<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 April 30, 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)
_________________
<TABLE>
<S> <C>
Delaware 35-1852615
(State or other jurisdiction of incorporation or (IRS Employer Identification No.)
organization)
105 North Niles Avenue
South Bend, Indiana 46617
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (219) 284-2907
</TABLE>
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 June 14, 2000.
<PAGE>
AM General Corporation
Form 10-Q
Quarter Ended April 30, 2000
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION 3
ITEM 1. FINANCIAL STATEMENTS 3
Consolidated Balance Sheets 3
Consolidated Statements of Operations 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. 7
GENERAL 7
HUMVEE/HUMMER Segment 7
Medium Truck Segment 8
SPLO Segment 8
STS/Other Segment 8
Engine Segment 8
H2 Segment 8
Results of Operations 9
Liquidity and Capital Resources 15
Forward-Looking Statements 16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 16
PART II - OTHER INFORMATION 17
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
</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>
April 30, October 31,
Assets 2000 1999
--------------------------------------------------------------------------------------------
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 1,834 1,081
Accounts receivable, net 71,206 77,081
Inventories 92,468 84,589
Prepaid expenses 1,132 984
Deferred income taxes 6,293 6,210
--------------------------------------------------------------------------------------------
Total current assets 172,933 169,945
Income taxes receivable 4,752 4,752
Property, plant, and equipment, net 51,169 43,858
Deferred income taxes 26,304 26,388
Goodwill, net 72,869 75,012
Other assets 3,877 5,838
--------------------------------------------------------------------------------------------
$ 331,904 325,793
============================================================================================
Liabilities and Stockholder's Deficit
--------------------------------------------------------------------------------------------
Current liabilities:
Current maturities of long-term debt $ 227 --
Accounts payable 42,698 37,425
Accrued expenses 77,026 71,163
--------------------------------------------------------------------------------------------
Total current liabilities 119,951 108,588
Long-term debt 96,183 92,805
Postretirement benefits other than pensions, noncurrent portion 162,705 160,403
Other long-term liabilities 6,681 8,064
--------------------------------------------------------------------------------------------
Total liabilities $ 385,520 369,860
--------------------------------------------------------------------------------------------
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. -- --
Paid-in capital 1,000 1,000
Accumulated deficit (59,616) (50,067)
--------------------------------------------------------------------------------------------
Total stockholder's deficit (53,616) (44,067)
Commitments and contingencies
--------------------------------------------------------------------------------------------
$ 331,904 325,793
============================================================================================
</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 Six Months Ended
April 30, April 30,
---------------------- -------------------------
2000 1999 2000 1999
=========================================================================================================================
<S> <C> <C> <C> <C>
Net Sales $ 100,310 103,258 191,701 190,895
=========================================================================================================================
Cost and expenses:
Cost of Sales 90,038 89,134 169,876 165,833
Depreciation and amortization 3,365 2,891 6,587 5,632
Selling, general, and administrative expenses 8,541 7,019 16,474 14,887
Restructuring/plant closing - (401) - (401)
-------------------------------------------------------------------------------------------------------------------------
Income (loss) before interest and income taxes (1,634) 4,615 (1,236) 4,944
Interest income 32 179 117 253
Interest expense (3,130) (2,707) (7,258) (5,724)
=========================================================================================================================
Income (loss) before income taxes and cumulative effect
of accounting change (4,732) 2,087 (8,377) (527)
Income tax expense (102) (1,218) (102) (759)
-------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of accounting change (4,834) 869 (8,479) (1,286)
Cumulative effect of accounting change - - (1,070) -
=========================================================================================================================
Net income (loss) $ (4,834) 869 (9,549) (1,286)
=========================================================================================================================
</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>
-------------------------------------------------------------------------------------------------------------------------------
Six Months Ended
April 30,
-----------------------------
2000 1999
===============================================================================================================================
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,549) (1,286)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Restructuring/plant closing charges - (401)
Restructuring payments (309) (292)
Depreciation and amortization of plant and equipment 3,922 2,966
Other amortization 3,057 3,187
Decrease in inventory reserve (1,041) (496)
Deferred income taxes 1 (747)
Noncash other postretirement cost 2,302 3,355
Cumulative effect of change in accounting principle 1,071 -
Gain on sale of equipment (25) -
Change in assets and liabilities:
Accounts receivable 5,875 15,643
Inventories (6,955) 780
Prepaid expenses (148) 212
Other assets 1 1,495
Accounts payable 5,273 (5,270)
Accrued expenses 5,772 2,106
Income taxes 91 1,410
Other liabilities (1,074) (889)
===============================================================================================================================
Net cash provided by operating activities 8,264 21,773
===============================================================================================================================
Cash flows from investing activities:
Proceeds from sale of equipment 59 -
Capital expenditures (11,150) (3,216)
===============================================================================================================================
Net cash used in investing activities (11,091) (3,216)
===============================================================================================================================
Cash flows from financing activities:
Net borrowings (repayments) under line-of-credit agreement 311 (7,854)
Proceeds from issuance of long-term debt 3,312 -
Repayment of long-term debt (43) -
===============================================================================================================================
Net cash provided by (used in) financing activities 3,580 (7,854)
===============================================================================================================================
Net change in cash 753 10,703
Cash and cash equivalents at beginning of period 1,081 2,687
===============================================================================================================================
Cash and cash equivalents at end of period $ 1,834 13,390
===============================================================================================================================
Supplemental disclosure of cash items
Interest paid $ 6,127 5,146
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 six-month period ended April 30, 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>
April 30,
2000 October 31,
(Unaudited) 1999
----------- -----------
<S> <C> <C>
Finished Goods $ 24,906 30,010
Service Parts 24,955 20,850
Raw Materials, supplies and work in progress 48,017 40,181
----------- -----------
97,878 91,041
Less allowance for inventory obsolescence (5,410) (6,452)
----------- -----------
Total $ 92,468 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 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 which plans to use the HUMMER trademark on a new
generation HUMMER vehicle (the "H2"), which GM plans to begin selling in 2002.
The H2 will be assembled by the Company for GM under a multi-year contract.
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
margin for these business segments. Prior year financial information has been
restated to provide discussion on comparative data. Management discussion
relevant to other financial data will be presented on a consolidated basis only.
HUMVEE/HUMMER Segment
HUMVEE
The Company began producing the latest generation of military HUMVEEs, the A2
Series, in August 1995. On December 23, 1995, the Company entered into a multi-
year annual requirements contract for A2 Series HUMVEEs known as the X001
Contract which provided a mechanism for the US Army to procure at least 2,350
HUMVEEs annually through fiscal year 2000. The contract, however, does not
require the Army to purchase the vehicles as funding for each 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 April 30, 2000, a total of 15,264 vehicles have been ordered on the X001
Contract.
The X001 contract expires at the end of the current fiscal year. The US Army's
long-term acquisition plan for its Light Tactical Vehicle fleet includes
developing an upgraded version of the HUMVEE which will be known as the A4
Series HUMVEEs. The plan further calls for the continuation of the current
production contract to allow sufficient time to develop the A4 Series and award
a production contract. The Company is currently negotiating the A4
Design/Development contract, and on May 31, 2000, received authorization from
the US Army Tank-Automotive and Armaments Command ("TACOM") to incur up to
$150,000 in pre-contract costs to cover the design and developmental effort for
the A4 Series HUMVEE. The Company anticipates this contact will be executed by
late June 2000 for an amount exceeding $13 million.
On March 29, 2000, the Company finalized negotiations with a foreign government
seeking to acquire 896 HUMVEEs to be produced and delivered in fiscal 2000. Due
to this order, along with heightened demand for HUMMERs, the Company increased
the production rate of HUMMER/HUMVEEs from 18 units per day to 24 on March 20,
2000.
In fiscal 1997, the Company manufactured 231 HUMVEEs for a foreign customer
seeking to acquire HUMVEEs under the FMS program ("the FMS Customer"). On May
19, 2000, the Company finalized negotiations with the FMS Customer and executed
a contract for the sale to that customer of 239 vehicles. As of June 14, 2000,
the Company has delivered 154 vehicles to the FMS Customer and anticipates
delivering 53 more units in June. Due to the delay in negotiating the order,
twenty-four (24) of the original units were sold to another foreign customer in
February 2000. As a result, the Company will manufacture those 24 units plus 8
additional units for delivery in July.
7
<PAGE>
HUMMER
The Company received orders for 508 HUMMER vehicles valued at $33.0 million
during the second quarter of 2000 compared to 381 HUMMER vehicles valued at
$23.7 million ordered during the second quarter of 1999. In response to higher
demand for new model year HUMMERs from its dealer network, along with higher
demand for military HUMVEEs as described above, the Company increased the
production of HUMMER/HUMVEEs on March 20, 2000 from 18 to 24 vehicles per day.
Medium Truck Segment
On April 19, 1999, the Company completed production of 2-1/2 ton trucks under
the Extended Service Program ("ESP") contract. The results of operations for the
second quarter of 1999 include unit sales of 353 vehicles under this contract.
The Army/DoD is developing, at Congressional direction, an acquisition
strategy/program to facilitate full and open competition for a new Family of
Medium Tactical Trucks ("FMTV") multi-year production contract that will be
awarded to a single contractor. Phase I (Prototype and test) contract award (for
up to three contractors) is projected for November 2000 with a subsequent Phase
II (Production) award to a single contractor in 2002. A DoD request for proposal
is scheduled for release in July 2000.
SPLO Segment
The Company's SPLO operation sells after-market parts and support-services for
vehicles manufactured by the Company and for non-AM General manufactured
vehicles, including HUMMER/HUMVEEs, 2-1/2 and 5-ton trucks and others.
STS/Other Segment
The Company's STS operation provides technical support and engineers to 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 engine for a period of ten years. The
agreement further provides that GM's internal parts distributor, Service Parts
Operation, will purchase all service requirements for this engine from AM
General for the term of the agreement. As of June 14, 2000 the Company has
manufactured nine validation engines which are being tested. The Company expects
assembly validation to be complete by the end of June 2000 and anticipates
beginning low-rate production in July 2000 and full production by the first
quarter of 2001 at a new, leased facility in Franklin, Ohio.
The results of operations for the first six months of fiscal year 2000 include
$2.0 million of start-up costs associated with launching the plant and
validating the assembly process, of which $1.2 million represents selling,
general and administrative expenses.
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. 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 April 2002.
During the second quarter of fiscal 2000, the Company selected Albert Kahn
Associates, Inc. to provide program management, engineering and architectural
services for a new H2 assembly facility. The Company also purchased several
tracts of land adjacent to the HUMMER/HUMVEE manufacturing facility on which the
new H2 facility will be located. Construction of the new facility is expected to
commence in August 2000.
The results of operations for the first six months of fiscal year 2000 include
$0.6 million of costs associated with launching the H2 program.
8
<PAGE>
Results of Operations
Three Months Ended April 30, 2000 ("second quarter of 2000") compared to Three
Months Ended April 30, 1999 ("second quarter of 1999")
Analysis of Net Sales and Unit Sales Information
------------------------------------------------
(in millions, except unit information)
<TABLE>
<CAPTION>
Three months ended
April 30,
----------------------
%
2000 1999 Change Change
---- ---- ------ ------
<S> <C> <C> <C> <C>
Net Sales
HUMMER/HUMVEEs $ 77.3 $ 63.3 $ 14.0 22.1 %
Medium Trucks - 22.8 (22.8) (100.0)
SPLO 19.7 13.8 5.9 42.8
STS/Other 3.3 3.4 (0.1) (2.9)
----------------------------------------
$ 100.3 $ 103.3 (3.0) (2.9)%
----------------------------------------
HUMMER/HUMVEE Unit Sales 1,220 1,071 149 13.9 %
HUMMER/HUMVEE Average Unit Selling Price $63,361 $59,104 $4,257 7.2 %
</TABLE>
Consolidated net sales decreased $3.0 million, or 2.9% to $100.3 million in the
second quarter of fiscal 2000 compared to fiscal 1999. The decrease in net sales
was due primarily to lower sales in connection with the completion of the ESP
contract in fiscal year 1999 partially offset by higher HUMMER/HUMVEE and SPLO
sales.
HUMMER/HUMVEE segment net sales increased $14.0 million, or 22.1% to $77.3
million in the second quarter of fiscal 2000 compared to fiscal 1999. The
increase in net sales is primarily due to higher US Armed Forces requirements
and increased demand for HUMMERs and International HUMVEEs. Higher average unit
selling prices also contributed to the increase in net sales. HUMMER/HUMVEE
average unit selling prices in the second quarter of fiscal 2000 increased 7.2%
over fiscal 1999 levels. The increase is attributable to a negotiated price
escalation on US Military HUMVEEs, a general price increase on model year 2000
HUMMERs, and a proportionate increase in sales of more expensive HUMMER models.
There were no Medium Truck segment net sales in the second quarter of fiscal
2000 due to the completion of the ESP contract in fiscal 1999. Segment net sales
for the second quarter of fiscal 1999 included $22.8 million of ESP contract
revenue.
SPLO segment net sales increased $5.9 million, or 42.8% to $19.7 million in the
second quarter of fiscal 2000 compared to fiscal 1999. The increase in net sales
is primarily attributable to a large HUMVEE engine order with the US Government.
STS/Other segment net sales decreased $.1 million, or 2.9% to $3.3 million in
the second quarter of fiscal 2000 compared to fiscal 1999. The decrease in net
sales is primarily due to a reduction in engineering labor hours requested by
the US Government.
9
<PAGE>
Analysis of Consolidated Gross Profit
-------------------------------------
(in millions, except unit information)
<TABLE>
<CAPTION>
Three months ended
April 30,
------------------------------------------
% of % of
2000 Net Sales 1999 Net Sales Change Change
---- --------- ---- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gross Profit
HUMMER/HUMVEEs $ 7.5 9.7% 6.8 10.7% $ 0.7 10.3 %
Medium Trucks - - 5.5 24.1 (5.5) (100.0)
SPLO 2.4 12.2 1.6 11.6 0.8 50.0
STS/Other 0.9 27.3 0.2 5.9 0.7 350.0
Engine (0.5) - - - (0.5) (100.0)
--------------------------------------- ------- ---------
$10.3 10.3% 14.1 13.6% $ (3.8) (27.0)%
</TABLE>
Consolidated gross profit decreased $3.8 million, or 27.0% to $10.3 million in
the second quarter of fiscal 2000 compared to fiscal 1999. The Company's
consolidated gross profit for the second quarter of fiscal 2000 was 10.3%
compared to 13.6% in fiscal 1999. The decrease is primarily attributable to
lower gross profit in the Medium Truck segment due to the completion of the ESP
program partially offset by higher gross margin in the HUMMER/HUMVEE, SPLO and
STS/Other segments.
HUMMER/HUMVEE segment gross profit increased $0.7 million, or 10.3% to $7.5
million in the second quarter of fiscal 2000 compared to fiscal 1999. The
segment gross profit was 9.7% in the second quarter of fiscal 2000 compared to
10.7% in fiscal 1999. The increase in gross profit is primarily attributable to
higher sales volumes in connection with increased military and commercial
demand, higher absorption of fixed manufacturing costs in connection with the
increased production rate from 16.5 vehicles per day during the second quarter
of 1999 compared to 24 vehicles per day for approximately half of the second
quarter of 2000, and lower variable per unit manufacturing costs. This increase
was partially offset by a $4.4 million adjustment for HUMMER warranty expenses
("the Warranty Adjustment") in connection with higher than estimated warranty
claims on prior year models.
There was no Medium Truck segment gross profit in the second quarter of fiscal
2000 due to the completion of the ESP contract in fiscal 1999. The results of
operations for the second quarter of fiscal 1999 included $5.5 million of gross
profit from the ESP contract. The segment gross profit was 24.1% in the second
quarter of 1999.
SPLO segment gross profit increased $0.8 million, or 50.0% to $2.4 million in
the second quarter of fiscal 2000 compared to fiscal 1999. The segment gross
profit for the second quarter of 2000 was 12.2% compared to 11.6% in fiscal
1999. The increase in gross profit margin is directly related to selling a
higher concentration of more profitable HUMVEE spare parts, partially offset by
higher warehousing expenses.
STS/Other segment gross profit increased $0.7 million, or 350.0% to $0.9 million
in the second quarter of fiscal 2000 compared to fiscal 1999. The segment gross
profit for the second quarter of 2000 was 27.3% compared to 5.9% in fiscal 1999.
Engine segment gross profit was ($0.5) million in the second quarter of fiscal
2000 primarily due to start-up costs in connection with the new Franklin, Ohio
manufacturing facility.
10
<PAGE>
Analysis and Management Discussions on Non-Segment Information
--------------------------------------------------------------
Depreciation and Amortization
Depreciation and amortization expense was $3.4 million for the second quarter of
2000, an increase of $.5 million or 17.2% from $2.9 million for the second
quarter of 1999. The increase is primarily attributable to higher tooling
amortization costs directly related to increased production volumes in fiscal
2000 and the amortization of costs incurred in fiscal 1999 in connection with
the implementation of a new Enterprise Resource Planning system ("ERP").
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses were $8.5 million for the
second quarter of 2000, an increase of $1.5 million or 21.4% from $7.0 million
for the second quarter of 1999. The increase is primarily due to higher salary
expenses in connection with increased staffing at the engine facility, legal and
engineering fees related to the GM transaction and higher marketing costs in
connection with the HUMMER.
Income (loss) before Interest and Income Taxes
The Company recorded a loss before interest and income taxes for the second
quarter of fiscal 2000 of $1.6 million, a decrease of $5.0 million from income
before interest and income taxes of $4.6 million in fiscal 1999. The decrease in
income before interest and income taxes is primarily attributable to the
reduction in gross profit discussed above and higher selling, general and
administrative expenses.
Interest Income and Expense
Interest expense for the second quarter of 2000 was $3.1 million, an increase of
$.4 million or 14.8% from $2.7 million for the second quarter of 1999. Average
debt outstanding during the first quarter of 2000 was $96.9 million at a
weighted average interest rate of 11.6%. Average debt outstanding during the
second quarter of fiscal 1999 was $75.0 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, partially offset by the $6.4
million reduction in the Company's 12 7/8 Senior Notes in connection with the
excess cash flow buy-back in fiscal 1999. Interest income decreased slightly
during the second quarter of fiscal 2000.
Income Tax Expense
Income tax expense was recorded at the statutory rate adjusted for permanent
differences primarily resulting from the amortization of goodwill. Income tax
expense was $0.1 million for the second quarter of fiscal 2000, a decrease of
$1.1 million from income tax expense of $1.2 million for the second quarter of
1999. The Federal income tax benefit resulting from net operating losses
incurred during the second quarter of fiscal 2000 were offset by an increase in
the Company's valuation allowance for deferred tax assets.
Net Income (Loss)
The net loss for the second quarter of fiscal 2000 was $4.8 million, an increase
of $5.7 million from net income of $.9 million in the second quarter of fiscal
1999. As discussed above, the increase in net loss was primarily due to
reductions in gross margin and increases in selling, general and administrative
expenses and interest expense.
11
<PAGE>
Six Months Ended April 30, 2000 ("first six months of 2000") compared to Six
Months Ended April 30, 1999 ("first six months of 1999")
<TABLE>
<CAPTION>
Analysis of Net Sales and Unit Sales Information
------------------------------------------------
(in millions, except unit information)
Six months ended
April 30, %
------------------------
2000 1999 Change Change
---- ---- ------ ------
<S> <C> <C> <C> <C>
Net Sales
HUMMER/HUMVEEs $ 153.2 $ 112.7 $ 40.5 35.9 %
Medium Trucks - 45.6 (45.6) (100.0)
SPLO 32.3 26.5 5.8 21.9
STS/Other 6.2 6.1 0.1 1.6
--------------------------------------------------------------
$ 191.7 $ 190.9 $ 0.8 0.4 %
--------------------------------------------------------------
HUMMER/HUMVEE Unit Sales 2,446 1,917 529 27.6 %
HUMMER/HUMVEE Average Unit Selling Price $ 62,633 $ 58,790 $ 3,843 6.5 %
</TABLE>
Consolidated net sales increased $0.8 million, or 0.4% to $191.7 million for the
first six months of fiscal 2000 compared to fiscal 1999. The increase in net
sales was due primarily to higher HUMMER/HUMVEE and SPLO sales partially offset
by lower Medium Truck sales in connection with the completion of the ESP
contract in fiscal year 1999.
HUMMER/HUMVEE segment net sales increased $40.5 million, or 35.9% to $153.2
million for the first six months of fiscal 2000 compared to fiscal 1999. The
increase in net sales is primarily due to higher US Armed Forces requirements
and increased demand for International HUMVEEs and Commercial HUMMERs. Higher
average unit selling prices also contributed to the increase in net sales.
HUMMER/HUMVEE average unit selling prices for the first six months of fiscal
2000 increased 6.5% over fiscal 1999 levels. The increase is attributable to a
negotiated price escalation on US Military HUMVEEs, a general price increase on
model year 2000 HUMMERs, and a proportionate increase in sales of more expensive
HUMMER models.
There were no Medium Truck segment net sales during the first six months of
fiscal 2000 due to the completion of the ESP contract in fiscal 1999. Segment
net sales for the first six months of fiscal 1999 included $45.6 million of ESP
contract revenue.
SPLO segment net sales increased $5.8 million, or 21.9% to $32.3 million in the
first six months of fiscal 2000 compared to fiscal 1999. The increase in net
sales is primarily attributable to a large engine order delivered in the second
quarter of fiscal 2000.
STS/Other segment net sales increased $0.1 million, or 1.6% to $6.2 million for
the first six months of fiscal 2000 compared to fiscal 1999. The increase was
due primarily to HUMMER royalties
12
<PAGE>
Analysis of Consolidated Gross Profit
-------------------------------------
(in millions, except unit information)
<TABLE>
<CAPTION>
Six months ended
April 30,
---------------------------------------------
% %
2000 Net Sales 1999 Net Sales Change Change
---- --------- ---- --------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Gross Profit
HUMMER/HUMVEEs $ 16.8 11.0% $ 12.1 10.7% $ 4.7 38.8 %
Medium Trucks - - 9.6 21.1 (9.6) (100.0)
SPLO 3.8 11.8 2.7 10.2 1.1 40.7
STS/Other 2.1 33.9 0.6 9.8 1.5 250.0
Engine (0.8) - - - (0.8) (100.0)
---------------------------------------------- ------- ---------
$ 21.9 11.4% $ 25.0 13.1% $ (3.1) (12.4) %
</TABLE>
Consolidated gross profit decreased $3.1 million, or 12.4% to $21.9 million in
the first six months of fiscal 2000 compared to fiscal 1999. The Company's
consolidated gross profit for the first six months of fiscal 2000 was 11.4%
compared to 13.1% in fiscal 1999. The decrease is primarily attributable to
lower profit in the Medium Truck segment due to the completion of the ESP
program partially offset by higher gross profit in the HUMMER/HUMVEE, SPLO and
STS/Other segments.
HUMMER/HUMVEE segment gross profit increased $4.7 million, or 38.8% to $16.8
million in the first six months of fiscal 2000 compared to fiscal 1999. The
segment gross profit was 11.0% in the first six months of fiscal 2000 compared
to 10.7% in fiscal 1999. The increase in gross profit is primarily attributable
to higher sales volumes in connection with increased military and commercial
demand, higher absorption of fixed manufacturing costs in connection with the
increased production rate from 16.5 vehicles per day during the second quarter
of 1999 compared to 24 vehicles per day for approximately half of the second
quarter of 2000, and lower variable per unit manufacturing costs. This increase
was partially offset by the Warranty Adjustment.
There was no Medium Truck segment gross profit in the first six months of fiscal
2000 due to the completion of the ESP contract in fiscal 1999. The results of
operations for the first six months of fiscal 1999 included $9.6 million of
gross profit from the ESP contract. The segment gross profit was 21.1% in the
second quarter of 1999.
SPLO segment gross profit increased $1.1 million, or 40.7% to $3.8 million in
the first six months of fiscal 2000 compared to fiscal 1999. The segment gross
profit for the first six months of 2000 was 11.8% compared to 10.2% in fiscal
1999. The increase in gross profit margin is directly related to increased sales
associated with a US Government parts order and selling a higher concentration
of more profitable HUMVEE spare parts.
STS/Other segment gross profit increased $1.5 million, or 250.0% to $2.1 million
in the first six months of fiscal 2000 compared to fiscal 1999. The segment
gross profit for the first six months of 2000 was 33.9% compared to 9.8% in
fiscal 1999. The increase is primarily due to profit under the Company's FMTV
Phase I contract which was closed out in the first quarter of fiscal 2000.
Engine segment gross profit was ($0.8) million in the first six months of fiscal
2000 primarily due to start-up costs in connection with the new Franklin, Ohio
manufacturing facility.
13
<PAGE>
Analysis and Management Discussions on Non-Segment Information
--------------------------------------------------------------
Depreciation and Amortization
Depreciation and amortization expense was $6.6 million for the first six months
of 2000, an increase of $1.0 million or 17.9% from $5.6 million for the first
six 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 fiscal 1999 in connection with
the implementation of a new ERP system.
Selling, General and Administrative
Selling, general and administrative ("SG&A") expenses were $16.5 million for the
first six months of 2000, an increase of $1.6 million or 10.7% from $14.9
million for the first six months of 1999. The increase is primarily due to
higher salary expenses in connection with increased staffing at the engine
facility, legal and engineering fees related to the GM Transaction and higher
marketing costs in connection with the HUMMER.
Income (loss) before Interest and Income Taxes
The Company recorded a loss before interest and income taxes for the first six
months of fiscal 2000 of $1.2 million, a decrease of $6.1 million from income
before interest and income taxes of $4.9 million in fiscal 1999. The decrease in
income before interest and income taxes is primarily due to lower gross profit
described above, higher selling, general and administrative expenses and higher
depreciation and amortization expense.
Interest Income and Expense
Interest expense for the first six months of fiscal 2000 was $7.3 million, an
increase of $1.6 million or 28.1% from $5.7 million for the first six months of
1999. Average debt outstanding during the first six months of 2000 was $97.0
million at a weighted average interest rate of 11.7%. Average debt outstanding
during the first six months of fiscal 1999 was $79.3 million at a weighted
average interest rate of 12.7%. The increase in average debt outstanding is
primarily due to higher borrowings under the Company's revolving credit facility
primarily due to the increase in raw material inventory levels, partially offset
by the $6.4 million reduction in the Company's 12 7/8 Senior Notes in connection
with the excess cash flow buy-back in fiscal 1999. The increase in interest
expense was due primarily to 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 the reduction in the Company's
12 7/8% Senior Notes. Interest income decreased by $0.1 million during the first
six months of fiscal 2000.
Income Tax Expense
Income tax expense was recorded at the statutory rate adjusted for permanent
differences primarily resulting from the amortization of goodwill. Income tax
expense was $0.1 million for the first six months of fiscal 2000, a decrease of
$0.7 million from income tax expense of $0.8 million for the first six months of
1999. The Federal income tax benefit resulting from net operating losses
incurred during the first six months of fiscal 2000 were offset by an increase
in the Company's valuation allowance for deferred tax assets.
Cumulative Effect of Accounting Change
The Company incurred a charge of $1.1 million for the cumulative effect of
adopting AICPA Statement of Position 98-5 related to start-up activities and
organization costs. See Note 3 to Consolidated Financial Statements for
additional information.
Net Loss
The net loss for the first six months of fiscal 2000 was $9.5 million, an
increase of $8.2 million from a net loss of $1.3 million in for the first six
months of fiscal 1999. As discussed above, the increase in net loss was
primarily due to reductions in gross margin, increased interest expense and the
one-time charge in connection with a change in accounting principle.
14
<PAGE>
Liquidity and Capital Resources
The Company's liquidity requirements result from capital investments, working
capital requirements, debt service obligations, postretirement health care and
pension funding, interest expense, and, to a lesser extent, principal payments
on its indebtedness. The Company has met these requirements in each fiscal year
since 1992 from cash provided by operating activities and borrowings under its
revolving credit facility and other permitted financing sources.
Cash provided by operating activities was $8.2 million for the six months ended
April 30, 2000 compared to $21.8 million for the six months ended April 30,
1999. The primary sources of cash flow during the first six months of 2000 were
reductions in accounts receivable and an increase in accounts payable and
accrued expenses partially offset by the net loss, an increase in inventory, and
long-term pension obligations. 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 April 30, 2000 were $5.9 million lower than levels
at the end of the prior fiscal year primarily due to higher than normal
receivables at the end of fiscal 1999 in connection with military vehicles sold
at the end of the year.
Net inventory levels at April 30, 2000 were $7.9 million higher than levels at
the end of the prior fiscal year due to higher manufacturing work-in-process,
raw material and SPLO inventory partially offset by lower finished goods
inventory. Manufacturing work-in process inventory increased $5.1 million due to
increasing the production line rate from 18 to 24 vehicles per day on March 20,
2000. Raw material levels increased $3.8 million primarily due to the increase
in the production line rate and an increase in the quantity of unique parts
required to support a more expensive international model mix. SPLO inventory
increased $4.1 million primarily due to a large US Government HUMVEE engine
order and in anticipation of increased sales for the remainder of fiscal 2000.
These increases were offset by a $5.1 million reduction in finished goods
inventory consisting primarily of US Military vehicles.
During the first six months of fiscal 2000 the Company spent $11.1 million on
capital expenditures, of which $3.2 million is in connection with the 6.5 liter
diesel engine facility. The remaining expenditures were in connection with
vendor tooling and equipment. Capital expenditures during the first six months
of 1999 were $3.2 million. The Company anticipates additional capital
expenditures in fiscal 2000 of approximately $99.4 million of which $90.0
million is in connection with the construction of the H2 assembly facility and
will be funded with the proceeds of a GM loan. On June 9, 2000 the Company
purchased the HUMMER/HUMVEE manufacturing facility for approximately $5.1
million. Financing for this acquisition was secured through a local bank. The
Company anticipates it will incur other capital expenditures of approximately
$4.3 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'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 April 30, 2000, the Company had borrowings outstanding of $25.3
million and approximately $20.6 million of availability under this facility.
The Revolving Credit Agreement contains numerous covenants and prohibitions that
impose limitations on the liquidity of the Company, including requirements that
the Company satisfy certain financial ratios and limitations on the incurrence
of additional indebtedness. The indenture governing the outstanding 12-7/8%
Senior Notes due 2002 also imposes limitations on the incurrence of additional
indebtedness. The Revolving Credit Agreement and Indenture were amended in
December to permit the GM Transaction. The ability of the Company to meet its
debt service requirements and to comply with such covenants will be dependent
upon future operating performance and financial results of the Company, which
will be subject to financial, economic, political, competitive and other factors
affecting the Company, many of which are beyond its control.
15
<PAGE>
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.
16
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
17
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits.
Exhibit No. Description
----------------------- ----------------------------------------------------------------------
<S> <C>
10.2.1 Supplement No. 3, dated February 24, 2000, to Employment Agreement of
James A. Armour.
27 Financial Data Schedule
</TABLE>
(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.
18
<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: June 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
19
<PAGE>
SUPPLEMENT NO. 3 dated February 24, 2000 to EMPLOYMENT AGREEMENT dated May
1, 1192 between JAMES A. ARMOUR and AM GENERAL CORPORATION, as amended by
Supplement No. 1, dated December 16, 1993 and Supplement No. 2 dated November 1,
1994.
Effective as of February 24, 2000, Section 2(a) of the Employment Agreement
is amended to read in its entirety as follows:
"(a) a salary at the rate of Five Hundred Thousand ($500,000) Dollars
per year (or such greater amount as Employer may from time to time
determine), payable periodically in accordance with Employer's usual
executive payroll payment procedures; plus"
Except as expressly modified hereby, all provisions of the Employment
Agreement as supplemented by Supplement No. 1 and Supplement No. 2 shall
remain in full force and effect.
AM GENERAL CORPORATION
By /s/ Ira Leon Rennert
-----------------------------------
Ira Leon Rennert
Chairman of the Board
/s/ James A. Armour
-----------------------------------
James A. Armour
Employee
20
