<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 8, 1998
REGISTRATION NO. 333-53491
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERICAN AXLE & MANUFACTURING
HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3714 38-3161171
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION) CLASSIFICATION CODE NUMBER)
</TABLE>
------------------------
1840 HOLBROOK AVENUE
DETROIT, MICHIGAN 48212
(313) 974-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
PATRICK S. LANCASTER
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
1840 HOLBROOK AVENUE
DETROIT, MICHIGAN 48212
(313) 974-2333
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
Copies of all correspondence to:
<TABLE>
<S> <C>
WILSON S. NEELY MICHAEL A. CAMPBELL
SIMPSON THACHER & BARTLETT MAYER, BROWN & PLATT
425 LEXINGTON AVENUE 190 SOUTH LASALLE STREET
NEW YORK, NEW YORK 10017 CHICAGO, ILLINOIS 60603-3441
(212) 455-2000 (312) 782-0600
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two prospectuses, one to be used in
connection with an offering in the United States and Canada (the 'U.S.
Prospectus') and one to be used in a concurrent international offering outside
the United States and Canada (the 'International Prospectus'). The complete U.S.
Prospectus follows immediately. Following the U.S. Prospectus are certain pages
of the International Prospectus, which include an alternate front cover page, an
alternate underwriting section and an alternate back cover page. All other pages
of the U.S. Prospectus and the International Prospectus are identical.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JULY 8, 1998
PROSPECTUS
SHARES
AMERICAN AXLE & MANUFACTURING
HOLDINGS, INC.
COMMON STOCK
------------------------
All of the shares of common stock, par value $.01 per share (the
'Common Stock'), of American Axle & Manufacturing Holdings, Inc., a Delaware
corporation (the 'Company'), offered hereby are being issued and sold by the
Company. Upon the closing of the Offerings (as defined below), Blackstone
Capital Partners II Merchant Banking Fund L.P. and its affiliates (collectively,
'Blackstone') and the officers and directors of the Company will own % and
%, respectively, of the outstanding Common Stock ( % and %, respectively,
if the over-allotment options are exercised in full).
Of the shares of Common Stock offered hereby, shares
are being offered initially in the United States and Canada by the U.S.
Underwriters (the 'U.S. Offering') and shares are being offered
initially outside the United States and Canada by the International Managers
(the 'International Offering'). The initial public offering price and the
underwriting discount per share will be identical for the U.S. Offering and the
International Offering (collectively, the 'Offerings'). See 'Underwriting.'
Prior to the Offerings, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price will
be between $ and $ per share. See 'Underwriting' for a discussion of
the factors to be considered in determining the initial public offering price.
The Company has applied to list the Common Stock on the New York Stock
Exchange under the proposed symbol 'AXL.'
------------------------
SEE 'RISK FACTORS' BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE TO PROCEEDS TO
PUBLIC UNDERWRITING DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share... $ $ $
Total(3).... $ $ $
</TABLE>
(1) The Company has agreed to indemnify the U.S. Underwriters and International
Managers (collectively, the 'Underwriters') against certain liabilities,
including certain liabilities under the Securities Act of 1933, as amended.
See 'Underwriting.'
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the U.S. Underwriters and the International Managers
options exercisable within 30 days of the date hereof to purchase up to an
additional and shares of Common Stock, respectively, solely to
cover over-allotments, if any. If such options are exercised in full, the
total Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See 'Underwriting.'
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
------------------------
MERRILL LYNCH & CO.
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
Securities Corporation
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED
------------------------
The date of this Prospectus is , 1998.
<PAGE>
[INSIDE FRONT COVER]
[GATEFOLD AND PICTURES]
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION
OF THESE ACTIVITIES, SEE 'UNDERWRITING.'
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
(including the notes thereto) appearing elsewhere in this Prospectus. Unless
otherwise indicated, the information in this Prospectus (i) assumes that the
Underwriters' over-allotment options are not exercised, (ii) gives effect to the
merger of American Axle & Manufacturing of Michigan, Inc., a Michigan
corporation ('Michigan'), into American Axle & Manufacturing Holdings, Inc., a
newly formed Delaware corporation ('Holdings'), that will occur prior to the
completion of the Offerings for the purpose of reincorporating in the State of
Delaware, and (iii) reflects a -for-1 stock split that will occur prior to
the completion of the Offerings. Statements concerning the automotive industry
contained in this Prospectus are based on information compiled by the Company or
derived from public sources which the Company believes to be reliable, including
J.D. Power & Associates, Inc. ('J.D. Power') and Autofacts Automotive Outlook.
Unless the context requires otherwise, all references herein to the 'Company'
shall mean Holdings, its predecessors and their wholly and majority owned
subsidiaries, collectively.
THE COMPANY
The Company is a Tier I supplier to the automotive industry and a world
leader in the design, engineering, and manufacturing of driveline systems for
light trucks and sport-utility vehicles ('SUVs'). The driveline system includes
all of the components that transfer power from the transmission and deliver it
to the drive wheels. Driveline products produced by the Company include axles,
propeller shafts, chassis components and forged products. With an estimated 33%
market share in North America (which represents an estimated 15% market share
worldwide), the Company is a leading independent supplier of driveline
components for light trucks and SUVs, the fastest growing segment of the light
vehicle market. The Company also manufactures axles, propeller shafts and other
products for rear-wheel drive ('RWD') passenger cars. Additionally, the Company
has the second largest (by sales) automotive forging operation in North America.
The Company is General Motors Corporation's ('GM') principal supplier of
driveline components for light trucks, SUVs and RWD passenger cars, supplying
substantially all of GM's rear axle and front four-wheel drive ('4WD') axle
requirements, and over 75% of its propeller shaft requirements for these vehicle
platforms in 1997. Approximately 96% of the Company's 1997 sales were to various
divisions and subsidiaries of GM. The Company's second largest customer is the
Ford Motor Company ('Ford'), for which the Company produces axle shafts and
double cardan joints for light trucks and SUVs manufactured by Ford in North
America.
THE 1994 ACQUISITION
The Company is the successor to the former Final Drive and Forge Business
Unit of the Saginaw Division of GM (the 'Business Unit' or 'Predecessor') and
has produced driveline components and forged products for over 75 years. In
March 1994, a private investor group led by Richard E. Dauch formed the Company
and purchased the Business Unit from GM (the '1994 Acquisition'). In connection
with the 1994 Acquisition, GM and the Company entered into a Component Supply
Agreement (the 'CSA') under which the Company became the sole-source supplier to
GM of all the products and components previously supplied to GM by the Business
Unit. In September 1997, the Company and GM signed an additional binding
agreement, the Amended and Restated Memorandum of Understanding ('MOU'), which
became operative after the Company's recapitalization described below. Under the
MOU, the Company and GM have agreed to transition the CSA into a number of
separate Lifetime Program Contracts ('LPCs'), under which the Company will
supply products and components for the life of each GM vehicle program covered
by an LPC. These LPCs will ultimately replace the CSA. See
'Business--Contractual Arrangements with GM.'
The Company's management team, which was formed in connection with the 1994
Acquisition, is led by Mr. Dauch as Chairman of the Board, Chief Executive
Officer and President and was carefully selected on the basis of its management
expertise in the automotive industry. Mr. Dauch has over 34 years of experience
in the industry and was an Executive Vice President for Chrysler Corporation
('Chrysler') from 1980 to 1991, and was instrumental in Chrysler's manufacturing
and financial turnaround. As an executive of GM, he also managed the Business
Unit's largest manufacturing plant (Detroit Gear & Axle) from 1974 to 1976. The
Company's senior
3
<PAGE>
management team is comprised of 12 executives with an average of 27 years'
experience in the automotive industry, including both automotive original
equipment manufacturer ('OEM') and supplier operations.
POST-ACQUISITION IMPROVEMENTS
Since the 1994 Acquisition, the Company has dramatically improved product
quality and manufacturing efficiency through a combination of management
leadership, significant investments in new equipment and technology, workforce
training, and process improvements resulting in increased capacity utilization.
From March 1994 through March 1998, the Company has invested approximately $700
million in capital expenditures and 1.2 million labor hours for training and
education of its associates and has received and maintained ISO/QS 9000
certification for each of its facilities. As a result, (i) the average number of
axles produced per production day increased from approximately 10,000 in March
1994 to approximately 14,000 in March 1998, (ii) discrepant parts shipped to GM
(as measured by GM) decreased from approximately 13,400 parts per million
('PPM') during the six months ended December 31, 1994 to approximately 180 PPM
during the six months ended March 31, 1998, and (iii) returned parts decreased
from 5,136 PPM during the ten months ended December 31, 1994 to 664 PPM during
the twelve months ended December 31, 1997. Net sales and operating income
increased to $2.15 billion and $116.1 million, respectively, for the year ended
December 31, 1997, from $2.02 billion and $93.5 million, respectively, for the
year ended December 31, 1996.
In February 1996, the Company was chosen as the design, development and
production supplier for the GMT-800 Program, which represents the next
generation of GM's full-size pickup trucks and SUVs, including the GMC and
Chevrolet full-size pickup trucks, as well as the Suburban, Tahoe and Yukon
SUVs. GM began to phase in production of GMT-800 vehicles in June 1998. In June
1997, the Company was chosen as the supplier for the next generation of GM's
mid-size SUVs, including the Blazer, Bravada and Jimmy (the 'New M-SUV
Program'). The current generation of these platforms represented approximately
70% of the Company's 1997 sales. For the GMT-800 Program, the Company has
designed and engineered significant improvements in the quality and reliability
of its driveline products, which will improve the ride and handling of these
light trucks and SUVs. Primarily as a result of these design and engineering
enhancements for these platforms, the 'Sales-Dollar Content' per vehicle (the
Company's revenue per vehicle containing the Company's products) will increase
beginning in late 1998.
THE RECAPITALIZATION
On September 17, 1997, AAM Acquisition, Inc., an entity organized by
Blackstone Capital Partners II Merchant Banking Fund L.P. and certain other
affiliated investors (collectively, 'Blackstone'), Jupiter Capital Corporation
('Jupiter'), Richard E. Dauch, Morton E. Harris, the Company and American Axle &
Manufacturing, Inc. ('AAM, Inc.'), then the parent of the Company, entered into
an agreement (the 'Recapitalization Agreement'), pursuant to which Blackstone
acquired control of the Company on October 29, 1997 (the 'Recapitalization').
Prior to the Recapitalization, the Company was a wholly-owned subsidiary of AAM,
Inc. Pursuant to the Recapitalization, the Company acquired a 100% ownership
interest in AAM, Inc. by exchanging shares of its own stock, on a one-for-one
basis, with the shareholders of AAM, Inc. Following the exchange of shares, on
October 29, 1997, pursuant to the Recapitalization Agreement, Blackstone
acquired shares of the Company's Common Stock from Jupiter and Mr. Dauch. The
Company used approximately $474 million of aggregate proceeds from certain
financings described herein to (i) repay certain indebtedness of AAM, Inc., (ii)
repurchase all of the issued and outstanding shares of Class A Preferred Stock
of AAM, Inc., (iii) repurchase certain shares of the Company's Common Stock held
by Jupiter and Mr. Harris, (iv) pay costs and expenses incurred in connection
with the Recapitalization, including fees, expenses and payments relating to
certain of the Company's then existing stock options, and (v) fund the working
capital requirements of the Company. Immediately after the closing of the
Recapitalization, on a fully diluted basis Blackstone owned approximately 63.9%
of the Common Stock, members of the Company's senior management owned
approximately 29.0% of the Common Stock and Jupiter and Mr. Harris collectively
owned approximately 5.4% of the Common Stock. See 'Ownership of Common Stock'
and Notes 2 and 8 to the Consolidated Financial Statements.
4
<PAGE>
INDUSTRY
The automotive industry has been and continues to be significantly
influenced by several industry trends which the Company believes will enhance
its strategic position and growth prospects. First, consumer demand for light
trucks and SUVs continues to grow both in North America and worldwide. The
Company benefits directly from this trend due to its leading North American
market share position as an independent supplier of driveline components for the
light truck and SUV segment. Second, sales penetration of 4WD in the U.S. light
vehicle market has increased from 7% in 1990 to over 15% in 1997 and, according
to J.D. Power, is expected to continue to rise. The Company benefits from this
trend since its Sales-Dollar Content per vehicle is approximately 40% higher on
a 4WD vehicle than on a comparable two-wheel drive vehicle. Third, automotive
OEMs continue to outsource component manufacturing as a result of competitive
pressures to improve quality and reduce capital expenditures, production costs
and inventory levels. A significant portion of driveline components are
currently manufactured by OEMs, representing a substantial outsourcing
opportunity for the Company. Fourth, in connection with this outsourcing trend,
OEMs are placing greater reliance on large Tier I full-service suppliers that
are capable of supplying integrated systems. It is anticipated that as this
trend continues, the number of suppliers will substantially decrease. As the
16th largest (by sales) North American automotive OEM parts supplier (according
to the March 30, 1998 Automotive News), the Company believes it is well
positioned to compete successfully as a systems integrator in the consolidating
supplier market. Fifth, OEMs are expanding manufacturing operations into global
markets, thereby providing Tier I suppliers the opportunity to follow OEMs into
those markets. The Company has participated in this trend by being awarded
contracts to supply components to GM's operations in South America, Indonesia
and Mexico.
BUSINESS STRATEGY
The Company plans to leverage its competitive advantages and actively
pursue the following strategies to increase revenue and profitability:
Improve Product Quality and Manufacturing Efficiency. Since the 1994
Acquisition, the Company has dramatically improved product quality and
efficiency. The Company is committed to continue reducing operating costs by
developing new manufacturing processes and by investing in new equipment,
technologies and improvements in product designs. The Company believes that the
significant modernization of its manufacturing equipment and facilities which
has been completed over the last four years, as well as initiatives to be
undertaken in connection with the GMT-800 and the New M-SUV Programs, will
generate enhanced productivity and operating efficiency. From March 1994 through
March 1998, the Company has invested approximately $700 million in the
modernization of its equipment and facilities and anticipates spending
approximately $225 million to $325 million in additional capital expenditures
during the last three quarters of 1998.
Diversify, Strengthen and Globalize OEM Customer Base. The Company
currently provides axle shafts and double cardan joints to Ford and has begun to
pursue strategic initiatives to further diversify its customer base by providing
products for vehicles manufactured by Isuzu, Nissan, CAMI (a joint venture
between GM and Suzuki), and Mercedes-Benz. Through its diversification efforts,
the Company has increased its sales to customers other than GM and estimates
that such sales will approximate $100 million in 1998. The Company will continue
to seek new business from existing customers, as well as develop relationships
with new customers worldwide. Substantially all of the Company's products are
presently sold in North America. The Company currently has a regional sales
office in Tokyo and is in the process of opening another office in Ulm, Germany;
this presence is intended to help the Company access new markets for its
products. Additionally, the Company is establishing a regional sales office and
constructing a manufacturing facility in Guanajuato, Mexico, which is currently
scheduled to begin production in the fall of 2000.
Expand Systems Integrator Capability. OEMs continue to consolidate their
supplier base and shift the design, engineering and manufacturing functions of
complete systems to their remaining Tier I suppliers. The Company currently
supplies axles, propeller shafts, chassis components and forged products for
light trucks and SUVs. The Company intends to provide additional driveline
components through a combination of developing new technologies and other
capabilities, managing Tier II and Tier III suppliers and acquiring other
suppliers in order to offer its customers more fully-integrated driveline
systems.
5
<PAGE>
Develop New Products. The Company intends to diversify its product
portfolio by designing and developing new products and systems. As part of its
commitment to product development, the Company opened its Technical Center in
1995 which provides resources to the Company's engineers to improve the design
of the Company's existing products and to design new products. The Company
invested $23.4 million and $27.8 million in research and development in 1996 and
1997, respectively. To date, these initiatives have resulted in several new
products such as the new 11.5' axle (initially being used in the GMT-800
Program), multi-link rear axles, an integral oil pan front axle, precision
steering system joints (which utilize lash free/low lash idlers and radiax pivot
sockets) and improved propeller shaft 'U-Joints.' The Company is also in the
process of developing other new products such as independent rear drive system
modules, traction-enhancing advanced differentials, banjo style axles, aluminum
rear axle carriers, axle cooler covers, spherical differential cases and near
net/net shaped forgings.
Pursue Selected Acquisition Opportunities. The Company intends to pursue an
acquisition strategy designed to accelerate the implementation of its strategic
initiatives. The acquisition candidates the Company will evaluate will include:
(i) suppliers of driveline components which complement the Company's current
product offerings, (ii) companies in the forging industry, a segment which is
highly fragmented, which will allow the Company to capitalize upon the trend
toward OEM supplier consolidation, and (iii) other automotive parts suppliers.
This acquisition strategy is intended to diversify the Company's customer base,
expand its product offerings, selectively globalize its operations and/or
leverage its design, engineering and validation expertise.
The Company is incorporated in Delaware. The address of the Company's
principal place of business is 1840 Holbrook Avenue, Detroit, Michigan 48212,
and its telephone number is (313) 974-2000.
6
<PAGE>
THE OFFERINGS
<TABLE>
<S> <C>
Common Stock offered...................................................... shares(1)
Common Stock to be outstanding after the Offerings........................ shares(1)(2)
Use of Proceeds........................................................... To reduce the Company's indebtedness
and for capital expenditures, as
described in 'Use of Proceeds.'
Proposed New York Stock Exchange symbol................................... AXL
</TABLE>
- ------------------
(1) Assumes no exercise of the over-allotment options granted by the Company to
the Underwriters.
(2) Does not include shares of Common Stock reserved for issuance upon
exercise of outstanding options and shares of Common Stock available
for future issuance under the Company's stock option plans. See
'Management--Stock Options.'
7
<PAGE>
SUMMARY FINANCIAL DATA
The following summary consolidated historical financial data at and for the
years ended December 31, 1993, 1995, 1996 and 1997 and the two months and ten
months ended February 28, 1994 and December 31, 1994, respectively, were derived
from audited consolidated financial statements of the Company, which have been
audited by Ernst & Young LLP, independent auditors. The financial data at and
for the three-month periods ended March 31, 1997 and 1998 were derived from
unaudited consolidated financial statements of the Company. In the opinion of
management, the unaudited data have been prepared on the same basis as the
audited consolidated financial statements since the 1994 Acquisition and include
all adjustments, consisting of normal recurring adjustments, which the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Results for interim periods are not
indicative of results for a full year. The pro-forma earnings per common share
has been computed based on the stock split to be effected prior to the
Offerings. The table should be read in conjunction with 'Management's Discussion
and Analysis of Financial Condition and Results of Operations,' the consolidated
financial statements of the Company and the related notes, the 'Unaudited Pro
Forma Condensed Consolidated Financial Statements' and the other financial
information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR(A)
--------------------------- THREE MONTHS ENDED
TWO MONTHS TEN MONTHS YEAR ENDED
YEAR ENDED ENDED ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, FEBRUARY 28, DECEMBER 31, ------------------------------------ -------------------
1993 1994(B) 1994(C) 1995 1996 1997 1997 1998
------------ ------------ ------------- ---------- ---------- ---------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............. $1,522,327 $ 294,466 $ 1,548,655 $1,968,076 $2,022,272 $2,147,451 $546,859 $583,285
Gross profit (loss)... 10,619 (17,386) 141,997 179,488 176,550 220,087 59,031 61,006
Operating income
(loss).............. (18,630) (21,921) 73,880 108,885 93,478 116,133 36,369 36,307
Net interest (expense)
income.............. -- -- 3,941 9,086 9,412 (1,846) 2,255 (9,749)
Net income (loss)..... (12,309) (21,369) 36,446 70,571 61,724 55,264 24,790 16,923
Net income per share
(pro-forma).........
BALANCE SHEET DATA:
Total assets.......... N/A $ 316,466 $ 534,108 $ 736,997 $ 771,222 $1,017,653 $854,722 $999,541
Total debt............ N/A 82,192 11,192 1,000 2,368 507,043 2,287 482,962
Preferred stock....... N/A 200,000 200,000 200,000 200,000 -- 200,000 --
Stockholders'
equity.............. N/A 20,500 88,101 168,572 250,168 37,231 282,833 54,457
OTHER DATA:
Net cash provided by
operating
activities.......... N/A N/A $ 196,990 $ 196,886 $ 65,687 $ 200,830 $ 73,642 $ 76,140
EBITDA(d)............. N/A N/A 96,038 144,779 134,740 152,838 50,978 50,623
Depreciation and
amortization........ 25,940 4,682 16,846 25,242 36,076 50,177 12,161 14,497
Capital expenditures.. $ 26,500 $ 9,600 25,168 147,077 162,317 282,625 59,344 66,301
</TABLE>
- ------------------
(a) The accompanying statement of operations data of the Predecessor for the
year ended December 31, 1993 and for the two months ended February 28, 1994
reflect its historical cost basis prior to the 1994 Acquisition.
Accordingly, the statement of operations for the periods subsequent to the
1994 Acquisition are not comparable to the periods prior to the 1994
Acquisition.
(b) The accompanying balance sheet data is as of March 1, 1994 and include the
accounts of the Company after adjustment of the corresponding assets and
liabilities to their estimated fair value to reflect the allocation of the
purchase price in connection with the 1994 Acquisition.
(c) Results are for the ten-month period beginning on the closing date of the
1994 Acquisition and ending on December 31, 1994.
(d) EBITDA represents income from continuing operations before interest expense,
income taxes, depreciation and amortization. EBITDA should not be construed
as a substitute for income from operations, net income or cash flow from
operating activities as determined by generally accepted accounting
principles. Other companies may calculate EBITDA differently.
8
<PAGE>
RISK FACTORS
This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the 'Securities Act').
The safe harbor provisions of Section 27A do not apply to initial public
offerings, such as the Offerings. Such forward-looking statements are based on
the beliefs of the Company's management as well as on assumptions made by and
information available to the Company at the time such statements were made. When
used in this Prospectus, the words 'anticipate,' 'believe,' 'estimate,'
'expect,' 'intends' and similar expressions as they relate to the Company are
intended to identify forward-looking statements, which include statements
regarding the Company's ability to continue to implement its operating and
growth strategies. Actual results could differ materially from those projected
in the forward-looking statements as a result of economic and business factors
and the factors described below, as well as other factors, some of which may be
beyond the control of the Company. The Company cautions the reader, however,
that this list of factors may not be exhaustive, particularly with respect to
future business conditions. In analyzing an investment in the Common Stock
offered hereby, prospective investors should carefully consider, along with the
other matters referred to herein, the risk factors described below.
AUTOMOTIVE INDUSTRY CYCLICALITY AND CONDITIONS
The Company's operations are cyclical because they are directly related to
domestic automotive production, which is itself cyclical and dependent on
general economic conditions and other factors. Sales of products for light
trucks and SUVs constituted approximately 90% of the Company's revenues in 1997.
There can be no assurance that positive trends in sales of these vehicles, or
that the increasing penetration of 4WDs as a percentage of the light vehicle
market, will continue. A decrease in consumer demand for the models that
generate the most sales for the Company, the failure of the Company to obtain
sales orders for new or redesigned models or pricing pressure from its customers
or competitors could have a material adverse effect on the Company. Government
regulations, including those relating to Corporate Average Fuel Economy
regulations, could impact vehicle mix and volume which could adversely affect
the demand for the Company's existing products.
In addition, the Company may be unable to pass on raw material price
increases to its customers due to pricing pressure to remain competitive. There
is substantial and continuing pressure from the major automotive companies to
reduce the number of outside suppliers and reduce costs. Management believes
that the Company's ability to control its own costs and to develop new products
will be essential to remain competitive. There can be no assurance that the
Company will be able to improve or maintain its profitability on product sales.
RELIANCE ON GM
Sales to GM constituted approximately 96% of the Company's sales in 1997
and 1996. See 'Business-- Contractual Arrangements with GM.' In connection with
the Company's purchase of the Business Unit, GM agreed pursuant to the CSA to
continue to purchase all of the components that were supplied to GM by the
Business Unit at the time of the 1994 Acquisition. In 1997, the Company and GM
entered into a binding MOU which provides for transitioning the CSA into a
number of separate LPCs, applicable for the life of each GM vehicle program
covered by an LPC. Although pricing has been established for products sold under
the LPCs, the Company must remain competitive with respect to technology, design
and quality. There can be no assurance that the Company will remain competitive
with respect to technology, design and quality to GM's reasonable satisfaction.
LPCs have terms equal to the lives of the relevant vehicle programs, which
typically run 6 to 12 years. The Company will have to compete for future GM
business upon the termination of the LPCs. In addition, pricing negotiated for
future programs may be more or less favorable than currently applicable terms.
If the Company loses any significant portion of its sales to GM, or if GM
significantly reduces its production of light trucks or SUVs, it would have a
material adverse effect on the results of operations and financial condition of
the Company. Additionally, a prolonged labor disruption involving GM and its
workers could have a negative impact on the Company.
In addition, GM provides several key services to the Company pursuant to
various agreements executed by the Company and GM or one of GM's subsidiaries in
connection with the 1994 Acquisition. See 'Business-- Contractual Arrangements
with GM.' These services consist primarily of the use of purchasing,
manufacturing and cost accounting systems support. Although the Company is
currently in the process of developing and
9
<PAGE>
installing its own information systems to allow transition from these GM
systems, there can be no assurance that the Company will convert these
operations in a timely or cost-effective manner.
TRANSITION FROM CSA TO MOU AND LPCS
The Company currently purchases through GM's purchasing network certain
materials for use in the manufacture of products sold under the CSA and the
LPCs. While the Company pays current market prices for such materials, increases
or decreases in such prices from levels established under the CSA currently
result in corresponding increases or decreases in the aggregate amount paid by
GM to the Company for its products, thereby protecting the Company from
increases in the costs of such materials while such purchasing arrangement is in
effect. The Company and GM have agreed to develop a mutually satisfactory plan
to terminate this purchasing arrangement no later than December 2002, although
the Company will continue to be eligible to participate in GM's then current
steel resale program and pricing adjustment policy for non-ferrous metals.
While the prices at which the Company sells its products under the CSA and
the LPCs have been established, under the LPCs, upon termination of the
purchasing arrangement described above, the Company will no longer have a
contractual right to pass on any future increases in the cost of such materials.
Increases in material costs beyond the established prices are the only costs
passed on to GM under the CSA and under the LPCs. There can be no assurance that
the Company will be able to pass on any increased labor, materials or other
costs to GM in the future as it has from time to time in the past pursuant to
the above-described terms of the CSA or by certain additional payments agreed to
as part of the commercial arrangements between GM and the Company (subject to
certain temporary reductions described in 'Management's Discussion and Analysis
of Financial Condition and Results of Operations--Company Overview').
Under the CSA, the Company is not liable for warranty costs for its
products after the relevant vehicle has been sold to a retail purchaser unless
it is determined that the frequency or total cost of warranty claims for a given
period significantly exceeds the historical frequency of such claims for a
comparable model. Under the LPCs, the Company's products are subject to the
warranty provisions of GM's standard purchase order, including warranties as to
the absence of defects and as to fitness and sufficiency for the particular
purposes for which such products are to be used by GM.
GM WORK STOPPAGES
Over the past four years, there have been labor strikes against GM which
have resulted in work stoppages at GM. It is estimated that work stoppages at GM
resulted in lost sales to the Company of approximately $80 million in each of
1996 and 1997, and it is estimated that the work stoppages at GM which began in
June 1998 have resulted in lost sales to the Company of approximately $ million
and lost operating income of approximately $ million. Since GM accounts for
approximately 96% of the Company's sales, future work stoppages at GM could
materially and adversely affect the Company's financial condition, results of
operations and the conduct of its business.
LABOR RELATIONS
The Company's current national collective bargaining agreements with the
United Automobile, Aerospace and Agricultural Implement Workers of America (the
'UAW') and the International Association of Machinists ('IAM') run through
February 25, 2000 and May 5, 2000, respectively. Since the 1994 Acquisition, the
Company has not experienced any strikes. Although the Company believes its
relations with its unions are positive, there can be no assurance that future
issues with its labor unions will be resolved favorably to the Company or that
the Company will not experience a work stoppage which could adversely affect the
Company's business.
LEVERAGE
The Company incurred indebtedness in connection with the Recapitalization
and this indebtedness is substantial in relation to its stockholders'
investment. As of March 31, 1998, the Company had approximately $483.0 million
of outstanding debt and approximately $54.5 million of stockholders' equity. The
degree to which the Company is leveraged could have important consequences,
including the following: (i) the Company's ability
10
<PAGE>
to obtain additional financing in the future for working capital, capital
expenditures, research and development, acquisitions or general corporate
purposes may be impaired; (ii) a substantial portion of the Company's cash flow
from operations must be dedicated to the payment of interest on its existing
indebtedness, thereby reducing the funds available to the Company for other
purposes; (iii) the Company's operations are restricted by the agreements
governing the Company's long-term indebtedness which contain certain financial
and operating covenants; (iv) indebtedness under the Company's Credit Facilities
(as defined below) is at variable rates of interest, and therefore the Company
is vulnerable to increases in interest rates; (v) all of the indebtedness
outstanding under the Credit Facilities is secured by substantially all of the
assets of the Company; and (vi) the Company's substantial degree of leverage
could make it more vulnerable in the event of a downturn in general economic
conditions or in its business. See 'Description of Certain Indebtedness.'
The Company's ability to satisfy its debt obligations will depend on its
future operating performance, which will be affected by prevailing economic
conditions and financial, business and other factors, certain of which are
beyond the Company's control. The Company believes, based on current
circumstances, that the Company's cash flow, together with available borrowings
under the Credit Facilities, will be sufficient to permit the Company to meet
its operating expenses and to service its debt requirements. Significant
assumptions underlie this belief, including, among other things, that the
Company will succeed in implementing its business and growth strategies and
there will be no material adverse developments in the business, liquidity or
capital requirements of the Company. It is anticipated that the Company will
increase its leverage to meet its working capital and capital expenditure
requirements in the future. The impact of work stoppages at GM may have a
significant adverse impact on the Company's results of operations and liquidity
and may contribute to an increase in the Company's leverage. In addition, the
consummation of future acquisitions could increase the Company's leverage. See
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources.'
DEBT COVENANTS
The agreements governing the Company's Credit Facilities include certain
covenants that, among other matters, restrict the Company's ability to: (i) pay
dividends or redeem or repurchase capital stock; (ii) incur additional
indebtedness; (iii) grant liens, other than liens created pursuant to such
agreements and certain permitted liens; and (iv) merge, make acquisitions or
sell assets. The Credit Facilities also require the Company to comply with
financial covenants relating to interest coverage, leverage, retained earnings
and capital expenditures. There can be no assurance that these requirements will
be met in the future. If they are not, the holders of the indebtedness under
such agreements would be entitled to declare such indebtedness immediately due
and payable. See 'Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources.'
The Company is currently in compliance with the covenants and restrictions
contained in the Credit Facilities. However, its ability to continue to comply
may be affected by events beyond its control, including prevailing economic,
financial and industry conditions. The breach of any of such covenants or
restrictions could result in a default under the Credit Facilities, which would
permit the lenders to declare all amounts borrowed thereunder to be due and
payable, together with accrued and unpaid interest, and the commitments of the
lenders to make further extensions of credit under the Credit Facilities could
be terminated. If the Company were unable to repay its indebtedness to its
lenders, such lenders could proceed against the collateral securing such
indebtedness.
Amounts outstanding under the Credit Facilities are unconditionally and
irrevocably guaranteed by the Company and certain of its subsidiaries. In
addition, the Credit Facilities are secured by first priority security interests
in substantially all of the tangible and intangible assets of the Company and
its subsidiaries (excluding receivables related to the Receivables Facility
(defined below)), including all the capital stock of, or other equity interests
in, the Company's existing or subsequently acquired or organized direct or
indirect domestic subsidiaries and 65% of the capital stock of, or other equity
interests in, each direct foreign subsidiary of the Company. See 'Description of
Certain Indebtedness--Senior Secured Credit Facilities.'
11
<PAGE>
PRODUCT PROGRAM IMPLEMENTATION
GM began to phase in the launch of a new light truck product program in
June 1998, known as the GMT-800 Program. Although the Company has installed and
certified the equipment needed to produce products for the GMT-800 Program in
time for the start of production, there can be no assurance that GM will phase
in the GMT-800 Program on schedule. In addition, there can be no assurance that
the transitioning of manufacturing facilities and resources to full production
under the GMT-800 Program, or any other future product programs, will not impact
production rates or other operational efficiency measures at the Company's
facilities. GM has also announced that it plans to launch a new truck product
program, referred to herein as the New M-SUV Program. Engineering changes to the
axles, propeller shafts, steering linkages and stabilizer bars necessitated by
the New M-SUV Program will require the Company to make a capital investment
currently estimated to be approximately $120 million. There can be no assurance
that the Company will be able to install and certify the equipment needed to
produce products for the New M-SUV Program in time for the start of production.
Moreover, there can be no assurance that GM will execute the New M-SUV Program,
or that GM or any future significant customer of the Company will execute any
other additional future program for which the Company may supply components, on
schedule.
COMPETITION
The automotive OEM supply industry is highly competitive with a number of
other manufacturers that produce competitive products. Quality, service and
price, as well as technological innovation, are the primary elements of
competition. There can be no assurance that the Company's products will compete
successfully with those of its competitors. These competitors include driveline
component manufacturing facilities of existing OEMs, as well as independent
domestic and international suppliers. Certain competitors are more diversified
and have greater access to financial resources. There can be no assurance that
the Company's business will not be adversely affected by increased competition,
or that the Company will be able to maintain its profitability, if the
competitive environment changes.
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend, in part, on the efforts of its executive
officers and other key associates, including Richard E. Dauch, Chairman of the
Board, Chief Executive Officer and President. In addition, the future success of
the Company will depend on, among other factors, the Company's ability to
continue to attract and retain qualified personnel. The Company does not have
employment agreements with, or 'key man' life insurance on, any of its
associates other than Mr. Dauch. The loss of the services of any of its key
associates or the failure to attract or retain associates could have a material
adverse effect on the financial condition and results of operations of the
Company. See 'Management.'
ENVIRONMENTAL REGULATION AND PROCEEDINGS
The Company's operations are subject to federal, state, local and foreign
laws and regulations governing, among other things, emissions to air, discharge
to waters and the generation, handling, storage, transportation, treatment and
disposal of waste and other materials. The Company believes that its business,
operations and facilities have been and are being operated in compliance in all
material respects with applicable environmental and health and safety laws and
regulations, many of which provide for substantial fines and criminal sanctions
for violations. The operation of automotive parts manufacturing plants entails
risks in these areas, however, and there can be no assurance that the Company
will not incur material costs or liabilities. In addition, potentially
significant expenditures could be required in order to comply with evolving
environmental and health and safety laws, regulations or requirements that may
be adopted or imposed in the future.
The Company believes that the overall impact of compliance with regulations
and legislation protecting the environment will not have a material effect on
its future financial position or results of operations, although no assurance
can be given in this regard. Capital expenditures and expenses in 1997
attributable to compliance with such regulations and legislation were not
material. See 'Business--Environmental Matters.'
12
<PAGE>
INVENTORY MANAGEMENT; RELIANCE ON SINGLE SOURCE SUPPLIERS
The Company has initiated a policy of strengthening its supplier
relationships by concentrating its productive material purchases with a limited
number of suppliers. The Company believes that this policy contributes to
quality and cost controls and increases the suppliers' commitments to the
Company. The Company relies upon, and expects to continue to rely upon, single
source suppliers for certain critical components that are not readily available
in sufficient volume from other sources. There can be no assurance that the
suppliers of these productive materials will be able to meet the Company's
future needs on a timely basis, or be willing to continue to be suppliers to the
Company, or that a disruption in a supplier's business would not disrupt the
supply of productive materials that could not easily be replaced.
The Company has an agreement with General Motors of Canada Limited
('GMCL'), an affiliate of GM, whereby GMCL has agreed to provide axles to the
Company for resale to GM. This agreement, as amended, expires in September 1999.
An interruption in production of the axles supplied by GMCL could have a
material adverse effect on the Company.
YEAR 2000 COMPLIANCE
While the Company believes it is addressing its computer systems and
software to be 'year 2000' compliant, it is dependent on third-party software
and computer technology, used internally, which, if not year 2000 compliant, may
materially impact the Company. Further, the Company's operations may be at risk
if its suppliers, customers and other third-parties fail to adequately address
the problem or if software conversions result in system incompatibilities with
these third parties. See 'Management's Discussion and Analysis of Financial
Conditions and Operations--Year 2000 Compliance.'
CONTROL BY PRINCIPAL STOCKHOLDER
Blackstone owns approximately 63.9% of the Company's Common Stock and, upon
completion of the Offerings, Blackstone is expected to own approximately
% of the outstanding Common Stock (or approximately %, if the
Underwriters' over-allotment options are exercised in full), in each case on a
fully diluted basis. See 'Ownership of Common Stock.' In addition, Blackstone,
Jupiter, Richard E. Dauch, Morton E. Harris and the Company are parties to a
stockholders' agreement (the 'Stockholders' Agreement') executed in connection
with the Recapitalization. Generally, pursuant to the Stockholders' Agreement,
so long as Blackstone owns at least one-third of the Common Stock held by it at
the closing of the Recapitalization, (i) if Blackstone receives and accepts an
offer from a person to purchase all, or substantially all, of the Common Stock
held by Blackstone, Jupiter and Messrs. Dauch and Harris, then Jupiter and
Messrs. Dauch and Harris are required to offer their shares of Common Stock in
any such sale and (ii) if Blackstone proposes to transfer all or a portion of
its shares of Common Stock, other than to its affiliates or in connection with a
public offering registered under the Securities Act, Jupiter and Messrs. Dauch
and Harris have the right to require the transferee to purchase a proportional
share of their respective shares. Moreover, upon completion of the Offerings,
Blackstone's ownership of approximately % of the outstanding Common Stock
will enable it to influence significantly the election of the Company's Board of
Directors and votes on all matters submitted to the Company's stockholders for
approval. See 'Certain Transactions--Stockholders' Agreement.'
ANTITAKEOVER PROVISIONS
Certain provisions of the Company's Certificate of Incorporation (the
'Certificate of Incorporation') and Bylaws (the 'Bylaws') and Delaware law may
make the acquisition of control of the Company in a transaction not approved by
the Company's Board of Directors more difficult or expensive. See 'Description
of Capital Stock.'
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Offerings, there has been no public market for the Common
Stock and there can be no assurance that an active trading market will develop
or be sustained in the future. The initial public offering price of the Common
Stock will be determined solely by negotiations among the Company and the
representatives of the Underwriters and may not be indicative of the market
price of the Common Stock after completion of the
13
<PAGE>
Offerings or the price at which Common Stock may be sold in the public market
after the Offerings. See 'Underwriting' for information relating to the method
of determining the initial public offering price of the Common Stock.
The Company believes that various factors, such as general economic
conditions and changes or volatility in the financial markets, announcements or
significant developments with respect to the automotive industry, actual or
anticipated variations in the Company's quarterly or annual financial results,
the introduction of new products or technologies by the Company or its
competitors, changes in other conditions or trends in the Company's industry or
in the markets of any of the Company's significant customers, changes in
governmental regulation or changes in securities analysts' estimates of the
Company's future performance or that of its competitors or its industry, could
cause the market price of the Common Stock to fluctuate substantially.
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of such shares for future sale will
have on the market price of the Common Stock prevailing from time to time. In
addition, pursuant to, and in accordance with the terms and conditions of, the
Stockholders' Agreement, Blackstone, Jupiter and Messrs. Dauch and Harris can
require the Company to effect a registration of their shares of Common Stock.
Generally, Blackstone has the right to request five such demand registrations,
and (i) Mr. Dauch and his affiliates and (ii) Jupiter, Mr. Harris and their
affiliates, can request one demand registration each, so long as the requesting
stockholder(s) own(s) at least 40% of the Company's Common Stock held by it at
the time of the closing of the Recapitalization, and all of such parties have
certain 'piggyback' registration rights. Sales of substantial amounts of Common
Stock in the public market, whether such shares are presently outstanding or
subsequently issued, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock and could impair
the Company's ability to raise capital in the future through an offering of its
equity securities or to consummate acquisitions using its equity securities as
consideration. The Company cannot predict when or how many of such additional
shares of Common Stock may be offered for sale or sold to the public in the
future. See 'Shares Eligible for Future Sale' and 'Certain
Transactions--Shareholders' Agreement.'
The Company and its executive officers and directors and substantially all
of its existing stockholders have agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, or any securities convertible
into or exercisable or exchangeable for Common Stock, for a period of 180 days
after the date of this Prospectus without the prior written consent of Merrill
Lynch, Pierce, Fenner & Smith Incorporated ('Merrill Lynch'), except, in the
case of the Company, for shares of Common Stock offered in the Offerings and
shares issued and options granted pursuant to the Company's stock option plans.
See 'Management--Stock Options,' 'Shares Eligible for Future Sale' and
'Underwriting.'
DILUTION
The initial public offering price is substantially higher than the book
value per share of the Common Stock. Accordingly, purchasers of the Common Stock
offered hereby would experience immediate and substantial dilution of $ in
net tangible book value per share of the Common Stock. See 'Dilution.'
14
<PAGE>
THE RECAPITALIZATION
On September 17, 1997, AAM Acquisition, Inc., an entity organized by
Blackstone, Jupiter, Mr. Dauch, Mr. Harris, the Company and American Axle &
Manufacturing, Inc. ('AAM, Inc.'), then the parent of the Company, entered into
an agreement (the 'Recapitalization Agreement'), pursuant to which Blackstone
acquired control of the Company on October 29, 1997 (the 'Recapitalization').
Prior to the Recapitalization, the Company was a wholly-owned subsidiary of AAM,
Inc. Pursuant to the Recapitalization, the Company acquired a 100% ownership
interest in AAM, Inc. by exchanging shares of its own stock, on a one-for-one
basis, with the shareholders of AAM, Inc. The exchange of shares has been
accounted for in a manner similar to a pooling of interest since both the
Company and AAM, Inc. were under common control. Following the exchange of
shares, on October 29, 1997, pursuant to the Recapitalization Agreement,
Blackstone acquired shares of the Company's Common Stock from Jupiter and Mr.
Dauch. The Company used approximately $474 million of aggregate proceeds from
certain financings described below (the 'Financings'), to (i) repay certain
indebtedness of AAM, Inc., (ii) redeem all of the issued and outstanding shares
of Class A Preferred Stock of AAM, Inc., (iii) repurchase certain shares of the
Company's Common Stock held by Jupiter and Mr. Harris, (iv) pay costs and
expenses incurred in connection with the Recapitalization, including fees,
expenses and payments relating to certain of the Company's then existing stock
options and (v) fund the working capital requirements of the Company.
Immediately after the closing of the Recapitalization, on a fully diluted basis
Blackstone owned approximately 63.9% of the Common Stock, members of senior
Company management owned approximately 29.0% of the Common Stock and Jupiter and
Mr. Harris collectively owned approximately 5.4% of the Common Stock. See
'Dividend Policy,' 'Ownership of Common Stock' and Notes 2 and 8 to the
Consolidated Financial Statements.
The Financings included (i) (a) a senior secured term loan facility (the
'Tranche A Term Loan Facility') providing for delayed draw term loans in an
aggregate principal amount of $125 million, (b) a senior secured term loan
facility (the 'Tranche B Term Loan Facility' and, together with the Tranche A
Term Loan Facility, the 'Term Loan Facility') providing for term loans in an
aggregate principal amount of $375 million and (c) a $250 million senior secured
revolving credit facility (the 'Revolving Credit Facility' and, together with
the Term Loan Facility, the 'Credit Facilities'), of which $474 million was
drawn at the closing of the Recapitalization, and (ii) a $125 million
receivables purchase facility (the 'Receivables Facility') of which $75 million
was drawn at the closing of the Recapitalization. See 'Description of Certain
Indebtedness.'
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby (at an assumed public offering price of $ per share and after
deducting underwriting discounts and estimated expenses from the Offerings
payable by the Company) are estimated to be $92.5 million ($106.6 million if the
Underwriters' over-allotment options are exercised in full).
The Company intends to use approximately $46.0 million of the net proceeds
of the Offerings to reduce the outstanding borrowings under the Revolving Credit
Facility. It is estimated that the remaining $46.5 million will be used to fund
capital expenditures over the 90 days following the completion of the Offerings.
The expected capital expenditures will be used for machinery and equipment
necessary to support the GMT-800 Program, construction of the Company's
production facility in Guanajuato, Mexico and other cost, quality and
productivity initiatives. Pending such uses, the Company intends to invest the
net proceeds of the Offerings in short-term investment grade, interest bearing
securities or money market instruments.
As of March 31, 1998, the Company had an aggregate of $421.0 million of
indebtedness outstanding under the Credit Facilities, including $46.0 million
outstanding under the Revolving Credit Facility. See 'Description of Certain
Indebtedness--Senior Secured Credit Facilities.' The Credit Facilities were
incurred in connection with the Recapitalization. Borrowings under the Tranche A
Term Loan Facility due October 2004, the Tranche B Term Loan Facility due April
2006 and the Revolving Credit Facility which terminates on October 30, 2005 each
bear interest, at the Company's option, at rates based on LIBOR or the Base Rate
(each as defined in the Credit Facilities) plus, in each case, an applicable
margin. The weighted average interest rate under the Revolving Credit Facility
at March 31, 1998 was 9.5%.
DIVIDEND POLICY
In 1997, the Company paid dividends of $29.9 million to GM, the holder of
its Class A Preferred Stock, and $4.6 million to the holders of its Common
Stock. In 1996, the Company paid dividends of $13.6 million to GM, the holder of
its Class A Preferred Stock, and $3.8 million to the holders of its Common
Stock. Contemporaneous with the Recapitalization, the Company repurchased all of
its outstanding Class A Preferred Stock. The Company has not paid any dividends
since the Recapitalization and it is the current policy of the Company's Board
of Directors to retain earnings to repay debt and finance operations of the
Company and not to pay any cash dividends on the Common Stock. In addition, the
Credit Facilities restrict the Company's payment of cash dividends on the Common
Stock. See 'Description of Certain Indebtedness--Senior Secured Credit
Facilities' and Notes 3 and 8 to the Consolidated Financial Statements.
The Company is a holding company that derives all of its cash flow from its
operating subsidiaries, the common stock of which constitutes a material asset
of the Company. Consequently, the Company's ability to pay dividends is
dependent upon the earnings of its operating subsidiaries and its other
subsidiaries and the distribution of those earnings to the Company.
16
<PAGE>
DILUTION
The net tangible book value of the Company as of March 31, 1998 was
approximately $ million, or $ per outstanding share of Common Stock,
based on an assumed shares of Common Stock outstanding. The net tangible
book value per share of Common Stock is equal to the Company's total tangible
assets (total assets less intangible assets, consisting primarily of patents,
licenses and goodwill) less its total liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the sale of
shares of Common Stock being offered by the Company in the Offerings at an
assumed initial public offering price of $ per share, the midpoint of the
estimated range of the initial public offering price, and the application by the
Company of the estimated net proceeds therefrom as described in 'Use of
Proceeds,' the pro forma net tangible book value of the Company at March 31,
1998 would have been $ million, or $ per share of Common Stock. This
represents an immediate increase in net tangible book value of $ per share
of Common Stock to existing stockholders and an immediate dilution in net
tangible book value of $ per share of Common Stock to purchasers of Common
Stock in the Offerings. If the Underwriters' over-allotment options are
exercised in full, net tangible book value upon completion of the Offerings
would be $ per share (assuming an initial public offering price of
$ per share).
The following table illustrates the per share dilution that would have
occurred if the Offerings had been consummated on March 31, 1998
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share....................................... $
-------
Net tangible book value per share
at March 31, 1998................................................................... $
Increase in net tangible book value per share
attributable to price paid by purchasers
of Common Stock in the Offerings....................................................
-------
Pro forma net tangible book value per share after
the Offerings.......................................................................
-------
Dilution in net tangible book value per share
to purchasers of Common Stock in the Offerings...................................... $
-------
-------
</TABLE>
The following table summarizes, on a pro forma basis as of March 31, 1998,
the differences between existing shareholders and the new investors with respect
to the number of shares of Common Stock purchased from the Company, the total
consideration paid (assuming an initial public offering price of $ per
share) and the average price per share paid:
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED(1) CONSIDERATION AVERAGE
----------------- ----------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders........................................... % $ % $
New investors...................................................
------ ------- ------ -------
Total........................................................... 100% $ 100%
------ ------- ------ -------
------ ------- ------ -------
</TABLE>
- ------------------
(1) These computations assume no exercise of any outstanding stock options after
March 31, 1998 or of the Underwriters' over-allotment options. See
'Underwriting' for information concerning the Underwriters' over-allotment
options. As of March 31, 1998, options to purchase shares of Common
Stock were outstanding. See 'Management--Stock Options.' To the extent these
stock options are exercised, there will be further dilution to new
investors.
17
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998, and as adjusted to give effect to (i) the sale of shares of Common
Stock by the Company in the Offerings at an assumed initial public offering
price of $ per share, after deduction of underwriting discounts and
estimated expenses of the Offerings, and (ii) the application of the estimated
net proceeds therefrom as described under 'Use of Proceeds.' This table should
be read in conjunction with the historical consolidated financial statements of
the Company and the notes thereto which are included elsewhere in the
Prospectus.
<TABLE>
<CAPTION>
AT MARCH 31, 1998
---------------------------
HISTORICAL AS ADJUSTED
---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents......................................................... $ 3,346 $ 49,846
---------- -----------
---------- -----------
Long-term debt:
Term Loan Facility.............................................................. $ 375,000 $ 375,000
Revolving Credit Facility....................................................... 46,000 --
Receivables Facility............................................................ 60,000 60,000
Other........................................................................... 1,962 1,962
---------- -----------
Total long-term debt....................................................... 482,962 436,962
---------- -----------
Shareholders' equity:
Preferred Stock, shares authorized, no shares
issued and outstanding....................................................... -- --
Common Stock, par value $.01 per share; shares authorized,
shares issued and outstanding, historical; shares issued and
outstanding, as adjusted..................................................... 1 1
Paid-in capital................................................................. 92,528 185,028
Accumulated deficit............................................................. (38,072) (38,072)
---------- -----------
Total shareholders' equity................................................. 54,457 146,957
---------- -----------
Total capitalization....................................................... $ 537,419 $ 583,919
---------- -----------
---------- -----------
</TABLE>
18
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth selected consolidated historical financial
and other data of the Company at and for the years ended December 31, 1993,
1995, 1996 and 1997, the two months and ten months ended February 28, 1994 and
December 31, 1994, respectively, and at and for the three-month periods ended
March 31, 1997 and 1998. The statement of operations data for the two months and
ten months ended February 28, 1994 and December 31, 1994, respectively, and the
years ended December 31, 1993, 1995, 1996 and 1997 and the balance sheet data as
of December 31, 1994, 1995, 1996 and 1997 were derived from audited consolidated
financial statements of the Company, which have been audited by Ernst & Young
LLP, independent auditors. The financial data for the three-month periods ended
March 31, 1997 and 1998 were derived from unaudited consolidated financial
statements of the Company. In the opinion of management, the unaudited financial
data have been prepared on the same basis as the audited consolidated financial
statements since the 1994 Acquisition and include all adjustments, consisting of
normal recurring adjustments, which the Company considers necessary for a fair
presentation of the financial position and the results of operations for these
periods. Results for interim periods are not indicative of results for a full
year. The pro-forma earnings per common share has been computed based on the
stock split that would be in effect upon consummation of the Offerings. The
table should be read in conjunction with 'Management's Discussion and Analysis
of Financial Condition and Results of Operations,' the consolidated financial
statements of the Company and the related notes, the 'Unaudited Pro Forma
Condensed Consolidated Financial Statements' and the other financial information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PREDECESSOR(A)
----------------------------- THREE
TWO MONTHS TEN YEAR ENDED MONTHS ENDED
YEAR ENDED ENDED MONTHS ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, FEBRUARY 28, DECEMBER 31, ------------------------------------ --------------------
1993 1994(B) 1994(C) 1995 1996 1997 1997 1998
------------ --------------- ------------ ---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............. $1,522,327 $ 294,466 $1,548,655 $1,968,076 $2,022,272 $2,147,451 $546,859 $ 583,285
Cost of goods sold.... 1,511,708 311,852 1,406,658 1,788,588 1,845,722 1,927,364 487,828 522,279
------------ --------------- ------------ ---------- ---------- ---------- -------- ---------
Gross profit (loss)... 10,619 (17,386) 141,997 179,488 176,550 220,087 59,031 61,006
Selling, general and
administrative
expenses............ 29,249 4,535 68,117 70,603 83,072 103,954 22,662 24,699
------------ --------------- ------------ ---------- ---------- ---------- -------- ---------
Operating income
(loss).............. (18,630) (21,921) 73,880 108,885 93,478 116,133 36,369 36,307
Net interest (expense)
income.............. -- -- 3,941 9,086 9,412 (1,846) 2,255 (9,749)
Recapitalization
expense............. -- -- -- -- -- (15,929) -- --
Other (expense)
income.............. 6,321 552 -- -- (4,566) (4,161) 111 333
------------ --------------- ------------ ---------- ---------- ---------- -------- ---------
Income (loss) before
income taxes........ (12,309) (21,369) 77,821 117,971 98,324 94,197 38,735 26,891
Income taxes.......... -- -- 41,375 47,400 36,600 38,933 13,945 9,968
------------ --------------- ------------ ---------- ---------- ---------- -------- ---------
Net income (loss)..... $ (12,309) $ (21,369) $ 36,446 $ 70,571 $ 61,724 $ 55,264 $ 24,790 $ 16,923
------------ --------------- ------------ ---------- ---------- ---------- -------- ---------
------------ --------------- ------------ ---------- ---------- ---------- -------- ---------
Net income per share
(pro-forma).........
BALANCE SHEET DATA:
Working capital
(deficit)........... N/A $ 88,224 $ 97,143 $ 80,894 $ 103,271 $ (96,826) $ 85,895 $(141,019)
Total assets.......... N/A 316,466 534,108 736,997 771,222 1,017,653 854,722 999,541
Total debt............ N/A 82,192 11,192 1,000 2,368 507,043 2,287 482,962
Preferred stock....... N/A 200,000 200,000 200,000 200,000 -- 200,000 --
Stockholders'
equity.............. N/A 20,500 88,101 168,572 250,168 37,231 282,833 54,457
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
PREDECESSOR(A)
----------------------------- THREE
TWO MONTHS TEN YEAR ENDED MONTHS ENDED
YEAR ENDED ENDED MONTHS ENDED DECEMBER 31, MARCH 31,
DECEMBER 31, FEBRUARY 28, DECEMBER 31, ------------------------------------ --------------------
1993 1994(B) 1994(C) 1995 1996 1997 1997 1998
------------ --------------- ------------ ---------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Net cash provided by
operating
activities.......... N/A N/A $ 196,990 $ 196,886 $ 65,687 $ 200,830 $ 73,642 $ 76,140
EBITDA(d)............. N/A N/A 96,038 144,779 134,740 152,838 50,978 50,623
Depreciation and
amortization........ $ 25,940 $ 4,682 16,846 25,242 36,076 50,177 12,161 14,497
Pension and OPEB
expenses(e)......... N/A N/A 36,761 36,319 48,050 34,620 8,655 9,413
Capital
expenditures........ 26,500 9,600 25,168 147,077 162,317 282,625 59,344 66,301
Net sales per year-end
hourly associate.... N/A N/A 214 258 268 293 N/A N/A
Hourly associates at
year-end............ N/A N/A 7,242 7,631 7,542 7,323 N/A N/A
</TABLE>
- ------------------
(a) The accompanying statements of operations of the Predecessor for the year
ended December 31, 1993 and for the two months ended February 28, 1994
reflect its historical cost basis prior to the 1994 Acquisition.
Accordingly, the statement of operations data for the periods subsequent to
the 1994 Acquisition are not comparable to such data for periods prior to
the 1994 Acquisition.
(b) The accompanying balance sheet data is as of March 1, 1994 and includes the
accounts of the Company after adjustment of the corresponding assets and
liabilities to their estimated fair value to reflect the allocation of the
purchase price in connection with the 1994 Acquisition.
(c) Results are for the ten-month period beginning on the closing date of the
1994 Acquisition and ending on December 31, 1994.
(d) EBITDA represents income from continuing operations before interest expense,
income taxes, depreciation and amortization. EBITDA should not be construed
as a substitute for income from operations, net income or cash flow from
operating activities as determined by generally accepted accounting
principles. Other companies may calculate EBITDA differently.
(e) Total expenses related to pension and other post-retirement benefits other
than pension ('OPEB'), the non-cash portion of which was $18.0 million for
the ten months ended December 31, 1994; $20.8 million, $22.1 million and
$30.7 million for the years ended December 31, 1995, 1996 and 1997,
respectively; and $8.6 million and $7.7 million for the three months ended
March 31, 1997 and 1998, respectively.
20
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
The following Unaudited Pro Forma Condensed Consolidated Statement of
Income is based on the consolidated financial statements included elsewhere in
this Prospectus, adjusted to give effect to (i) the Recapitalization and (ii)
the Offerings and the application of the net proceeds therefrom (the
'Transactions'), as if they had occurred on January 1, 1997.
The pro forma adjustments are based upon available information and upon
certain assumptions that management believes are reasonable under the
circumstances. The Unaudited Pro Forma Condensed Consolidated Statement of
Income and accompanying notes should be read in conjunction with the historical
consolidated financial statements of the Company, including the notes thereto,
and other financial information pertaining to the Company included elsewhere in
this Prospectus. The Unaudited Pro Forma Condensed Consolidated Statement of
Income does not purport to represent what the Company's actual results of
operations would have been if the Recapitalization and the Offerings in fact had
occurred on such date or to project the Company's results of operations for any
future period. The Unaudited Pro Forma Condensed Consolidated Statement of
Income does not give effect to any transactions other than the Recapitalization,
the Offerings and the transactions related thereto discussed in the notes to the
Unaudited Pro Forma Condensed Consolidated Statement of Income set forth below.
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------
ACTUAL RECAPITALIZATION THE OFFERINGS PRO FORMA
---------- ---------------- ------------- ----------
<S> <C> <C> <C> <C>
Net sales........................................ $2,147,451 -- -- $2,147,451
Cost of goods sold............................... 1,927,364 -- -- 1,927,364
---------- ----------
Gross profit..................................... 220,087 -- -- 220,087
Selling, general and administrative expenses..... 103,954 -- -- 103,954
---------- ----------
Operating income................................. 116,133 -- -- 116,133
Recapitalization expenses........................ (15,929) 15,929(a) -- --
Net interest (expense) income.................... (1,846) (34,193)(b) 4,370(d) (31,669)
Other (expense) income........................... (4,161) -- -- (4,161)
---------- ---------------- ------------- ----------
Income before income taxes....................... 94,197 (18,264) 4,370 80,303
Income taxes..................................... 38,933 (10,838)(c) 1,617(e) 29,712
---------- ---------------- ------------- ----------
Net income....................................... $ 55,264 $ (7,426) $ 2,753 $ 50,591
---------- ---------------- ------------- ----------
---------- ---------------- ------------- ----------
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
(a) Adjustment to eliminate non-recurring expenses incurred pursuant to the
Recapitalization.
(b) Adjustment to reflect additional interest expense related to borrowings
initiated in the Recapitalization inclusive of additional amortization of
debt issuance costs of $2,593.
(c) Adjustment to income tax expense related to notes (a) and (b) above.
(d) Adjustment to reflect use of proceeds. Assumes pay-down of Revolving Credit
Facility of $46 million bearing interest at 9.5% per annum.
(e) Adjustment to income tax expense related to Note (d) above.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis presents the factors that had a material
effect on the Company's results of operations and cash flows during the three
months ended March 31, 1998 and March 31, 1997 and the three years ended
December 31, 1997, and the Company's financial position at March 31, 1998 and
December 31, 1997. This discussion and analysis should be read in conjunction
with the 'Selected Financial and Other Data' and the Consolidated Financial
Statements and notes thereto appearing elsewhere in this Prospectus.
COMPANY OVERVIEW
The Company is a Tier I supplier to the automotive industry and a world
leader in the design, engineering and manufacturing of driveline systems for
light trucks and SUVs. The driveline system includes all of the components that
transfer power from the transmission and deliver it to the drive wheels. The
driveline products produced by the Company include axles, propeller shafts,
chassis components and forged products. The Company is GM's principal supplier
of driveline components for light trucks, SUVs and RWD passenger cars. Sales to
GM were approximately 96% of the Company's 1997 and 1996 sales.
In March 1994, the Company purchased the assets of the Final Drive and
Forge Business Unit of the Saginaw Division of GM. In connection with the
Company's acquisition of the Business Unit, GM and the Company entered into the
CSA under which the Company became the sole-source supplier to GM of all the
products and components previously supplied to GM by the Business Unit. In
October 1997, the Company entered into a Recapitalization Agreement, pursuant to
which Blackstone acquired control of the Company. In connection with the
Recapitalization, the Company and GM entered into an additional binding
agreement, the MOU. Under the MOU, the Company and GM have agreed to commit to
transition the CSA into a number of separate LPCs, applicable for the life of
each GM vehicle program for which the Company supplies products. These LPCs will
ultimately replace the CSA.
In order to induce GM to enter into the MOU and commit to enter into LPCs,
in 1997, the Company agreed to temporary reductions of certain payments
previously agreed to be made by GM to the Company as part of the commercial
arrangements between them, including certain payments pursuant to the CSA. Such
reductions amounted to approximately $11.4 million in 1997 and approximately
$12.7 million in the first quarter of 1998. Such reductions are currently
estimated by the Company to amount to approximately $51.1 million for the full
year ending December 31, 1998, at which time such reductions are expected to
terminate.
The Company sells most of its products under long-term contracts at fixed
prices, some of which are subject to annual price reductions in subsequent
years, and all of which are subject to negotiated price increases for
engineering changes. With respect to GM, pricing has been established for
products sold under the CSA and the LPCs; however, the Company must remain
competitive with respect to technology, design and quality. Under the CSA, the
Company pays current market prices for certain materials used in the manufacture
of products sold to GM, but increases or decreases in such prices from levels
established under the CSA currently result in corresponding increases or
decreases in the aggregate amount paid by GM to the Company for its products,
thereby protecting the Company from increases in the costs of such materials
while such purchasing arrangement is in effect. The Company and GM have agreed
to develop a mutually satisfactory plan to terminate this purchasing arrangement
no later than December 2002. Thus, while the prices at which the Company sells
its products under the CSA and the LPCs have been established, under the LPCs,
upon termination of the purchasing arrangement described above, the Company will
no longer have a contractual right to pass on any future increases in the cost
of such materials. Increases in material costs beyond the established prices are
the only costs passed on to GM under the CSA and under the LPCs. There can be no
assurance that the Company will be able to pass on any increased labor,
materials or other costs to GM in the future as it has from time to time in the
past pursuant to the above-described terms of the CSA or by certain additional
payments agreed to as part of the commercial arrangements between GM and the
Company. LPCs have terms equal to the lives of the relevant vehicle programs,
which typically run 6 to 12 years. The Company will have to compete for future
GM business upon the termination of the LPCs. See 'Risk Factors--Reliance on GM'
and '--Transition from CSA to MOU and LPCs' and 'Business--Contractual
Arrangements with GM.'
22
<PAGE>
INDUSTRY AND COMPETITION
The Company's operations are cyclical because they are directly related to
domestic automotive production, which is itself cyclical and dependent on
general economic conditions and other factors. The axle and related driveline
systems segment of the automotive industry is highly competitive. The current
trend in the automotive industry is for OEMs to shift research and development
('R&D'), design and testing responsibility to suppliers to take advantage of
certain efficiencies. The OEMs have also been reducing the number of their
suppliers, preferring stronger relationships with fewer suppliers. As a result,
the Tier I supplier market has been undergoing consolidation over the past three
to four years. This trend is expected to continue, leaving the industry with
only a small number of dominant, worldwide suppliers.
The following table sets forth certain statement of operations data
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ---------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Statement of income data:
Net sales........................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................................. 90.9 91.3 89.8 89.2 89.5
----- ----- ----- ----- -----
Gross profit........................................ 9.1 8.7 10.2 10.8 10.5
Selling, general and administrative expenses........ 3.6 4.1 4.8 4.1 4.3
----- ----- ----- ----- -----
Operating income.................................... 5.5 4.6 5.4 6.7 6.2
Other expense (income).............................. (.5) (.3) 1.0 (.4) 1.6
----- ----- ----- ----- -----
Income before income taxes.......................... 6.0 4.9 4.4 7.1 4.6
Income tax expense.................................. 2.4 1.8 1.8 2.6 1.7
----- ----- ----- ----- -----
Net income.......................................... 3.6% 3.1% 2.6% 4.5% 2.9%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO
THE THREE MONTHS ENDED MARCH 31, 1997
Net Sales. Net sales increased approximately 7% to $583.3 million for the
three months ended March 31, 1998 compared with $546.9 million for the three
months ended March 31, 1997. This increase was primarily a result of volume
increases in 1998 related to customer demand for the Company's products.
Sales to customers other than GM increased 22% to approximately $25.9
million in the first quarter of 1998 versus $21.3 million in the similar period
of 1997. Additionally, the Company had export sales of $89.2 million in the
first quarter of 1998 versus $77.9 million in the first quarter of 1997. The
increases in these sales were a result of new business that the Company has
gained.
Gross Profit. Gross profit increased 3% to $61.0 million for the three
months ended March 31, 1998 compared with $59.0 million for the three months
ended March 31, 1997. Gross margin decreased to 10.5% in the first quarter of
1998 compared to 10.8% for the same period of 1997. The decrease in gross margin
in the first quarter of 1998 was due to the temporary payment reductions
discussed under '--Company Overview' above, partially offset by increased
productivity as a result of the prior capital expenditures made to improve
manufacturing initiatives, reduce labor intensive operations and achieve other
cost efficiencies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (including R&D) increased 9% to $24.7 million for the
three months ended March 31, 1998 compared with $22.7 million for the three
months ended March 31, 1997. Selling, general and administrative expenses as a
percentage of sales increased to 4.3% for the three months ended March 31, 1998
compared to 4.1% for the similar period of 1997. These increases were
principally due to the Company's increase in personnel to support the Company's
growth and continued investments for information systems as the Company
continues to transition from GM systems. R&D expenses were $6.4 million for the
three months ended March 31, 1998 compared to $6.8 million for the three months
ended March 31, 1997.
Operating Income. Operating income was $36.3 million for the three months
ended March 31, 1998 compared to $36.4 million for the three months ended March
31, 1997. Operating margin decreased to 6.2% for the three months ended March
31, 1998 compared to 6.7% for the similar period of 1997. The decrease in
23
<PAGE>
operating margin was primarily due to the decline in gross margin and increased
selling, general and administrative expenses, partially offset by increased
sales volumes.
Net Interest. Net interest expense was $9.7 million for the three months
ended March 31, 1998 compared to net interest income of $2.3 million for the
similar period of 1997. The increase was due to the borrowings incurred in
connection with the Recapitalization.
Income Tax Expenses. Income tax expense decreased 29% to $10.0 million for
the three months ended March 31, 1998 compared to $13.9 million for the three
months ended March 31, 1997. The Company's effective income tax rate was 37.1%
for the three months ended March 31, 1998 versus 36.0% for the three months
ended March 31, 1997.
Net Income. Net income decreased 32% to $16.9 million for the three months
ended March 31, 1998 compared to $24.8 million for the three months ended March
31, 1997 primarily due to the operating results discussed previously and the
impact of additional interest expense in 1998.
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED
DECEMBER 31, 1996
Net Sales. Net sales increased 6% to $2.15 billion for 1997 compared to
$2.02 billion for 1996. This increase was primarily a result of volume increases
related to customer demand for the Company's products.
Sales to GM were approximately 96% of the Company's total sales in both
1997 and 1996. Sales to customers other than GM increased approximately 12% to
approximately $88.5 million in 1997 compared to $78.8 million in 1996. The
Company had export sales of $328.0 million in 1997 compared to $265.7 million in
1996. These increases were a result of new business initiatives that the Company
implemented.
Gross Profit. Gross profit increased approximately 25% to $220.1 million
for 1997 compared to $176.6 million for 1996. Gross margin increased to 10.2%
for 1997 compared to 8.7% for 1996. These increases were primarily due to
increased sales volume and increased productivity primarily as a result of the
capital expenditures to support manufacturing initiatives, reduce labor
intensive operations and achieve cost productivity initiatives, as well as a
benefit of approximately $20 million related to a change in assumptions in 1997
related to pensions and other postretirement benefits other than pensions, and a
decrease in depreciation resulting from a change in estimated lives.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (including R&D) increased approximately 25% to $104.0
million for 1997 compared to $83.1 million for 1996. Selling, general and
administrative expenses as a percentage of sales increased to 4.8% for 1997
compared to 4.1% for 1996. These increases were principally due to the Company's
increase in personnel to support the Company's growth, investments made for
information systems as the Company transitions from GM systems, certain stock
compensation expenses totaling $9.2 million and increases in R&D expenses. R&D
expenses increased approximately 19% to $27.8 million for 1997 compared to $23.4
million for 1996. The increases in R&D spending were primarily related to the
Company's initiative to expand its customer and product base through the
development of advanced driveline systems including the support of the New M-SUV
Program.
Operating Income. Operating income increased approximately 24% to $116.1
million for 1997 compared to $93.5 million for 1996. Operating margins increased
to 5.4% for 1997 compared to 4.6% for 1996. These increases were primarily due
to increased volumes and increased productivity, the impact of the change in
assumptions and depreciable lives partially offset by the impact of increased
selling, general and administrative expenses discussed above.
Net Interest. Net interest expense was $1.8 million for 1997 compared to
net interest income of $9.4 million for 1996. The increase was due to the
additional borrowings incurred in connection with the Recapitalization. For most
of 1996 and 1997, the Company had excess cash invested in short-term investments
and limited outstanding debt.
Recapitalization Expenses. The Company incurred $15.9 million of expenses
in 1997 related to the Recapitalization. These expenses were seller-related
expenses which included professional advisory fees.
Income Tax Expense. Income tax expense increased 6% to $38.9 million for
1997 compared to $36.6 million in 1996. The Company's effective income tax rate
was 41.3% for 1997 compared to 37.2% for 1996. The increase in the effective tax
rate for 1997 was primarily due to non-deductible permanent items related to
stock compensation.
24
<PAGE>
Net Income. Net income decreased 10% to $55.3 million for 1997 compared to
$61.7 million for 1996 primarily due to the factors described above.
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED
DECEMBER 31, 1995
Net Sales. Net sales increased approximately 3% to $2.02 billion for 1996
compared to $1.97 billion for 1995. This increase was primarily a result of
volume increases related to customer demand for the Company's products offset by
labor-related work stoppages at GM which adversely impacted sales.
Sales to GM were approximately 96% and 97% of the Company's total sales in
1996 and 1995, respectively. Sales to customers other than GM increased 29% to
approximately $78.8 million in 1996 compared to $61.3 million in 1995. The
Company had export sales of $265.7 million in 1996 compared to $255.8 million in
1995. These increases were a result of new business that the Company has gained.
Gross Profit. Gross profit decreased approximately 2% to $176.6 million
for 1996 compared to $179.6 million for 1995. Gross margin decreased to 8.7% for
1996 compared to 9.1% for 1995. These decreases were a result of (i) the adverse
impact of the work stoppages at GM, (ii) additional training costs to train
associates to replace workers who elected to transition back to GM, (iii)
increased benefit expenses associated with the higher number of workers moving
into full benefit status, and (iv) charges relating to maintenance and expenses
for cleaning, painting and general repairs of the Company's facilities.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (including R&D) increased approximately 18% to $83.1
million for 1996 compared to $70.6 million for 1995. Selling, general and
administrative expenses as a percentage of sales increased to 4.1% for 1996
compared to 3.6% for 1995. These increases were principally due to the Company's
increase in personnel to support the Company's growth and investments made for
the Company to perform certain functions that were previously performed by GM;
these increases were partially offset by decreased R&D expenses. R&D expenses
decreased approximately 19% to $23.4 million for 1996 compared to $29.0 million
for 1995. The decreases in R&D spending were primarily related to the Company's
initiative to support the early designs related to the GMT-800 Program that were
incurred in 1995.
Operating Income. Operating income decreased approximately 14% to $93.5
million for 1996 compared to $108.9 million for 1995. Operating margin decreased
to 4.6% for 1996 compared to 5.5% for 1995. These decreases were primarily due
to the GM work stoppages discussed previously.
Net Interest. Net interest income was $9.4 million and $9.l million for
1996 and 1995, respectively. For most of 1996 and 1995, the Company had excess
cash invested in short-term investments.
Income Tax Expense. Income tax expense decreased 23% to $36.6 million for
1996 compared to $47.4 million in 1995. The Company's effective income tax rate
was 37.2% for 1996 compared to 40.2% for 1995. The decrease in the tax expense
was related to the decrease in the Company's operating income discussed
previously. The decrease in the effective tax rate for 1996 was primarily due to
the use of federal tax credits and various state and local tax incentives.
Net Income. Net income decreased approximately 13% to $61.7 million for
1996 compared to $70.6 million for 1995 primarily due to the factors described
above.
LIQUIDITY AND CAPITAL RESOURCES
The 1997 Recapitalization involved the incurrence of substantial new
indebtedness and the repurchase of a substantial amount of equity. See 'The
Recapitalization' and Note 2 to the Consolidated Financial Statements.
Management assesses the Company's liquidity in terms of its overall ability
to mobilize cash to support business needs and to fund its growth. The Company
relies primarily upon cash flow from operations and borrowings under the
Company's Credit Facilities and Receivables Facility to finance operations and
capital expenditures. See 'Description of Certain Indebtedness' and Note 3 to
Consolidated Financial Statements.
At March 31, 1998, the Company had a working capital deficit of $141.0
million versus a deficit of $96.8 million at December 31, 1997. This increase
was a result of a decrease in receivables (the collections of which were applied
to pay amounts outstanding under the Credit Facilities, which are classified as
long-term debt) and the increase in liabilities related to the capital
expenditure program in connection with the launch of the GMT-800 Program, which
is being funded primarily through long-term debt. The decrease in accounts
receivable at March 31, 1998 from December 31, 1997 was due to the receipt of
payments from GM for rebillable tooling charges, premium charges for additional
manufacturing capacity and volume and raw material rebates.
25
<PAGE>
The Company had a working capital deficit of $96.8 million at December 31,
1997 compared to a working capital surplus of $103.2 million at December 31,
1996. This decrease in working capital was a result of the Recapitalization, the
liabilities related to the capital expenditure program in connection with the
launch of the GMT-800 Program (which is being funded primarily through long-term
debt) and payments to be made in connection with certain benefit programs such
as pensions and bonuses.
The increase in accounts receivable at December 31, 1997 was due to amounts
due from GM for rebillable tooling (in connection with the GMT-800 manufacturing
process), amounts due for premium charges for additional manufacturing capacity
and volume, and raw material rebates.
As part of the arrangements with GM, payment terms for products shipped to
GM will steadily lengthen during the three-year period beginning March 1, 1999,
resulting in an expected increase in accounts receivable balances and
anticipated increased interest expense related to the Company's funding of
working capital. The Company anticipates that this working capital increase will
be funded from available sources including cash flow from operations and its
Credit Facilities.
The Company intends to lend approximately $15.0 million in the third
quarter of 1998 to its Chairman to enable him to pay taxes related to the
recognition of income associated with certain stock options. The expected source
of funding for the $15.0 million loan will be either from the Company's cash
flow from operations or from the Company's Credit Facilities.
The increase in other assets as of December 31, 1997 was due to fees paid
in connection with the establishment of the Credit Facilities and the
Receivables Facility. The increase in non-current deferred income taxes asset is
primarily due to the Recapitalization.
At March 31, 1998, $375 million of borrowings were outstanding and $125
million was available for future borrowings under the Term Loan Facility and $46
million was outstanding and $204 million was available for future borrowings
under the Revolving Credit Facility. Additionally at March 31, 1998,
approximately $75 million was available under the variable funding certificates
of the Receivables Facility, of which $60 million was utilized and borrowed.
These facilities were established in connection with the Recapitalization.
The weighted average interest rate of the Company's long-term debt
outstanding as of March 31, 1998 was approximately 7.9% and was approximately
8.1% at December 31, 1997.
Capital expenditures were $66.3 million for the three months ended March
31, 1998. These investments in machinery and equipment were primarily made to
support the launch of the GMT-800 Program and to generate additional capacity.
The Company estimates that it will invest between $300 million and $400 million
in capital expenditures in 1998.
Capital expenditures were $282.6 million, $162.3 million and $147.1 million
in 1997, 1996 and 1995, respectively. These investments in machinery and
equipment were primarily made to support the launch of the GMT-800 program, to
reduce labor-intensive operations, to support additional capacity and for cost
reduction programs including upgrades in machinery technology and quality
standards.
The Company intends to fund its capital expenditures by borrowing under the
Credit Facilities or the Receivables Facility. The Company believes it has lines
of credit adequate to support ongoing operational requirements. Beyond that, the
Company believes it has sufficient financial flexibility to attract long-term
funding on acceptable terms as may be needed to support its growth objectives.
The Company has initiated discussions with Chase to amend its Credit Facilities
which, if completed, would result in lower interest rates and otherwise more
favorable terms and conditions. However, there can be no assurance that these
discussions will result in lower interest rates or other more favorable terms or
that such amendment will be completed.
RECENT DEVELOPMENTS
The work stoppage at GM which began in June 1998 resulted in the shutdown
of nearly all of GM's North American production facilities. This work stoppage
reduced the Company's sales and operating income for the second quarter of 1998
by approximately $ and $ , respectively.
SEASONALITY
The Company's business is moderately seasonal as its major OEM customers
historically have a two week shutdown of operations in July and approximately a
one week shutdown in December. In addition, traditionally in the third quarter
OEM customers have incurred lower production rates as model changes enter
production. Accordingly, third and fourth quarter results may reflect these
trends.
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<PAGE>
EFFECTS OF INFLATION
Inflation generally affects the Company by increasing the cost of labor,
equipment and raw materials. The Company believes that the relatively moderate
rate of inflation over the past few years has not had a significant impact on
the Company's operations as the Company offset the increases by realizing
improvements in operating efficiency or by passing through certain increases in
the cost of raw materials to GM under the terms of the CSA. See
'Business--Contractual Arrangements with GM.'
FINANCIAL INSTRUMENTS MARKET RISK
The Company's business and financial results are affected by fluctuations
in world financial markets, including interest rates and currency exchange
rates. The Company's hedging policy attempts to manage these risks to an
acceptable level based on management's judgment of the appropriate trade-off
between risk, opportunity and costs. The Company hedges its interest rate risks
by utilizing swaps and collars. The Company does not currently have significant
exposures relating to currency risks and does not have any financial instruments
to reduce currency risks at March 31, 1998 or at December 31, 1997. The Company
does not hold financial instruments for trading or speculative purposes.
The Credit Facilities required the Company to enter into interest rate
hedging arrangements with a notional value of $112.5 million. The arrangements
entered into by the Company, which terminate in December 2000, require the
Company to pay a floating rate of interest based on three-month LIBOR with a cap
rate of 6.5% and a floor rate of 5.5%.
Interest Rate Risk. As part of its risk-management program, the Company
performs sensitivity analyses to assess potential gains and losses in earnings
and changes in fair value relating to hypothetical movements in interest rates.
An 80 basis-point increase in interest rates (approximately 10% of the Company's
weighted average interest rate) affecting the Company's debt obligations,
related interest rate swaps and collars (existing at December 31, 1997), would
impact the Company's 1998 pretax earnings by approximately $3.0 million. See
Note 5 to the Consolidated Financial Statements.
Currency Risk. The Company does not currently have material exposures to
currency exchange-rate risk as most of its business is denominated in U.S.
dollars. Future business operations and opportunities, including the
construction of its new manufacturing facility in Guanajuato, Mexico, may expose
the Company to the risk that the eventual net dollar cash inflows resulting from
these activities may be adversely affected by changes in currency exchange
rates. The Company intends to manage these risks by utilizing various types of
foreign exchange contracts, where appropriate.
YEAR 2000 COMPLIANCE
The Company is in the process of implementing appropriate action to ensure
that its computer information systems will be able to interpret the calendar
year term '2000.' (Systems that process transactions based on storing two digits
for the year rather than the full four digits may encounter significant process
inaccuracies and even inoperability in attempting to process year 2000
transactions.) The costs of software to replace existing year 2000 non-compliant
systems will be capitalized and amortized over the software's estimated useful
life, and software modifications will be expensed as incurred in accordance with
the Company's software capitalization policy. The amounts expensed to date have
been immaterial and the Company does not expect the amounts required to be
expensed in the future to have a material effect on its financial position or
results of operations. Management presently believes that, with planned
modifications to existing software and conversion to new software, year 2000
compliance will not pose significant operational problems. However, if such
modifications and conversions are not completed on a timely basis, or if the
Company's suppliers have significant unresolved systems problems, there is a
risk that year 2000 compliance could have a material impact on the operations of
the Company.
LITIGATION AND ENVIRONMENTAL REGULATIONS
The Company is party to various legal actions and is subject to various
claims arising in the ordinary course of business. The Company believes that the
disposition of these matters will not have a material adverse effect on the
financial position, results of operations or cash flows of the Company.
GM has agreed to indemnify and hold the Company harmless from certain
environmental issues identified as potential areas of environmental concern at
the time of the 1994 Acquisition. GM has also agreed to indemnify
27
<PAGE>
the Company, under certain circumstances, for up to ten years from the date of
closing of the 1994 Acquisition with respect to certain pre-closing
environmental conditions.
Approximately one-acre of a parking lot at the Company's Buffalo facility
has been designated by the New York Department of Environmental Conservation
('NYDEC') as a Class 3 Inactive Hazardous Waste Disposal Site due to the
presence of polychlorinated byphenyl in subsurface soil and groundwater below
existing pavement, and an elevated level of lead in the soil. A Class 3
designation is given to a site which does not present a significant threat to
the public health or environment and at which action may be deferred. The
contamination took place prior to the Company acquiring the property and is the
responsibility of GM. The area is the subject of an Order of Consent between GM
and NYDEC effective February 2, 1995. Remediation required thereunder is being
performed by GM in the ordinary course of business.
Based on the Company's assessment of costs associated with its
environmental responsibilities, including recurring administrative costs,
capital expenditures and other compliance costs, such costs have not had, and in
management's opinion, will not have in the foreseeable future, a material effect
on the Company's financial position, results of operations, cash flows or
competitive position.
EFFECT OF NEW ACCOUNTING STANDARDS
The Company adopted SFAS No. 128 'Earnings Per Share' in 1997. This
accounting standard specifies new computation, presentation and disclosure
requirements for earnings per share to be applied retroactively. SFAS No. 128
requires, among other things, presentation of basic and diluted earnings per
share, replacing the former primary and fully diluted earnings per share, on the
face of the income statement.
In 1998, the Company adopted SFAS No. 130, 'Reporting Comprehensive Income'
and SFAS No. 131, 'Disclosures about Segments of an Enterprise and Related
Information.' SFAS No. 130 requires that the components and total amount of
comprehensive income be displayed in the financial statements for interim and
annual periods in 1998. SFAS No. 131 requires, among other things, the reporting
of detailed operating segment information and related disclosures about products
and services, geographic areas and major customers for annual periods beginning
in 1998 and for interim periods beginning in 1999. Management is currently
evaluating it alternatives under the new Statement and anticipates disclosures
in one segment under the new rules.
SFAS No. 132, 'Employers' Disclosures about Pensions and Other
Postretirement Benefits,' was issued in February 1998. SFAS No. 132, which
supersedes the disclosure requirements in SFAS No. 87, SFAS No. 88 and SFAS No.
106, standardizes disclosures about pensions and other postretirement benefits
and makes the information easier to prepare and understand. SFAS No. 132
addresses disclosure issues only and does not change the measurement or
recognition of pension and postretirement assets, liabilities or expenses.
Beginning at year-end 1998, the Company will make its disclosures about pensions
and postretirement benefits in conformity with SFAS No. 132.
Statement of Position ('SOP') 98-1, 'Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use,' was issued in March 1998. SOP
98-1, among other things, requires that certain costs of internal use software,
whether purchased or developed internally, be capitalized and amortized over the
estimated useful life of the software. Adoption of SOP 98-1 is required as of
January 1, 1999, but earlier adoption is allowed. The Company has historically
followed the guidelines specified in SOP 98-1.
28
<PAGE>
BUSINESS
GENERAL
The Company is a Tier I supplier to the automotive industry and a world
leader in the design, engineering and manufacturing of driveline systems for
light trucks and SUVs. The driveline system includes all of the components that
transfer power from the transmission and deliver it to the drive wheels.
Driveline products produced by the Company include axles, propeller shafts,
chassis components and forged products. With an estimated 33% market share in
North America (which represents an estimated 15% market share worldwide), the
Company is a leading independent supplier of driveline components for light
trucks and SUVs, the fastest growing segments of the light vehicle market. The
Company also manufactures axles, propeller shafts and other products for RWD
passenger cars. Additionally, the Company has the second largest (by sales)
automotive forging operation in North America.
The Company is GM's principal supplier of driveline components for light
trucks, SUVs and RWD passenger cars, supplying substantially all of GM's rear
axle and front 4WD axle requirements, and over 75% of its propeller shaft
requirements for these vehicle platforms in 1997. Approximately 96% of the
Company's 1997 sales were to various divisions and subsidiaries of GM. The
Company's second largest customer is Ford, for which the Company produces axle
shafts and double cardan joints for light trucks and SUVs manufactured by Ford
in North America.
THE 1994 ACQUISITION
The Company is the successor to the former Final Drive and Forge Business
Unit of the Saginaw Division of GM and has produced driveline components and
forged products for over 75 years. In March 1994, a private investor group led
by Richard E. Dauch formed the Company and consummated the 1994 Acquisition. In
connection with the 1994 Acquisition, GM and the Company entered into the CSA
under which the Company became the sole-source supplier to GM of all the
products and components previously supplied to GM by the Business Unit. In
September 1997, the Company and GM signed an additional binding agreement, the
MOU, which became operative after the Company's Recapitalization. Under the MOU,
the Company and GM have agreed to transition the CSA into a number of separate
LPCs, under which the Company will supply products and components for the life
of each GM vehicle program covered by an LPC. These LPCs will ultimately replace
the CSA. See '--Contractual Arrangements with GM.'
The Company's management team, which was formed in connection with the 1994
Acquisition, is led by Mr. Dauch as Chairman of the Board, Chief Executive
Officer and President and was carefully selected on the basis of its management
expertise in the automotive industry. Mr. Dauch has over 34 years of experience
in the industry and was an Executive Vice President for Chrysler from 1980 to
1991 and was instrumental in Chrysler's manufacturing and financial turnaround.
As an executive of GM, he also managed the Business Unit's largest manufacturing
plant (Detroit Gear & Axle) from 1974 to 1976. The Company's senior management
team is comprised of 12 executives with an average of 27 years' experience in
the automotive industry and experience in both automotive original equipment
manufacturer ('OEM') and supplier operations.
POST-ACQUISITION IMPROVEMENTS
Since the 1994 Acquisition, the Company has dramatically improved product
quality and manufacturing efficiency through a combination of management
leadership, significant investments in new equipment and technology, workforce
training, and process improvements resulting in increased capacity utilization.
From March 1994 through March 1998, the Company has invested approximately $700
million in capital expenditures and 1.2 million labor hours for training and
education of its associates and has received and maintained ISO/QS 9000
certification for each of its facilities. As a result, (i) the average number of
axles produced per production day increased from approximately 10,000 in March
1994 to approximately 14,000 in March 1998, (ii) discrepant parts shipped to GM
(as measured by GM) decreased from approximately 13,400 PPM during the six
months ended December 31, 1994 to approximately 180 PPM during the six months
ended March 31, 1998, and (iii) returned parts decreased from 5,136 PPM during
the ten months ended December 31, 1994 to 664 PPM during the twelve months ended
December 31, 1997. See 'Risk Factors--Product Program Implementation.'
29
<PAGE>
Net sales and operating income increased to $2.15 billion and $116.1 million,
respectively, for the year ended December 31, 1997 from $2.02 billion and $93.5
million, respectively, for the year ended December 31, 1996.
INDUSTRY OVERVIEW
The automotive industry has been and continues to be significantly
influenced by several trends which the Company believes will enhance its
strategic position and growth prospects.
Demand for Light Trucks and SUVs. From 1990 to 1997, domestic unit sales
of light trucks and SUVs increased as a percentage of total U.S. light vehicle
unit sales from 33% to 45%. While GM's sales of light trucks and SUVs during the
same period followed a similar trend, increasing to 43.0% in 1997, it still
trailed Chrysler and Ford which had penetrations of 68% and 58%, respectively.
Increased consumer demand for light trucks and SUVs increases the demand for the
Company's products.
4WD Penetration. Between 1990 and 1997, 4WD sales penetration of the U.S.
light vehicle market doubled, from 7% to over 15% and, according to J.D. Power,
is expected to continue to rise. The increasing penetration of 4WD vehicles is
also evident in the sales of GM light trucks and SUVs. For example, in 1990, 4WD
penetration of GM light truck and SUV sales was 31%. By 1997, this penetration
rate had risen to nearly 42%. The Company benefits from this trend to increased
4WD penetration since its Sales-Dollar Content per vehicle is approximately 40%
higher on a 4WD vehicle than on a comparable two-wheel drive vehicle.
Outsourcing. In recent years, OEMs have been shifting research and
development, design, testing and validation responsibilities to suppliers to
take advantage of suppliers' lower cost structures, allocate engineering
resources more efficiently, and realize the synergistic benefits of a systems
approach. The trend has also been driven by the competitive pressures on OEMs to
improve product quality and to reduce capital expenditures, production costs and
inventory levels. A significant portion of driveline components are currently
manufactured by OEMs, representing a substantial outsourcing opportunity for the
Company.
Supplier Consolidation and Systems Integration. The OEMs have been
reducing the number of their suppliers, establishing stronger relationships with
large Tier I full-service suppliers. In conjunction with this trend, OEMs are
transitioning from purchasing components to shifting complete responsibility for
design, engineering and manufacturing full component systems to their remaining
Tier I suppliers. In response to this trend, suppliers have combined with other
suppliers to gain the critical mass to support research and development and
realize economies of scale. Furthermore, these combinations have been pursued to
add capabilities to manufacture complementary components and achieve more
complete systems supplier capabilities. The Company believes that this trend
toward multi-component system integrators will compel further consolidation,
leaving the industry with only a small number of dominant, worldwide suppliers.
Globalization. Tier I suppliers are increasingly following their OEM
customers as they expand manufacturing into global markets. Shipping costs,
import duties and local content laws make it advantageous for OEMs to purchase
from Tier I suppliers with a local presence. The Company is positioning itself
to follow the industry as it expands globally. The Company is in the process of
constructing a manufacturing facility in Guanajuato, Mexico; this facility is
currently scheduled to begin production in the fall of 2000.
The Company believes that as a result of its leading North American market
position as an independent supplier of driveline systems for the light truck and
SUV segment, management expertise, strong OEM and labor relationships, full
service engineering capabilities, high quality products, critical mass and
access to capital, it is well positioned to take advantage of trends in the
industry and to compete successfully as both a sub-assembly supplier and as a
manufacturing process specialist in the consolidating OEM supplier market.
BUSINESS STRATEGY
The Company plans to leverage its competitive advantages and actively
pursue the following strategies to increase revenue and profitability:
Improve Product Quality and Manufacturing Efficiency. Since the 1994
Acquisition, the Company has dramatically improved product quality and
efficiency. The Company is committed to continue reducing operating costs by
developing new manufacturing processes and by investing in new equipment,
technologies and
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<PAGE>
improvements in product designs. The Company believes that the significant
modernization of its manufacturing equipment and facilities which has been
completed over the last four years, as well as initiatives to be undertaken in
connection with the GMT-800 and the New M-SUV Programs, will generate enhanced
productivity and operating efficiency. From March 1994 through March 1998, the
Company has invested approximately $700 million in the modernization of its
equipment and facilities and anticipates spending $225 million to $325 million
in additional capital expenditures during the last three quarters of 1998.
Diversify, Strengthen and Globalize OEM Customer Base. The Company
currently provides axle shafts and double cardan joints to Ford and has begun to
pursue strategic initiatives to further diversify its customer base by providing
products for vehicles manufactured by Isuzu, Nissan, CAMI (a joint venture
between GM and Suzuki), and Mercedes-Benz. Through its diversification efforts,
the Company has increased its sales to customers other than GM and estimates
that such sales will approximate $100 million in 1998. The Company will continue
to seek new business from existing customers, as well as develop relationships
with new customers worldwide. Substantially all of the Company's products are
presently sold in North America. The Company currently has a regional sales
office in Tokyo, Japan and is in the process of opening another office in Ulm,
Germany; this presence is intended to help the Company access new markets for
its products. Additionally, the Company is establishing a regional sales office
and constructing a manufacturing facility in Guanajuato, Mexico; this facility
is currently scheduled to begin production in the fall of 2000.
Expand Systems Integrator Capability. OEMs continue to consolidate their
supplier base and shift the design, engineering and manufacturing functions of
complete systems to their remaining Tier I suppliers. The Company currently
supplies axles, propeller shafts, chassis components and forged products for
light trucks and SUVs. The Company intends to provide additional driveline
components through a combination of developing new technologies and other
capabilities, managing Tier II and Tier III suppliers and acquiring other
suppliers in order to offer its customers a more fully-integrated driveline
systems.
Develop New Products. The Company intends to diversify its product
portfolio by designing and developing new products and systems. As part of its
commitment to product development, the Company opened its Technical Center in
1995 which provides resources to the Company's engineers to improve the design
of the Company's existing products and to design new products. The Company
invested $23.4 million and $27.8 million in research and development expenses in
1996 and 1997, respectively. To date, these initiatives have resulted in several
new products such as the new 11.5' axle (initially being used in the GMT-800
Program), multi-link rear axles, an integral oil pan front axle, precision
steering system joints (which utilize lash free/low lash idlers and radiax pivot
sockets) and improved propeller shaft 'U-Joints.' The Company is also in the
process of developing other new products such as independent rear drive system
modules, traction-enhancing advanced differentials, banjo style axles, aluminum
rear axle carriers, axle cooler covers, spherical differential cases and near
net/net shaped forgings.
Pursue Selected Acquisition Opportunities. The Company intends to pursue an
acquisition strategy designed to accelerate the implementation of its strategic
initiatives. The acquisition candidates the Company will evaluate will include:
(i) suppliers of driveline components which complement the Company's current
product offerings, (ii) companies in the forging industry, a segment which is
highly fragmented, which will allow the Company to capitalize upon the trend
toward OEM supplier consolidation, and (iii) other automotive parts suppliers.
This acquisition strategy is intended to diversify the Company's customer base,
expand its product offerings, selectively globalize its operations and/or
leverage its design, engineering and validation expertise.
PRODUCTS
The Company designs, engineers and manufactures components for driveline
systems. The driveline system includes all the components that transfer power
from the transmission and deliver it to the drive wheels. Driveline products
produced by the Company include axles, propeller shafts, chassis components and
forged products. The
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following chart sets forth the percentage of total revenues attributable to the
Company's products for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Rear Axles........................................................... 55.0% 53.9% 53.0%
Front Axles.......................................................... 14.1 15.2 16.5
Propeller shafts..................................................... 8.4 8.7 8.8
Chassis components................................................... 11.9 10.5 9.8
Forged products...................................................... 8.8 8.9 9.2
Other................................................................ 1.8 2.8 2.7
----- ----- -----
100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
</TABLE>
Rear Axles. Rear axles are rigid, integral drive axle modules for use on
light trucks, SUVs and RWD passenger cars. The Company offers a range of axle
sizes, gear ratios, differentials, brakes and anti-corrosion coatings. Each unit
is assembled, tested and shipped as an integrated system to minimize noise and
vibration. The products are available in semi-floating models for economy or
full-floating models for higher shaft torque and load capacity.
Front Axles. Independent front axles are chassis-mounted drive axles for
all-wheel and 4WD vehicles with independent front suspensions. Typical vehicle
applications include light trucks and SUVs. The Company produces a
'shift-on-the-fly' disconnect system that allows shifting into and out of 4WD
while the vehicle is moving. This innovation reduces system wear and extends
service life by making it easy to disconnect the front-drive system when not
needed. Components are matched and balanced to reduce noise and vibration.
Propeller Shafts. Propeller shafts, also referred to as driveshafts,
transmit power from the transmission to the axle. The Company produces one- and
two-piece propeller shafts for RWD vehicles and front-auxiliary shafts for 4WD
and all-wheel drive systems. Propeller shafts can be designed and manufactured
to meet customer requirements for torque, packaging, speed, size, joint type and
special configuration. Each propeller shaft can be system balanced with its
corresponding axle or marked for future match-mounting considerations. For
applications requiring faster rotation speed, lighter weight or longer
distances, metal composites and all aluminum designs are also manufactured.
Chassis Components. Chassis components consist of steering linkage
assemblies, stabilizer bars and other components. Steering linkage assemblies
convert the circular motion of the steering wheel into the linear motion which
is used to turn the front wheels and control the direction of the vehicle.
Stabilizer bars are used for anti-roll systems. The Company's chassis components
also include brake drums, front suspensions, rods, ball studs and stabilizer bar
links.
Forged Products. The Company's forge division designs and manufactures a
wide variety of forged light truck, SUV and passenger car products for sale to
external customers and for internal use in the Company's driveline products. The
Company has the second largest (by sales) automotive forging operation in North
America and has invested significant capital in equipment and tooling which
enables it to produce large volumes of its products. The Company's forged
products include: net shaped differential gears, axle shafts, output shafts,
hypoid driving gears, pinions, weld yokes, tie rod sockets, relay rods, wheel
spindles, hubs, struts, connecting rods and caps, toe links, torsion bars and
trunnions. The Company's forging operations are designed to optimize material
usage and provide a low cost, high volume source for all forming needs.
Computerized tool design, metal flow simulation and computerized video gauging
are all used to design products quickly and efficiently, eliminating the costly
trial and error process used by other methods. The Company has developed
advanced net-shape forging capabilities that allow parts to be forged close to
finish size greatly reducing machining requirements after the forging process
and reducing materials waste.
Other. The Company's other sales revenue is comprised of service parts and
aftermarket sales.
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CUSTOMERS
The Company is GM's principal supplier of driveline components for light
trucks, SUVs and RWD passenger cars, supplying substantially all of GM's rear
axle and front 4WD axle requirements, and over 75% of its propeller shaft
requirements for these vehicle platforms in 1997. Approximately 96% of the
Company's 1997 sales were to various divisions and subsidiaries of GM. The
Company's second largest customer is Ford, for which the Company produces axle
shafts and double cardan joints for its light trucks and SUVs manufactured in
North America.
GM programs currently supplied and to be supplied by the Company include:
<TABLE>
<CAPTION>
VEHICLE PLATFORM VEHICLE DESCRIPTION VEHICLE NAMEPLATE
- ------------------------------ ------------------------ ---------------------
<S> <C> <C>
C/K (GMT-400/GMT-800) Full-size Pick-up/SUV Silverado, Sierra,
Suburban, Tahoe and
Yukon
S/T (GMT-325-330/New M-SUV Mid-size Pick-up/SUV Blazer, Jimmy,
Program) Bravada, S-10 Pick-up
and Sonoma
M/L Mid-size Van Astro and Safari
G-VAN (GMT-600) Full-size Van Savana and Chevrolet
Express
F-CAR RWD Passenger Car Camaro and Firebird
P-TRUCK Medium-Duty Commercial Commercial trucks and
Truck motorhomes
</TABLE>
The Company has been chosen as the design, development and production
supplier for the GMT-800 and New M-SUV Programs. The GMT-800 Program represents
the next generation of GM's full-size pickup trucks, as well as the Suburban,
Tahoe and Yukon SUVs. GM began to phase in production of GMT-800 vehicles in
June 1998. The New M-SUV Program represents the next generation of GM's compact
SUVs, including the Blazer, Bravada and Jimmy. See 'Risk Factors--Product
Program Implementation.'
While the Company is working to continue expanding its business with GM, it
is also pursuing strategic initiatives to diversify its customer base. In
addition to its business with Ford, the Company also currently supplies products
for vehicles manufactured by Isuzu, Nissan, CAMI (a joint venture between Suzuki
and GM), and Mercedes-Benz. Through its diversification efforts, the Company has
increased its sales to customers other than GM and estimates that such sales
will approximate $100 million in 1998. The Company will continue to seek new
business from existing customers, as well as develop relationships with new
customers worldwide. The Company currently has a regional sales office in Tokyo
and is opening two additional regional sales offices in Ulm, Germany and in
Guanajuato, Mexico.
CONTRACTUAL ARRANGEMENTS WITH GM
In connection with the Company's acquisition of the Business Unit in 1994,
it entered into the CSA with GM pursuant to which the Company became the
sole-source supplier to GM of all products and components that were supplied to
GM by the Business Unit at such time. Substantially all of the Company's 1997
sales to GM were under the CSA. In connection with the Recapitalization in 1997,
the Company and GM entered into the MOU. Under the MOU, which is a binding
agreement, the Company and GM have agreed to replace the CSA with separate
sole-source lifetime program contracts ('LPCs') for each of the GM vehicle
programs covered by the CSA. LPCs have been entered into with respect to several
GM vehicle programs, including the GMT-800 and New M-SUV Programs described
above. The material terms and conditions of the CSA and the MOU as well as of
the standard form LPCs entered into pursuant to the MOU are discussed below.
The CSA has an initial term of seven years, expiring March 2001, and is
automatically extended for successive one-year periods unless otherwise
terminated. During the term of the CSA, GM has agreed to purchase all of its
requirements for the products and components subject to the CSA so long as GM
continues
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<PAGE>
regular production of the applicable vehicle models or requires the products or
components for service parts. LPCs have terms equal to the lives of the relevant
vehicle programs, which typically run 6 to 12 years.
Prices for products sold under the CSA were established at the time the
parties entered into the agreement and are subject to adjustment for engineering
changes that result from changes in GM's component specifications. Prices for
products sold under the LPCs have been agreed to for existing programs,
including the GMT-800 and New M-SUV Programs. Prices for future programs will be
negotiated at the time the contracts for such programs are awarded.
The Company currently purchases through GM's purchasing network certain
materials for use in the manufacture of products sold under the CSA and the
LPCs. While the Company pays current market prices for such materials, increases
or decreases in such prices from levels established under the CSA currently
result in corresponding increases or decreases in the aggregate amount paid by
GM to the Company for its products, thereby protecting the Company from
increases in the costs of such materials while such purchasing arrangement is in
effect. The Company and GM have agreed to develop a mutually satisfactory plan
to terminate this purchasing arrangement no later than December 2002, although
the Company will continue to be eligible to participate in GM's then current
steel resale program and pricing adjustment policy for non-ferrous metals.
While the prices at which the Company sells its products under the CSA and
the LPCs have been established, under the LPCs, upon termination of the
purchasing arrangement described above, the Company will no longer have a
contractual right to pass on any future increases in the cost of such materials.
There can be no assurance that the Company will be able to pass on any increased
labor, materials or other costs to GM in the future as it has from time to time
in the past pursuant to the above-described terms of the CSA or by certain
additional payments agreed to as part of the commercial arrangements between GM
and the Company (subject to certain temporary reductions described in
'Management's Discussion and Analysis of Financial Condition and Results of
Operations--Company Overview').
Under the CSA, the Company and GM have agreed to share certain savings in
costs resulting from their mutual efforts or from labor contract negotiations.
To date, such shared cost savings have been minimal. Other cost savings
resulting from the Company's management expertise and knowledge or contributions
by Company associates, without input from GM, are not included in any such cost
savings computations and are not shared with GM. Sharing of cost savings under
the LPCs is substantially similar as under the CSA, but does not include savings
resulting from labor contract negotiations.
Under the CSA, the Company is not liable for warranty costs for its
products after the relevant vehicle has been sold to a retail purchaser unless
it is determined that the frequency or total cost of warranty claims for a given
period significantly exceeds the historical frequency of such claims for a
comparable model. Under the LPCs, the Company's products are subject to the
warranty provisions of GM's standard purchase order, including warranties as to
the absence of defects and as to fitness and sufficiency for the particular
purposes for which such products are to be used by GM.
Under the terms of the CSA, if GM determines that a family of products (as
defined in the CSA) produced by the Company under the CSA is no longer
competitive in terms of quality, service or price and, following notice from GM,
the Company fails to remedy the noncompetitive condition within a specified
period, then GM may elect to discontinue purchasing such family of products from
the Company beginning March 2001. GM also may terminate the CSA in the event the
Company becomes insolvent or enters into bankruptcy or similar proceedings or if
a significant portion of the Company's assets become subject to attachment,
embargo or expropriation. Pursuant to the MOU, the CSA will terminate when the
materials purchasing arrangements described above have been terminated and all
products currently supplied under the CSA are included in LPCs, but in any event
no earlier than March 2001.
Under the terms of the standard form LPC, if GM determines that products
produced by the Company under an LPC are no longer competitive in terms of
technology, design or quality and, following notice from GM, the Company fails
to remedy the noncompetitive condition within a specified period, then GM may
elect to terminate such LPC. Termination with respect to such products becomes
effective one year after GM gives the Company notice of termination. Under the
LPCs, the Company has agreed not to sue GM or its other suppliers in the event
GM terminates the LPC and obtains similar products from other sources.
34
<PAGE>
The Company at the time of the 1994 Acquisition also entered into a supply
agreement (the 'GMCL Agreement') with General Motors of Canada, Limited
('GMCL'), an affiliate of GM, whereby axles produced at GMCL's St. Catharines,
Ontario facility are purchased by the Company for resale to GM. The GMCL
Agreement, as amended, expires in September 1999. The axles produced at St.
Catharines accounted for approximately 10% of the Company's revenues in 1997. In
addition, the Company has an irrevocable option to purchase for a nominal amount
the equipment used by GMCL at this facility to produce axles.
SALES AND BUSINESS DEVELOPMENT
The Company's sales and business development organization is structured
into two groups. The first group manages the commercial sales to GM's North
American operations, while the second group supports all other customers
worldwide, including GM's international divisions. Sales and business
development associates work closely with customers and Company engineers to
identify product needs and anticipate customer program initiatives and timing in
order to position the Company to support new programs, beginning with the design
and the development and continuing through product launch.
As GM and other OEMs expand globally, the Company intends to support its
customers through regional sales offices. The Company currently has a regional
sales office in Tokyo to support its customers and pursue business development
opportunities in Asia. In addition, the Company plans to open a regional sales
office in Ulm, Germany in the summer of 1998 and will consider offices in other
regions of the world in order to support OEM programs worldwide and provide
access to new markets for the Company's products. The Company has also begun
construction of a manufacturing facility, which will include a regional sales
office, in Guanajuato, Mexico. Production in this facility currently is
scheduled to begin in the fall of 2000.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are intended to facilitate
its ability to respond to the technological demands of the market and to support
its customers. In July 1995, the Company completed construction of its Technical
Center in Rochester Hills, Michigan, employing approximately 150 engineers,
designers and technicians, specializing in design, development and process
engineering. The Technical Center is located near GM's Truck Group Headquarters,
as well as the technical centers of other major OEMs, which facilitates
communications between the Company and its customers. The Technical Center
includes a materials laboratory and complete product testing and development
equipment, including four-wheel drive chassis and driveline dynamometers in
semi-anechoic noise chambers to analyze complete driveline systems for sources
of noise and vibration. The Company engages in a multi-phase program of
management processes and product launch review to ensure product readiness. The
Company believes that this rigorous program of research and development, testing
and validation provides its customers with full-service design services and high
quality engineering and manufacturing.
Approximately $23.4 million and $27.8 million was invested in research and
development expenses, product enhancement and new designs during the years ended
December 31, 1996 and 1997, respectively, in order for the Company to maintain
and expand its technological expertise in both product and process. Engineering
design at the Company involves the use of highly sophisticated analytical tools,
computer-aided design techniques and a simultaneous engineering processes based
on close communications and teamwork among design engineers, manufacturing
engineers and the customer. The Company promotes a cross-functional product team
approach with respect to product and process development that utilizes
engineering tools such as: computer-aided design, manufacturing and engineering,
computer-integrated manufacturing, engineering analysis, design validation plans
and reports, and a fully integrated LAN/WAN computer network.
MANUFACTURING
The Company continues to expand and implement a flexible manufacturing
strategy that improves quality, delivery integrity and cost reduction ability.
All of the Company's manufacturing plants, its Technical Center and its
corporate headquarters have received ISO/QS 9000 certifications, which are
international and industry quality standards.
The Company utilizes the latest technology such as computer-aided design
and manufacturing to reduce lead time and to assure dimensional accuracy and
quality of its final products. For example, computer integrated
35
<PAGE>
manufacturing allows the Company to validate tooling before release to actual
production. Reductions in cost are expected to result from newer flexible
equipment, the Company's ability to perform several manufacturing processes at
the same facility, less inventory, reduction in defects and fewer returned
sales. From March 1994 to March 1998, the Company has invested approximately
$700 million to upgrade its equipment and facilities.
The Company is committed to reducing operating costs by developing new
manufacturing processes, improving product design and investing in new equipment
and technology. Management continues to identify and implement new cost
reduction initiatives and believes that additional improvements can be achieved
through improved manufacturing methods, many of which involve minimal capital
expenditures. These initiatives have been focused on key capacity and efficiency
issues such as reducing equipment downtime, improving product and material
workflow, eliminating bottleneck operations and upgrading personnel through
training and hiring.
Another important element of the Company's manufacturing strategy and a key
to its future success is the strategic investment of capital for new technology.
Any new machinery and equipment purchased by the Company is analyzed for its
flexibility, speed and reliability and must be capable of achieving maximum
throughput at world-class quality levels.
The Company produces on average 14,000 axles, 11,500 propeller shafts,
10,500 steering linkages, 20,000 stabilizer bars and 220,000 forgings each
production day. The Company has successfully increased production of axles per
production day from approximately 10,000 in March 1994 to approximately 14,000
in March 1998 while reducing manufacturing space requirements and improving
quality. The Company has reduced discrepant parts shipped to GM, as measured by
GM, from approximately 13,400 PPM during the six months ended December 31, 1994
to approximately 180 PPM during the six months ended March 31, 1998, and
returned parts decreased from 5,136 PPM during the ten months ended December 31,
1994 to 664 PPM during the twelve months ended December 31, 1997. See 'Risk
Factors--Product Program Implementation.' The Company's manufacturing facilities
have adequate production capacity for its current needs, and management believes
its present facilities, enhanced by currently budgeted capital expenditures for
equipment additions and improvements, will be adequate to meet currently
anticipated customer requirements.
ASSOCIATES
The Company believes that one of its most important assets is its
workforce. Since the 1994 Acquisition, the Company has focused on making
significant improvements in its labor relations through improving working
conditions, incentive programs and town hall meetings with its hourly
associates. The Company has also implemented a program of continuous training
whereby the Company associates are taught the skill sets important to producing
products of precision quality. In each of the past three years, the Company has
invested approximately 300,000 labor hours annually in various training and
educational programs.
The Company also recognizes that a key element of its long-term
competitiveness is developing a constructive working relationship with its
unions. In 1997, the Company's management negotiated, and the Company's workers
ratified, the Company's first non-GM agreements with the UAW and the IAM.
Significantly, the unions have committed to assist the Company in achieving both
quality and productivity gains over the life of the contract.
As of March 31, 1998, the Company employed approximately 8,500 associates.
Approximately 7,000 of the Company's hourly associates are represented by the
UAW under a collective bargaining agreement which runs through February 25,
2000. The Company's approximately 300 remaining hourly associates are
represented by the IAM under a collective bargaining agreement which runs
through May 5, 2000. The Company believes its relationships with its associates
and their unions are positive.
As part of the 1994 Acquisition, the Company's hourly associates were given
the option to transition back to GM as jobs at GM became available. Of the 6,500
hourly associates that were employed on March 1, 1994, approximately 2,900 have
returned to GM and as of March 31, 1998, approximately 1,600 associates are
eligible to return to GM. Such associates may transition back to GM once a
requested position becomes available on a schedule to be determined by the
Company. Such associates may also elect to remain at the Company. Many of those
who returned to GM were high seniority workers who were at or near retirement
age. As a result of this turnover, the average age of hourly associates has
decreased and the level of education of hourly associates in the workforce has
increased.
36
<PAGE>
COMPETITION
The primary competitors to the Company in the North American light truck
and SUV driveline systems market are (i) the internal 'captive' operations of
Ford and Chrysler and (ii) independent, publicly-traded Dana Corporation. The
Ford and Chrysler operations are strictly internal and do not manufacture
products for outside customers at this time. Several foreign firms have niche
driveline businesses which primarily supply foreign transplant auto
manufacturers.
The automotive industry is highly competitive. The Company competes based
on technology, quality, price, durability, reliability and overall customer
service. The Company's competitors include driveline component manufacturing
facilities of existing OEMs, as well as a small number of independent suppliers
of driveline systems and several independent suppliers of forged products.
Certain of these OEMs are also customers of the Company. The Company's principal
competitors are large and have substantial resources, including those
competitors that are owned by OEMs. There can be no assurance that competitors
will not be able to take actions, including developing new technology or
products, or offering prolonged reduced pricing, which could adversely affect
the Company.
The Company believes that the trend in the industry is for OEMs to reduce
the number of their suppliers and develop close ties and long term,
partnership-style relationships with those suppliers similar to the relationship
developed between the Company and GM.
PRODUCTIVE MATERIALS
The Company believes it has adequate sources for the supply of productive
materials and components for its manufacturing needs. The Company's suppliers
are located primarily in North America. The Company has initiated a policy of
strengthening its supplier relationships by concentrating its purchases for
particular parts over a limited number of suppliers. The Company believes that
this policy contributes to quality and cost control and increases a supplier's
commitment to the Company. The Company relies upon, and expects to continue to
rely upon, single source suppliers for certain critical components. See 'Risk
Factors--Reliance on GM' and '--Inventory Management; Reliance on Single Source
Suppliers.'
PATENTS AND TRADEMARKS
The Company maintains and has pending various U.S. and foreign patents and
other rights to intellectual property relating to its business, which it
believes are appropriate to protect the Company's interest in existing products,
new inventions, manufacturing process and product developments. The Company does
not believe any single patent is material to its business nor would the
expiration or invalidity of any patent have a material adverse effect on its
business or its ability to compete. The Company is not currently engaged in any
material infringement litigation, nor are there any material claims pending by
or against the Company.
PROPERTIES
Since the 1994 Acquisition, the Company has dedicated substantial resources
to improving the functionality and physical appearance of its facilities, making
renovations including painting, lighting, roofing, insulation, ventilation, fire
protection, fencing, parking lot, railroad and dock upgrades, and office
improvements. The Company has also purchased numerous buildings surrounding its
facilities and subsequently demolished these buildings and landscaped the areas.
Working with state and local governments, the Company has been successful in
securing infrastructure improvements surrounding the Detroit and Buffalo
facilities, including road, sewer and utility upgrades.
37
<PAGE>
The following is a summary of the Company's facilities:
<TABLE>
<CAPTION>
APPROX. TYPE OF
NAME SQ. FEET INTEREST FUNCTION
- ----------------------------------------- ---------------- ------- -----------------------------------------
<S> <C> <C> <C>
Detroit Gear & Axle ..................... 1,660,000 Owned Rear and front axles, front suspensions,
Detroit, MI brake assemblies, and rear brake drums
Buffalo Gear & Axle ..................... 1,165,000 Owned Rear axles and steering linkages
Buffalo, NY
Detroit Forge ........................... 710,000 Owned Forged products
Detroit, MI
Three Rivers Plant ...................... 750,000 Owned Rear propeller shafts, front auxiliary
Three Rivers, MI propeller shafts, and universal joints
Tonawanda Forge ......................... 470,000 Owned Forged products
Tonawanda, NY
Guanajuato Gear & Axle .................. 335,000 Owned Rear axles
Guanajuato, Mexico (in construction
phase)
Corporate Headquarters .................. 31,000 Owned Executive and administrative offices
Detroit, MI located at the Detroit Gear & Axle
facility
Technical Center ........................ 66,000 Leased Research and development, design
Rochester Hills, MI engineering, metallurgy, testing,
validation, materials purchasing and
sales
</TABLE>
The Detroit Gear & Axle, Detroit Forge, Three Rivers Plant and Corporate
Headquarters facilities are each subject to a mortgage executed in favor of the
several lenders party to the Credit Facilities. Such mortgages expire upon
satisfaction of all borrowings under the Credit Facilities.
SEASONALITY
The Company's business is moderately seasonal as it typically shuts down
its operations for two weeks each July and approximately one week at the end of
December consistent with the work schedule of its principal customers. The
Company's third and fourth quarter results reflect the effects of these
shutdowns. In addition, the Company's principal customers have incurred lower
production rates in the third quarter as model changes enter production.
ENVIRONMENTAL MATTERS
In connection with the 1994 Acquisition, GM has agreed to indemnify and
hold the Company harmless from certain environmental issues identified as
potential areas of environmental concern at the time of the 1994 Acquisition. GM
has also agreed to indemnify the Company, under certain circumstances, for up to
ten years from the date of closing of the 1994 Acquisition with respect to
certain preclosing environmental conditions.
Approximately one acre of a parking lot at the Company's Buffalo facility
has been designated by the New York Department of Environmental Conservation
('NYDEC') as a Class 3 Inactive Hazardous Waste Disposal Site due to the
presence of polychlorinated biphenyl in subsurface soil and groundwater below
existing pavement, and an elevated level of lead in the soil. A Class 3
designation is given to a site which does not present a significant threat to
the public health or the environment and at which action may be deferred. The
contamination took place prior to the Company acquiring the property and is the
responsibility of GM. The area is the subject of an Order of Consent between GM
and NYDEC effective February 2, 1995. Remediation required thereunder is being
performed by GM in the ordinary course of business.
LITIGATION
The Company has no material litigation and management is not aware of any
pending matters of potential litigation or administrative processes which it
believes will have a material adverse impact upon the Company.
38
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company possesses a management team with proven leadership and
extensive automotive industry experience. The management team has been a
critical factor in the turnaround of the Company's operations since the 1994
Acquisition. The directors and executive officers of the Company and its
principal operating subsidiary, American Axle & Manufacturing, Inc. ('AAM,
Inc.'), are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ ---- -----------------------------------------------------
<S> <C> <C>
Richard E. Dauch.......................... 55 Chairman of the Board of Directors, Chief Executive
Officer and President*
B.G. Mathis............................... 65 Executive Vice President and Chief Administrative
Officer*; Director
Michael D. Alexander...................... 50 Vice President--Management Information Systems and
Internal Audit, and Chief Information Officer**
Marion A. Cumo, Sr........................ 56 Vice President--Materials Management**
George J. Dellas.......................... 55 Vice President--Quality Assurance and Customer
Satisfaction**
David J. Demos............................ 48 Vice President--Sales and Business Development**
Patrick S. Lancaster...................... 50 Vice President, General Counsel and Secretary*
Allan R. Monich........................... 44 Vice President--Personnel**
Joel D. Robinson.......................... 55 Vice President--Manufacturing**
Daniel V. Sagady, P.E..................... 49 Vice President--Product Development and Engineering**
Michael D. Straney........................ 55 Vice President--Procurement**
Gary J. Witosky........................... 41 Vice President--Finance and Chief Financial Officer*
Robert A. Krause.......................... 42 Treasurer*
Glenn H. Hutchins......................... 42 Director
Bret D. Pearlman.......................... 31 Director
David A. Stockman......................... 51 Director
</TABLE>
- ------------------
* Executive Officer of the Company and AAM, Inc.
** Executive Officer of AAM, Inc.
Richard E. Dauch has been Chief Executive Officer, President and a member
of the Board of Directors of the Company since the 1994 Acquisition. In October
1997, he was named Chairman of the Board of Directors. Prior to March 1994, he
spent 12 years at Chrysler. He left Chrysler in 1991 as Executive Vice President
of Worldwide Manufacturing. Mr. Dauch also served as group vice president of
Volkswagen of America, where he established the manufacturing facilities for the
first automotive transplant in the United States. Mr. Dauch has over 34 years of
experience in the automotive industry. In 1996, Mr. Dauch was recognized as the
Worldwide Automotive Executive of the Year by the Automotive Hall of Fame and
was recently named the 1997 Manufacturer of the Year by the Michigan
Manufacturer's Association. He has lectured extensively on the subject of
manufacturing and authored the book, Passion for Manufacturing, which is
distributed in 80 countries in several languages.
B. G. Mathis has been Executive Vice President and Chief Administrative
Officer since November 1997 and previously was Vice President--Administration
and Chief Administrative Officer of the Company since it was
39
<PAGE>
purchased in the 1994 Acquisition. Mr. Mathis has also served as a director of
the Company since October 1997. Mr. Mathis spent 28 years at Chrysler and held
increasingly responsible executive administrative positions, including Manager
of Personnel for all Chrysler Manufacturing Operations. He retired from Chrysler
in 1988.
Michael D. Alexander has been Vice President--Management Information
Systems and Internal Audit, and Chief Information Officer since November 1997
and previously was Vice President--Personnel and Management Information Systems
since March 1997. From March 1994 to March 1997, Mr. Alexander was Vice
President--Finance and Chief Financial Officer of the Company. Before coming to
the Company, Mr. Alexander worked at Chrysler Corporation for 21 years. He held
both technical and managerial positions in the financial operational disciplines
with Chrysler Corporation. His experience spans all facets of manufacturing
including corporate, assembly, stamping, and power train operations in domestic
and international organizations, and he held the following positions: Finance
Manager, Latin America; Plant Controller; Senior Financial Specialist;
Divisional Manufacturing Financial Executive; and Director Hardware Planning,
Finance and Administration.
Marion A. Cumo, Sr. has been Vice President--Materials Management since May
1996 and was Vice President--Quality Assurance and Customer Satisfaction from
March 1994 to May 1996. Prior to joining the Company, Mr. Cumo spent 11 years
from 1980 to 1991 working as a manufacturing executive at Chrysler. His most
recent title at Chrysler was General Plants Manager of Assembly Operations.
After leaving Chrysler in 1991, Mr. Cumo became President of Tri-County Chrysler
Products in Peebles/West Union, Ohio, and also worked as an automotive
manufacturing consultant.
George J. Dellas has been Vice President--Quality Assurance and Customer
Satisfaction since May 1996 and prior thereto was Vice President--Procurement
and Material Management since the 1994 Acquisition. Prior to joining the
Company, Mr. Dellas spent 11 years in executive positions of increasing
responsibility at Chrysler. Before leaving Chrysler in 1991, he served as the
Director of Advanced Planning for the Assembly Division. Mr. Dellas has over 30
years experience in the automotive industry.
David J. Demos has been Vice President--Sales and Business Development
since November 1997 and previously was Vice President--Sales since May 1996.
Prior to joining the Company, Mr. Demos worked for GM for 21 years in various
engineering, quality and sales positions in the United States and overseas. In
his most recent position with GM he was chief engineer for the European business
unit of GM's Saginaw Division and chief engineer of GM final drive systems.
Since joining the Company he has held the positions of Executive Director, Sales
and Marketing, and Director, Sales, Marketing and Planning.
Patrick S. Lancaster has been Vice President, General Counsel and Secretary
since November 1997, and previously was General Counsel and Secretary since June
1994. Prior to joining the Company, Mr. Lancaster worked at Fruehauf Trailer
Corporation and its predecessor company from 1981 to 1994 where he last served
as General Counsel and Assistant Secretary from March 1990.
Allan R. Monich has been Vice President--Personnel since November 1997. Mr.
Monich served as plant manager for the Buffalo Gear & Axle plant since the
formation of the Company in March 1994. Prior to joining the Company in March
1994, Mr. Monich worked for GM for 21 years in the areas of manufacturing,
quality, sales and engineering, including four years as a GM plant manager.
Joel D. Robinson has been Vice President--Manufacturing since April 1997.
Mr. Robinson joined the Company in March 1994 and has held various positions,
including, most recently, Executive Director of the GMT-800 Program. Mr.
Robinson began his career in the automotive industry at Ford in 1963, where he
held a series of technical and manufacturing management positions. Mr. Robinson
also worked for American Motors Corporation, serving as Director of Vehicle
Assembly, and later, at Chrysler, where he was responsible for all car body
programs.
Daniel V. Sagady, P.E. has been Vice President--Product Development and
Engineering since November 1997 and previously was Executive Director of Product
Engineering since May 1996. Prior to his promotion, Mr. Sagady served as the
Company's Director of Product Engineering from March 1994. He began is career at
GM in 1967 and has spent over 30 years in the automotive industry with both Ford
and GM where he has held various positions in manufacturing, quality, testing,
and developmental engineering. Mr. Sagady is a licensed Professional Engineer.
40
<PAGE>
Michael D. Straney has been Vice President--Procurement since November 1997
and previously was Executive Director of Procurement since May 1996. Prior to
his current position, Mr. Straney served as Executive Director of Strategic
Planning from August 1995 and Director of Capacity, Planning, Modernization and
Investment since joining the Company in March 1994. Mr. Straney began his career
in 1960 with GM and has served in various capacities, including Plant Manager at
the Buffalo facilities of the Company while it was owned by GM, and as the
Operations Manager of all driveline facilities.
Gary J. Witosky has been Vice President--Finance and Chief Financial
Officer of the Company since March 1997. He also has been Treasurer of the
Company from March 1994 until January 1998 and Vice President since July 1996.
Prior to joining the Company, Mr. Witosky worked for Park Corporation from 1986
to 1994 in Cleveland, Ohio where he served in various positions including
Corporate Controller, Assistant Treasurer and Treasurer. In addition, Mr.
Witosky spent several years in public accounting and is a Certified Public
Accountant.
Robert A. Krause has been Treasurer of the Company since January 1998.
Prior to joining the Company, Mr. Krause worked for Baxter International Inc.
from 1985 to 1997 where he served in various positions in treasury and corporate
controller functions. In addition, Mr. Krause spent several years in public
accounting and is a Certified Public Accountant.
Glenn H. Hutchins was elected director of the Company in connection with
the Recapitalization. He is a member of the limited liability company which acts
as the general partner of Blackstone. He is a Senior Managing Director of The
Blackstone Group L.P. and has been with Blackstone since 1994. Mr. Hutchins was
a Managing Director of Thomas H. Lee Co. ('THL') from 1987 until 1994 and, while
on leave from THL during parts of 1993 and 1994, was a Special Advisor in the
White House. Mr. Hutchins is a member of the boards of directors of Clark
Refining & Marketing, Inc., Clark USA, Inc., CommNet Cellular Inc., Corp Banca
(Argentina) S.A., Corp Group C.V., and Haynes International, Inc. In 1994, Mr.
Hutchins was also appointed Chairman of the board of directors of the Western
N.I.S. Enterprise Fund by President Clinton.
Bret D. Pearlman was elected director of the Company in May 1998. Mr.
Pearlman became a Managing Director of The Blackstone Group L.P. in 1998, and
has been involved in the firm's principal activities since 1989.
David A. Stockman was elected director of the Company liability company
which acts as the general partner of Blackstone. He is a Senior Managing
Director of The Blackstone Group L.P. and has been with Blackstone since 1988.
Mr. Stockman is also a Co-Chairman of the board of directors of Collins & Aikman
Corporation and a member of the boards of directors of Bar Technologies Inc.,
Clark Refining & Marketing, Inc., Clark USA, Inc., and Haynes International,
Inc.
The Company's Board of Directors is divided into three classes. The members
of each class of directors serve for staggered three year terms except that the
initial terms of the Class I, Class II and Class III directors will expire upon
the election of directors at the annual meetings of stockholders to be held in
1999, 2000 and 2001, respectively. Directors hold office until the expiration of
their respective terms and until their successors have been elected and
qualified, or until their earlier death, resignation or removal. Executive
officers and other officers are elected or appointed by, and serve at the
pleasure of, the Board of Directors. Pursuant to Mr. Dauch's employment
agreement with the Company, the Company has agreed that he will serve as
Chairman of the Board, President and Chief Executive Officer until the
termination of the agreement. See '--Employment Agreements.'
In connection with the Offerings, the Board intends to elect at least two
independent directors. The identity of the independent directors has not yet
been determined and may not be determined until after the completion of the
Offerings. The Company does not have a nominating committee.
COMMITTEES
Audit Committee. The Company has established an Audit Committee currently
consisting of Messrs. Mathis and Pearlman. The Audit Committee shall consider
and recommend to the Board of Directors the engagement of independent auditors
to audit annually the books and records of the Company and the terms of such
engagement; to review the reports of such independent auditors; the
appropriateness of the accounting principles followed in preparation of the
financial statements of the Company; to review the performance of the
41
<PAGE>
Company's program of internal control to ensure compliance of the Company with
legal requirements; and to perform such other duties related to the foregoing as
may be directed by the Board of Directors. It is intended that the Company's new
independent directors will replace Messrs. Mathis and Pearlman on this
committee.
Executive Committee. The Company has established an Executive Committee
consisting of Messrs. Dauch (Committee Chairman), Stockman and Hutchins. The
Executive Committee has the authority to exercise the powers of the full Board
between Board meetings.
Compensation Committee. The Company has established a Compensation
Committee consisting of Messrs. Hutchins and Stockman. The duties of the
Compensation Committee are generally to review employment, development,
reassignment and compensation matters involving corporate officers and such
other executive level associates as may be appropriate, including, without
limitation, issues relative to salary, bonus, stock options and other incentive
arrangements. The Compensation Committee also oversees the Company's pension and
employee benefit plans.
DIRECTOR COMPENSATION
The Company expects to pay its non-employee and non-affiliated directors an
annual fee of $ , plus $ for each regularly scheduled meeting
attended and an additional $ for attendance at each Board committee
meeting.
EXECUTIVE COMPENSATION
The following tables set forth the compensation awarded or paid to, or
earned by, the Company's Chief Executive Officer and each of the Company's other
four most highly compensated executive officers during 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL
----------------------- UNDERLYING OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)(1) OPTIONS(#) COMPENSATION($)(2)
- ------------------------------------------------------------- --------- ----------- ------------ ------------------
<S> <C> <C> <C> <C>
Richard E. Dauch ............................................ $ 625,000 $ 1,000,000 $ 11,029,000
Chairman of the Board, Chief Executive Officer and
President
B. G. Mathis ................................................ 220,833 325,000 980,999
Executive Vice President and Chief Administrative Officer
Michael D. Alexander ........................................ 204,167 225,000 3,155,056
Vice President--Management Information Systems and Internal
Audit, and Chief Information Officer
George J. Dellas ............................................ 200,000 200,000 1,861,334
Vice President--Quality Assurance and Customer Satisfaction
Marion A. Cumo, Sr. ......................................... 183,333 200,000 1,865,484
Vice President--Materials Management
</TABLE>
- ------------------
(1) Bonuses are paid in the year subsequent to the year in which they are
earned.
(2) Of the amount paid to Mr. Dauch, $11,000,000 represents a payment made in
connection with the Recapitalization. See 'Certain
Transactions--Transactions with Management.' The remaining amounts shown
represent the Company matching contributions in the Company's qualified
section 401(k) plan, the dollar value of split-dollar life insurance
benefits and payments made in connection with an incentive compensation plan
due to a change in control. These amounts for 1997, expressed in the same
order as identified above, for the named executive officers are as follows:
Mr. Dauch--$14,250, $14,750 and $0; Mr. Mathis--$5,125, $0 and $975,874; Mr.
Alexander--$4,625, $0 and $3,150,431; Mr. Dellas--$0, $0 and $1,861,334 and
Mr. Cumo, Sr.--$4,150, $0 and $1,861,334.
42
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
% OF TOTAL
NUMBER OF OPTIONS/
SECURITIES SARS POTENTIAL REALIZABLE VALUE AT
UNDERLYING GRANTED TO EXERCISE ASSUMED ANNUAL RATES OF STOCK PRICE
OPTIONS/ EMPLOYEES OR BASE APPRECIATED FOR OPTION TERM
SARS IN FISCAL PRICE EXPIRATION ---------------------------------------
NAME GRANTED(#) YEAR ($/SH) DATE 0%($) 5%($)(1) 10%($)(1)
- ------------------------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard E. Dauch......... 12.8% $16,811.78 11/10 $ 6,997,989 $19,376,711
47.6 1.00 11/07 $29,368,433 47,839,181 76,176,935
B. G. Mathis............. 6.9 16,811.78 11/10 3,767,003 10,430,442
Michael D. Alexander..... 0.9 16,811.78 11/10 506,238 1,401,720
Marion A. Cumo........... 3.2 16,811.78 11/10 1,742,053 4,823,564
George J. Dellas......... 3.2 16,811.78 11/10 1,742,053 4,823,564
</TABLE>
- ------------------
(1) The dollar amounts are based on assumed rates of annually compounded stock
price appreciation of 5% and 10% over the term of the option pursuant to the
rules of the Securities and Exchange Commission and are not intended to
forecast possible future appreciation, if any, in the price of the Common
Stock.
STOCK OPTIONS
Management Stock Option Plan
The Company has adopted The Amended and Restated American Axle &
Manufacturing of Michigan, Inc. Management Stock Option Plan (the 'Option Plan')
under which the Company is authorized to grant options to purchase up to
shares of Common Stock.
The Option Plan provides for the issuance of shares of authorized but
unissued or reacquired shares of Common Stock, subject to adjustment to reflect
certain events such as stock dividends, stock splits, mergers or reorganizations
of or by the Company. The Option Plan is intended to assist the Company in
attracting and retaining employees of outstanding ability and to promote the
identification of their interests with those of the stockholders of the Company.
The Option Plan permits the grant of non-qualified stock options to purchase
shares of common stock. Unless sooner terminated by the Company's Board of
Directors, the Option Plan will terminate on December 31, 2004. Such termination
will not affect the validity of any outstanding grants on the date of the
termination.
The Compensation Committee of the Board of Directors will administer the
Option Plan. The Board of Directors may from time to time amend the terms of any
grant of options, but, except for adjustments made upon a change in the Common
Stock by reason of a stock split, spin-off, stock dividend, recapitalization,
reorganization or similar event, such action will not adversely affect the
rights of any participant under the Option Plan without such participant's
consent. The Board of Directors will retain the right to amend, suspend or
terminate the Option Plan.
In November 1997, the Company granted certain options (the 'Options') to
key employees to purchase an aggregate of approximately shares of Common
Stock (the 'Option Shares') at a purchase price of $ per share.
One-third of the Options vest and become exercisable ratably over 5 years;
provided, however, that such Options will become immediately vested and
exercisable upon the earlier of a Change of Control, for certain participants,
or a participant's termination of employment without Cause or voluntary
termination of employment for Good Reason, as those terms are defined in the
Option Plan. The remaining two-thirds of the Options vest and become exercisable
on the seventh anniversary of the grant date; provided, however, that such
options may become exercisable sooner upon the achievement of certain
performance targets as specified in the Option Plan.
43
<PAGE>
Replacement Plan
The Company has also adopted the 1997 American Axle & Manufacturing of
Michigan, Inc. Replacement Plan (the 'Replacement Plan') under which the Company
was authorized to grant options to purchase up to shares of Common Stock.
The purpose of the Replacement Plan is to provide the award of Replacement
Stock Options (as defined in the Replacement Plan) to certain current or former
executive officers or directors ('Eligible Holders') of the Company whose awards
under the American Axle & Manufacturing, Inc. Phantom Stock Plan dated March 1,
1994 (the 'PSP Plan') were voluntarily canceled in connection with the
Recapitalization. Following the Recapitalization, the PSP Plan was terminated.
The Replacement Stock Options are intended to preserve the economic value of the
cancelled awards. The Company expects that it will benefit from the added
interest which such Eligible Holders will have in the welfare of the Company as
a result of their proprietary interest in the Company's success. The Company has
granted options to purchase an aggregate of shares of Common Stock under
the Replacement Plan, subject to adjustment to reflect certain events such as
stock dividends, stock splits, mergers or reorganizations of or by the Company.
No further options may be granted under the Replacement Plan.
The Compensation Committee of the Board of Directors will administer the
Replacement Plan. The Board of Directors may from time to time amend the terms
of any grant of options, but, except for adjustments made upon a change in the
Common Stock by reason of a stock split, spin-off, stock dividend,
recapitalization, reorganization, or similar event, such action will not
adversely affect the rights of any participant under the Replacement Plan,
without such participants, consent. The Board of Directors will retain the right
to amend, suspend or terminate the Replacement Plan. The Replacement Stock
Options are non-qualified options and are fully vested and exercisable.
Nonqualified Stock Option Agreement
AAM, Inc. and Richard E. Dauch are parties to a nonqualified stock option
agreement dated February 27, 1994 and amended as of December 21, 1994 (the
'Nonqualified Option Agreement'). Pursuant to the Nonqualified Option Agreement,
AAM, Inc. granted Mr. Dauch an option to purchase 1,747 shares of common stock
of AAM, Inc. (the 'AAM, Inc. Option'), with such number of shares to be adjusted
to reflect certain events such as stock dividends, stock splits, mergers or
reorganizations. In connection with the Recapitalization, the Company agreed to
provide Mr. Dauch with an option to purchase shares of the Company's Common
Stock (the 'Exchange Option') in exchange for the AAM, Inc. Option. The terms of
the Exchange Option are set forth in a nonqualified option agreement dated as of
October 30, 1997 between American Axle & Manufacturing of Michigan, Inc. and Mr.
Dauch. The Exchange Option expires 10 years after the date such Exchange Option
was granted, and is fully vested and exercisable.
The 1998 Stock Incentive Plan
The following is a brief summary of the terms of the 1998 Stock Incentive
Plan (the 'Incentive Plan'), approved by the Board of Directors on
1998. The purpose of the Incentive Plan is to provide directors,
officers and key employees of the Company and its subsidiaries ('Participants')
an opportunity to benefit from an appreciation in the value of the Common Stock,
thus providing an increased incentive for the Participants to contribute to the
future success and prosperity of the Company, enhancing the value of the Common
Stock for the benefit of the shareholders and increasing the ability of the
Company and its subsidiaries to attract and retain highly qualified individuals.
The total number of shares of Common Stock that may be issued under the
Incentive Plan is shares. The maximum number of shares of
Common Stock for which awards may be granted during a calendar year to any
Participant shall be .
The Incentive Plan is administered by the Compensation Committee of the
Board of Directors or a subcommittee thereof. The Compensation Committee has the
authority to select the Participants to be granted awards under the Incentive
Plan, to determine the size and terms of an award and to determine the time when
grants of awards will be made. The Compensation Committee also is authorized to
interpret the Incentive Plan, to establish, amend and rescind any rules and
regulations relating to the Incentive
44
<PAGE>
Plan and to make any other determinations that it deems necessary or desirable
for the administration of the Incentive Plan.
Under the Incentive Plan, the Compensation Committee may grant awards in
the form of options, which may be incentive stock options within the meaning of
Section 422 of the Code or non-qualified stock options; stock appreciation
rights; or other awards that are valued in whole or in part by reference to, or
are otherwise based on, the value of the Common Stock. Awards may be paid in
Common Stock.
The terms and conditions of options granted under the Incentive Plan shall
be established by the Compensation Committee and set forth in a stock option
agreement with the Participant. The option price per share of Common Stock shall
be determined by the Compensation Committee but shall not be less than the fair
market value of the Common Stock. Options granted under the Incentive Plan shall
be exercisable at such time and upon such terms and conditions as may be
determined by the Compensation Committee, but in no event shall an option be
exercisable more than ten years after the date it is granted.
The Compensation Committee may grant a stock appreciation right independent
of or in conjunction with an option or designated portion thereof at the time
the related option is granted or at any time prior to the exercise or
cancellation of the related option. The exercise price shall be an amount
determined by the Compensation Committee but in no event shall such amount be
less than the greater of (i) the fair market value of a share on the date the
stock appreciation right is granted or, in the case of a stock appreciation
right granted in conjunction with an option, or a portion thereof, the option
price of the related option and (ii) an amount permitted by applicable laws,
rules, by-laws or policies of applicable regulatory authorities or stock
exchanges.
Upon the exercise of a stock appreciation right, the Participant shall be
entitled to receive with respect to each share to which such stock appreciation
right relates an amount in cash and/or shares, as the case may be, equal to the
excess of (i) the fair market value of a share of Common Stock on the date of
exercise over (ii) the exercise price of the stock appreciation right. The
Compensation Committee may impose conditions upon the exercisability of stock
appreciation rights.
The Compensation Committee may grant, in its sole discretion, other awards
of shares and awards that are valued in whole or in part by reference to, or are
otherwise based on the fair market value of, shares of Common Stock. Certain of
such other share-based awards may be granted in a manner that is deductible by
the Company under Section 162(m) of the Code and may be based upon stock price,
market share, sales, earnings per share, return on equity, costs or other
performance goals approved by the Compensation Committee. The Compensation
Committee also has the authority to grant other stock-based awards not
specifically described above, including awards of Common Stock subject to
vesting conditions or restrictions on transfer.
Except as otherwise provided in the Incentive Plan or in an award
agreement, an award may be exercised for all, or from time to time any part, of
the shares of Common Stock for which it is then exercisable. The purchase price
for the shares of Common Stock subject to an award may be paid to the Company in
full at the time of exercise at the election of the Participant (i) in cash,
(ii) in shares of Common Stock having a fair market value equal to the aggregate
option price for the shares of Common Stock being purchased and satisfying such
other requirements as may be imposed by the Compensation Committee, (iii) partly
in cash and partly in such shares of Common Stock, or (iv) through the delivery
of irrevocable instructions to a broker to deliver promptly to the Company an
amount equal to the aggreagte exercise price for the shares of Common Stock
being purchased.
Each award will be non-transferable during the lifetime of the Participant
unless otherwise provided by the Compensation Committee. The Compensation
Committee may establish the terms and conditions, if any, under which awards may
be exercised by Participants following the termination of their employment or
service on the Board, as applicable.
The Board of Directors may suspend, amend or terminate the Incentive Plan,
in whole or in part. No amendment may be made without approval of the
shareholders, however, if such approval is required by stock exchange rules or
by law. Furthermore, no amendment, suspension or termination of the Incentive
Plan may, without the consent of a Participant, impair any of the rights under
any award previously granted to such Participant under the Incentive Plan.
45
<PAGE>
In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend or split, reorganization, recapitalization, merger,
consolidation, spin-off, combination or exchange of shares of Common Stock or
other corporate exchange, or any distribution to shareholders of shares of
Common Stock, the Compensation Committee may make such substitution or
adjustment as it deems to be equitable to any affected terms of such awards. In
the event of a change of control, as defined in the Incentive Plan, the award
may provide that nonvested portion thereof shall vest and become exercisable in
full.
RETIREMENT PROGRAM
The retirement program for the Company executives consists of the American
Axle & Manufacturing, Inc. Retirement Program for Salaried Employees, which is a
tax-qualified plan and subject to ERISA, as well as one non-qualified plan
(collectively the American Axle & Manufacturing Supplemental Executive
Retirement Program). The contributory portion of the tax-qualified plan provides
defined benefits under a formula based on eligible years of credited service,
and upon the average monthly remuneration received in the highest sixty months
out of the final ten years of service, subject to certain Internal Revenue Code
limitations which change from time to time. In addition, employees receive an
annual retirement benefit which is equal to the sum of 100% of their
contributions upon retirement at or after age 65. If employees do not elect to
contribute to the tax-qualified plan, they are entitled to receive only basic
retirement benefits equal to flat dollar amount per year of credited service,
essentially equivalent to the American Axle & Manufacturing Hourly-Rate
Employees Pension Plan. All participants in the plan are entitled to this flat
dollar benefit. In accordance with its terms, benefits under the tax-qualified
plan fully vest after five years of credited service and are payable at the
normal retirement age of 65, or earlier at the election of the participant,
either in the form of a single life annuity or in a reduced amount, in joint and
survivor form. Supplemental early retirement benefits are available for certain
employees hired before 1998.
If executives made the required contributions to the tax-qualified plan,
they may also be eligible to receive the regular form of a supplemental
executive benefit (herein referred to as 'Regular Supplemental Executive
Retirement Program'). The regular form of the supplemental executive retirement
benefit will provide the executive with total monthly retirement benefits equal
to 2% of the average monthly base salary received in the highest sixty months
out of the final ten years of service, times the years of credited service
calculated for purposes of the contributory portion of the qualified plan, less
the sum of all benefits payable under this plan before reduction for any
survivor option plus 2% times the years of credited service times the maximum
monthly Social Security benefit payable to a person retiring at age 65. Table I
shows the regular form of the estimated total annual retirement benefit related
to final average base salary as of December 31, 1997, that would be payable in
12 equal monthly installments per annum as a single life annuity to executives
retiring in 1998 at age 65 (the benefits shown are based upon maximum annual
Social Security benefits of $ payable to persons retiring in 1998). If the
executive elects to receive benefits in the form of 60% joint and survivor
annuity, the amounts shown would generally be reduced by 5%, subject to certain
adjustments depending on the age differential between spouses.
TABLE I
PROJECTED TOTAL ANNUAL SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFITS
ASSUMING EXECUTIVE QUALIFIES FOR REGULAR RETIREMENT PROGRAM BENEFITS
<TABLE>
<CAPTION>
YEARS OF ELIGIBLE CONTRIBUTORY CREDITED SERVICE
- ---------------------------------------------------------------------
HIGHEST FIVE-YEAR
ANNUAL SALARY 15 YEARS 25 YEARS 35 YEARS 45 YEARS
- ----------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
$ 150,000 $ 44,540 $ 74,240 $103,940 $133,610
200,000 55,169 91,948 128,727 165,506
300,000 85,169 141,948 198,727 255,506
400,000 115,169 191,948 268,727 345,506
500,000 145,169 241,948 338,727 435,506
600,000 175,169 291,948 408,727 525,506
</TABLE>
46
<PAGE>
The annual base salaries for the most recent year(s) considered in the
calculations of the averages reported here in the Summary Compensation Table in
the column labeled 'Salary.'
An executive may be eligible to receive the alternative form of the
supplemental executive retirement benefit (herein referred to as Alternative
Retirement Program) in lieu of the regular form of the supplemental executive
retirement benefit. The executive will receive the greater of the regular form
or alternative form of the supplemental executive retirement benefit. The sum of
the qualified plan benefits and the alternative supplemental retirement benefit
will provide the executive with total annual retirement benefits that are equal
to 1.5% times eligible years of credited service times the average monthly
compensation of the executive's highest five years of total direct compensation
(i.e., the average of the 60 highest months of base salary plus the average
monthly compensation of the five highest years of bonus and/or restricted stock
units awarded) out of the last ten years, less 100% of the maximum monthly
Social Security benefit payable to a person in the year of retirement. Table II
shows the alternative form of the estimated total supplemental executive annual
retirement benefit related to final average total direct compensation as of
December 31, 1997, that would be payable in 12 equal monthly installments per
annum as a single annuity to executives retiring in 1998 at age 65 (the benefits
shown are based upon the maximum Social Security benefits of the $16,104 payable
retiring in 1998). Again, the amounts shown would be reduced in the same way if
the executive were to elect joint and survivor benefits.
TABLE II
PROJECTED TOTAL ANNUAL ALTERNATIVE RETIREMENT BENEFITS
ASSUMING EXECUTIVE QUALIFIES FOR ALTERNATIVE SUPPLEMENTAL
EXECUTIVE RETIREMENT PROGRAM BENEFITS (A)
<TABLE>
<CAPTION>
YEARS OF ELIGIBLE CONTRIBUTORY CREDITED SERVICE
- --------------------------------------------------------------------------
HIGHEST FIVE-YEAR
AVERAGE ANNUAL TOTAL
DIRECT COMPENSATION 15 YEARS 25 YEARS 35 YEARS 45 YEARS
- -------------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
$ 400,000 $ 76,916 $139,166 $201,416 $ 263,666
500,000 96,396 171,396 246,396 321,396
1,000,000 208,896 358,896 508,896 658,896
1,200,000 253,896 433,896 613,896 793,896
1,500,000 321,396 546,396 771,396 996,396
1,800,000 388,896 658,896 928,896 1,198,896
</TABLE>
The annual total direct compensation for the most recent year considered in
the calculation of the sum of the averages of salary and of bonus income, which
is reported here as average annual total direct compensation, will be found in
the Summary Compensation Table in the column labeled 'Salary' and in the column
labeled 'Bonus.'
The regular or alternative form of the supplemental executive retirement
benefit is provided under a program which is non-qualified for tax purposes and
not pre-funded. Supplemental executive retirement benefits under the regular and
alternative formula can be reduced or eliminated for both retirees and active
employees by the Compensation Committee and the Board of Directors.
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
For a discussion of certain business relationships between Mr. Dauch and
the Company, see 'Certain Transactions--Transactions with Management.' The
Company has established a Compensation Committee of which no member of which is
an insider of the Company.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
As permitted by the Delaware General Corporation Law ('Delaware Law'), the
Company's Certificate of Incorporation, to be in effect upon consummation of the
Offerings will eliminate the personal liability of a director of the Company for
monetary damages for breach of fiduciary duty of care as a director, except for
(i) any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) acts or omissions not in
47
<PAGE>
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) unlawful payment of dividends or stock purchases or redemptions
pursuant to Section 174 of the Delaware Law and (iv) any transaction from which
the director derived an improper personal benefit. In addition, the Company's
Bylaws provide for indemnification, to the full extent specifically authorized
under the Delaware Law, of directors and officers of the Company and persons who
serve at the request of the Company as a director, officer, employee, agent or
trustee of another corporation, partnership, joint venture, trust or other
enterprise.
EMPLOYMENT AGREEMENT
The Company has a seven-year employment agreement with Mr. Dauch, which
expires on December 31, 2004, subject to periodic renewal, and provides for an
annual base salary of $750,000. Pursuant to the agreement, Mr. Dauch will be a
voting member of the Board of Directors for the term of his employment. Mr.
Dauch's employment agreement also provides, among other things, (i) for an
annual bonus payable on or before the March 15th following the year in which
such bonus was earned and (ii) participation in the Company Stock Option Plan.
Under the terms of his employment agreement, Mr. Dauch is bound by
confidentiality and non-competition covenants for a period of two years
following the expiration of the employment agreement. The Company may terminate
Mr. Dauch's employment agreement for Cause (as defined therein).
The Company has purchased a $5.0 million life insurance policy for the
benefit of Mr. Dauch, which the Company will maintain during employment and for
two years after termination other than for cause.
In connection with the commencement of his employment with the Company, Mr.
Dauch received an option to purchase 1,747 shares of AAM, Inc. at an exercise
price of $1.00 per share. In connection with the Recapitalization, the Company
agreed to provide Dauch with an option to purchase shares of Company
Common Stock (the 'Exchange Option') in exchange for the AAM, Inc. Option. The
terms of the Exchange Option are set forth in a nonqualified option agreement
dated as of October 30, 1997 between American Axle & Manufacturing of Michigan,
Inc. and Mr. Dauch. The Exchange Option expires 10 years after the date such
Exchange Option was granted, and is fully vested and exercisable.
48
<PAGE>
OWNERSHIP OF COMMON STOCK
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of June 30, 1998 by (i) each person known by
the Company to be the beneficial owner of 5% or more of the outstanding Common
Stock, (ii) each director of the Company, (iii) each of the named executive
officers of the Company and (iv) all of the Company's directors and executive
officers as a group. Unless otherwise indicated, the Company believes that the
beneficial owner has sole voting and investment power over such shares. The
table does not reflect the potential sale of additional shares if the
Underwriters' over-allotment options are exercised. The Company, Blackstone,
Jupiter and Messrs. Dauch and Harris are parties to a Stockholders' Agreement
that provides for certain tag-along and drag-along rights, the operation of
which could result in a change of control in the Company. See 'Certain
Transactions--Stockholders' Agreement and Recapitalization.'
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT OF
CURRENTLY OWNED CLASS(1)
--------------- ----------------------
NAME AND ADDRESS OF BEFORE AFTER
BENEFICIAL OWNER OFFERINGS OFFERINGS
- -------------------------------------------------------------------------- --------- ---------
<S> <C> <C> <C>
Blackstone(2)............................................................. 64.3%
Richard E. Dauch(3)(4).................................................... 25.3%
Jupiter Capital Corporation(5)............................................ 5.1%
Park Corporation(5)....................................................... 5.1%
Raymond P. Park(5)........................................................ 5.1%
Dan K. Park(5)............................................................ 5.1%
Patrick M. Park(5)........................................................ 5.1%
Kelly C. Park(5).......................................................... 5.1%
Piper Park-Strasshofer(5)................................................. 5.1%
Glenn H. Hutchins(6)...................................................... 64.3%
Bret D. Pearlman(6)....................................................... 64.3%
David A. Stockman(6)...................................................... 64.3%
B. G. Mathis(4)........................................................... 1.3%
Michael D. Alexander...................................................... *
Marion A. Cumo, Sr.(4).................................................... *
George J. Dellas(4)....................................................... *
All directors and executive officers of the Company as a group
(16) persons(7)......................................................... 93.0%
</TABLE>
- ------------------
* Represents holdings that do not exceed one percent.
(1) Assumes the exercise of options to purchase shares of Common Stock
that are currently exercisable at exercise prices below an assumed initial
public offering price of $ per share (the mid-point of the range set
forth on the cover of this Prospectus). If such options are not assumed to
be exercised, Blackstone would beneficially own 81.7% of the Common Stock
before the Offerings and % of the Common Stock after the Offerings.
(2) shares, or 64.3% (before the Offerings), of the outstanding
shares are held collectively by Blackstone Capital Partners II Merchant
Banking Fund L.P., Blackstone Offshore Capital Partners II L.P. and
Blackstone Family Investment Partnership II L.P. Blackstone Management
Associates II L.L.C. ('BMA') is the general partner of each of such
entities. Messrs. Peter G. Peterson and Stephen A. Schwarzman are the
founding members of BMA and as such may be deemed to share beneficial
ownership of the shares owned by Blackstone. Blackstone's business address
is 345 Park Avenue, 31st Floor, New York, NY 10154.
(3) Mr. Dauch's business address is 1840 Holbrook Avenue, Detroit, Michigan
48212. Includes shares held by the Dauch Annuity Trust 2001, the Dauch
Annuity Trust 2004 and the Dauch Annuity Trust 2007 (collectively, the
'Trusts'). Mr. Dauch is Trustee of the Trusts and has the power to sell,
transfer or otherwise dispose of shares owned by the Trusts. Mr. Dauch
disclaims beneficial ownership of such shares.
(Footnotes continued on next page)
49
<PAGE>
(Footnotes continued from previous page)
(4) Includes shares issuable pursuant to options that are currently exercisable
as follows: Mr. Dauch ; Mr. Mathis ; Mr. Cumo
; and Mr. Dellas .
(5) Such person's business address is 6200 Riverside Drive, Cleveland, Ohio
44135. Jupiter is a wholly-owned subsidiary of Park Corporation, a company
that is privately owned by Raymond P. Park, Dan K. Park, Patrick M. Park,
Kelly C. Park and Piper Park-Strasshofer, with each holding equal shares of
Park Corporation.
(6) Each such person's business address is 345 Park Avenue, 31st Floor, New
York, New York 10154. Messrs. Hutchins and Stockman are members of BMA,
which has investment and voting control over the shares held or controlled
by Blackstone. Beneficial ownership of shares by such three individuals
include the shares beneficially owned by Blackstone. Each of such persons
disclaims beneficial ownership of such shares.
(7) Includes options to purchase shares of Common Stock, and shares of
Common Stock beneficially owned by Blackstone as described in note (2)
above.
CERTAIN TRANSACTIONS
TRANSACTIONS WITH BLACKSTONE AFFILIATES
In connection with the Recapitalization, the Company and Blackstone
Management Partners L.P. ('Blackstone Management'), an affiliate of Blackstone,
entered into a monitoring agreement dated as of October 29, 1997 (the
'Monitoring Agreement'), pursuant to which Blackstone Management will provide
certain advisory and consulting services to the Company in connection with the
ongoing strategic and operational affairs of the Company. The term of the
Monitoring Agreement expires when Blackstone ceases to own at least one-half of
the Common Stock held by it at the closing of the Recapitalization. Under the
Monitoring Agreement, the Company paid Blackstone $838,356 during the year ended
December 31, 1997. On each March 31 and September 30 thereafter, the Company
will pay Blackstone Management $1.0 million. In addition, on each March 31,
commencing in 1999, the Company will pay Blackstone an amount equal to 1.0% of
EBITDA (as defined in the Monitoring Agreement) for the most recently completed
fiscal year less $2.0 million (if such amount is positive). In addition, in 1997
the Company paid Blackstone Management a $9.3 million transaction fee for
services provided in connection with the Recapitalization. Glenn H. Hutchins and
David A. Stockman, each of whom serves as a director of the Company, are senior
managing directors of The Blackstone Group L.P., an affiliate of Blackstone
Management. Bret D. Pearlman, who also serves as a director of the Company, is a
managing director of The Blackstone Group L.P.
STOCKHOLDERS' AGREEMENT AND RECAPITALIZATION
In connection with the Recapitalization, the Company, Blackstone, Jupiter
and Messrs. Dauch and Harris entered into the Stockholders' Agreement which
provides for, among other things, the matters described below:
Tag-Along Rights. So long as Blackstone owns not less that one-third of
the Common Stock held by it at the closing of the Recapitalization, the
Stockholders' Agreement grants each of Jupiter and Messrs. Dauch and Harris the
right, subject to certain exceptions, in connection with a proposed transfer of
Common Stock by Blackstone, to require the proposed transferee to purchase a
certain percentage of the Common Stock owned by them at the same price and upon
the same terms and conditions.
Drag-Along Rights. So long as Blackstone owns not less than one-third of
the Common Stock held by it at the closing of the Recapitalization, the
Stockholders' Agreement grants Blackstone the right, in connection with an offer
by a third party to purchase all of the Common Stock held by Blackstone, Jupiter
and Messrs. Dauch and Harris, to require Jupiter and Messrs. Dauch and Harris to
transfer all of the Common Stock owned by them to such third party on the terms
of the offer so accepted by Blackstone, subject to certain restrictions.
50
<PAGE>
Registration Rights. The Stockholders' Agreement grants 'piggy-back'
registration rights to Blackstone, Jupiter and Messrs. Dauch and Harris, subject
to certain limitations, each time the Company files a registration statement in
connection with the sale of Common Stock by the Company. The Stockholders'
Agreement also grants 'demand' registration rights to Blackstone, Jupiter and
Messrs. Dauch and Harris, subject to certain limitations. See 'Shares Eligible
for Future Sale.'
Participation Rights. The Stockholders' Agreement grants to Jupiter and
Messrs. Dauch and Harris the right, upon any issuance by the Company of
additional Common Stock to Blackstone (other than pursuant to a public offering
or a pro rata issuance to all holders of Common Stock), to subscribe for
additional Common Stock at the same price and upon the same conditions so that,
after giving effect to the issuance and the exercise of such rights, the Common
Stock owned by each represents the same percentage of the total outstanding
Common Stock on a fully diluted basis as was owned by each immediately prior
thereto.
Approval of Affiliate Transactions. The Stockholders' Agreement generally
provides that, subject to certain conditions, the Company will not, and will
cause its subsidiaries not to, enter into any transaction with an affiliate of
the Company (other than the Company and its subsidiaries) (an 'Affiliate') for
the benefit of such an Affiliate that would require consent of the banks under
the Credit Facilities among the Company and the lenders thereto unless such
transaction (i) is approved by the Board of Directors of the Company, (ii) is
contemplated by the Recapitalization Agreement or (iii) is the payment of
certain management and monitoring fees or customary investment banking fees to
Blackstone. Such transactions with an Affiliate requiring the consent of the
banks under the Credit Facilities generally include (i) the sale or transfer to,
or purchase or acquisition of assets from or any other transaction with, an
Affiliate, subject to specified exceptions and (ii) the payment of monitoring or
management fees to Blackstone or its affiliates in an amount exceeding in any
fiscal year the greater of (i) $2,000,000 or (ii) an amount equal to 1% of
EBITDA (as defined under the Credit Facilities) for the prior fiscal year.
Termination. The Stockholders' Agreement will terminate on the earliest
date on which Blackstone and its affiliates do not collectively own one-fifth or
more of the Common Stock on a fully diluted basis. See 'Ownership of Common
Stock.'
In connection with the Recapitalization, (i) the Company repurchased shares
of Common Stock held by Jupiter and Morton E. Harris for an aggregate purchase
price of $110.0 million and $10.0 million, respectively, (ii) the Company made a
$74.2 million payment to Jupiter related to certain tax payments, and (iii) AAM,
Inc. paid to James W. McLernon, the former chairman of the board of directors of
AAM, Inc., a bonus of approximately $7.2 million pursuant to a letter agreement
dated July 29, 1997.
TRANSACTIONS WITH PARK CORPORATION
Immediately after the closing of the Recapitalization, Jupiter, a wholly
owned subsidiary of Park Corporation, owned 5.1% of the Common Stock. Prior to
the Recapitalization, Park Corporation provided AAM, Inc. cash management
services whereby available cash balances of AAM, Inc. were invested on its
behalf. Park Corporation received $12,536,288 from AAM, Inc. in consideration
for services it provided to AAM, Inc. from March 1994 to September 1997. In
addition, prior to the Recapitalization, AAM, Inc. purchased certain
manufacturing equipment from Motch Corporation, an affiliate of Park
Corporation. During 1997, payments to Motch Corporation from AAM, Inc. for such
equipment totalled approximately $9.6 million.
TRANSACTIONS WITH MANAGEMENT
In connection with the Recapitalization, AAM, Inc. made a payment of $11.0
million to Mr. Dauch. In connection with this payment, Mr. Dauch agreed to repay
to AAM, Inc. any refund, overpayment or other redistribution of Election Taxes
(as defined in the Recapitalization Agreement) to be received by him from
Jupiter in an amount up to $11.0 million. At Mr. Dauch's direction, Jupiter paid
AAM, Inc. approximately $7.2 million in May 1998 in full satisfaction of such
agreement.
The Company intends to lend approximately $15.0 million in the third
quarter of 1998 to Mr. Dauch to enable him to pay taxes related to the
recognition of income associated with certain stock options.
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Two sons of Mr. Dauch and a son of Mr. Mathis are employees of the Company.
David C. Dauch serves as Director, GM Full Size Truck Programs, Richard F. Dauch
serves as Director, Strategic and Capacity Planning, and Robert Mathis serves as
Manager, Human Resources Operations.
DESCRIPTION OF CAPITAL STOCK
The following summary describes elements of the Company's Certificate of
Incorporation and Bylaws to be in effect prior to consummation of the Offerings.
The Company's authorized capital stock consists of (i) shares of
common stock, par value $.01 per share, of which shares are issued and
outstanding, and (ii) shares of preferred stock, par value $.01 per
share ('Preferred Stock') of which no shares are issued and outstanding.
Immediately following completion of the Offerings, there are expected to be
shares of Common Stock ( shares of Common Stock if the
Underwriters' over-allotment options are exercised in full) and no shares of
preferred stock outstanding. The following description of the Company's capital
stock and related matters is qualified in its entirety by reference to the
Certificate of Incorporation and the Bylaws, copies of which are being filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. The holders of Common Stock do not have
cumulative voting rights in the election of directors. Holders of Common Stock
are entitled to receive dividends if, as and when dividends are declared from
time to time by the Company's Board of Directors out of funds legally available
therefor, after payment of dividends required to be paid on outstanding
preferred stock (as described below), if any. In the event of liquidation,
dissolution or winding up of the Company, the holders of Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and accrued but unpaid dividends and liquidation preferences on any outstanding
preferred stock of the Company. The Common Stock has no preemptive or conversion
rights and is not subject to further calls or assessment by the Company.
However, pursuant to the Stockholders' Agreement, Jupiter and Messrs. Dauch and
Harris have the right, upon any issuance by the Company of additional Common
Stock to Blackstone (other than pursuant to a public offering or a pro rata
issuance to all holders of Common Stock), to subscribe for additional Common
Stock. See 'Certain Transactions--Stockholders' Agreement and Recapitalization.'
There are no redemption or sinking fund provisions applicable to the Common
Stock. The Common Stock being sold by the Company in the Offerings, when sold to
the Underwriters in the manner described in this Prospectus will be, and all
currently outstanding Common Stock of the Company is, duly authorized, validly
issued, fully paid and non-assessable.
PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors to
establish one or more series of Preferred Stock and to determine, with respect
to any series of Preferred Stock, the terms and rights of such series, including
(i) the designation of the series, (ii) the number of shares of the series,
which number the Board may thereafter (except where otherwise provided in the
Preferred Stock designation) increase or decrease (but not below the number of
shares thereof then outstanding), (iii) whether dividends, if any, will be
cumulative or non-cumulative and the dividend rate of the series, (iv) the dates
at which dividends, if any, will be payable, (v) the redemption rights and price
or prices, if any, for shares of the series, (vi) the terms and amounts of any
sinking fund provided for the purchase or redemption of shares of the series,
(vii) the amounts payable on shares of the series in the event of any voluntary
or involuntary liquidation, dissolution or winding-up of the affairs of the
Company, (viii) whether the shares of the series will be convertible into shares
of any other class or series, or any other security, of the Company or any other
corporation, and, if so, the specification of such other class or series or such
other security, the conversion price or prices or rate or rates, any adjustments
thereof, the date or dates as of which such shares shall be convertible and all
other terms and conditions upon which such conversion may be made, (ix)
restrictions on the issuance of shares of the same series or of any other class
or series, and (x) the voting rights, if any, of the holders of such series. The
authorized shares of Preferred Stock, as well as shares of Common Stock, will be
available for issuance without further action by the Company's stockholders,
unless such
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action is required by applicable law or the rules of any stock exchange or
automated quotation system on which the Company's securities may be listed or
traded.
Although the Board has no intention at the present time of doing so, it
could issue a series of Preferred Stock that could, depending on the terms of
such series, impede the completion of a merger, tender offer or other takeover
attempt. The Board will make any determination to issue such shares based on its
judgment as to the best interests of the Company and its stockholders. The
Board, in so acting, could issue Preferred Stock having terms that could
discourage an acquisition attempt or other transaction that some, or a majority,
of the Company's stockholders might believe to be in their best interests or in
which stockholders might receive a premium for their stock over the then-current
market price of such stock.
THE DELAWARE GENERAL CORPORATION LAW
The Company is a Delaware corporation subject to Section 203 of the
Delaware General Corporation Law (the 'DGCL'). Section 203 provides that,
subject to certain exceptions specified therein, a Delaware corporation shall
not engage in certain 'business combinations' with any 'interested stockholder'
for a three-year period following the time that such stockholder became an
interested stockholder unless (i) the corporation has elected in its certificate
of incorporation not to be governed by Section 203 (the Company has not made
such an election), (ii) prior to such time, the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (iii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding certain shares), or (iv) at or subsequent to such time, the
business combination is approved by the board of directors of the corporation
and by the affirmative vote of at least 66 2/3% of the outstanding voting stock
which is not owned by the interested stockholder. The three-year prohibition
also does not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors. The term 'business combination' is defined generally to include
mergers or consolidations between a Delaware corporation and an 'interested
stockholder,' transactions with an 'interested stockholder' involving the assets
or stock of the corporation or its majority-owned subsidiaries and transactions
which increase an interested stockholder's percentage ownership of stock. Except
as specified in Section 203 of the DGCL, an interested stockholder is defined to
include (x) any person that is the owner of 15% or more of the outstanding
voting stock of the corporation, or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation, at any time within three years immediately prior to the
relevant date and (y) the affiliates and associates of any such person. Under
certain circumstances, Section 203 of the DGCL makes it more difficult for an
'interested stockholder' to effect various business combinations with a
corporation for a three-year period, although the stockholders may elect to
exclude a corporation from the restrictions imposed thereunder. The Certificate
of Incorporation does not exclude the Company from the restrictions imposed
under Section 203 of the DGCL.
CERTIFICATE OF INCORPORATION; BYLAWS
The Certificate of Incorporation and the Bylaws contain certain provisions
that could make more difficult the acquisition of the Company by means of a
tender offer, a proxy contest or otherwise.
Classified Board. The Certificate of Incorporation provides that the
Company's Board of Directors will be divided into three classes of directors,
with the classes to be as nearly equal in number as possible. As a result,
approximately one-third of the Board of Directors will be elected each year. The
classification of directors will have the effect of making it more difficult for
stockholders to change the composition of the Company's Board. The Certificate
of Incorporation provides that, subject to any rights of holders of Preferred
Stock to elect additional directors under specified circumstances, the number of
directors will be fixed in the manner provided in the Bylaws. The Bylaws provide
that, subject to any rights of holders of Preferred Stock to elect directors
under specified circumstances, the number of directors will be fixed from time
to time exclusively pursuant to a resolution adopted by directors constituting a
majority of the total number of directors that the Company would have if there
were no vacancies on the Board, but must consist of not more than nor
fewer than
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directors. In addition, the Certificate of Incorporation provides that, subject
to any rights of holders of Preferred Stock, and unless the Board otherwise
determines, any vacancies will be filled only by the affirmative vote of a
majority of the remaining directors, though less than a quorum.
Removal of Directors. Under the DGCL, unless otherwise provided in the
Certificate of Incorporation, directors serving on a classified board may be
removed by the stockholders only for cause. In addition, the Certificate of
Incorporation and the Bylaws provide that directors may be removed only for
cause and only upon the affirmative vote of holders of at least 75% of the
voting power of all the then outstanding shares of stock entitled to vote
generally in the election of directors ('Voting Stock'), voting together as a
single class.
Stockholder Action. The Certificate of Incorporation and the Bylaws
provide that, subject to the rights of any holders of Preferred Stock to elect
additional directors under specified circumstances, stockholder action can be
taken only at an annual or special meeting of stockholders and may not be taken
by written consent in lieu of a meeting. The Bylaws provide that, subject to the
rights of holders of any series of Preferred Stock to elect additional directors
under specified circumstances, special meetings of stockholders can be called
only by the Board pursuant to a resolution adopted by a majority of the total
number of directors. Stockholders are not permitted to call a special meeting or
to require that the Board call a special meeting of stockholders. Moreover, the
business permitted to be conducted at any special meeting of stockholders is
limited to the business brought before the meeting pursuant to the notice of
meeting given by the Company.
Advance Notice Procedures. The Bylaws establish an advance notice
procedure for stockholders to make nominations of candidates for election as
directors, or bring other business before an annual or special meeting of
stockholders of the Company (the 'Stockholders Notice Procedure'). The
Stockholders Notice Procedure provides that only persons who are nominated by,
or at the direction of, the Board, or by a stockholder who has given timely
written notice to the Secretary of the Company prior to the meeting at which
directors are to be elected, will be eligible for election as directors of the
Company. The Stockholders Notice Procedure also provides that at an annual
meeting only such business may be conducted as has been brought before the
meeting by, or at the direction of, the Chairman of the Board or by a
stockholder who has given timely written notice to the Secretary of the Company
of such stockholder's intention to bring such business before such meeting.
Under the Stockholders Notice Procedure, for notice of stockholder nominations
to be made at an annual meeting to be timely, such notice must be received by
the Company not less than 60 days nor more than 90 days prior to the first
anniversary of the previous year's annual meeting (or, if the date of the annual
meeting is advanced by more than 30 days or delayed by more than 60 days from
such anniversary date, not earlier than the 90th day prior to such meeting and
not later than the later of (x) the 60th day prior to such meeting and (y) the
10th day after public announcement of the date of such meeting is first made).
Notwithstanding the foregoing, in the event that the number of directors to be
elected is increased and there is no public announcement naming all of the
nominees for director or specifying the size of the increased Board of Directors
made by the Company at least 70 days prior to the first anniversary of the
preceding year's annual meeting, a stockholder's notice will be timely, but only
with respect to nominees for any new positions created by such increase, if it
is received by the Company not later than the 10th day after such public
announcement is first made by the Company. Under the Stockholders Notice
Procedure, for notice of a stockholder nomination to be made at a special
meeting at which directors are to be elected to be timely, such notice must be
received by the Company not earlier than the 90th day before such meeting and
not later than the later of (x) the 60th day prior to such meeting and (y) the
10th day after the public announcement of the date of such meeting is first
made. In addition, under the Stockholders Notice Procedure, a stockholder's
notice to the Company proposing to nominate a person for election as a director
or relating to the conduct of business other than the nomination of directors
must contain certain specified information. If the Chairman of the Board or
other officer presiding at a meeting determines that a person was not nominated,
or other business was not brought before the meeting, in accordance with the
Stockholders Notice Procedure, such person will not be eligible for election as
a director, or such business will not be conducted at such meeting, as the case
may be.
Liability of Directors; Indemnification. The Certificate of Incorporation
provides that a director will not be personally liable for monetary damages to
the Company or its stockholders for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to the
Company or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) for
paying a dividend or approving a stock repurchase or redemption in violation of
Section 174 of the
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DGCL, or (iv) for any transaction from which the director derived an improper
personal benefit. The Certificate of Incorporation also provides that each
current or former director, officer, employee or agent of the Company, or each
such person who is or was serving or who had agreed to serve at the request of
the Company as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise (including the heirs,
executors, administrators or estate of such person), will be indemnified by the
Company to the full extent permitted by the DGCL, as the same exists or may in
the future be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Company to provide broader
indemnification rights than said law permitted the Company to provide prior to
such amendment). The Certificate of Incorporation also specifically authorizes
the Company to enter into agreements with any person providing for
indemnification greater or different than that provided by the Certificate of
Incorporation.
Amendment. The Certificate of Incorporation provides that the affirmative
vote of the holders of at least 75% of the voting power of the outstanding
shares of Voting Stock, voting together as a single class, is required to amend
provisions of the Certificate of Incorporation relating to the prohibition of
stockholder action without a meeting; the number, election and term of the
Company's directors; and the removal of directors. The Certificate of
Incorporation further provides that the Bylaws may be amended by the Board or by
the affirmative vote of the holders of at least 75% of the outstanding shares of
Voting Stock, voting together as a single class.
The description set forth above is intended as a summary only and is
qualified in its entirety by reference to the forms of the Certificate of
Incorporation and the Bylaws, copies of which are being filed as exhibits to the
Registration Statement of which this Prospectus is a part. See 'Available
Information.'
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the Common Stock is First Chicago
Trust Company of New York.
LISTING
The Company has applied to list the Common Stock on the New York Stock
Exchange under the proposed symbol 'AXL.'
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR SECURED CREDIT FACILITIES
In connection with the Recapitalization, The Chase Manhattan Bank ('Chase')
and a group of other lenders provided the Company with Credit Facilities, in an
aggregate principal amount not to exceed $750 million of which (i) $399 million
was drawn at the closing of the Recapitalization and (ii) $125 million is
available under the Tranche A Term Loan Facility (as defined below) to finance
Capital Expenditures as defined in the Credit Facilities and refinance the
Revolving Credit Facility and $195 million is available under the Revolving
Credit Facility (as defined below) for general corporate purposes, each subject
to customary borrowing conditions.
The Credit Facilities consist of (i) a Senior Secured Term Loan Facility
(the 'Tranche A Term Loan Facility') providing for delayed draw term loans in an
aggregate principal amount of $125 million, (ii) a Senior Secured Term Loan
Facility (the 'Tranche B Term Loan Facility' and, together with the Tranche A
Term Loan Facility, the 'Term Loan Facility')) providing for term loans in an
aggregate principal amount of $375 million and (iii) a Senior Secured Revolving
Credit Facility (the 'Revolving Credit Facility') providing for revolving loans
and the issuance of letters of credit in an aggregate principal and stated
amount not to exceed $250 million (of which not more than $30 million may be
represented by letters of credit).
Except as set forth below, the full amount of the Tranche B Term Loan
Facility was drawn in a single drawing at the closing of the Recapitalization
and amounts repaid and prepaid under any Term Loan Facility may not be
reborrowed. Loans under the Tranche A Term Loan Facility are available at any
time prior to October 1999. Loans and letters of credit under the Revolving
Credit Facility are available at any time prior to October 30, 2004. In
connection with the Revolving Credit Facility, the Company may make short-term
borrowings of up to $20 million of swing-line loans. Any such swing-line loans
will reduce the amount available under the Revolving Credit Facility on a
dollar-for-dollar basis.
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Loans made under the Tranche A Term Loan Facility will amortize
semi-annually and mature on October 30, 2004. The Tranche B Term Loan Facility
amortizes semi-annually and matures on April 30, 2006. The Company is required
to make mandatory prepayments of term loans, and commitments will be mandatorily
reduced, in amounts, at specified times and subject to certain exceptions, (a)
in respect of 75% of consolidated excess cash flow of the Company and its
subsidiaries (after giving effect to debt service on the Credit Facilities), (b)
in respect of 100% of the net proceeds of (i) certain dispositions by the
Company or any of its subsidiaries of assets or the stock of subsidiaries (other
than asset sales effected pursuant to certain lease financings and the
Receivables Facility) or (ii) the incurrence of certain indebtedness by the
Company or its subsidiaries and (c) in respect of 50% of the net proceeds of
certain sales of the Company's equity securities.
Amounts outstanding under the Credit Facilities are unconditionally and
irrevocably guaranteed by the Company and certain of its subsidiaries. In
addition, the Credit Facilities are secured by first priority security interests
in substantially all of the tangible and intangible assets of the Company and
its subsidiaries (excluding receivables related to the Receivables Facility),
including all the capital stock of, or other equity interests in, the Company's
domestic subsidiaries and its existing or subsequently acquired or organized
direct or indirect domestic subsidiaries and 65% of the capital stock of, or
other equity interests in, each foreign subsidiary of the Company.
At the Company's option, the interests rates applicable to the Credit
Facilities are either based on Chase's alternate base rate plus a margin ranging
from zero to 1.50% or the eurodollar rate plus a margin ranging from 0.75% to
2.25%. The alternate base rate is the higher of Chase's Prime Rate and the
federal funds effective rate plus 0.50%.
The Company pays a per annum fee equal to the applicable margin with
respect to the eurodollar rate then in effect under the Revolving Credit
Facility multiplied by the aggregate face amount of outstanding letters of
credit under the Revolving Credit Facility and a per annum fee ranging from
0.25% to 0.50% multiplied by the undrawn portion of the commitments under the
Tranche A Term Loan Facility and the Revolving Credit Facility.
The Credit Facilities contain various operating covenants which, among
other things, impose certain limitations on the Company's ability to redeem or
repurchase capital stock, incur liens, incur indebtedness, or merge, make
acquisitions or sell assets. The Credit Facilities also restrict the payment of
dividends on, or other distributions with respect to, the capital stock of the
Company, other than (i) dividends or distributions payable solely in Common
Stock and (ii) subject to certain dollar limitations, payable to employee
benefit plans or to officers and employees in connection with stock option and
similar employee benefit plans. In addition, the Credit Facilities require the
Company to comply with specified financial ratios and tests, including covenants
relating to interest coverage, leverage, retained earnings and capital
expenditures.
The Company has initiated discussions with Chase to amend its Credit
Facilities which, if completed, would result in lower interest rates and
otherwise more favorable terms and conditions. However, there can be no
assurance that these discussions will result in lower interest rates or other
more favorable terms or that such amendment will be completed.
RECEIVABLES FACILITY
The following is a summary of the material terms of the Receivables
Facility and is qualified in its entirety by reference to the Receivables Sale
Agreement and the Pooling Agreement (each as defined below).
The Receivables Facility
The Company established AAM Receivables as a wholly-owned, special purpose,
bankruptcy-remote subsidiary that purchases all receivables (the 'Receivables')
generated by AAM, Inc. (the 'Seller') pursuant to a receivables sale agreement
(the 'Receivables Sale Agreement'). The Receivables Sale Agreement contains
customary terms for similar transactions, including representations and
warranties of the Seller as to the Receivables and certain corporate matters,
affirmative and negative covenants and purchase termination events, and is
limited recourse to the Seller for breach of representations, warranties and
covenants.
AAM Receivables also entered into a pooling agreement (the 'Pooling
Agreement') with Chase as trustee (the 'Trustee') pursuant to which AAM
Receivables transferred to a trust (the 'Trust') all the Receivables, and
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Chase, as a purchaser (in such capacity, the 'Purchaser') provided financing to
AAM Receivables (which in turn used such financing to pay a portion of the
purchase price of the Receivables purchased from the Seller) through the
purchase of an undivided percentage ownership interest in the Trust
('Transferred Interests'). The Receivables Facility is supported by a commitment
of the Purchaser, subject to the terms and conditions of the Pooling Agreement,
to purchase Transferred Interests through the Trust on a revolving basis in an
amount not to exceed $125 million. The availability of the Receivables Facility
is subject to the Trust holding Receivables meeting certain eligibility
requirements equal to the amount of the outstanding Transferred Interests and
required reserves. At December 31, 1997, approximately $99 million was available
under the Receivables Facility, of which $75 million was utilized. The sale of
Receivables to AAM Receivables, the transfer of Receivables to the Trust and the
sale of Transferred Interests are without recourse to AAM, Inc., except for
claims arising from a breach of representations and warranties or covenants.
The Trust, on behalf of the Purchaser, has a first priority perfected
security interest in the Receivables, the rights of AAM Receivables under the
Receivables Sales Agreement and cash collections and other proceeds received in
respect of the Receivables.
The Receivables are not available to the Company's general creditors.
However, the primary customer of the Seller is also a vendor to the Seller and,
in certain circumstances, may be able to offset amounts payable by the Seller
against the Seller's trade receivables from the vendor. Accordingly, the
Receivables Facility has been accounted for as a secured borrowing and is
consolidated.
Pursuant to a servicing agreement entered into by AAM, Inc., AAM
Receivables and the Trust, AAM, Inc. agreed to service the Receivables for the
Trust; provided, that, upon the occurrence of certain events, the servicing
agreement may be terminated by the Trustee.
Interest
The Receivables Facility bears interest determined, at the Company's
option, at rates based on Chase's alternate base rate or LIBOR, plus, in each
case, an applicable margin which is subject to specified increases on or about
July 31, 1998.
Fees
AAM Receivables pays certain fees with respect to the Receivables Facility,
including a commitment fee (the 'Commitment Fee') to the Purchaser in an amount
equal to the excess of the average aggregate purchase commitment for any monthly
period over the average aggregate Transferred Interests for such period and a
monthly program fee. The Commitment Fee is subject to specified increases on or
about July 31, 1998.
Facility Reductions
The Receivables Facility is supported by a commitment of the Purchaser,
subject to the terms and conditions of the Pooling Agreement, providing for the
purchase of Receivables through October 2003 to purchase Transferred Interests
on a revolving basis. After such time, all collections in respect of Receivables
purchased by AAM Receivables from the Seller will be used to reduce the
Transferred Interests of the Purchaser in the Receivables. Additionally, at any
time, AAM Receivables at its option may reduce the purchase commitment upon
notice to the Purchaser or terminate the purchases of Transferred Interests by
the Purchaser.
Early Termination Events
The Pooling Agreement contains certain early amortization events which
would cause the termination of, or permit the Purchaser to terminate, the
revolving period and effectively reduce the amount of financing available under
the Receivables Facility to zero. Early amortization events include nonpayment
of amounts when due, violation of covenants, inaccuracy of representations and
warranties in any material respect, failure to comply with specified Receivables
performance tests, purchase termination events under the Receivables Sale
Agreement, bankruptcy, material judgments, imposition of PBGC liens or material
tax liens, and actual or asserted invalidity of the Purchaser's ownership
interest in the Receivables. Purchase termination events under the Receivables
Sales Agreement relating to the Seller include nonpayment of amounts when due,
violation of
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covenants, inaccuracy of representations and warranties in any material respect,
bankruptcy, ERISA events, imposition of PBGC liens or material environmental or
tax liens, and certain cross-defaults to the Credit Facilities.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the consummation of the Offerings, the Company will have outstanding
shares of Common Stock ( shares if the Underwriters' over-allotment
options are exercised in full). In addition, the Company will have reserved an
additional shares of Common Stock for issuance pursuant to the Company's
option and incentive plans. Of such outstanding shares, the shares sold in
connection with the Offerings will be freely tradeable in the United States
without restriction under the Securities Act, except that shares purchased by an
'affiliate' of the Company, within the meaning of the rules and regulations
adopted under the Securities Act, may be subject to resale restrictions. The
remaining outstanding shares and any of the shares issued pursuant to the
Company's option and incentive plans are 'restricted securities,' as that term
is defined under such rules and regulations, and may not be sold unless they are
registered under the Securities Act or they are sold in accordance with Rule 144
under the Securities Act or some other exemption from such registration
requirement. In addition, certain of those remaining outstanding shares are
subject to restrictions on transfer under various agreements. As those
restrictions under the Securities Act and those agreements lapse, such shares
may be sold to the public pursuant to Rule 144. The Company intends to register
under the Securities Act the shares issued or issuable under the Company's
option and incentive plans. In addition, pursuant to, and in accordance with the
terms and conditions of, the Stockholders' Agreement, Blackstone, Jupiter and
Messrs. Dauch and Harris can require the Company to effect a registration of
their shares of Common Stock. Generally, Blackstone has the right to request
five such demand registrations, and (i) Mr. Dauch and his affiliates and (ii)
Jupiter, Mr. Harris and their affiliates, can request one demand registration
each, so long as the requesting stockholder(s) own(s) at least 40% of the
Company's Common Stock held by it at the time of the closing of the
Recapitalization, and all of such parties have certain 'piggyback' registration
rights. See 'Management' and 'Certain Transactions--Stockholders' Agreement and
Recapitalization.'
In general, under Rule 144, beginning 90 days after the date of this
Prospectus, subject to certain conditions with respect to the manner of sale,
the availability of current public information concerning the Company and other
matters, each of the existing stockholders who has beneficially owned shares of
Common Stock for at least one year will be entitled to sell within any three
month period that number of such shares which does not exceed the greater of 1%
of the total number of the then outstanding shares of Common Stock or the
average weekly trading volume of shares of Common Stock during the four calendar
weeks preceding the date on which notice of the proposed sale is sent to the
Commission and the New York Stock Exchange. Moreover, each of the existing
stockholders who is not deemed to be an affiliate of the Company at the time of
the proposed sale, who is not deemed to be such an affiliate during the three
months preceding the time of the proposed sale and who has beneficially owned
his shares of Common Stock for at least two years will be entitled to sell such
shares under Rule 144 without regard to such volume limitations or notice
requirements.
The Company and certain of its executive officers and directors and
substantially all of its existing stockholders have agreed that, for a period of
180 days after the date of this Prospectus, they will not dispose of any shares
of Common Stock or securities convertible or exchangeable into or exercisable
for any shares of Common Stock without the prior written consent of Merrill
Lynch, Pierce, Fenner & Smith Incorporated, subject to certain limited
exceptions.
Prior to the Offerings, there has been no public market for the Common
Stock, and no assurance can be given that such a market will develop or, if it
develops, will be sustained after the Offerings or that the purchasers of the
Common Stock will be able to resell such Common Stock at a price higher than or
equal to the initial public offering price or otherwise. If such a market
develops, no prediction can be made as to the effect, if any, that future sales
of shares of Common Stock, or the availability of shares of Common Stock for
future sale, to the public will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock in
the public market, whether such shares are presently outstanding or subsequently
issued, or the perception that such sales could occur, could adversely affect
prevailing market prices for the Common Stock and could impair the Company's
ability to raise capital in the future through an offering of its
58
<PAGE>
equity securities or to consummate acquisitions using its equity securities as
consideration. The Company cannot predict when or how many of such additional
shares of Common Stock may be offered for sale or sold to the public in the
future.
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain United States federal
income and estate tax consequences of the purchase, ownership and disposition of
Common Stock by a Non-U.S. Holder. As used herein the term 'Non-U.S. Holder'
means any person or entity that is not a United States Holder ('U.S. Holder'). A
U.S. Holder is any beneficial owner of Common Stock that is (i) an individual
who is a citizen of the United States or is treated as a resident of the United
States for United States federal income or estate tax purposes as applicable,
(ii) an entity treated as a corporation or partnership for United States federal
income tax purposes that is created or organized in or under the laws of the
United States or any political subdivision thereof, (iii) an estate the income
of which is subject to United States federal income taxation regardless of its
source and (iv) a trust which is subject to the supervision of a court within
the United States and the control of a United Stated person as described in
section 7701(a)(30) of the Internal Revenue Code of 1986, as amended (the
'Code'). This discussion does not address all aspects of United States federal
income and estate taxes and does not deal with foreign, state and local
consequences that may be relevant to such Non-U.S. Holders in light of their
personal circumstances. Furthermore, this discussion is based on provisions of
the Code, existing and proposed regulations promulgated thereunder and
administrative and judicial interpretations thereof, as of the date hereof, all
of which are subject to change. EACH PROSPECTIVE PURCHASER OF COMMON STOCK IS
ADVISED TO CONSULT A TAX ADVISOR WITH RESPECT TO CURRENT AND POSSIBLE FUTURE TAX
CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF COMMON STOCK AS WELL AS ANY
TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY U.S. STATE, MUNICIPALITY
OR OTHER TAXING JURISDICTION.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of Common Stock generally will be
subject to withholding of United States federal income tax at a 30% rate or such
lower rate as may be specified by an applicable income tax treaty. However,
dividends that are effectively connected with the conduct of a trade or business
by the Non-U.S. Holder within the United States and, where a tax treaty applies,
are attributable to a United States permanent establishment of the Non-U.S.
Holder, are not subject to the withholding tax, but instead are subject to
United States federal income tax on a net income basis at applicable graduated
individual or corporate rates. Certain certification and disclosure requirements
must be complied with in order to be exempt from withholding under such
effectively connected income exemption. Any such effectively connected dividends
received by a foreign corporation may, under certain circumstances, be subject
to an additional 'branch profits tax' at a 30% rate or such lower rate as may be
specified by an applicable income tax treaty.
Under current law, dividends paid to an address outside the United States
are presumed to be paid to a resident of such country (unless the payer has
knowledge to the contrary) for purposes of the withholding tax discussed above
and, under the current interpretation of United States Treasury regulations, for
purposes of determining the applicability of a tax treaty rate. Under recently
finalized United States Treasury regulations (the 'Final Regulations'), a
Non-U.S. Holder of Common Stock who wishes to claim the benefit of an applicable
treaty rate (and avoid back-up withholding as discussed below) for dividends
paid after December 31, 1999, will be required to satisfy applicable
certification and other requirements.
A Non-U.S. Holder of Common Stock eligible for a reduced rate of United
States withholding tax pursuant to an income tax treaty may obtain a refund of
any excess amounts withheld by filing an appropriate claim for refund with the
Internal Revenue Service (the 'IRS').
GAIN ON DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of
Common Stock unless (i) the gain is effectively connected with a trade or
business of the Non-U.S. Holder in the United States, and, where a tax treaty
applies, is attributable to a
59
<PAGE>
United States permanent establishment of the Non-U.S. Holder (ii) in the case of
a Non-U.S. Holder who is an individual and holds the Common Stock as a capital
asset, such holder is present in the United States for 183 or more days in the
taxable year of the sale or other disposition and certain other conditions are
met, or (iii) the Company is or has been a 'U.S. real property holding
corporation' for United States federal income tax purposes.
An individual Non-U.S. Holder described in clause (i) above will be subject
to tax on the net gain derived from the sale under regular graduated United
States federal income tax rates. An individual Non-U.S. Holder described in
clause (ii) above will be subject to a flat 30% tax on the gain derived from the
sale, which may be offset by United States source capital losses (even though
the individual is not considered a resident of the United States). If a Non-U.S.
Holder that is a foreign corporation falls under clause (i) above, it will be
subject to tax on its gain under regular graduated United States federal income
tax rates and, in addition, may be subject to the branch profits tax equal to
30% of its effectively connected earnings and profits within the meaning of the
Code for the taxable year, as adjusted for certain items, unless it qualifies
for a lower rate under an applicable income tax treaty.
The Company is not and does not anticipate becoming a 'U.S. real property
holding corporation' for United States federal income tax purposes.
Special rules may apply to certain Non-U.S. Holders, such as 'controlled
foreign corporations', 'passive foreign investment companies' and 'foreign
personal holding companies', that are subject to special treatment under the
Code. Such entities should consult their own tax advisors to determine the U.S.
federal, state, local and other tax consequences that may be relevant to them.
FEDERAL ESTATE TAX
Common Stock held by an individual Non-U.S. Holder at the time of death
will be included in such holder's gross estate for United States federal estate
tax purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the IRS and to each Non-U.S. Holder the
amount of dividends paid to such holder and the tax withheld with respect to
such dividends, regardless of whether withholding was required. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which the Non-U.S. Holder
resides under the provisions of an applicable income tax treaty.
Under current law, backup withholding at the rate of 31% generally will not
apply to dividends paid to a Non-U.S. Holder at an address outside the United
States (unless the payer has knowledge that the payee is a U.S. person). Under
the Final Regulations, however, a Non-U.S. Holder will be subject to back-up
withholding unless applicable certification requirements are met.
Payment of the proceeds of a sale of Common Stock within the United States
or conducted through certain U.S. related financial intermediaries is subject to
both backup withholding and information reporting unless the beneficial owner
certifies under penalties of perjury that it is a Non-U.S. Holder (and the payor
does not have actual knowledge that the beneficial owner is a United States
person) or the holder otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules may be allowed as a
refund or a credit against such holder's U.S. federal income tax liability
provided the required information is furnished to the IRS.
60
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce Fenner & Smith Incorporated ('Merrill Lynch'), Credit
Suisse First Boston Corporation, Donaldson, Lufkin & Jenrette Securities
Corporation, Morgan Stanley & Co. Incorporated and PaineWebber Incorporated are
acting as representatives (the 'U.S. Representatives') of each of the
Underwriters named below (the 'U.S. Underwriters'). Subject to the terms and
conditions set forth in a purchase agreement (the 'U.S. Purchase Agreement')
among the Company and the U.S. Underwriters, and concurrently with the sale of
shares of Common Stock to the International Managers (as defined
below), the Company has agreed to sell to the U.S. Underwriters, and each of the
U.S. Underwriters has severally agreed to purchase from the Company, the number
of shares of Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITER OF SHARES
---------------- ----------
<S> <C>
Merrill Lynch, Pierce Fenner & Smith
Incorporated.................................................................
Credit Suisse First Boston Corporation....................................................
Donaldson, Lufkin & Jenrette Securities Corporation.......................................
Morgan Stanley & Co. Incorporated.........................................................
PaineWebber Incorporated..................................................................
Total........................................................................
----------
----------
----------
</TABLE>
The Company has also entered into an international purchase agreement (the
'International Purchase Agreement') with certain underwriters outside the United
States and Canada (collectively, the 'International Managers' and, together with
the U.S. Underwriters, the 'Underwriters') for whom Merrill Lynch International
Limited, Credit Suisse First Boston Corporation, Donaldson, Lufkin & Jenrette
Securities Corporation, Morgan Stanley & Co. International Limited and
PaineWebber Incorporated are acting as lead managers (the 'Lead Managers').
Subject to the terms and conditions set forth in the International Purchase
Agreement, and concurrently with the sale of shares of Common Stock
to the U.S. Underwriters pursuant to the U.S. Purchase Agreement, the Company
has agreed to sell to the International Managers, and the International Managers
severally have agreed to purchase from the Company, an aggregate of
shares of Common Stock. The initial public offering price per share of Common
Stock and the underwriting discount per share of Common Stock will be identical
under the U.S. Purchase Agreement and the International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
such agreement are purchased. The closings with respect to the sale of shares of
Common Stock to be purchased by the U.S. Underwriters and the International
Managers are conditioned upon one another.
The U.S. Representatives have advised the Company that the U.S.
Underwriters propose initially to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share of Common Stock. The U.S. Underwriters may allow, and such
dealers may reallow, a discount not in excess of $ per share of Common Stock
on sales to certain other dealers. After the initial public offering, the public
offering price, concession and discount may be changed.
The Company has granted an option to the U.S. Underwriters, exercisable for
30 days after the date of this Prospectus, to purchase up to an aggregate of
additional shares of Common Stock at the initial public offering
price set forth on the cover page of this Prospectus, less the underwriting
discount. The U.S. Underwriters may exercise this option solely to cover
over-allotments, if any, made on the sale of the Common Stock offered hereby. To
the extent that the U.S. Underwriters exercise such option, each of the U.S.
Underwriters will be obligated, subject to certain conditions, to purchase a
number of additional shares of Common Stock proportionate to such U.S.
Underwriter's initial amount reflected in the foregoing table. The Company has
also granted an option to the International Managers, exercisable for 30 days
after the date of this
61
<PAGE>
Prospectus, to purchase up to an aggregate of shares of Common Stock to
cover over-allotments, if any, on terms similar to those granted to the U.S.
Underwriters.
The Company, its executive officers and directors and substantially all of
its existing stockholders have agreed, subject to certain exceptions, not to
directly or indirectly (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of or otherwise dispose of or transfer
any shares of Common Stock or securities convertible into or exchangeable or
exercisable for Common Stock, whether now owned or thereafter acquired by the
person executing the agreement or with respect to which the person executing the
agreement thereafter acquires the power of disposition, or file a registration
statement under the Securities Act with respect to the foregoing except for the
registration under the Securities Act of the shares issuable under the
that may be registered on Form S-8 or any such successor form or (ii)
enter into any swap or other agreement that transfers, in whole or in part, the
economic consequence of ownership of the Common Stock whether any such swap or
transaction is to be settled by delivery of Common Stock or other securities, in
cash or otherwise, without the prior written consent of Merrill Lynch on behalf
of the Underwriters for a period of 180 days after the date of this Prospectus.
See 'Shares Eligible for Future Sale.'
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the 'Intersyndicate Agreement') that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
U.S. Underwriters and the International Managers are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Pursuant to the
Intersyndicate Agreement, the U.S. Underwriters and the International Managers
are permitted to sell shares of Common Stock to each other for purposes of
resale at the initial public offering price, less an amount not greater than the
selling concession. Under the terms of the Intersyndicate Agreement, the U.S.
Underwriters and any dealer to whom they sell shares of Common Stock will not
offer to sell or sell shares of Common Stock to persons who are non-U.S. or
non-Canadian persons or to persons they believe intend to resell to persons who
are non-U.S. or non-Canadian persons, and the International Managers and any
dealer to whom they sell shares of Common Stock will not offer to sell or sell
shares of Common Stock to U.S. persons or to Canadian persons or to persons they
believe intend to resell to U.S. persons or to Canadian persons, except in the
case of transactions pursuant to the Intersyndicate Agreement.
Prior to the Offerings, there has been no public market for the Common
Stock of the Company. The initial public offering price will be determined
through negotiations between the Company and the U.S. Representatives and the
Lead Managers. The factors to be considered in determining the initial public
offering price, in addition to prevailing market conditions, will be
price-earning ratios of publicly-traded companies that the U.S. Representatives
believe to be comparable to the Company, certain financial information of the
Company, the history of, and the prospects for, the Company and the industry in
which it competes, an assessment of the Company's management, its past and
present operations, the prospects for, and the timing of, future revenues of the
Company, the present state of the Company's development, and the above factors
in relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. There can be no assurance that an
active trading market will develop for the Common Stock or that the Common Stock
will trade in the public market subsequent to the Offerings at or above the
initial public offering price.
The Underwriters do not intend to confirm sales of Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, the U.S. Representatives are permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
62
<PAGE>
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the U.S.
Representatives may reduce that short position by purchasing Common Stock in the
open market. The U.S. Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment opinion described
above.
The U.S. Representatives may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the U.S.
Representatives purchase shares of Common Stock in the open market to reduce the
Underwriters' short position or to stabilize the price of the Common Stock, they
may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
At the request of the Company, the Underwriters have reserved for sale, at
the initial public offering price, up to shares of Common Stock that
will be offered by this Prospectus for certain employees, customers and
suppliers of the Company and certain other persons with whom the Company has
existing relationships who have expressed an interest in purchasing such shares.
The number of shares of Common Stock available for sale to the general public
will be reduced to the extent such persons purchase such reserved shares. Any
reserved shares that are not so purchased will be offered by the Underwriters to
the general public on the same basis as the other shares offered hereby.
Merrill Lynch acted as a financial advisor to the Company in connection
with the Recapitalization for which it received customary fees. In addition,
Credit Suisse First Boston and certain affiliates of Merrill Lynch are lenders
under the Credit Facilities. Credit Suisse First Boston, as a lender under the
Revolving Credit Facility, is expected to receive a portion of the proceeds from
the Offerings, which is expected to be less than 10% of the aggregate net
proceeds of the Offerings. See 'Use of Proceeds.'
LEGAL OPINIONS
The validity of the issuance of the Common Stock offered hereby will be
passed on for the Company by Simpson Thacher & Bartlett, New York, New York.
Certain legal matters will be passed upon for the Underwriters by Mayer, Brown &
Platt, Chicago, Illinois.
EXPERTS
The consolidated financial statements of the Company at December 31, 1997
and 1996 and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement on Form S-1 (herein, together with all
amendments and exhibits thereto, referred to as the 'Registration Statement')
under the Securities Act with respect to the registration of the shares of
Common
63
<PAGE>
Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, omits certain information contained in the Registration
Statement as permitted by the rules and regulations of the Commission.
Statements contained herein concerning the provisions of any contract, agreement
or other document are not necessarily complete, and, in each instance, reference
is made to the copy of such document filed as an exhibit to the Registration
Statement for a more complete description of the matter involved, and each such
statement is qualified in its entirety by such reference. The Registration
Statement, including the exhibits and schedules filed therewith, may be
inspected at the public reference facilities maintained by the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at 7 World Trade Center, Suite 1300, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such materials may be obtained from the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Commission maintains a Web site at http://www.sec.gov
containing reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the 'Exchange Act'). As a
result of the Offerings, the Company will become subject to the informational
requirements of the Exchange Act. The Company will fulfill its obligations with
respect to such requirements by filing periodic reports with the Commission. In
addition, the Company will furnish its shareholders with annual reports
containing audited financial statements certified by its independent accountants
and quarterly reports for the first three quarters of each fiscal year
containing unaudited summary financial information.
64
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Consolidated Financial Statements:
<S> <C>
Report of Independent Auditors........................................................................... F-2
Consolidated Balance Sheets at December 31, 1997 and 1996................................................ F-3
Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995............... F-5
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996
and 1995.............................................................................................. F-6
Notes to Consolidated Financial Statements............................................................... F-7
Unaudited Interim Financial Statements:
Condensed Consolidated Balance Sheets at March 31, 1998 and December 31, 1997............................ F-22
Condensed Consolidated Statements of Income for the three months ended March 31, 1998
and 1997.............................................................................................. F-23
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1998
and 1997.............................................................................................. F-24
Notes to Unaudited Condensed Consolidated Financial Statements........................................... F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Axle & Manufacturing of Michigan, Inc.
We have audited the accompanying consolidated balance sheets of American Axle &
Manufacturing of Michigan, Inc. and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. Our audit also included the financial statement schedule listed in Item
16. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Axle & Manufacturing of Michigan, Inc. and subsidiaries at December 31,
1997 and 1996, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects, the information set forth therein.
/s/ ERNST & YOUNG LLP
Detroit, Michigan
May 15, 1998
F-2
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
---------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 17,285 $126,034
Accounts receivable................................................................... 166,459 91,137
Inventories........................................................................... 96,636 107,439
Prepaid expenses and other............................................................ 3,184 3,819
Deferred income taxes................................................................. 5,608 12,309
---------- --------
Total current assets.................................................................... 289,172 340,738
Property, plant and equipment........................................................... 768,883 491,875
Less accumulated depreciation........................................................... 119,103 72,479
---------- --------
Property, plant and equipment, net...................................................... 649,780 419,396
Deferred income taxes................................................................... 53,959 7,301
Other assets and deferred charges....................................................... 24,742 3,787
---------- --------
Total assets............................................................................ $1,017,653 $771,222
---------- --------
---------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................................................... $ 227,826 $127,968
Accrued compensation and benefits..................................................... 135,513 99,315
Other accrued expenses................................................................ 22,659 10,184
---------- --------
Total current liabilities............................................................... 385,998 237,467
Long-term debt.......................................................................... 507,043 2,368
Long-term liabilities................................................................... 87,381 81,219
---------- --------
Total liabilities....................................................................... 980,422 321,054
Preferred stock, par value $.01 a share, shares authorized and
issued--13,334 in 1996................................................................ -- 200,000
Shareholders' equity:
Common stock, par value $.01 a share; shares
authorized--100,000 in 1997 and 36,134 in 1996;
shares issued--8,209 in 1997 and 21,053 in 1996.................................... 1 1
Paid-in capital....................................................................... 92,225 90,205
Retained (deficit) earnings........................................................... (54,995) 159,962
---------- --------
Total shareholders' equity.............................................................. 37,231 250,168
---------- --------
Total liabilities and shareholders' equity.............................................. $1,017,653 $771,222
---------- --------
---------- --------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales............................................................... $2,147,451 $2,022,272 $1,968,076
Cost of goods sold...................................................... 1,927,364 1,845,722 1,788,588
---------- ---------- ----------
Gross profit............................................................ 220,087 176,550 179,488
Selling, general and administrative expenses............................ 103,954 83,072 70,603
---------- ---------- ----------
Operating income........................................................ 116,133 93,478 108,885
Recapitalization expenses............................................... (15,929) -- --
Net interest (expense) income........................................... (1,846) 9,412 9,086
Other (expense) income.................................................. (4,161) (4,566) --
---------- ---------- ----------
Income before income taxes.............................................. 94,197 98,324 117,971
Income taxes............................................................ 38,933 36,600 47,400
---------- ---------- ----------
Net income.............................................................. 55,264 61,724 70,571
Preferred dividends..................................................... (29,915) (13,642) --
Excess of the carrying amount over the fair value
of the consideration transferred to the holders of
Class A Preferred Stock............................................... 29,814 -- --
---------- ---------- ----------
Net income available for common shareholders............................ $ 55,163 $ 48,082 $ 70,571
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share................................................ $ 2,917 $ 2,284 $ 3,352
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per share.............................................. $ 1,723 $ 1,708 $ 1,953
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities
Net income............................................................... $ 55,264 $ 61,724 $ 70,571
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization....................................... 50,177 36,076 25,242
Deferred income taxes............................................... (9,651) (7,549) (6,557)
Stock option compensation expense................................... 6,870 -- --
Pensions and other postretirement benefits.......................... 30,701 22,050 20,751
Loss on disposal of equipment....................................... 4,161 4,566 --
Changes in operating assets and liabilities:
Accounts receivable.............................................. (75,322) 2,529 (21,863)
Inventories...................................................... 10,803 2,255 (5,070)
Accounts payable and accrued expenses............................ 141,521 (68,963) 106,800
Long-term liabilities............................................ (9,916) 6,049 17,367
Income taxes payable............................................. -- -- (10,344)
Other assets and deferred charges................................ (3,778) 6,950 (11)
--------- --------- ---------
Net cash provided by operating activities.................................. 200,830 65,687 196,886
Investing activities
Purchases of property and equipment, net................................. (282,625) (162,317) (147,077)
Proceeds from sale-leaseback of equipment................................ -- 31,085 --
--------- --------- ---------
Net cash used in investing activities...................................... (282,625) (131,232) (147,077)
Financing activities
Borrowings under Revolving Credit and Receivables facilities, net........ 130,000 -- --
Proceeds from issuance of long-term debt................................. 375,000 2,420 --
Payments on long-term debt............................................... (325) (1,052) (10,192)
Debt issuance costs...................................................... (18,567) -- --
Payment of dividends..................................................... (34,538) (17,434) --
Recapitalization payments................................................ (478,928) -- --
Proceeds from issuance of common stock................................... 404 -- --
Payments from shareholder of preferred stock............................. -- 37,306 10,400
Redemption of Class B preferred shares................................... -- -- (500)
--------- --------- ---------
Net cash (used in) provided by financing activities........................ (26,954) 21,240 (292)
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents....................... (108,749) (44,305) 49,517
Cash and cash equivalents at beginning of year............................. 126,034 170,339 120,822
--------- --------- ---------
Cash and cash equivalents at end of year................................... $ 17,285 $ 126,034 $ 170,339
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
RECEIVABLE
FROM
ADDITIONAL RETAINED SHAREHOLDER
COMMON PAID-IN EARNINGS OF PREFERRED
STOCK CAPITAL (DEFICIT) STOCK
------ ---------- -------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at January 1, 1995....................................... $1 $ 94,999 $ 45,101 $(52,000)
Net income....................................................... 70,571
Payment received from shareholder of preferred stock............. 10,400
Redemption of 50 Class B preferred shares........................ (500)
------ ---------- -------- ------------
Balance at December 31, 1995..................................... 1 94,499 115,672 (41,600)
Net income....................................................... 61,724
Cash dividends:
Preferred stock--$1,023 per share.............................. (13,642)
Common stock--$180 per share................................... (3,792)
Payment received from shareholder of preferred stock............. 37,306
Discount for prepayment of receivable from shareholder of
preferred stock................................................ (4,294) 4,294
------ ---------- -------- ------------
Balance at December 31, 1996..................................... 1 90,205 159,962 0
Net income....................................................... 55,264
Cash dividends:
Preferred stock--$2,243 per share.............................. (29,915)
Common stock--$220 per share................................... (4,623)
Recapitalization of common stock................................. (12,867) (203,450)
Recapitalization of preferred stock.............................. 29,814
Recapitalization tax payment to Jupiter Capital Corporation...... (74,200)
Recapitalization costs paid to or on behalf of shareholders...... (18,225)
Recapitalization deferred taxes.................................. 30,378
Issuance of common stock......................................... 404
Stock option grants.............................................. 14,483
------ ---------- -------- ------------
Balance at December 31, 1997..................................... $1 $ 92,225 $(54,995) $ 0
------ ---------- -------- ------------
------ ---------- -------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
American Axle & Manufacturing of Michigan, Inc. ('AAMM') and its
subsidiaries (the 'Company'), is a Tier I supplier to the automotive industry
and a world leader in the design, engineering and manufacturing of driveline
systems for light trucks, sport utility vehicles, pickups and vans. The
driveline system includes all the components that transfer power from the
transmission and deliver it to the drive wheels. AAM's driveline systems include
axles, propeller shafts, chassis components and forged products. The Company's
manufacturing facilities consist of gear and axle plants located in Detroit,
Michigan and Buffalo, New York; forge plants located in Detroit, Michigan and
Tonawanda, New York; a propeller shaft plant located in Three Rivers, Michigan;
and a technical center in Rochester Hills, Michigan. AAMM is a predecessor
company to American Axle & Manufacturing Holdings, Inc. (the 'Registrant'). The
Registrant has not commenced operations and has no assets or liabilities.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company.
All intercompany transactions, balances and profits are eliminated upon
consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid
investments with a maturity of ninety days or less at time of purchase. At
December 31, 1996, cash and cash equivalents included cash balances held in
repurchase agreements collateralized by U.S. Government securities with a
maturity of thirty days or less when purchased.
Revenue Recognition
The Company recognizes revenue when goods are shipped to the customer.
Research and Development Costs
The Company expenses research and development costs as incurred. Research
and development costs were $27.8 million, $23.4 million and $29.0 million for
1997, 1996 and 1995, respectively.
Inventories
The components of inventory are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1996
------- --------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and work-in-process...................................... $68,323 $ 80,829
Finished goods......................................................... 25,587 22,305
------- --------
Gross inventories at average cost...................................... 93,910 103,134
Excess of average cost over LIFO cost.................................. 7,650 6,200
------- --------
Net inventories at LIFO................................................ 86,260 96,934
Supplies and repair parts.............................................. 10,376 10,505
------- --------
$96,636 $107,439
------- --------
------- --------
</TABLE>
F-7
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Inventories are carried at lower of cost or market determined on the
last-in, first-out (LIFO) method. Supplies and repair parts inventory consists
of materials consumed in the manufacturing process but not incorporated into the
finished products and repair parts used to service machinery and equipment.
Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and land improvements............................................ $ 15,757 $ 11,899
Buildings and building improvements................................... 40,426 32,506
Machinery and equipment............................................... 506,927 358,551
Construction in progress.............................................. 205,773 88,919
-------- --------
$768,883 $491,875
-------- --------
-------- --------
</TABLE>
Property, plant and equipment are stated at cost. Construction in progress
includes costs incurred for machinery and equipment and building improvements in
process. Depreciation is provided using the straight-line method over the
estimated useful lives of the related assets. Depreciation expense totaled $48
million, $35 million and $22 million in 1997, 1996 and 1995, respectively.
The estimated lives of property, plant and equipment are as follows:
<TABLE>
<S> <C>
Land improvements 15 years
Buildings and building improvements 40 years
Machinery and equipment 5 to 15 years (5 to 10 years prior to 1997)
</TABLE>
Effective January 1, 1997, the Company extended the estimated useful lives
of certain machinery and equipment to better allocate the cost of the assets
over their estimated useful lives. This change in estimated useful lives
increased operating income by approximately $6.4 million in 1997. The Company
analyzed the useful lives of machinery and equipment in conjunction with the
Agreements discussed in Note 12 together with alternative uses for this
equipment and determined that machinery and equipment lives could be extended to
15 years in certain circumstances.
Included in 1997 purchases of machinery and equipment was $9.6 million of
equipment acquired from an affiliate of Jupiter Capital Corporation (AAM's
parent prior to the recapitalization discussed in Note 2; 'Jupiter') in an
arms-length transaction.
Other Assets and Deferred Charges
Intangible assets consisting of patents, other identified rights, and
deferred charges are amortized on a straight-line basis over their estimated
useful lives, ranging from 1 to 8 1/2 years.
Valuation of Long Lived Assets
The Company periodically evaluates the carrying value of long-lived assets
to be held and used, including intangible assets, when events and circumstances
warrant such a review. Based upon management's assessment of the future
undiscounted operating cash flows related to these assets, the carrying values
have not been impaired at December 31, 1997.
F-8
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Effect of Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. This Statement is effective for fiscal years
beginning after December 15, 1997 and establishes standards for the reporting
and display of comprehensive income and its components in a full set of general
purpose financial statements. Beginning in 1998, the Company will provide the
information relating to comprehensive income to conform to the requirements. For
the year ended December 31, 1997, comprehensive income would have been equal to
net income.
In 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosures about Segments of an Enterprise and Related Information. This
Statement is effective for fiscal years beginning after December 15, 1997 and
significantly changes the basis on which public business enterprises report
information about operating segments. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Beginning in 1998, the Company will provide the information relating to
Statement No. 131 to conform to the requirements. As of December 31, 1997,
segment information was presented in accordance with Financial Accounting
Standards Board Statement No. 14.
Accounting for Stock Based Compensation
The Company has elected to follow Accounting Principles Board Opinion
Number 25 (APB No. 25), Accounting for Stock Issued to Employees and related
interpretations in accounting for its employee stock options. Accordingly,
compensation cost is measured on the excess, if any, of the market price of the
company's stock at the date of grant over the amount an employee must pay to
acquire the stock. The Company has adopted the disclosure-only provisions for
Statement of Financial Accounting Standards Number 123 (SFAS No. 123),
Accounting for Stock-Based Compensation, which requires the company to record
compensation for stock-based compensation at fair value.
Derivatives
Gains and losses on hedges of assets and liabilities are included in the
carrying amounts of those assets or liabilities and ultimately are recognized in
income. The interest rate differential relating to interest rate swaps and
collars used to hedge debt obligations is reflected as an adjustment to interest
expense over the lives of the swaps. Cash flows from derivatives are classified
in the same category as the cash flows from the related activity. In
circumstances where the underlying assets or liabilities are sold or no longer
exist, any remaining carrying value adjustments are recognized in other income
or expense. See Note 5.
Earnings Per Share
In 1997, the Company adopted the Financial Accounting Standards Board
issued Statement No. 128, Earnings Per Share, which is effective for periods
ending after December 15, 1997. The statement replaced the calculation of
primary and fully diluted earnings per share computed in accordance with Opinion
No. 15 with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is similar to
the previously reported fully diluted earnings per share. See Note 15.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts and the disclosures in the
financial statements. Actual results could differ from those estimates.
F-9
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Reclassifications
Certain 1995 and 1996 amounts have been reclassified to conform with 1997
presentation.
2. RECAPITALIZATION
On October 29, 1997, the Company completed a comprehensive recapitalization
(the 'Recapitalization'). Prior to the Recapitalization, AAMM was a wholly-owned
subsidiary of American Axle & Manufacturing, Inc. ('AAM'). Pursuant to the
Recapitalization, AAMM acquired a 100% ownership interest in AAM by exchanging
shares of its own stock, on a one-for-one basis, with the shareholders of AAM.
The exchange of shares has been accounted for in a manner similar to a pooling
of interests since both AAMM and AAM were under common control. Following the
exchange of shares, AAMM repurchased 12,867.15 shares or 61% of its common stock
outstanding for $216.3 million. Following the Recapitalization, the original
shareholders of AAM owned 17.8% of outstanding common stock. As part of the
Recapitalization, AAMM repurchased all outstanding Preferred Stock for $170.2
million. As part of the Recapitalization, AAMM made a $74.2 million payment to
Jupiter related to certain tax payments.
Recapitalization expenses of $15.9 million consisted primarily of fees for
professional services. In addition, other Recapitalization costs of $18.2
million were paid either to shareholders or to third parties on the
shareholders' behalf and have been charged directly to retained earnings.
At December 31, 1997, the Company had a $7.2 million receivable from a
shareholder arising from a tax-related post-closing adjustment associated with
the Recapitalization. This was repaid in 1998.
3. LONG-TERM DEBT AND CREDIT FACILITIES
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
-------- ------
(IN THOUSANDS)
<S> <C> <C>
Credit Facilities:
Revolver.............................................................. $ 55,000 $ 0
Tranche A Term Loan................................................... 0 0
Tranche B Term Loan................................................... 375,000 0
-------- ------
Total Credit Facilities............................................ 430,000 0
Receivables Facility.................................................... 75,000 0
Other................................................................... 2,043 2,368
-------- ------
$507,043 $2,368
-------- ------
-------- ------
</TABLE>
At December 31, 1997, the Revolver and Receivables Facility are supported
by long-term Credit Facilities.
Credit Facilities
The Company's Senior Secured Bank Credit Facilities ('Credit Facilities')
consist of a (i) $250 million Revolving Credit Facility, due October 2004
('Revolver'), (ii) $125 million delayed draw Term Loan Facility ('Tranche A Term
Loan') due in semi-annual installments of varying amounts through October 2004
and (iii) $375 million Term Loan Facility ('Tranche B Term Loan') due in
semi-annual installments of varying amounts through April 2006. The Tranche A
Term Loan can be drawn until October 1999.
F-10
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
3. LONG-TERM DEBT AND CREDIT FACILITIES--(CONTINUED)
Amounts outstanding under the Credit Facilities are secured by the capital
stock of the Company's significant subsidiaries and all the assets except for
those securing the Receivables Facility and permitted equipment and lease
financings. Borrowings under the Credit Facilities bear interest at rates based
on The Chase Manhattan Bank ('Chase') alternate base rate or LIBOR, plus, in
each case, an applicable margin. At December 31, 1997, $375 million of
borrowings were outstanding and $125 million was available under the Term Loan
Facility and $55 million was outstanding and $195 million was available for
future borrowings under the Revolver.
The Credit Facilities contain various operating covenants which, among
other things, impose certain limitations on the Company's ability to declare or
pay dividends or distributions on capital stock, redeem or repurchase capital
stock, incur liens, incur indebtedness, or merge, make acquisitions or sell
assets. Under the Credit Facilities, the company is required to comply with
financial covenants relating to interest coverage, leverage, retained earnings
and capital expenditures. Borrowings under the Credit Facilities may be prepaid
by the Company at any time at the option of the Company, without penalty, other
than breakage costs. Loans made under the Credit Facilities are subject to
mandatory prepayments under certain conditions. Additionally, the Credit
Facilities required the Company to enter into interest rate hedging arrangements
with a notional value of $112.5 million.
At December 31, 1997, the weighted average rate of interest on the balances
outstanding under the Credit Facilities was 8.2%.
Receivables Facility
In connection with the Recapitalization, AAM (the 'Seller') established a
receivables financing facility (the 'Receivables Facility') through AAM
Receivables Corp. ('AAM Receivables'), a wholly-owned, bankruptcy-remote
subsidiary of the Company. Pursuant to the Receivables Facility, the Seller
agreed to sell certain customer trade receivables created from time to time to
AAM Receivables which, in turn, transferred all of such receivables to a trust,
which issued a variable funding certificate (the 'VFC') representing an
undivided interest in the receivables pool to Chase. Under the VFC, Chase
provided a revolving financing commitment, subject to the terms and conditions
of the Receivables Facility, of up to $125 million through October 2003. These
receivables are not available to the Company's general creditors. However, the
primary customer of the Seller is also a supplier to the Seller and, in certain
circumstances, may be able to offset amounts payable by the Seller against the
Seller's trade receivables from the supplier. Accordingly, the Receivables
Facility has been accounted for as a secured borrowing.
Availability of financing under the VFC depends on the amount of
receivables generated by the Seller from its sales, the rate of collection on
those receivables and certain other characteristics of those receivables that
affect their eligibility. At December 31, 1997, approximately $99 million was
available under the VFC, of which $75 million was utilized.
The Receivables Facility bears interest, at the Company's option, at rates
based on Chase's alternate base rate or LIBOR plus, in each case, an applicable
margin. The margins for borrowings under the Receivables Facility increase in
July 1998 to be the same as the margins for the Revolver and the Tranche A Term
Loan. The weighted average rate of interest on the balances outstanding under
the Receivables Facility at December 31, 1997 was 7.3%.
F-11
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
3. LONG-TERM DEBT AND CREDIT FACILITIES--(CONTINUED)
General
The Company made cash payments of interest of $1,723,000, $14,000 and
$1,566,000 in 1997, 1996 and 1995, respectively.
Aggregate Debt Maturities
Aggregate debt maturities at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998....................................................... $ 0
1999....................................................... 368
2000....................................................... 1,380
2001....................................................... 1,380
2002....................................................... 1,380
Thereafter................................................. 502,773
--------------
Total obligations.......................................... 507,281
Amounts representing interest.............................. (238)
--------------
Present value of long-term debt............................ $507,043
--------------
--------------
</TABLE>
4. LEASE OBLIGATIONS
The Company leases certain facilities, machinery and equipment under
operating leases expiring at various dates. All of the leases contain renewal
and/or purchase options. Total expense for all operating leases was $9,679,000,
$4,440,000 and $180,000 for the years ended December 31, 1997, 1996 and 1995
respectively.
Future minimum lease payments under noncancelable operating leases at
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1998....................................................... $ 14,484
1999....................................................... 14,366
2000....................................................... 14,368
2001....................................................... 14,346
2002....................................................... 38,250
Thereafter................................................. 2,406
--------------
$ 98,220
--------------
--------------
</TABLE>
5. RISK MANAGEMENT
Financial Instruments
The Company uses interest-rate swaps and collars of up to 3 years in
duration to manage its exposure to adverse movements in interest rates. The
Company entered into a rate collar transaction in connection with $112.5 million
of the Tranche B Term Loan to pay a floating rate of interest based on 3-month
LIBOR with a cap rate of 6.5% and a floor rate of 5.5% which terminates in
December 2000. Additionally, the Company entered into an interest rate swap
agreement with a notional amount of $77.4 million that converts the variable
rate of a lease to a fixed rate of approximately 8%. The carrying value of these
instruments approximates fair value at December 31, 1997 and 1996.
F-12
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
5. RISK MANAGEMENT--(CONTINUED)
Fair Values
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximates fair value due to the
short-term maturities of these assets and liabilities. The fair values of
long-term debt is approximately the same as the carrying values due to the
frequent resetting of the interest rate.
Concentrations of Credit Risk
In the normal course of business, the Company provides credit to customers
in the automotive industry, performs credit evaluations of these customers and
maintains reserves for potential credit losses which, when realized, have been
within the range of management's allowance for doubtful accounts. The allowance
for doubtful accounts was $3.2 million and $2.6 million at December 31, 1997 and
1996, respectively. See Note 12.
The Company invests the majority of its excess cash in money market
accounts (or previously in repurchase agreements collaterized by U.S. Government
securities) and, where appropriate, diversifies the concentration of cash among
different financial institutions. With respect to financial instruments, where
appropriate, the Company has diversified its selection of counter-parties.
6. EMPLOYEE BENEFIT PLANS
The Company sponsors qualified and non-qualified defined benefit pension
plans covering substantially all employees. The plan covering salaried employees
provides benefits that are based upon years of service and final average
compensation. Benefits for hourly employees, which are all substantially covered
by collective bargaining agreements, are based on stated amounts for each year
of service. The Company's funding policy is to contribute amounts to provide the
plans with sufficient assets to meet future benefit payment requirements
consistent with the funding requirements of federal laws and regulations. The
assets of the plan are primarily invested in fixed income and equity securities.
The components of pension expense are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period........................ $15,324 $22,586 $19,516
Interest cost on projected benefit obligation.......................... 5,807 5,046 2,730
Actual return on assets................................................ (10,965) (4,815) (2,783)
Net amortization and deferral.......................................... 4,242 1,883 654
------- ------- -------
Total pension expense.................................................. $14,408 $24,700 $20,117
------- ------- -------
------- ------- -------
</TABLE>
Changes in assumptions for 1997 had an impact which reduced pension expense
by approximately $10.9 million. These changes included an increase in the
discount rate assumption and expected return on assets, and a decrease in
expected benefit rate increases.
F-13
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
6. EMPLOYEE BENEFIT PLANS--(CONTINUED)
The funded status for the Company's defined benefit pension plans at
September 30, 1997 and 1996 reconciled to the net pension liability at December
31, 1997 and 1996, respectively, is shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated pension benefit obligation
Vested.......................................................................... $40,459 $29,697
Nonvested....................................................................... 35,552 26,448
------- -------
76,011 56,145
Value of future salary and benefit projections.................................. 2,350 15,277
------- -------
Total projected pension benefit obligation........................................ 78,361 71,422
Less plan assets at fair value.................................................... (81,296) (57,344)
------- -------
Plan assets (in excess of)/less than projected benefit obligation................. (2,935) 14,078
Unrecognized prior service cost................................................... (5,612) (824)
Unrecognized net gain/(loss)...................................................... 22,825 (3,304)
------- -------
Net pension liability at September 30............................................. 14,278 9,950
Fourth quarter contribution....................................................... (2,000) (8,285)
------- -------
Net pension liability at December 31.............................................. $12,278 $ 1,665
------- -------
------- -------
</TABLE>
Assumptions used in determining the funded status of these plans as of
September 30, 1997, 1996 and 1995 were:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Discount rate applied to benefit obligations.................................... 7.5% 7.0% 7.0%
Annual rate of increase in compensation levels.................................. 4.0% 4.0% 4.0%
Return on assets................................................................ 9.0% 8.0% 8.0%
</TABLE>
The Company sponsors voluntary savings plans for eligible salaried and
hourly employees. Participants may contribute up to 18% and 15% (limited to
$9,500 per individual in 1997) of their annual compensation to the hourly and
salaried plans, respectively, pursuant to section 401(k) of the Internal Revenue
Code. The Company matches 25% of the first 6% of salaried employee
contributions. Effective July 1, 1997 the Company matching contribution was
increased to 50% of the first 6% of salaried contributions. Company matching
contributions totaling $910,000, $547,000 and $472,000 were made for the years
ended December 31, 1997, 1996 and 1995 respectively.
In addition to pension plans, the Company maintains hourly and salaried
benefit plans that provide postretirement medical, dental, vision and life
insurance to domestic retirees and eligible dependents. The benefits are payable
for life, although the Company retains the right to modify or terminate the
plans providing these benefits. The salaried plan is contributory, with
additional cost sharing features such as deductibles and co-payments. Pursuant
to the Asset Purchase Agreement (see Note 12) the Company and General Motors
agreed to share proportionally the cost of postretirement medical benefits based
upon the length of service an employee had with each company. It is the
Company's policy to fund these benefits as claims are incurred.
F-14
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
6. EMPLOYEE BENEFIT PLANS--(CONTINUED)
Expense for postretirement benefits other than pensions is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost--benefits earned during the period........................ $17,218 $19,764 $14,460
Interest cost.......................................................... 4,103 3,559 1,982
Net amortization and deferral.......................................... (1,109) 27 (240)
------- ------- -------
Total postretirement benefits other than pension expense............... $20,212 $23,350 $16,202
------- ------- -------
------- ------- -------
</TABLE>
Changes in assumptions for 1997 had an impact which reduced the expense for
postretirement benefits other than pensions by approximately $6.3 million. These
changes included an increase in the discount rate assumption and a decrease in
the health care trend rate.
The funded status of the postretirement benefit plans at September 30, 1997
and 1996, reconciled to the net postretirement benefit liability at December 31,
1997 and 1996, respectively, is shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of accumulated postretirement benefit obligation:
Retirees........................................................................ $ 331 $ 0
Active employees fully eligible for benefits.................................... 12,288 12,714
Other active employees.......................................................... 40,046 36,912
------- -------
52,665 49,626
Unamortized amounts not yet recognized:
Prior service cost.............................................................. (146) (173)
Net gain........................................................................ 18,060 986
------- -------
Accrued postretirement benefit liability at September 30.......................... 70,579 50,439
Fourth quarter benefit payments................................................. (52) 0
------- -------
Accrued postretirement benefit liability at December 31........................... $70,527 $50,439
------- -------
------- -------
</TABLE>
Assumptions used in determining the accrued postretirement benefit
liability at September 30, 1997, 1996 and 1995 were:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Discount rate................................................................... 7.5% 7.0% 7.0%
Annual rate of increase in the
Per capita cost............................................................... 7.75 8.2 8.6
Rate to decrease to........................................................... 5.0 5.5 5.5
By the year ended............................................................. 2002 2002 2002
</TABLE>
An increase of 1% in assumed health care cost trend rates would increase
the accrued postretirement benefit liability as of December 31, 1997 and 1996 by
$8,177,000 and $9,303,000, respectively. Components of the net periodic cost
would have increased by $5,369,000, $4,882,000 and $3,465,000 during the years
ended December 31, 1997, 1996 and 1995, respectively.
The Company sponsors profit sharing plans covering substantially all of its
employees. Distributions are determined based upon established formulas and are
made annually. Profit sharing expense for the years ended December 31, 1997,
1996 and 1995 was $23,275,000, $16,900,000 and $20,100,000, respectively.
F-15
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
7. SHAREHOLDERS' EQUITY AND PREFERRED STOCK
The authorized capital stock of the Company consists of Common and
Preferred Stock. Authorized shares of Stock at December 31, 1997 were 100,000
shares of Common Stock and 100,000 shares of Preferred Stock. At December 31,
1996, AAM had authorized 36,134 shares of common stock and 13,334 shares of
Class A Preferred Stock.
In 1994, General Motors agreed to contribute an additional $52 million to
fund capital improvements to increase the Company's productive capacity. The
contribution was payable in sixty monthly installments of $867,000 beginning
January, 1995. General Motors paid 14 installments of $867,000 and in March 1996
paid a final amount of $35.6 million, which represented the remaining balance
discounted at 6%. The Company is not required to repay this contribution.
8. REDEEMABLE PREFERRED STOCK
On March 1, 1994, AAM issued 13,334 shares of preferred stock to General
Motors (see Note 12). General Motors was entitled to receive dividends annually
based on a cash flow formula, as defined, up to a maximum amount not to exceed
$16 million. In addition to dividends based upon the cash flow formula, the
Preferred Stock shareholder could receive an additional dividend based upon net
income. In 1997, 1996 and 1995, $12 million, $17.9 million and $13.6 million,
respectively, of dividends were earned. Both the 1997 and 1996 dividends were
declared and paid in 1997, and the 1995 dividends were declared and paid in
1996.
The Class A Preferred Stock was redeemable at any time and was subject to
mandatory redemption requirements beginning March 31, 2001 and on March 31 of
each year thereafter, based on AAM's cash flow of the preceding year, as
defined. The Class A Preferred Stock was not convertible into Common Stock
unless AAM tendered cash to redeem the Preferred Stock or notified the preferred
shareholder of its intent to engage in a public offering. AAM had reserved
13,334 shares of Common Stock to be issued only for the conversion of the Class
A Preferred Stock. As part of the Recapitalization, AAM redeemed and retired all
outstanding shares of Class A Preferred Stock.
9. STOCK OPTIONS
In 1994, the Company granted an officer of the Company options to purchase
1,747 shares of the Company's common stock. In 1997, the Company canceled and
replaced these options at substantially identical terms, except for a
modification of the exercisability period. The options may be exercised at any
time within a 10 year term at a price of $1 per share. At December 31, 1997,
none of the options were exercised. The Company recognized compensation expense
of $6.8 million resulting from the modification of the exercisability period.
On October 29, 1997, the Company granted several officers of the Company
options to purchase 471 shares of the Company's common stock as replacement for
an incentive compensation plan established in 1994. The options were immediately
vested and exercisable at a weighted average exercise price of $648. At December
31, 1997, none of the options were exercised. Under APB No. 25, compensation
expense resulting from stock options is measured and recorded when earned.
Compensation expense relating to the incentive compensation plan established in
1994 was $2,293,000, $6,050,000 and $4,300,000 in 1997, 1996 and 1995,
respectively.
On October 29, 1997, the Company granted an officer of the Company options
to purchase 83 shares of the Company's common stock. The options may be
exercised at any time through June 15, 1999 at a price of $16,812 per share. At
December 31, 1997, none of the options were exercised.
In addition, on November 1, 1997, and as amended on November 15, 1997, the
Company's shareholders established a stock option plan (the 'Plan') for certain
employees. There are 1,425 options authorized for grant under the Plan. The Plan
allows participants to vest in options to purchase shares of the Company's
common stock based upon duration of employment and/or operating performance. The
exercise price of the options equals
F-16
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
9. STOCK OPTIONS--(CONTINUED)
the underlying value of the common stock at time of grant and the options vest
and become exercisable over a seven-year period. In 1997, 1,366 options were
granted under the Plan at an exercise price of $16,812. No options were
exercised as of December 31, 1997. Under APB No. 25, no compensation cost has
been recognized for the options granted under the Plans
Had the Company determined compensation cost based upon the fair value of
the options at the grant date consistent with the method of SFAS No. 123, and
using the Minimum Value method at an assumed interest rate of 6.13%, the
Company's net income and earnings per share would have been adjusted to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(IN THOUSANDS, EXCEPT FOR PER
SHARE DATA)
<S> <C> <C> <C>
Net income as reported................................. $55,264 $61,724 $70,571
------- ------- -------
------- ------- -------
Pro forma.............................................. $55,138 $61,724 $70,571
------- ------- -------
------- ------- -------
Basic earnings per share as reported................... $ 2,917 $ 2,284 $ 3,352
------- ------- -------
------- ------- -------
Pro forma.............................................. $ 2,910 $ 2,284 $ 3,352
------- ------- -------
------- ------- -------
Diluted earnings per share as reported................. $ 1,723 $ 1,708 $ 1,953
------- ------- -------
------- ------- -------
Pro forma.............................................. $ 1,723 $ 1,708 $ 1,953
------- ------- -------
------- ------- -------
</TABLE>
Since the above pro forma disclosure of results is only required to
consider grants awarded in 1995 and thereafter, the pro forma effects described
above may not be representative of the effects on the reported results for
future years.
The following table summarizes the activity relating to the Company's stock
options:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Outstanding at January 1, 1995..................................... 1,747 $ 1
Options granted.................................................. -- --
Options exercised................................................ -- --
Options lapsed or canceled....................................... -- --
--------- --------------
Outstanding at December 31, 1995................................... 1,747 $ 1
Options granted.................................................. -- --
Options exercised................................................ -- --
Options lapsed or canceled....................................... -- --
--------- --------------
Outstanding at December 31, 1996................................... 1,747 $ 1
Options granted.................................................. 3,667 6,727
Options exercised................................................ -- --
Options lapsed or canceled....................................... (1,747) $ 1
--------- --------------
Outstanding at December 31, 1997................................... 3,667 6,727
--------- --------------
--------- --------------
Options exercisable at December 31, 1995........................... 1,747 $ 1
--------- --------------
--------- --------------
Options exercisable at December 31, 1996........................... 1,747 $ 1
--------- --------------
--------- --------------
Options exercisable at December 31, 1997........................... 2,301 $ 739
--------- --------------
--------- --------------
</TABLE>
F-17
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
10. NET INTEREST (EXPENSE) INCOME
Net interest (expense) income consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income......................................................... $ 7,110 $ 9,752 $10,652
Interest expense........................................................ (8,956) (340) (1,566)
------- ------- -------
$(1,846) $ 9,412 $ 9,086
------- ------- -------
------- ------- -------
</TABLE>
11. INCOME TAXES
The following is a summary of the components of the provision for income
taxes:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................................................. $43,439 $37,773 $46,985
Michigan single business tax......................................... 4,051 5,638 5,935
Other state and local................................................ 1,094 738 1,037
------- ------- -------
48,584 44,149 53,957
Deferred:
Federal.............................................................. (8,108) (8,247) (2,340)
Michigan single business tax......................................... (1,132) 221 (3,243)
Other state and local................................................ (411) 477 (974)
------- ------- -------
(9,651) (7,549) (6,557)
------- ------- -------
$38,933 $36,600 $47,400
------- ------- -------
------- ------- -------
</TABLE>
A reconciliation of income taxes at the United States federal statutory
rate to the effective income tax rate follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Federal statutory................................................... 35.0% 35.0% 35.0%
State and local..................................................... 2.9 4.1 3.8
Other............................................................... 3.4 (1.9) 1.4
------ ------ ------
Effective income tax rate........................................... 41.3% 37.2% 40.2%
------ ------ ------
------ ------ ------
</TABLE>
F-18
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
11. INCOME TAXES--(CONTINUED)
The following is a summary of the significant components of the Company's
deferred tax assets and liabilities:
<TABLE>
<CAPTION>
DEFERRED TAX
DEFERRED TAX ASSETS LIABILITIES
-------------------- ----------------------
CURRENT LONG-TERM CURRENT LONG-TERM
------- --------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1997:
Employee benefits...................................... $ 1,958 $24,312
Inventory.............................................. 3,460
Depreciation and amortization.......................... 13,241
Net operating loss carryforwards....................... 13,539
Other.................................................. 190 2,867
------- --------- --- ----------
$ 5,608 $53,959 $ 0 $ 0
------- --------- --- ----------
------- --------- --- ----------
December 31, 1996:
Employee benefits...................................... $ 8,266 $41,507
Inventory.............................................. 1,173
State and local taxes.................................. 1,715
Depreciation and amortization.......................... $ 36,640
Other.................................................. 1,155 2,434
------- --------- --- ----------
$12,309 $43,941 $ 0 $ 36,640
------- --------- --- ----------
------- --------- --- ----------
</TABLE>
As part of the Recapitalization, an election was made to treat the
transaction as a sale of assets for tax purposes under Internal Revenue Code
Section 338(h)(10). As a result of this election, certain differences between
book and tax bases of the Company's assets and liabilities were created which
generated a deferred tax asset of $30,378,000. This amount was charged directly
to retained earnings.
Through October 29, 1997, AAM filed a consolidated federal income tax
return with Jupiter Capital Corporation (AAM's parent prior to
Recapitalization). Under the terms of a tax-sharing agreement, federal income
taxes reflect the tax expense and the related liability which would have been
applicable if a separate federal income tax return had been filed by the
Company. Subsequent to the Recapitalization, the Company will file stand-alone
consolidated tax returns. The Company's income tax expense would not have
differed materially from that reported had the Company filed tax returns on a
stand-alone basis.
Income tax payments, including federal and state income taxes for the years
ended December 31, 1997, 1996 and 1995 were $43,738,000, $44,099,000 and
$53,161,000, respectively.
The Company has net operating loss carryovers for federal tax purposes of
approximately $32 million and approximately $92 million, for various state and
local tax purposes all of which expire at various times during 2007-2017. In
addition, the Company has a federal research and development tax credit
carryover of $600,000 which expires in 2012. The tax effect of these carryovers
and credits is reflected as a deferred tax asset totaling $13,539,000 at
December 31, 1997.
12. TRANSACTIONS WITH GENERAL MOTORS
On March 1, 1994, AAM finalized an Asset Purchase Agreement with General
Motors Corporation ('General Motors') to acquire substantially all of General
Motors' Saginaw Division's Final Drive and Forge Business Unit inventory,
property, plant and equipment, and various other assets. In addition, the
Company entered into long-term component supply agreements with General Motors
and General Motors of Canada, Ltd.
F-19
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
12. TRANSACTIONS WITH GENERAL MOTORS--(CONTINUED)
('GMCL'), which made the Company the sole-source supplier to General Motors for
all components manufactured by the Company at the date of acquisition. In 1997,
the Company and General Motors entered into a binding memorandum of
understanding (MOU) which provides the framework for the continuance of this
business relationship on a long term basis. The GMCL supply agreement, which
expires in September 1999, sets forth the terms whereby GMCL supplies axles
produced at the General Motors St. Catharines, Ontario facility to the Company
which resells them to General Motors. The Company has an irrevocable option to
purchase, for a nominal amount, and relocate the equipment used in axle
production by GMCL at this facility.
Sales to General Motors accounted for approximately 96% of the Company's
sales for 1997 and 1996, and 97% for 1995. The Company also purchased materials
and services from General Motors in the amount of $331 million, $328 million and
$402 million in 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996
accounts receivable from General Motors were $144 million and $77 million,
respectively, and accounts payable to General Motors were $23 million and $26
million, respectively.
13. COMMITMENTS
The Company plans to continue to make significant capital expenditures for
new product and capacity programs and to upgrade its machinery, equipment and
facilities. In 1998, the Company expects to invest between $300 million to $400
million for capital expenditures, of which obligated purchase commitments were
approximately $150 million as of December 31, 1997.
14. SEGMENT INFORMATION
The Company is engaged in one business segment: the manufacturing of
driveline systems, including forged products for the automotive industry.
United States export sales were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Canada............................................................. $200,572 $158,536 $204,659
Mexico and South America........................................... 126,035 105,574 50,260
Other.............................................................. 1,439 1,572 928
-------- -------- --------
$328,046 $265,682 $255,847
-------- -------- --------
-------- -------- --------
</TABLE>
F-20
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1997, 1996 AND 1995
15. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Numerator:
Net Income..................................................................... $55,264 $61,724 $70,571
Preferred dividends............................................................ (29,915) (13,642) --
Excess of the carrying amount over the fair value of the consideration
transferred to the holders of Class A Preferred Stock....................... 29,814 -- --
------- ------- -------
Numerator for basic earnings per share--income available to common
shareholders................................................................ $55,163 $48,082 $70,571
Effect of dilutive securities:
Preferred dividends......................................................... 29,915 13,642 --
Excess of the carrying amount over the fair value of the consideration
transferred to the holders of Class A Preferred Stock....................... (29,814) -- --
------- ------- -------
Numerator for diluted earnings per share--income available to common
shareholders after assumed conversions...................................... $55,264 $61,724 $70,571
Denominator:
Denominator for basic earnings per share--weighted-average shares.............. 18,912 21,053 21,053
Effect of dilutive securities:
Dilutive stock options outstanding.......................................... 2,041 1,747 1,747
Conversion of Class A Preferred Stock....................................... 11,112 13,334 13,334
------- ------- -------
Dilutive potential common shares............................................... 13,153 15,081 15,081
Denominator for dilutive earnings per share--adjusted weighted-average shares
and assumed conversion...................................................... 32,065 36,134 36,134
------- ------- -------
Basic earnings per share......................................................... $ 2,917 $ 2,284 $ 3,352
------- ------- -------
------- ------- -------
Diluted earnings per share....................................................... $ 1,723 $ 1,708 $ 1,953
------- ------- -------
------- ------- -------
</TABLE>
F-21
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 3,346 $ 17,285
Accounts receivable................................................................. 115,181 166,459
Inventories......................................................................... 97,207 96,636
Prepaid expenses.................................................................... 6,683 3,184
Deferred income taxes............................................................... 5,608 5,608
----------- ------------
Total current assets.................................................................. 228,025 289,172
Property, plant and equipment......................................................... 835,184 768,883
Less accumulated depreciation......................................................... (132,511) (119,103)
----------- ------------
Property, plant and equipment, net.................................................... 702,673 649,780
Deferred income taxes................................................................. 45,190 53,959
Other assets and deferred charges..................................................... 23,653 24,742
----------- ------------
Total assets.......................................................................... $ 999,541 $1,017,653
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 250,704 $ 227,826
Accrued compensation and benefits................................................... 98,304 135,513
Other accrued expenses.............................................................. 20,036 22,659
----------- ------------
Total current liabilities............................................................. 369,044 385,998
Long-term debt........................................................................ 482,962 507,043
Long-term liabilities................................................................. 93,078 87,381
----------- ------------
Total liabilities..................................................................... 945,084 980,422
Shareholders' equity:
Common stock........................................................................ 1 1
Paid-in capital..................................................................... 92,528 92,225
Retained (deficit).................................................................. (38,072) (54,995)
----------- ------------
Total shareholders' equity............................................................ 54,457 37,231
----------- ------------
Total liabilities and shareholders' equity............................................ $ 999,541 $1,017,653
----------- ------------
----------- ------------
</TABLE>
See notes to condensed consolidated financial statements.
F-22
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Net Sales................................................................................. $583,285 $546,859
Cost of goods sold........................................................................ 522,279 487,828
-------- --------
Gross profit.............................................................................. 61,006 59,031
Selling, general and administrative expenses.............................................. 24,699 22,662
-------- --------
Operating income.......................................................................... 36,307 36,369
Net interest (expense) income............................................................. (9,749) 2,255
Other income.............................................................................. 333 111
-------- --------
Income before income taxes................................................................ 26,891 38,735
Income taxes.............................................................................. 9,968 13,945
-------- --------
Net income................................................................................ $ 16,923 $ 24,790
-------- --------
-------- --------
Basic earnings per share.................................................................. $ 2,061 $ 1,178
-------- --------
-------- --------
Diluted earnings per share................................................................ $ 1,651 $ 686
-------- --------
-------- --------
</TABLE>
See notes to condensed consolidated financial statements.
F-23
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
---------------------
1998 1997
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net cash provided by operating activities................................................ $ 76,140 $ 73,642
Purchases of property and equipment, net, and net cash (used in)
investing activities................................................................... (66,301) (59,344)
Financing activities
Proceeds from issuance of long-term debt............................................... (9,000) --
Payments on long-term debt............................................................. (81) (81)
Payments of accounts receivable facility............................................... (15,000) --
Proceeds from issuance of common stock................................................. 303 --
-------- ---------
Net cash (used in) financing activities.................................................. (23,778) (81)
-------- ---------
Net (decrease) increase in cash and cash equivalents..................................... (13,939) 14,217
Cash and cash equivalents at beginning of quarter........................................ 17,285 126,034
-------- ---------
Cash and cash equivalents at end of quarter.............................................. $ 3,346 $ 140,251
-------- ---------
-------- ---------
</TABLE>
See notes to condensed consolidated financial statements.
F-24
<PAGE>
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements contain all adjustments, consisting of normal recurring adjustments,
which are, in the opinion of the management of American Axle & Manufacturing of
Michigan, Inc. (the 'Company'), necessary to present fairly the condensed
consolidated financial position of the Company as of March 31, 1998 and December
31, 1997, and the condensed consolidated results of operations and cash flows of
the Company for the three months ended March 31, 1998 and 1997, respectively.
Results of operations for the periods presented are not necessarily indicative
of the results for the full fiscal year. The balance sheet at December 31, 1997
has been derived from the audited consolidated financial statements at that date
but does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. These 1997
financial statements should be read in conjunction with the audited consolidated
financial statements and notes thereto for the year ended December 31, 1997.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and work-in-progress.................................. $68,979 $ 68,323
Finished goods...................................................... 25,513 25,587
--------- ------------
Gross inventories at average cost................................... 94,492 93,910
Excess of average cost over LIFO cost............................... 7,790 7,650
--------- ------------
Net inventories at LIFO............................................. 86,702 86,260
Supplies and repair parts........................................... 10,505 10,376
--------- ------------
$97,207 $ 96,636
--------- ------------
--------- ------------
</TABLE>
3. COMPREHENSIVE INCOME
In 1998, the Company adopted SFAS No. 130, 'Reporting Comprehensive
Income'. SFAS No. 130 requires that the components and total amount of
comprehensive income be reported in the financial statements for interim and
annual periods in 1998. For the quarters ended March 31, 1998 and March 31,
1997, comprehensive income is equal to net income.
4. EARNINGS PER SHARE
The weighted average number of common shares outstanding for purposes of
the earnings per share computations are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
--------- ------------
<S> <C> <C>
Basic............................................................... 8,211 21,053
--------- ------------
--------- ------------
Diluted............................................................. 10,252 36,134
--------- ------------
--------- ------------
</TABLE>
On October 29, 1997 the Company completed a comprehensive recapitalization
(the 'Recapitalization'). The weighted average number of common shares
outstanding for purposes of the earnings per share calculation for the three
months ended March 31, 1998 reflects the effects of such Recapitalization.
F-25
<PAGE>
5. SUBSEQUENT EVENTS
'AAMM' is the predecessor to American Axle & Manufacturing Holdings, Inc.
('Holdings'), a newly formed entity. Holdings has not yet commenced operations
and has no assets or liabilities. The Company is in the process of undertaking
an initial public offering and in May 1998, the Company filed a Registration
Statement on Form S-1 with the Securities and Exchange Commission to offer
approximately $100 million of Holding's common stock (the 'Offering') (assuming
the Underwriters' over-allotment options are not exercised). The net proceeds to
the Company from such Offering, after deduction of associated expenses, are
expected to be approximately $92.5 million (assuming the Underwriters'
over-allotment options are not exercised). AAMM will be merged into Holdings
prior to completion of the Offering.
F-26
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 9
The Recapitalization........................................ 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Dilution.................................................... 17
Capitalization.............................................. 18
Selected Financial and Other Data........................... 19
Unaudited Pro Forma Condensed Consolidated Statement of
Income.................................................... 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 29
Management.................................................. 39
Ownership of Common Stock................................... 48
Certain Transactions........................................ 49
Description of Capital Stock................................ 51
Description of Certain Indebtedness......................... 54
Shares Eligible for Future Sale............................. 57
Certain United States Federal Tax Consequences to Non-U.S.
Holders of Common Stock................................... 58
Underwriting................................................ 60
Legal Opinions.............................................. 62
Experts..................................................... 62
Additional Information...................................... 62
Index to Financial Statements............................... F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
[LOGO]
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
COMMON STOCK
---------------------------
P R O S P E C T U S
---------------------------
MERRILL LYNCH & CO.
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
Securities Corporation
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INCORPORATED
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
[ALERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED , 1998
PROSPECTUS
SHARES
[LOGO]
AMERICAN AXLE & MANUFACTURING
HOLDINGS, INC.
COMMON STOCK
------------------------
All of the shares of common stock, par value $.01 per share (the
'Common Stock'), of American Axle & Manufacturing Holdings, Inc., a Delaware
corporation (the 'Company'), offered hereby are being issued and sold by the
Company. Upon the closing of the Offerings (as defined below), Blackstone
Capital Partners Merchant Banking Fund L.P. and its affiliates (collectively,
'Blackstone') and the officers and directors of the Company will own % and
%, respectively, of the outstanding Common Stock ( % and %,
respectively, if the over-allotment options are exercised in full).
Of the shares of Common Stock offered initially hereby,
shares are being offered initially outside the United States and
Canada by the International Managers (the 'International Offering') and
shares are being offered initially in the United States and Canada by
the U.S. Underwriters (the 'U.S. Offering'). The initial public offering price
and the underwriting discount per share will be identical for the International
Offering and the U.S. Offering (collectively, the 'Offering'). See
'Underwriting.'
Prior to the Offering, there has been no public market for the Common
Stock. It is currently anticipated that the initial public offering price will
be between $ and $ per share. See 'Underwriting' for a discussion of
the factors to be considered in determining the initial public offering price.
The Company has applied to list the Common Stock on the New York Stock
Exchange under the proposed symbol 'AXL'.
------------------------
SEE 'RISK FACTORS' BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
<S> <C> <C> <C>
Per Share... $ $ $
Total(3).... $ $ $
</TABLE>
(1) Company has agreed to indemnify the International Managers and U.S.
Underwriters (collectively, the 'Underwriters') against certain liabilities,
including certain liabilities under the Securities Act of 1933, as amended.
See 'Underwriting.'
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the International Managers and the U.S. Underwriters
options exercisable within 30 days of the date hereof to purchase up to an
additional and shares of Common Stock, respectively, solely to
cover over-allotments, if any. If such options are exercised in full, the
total Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ , and $ respectively. See 'Underwriting.'
------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to the
approval of certain legal matters by counsel for the Underwriters and to certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1998.
------------------------
MERRILL LYNCH INTERNATIONAL
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
International
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INTERNATIONAL
------------------------
The date of this Prospectus is , 1998
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Merrill Lynch International ('Merrill Lynch'), Credit Suisse First Boston
Corporation, Donaldson, Lufkin & Jenrette International, Morgan Stanley & Co.
International Limited and PaineWebber International (U.K.) Ltd. are acting as
International Managers. Subject to the terms and conditions set forth in the
purchase agreement (the 'International Purchase Agreement') among the Company
and the International Managers, and concurrently with the sale of
shares of Common Stock to the U.S. Underwriters (as defined
below), the Company has agreed to sell to the International Managers, and each
of the International Managers has severally agreed to purchase from the Company,
the number of shares of Common Stock set forth opposite its name below.
<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL MANAGER OF SHARES
--------------------- ---------
<S> <C>
Merrill Lynch International................................................................
Credit Suisse First Boston Corporation.....................................................
Donaldson, Lufkin & Jenrette International.................................................
Morgan Stanley & Co. International Limited.................................................
PaineWebber International (U.K.) Ltd.......................................................
---------
Total.........................................................................
---------
---------
</TABLE>
The Company has also entered into a purchase agreement (the 'U.S. Purchase
Agreement') with certain underwriters in the United States and Canada
(collectively, the 'U.S. Underwriters' and, together with the International
Underwriters, the 'Underwriters'), for whom Merrill Lynch, Pierce Fenner & Smith
Incorporated, Credit Suisse First Boston Corporation, Donaldson, Lufkin &
Jenrette Securities Corporation, Morgan Stanley & Co. Incorporated and
PaineWebber Incorporated are acting as representatives (the 'U.S.
Representatives'). Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, and concurrently with the sale of shares of
Common Stock to the International Managers pursuant to the International
Purchase Agreement, the Company has agreed to sell to the U.S. Underwriters, and
the U.S. Underwriters severally have agreed to purchase from the Company, an
aggregate of shares of Common Stock. The initial public offering
price per share of Common Stock and the underwriting discount per share of
Common Stock will be identical under the International Purchase Agreement and
the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such agreement if any of the shares of Common Stock being sold pursuant to
such agreement are purchased. The closings with respect to the sale of shares of
Common Stock to be purchased by the International Managers and the U.S.
Underwriters are conditioned upon one another.
The International Managers have advised the Company that the International
Managers propose initially to offer the shares of Common Stock to the public at
the initial public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share of Common Stock. The International Managers may allow,
and such dealers may reallow, a discount not in excess of $ per share
of Common Stock on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
The Company has granted an option to the International Managers,
exercisable for 30 days after the date of this Prospectus, to purchase up to an
aggregate of shares of Common Stock at the initial public
offering price set forth on the cover page of this Prospectus, less the
underwriting discount. The International Managers may exercise this option
solely to cover over-allotments, if any, made on the sale of the Common Stock
offered hereby. To the extent that the International Managers exercise such
options, each of the International Managers will be obligated, subject to
certain conditions, to purchase a number of additional shares of Common Stock
proportionate to such International Manager's initial amount reflected in the
foregoing table. The Company has also granted an option to the U.S.
Underwriters, exercisable for 30 days after the date of this Prospectus, to
purchases up to an aggregate of shares of Common Stock to cover
over-allotments, if any, on terms similar to those granted to the International
Managers.
60
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
The Company, its executive officers and directors and substantially all of
its existing stockholders have agreed, subject to certain exceptions, not to
directly or indirectly (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of or otherwise dispose of or transfer
any shares of Common Stock or securities convertible into or exchangeable or
exercisable for Common Stock, whether now owned or thereafter acquired by the
person executing the agreement or with respect to which the person executing the
agreement thereafter acquires the power of disposition, or file a registration
statement under the Securities Act with respect to the foregoing except for the
registration under the Securities Act of the shares issuable under the
that may be registered on Form S-8 or any such successor form
or (ii) enter into any swap or other agreement that transfers, in whole or in
part, the economic consequence of ownership of the Common Stock whether any such
swap or transaction is to be settled by delivery of Common Stock or other
securities, in cash or otherwise, without the prior written consent of Merrill
Lynch on behalf of the Underwriters for a period of 180 days after the date of
this Prospectus. See 'Shares Eligible for Future Sale.'
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the 'Intersyndicate Agreement') that provides for the
coordination of their activities. Pursuant to the Intersyndicate Agreement, the
International Managers and the U.S. Underwriters are permitted to sell shares of
Common Stock to each other for purposes of resale at the initial public offering
price, less an amount not greater than the selling concession. Pursuant to the
Intersyndicate Agreement, the International Managers and the U.S. Underwriters
are permitted to sell shares of Common Stock to each other for purposes of
resale at the initial public offering price, less an amount not greater than the
selling concession. Under the terms of the Intersyndicate Agreement, the U.S.
Underwriters and any dealer to whom they sell shares of Common Stock will not
offer to sell or sell shares of Common Stock to persons who are non-U.S. or
non-Canadian persons or to persons they believe intend to resell to persons who
are non-U.S. or non-Canadian persons, and the International Managers and any
dealer to whom they sell shares of Common Stock will not offer to sell or sell
shares of Common Stock to U.S. persons or to Canadian persons or to persons they
believe intend to resell to U.S. persons or to Canadian persons, except in the
case of transactions pursuant to the Intersyndicate Agreement.
Prior to the Offerings, there has been no public market for the Common
Stock of the Company. The initial public offering price will be determined
through negotiations between the Company and the International Managers and the
U.S. Representatives. The factors to be considered in determining the initial
public offering price, in addition to prevailing market conditions, will be
price-earnings ratios of publicly traded companies that the International
Managers believe to be comparable to the Company, certain financial information
of the Company, the history of, and the prospects for, the Company and the
industry in which it competes, an assessment of the Company's management, its
past and present operations, the prospects for, and the timing of, future
revenues of the Company, the present state of the Company's development, and the
above factors in relation to market values and various valuation measures of
other companies engaged in activities similar to the Company. There can be no
assurance that an active trading market will develop for the Common Stock or
that the Common Stock will trade in the public market subsequent to the
Offerings at or above the initial public offering price.
Each International Manager has agreed that (i) it has not offered or sold,
and it will not offer or sell, directly or indirectly, any shares of Common
Stock offered hereby to persons in the United Kingdom prior to the expiration of
the period of six months from the closing date except to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public within the meaning of the Public Offers of Securities
Regulations 1995, (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the Common Stock in, from, or otherwise involving the United
Kingdom, and (iii) it has only issued or passed on and will only issue or pass
on to any person in the United Kingdom any document received by it in connection
with the issuance of Common Stock if that person is of a kind described in
Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1995 or is a person to whom the document may otherwise
lawfully be issued or passed on.
The Underwriters do not intend to confirm sales of Common Stock offered
hereby to any accounts over which they exercise discretionary authority.
61
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, the International Managers are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offerings, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the International
Managers may reduce that short position by purchasing Common Stock in the open
market. The International Managers may also elect to reduce any short position
by exercising all or part of the over-allotment opinion described above.
The International Managers may also impose a penalty bid on certain
Underwriters and selling group members. This means that if the International
Managers purchase shares of Common Stock in the option market to reduce the
Underwriters' short position or to stabilize the price of the Common Stock, they
may reclaim the amount of the selling concession from the Underwriters and
selling group members who sold those shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
International Managers will engage in such transactions, or that such
transactions, once commenced, will not be discontinued without notice.
Purchasers of the shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase, in addition to the offering price set forth on the cover page hereof.
Merrill Lynch acted as a financial advisor to the Company in connection
with the Recapitalization for which it received customary fees. In addition,
Credit Suisse First Boston and certain affiliates of Merrill Lynch are lenders
under the Credit Facilities. Credit Suisse First Boston, as a lender under the
Revolving Facility, is expected to receive a portion of the proceeds from the
Offerings, which is expected to be less than 10% of the aggregate net proceeds
of the Offerings. See 'Use of Proceeds.'
62
<PAGE>
[ALTERNATE BACK COVER]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Prospectus Summary.......................................... 3
Risk Factors................................................ 9
The Recapitalization........................................ 15
Use of Proceeds............................................. 16
Dividend Policy............................................. 16
Dilution.................................................... 17
Capitalization.............................................. 18
Selected Financial and Other Data........................... 19
Unaudited Pro Forma Condensed Consolidated Financial Data... 21
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 22
Business.................................................... 29
Management.................................................. 39
Ownership of Common Stock................................... 48
Certain Transactions........................................ 49
Description of Capital Stock................................ 51
Description of Certain Indebtedness......................... 54
Shares Eligible for Future Sale............................. 57
Certain United States Federal Tax Consequences to Non-U.S.
Holders of Common Stock................................... 58
Underwriting................................................ 60
Index to Financial Statements............................... F-1
</TABLE>
------------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING
TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
[LOGO]
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
COMMON STOCK
---------------------------
P R O S P E C T U S
---------------------------
MERRILL LYNCH INTERNATIONAL
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
International
MORGAN STANLEY DEAN WITTER
PAINEWEBBER INTERNATIONAL
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee and the NASD filing fee, all amounts are estimates.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 33,925
NASD filing fee............................................... 12,000
NYSE filing fee............................................... 150,000
Accounting fees and expenses.................................. 400,000
Legal fees and expenses....................................... 500,000
Blue Sky fees and expenses (including counsel fees)........... 5,000
Printing and engraving expenses...............................
Transfer agent's and registrar's fees and expenses............
Miscellaneous Expenses........................................
--------
Total.................................................... $
--------
--------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware (the
'Delaware Law') authorizes the Registrant to indemnify the officers and
directors of the Company, under certain circumstances and subject to certain
conditions and limitations as stated therein, against all expenses and
liabilities incurred by or imposed upon them as a result of actions, suits and
proceedings, civil or criminal, brought against them as such officers and
directors if they acted in good faith and in a manner they reasonably believed
to be in or not opposed to the best interests of the Registrant and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
their conduct was unlawful.
Reference is hereby made to Article VI of the Registrant's By-laws, a copy
of which is filed as Exhibit 3.02, which provides for indemnification of
officers and directors of the Registrant to the full extent authorized by
Section 145 of the Delaware Law. Section 7 of Article VI of the Bylaws
authorizes the Registrant to purchase and maintain insurance on behalf of any
officer, director, employee, trustee or agent of the Registrant or its
subsidiaries against any liability asserted against or incurred by them in such
capacity or arising out of their status as such, whether or not the Registrant
would have the power to indemnify such officer, director, employee, trustee or
agent against such liability under the provisions of such Article or Delaware
law.
The Registrant maintains a directors' and officers' insurance policy which
insures the officers and directors of the Registrant from any claim arising out
of an alleged wrongful act by such persons in their respective capacities as
officers and directors of the Registrant.
Section 102(b)(7) of the Delaware Law permits corporations to eliminate or
limit the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of a fiduciary duty of care as a
director. Reference is made to Article __ of the Registrant's Articles of
Incorporation, a copy of which is filed as Exhibit 3.01, which limits a
director's liability in accordance with such Section.
Reference is made to Section 6 of the U.S. Purchase Agreement and the
International Purchase Agreement, copies of which are filed as Exhibit 1.01 and
1.02, respectively, for information concerning indemnification arrangements
among the Registrant and the Underwriters.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the Recapitalization, the Company issued 18,261, 1,488
and 1,304 shares of Common Stock to Jupiter, Richard E. Dauch and Morton E.
Harris, respectively, in a one-for-one exchange for AAM, Inc. common stock held
by each of the above pursuant to a private placement. In addition, the Company
privately
II-1
<PAGE>
issued 24 and 18 shares of Common Stock to Michael D. Alexander and Gary J.
Witosky, respectively, pursuant to Management Common Stock Subscription
Agreements. Mr. Alexander purchased his shares in October 1997 for approximately
$400,000 and Mr. Witosky purchased his shares in March 1998 for approximately
$300,000.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The following exhibits are filed herewith unless otherwise indicated.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C>
**1.01 -- Proposed form of U.S. Purchase Agreement
**1.02 -- Proposed form of International Purchase Agreement
**3.01 -- Articles of Incorporation of the Company, as Amended
**3.02 -- Bylaws of the Company
**4.01 -- Specimen Stock Certificate
**5.01 -- Opinion of Simpson Thacher & Bartlett as to the legality of the Common Stock being registered
*10.01 -- Asset Purchase Agreement, dated February 18, 1994, between the American Axle & Manufacturing,
Inc. ('AAM, Inc.') and General Motors Corporation ('GM'), and all amendments thereto
+*10.02 -- Component Supply Agreement, dated February 28, 1994, between AAM, Inc. and GM
*10.02(a) -- Amendment No. 1 to Component Supply Agreement, dated February 28, 1994, between AAM, Inc. and GM
+*10.02(b) -- Amendment No. 2 to Component Supply Agreement, dated February 7, 1996, between AAM, Inc. and GM
+*10.02(c) -- Letter of Intent dated February 21, 1996, by G.M.T.G., GMT-800 PGM Worldwide Purchasing
('G.M.T.G') (re: front & rear axles)
+*10.02(d) -- Letter of Intent dated February 21, 1996, by G.M.T.G. (re: front & rear propeller shafts)
+*10.02(e) -- Letter Agreement dated June 25, 1997, between AAM, Inc. and GM
+*10.02(f) -- Amended and Restated Memorandum of Understanding, dated September 2, 1997, between AAM, Inc. and
GM
*10.02(g) -- MOU Extension Agreement, dated September 22, 1997, between AAM, Inc. and GM
+*10.03 -- GMCL Purchase Order Agreement dated February 17, 1994 by and between AAM, Inc. and General Motors
of Canada Limited ('GMCL')
+*10.04 -- AAM/GMCL Supply Agreement dated February 17, 1994 ('AAM/GMCL Supply Agreement') by and between
AAM, Inc. and GMCL
*10.04(a) -- Amending Agreement dated as of September 5, 1996, between AAM, Inc. and GMCL
*10.04(b) -- Amending Agreement dated as of October 7, 1996, between AAM, Inc. and GMCL
*10.04(c) -- Amendment No. 1 to AAM/GMCL Supply Agreement dated February 17, 1994, between AAM, Inc. and GMCL
+*10.05 -- Agreement dated February 17, 1997, between AAM, Inc. and GM
+*10.05(a) -- Letter dated December 13, 1996, by AAM, Inc.
*10.06 -- Lease dated September 30, 1994, by and between AAM, Inc., as lessee, and First Industrial, L.P.,
as lessor (Technical Center)
*10.07 -- 1997 American Axle & Manufacturing of Michigan, Inc. Replacement Plan
*10.08 -- The Amended and Restated American Axle & Manufacturing of Michigan, Inc. Management Stock Option
Plan
10.09 -- Nonqualified Stock Option Agreement, dated October 30, 1997, between the Company and Dauch
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- -------------------------------------------------------------------------------------------------------
<S> <C>
*10.10 -- Indemnification Agreement, dated February 28, 1994, between AAM, Inc. and GM
*10.11 -- Employment Agreement, dated October 27, 1997, by and between the Company and Dauch
10.11(a) -- Letter Agreement, dated August 18, 1997, between AAM Acquisition, Inc. and Dauch
*10.12 -- Recapitalization Agreement, dated as of September 19, 1997, among AAM, Inc., the Company, Jupiter
Capital Corporation ('Jupiter'), Richard E. Dauch ('Dauch'), Morton E. Harris ('Harris') and AAM
Acquisition, Inc.
*10.13 -- Stockholders' Agreement, dated as October 29, 1997, among Blackstone Capital Partners II Merchant
Banking Fund L.P., Blackstone Offshore Capital Partners II L.P., Blackstone Family Investment
Partnership II L.P., Jupiter, Dauch, Harris and AAM, Inc.
*10.14 -- Monitoring Agreement, dated as of October 29, 1997, between the Company and Blackstone Management
Partners L.P.
*10.15 -- Credit Agreement, dated as of October 27, 1997, among the Company, AAM, Inc., the lenders named
therein, The Chase Manhattan Bank, as administrative agent and collateral agent, and Chase
Manhattan Bank Delaware, as fronting bank
*10.16 -- AAM Master Trust Pooling Agreement, dated as of October 29, 1997, among AAM Receivables
Corp.('AAM Receivables'), the Company, as Servicer, and The Chase Manhattan Bank, as Trustee
*10.16(a) -- AAM Master Trust Series 1997-A Supplement to Pooling Agreement, dated as of October 29, 1997,
among AAM Receivables, the Company, as Servicer, and The Chase Manhattan Bank, as Trustee
*10.17 -- Receivables Sale Agreement, dated as of October 29, 1997, between AAM Receivables, as purchaser,
and the Company, as Seller and Servicer
*10.18 -- Servicing Agreement, dated as of October 29, 1997, among AAM Receivables, the Company, as
Servicer, and The Chase Manhattan Bank, as Trustee
*10.19 -- Agreement for Information Technology Services, dated March 1, 1998, between AAM, Inc. and
Electronic Data Systems Corporation
**10.20 -- 1998 Stock Incentive Plan
*21 -- Subsidiaries of the Registrant
**23.01 -- Consent of Simpson Thacher & Bartlett (contained in Exhibit 5.01)
23.02 -- Consent of Ernst & Young LLP
*24.01 -- Power of Attorney
27 -- Financial Data Schedules (For SEC use only)
</TABLE>
- ------------------
* Previously filed
** To be filed by amendment.
+ Certain portions of the identified Exhibit have been omitted and separately
filed with the Commission based upon a request for confidential treatment.
(b) Financial Statement Schedules:
Schedule II--American Axle & Manufacturing of Michigan, Inc.--Allowance for
Doubtful Accounts
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the
II-3
<PAGE>
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the Offerings of such securities at that time shall be deemed to be the
initial bona fide International Manager thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 2 to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Detroit, State of Michigan, on the 8th day of July, 1998.
AMERICAN AXLE & MANUFACTURING
HOLDINGS, INC.
BY: /S/ PATRICK S. LANCASTER
----------------------------------
TITLE: SECRETARY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement has been signed below by the
following persons in the capacities indicated on the 8th day of July, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------- -------------------------------------------- -----------------
<C> <S> <C>
*Richard E. Dauch Chairman of the Board of Directors; July 8, 1998
- -------------------------------------------- President and Chief Executive Officer
Richard E. Dauch
*Gary J. Witosky Vice President--Finance and Chief Financial July 8, 1998
- -------------------------------------------- Officer
Gary J. Witosky
*Robert A. Krause Treasurer July 8, 1998
- --------------------------------------------
Robert A. Krause
*B. G. Mathis Director; Executive Vice President and Chief July 8, 1998
- -------------------------------------------- Administration Officer
B. G. Mathis
*Glenn H. Hutchins Director July 8, 1998
- --------------------------------------------
Glenn H. Hutchins
*Bret D. Pearlman Director July 8, 1998
- --------------------------------------------
Bret D. Pearlman
*David A. Stockman Director July 8, 1998
- --------------------------------------------
David A. Stockman
*By: /s/ Patrick S. Lancaster
---------------------------------
Patrick S. Lancaster
Attorney-in-Fact
</TABLE>
II-5
<PAGE>
SCHEDULE II
AMERICAN AXLE & MANUFACTURING OF MICHIGAN, INC.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND DEDUCTIONS-- BALANCE AT
PERIOD PERIOD EXPENSES DESCRIBE END OF PERIOD
- ---------------------------------------------------------- ------------ ---------- ----------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Year Ended December 31, 1995.............................. $ 100 $ 950 $ 50(1) $ 1,000
Year Ended December 31, 1996.............................. $1,000 $1,600 $ 0 $ 2,600
Year Ended December 31, 1997.............................. $2,600 $1,000 $ 353(1) $ 3,247
</TABLE>
(1) Uncollectible accounts charged off net of recoveries.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------------------------- ----------
<S> <C> <C>
**1.01 -- Proposed form of U.S. Purchase Agreement
**1.02 -- Proposed form of International Purchase Agreement
**3.01 -- Articles of Incorporation of the Company, as Amended
**3.02 -- Bylaws of the Company
**4.01 -- Specimen Stock Certificate
**5.01 -- Opinion of Simpson Thacher & Bartlett as to the legality of the Common Stock being
registered
*10.01 -- Asset Purchase Agreement, dated February 18, 1994, between the American Axle &
Manufacturing, Inc. ('AAM, Inc.') and General Motors Corporation ('GM'), and all
amendments thereto
+*10.02 -- Component Supply Agreement, dated February 28, 1994, between AAM, Inc. and GM
*10.02(a) -- Amendment No. 1 to Component Supply Agreement, dated February 28, 1994, between AAM,
Inc. and GM
+*10.02(b) -- Amendment No. 2 to Component Supply Agreement, dated February 7, 1996, between AAM,
Inc. and GM
+*10.02(c) -- Letter of Intent dated February 21, 1996, by G.M.T.G., GMT-800 PGM Worldwide
Purchasing ('G.M.T.G') (re: front & rear axles)
+*10.02(d) -- Letter of Intent dated February 21, 1996, by G.M.T.G. (re: front & rear propeller
shafts)
+*10.02(e) -- Letter Agreement dated June 25, 1997, between AAM, Inc. and GM
+*10.02(f) -- Amended and Restated Memorandum of Understanding, dated September 2, 1997, between
AAM, Inc. and GM
*10.02(g) -- MOU Extension Agreement, dated September 22, 1997, between AAM, Inc. and GM
+*10.03 -- GMCL Purchase Order Agreement dated February 17, 1994 by and between AAM, Inc. and
General Motors of Canada Limited ('GMCL')
+*10.04 -- AAM/GMCL Supply Agreement dated February 17, 1994 ('AAM/GMCL Supply Agreement') by
and between AAM, Inc. and GMCL
*10.04(a) -- Amending Agreement dated as of September 5, 1996, between AAM, Inc. and GMCL
*10.04(b) -- Amending Agreement dated as of October 7, 1996, between AAM, Inc. and GMCL
*10.04(c) -- Amendment No. 1 to AAM/GMCL Supply Agreement dated February 17, 1994, between AAM,
Inc. and GMCL
+*10.05 -- Agreement dated February 17, 1997, between AAM, Inc. and GM
+*10.05(a) -- Letter dated December 13, 1996, by AAM, Inc.
*10.06 -- Lease dated September 30, 1994, by and between AAM, Inc., as lessee, and First
Industrial, L.P., as lessor (Technical Center)
*10.07 -- 1997 American Axle & Manufacturing of Michigan, Inc. Replacement Plan
*10.08 -- The Amended and Restated American Axle & Manufacturing of Michigan, Inc. Management
Stock Option Plan
10.09 -- Nonqualified Stock Option Agreement, dated October 30, 1997, between the Company and
Dauch
*10.10 -- Indemnification Agreement, dated February 28, 1994, between AAM, Inc. and GM
*10.11 -- Employment Agreement, dated October 27, 1997, by and between the Company and Dauch
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- ----------- ------------------------------------------------------------------------------------------- ----------
<S> <C> <C>
10.11(a) -- Letter Agreement, dated August 18, 1997, between AAM Acquisition, Inc. and Dauch
*10.12 -- Recapitalization Agreement, dated as of September 19, 1997, among AAM, Inc., the
Company, Jupiter Capital Corporation ('Jupiter'), Richard E. Dauch ('Dauch'), Morton
E. Harris ('Harris') and AAM Acquisition, Inc.
*10.13 -- Stockholders' Agreement, dated as October 29, 1997, among Blackstone Capital Partners
II Merchant Banking Fund L.P., Blackstone Offshore Capital Partners II L.P.,
Blackstone Family Investment Partnership II L.P., Jupiter, Dauch, Harris and AAM,
Inc.
*10.14 -- Monitoring Agreement, dated as of October 29, 1997, between the Company and
Blackstone Management Partners L.P.
*10.15 -- Credit Agreement, dated as of October 27, 1997, among the Company, AAM, Inc., the
lenders named therein, The Chase Manhattan Bank, as administrative agent and
collateral agent, and Chase Manhattan Bank Delaware, as fronting bank
*10.16 -- AAM Master Trust Pooling Agreement, dated as of October 29, 1997, among AAM
Receivables Corp.('AAM Receivables'), the Company, as Servicer, and The Chase
Manhattan Bank, as Trustee
*10.16(a) -- AAM Master Trust Series 1997-A Supplement to Pooling Agreement, dated as of October
29, 1997, among AAM Receivables, the Company, as Servicer, and The Chase Manhattan
Bank, as Trustee
*10.17 -- Receivables Sale Agreement, dated as of October 29, 1997, between AAM Receivables, as
purchaser, and the Company, as Seller and Servicer
*10.18 -- Servicing Agreement, dated as of October 29, 1997, among AAM Receivables, the
Company, as Servicer, and The Chase Manhattan Bank, as Trustee
*10.19 -- Agreement for Information Technology Services, dated March 1, 1998, between AAM, Inc.
and Electronic Data Systems Corporation
**10.20 -- 1998 Stock Incentive Plan
*21 -- Subsidiaries of the Registrant
**23.01 -- Consent of Simpson Thacher & Bartlett (contained in Exhibit 5.01)
23.02 -- Consent of Ernst & Young LLP
*24.01 -- Power of Attorney
27 -- Financial Data Schedules (For SEC use only)
</TABLE>
- ------------------
* Previously filed
** To be filed by amendment.
+ Certain portions of the identified Exhibit have been omitted and separately
filed with the Commission based upon a request for confidential treatment.
<PAGE>
NONQUALIFIED STOCK OPTION AGREEMENT
THIS NONQUALIFIED STOCK OPTION AGREEMENT (this "Agreement") is
made as of October 30, 1997, by and between AMERICAN AXLE & MANUFACTURING OF
MICHIGAN, INC., a Michigan corporation (the "Company"), and RICHARD E. DAUCH, an
executive employee of the Company (the "Employee").
PRELIMINARY STATEMENT
WHEREAS, The Company currently has authorized one hundred
thousand (100,000) shares of common stock, $0.01 par value ("Shares"), of which
approximately eight thousand two hundred and twenty seven (8,227) shares are
issued and outstanding.
WHEREAS, the Company has agreed, pursuant to a letter
agreement dated August 18, 1997 from AAM Acquisition, Inc. to the Employee, to
grant options to purchase Shares in return for the cancellation of options held
by the Employee to purchase common stock of American Axle & Manufacturing, Inc
("AAM").
WHEREAS, The Board of Directors of the Company has duly
authorized the execution and delivery by the Company of this Agreement and
granting of options to the Employee to purchase Shares as herein provided.
NOW, THEREFORE, in consideration of the mutual covenants
herein contained and other good and valuable consideration, receipt of which is
hereby acknowledged, the parties hereto do hereby agree as follows:
1. Grant of Options.
(a) Subject to and effective upon the closing under the
Recapitalization and Stock Purchase Agreement dated as of September 19, 1997,
among the Company, AAM, Jupiter Capital Corporation, Mr. Richard E. Dauch, Mr.
Morton E. Harris and AAM Acquisition, Inc. (the "Recapitalization"), the Company
hereby grants to the Employee the right and option (the "Options") to purchase
from the Company on the terms and conditions set forth herein all or any portion
of an aggregate number of Shares (or any securities into which Shares hereafter
may be converted by the Company) (such number being subject to adjustment as set
forth herein) equal to 1,747, all or any portion of which may be exercised by
the Employee at any time or from time to time from and after the date hereof.
Notwithstanding anything to the contrary contained in this
Agreement, the parties hereby acknowledge and agree that in the event that the
closing under the Recapitalization is not consummated, this Agreement shall have
no force or effect and shall be null and void.
<PAGE>
2
2. Option Price. The purchase price for each Share subject to
the Options is one dollar ($1.00) (such price being subject to adjustment as set
forth herein) (the "Option Price").
3. Exercise of Options.
(a) The Options may be exercised by the Employee at any time
and from time to time as to a portion or all of the aggregate number of Shares
subject to the Options as provided in Section 1 not theretofore exercised. The
Employee shall exercise the Options by delivering to the Company written notice
of such exercise, setting forth in such notice the number of Shares to be
purchased by the Employee pursuant to such exercise and accompanied by payment
in full in the form of cash for the Shares to be purchased pursuant to such
exercise. The Options shall terminate and be of no further force or effect at
11:59 p.m., Cleveland, Ohio, time as to any Share subject to the Options for
which a notice of exercise has not been given prior to the tenth (10th)
anniversary of the date hereof.
(b) No Shares shall be issued until full payment therefor has
been made, and the Employee shall have all of the rights of a stockholder in
respect of any shares of common stock of the Company upon the payment and
issuance of such shares.
(c) Upon payment in full for all of the Shares to be purchased
pursuant to an exercise of the Options, the Company shall issue and deliver to
the Employee stock certificates for the number of Shares so purchased by the
Employee.
(d) The Shares that are issued by the Company to the Employee
pursuant to an exercise of the Options will be duly issued, fully paid,
nonassessable and free from all taxes, liens, encumbrances, charges and
restrictions of any kind, except as expressly provided in this Agreement or as
may subsequently be mutually agreed to by the parties hereto.
(e) The Company shall reserve or hold available at all times a
sufficient number of Shares to cover the aggregate number of shares issuable
pursuant to this Agreement.
4. Taxes. The Company and the Employee shall mutually agree on
any tax amount the Company is or will be required to withhold with respect to
the transactions contemplated hereby, and the Company may elect to deduct taxes
from any amounts payable to the Employee. Company and Employee further agree
that, for tax purposes, the grant of this Agreement is equivalent to the
transfer of shares under Section 83 of the Internal Revenue Code of 1986, as
amended, and as such Employee shall be deemed, for tax purposes, to have
received shares in the Company as of October 30, 1997.
5. Adjustment of Exercise Price and Number of Shares
Purchasable. If the Company shall at any time after the date
<PAGE>
3
hereof: (i) declare a dividend on its common stock payable in shares of its
capital stock (whether shares of common stock or of capital stock of any other
class), (ii) subdivide its outstanding common stock, (iii) combine its
outstanding common stock into a smaller number of shares, or (iv) issue any
shares of its capital stock in connection with a consolidation or merger in
which the Company is the continuing corporation, the Option Price in effect at
the time of the record date for that dividend or of the effective date of that
subdivision, combination, consolidation or merger, and/or the number and kind
of shares of capital stock issuable on that date pursuant to the Options, shall
be proportionately adjusted so that the Employee shall be entitled to receive
the aggregate number and kind of shares of capital stock which, if the Options
had been exercised immediately prior to that date, the Employee would have owned
upon such exercise and been entitled to receive by virtue of that dividend,
subdivision, combination, consolidation or merger. The foregoing adjustment
shall be made successively whenever any event listed above shall occur.
6. Securities Law Compliance. The Options may not be exercised
and the Company shall not be required to issue any Shares hereunder if such
exercise or issuance would, in the reasonable judgment of the Board of Directors
of the Company, acting upon a written legal opinion of a reputable firm
qualified in securities law, constitute a violation of any state or federal law,
or of the rules or regulations of any governmental regulatory body, or any
securities exchange. The Company, in its sole discretion, may require the
Employee to furnish the Company with appropriate representations and a written
investment agreement prior to the exercise of the Options and the delivery of
any Shares pursuant to the Options, and may endorse on any share certificates
any legends required to reflect the restrictions and limitations contemplated by
this Agreement.
7. Restrictions on Transfer.
(a) Any Options or Shares that are purchased pursuant to the
exercise of the Options shall not be transferable, whether by sale, encumbrance,
pledge, hypothecation or otherwise, voluntarily or involuntarily, by the
Employee or any transferee of the Employee to any person or enterprise which is,
or which owns or controls another enterprise which is, engaged in a business
competitive with the Company and its products and business plans including,
without limitation, the manufacture, assembly, distribution and/or sale of the
foregoing, axles, prop shafts and all related parts and components and successor
products thereto which are made, sold or used by the Company.
(b) The certificates representing Shares issued pursuant to
the exercise of the Options shall bear substantially the following legend:
<PAGE>
4
"The shares represented by this certificate are issued and
held subject to the rights and obligations, including without
limitation, restrictions on transfer, contained in a
Nonqualified Stock Option Agreement dated as of October 30,
1997, by and between the Company and the person to whom the
shares represented by this certificate were originally issued,
which is on file at the office of the Company. Among other
things, transfer of these shares cannot be made except upon
compliance with such provisions, of which notice is hereby
given. The Company will mail to the registered holder of this
certificate a copy of said agreement, without charge, within
five (5) days after receipt of written request therefor."
8. Notices. Notices, consents and other communications
hereunder shall be in writing and shall be deemed to have been duly given when
sent by telex, cable or certified mail, postage prepaid, addressed to the
intended recipient at the address set forth at the end of this Agreement, or at
such other address as such intended recipient hereafter may have designated most
recently to the other party hereto with specific reference to this Section.
9. Entire Agreement. This Agreement constitutes the entire
agreement with respect to the subject matter hereof and supersedes all prior
written and oral agreements with respect thereto, and may be modified only by an
instrument in writing signed by each of the parties hereto.
10. Counterparts. This Agreement may be executed in multiple
counterparts, each of which may be deemed an original, but all of which together
may be construed as one and the same instrument.
11. Binding Effect. The provisions contained in this Agreement
shall be binding upon and enure to the benefit of the parties hereto and their
respective successors and assigns.
12. Applicable Law. This Agreement, all matters of corporate
law as applying to the Company and the Shares, and the construction and
interpretation of the provisions hereof shall be governed by the laws of the
State of Delaware, without regard to the choice of law provisions thereof.
13. Cancellation of American Axle Manufacturing, Inc. Options.
The Employee hereby agrees, that in consideration of the options granted
hereunder that any and all options granted to the Employee pursuant to the
Nonqualified Stock Option Agreement made as of February 27, 1994, as amended, by
and between AAM and the Employee shall immediately become null and void and of
no force or effect.
<PAGE>
5
IN WITNESS WHEREOF, the Company has caused this Agreement to
be duly executed by its duly authorized officer, and the Employee has executed
this Agreement, all on the day and year first above written.
ADDRESSES: AMERICAN AXLE AND
MANUFACTURING OF MICHIGAN,
INC.
1840 Holbrook Avenue
Detroit, MI 48212
By: /s/ Patrick S. Lancaster
------------------------
Title: Vice-President,
General Counsel and
Secretary
1840 Holbrook Avenue
Detroit, MI 48212
/s/ Richard E. Dauch
---------------------
Richard E. Dauch
<PAGE>
AAM ACQUISITION, INC.
August 18, 1997
Mr. Richard E. Dauch
President and Chief Executive Officer
American Axle & Manufacturing, Inc.
1840 Holbrook Avenue
Detroit, Michigan 48212
Dear Dick:
This letter sets forth our agreement with respect to the following
issues in connection with the recapitalization of American Axle & Manufacturing,
Inc. ("AAM") and the purchase by AAM Acquisition, Inc. (the "Purchaser") of
certain of your shares in American Axle & Manufacturing of Michigan, Inc.
("AAMM") as part of the recapitalization.
1. Subject to, and as promptly as practicable after, the closing of the
transactions contemplated by the Recapitalization and Stock Purchase Agreement
(the "Closing") Purchaser will cause AAMM to make such payment(s) to you as are
necessary to cause you to (i) receive $10 million in "net proceeds" as a result
of the sale of certain of your shares in AAMM ("net proceeds" shall mean the
final amount retained by you after closing, net of all taxes and net of any
adjustments payable pursuant to the agreement between stockholders attached as
Exhibit A) (the foregoing payment(s) shall also be subject to the approval of
the stockholders of AAMM in the manner set forth in Section 280G(b)(5)(B) of the
Internal Revenue Code of 1986, as amended, and the proposed regulations
thereunder) and (ii) retain a fully diluted equity interest in the ongoing
entity, directly or indirectly, of 25.36%, at the time of closing. It being
understood that the implied total equity of AAMM will be $175 million
post-closing.
2. AAM Acquisition Inc. will negotiate with you, in good faith, to
reach terms not more than 30 days from the date hereof on (i) a replacement of
your current employment agreement which will include without limitation,
provisions addressing compensation, benefits, appropriately adjusted bonus
formula and employment term provided, however, that the individual terms of your
new employment agreement shall be at least as favorable as those contained in
your present employment agreement; and (ii) an equity incentive plan for you and
at least 25 management associates chosen by you. Other subjects to be negotiated
will include Board membership and the liquidity of your equity investment on
your death.
<PAGE>
Mr. Richard E. Dauch -2- August 18, 1997
3. Purchaser, subject to the occurrence of the Closing, will cause the
options to be issued to you by AAMM in the recapitalization in exchange for the
AAM options held by you to be on the same terms as those cancelled in AAM,
except that such options shall be exercisable through a date at least 10 years
after issuance by AAMM.
AAM ACQUISITION, INC.
/s/ David A. Stockman
David A. Stockman
President
Attachment
<PAGE>
Exhibit 23.02
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated May 15, 1998, in Amendment No. 2 to the Registration
Statement (Form S-1 No. 333-53491) and related Prospectus of American Axle &
Manufacturing Holdings, Inc. dated July 8, 1998.
/s/ Ernst & Young LLP
Detroit, Michigan
July 8, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such consolidated financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<CASH> 17,285 3,346
<SECURITIES> 0 0
<RECEIVABLES> 169,706 118,428
<ALLOWANCES> 3,247 3,247
<INVENTORY> 96,636 97,207
<CURRENT-ASSETS> 289,172 228,025
<PP&E> 768,883 835,184
<DEPRECIATION> 119,103 132,511
<TOTAL-ASSETS> 1,017,653 999,541
<CURRENT-LIABILITIES> 385,998 369,044
<BONDS> 507,043 482,962
0 0
0 0
<COMMON> 1 1
<OTHER-SE> 37,230 54,456
<TOTAL-LIABILITY-AND-EQUITY> 1,017,653 999,541
<SALES> 2,147,451 583,285
<TOTAL-REVENUES> 2,147,451 583,285
<CGS> 1,927,364 522,279
<TOTAL-COSTS> 1,927,364 522,279
<OTHER-EXPENSES> 103,954 24,699
<LOSS-PROVISION> 1,000 0
<INTEREST-EXPENSE> 8,956 9,981
<INCOME-PRETAX> 94,197 26,891
<INCOME-TAX> 38,933 9,968
<INCOME-CONTINUING> 55,264 16,923
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 55,264 16,923
<EPS-PRIMARY> 2,917 2,061
<EPS-DILUTED> 1,723 1,651
</TABLE>
