<PAGE>
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 July 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file Number: 33-93302
AM General Corporation
(Exact name of registrant as specified in its charter)
-------------------
Delaware 35-1852615
(State or other jurisdiction of incorporation or (IRS Employer Identification
organization) No.)
105 North Niles Avenue
South Bend, Indiana 46617
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (219) 284-2907
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Nine hundred shares of the registrant's common stock, par value $.01 per share,
are outstanding as of September 14, 2000.
<PAGE>
AM General Corporation
Form 10-Q
Quarter Ended July 31, 2000
<TABLE>
<CAPTION>
<S> <C>
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. 7
General Discussion 7
Segment Discussion 7
Three Months Ended July 31, 2000 compared to Three Months Ended July 31, 1999 10
Nine Months Ended July 31, 2000 compared to Nine Months Ended July 31, 1999 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 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollar amounts in thousands, except share information)
<TABLE>
<CAPTION>
July 31, October 31,
Assets 2000 1999
--------------------------------------------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 1,992 1,081
Accounts receivable, net 69,103 77,081
Inventories 102,509 84,589
Prepaid expenses 1,707 984
Deferred income taxes 6,157 6,210
--------------------------------------------------------------------------------------------------------------------------------
Total current assets 181,468 169,945
Income taxes receivable 4,752 4,752
Property, plant, and equipment, net 59,250 43,858
Deferred income taxes 26,441 26,388
Goodwill, net 71,797 75,012
Other assets 3,432 5,838
--------------------------------------------------------------------------------------------------------------------------------
$ 347,140 325,793
--------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholder's Deficit
--------------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 596 -
Accounts payable 50,566 37,425
Accrued expenses 82,450 71,163
--------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 133,612 108,588
Long-term debt 89,870 92,805
Postretirement benefits other than pensions, noncurrent portion 163,747 160,403
Other long-term liabilities 9,285 8,064
--------------------------------------------------------------------------------------------------------------------------------
Total liabilities $ 396,514 369,860
--------------------------------------------------------------------------------------------------------------------------------
Stockholder's deficit:
8% cumulative preferred stock, $1,000 par value. Authorized
10,000 shares; issued and outstanding 5,000 shares. $ 5,000 5,000
Common stock, $.01 par value. Authorized, issued and
outstanding 900 shares. 0 0
Paid-in capital 1,000 1,000
Accumulated deficit (55,374) (50,067)
--------------------------------------------------------------------------------------------------------------------------------
Total stockholder's deficit (49,374) (44,067)
Commitments and contingencies
--------------------------------------------------------------------------------------------------------------------------------
$ 347,140 325,793
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Dollar amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
July 31, July 31,
----------------------------- ----------------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Net sales $ 110,678 72,124 302,379 263,019
---------------------------------------------------------------------------------------------------------------------------------
Cost and expenses:
Cost of sales 92,437 67,797 262,338 233,631
Depreciation and amortization 3,224 2,733 9,811 8,364
Selling, general, and administrative expenses 7,373 7,017 23,822 21,903
Restructuring/Plant closing - - - (401)
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest and income taxes 7,644 (5,423) 6,408 (478)
Interest income 52 53 169 306
Interest expense (3,220) (2,675) (10,478) (8,399)
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative
Effect of accounting change 4,476 (8,045) (3,901) (8,571)
Income tax (expense) benefit (234) 2,533 (336) 1,773
---------------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of accounting change 4,242 (5,512) (4,237) (6,798)
Cumulative effect of accounting change - - (1,070) -
---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 4,242 (5,512) (5,307) (6,798)
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
AM GENERAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)
(unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
Nine Months Ended
July 31,
------------------------------------
2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,307) (6,798)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization of plant and equipment 5,852 4,366
Other amortization 4,546 4,756
Noncash other postretirement cost 3,344 5,033
Deferred income taxes - (938)
Decrease in inventory reserve (895) (93)
Restructuring payments (315) (598)
Restructuring/plant closing charges - (401)
Cumulative effect of change in accounting principle 1,070 -
(Gain) loss on sale of equipment (25) 23
Change in assets and liabilities:
Accounts receivable 7,979 11,287
Inventories (17,143) (5,952)
Prepaid expenses (722) (397)
Other assets 4 1,510
Accounts payable 13,141 (9,104)
Accrued expenses 9,454 1,466
Income taxes 325 (931)
Other liabilities 3,044 (2,122)
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 24,352 1,107
--------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sale of equipment 59 8
Capital expenditures (21,122) (5,234)
--------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (21,063) (5,226)
--------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreement (13,424) 2,029
Proceeds from issuance of long-term debt 11,210 -
Repayment of long-term debt (164) -
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,378) 2,029
--------------------------------------------------------------------------------------------------------------------------
Net change in cash 911 (2,090)
Cash and cash equivalents at beginning of period 1,081 2,687
--------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,992 597
--------------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash items
Interest paid $ 12,079 10,063
Taxes paid 11 96
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
AM General Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar amounts in thousands)
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes to consolidated financial statements required by generally accepted
accounting principles for complete financial statement presentation.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine-month period ended July 31, 2000 are not
necessarily indicative of the results that may be expected for the year ending
October 31, 2000.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Registrant's Form 10-K for the year ended
October 31, 1999.
Note 2. Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
July 31,
2000 October 31,
(unaudited) 1999
-------------------- -------------------
<S> <C> <C>
Finished Goods $ 16,354 30,010
Service Parts 25,285 20,850
Raw Materials, supplies and work in progress 66,426 40,181
-------------------- -------------------
108,065 91,041
Less allowance for inventory obsolescence (5,556) (6,452)
-------------------- -------------------
Total $ 102,509 84,589
-------------------- -------------------
</TABLE>
Note 3. Change in Accounting Principle
In April 1998, the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5, Reporting on the Costs of Start-up Activities (SOP
98-5). SOP 98-5 is applicable to all non-governmental entities and requires
that costs of start-up activities, including organization costs, be expensed as
incurred. All start-up costs previously capitalized are required to be fully
amortized effective with adoption of SOP 98-5. Except for certain investment
companies, SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. Restatement of previously issued financial
statements is not permitted. Except for certain specified investment companies,
initial application of the SOP should be as of the beginning of the fiscal year
in which the SOP is first adopted and should be reported as the cumulative
effect of a change in accounting principle as described in APB Opinion No. 20,
Accounting Changes. The Company adopted SOP 98-5 in the first quarter of fiscal
2000 and incurred a cumulative effect expense of $1.1 million.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
AM General Corporation ("AM General" or the "Company") is the largest supplier
of light tactical wheeled vehicles for the United States Department of Defense
("DoD"). The Company is the original designer and sole manufacturer of the High
Mobility Multipurpose Wheeled Vehicle ("HMMWV" or "HUMVEE"(R). The Company also
sells HUMVEEs to foreign military services through the DoD's Foreign Military
Sales ("FMS") program and on a direct sale basis. In 1993, the Company began
selling a commercial version of the HUMVEE under the registered trademark
HUMMER(R)to industrial and retail users through its commercial dealer network.
In December 1999, the Company entered into a series of agreements with General
Motors Corporation ("GM") pursuant to which, among other things, it transferred
the HUMMER trademark to GM. GM will use the HUMMER trademark on a new
generation HUMMER vehicle (the "H2"), which it plans to begin selling in 2002.
The Company will assemble the H2 for GM under a multi-year contract.
In June 2000, the Company purchased the previously leased HUMMER/HUMVEE
manufacturing facility located in Mishawaka, IN for $5.2 million.
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.
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information," the
Company is providing management discussion on net sales, unit sales and gross
profit for these business segments. Prior year financial information has been
restated to provide discussion on comparative data. Management discussion
relevant to other financial data will be presented on a consolidated basis only.
HUMVEE/HUMMER Segment
HUMVEE
The Company began producing the latest generation of military HUMVEEs, the A2
Series, in August 1995. On December 23, 1995, the Company entered into a multi-
year annual requirements contract for A2 Series HUMVEEs known as the X001
Contract which provided a mechanism for the US Army to procure at least 2,350
HUMVEEs annually through fiscal year 2000. The contract, however, does not
require the Army to purchase the vehicles as funding for each year must be
appropriated pursuant to the annual Defense Budget. The FY00 Defense Bill
contains the necessary funding for the expected fiscal year 2000 production.
Through July 31, 2000, a total of 16,248 vehicles have been ordered on the X001
Contract.
The X001 contract expires on December 14, 2000. The Company anticipates
delivery of vehicles ordered under this contract will be completed by the end of
April 2001. The US Army's long-term acquisition plan for its light tactical
vehicle fleet includes developing an upgraded version of the HUMVEE which will
be known as the A4 Series HUMVEEs. The plan further calls for the continuation
of A2 production to allow sufficient time to develop the A4 Series. The Company
is currently negotiating a new follow-on A2 production contract and anticipates
the contract will be awarded on October 30, 2000. On August 7, 2000, the Company
signed an A4 modernization design/development contract with the DOD valued at
$11.5 million. Engineering changes developed under this contract will enable the
Company to integrate technology advancements into the current A2 Series HUMVEE
and build prototype vehicles, which will be subject to Government testing.
On March 29, 2000, the Company finalized negotiations of a direct sale contract
with a foreign government seeking to acquire 896 HUMVEEs to be produced by the
end of the calendar year. The Company delivered the first 134 of these vehicles
in the third quarter and anticipates delivering an additional 682 vehicles by
the end of the fiscal year.
7
<PAGE>
HUMMER
Since its introduction in 1992, the Company has sold 8,407 HUMMERs through its
network of domestic and international dealerships and distributors. At July 31,
2000, AM General had a total backlog of 126 HUMMERs valued at $8.2 million
compared to 119 valued at $7.4 million on July 31, 1999.
Medium Truck Segment
On April 19, 1999, the Company completed production of 2-1/2 ton trucks under
the Extended Service Program ("ESP") contract. The Army/DoD is developing, at
Congressional direction, an acquisition strategy/program to facilitate full and
open competition for a new Family of Medium Tactical Trucks ("FMTV") multi-year
production contract that will be awarded to a single contractor. Phase I
(Prototype and test) contract award (for up to three contractors) is projected
for November 2000 with a subsequent Phase II (Production) award to a single
contractor in 2002. The Phase I draft solicitation, issued on June 20, 2000,
requires contractors to furnish a production price estimate. Award for Phase I
will be made on a Government determined "Best Value" basis.
SPLO Segment
The Company's SPLO operation sells after-market parts and support-services for
HUMMER/HUMVEEs, 2-1/2 and 5-ton trucks and other vehicles.
STS/Other Segment
The Company's STS operation provides technical support and engineers to the US
Army's Tank-Automotive and Armaments Command ("TACOM"). Services include
engineering, design and drafting, configuration and data management,
translation, and integrated logistics support.
Engine Segment
The Company acquired its 6.5 liter diesel engine business from GM Powertrain, a
division of GM on June 11, 1999. Under terms of the agreement, the Company has
a license to produce and sell the 6.5 liter diesel engine for a period of ten
years. The agreement further provides that GM's internal parts distributor,
Service Parts Operation, will purchase all of its spare parts requirements for
this engine from the Company's General Engine Products subsidiary ("GEP") for
the term of the agreement.
During the third quarter of fiscal year 2000, the Company successfully completed
assembly validation and began component validation. The Company expects
component validation to be complete by the end of September 2000.
In August 2000, GM ceased production of the 6.5 liter diesel engine at its
Morraine, Ohio facility and commenced plant-closing operations. In connection
with the plant-closing, GEP will commence the transfer of certain manufacturing
equipment and the hiring of manpower from GM in support of the Company's
Franklin, Ohio assembly plant production launch. The 6.5 liter diesel engine is
the only engine currently available for production of both the HUMMER and HUMVEE
vehicles. GM has a sufficient supply of engines and component parts on hand to
support the Company's requirement of engines through December, 2000 at which
time GEP will assemble and transfer to the Company its 6.5 liter diesel engine
requirements. GEP began running low-rate initial production in August and
anticipates it will reach full production during the first quarter of fiscal
2001.
H2 Segment
On December 21, 1999, the Company concluded a series of agreements with GM ("the
GM Transaction") pursuant to which GM will design, engineer, certify and sell a
new generation HUMMER vehicle to be known as the H2 which will be assembled for
GM by the Company. Reference is hereby made to the GM Agreements filed as
exhibits to the Company's Form 10-K filed with the Securities and Exchange
Commission on January 31, 2000. The Company expects to begin assembling the H2
for GM in the spring of 2002 at a new assembly facility in Mishawaka, Indiana
(THE "New Facility"). Construction costs of the New Facility are expected to
exceed $200 million and will be funded through a non-interest bearing loan from
GM (the "GM Loan"). Construction of the New Facility began in August, 2000.
8
<PAGE>
During the third quarter of fiscal 2000, the Company executed a contract with
Lamb Technicon Body and Assembly Systems and issued a purchase order valued at
approximately $28.9 million for the design, setup and implementation of state-
of-the-art body shop process equipment. Also during the third quarter, the
Company selected ABB Automation to design and implement the automated paint
systems for the New Facility. In connection with this project, the Company
issued a purchase order in the amount of $66.0 million. Additional purchase
orders issued in the third quarter amounted to $27.3 million. These purchase
orders will be funded through the proceeds of the GM Loan.
As of July 31, 2000, the Company had received funding from GM totaling $3.6
million in connection with the New Facility construction. These funds were
spent primarily on program management and architectural engineering services.
The Company anticipates additional GM funding in fiscal 2000 of approximately
$22.3 million to be spent primarily on paint shop process equipment, building
costs, site work and architectural engineering services.
The results of operations for the first nine months of fiscal year 2000 include
$0.8 million of expenses associated with launching the H2 program.
9
<PAGE>
Results of Operations
Three Months Ended July 31, 2000 ("third quarter of 2000") compared to Three
Months Ended July 31, 1999 ("third quarter of 1999")
Analysis of Net Sales and Unit Sales Information
------------------------------------------------
(in millions, except unit information)
<TABLE>
<CAPTION>
Three months ended
July 31, %
----------------------------------
2000 1999 Change Change
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net Sales
HUMMER/HUMVEEs $ 91.1 $ 55.8 $ 35.3 63.3%
SPLO 17.4 11.4 6.0 52.6
STS/Other 2.2 4.9 (2.7) (55.1)
------------- -------------
$ 110.7 $ 72.1 $ 38.6 53.5%
-------------- ------------- ------------- --------------
HUMMER/HUMVEE Unit Sales 1,328 868 460 53.0%
HUMMER/HUMVEE Average Unit Selling Price $ 68,599 $ 64,286 $ 4,313 6.7%
</TABLE>
Consolidated net sales increased $38.6 million, or 53.5% to $110.7 million in
the third quarter of 2000 compared to 1999. The increase in net sales was due
primarily to higher HUMMER/HUMVEE and SPLO sales, partially offset by lower
STS/Other sales.
HUMMER/HUMVEE segment net sales increased $35.3 million, or 63.3% to $91.1
million in the third quarter of 2000 compared to 1999. The increase in net
sales is primarily due to higher demand for both US and foreign military
HUMVEEs. This increased demand resulted in the Company increasing the
HUMMER/HUMVEE production line rate to 24 units per day in the third quarter of
2000 from 18 units per day in the third quarter of 1999. Also during the third
quarter, the Company delivered 207 HUMVEEs produced in fiscal 1997 to a foreign
customer under the FMS program. HUMMER/HUMVEE average unit selling prices
increased 6.7% over 1999 levels, primarily due to a negotiated price escalation
on US Military HUMVEEs and a proportionate increase in sales of more expensive
HUMMER models. The increase in net sales was partially offset by lower HUMMER
sales in the third quarter of 2000 compared to the third quarter of 1999. The
lower sales were primarily due to higher than normal sales in the third quarter
of 1999 in connection with delayed deliveries during the second quarter of 1999.
SPLO segment net sales increased $6.0 million, or 52.6% to $17.4 million in the
third quarter of 2000 compared to 1999. The increase in net sales is primarily
attributable to increased Government military orders in 2000.
STS/Other segment net sales decreased $2.7 million, or 55.1% to $2.2 million in
the third quarter of 2000 compared to 1999. The decrease in net sales is
primarily due to higher than normal revenues in the third quarter of 1999 for
translation manuals and the completion of the FMTV contract in 1999.
10
<PAGE>
Analysis of Consolidated Gross Profit
-------------------------------------
(in millions, except unit information)
<TABLE>
<CAPTION>
Three months ended
July 31,
----------------------------------------------------------------
% of % of
2000 Net Sales 1999 Net Sales Change Change
----------- ------------ ---------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gross Profit
HUMMER/HUMVEEs $ 17.9 19.7% $ 3.2 5.8% $ 14.7 459.4%
SPLO 1.7 9.8 0.5 4.4 1.2 240.0
STS/OTHER 0.1 4.6 0.6 12.0 (0.5) (83.3)
Engine (0.7) - - - (0.7) -
H2 (0.8) - - - (0.8) -
----------- ---------- ---------- ----------- ------------- ------------
$ 18.2 16.4% $ 4.3 6.0% $ 13.9 323.3%
</TABLE>
Consolidated gross profit increased $13.9 million, or 323.3% to $18.2 million in
the third quarter of 2000 compared to 1999. The Company's consolidated gross
profit for the third quarter of 2000 was 16.4% compared to 6.0% in 1999. The
increase is primarily attributable to increased gross profit in the
HUMMER/HUMVEE and SPLO segments partially offset by reductions in the H2, engine
and STS/Other segments.
HUMMER/HUMVEE segment gross profit increased $14.7 million, or 459.4% to $17.9
million in the third quarter of 2000 compared to 1999. The segment gross profit
was 19.7% in the third quarter of 2000 compared to 5.8% in 1999. The increase
in gross profit is primarily attributable to higher sales volumes in connection
with increased military demand, a reduction in HUMMER/HUMVEE variable costs, a
$2.5 million increase in connection with a physical inventory adjustment,
reduced warranty expenses, higher absorption of fixed manufacturing costs in
connection with the increased production rate, and reduced non-cash other post-
employment benefits ("OPEB") expense.
SPLO segment gross profit increased $1.2 million, or 240.0% to $1.7 million in
the third quarter of 2000 compared to 1999. The segment gross profit for the
third quarter of 2000 was 9.8% compared to 4.4% in 1999. The increase in gross
profit is due to increased sales and efficiencies resulting from increased sales
volumes.
STS/Other segment gross profit decreased $0.5 million, or 83.3% to $0.1 million
in the third quarter of 2000 compared to 1999. The segment gross profit for the
third quarter of 2000 was 4.6% compared to 12.0% in 1999. The decrease in gross
profit is primarily attributable to decreased sales.
Engine segment gross profit (loss) was ($0.7) million in the third quarter of
2000 primarily due to start-up costs in connection with the new Franklin, Ohio
manufacturing facility.
H2 segment gross profit (loss) was ($0.8) million in the third quarter of 2000
primarily due to start-up costs in connection with the new vehicle program.
11
<PAGE>
Analysis and Management Discussions on Non-Segment Information
--------------------------------------------------------------
Depreciation and Amortization
Depreciation and amortization expense was $3.2 million for the third quarter of
2000, an increase of $.5 million or 18.5% from $2.7 million for the third
quarter of 1999. The increase is primarily attributable to higher tooling
amortization costs in connection with increased fiscal 2000 production volumes
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") expenses were $7.4 million for the
third quarter of 2000, an increase of $0.4 million or 5.7% from $7.0 million for
the third quarter of 1999. The increase is primarily due to higher salary
expenses in connection with increased staffing at the engine facility, higher
marketing costs in connection with the HUMMER, and increased corporate wages and
travel expenses
Income (Loss) before Interest and Income Taxes
The Company recorded a profit before interest and income taxes for the third
quarter of 2000 of $7.6 million, an increase of $13.0 million from loss before
interest and income taxes of $5.4 million for the third quarter of 1999. The
increase in income before interest and income taxes is primarily attributable to
the higher gross profit discussed above, partially offset by higher depreciation
and amortization expense and selling, general and administrative expenses.
Interest Income and Expense
Interest expense for the third quarter of 2000 was $3.2 million, an increase of
$.5 million or 18.5% from $2.7 million for the third quarter of 1999. Average
debt outstanding during the third quarter of 2000 was $106.3 million at a
weighted average interest rate of 11.8%. Average debt outstanding during the
third quarter of 1999 was $75.6 million at a weighted average interest rate of
12.8%. The increase in average debt outstanding is primarily due to higher
borrowings under the Company's revolving credit facility primarily due to the
increase in raw material inventory levels and other financing in connection with
the purchase of the HUMMER/HUMVEE manufacturing facility during the third
quarter of 2000, partially offset by a $6.4 million reduction in the Company's
12 7/8% Senior Notes in connection with the excess cash flow buy-back in the
fourth quarter of 1999. Interest income decreased slightly during the third
quarter of 2000.
Income Tax (Expense) Benefit
Federal income tax expense is recorded on a consolidated, year-to date basis at
the statutory rate adjusted for permanent differences primarily resulting from
the amortization of goodwill. During the first nine months of 2000, the Company
incurred net operating losses for tax purposes. The Federal income tax benefit
resulting from these losses was offset by an increase in the Company's valuation
allowance for deferred tax assets. Income tax expense was $0.2 million for the
third quarter of 2000 in connection with State income taxes, an increase of $2.7
million from income tax benefit of $2.5 million for the third quarter of 1999.
Net Income (Loss)
The net income for the third quarter of 2000 was $4.3 million, an increase of
$9.8 million from net loss of $5.5 million in the third quarter of 1999. As
discussed above, the increase in net income was primarily due to an increase in
gross profit, partially offset by increases in income tax expense, depreciation
and amortization, interest expense, and selling, general and administrative
expenses.
12
<PAGE>
Nine Months Ended July 31, 2000 ("first nine months of 2000") compared to Nine
Months Ended July 31, 1999 ("first nine months of 1999")
Analysis of Net Sales and Unit Sales Information
------------------------------------------------
(in millions, except unit information)
<TABLE>
<CAPTION>
Nine months ended
July 31, %
------------------------------------
2000 1999 Change Change
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Net Sales
HUMMER/HUMVEEs $ 244.3 $ 168.4 $ 75.9 45.1%
Medium Trucks - 45.6 (45.6) (100.0)
SPLO 49.8 37.9 11.9 31.4
STS/Other 8.3 11.1 (2.8) (25.2)
------------- -------------- ------------- --------------
$ 302.4 $ 263.0 $ 39.4 15.0%
------------- -------------- ------------- --------------
HUMMER/HUMVEE Unit Sales 3,774 2,785 989 35.5%
HUMMER/HUMVEE Average Unit Selling Price $ 64,732 $ 60,431 $ 4,301 7.1%
</TABLE>
Consolidated net sales increased $39.4 million, or 15.0% to $302.4 million for
the first nine months of 2000 compared to 1999. The increase in net sales was
due primarily to higher HUMMER/HUMVEE and SPLO sales partially offset by a lack
of Medium Truck sales, primarily due to the completion of the ESP contract in
1999, and lower STS/Other sales.
HUMMER/HUMVEE segment net sales increased $75.9 million, or 45.1% to $244.3
million for the first nine months of 2000 compared to 1999. The increase in net
sales is primarily due to higher demand for US Armed Forces and International
HUMVEEs and Commercial HUMMERs. A 7.1% increase in HUMMER/HUMVEE average 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 the first nine months of
2000 due to the completion of the ESP contract in 1999. Segment net sales for
the first nine months of 1999 included $45.6 million of ESP contract revenue.
SPLO segment net sales increased $11.9 million, or 31.4% to $49.8 million in the
first nine months of 2000 compared to 1999. The increase in net sales is
primarily attributable to increased Government military orders in 2000.
STS/Other segment net sales decreased $2.8 million, or 25.2% to $8.3 million for
the first nine months of 2000 compared to 1999. The third quarter of 1999 had
included higher than normal revenues for translation manuals and the completion
of the FMTV contract.
13
<PAGE>
Analysis of Consolidated Gross Profit
-------------------------------------
(in millions, except unit information)
<TABLE>
<CAPTION>
Nine months ended
July 31,
----------------------------------------------------------------
% of % of
2000 Net Sales 1999 Net Sales Change Change
----------- ------------- --------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Gross Profit
HUMMER/HUMVEEs $ 34.9 14.3% $ 15.7 9.3% 19.2 122.3%
Medium Trucks - - 9.3 20.4 (9.3) (100.0)
SPLO 5.3 10.6 3.0 7.9 2.3 76.7
STS/Other 2.2 26.5 1.4 12.6 0.8 57.1
Engine (1.5) - - - (1.5) -
H2 (0.8) - - - (0.8) -
----------- --------- --------- ---------- ----------- ------------
$ 40.1 13.3% $ 29.4 11.2% 10.7 36.4%
</TABLE>
Consolidated gross profit increased $10.7 million, or 36.4% to $40.1 million in
the first nine months of 2000 compared to 1999. The Company's consolidated
gross profit for the first nine months of 2000 was 13.3% compared to 11.2% in
1999. The increase 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 Engine and H2 segments.
HUMMER/HUMVEE segment gross profit increased $19.2 million, or 122.3% to $34.9
million in the first nine months of 2000 compared to 1999. The segment gross
profit was 14.3% in the first nine months of 2000 compared to 9.3% in 1999. The
increase in gross profit is primarily attributable to higher sales volumes in
connection with increased military and commercial 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, a $2.5 million increase in connection with a physical inventory adjustment,
and lower non-cash OPEB expenses, partially offset by increased warranty expense
during the first nine months of 2000.
There was no Medium Truck segment gross profit in the first nine months of 2000
due to the completion of the ESP contract in 1999. The results of operations
for the first nine months of 1999 included $9.3 million of gross profit from the
ESP contract. The segment gross profit was 20.4% for the first nine months of
1999.
SPLO segment gross profit increased $2.3 million, or 76.7% to $5.3 million in
the first nine months of 2000 compared to 1999. The segment gross profit for
the first nine months of 2000 was 10.6% compared to 7.9% in 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 $0.8 million, or 57.1% to $2.2 million
in the first nine months of 2000 compared to 1999. The segment gross profit for
the first nine months of 2000 was 26.5% compared to 12.6% in 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 2000, partially offset by lower sales for the
first nine months of 2000 compared to 1999.
Engine segment gross profit (loss) was ($1.5) million in the first nine months
of 2000 primarily due to start-up costs in connection with the new Franklin,
Ohio manufacturing facility.
H2 segment gross profit (loss) was ($0.8) million for the first nine months of
2000 primarily due to start-up costs in connection with the new program.
14
<PAGE>
Analysis and Management Discussions on Non-Segment Information
Depreciation and Amortization
Depreciation and amortization expense was $9.8 million for the first nine months
of 2000, an increase of $1.4 million or 16.7% from $8.4 million for the first
nine months of 1999. The increase is primarily attributable to higher tooling
amortization costs directly related to increased production volumes in fiscal
2000 and the amortization of costs incurred in 1999 in connection with the
implementation of a new ERP system.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses were $23.8 million for the
first nine months of 2000, an increase of $1.9 million or 8.7% from $21.9
million for the first nine months of 1999. The increase is primarily due to
higher salary expenses in connection with increased staffing at the engine
facility, higher marketing costs in connection with the HUMMER, and increased
corporate salary and travel expenses.
Income (Loss) before Interest and Income Taxes
The Company recorded income before interest and income taxes for the first nine
months of 2000 of $6.4 million, an increase of $6.9 million from loss before
interest and income taxes of $.5 million in 1999. The increase in income before
interest and income taxes is primarily due to the higher gross profit described
above, partially offset by higher selling, general and administrative expenses
and depreciation and amortization.
Interest Income and Expense
Interest expense for the first nine months of 2000 was $10.5 million, an
increase of $2.1 million or 25.0% from $8.4 million for the first nine months of
1999. Average debt outstanding during the first nine months of 2000 was $100.3
million at a weighted average interest rate of 11.6%. Average debt outstanding
during the first nine months of 1999 was $75.6 million at a weighted average
interest rate of 12.8%. The increase in average debt outstanding is primarily
due to higher borrowings under the Company's revolving credit facility primarily
due to the increase in raw material inventory levels and other financing in
connection with the purchase of the HUMMER/HUMVEE manufacturing facility during
the third quarter of 2000, partially offset by the $6.4 million reduction in the
Company's 12 7/8% Senior Notes in connection with the excess cash flow buy-back
in the fourth quarter of 1999. 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 12 7/8% Senior 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 12 7/8% Senior Notes. The change in
interest income was insignificant.
Income Tax (Expense) Benefit
Federal income tax expense is recorded on a consolidated, year-to-date basis at
the statutory rate adjusted for permanent differences primarily resulting from
the amortization of goodwill. During the first nine months of 2000, the Company
incurred net operating losses for tax purposes. The Federal income tax benefit
resulting from these losses was offset by an increase in the Company's valuation
allowance for deferred tax assets. Income tax expense was $0.3 million for the
first nine months of 2000 in connection with State income taxes, an increase of
$2.1 million from an income tax benefit of $1.8 million for the first nine
months of 1999.
Cumulative Effect of Accounting Change
The Company incurred a charge of $1.1 million for the cumulative effect of
adopting AICPA Statement of Position 98-5 related to start-up activities and
organization costs. See Note 3 to Consolidated Financial Statements for
additional information.
15
<PAGE>
Net Loss
The net loss for the first nine months of 2000 was $5.3 million, a decrease of
$1.5 million from a net loss of $6.8 million for the first nine months of 1999.
As discussed above, the decrease in net loss was primarily due to higher gross
profit partially offset by higher income tax expense, interest expense, selling,
general and administrative expense, depreciation and amortization, and the one-
time charge in connection with a change in accounting principle.
Liquidity and Capital Resources
The Company's liquidity requirements result from capital investments, working
capital requirements, debt service obligations, postretirement health care and
pension funding, interest expense, and 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 permitted financing sources. The Company believes these
sources, as well as the proceeds of the GM Loan, will provide adequate funds to
meet current and projected operating results. In reference to the GM Loan
please refer to the GM Agreements filed as exhibits to the Company's Form 10-K
filed with the Securities and Exchange Commission on January 31, 2000.
Cash provided by operating activities was $24.4 million for the nine months
ended July 31, 2000 compared to $1.1 million for the nine months ended July 31,
1999. The primary sources of cash flow during the first nine months of 2000
were increases in accounts payable and accrued expenses and a reduction in
accounts receivable, partially offset by an increase in inventory and the net
loss. Other factors include non-cash charges to operating income including
depreciation, amortization, non-cash postretirement expenses and the one-time
charge in connection with a cumulative effect change in accounting principle.
Accounts receivable levels at July 31, 2000 were $8.0 million lower than levels
at the end of the prior fiscal year primarily due to higher than normal
receivables at the end of 1999 in connection with military vehicles sold at the
end of the year.
Net inventory levels at July 31, 2000 were $17.9 million higher than levels at
the end of the prior fiscal year due to higher raw materials, manufacturing
work-in-process, and SPLO inventory, partially offset by lower finished goods
inventory. Raw material levels increased $19.3 million primarily due to excess
inventory procured during the first nine months of fiscal 2000, expected
inventory escalation due to the increased production line rate, and an increase
in the quantity of unique parts required to support a more expensive
international model mix. The Company anticipates it will take approximately four
months to consume the excess inventory in production and return raw material to
normal operating levels. Manufacturing work-in process inventory increased $6.0
million due to the increase in the production line rate. SPLO inventory
increased $4.4 million primarily due to the procurement of excess inventory. The
Company currently has orders for the excess inventory and anticipates it will
take approximately three months to ship the parts. These increases were
partially offset by a $13.7 million reduction in finished goods inventory
consisting primarily of US Military vehicles.
During the first nine months of 2000 the Company spent $21.1 million on capital
expenditures, of which $3.6 million is in connection with the New Facility and
$3.0 million is in connection with the 6.5 liter diesel engine facility. The
remaining expenditures were in connection with vendor tooling and equipment and
the purchase of the HUMMER/HUMVEE manufacturing facility. Capital expenditures
during the first nine months of 1999 were $5.2 million. The Company anticipates
additional capital expenditures in fiscal 2000 of approximately $25.8 New
which $22.3 million is in connection with the construction of the New Facility
and will be funded with the proceeds of the GM loan. These expenditure levels
are significantly less than management's original expectations primarily due to
the extension of the automated paint system costs into future years. The Company
anticipates it will incur other capital expenditures of approximately $3.5
million on vendor tooling, machinery and equipment, and other capital
requirements. These capital requirements will be funded from operating cash flow
and availability under the revolving credit facility. The Company believes these
capital expenditures will be sufficient to support the strategic and operating
needs of the Company.
16
<PAGE>
The Company's revolving credit facility has a maximum borrowing limit of $60
million, is secured by a first lien on all of the Company's accounts receivable,
inventories and certain other assets, as defined therein, and expires on October
30, 2001. As of September 13, 2000 the Company had borrowings outstanding of
$22.4 million and approximately $11.8 million of availability under this
facility.
The Revolving Credit Agreement contains numerous covenants and prohibitions that
impose limitations on the Company, including requirements that the Company
satisfy certain financial ratios and limitations on the incurrence of additional
indebtedness. At the end of the third quarter of 2000, the Company was in non-
compliance with certain covenants pertaining to its Revolving Credit Agreement
with Congress Financial Corporation. The Company has been in discussion with
Congress Financial with respect to obtaining waivers for these events of
non-compliance and does not anticipate that such waivers will be withheld. The
indenture governing the outstanding 12-7/8% Senior Notes due 2002 also imposes
limitations on the incurrence of additional indebtedness. The Revolving Credit
Agreement and Indenture were amended in December 1999 to permit the GM
Transaction. The ability of the Company to meet its debt service requirements
and to comply with such covenants will be dependent upon future operating
performance and financial results of the Company, which will be subject to
financial, economic, political, competitive and other factors affecting the
Company, many of which are beyond its control.
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; volume of orders for the H2; the ability to complete
the H2 assembly facility within the limits of the GM loan; the outcome of the
FMTV competition; the outcome of pending litigation; the loss of any significant
customers; the loss of any major supplier; and the availability of qualified
personnel. These forward-looking statements speak only as of the date of this
report. The Company expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstance on which any forward-looking
statement is based.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk represents the risk of loss that may impact the financial position,
results of operations or cash flows of the Company due to adverse changes in
market prices and rates. The Company is exposed to market risk from interest
rate changes primarily due to its revolving credit facility used for maintaining
liquidity, funding capital expenditures and expanding operations. The Company's
revolving credit facility bears interest at prime plus a negotiated margin,
therefore any borrowings outstanding will approximate fair market value at all
times. The Company believes fluctuations in interest rates will not have a
material adverse impact on its results of operations over the next year.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Labor Dispute
Akers vs. AM General was filed on June 18, 1998 in U.S. District Court in
Indianapolis, Indiana by a group of former employees. Their complaint alleges
that the Company and the Union committed fraud and breach of contract in
conducting the plant closing in Indianapolis. The Company's lawyers filed a
motion for summary judgment, and in July 2000 the court granted this motion. The
Company has prevailed in this litigation and the case has been terminated.
Patent, Trademark, & Copyright Litigation
The Company is involved in litigation with a California company, California
Gold, and its principal, Glenn Harris. Mr. Harris claims that he owns the
intellectual property rights to the Commercial Slant Back version of the HUMMER.
After Mr. Harris made several threats of litigation, on August 10, 2000, the
Company filed a declaratory judgment action in the U.S. District Court for the
Northern District of Indiana. On August 18, 2000, Mr. Harris filed a complaint
in the U.S. District Court for the Central District of California. The Company
has retained local counsel. The parties are currently disputing the proper
jurisdiction venue for this litigation. The Company expects to eventually
prevail on the merits of this matter. The Company does not believe that this
litigation will have a material adverse effect on the company.
Breach of Contract Case
On August 28, 2000, the Beanstalk Group filed a breach of contract case against
AM General and General Motors in the U.S. District Court for the Northern
District of Indiana. Beanstalk and the Company have a "Representation Agreement"
that designates Beanstalk as the exclusive, non-employee, licensing agent for AM
General's trademarks. The agreement provides Beanstalk with 35% of any revenue
generated from trademark licensing agreements negotiated by Beanstalk on behalf
of the Company. In its lawsuit, Beanstalk claims that the Company breached the
Representation Agreement when the Company assigned the HUMMER trademark to
General Motors; that the Company breached its duty of "good faith and fair
dealing;" and that the Company has been "unjustly enriched." Beanstalk also
claims that General Motors has breached the Agreement and interfered with the
contractual relationship between Beanstalk and the Company. Beanstalk's
Complaint seeks compensatory damages of more than $30 million dollars. The
Company is in the process of retaining counsel to defend this lawsuit. The
Company does not believe that it breached the terms of its Representation
Agreement with Beanstalk and, therefore, does not believe that Beanstalk will
prevail in this case; however, the outcome of any jury trial is uncertain and an
adverse decision could have a material adverse effect on the Company.
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description
----------------- ------------------------------------------------------------
10.3.3 Supplement No. 4, dated May 15, 2000, to Employment
Agreement of Robert J. Gula
10.3.4 Supplement No. 5, dated May 15, 2000, to Employment
Agreement of Edmond L. Peters
10.3.5 Supplement No. 2, dated May 15, 2000, to Employment
Agreement of Paul J. Cafiero
10.34 Contract dated August 18, 2000 between the Company and
Lamb Technicon Body & Assembly Systems (technical
schedules omitted)
10.35 Term Promissory Note dated June 5, 2000 between 1/st/
Source Bank and AM General Corporation
27 Financial Data Schedule
(b) Reports on Form 8-K. Registrant did not file any reports on Form 8-K during
the quarter for which this report is filed.
19
<PAGE>
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: September 14, 2000 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
20
