract for A2 Series HUMVEEs known as the X001
Contract which provided a mechanism for the US Army to procure at least 2,350
HUMVEEs annually through fiscal year 2000. The X001 contract expired on December
14, 2000. The Company successfully negotiated a new follow-on A2 production
contract that was awarded on November 6, 2000 (the "S001 contract"). This is a
sole source firm-fixed price contract calling for first year production of 2,861
HUMVEE's, 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 with a mechanism to procure up to
150% of first year production. If all option years on the contract are
exercised, approximately 30,000 vehicles 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.
As of March 13, 2002, the Company has received orders from the US Armed Forces
for the procurement of 2,610 vehicles, of which 1,831 remain unsold. 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 be approximately the same as the number of HUMVEEs that
were produced and delivered to the DoD in fiscal 2001 (3,607 units).
On August 7, 2000, the Company signed an engineering contract with the DoD
valued at $11.5 million. This contract (the "A4") 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 testing during July and August 2001. In accordance with the
provisions of the contract, the Company will build
10
and deliver ten pilot vehicles for Government testing by the fourth quarter of
fiscal 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
of fiscal 2002.
HUMMER
Since its introduction in 1992, the Company has sold 9,538 HUMMERs through its
network of domestic and international dealerships and distributors. At January
31, 2002, AM General had a total backlog of 244 HUMMERs valued at $15.9 million
compared to 172 valued at $11.1 million on October 31, 2001.
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
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.
SPLO Segment
SPLO provides comprehensive after-market parts, support-services, 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
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 Segment
On June 11, 1999, the Company acquired a license to build the 6.5 liter diesel
engine and certain other 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 GEP for a period of ten 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.
In August 2000, GEP contracted with GM to perform testing and general repair
services on 17,305 engines previously assembled by GM. As of January 31, 2002,
the Company has performed testing of 10,755 engines for GM under this contract
generating revenues of $4.1 million. The Company anticipates it will complete
work under this contract during the third quarter of fiscal 2002.
GEP is currently supplying to the Company all of the Company's 6.5 liter diesel
engine requirements.
11
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 has retained the Company to assemble H2s over a seven
and one half year period effective with the release of the H2. As part of the GM
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 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 has not committed to any specific minimum annual
number of H2s.
Construction of the New Facility, as well as the Company's vehicle assembly
start-up plan, are both currently on schedule. Construction costs of the New
Facility are expected to exceed $200 million and will be funded through the GM
Loan.
As of March 8, 2002, the Company has hired 104 salaried employees and 421 hourly
employees for the H2 program. The Company has implemented a comprehensive
assessment, hiring, and training plan for the H2 program that is currently
underway. This plan provides the Company a mechanism to recruit, screen, hire,
and train new employees to work on the H2 program. The Company anticipates
salaried and hourly employment levels for the H2 program will reach 168 and 890,
respectively, by the end of fiscal 2002.
12
Results of Operations
Three Months Ended January 31, 2002 ("first quarter of 2002") compared to Three
Months Ended January 31, 2001 ("first quarter of 2001")
Analysis of Net Sales and Unit Sales Information
- ------------------------------------------------
(in millions, except unit information)
Three Months Ended
January 31,
-------------------- %
2002 2001 Change Change
------- ------- ------ ------
Net Sales
HUMMER/HUMVEEs $ 93.2 $ 95.0 $ (1.8) (1.9)%
SPLO 21.7 18.3 3.4 18.6
STS/Other 3.7 4.5 (0.8) (17.8)
GEP 18.1 9.9 8.2 82.8
Inter-segment (8.4) (6.2) (2.2) (35.5)
------- ------- ------- -----
$ 128.3 $ 121.5 $ 6.8 5.6%
======= ======= ======= =====
HUMVEE/HUMMER Unit Sales 1,304 1,299 5 0.4%
HUMVEE/HUMMER Average Unit Selling Prices $71,472 $73,133 $(1,661) (2.3)%
Consolidated net sales were $128.3 million in the first quarter of 2002, an
increase of $6.8 million, or 5.6% from $121.5 million in the first quarter of
2001. The increase in net sales was due to higher GEP and SPLO sales, partially
offset by lower HUMMER/HUMVEE and STS/Other sales.
HUMMER/HUMVEE segment net sales were $93.2 million in the first quarter of 2002,
a decrease of $1.8 million, or 1.9% from $95.0 million in the first quarter of
2001. The decrease is due to selling 95 fewer international units and 11 fewer
H1's which are more expensive vehicles. This was partially offset by selling 111
more government HUMVEE's, that are less expensive than international and
commercial vehicles. The decrease in average unit selling prices is attributable
to selling a larger concentration of less expensive US Government HUMVEE's. In
fiscal 2001, the Company manufactured 54 HUMVEE's valued at $8.7 million for a
foreign customer which remained unsold at January 31, 2002 due to a temporary
delay in the customer obtaining adequate financing. The foreign customer is in
the process of negotiating financing arrangements and the Company anticipates
the vehicles will be sold by the end of the second quarter. Had the Company sold
these vehicles in the first quarter of 2002, segment net sales would have been
$6.9 million higher than the first quarter of 2001.
SPLO segment net sales were $21.7 million in the first quarter of 2002, an
increase of $3.4 million, or 18.6% from $18.3 million in the first quarter of
2001. The increase in net sales is primarily attributable to an increase in U.S.
Government military orders.
STS/Other segment net sales were $3.7 million in the first quarter of 2002, a
decrease of $0.8 million, or 17.8% from $4.5 million in the first quarter of
2001. The decrease in net sales is primarily due to temporary funding
limitations on the US Government A4 contract. In accordance with the terms and
conditions of the contract, upon completion of 75% of the contract requirements
which occurred on October 17, 2001, the US Government requested the Company to
cease efforts on the contract to afford them additional time to reevaluate the
remaining level of effort, scope and available funding levels necessary to
complete the contract. On March 5, 2002, the Company received notice from the US
Government requesting work to continue on the contract up to a new contract
amount of $11.9
13
million. The US Government is continuing to evaluate the scope of the contract
to determine if additional funding will be appropriated to the contract.
GEP segment net sales were $18.1 million, including $8.4 million to the
HUMMER/HUMVEE segment in the first quarter of 2002, an increase of $8.2, or
82.8% from $9.9 million, including $6.2 million to the HUMMER/HUMVEE segment in
the first quarter of 2001. The increase was due to a higher production rate
during the first quarter of fiscal 2002 compared to a start-up production rate
during the first quarter of 2001.
The inter-segment sales of $(8.4) million represents the elimination of
inter-company engine sales from GEP to the Company's HUMMER/HUMVEE segment
during the first quarter of 2002.
Analysis of Consolidated Gross Profit
- -------------------------------------
(in millions)
Three months ended
January 31,
-----------------------------------
2002 % 2001 % Change Change
------ ---- ------ ---- ------ -------
Gross Profit
HUMMER/HUMVEEs $ 14.5 15.6% $ 15.9 16.7% $ (1.4) (8.8)%
SPLO 3.2 14.8 2.8 15.3 0.4 14.3
STS/Other 0.3 8.1 0.4 8.9 (0.1) (25.0)
GEP 4.8 26.5 2.0 20.2 2.8 140.0
H2 (11.1) -- (0.6) -- (10.5) --
Inter-segment (0.2) -- (0.5) -- 0.3 --
------ ----- ------ ---- ------ -----
$ 11.5 9.0% $ 20.0 16.5% $ (8.5) (42.5)%
====== ==== ====== ==== ====== =====
Consolidated gros s profit w as $11.5 million in the first quarter of 2002, a
decrease of $8.5 million, or 42.5% from $20.0 million in the first quarter of
2001. The Company's consolidated gross profit percentage for the first quarter
of 2002 was 9.0% compared to 16.5% for the first quarter of 2001. The decrease
is primarily due to H2 start-up costs, lower HUMMER/HUMVEE and STS/Other gross
profit, partially offset by higher gross profit in the GEP and SPLO segments.
Had the Company not incurred H2 start-up costs, gross profit would have been
$2.0 million higher in the first quarter of 2002 compared to the first quarter
of 2001.
HUMMER/HUMVEE segment gross profit was $14.5 million in the first quarter of
2002, a decrease of $1.4 million, or 8.8% from $15.9 million in the first
quarter of 2001. The segment gross profit percentage was 15.6% for the first
quarter of 2002 compared to 16.7% for the first quarter of 2001. The decrease in
gross profit is primarily due to a higher concentration of more expensive
international HUMVEE's sold during the first quarter of 2001 compared to the
first quarter of 2002. As previously mentioned, the Company was unable to sell
54 vehicles manufactured for an international customer due to the customer's
temporary financing difficulties. Had these vehicles been sold during the first
quarter of 2002, gross profit would have been $1.4 million higher than gross
profit reported in the first quarter of 2001.
SPLO segment gross profit was $3.2 million in the first quarter of 2002, an
increase of $0.4 million, or 14.3% from $2.8 million in the first quarter of
2001. The segment gross profit percentage for the first quarter of 2002 was
14.8% compared to 15.3% for the first quarter of 2001. The increase in gross
profit is primarily due to increased demand for spare parts by the US
Government.
STS/Other segment gross profit was $0.3 million in the first quarter of 2002, a
decrease of $0.1 million, or 25.0% from $0.4 million in the first quarter of
2001. The segment gross profit percentage for the first quarter of 2002 was 8.1%
compared to 8.9% for the first quarter of 2001. The decrease in gross profit is
due to the temporary funding limitations on the US Government A4 contract.
14
GEP segment gross profit was $4.8 million in the first quarter of 2002, an
increase of $2.8 million, or 140.0% from $2.0 million in the first quarter of
2001. The segment gross profit percentage for the first quarter of 2002 was
26.5% compared to 20.2% for the first quarter of 2001. Gross profit was higher
in the first quarter of 2002 primarily due to higher sales. The segment was
still operating within their start-up mode during the first quarter of 2001.
The H2 segment incurred start-up costs of $11.1 million in the first quarter of
2002 in connection with the new H2 project compared to $0.6 million in the first
quarter of 2001.
The inter-segment amount of $(0.2) million represents the elimination of gross
profit on inter-company engine sales from GEP to the Company's HUMMER/HUMVEE
segment which remained in its inventory at the end of the first quarter of 2002.
Analysis and Management Discussions on Non-Segment Information
- --------------------------------------------------------------
Depreciation and Amortization
Depreciation and amortization expense was $3.1 million for the first quarter of
2002, a decrease of $0.9 million or 22.5% from $4.0 million for the first
quarter of 2001. The decrease is primarily due to the Company's adoption of FASB
Statement No. 142 which requires that goodwill no longer be amortized. This
resulted in a $1.1 million reduction in expense during the first quarter of
2002. This reduction was partially offset by higher depreciation expense
associated with the capital expenditures made during fiscal year 2001 for the
HUMMER/HUMVEE manufacturing facility and the GEP facility.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expense was $10.5 million for the
first quarter of 2002, an increase of $2.1 million or 25.0% from SG&A expense of
$8.4 million for the first quarter of 2001. The increase is primarily due to
higher Independent Research and Development ("IR&D") engineering expenses
resulting from the temporary funding limitations on the US Government A4
Contract which caused a temporary shift in Company resources being allocated to
non-reimbursable engineering projects. As previously reported, the Company
received authorization from the US Government to recommence work on the A4
Contract on March 5, 2002. Accordingly, the Company has shifted engineering
resources back to this contract. GEP segment SG&A expenses also increased due to
expenses in connection with 2004 vehicle emission certifications.
Income (Loss) before Interest and Income Taxes
The Company recorded a loss before interest and income taxes for the first
quarter of 2002 of $2.0 million, a decrease of $9.6 million from income before
interest and income taxes of $7.6 million in 2001. The decrease in income before
interest and income taxes is primarily due to the lower gross profits described
above and higher SG&A expense, partially offset by lower depreciation and
amortization expense.
Interest Income and Expense
Interest expense for the first quarter of 2002 was $2.2 million, a decrease of
$1.3 million or 37.1% from $3.5 million for the first quarter of 2001. Average
debt outstanding during the first quarter of 2002, exclusive of the non-interest
bearing GM Loan, was $76.4 million, a decrease of $34.8 million from $111.2
million for the first quarter of 2001. The weighted average interest rate was
10.5% in the first quarter of 2002 compared to 11.8% in the first quarter of
2001. The average debt outstanding decreased primarily due to the repurchase of
$20.5 million aggregate principal amount of the Company's senior notes during
fiscal 2001 in connection with the Mandatory Purchase Offer provision of the
Indenture governing the notes. Average debt outstanding was further reduced in
connection with lower inventory levels in the first quarter of 2002 compared to
the first quarter of 2001.
15
Income Tax Benefit (Expense)
Income tax expense was recorded at the statutory rate adjusted for permanent
differences. The Company recorded an income tax benefit for the first quarter of
2002 of $1.5 million compared to income tax expense of $2.0 million recorded
during the first quarter of 2001.
Net Income (Loss)
The Company reported a net loss for the first quarter of 2002 of $2.8 million, a
decrease of $5.0 million from a net income of $2.2 million in the first quarter
of 2001. As discussed above, the decrease in net income is primarily due to
lower gross profits and higher SG&A expenses partially offset by lower income
tax expense, interest expense and depreciation and amortization.
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 and other
financing sources.
Cash provided by operating activities was $28.5 million for the first quarter of
2002 compared to $5.0 million for the first quarter of 2001. The key factors
affecting cash flow from operating activities during the first three months of
2002 were reductions in accounts receivable and increases in income taxes and
pension liabilities, partially offset by reductions in accrued expenses,
increases in deferred income taxes, and funding the Company's net loss. Other
factors include non-cash charges to operating income including depreciation,
amortization, and non-cash postretirement expenses.
Accounts receivable levels, including unbilled contract modifications, at
January 31, 2002 were $28.7 million lower than levels at the end of the prior
fiscal year primarily due to the collection of higher than normal sales recorded
at the end of the preceding fiscal year in connection with HUMVEE sales to
several international customers and to the US Government. As of January 31,
2002, unbilled contract modifications totaled $9.9 million. These unbilled
receivables represent work performed by the Company for which a contract
modification with the DoD has not yet been finalized. The Company expects these
contract modifications to be completed during fiscal 2002. As these
modifications are finalized, the amounts receivable under the contract
modifications will be offset against all contract modifications payable which
presently is estimated to be similar in amount.
During the first quarter of 2002, the Company spent $33.0 million on capital
expenditures, including $30.4 million in connection with construction of the New
Facility. The Company spent $2.6 million and $1.8 million in the first quarter
of 2002 and 2001, respectively, primarily in connection with production tooling,
data equipment and leasehold improvements. The Company anticipates additional
capital expenditures in fiscal 2002 of approximately $49.459.1 million of which
$38.0 million is for the construction of the New Facility and will be funded
with the proceeds of the GM Loan. The Company anticipates it will incur
additional capital expenditures of approximately $11.4 million for vendor
tooling, machinery and equipment, vehicles and other capital requirements. These
capital requirements will be funded from operating cash flow and availability
under the revolving credit facility.
To repay the GM Loan, the Company will pay 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. As of January 31, 2002, the Company had
borrowings outstanding under the GM Loan of $195.6 million, net of unamortized
discount of $4.8 million.
The Company's revolving credit facility has a maximum borrowing limit of $60
million, is secured by a first lien on all of the Company's accounts receivable,
inventories and certain other assets, as defined in the applicable loan and
security agreement, and expires on October 30, 2004. As of March 7, 2002, the
16
Company had borrowings outstanding of $15.0 million and approximately $23.2
million of remaining availability under this facility.
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 facility 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.
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 outcome of pending litigation; the outcome of the
DaimlerChrysler litigation, the DCAA matter reported in the Company's 10-K filed
on January 29, 2002 and other litigation discussed in Item 1 of Part II; the
ability to obtain sufficient funds to retire the senior notes due May 1, 2002;
the loss of any significant customers; the loss of any major supplier; and the
availability of qualified personnel. These forward-looking statements speak only
as of the date of this report. The Company expressly disclaims any obligation or
undertaking to disseminate any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstance on which
any forward-looking statement is based.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
market prices and rates. The Company is exposed to market risk from interest
rate changes primarily due to its revolving credit facility used for maintaining
liquidity, funding capital expenditures and expanding operations. The Company's
revolving credit facility bears interest at prime plus a negotiated margin,
therefore any borrowings outstanding will approximate fair market value at all
times. The Company believes fluctuations in interest rates will not have a
material adverse impact on its results of operations over the next year.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 conducted a hearing on DaimlerChrysler's
Motion for Preliminary Injunction in February 2002, and issued an order denying
DaimlerChrysler's request for injunction on February 28. A trial is scheduled
for 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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On February 15, 2002, The Renco Group, Inc., as sole stockholder of the Company,
executed a written consent, in lieu of meeting of stockholders, to the
re-election of Ira Leon Rennert as Chairman of the Board and sole director of
the Corporation.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 18, 2002 AM GENERAL CORPORATION
Registrant
By /s/ Paul J. Cafiero
-------------------------------
Paul J. Cafiero
Vice President and Chief
Financial Officer
Duly authorized officer and
principal financial and
accounting officer
19