<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): February 12, 1999
American Axle & Manufacturing Holdings, Inc.
----------------------------------------------
(Exact Name of registrant specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 001-14303 38-3161171
- -------- --------- ----------
(State or other Jurisdiction of (Commission File Number) (I.R.S. employer Identification
Incorporation) No.)
</TABLE>
1840 Holbrook Avenue
Detroit, Michigan 48212
--------------------------------------
(Address of principal executive offices)
Registrant's telephone number: (313) 974-2000
<PAGE>
Item 5. Other Events
On February 12, 1999, the Company announced the signing of a definitive
agreement to acquire all the outstanding stock of Colfor Manufacturing, Inc.
("Colfor") for a cash purchase price ranging from $160 million to $170 million,
depending on certain purchase price adjustments. Colfor specializes in precision
cold, warm and hot forgings, and operates three manufacturing facilities in
Ohio. Giving effect as of January 1, 1998 to Colfor's October 1998 acquisition
of Valley Forge, Inc., Colfor's pro forma net sales for 1998 would have been
approximately $126 million. The Company intends to finance the acquisition with
cash and, if necessary, borrowings under its Credit Facilities and/or its
Receivables Facility. The transaction is subject to customary closing
conditions, including approval of regulatory authorities, and there can be no
assurance that the transaction will be consummated.
Attached as Exhibit (99) is (i) Selected Consolidated Financial and Other
Data, (ii) Management's Discussion and Analysis of Financial Condition and
Results of Operations and (iii) the Company's Consolidated Financial Statements
and the related notes thereto as of December 31, 1997 and 1998 and for each of
the years ended December 31, 1996, 1997 and 1998.
Item 7. Financial Statements and Exhibits
(c) Exhibits
(99) Selected Consolidated Financial and Other Data.
Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Consolidated Financial Statements and the related
notes thereto as of December 31, 1997 and 1998 and for each of the years ended
December 31, 1996, 1997 and 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN AXLE & MANUFACTURING
HOLDINGS, INC. (Registrant)
By: /s/ Robert A. Krause
-------------------------
Name: Robert A. Krause
Title: Treasurer
Date: February 18, 1999
<PAGE>
4
INDEX TO EXHIBITS
-----------------
Exhibit Number Exhibit
- -------------- -------
(99) Selected Consolidated Financial and Other Data.
Management's Discussion and Analysis of Financial
Conditions and Results of Operations.
Consolidated Financial Statements and the related
notes thereto as of December 31, 1997 and 1998 and
for the years ended December 31, 1996, 1997 and 1998.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected consolidated historical financial
and other data of the Company at and for the years ended December 31, 1995,
1996, 1997 and 1998 and the two months and ten months ended February 28, 1994
and December 31, 1994, respectively. The statement of income data for the two
months and ten months ended February 28, 1994 and December 31, 1994,
respectively, and the years ended December 31, 1995, 1996 and 1997 and the
balance sheet data as of December 31, 1994, 1995, 1996 and 1997 and March 1,
1994 were derived from audited consolidated financial statements of the Company
which have been audited by Ernst & Young LLP, independent auditors. The
statement of income data for the year ended December 31, 1998 and the balance
sheet data as of December 31, 1998 were derived from audited consolidated
financial statements of the Company which have been audited by Deloitte &
Touche LLP, independent auditors. 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 included elsewhere in this report.
<TABLE>
<CAPTION>
PREDECESSOR
TWO MONTHS TEN
ENDED MONTHS ENDED YEAR ENDED DECEMBER 31,
FEBRUARY 28, DECEMBER 31, -------------------------------------------------
1994(A) 1994(B) 1995 1996 1997 1998
--------------- ------------ ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales........................... $ 294,466 $1,548,655 $1,968,076 $2,022,272 $2,147,451 $2,040,578
Cost of goods sold.................. 311,852 1,406,658 1,788,588 1,845,722 1,927,364 1,884,197
--------- ---------- ---------- ---------- ---------- ----------
Gross profit (loss)................. (17,386) 141,997 179,488 176,550 220,087 156,381
Selling, general and administrative
expenses.......................... 4,535 68,117 70,603 83,072 103,954 106,191
--------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) ............ (21,921) 73,880 108,885 93,478 116,133 50,190
Net interest (expense) income....... -- 3,941 9,086 9,412 (1,846) (44,337)
Recapitalization expense ........... -- -- -- -- (15,929) --
Other (expense) income, net ........ 552 -- -- (4,566) (4,161) (251)
--------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes
(benefit)......................... (21,369) 77,821 117,971 98,324 94,197 5,602
Income taxes........................ -- 41,375 47,400 36,600 38,933 2,074
--------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................... $ (21,369) $ 36,446 $ 70,571 $ 61,724 $ 55,264 $ 3,528
--------- ---------- ---------- ---------- ---------- ----------
--------- ---------- ---------- ---------- ---------- ----------
Net income per share--diluted....... N/A N/A $ .50 $ .43 $ .43 $ .08
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Working capital (deficit)........... $ 88,224 $ 97,143 $ 80,894 $ 103,271 $ (96,826) $ (68,869)
Total assets........................ 316,466 534,108 736,997 771,222 1,017,653 1,226,232
Total debt and capital lease
obligations....................... 82,192 11,192 1,000 2,368 507,043 693,368
Preferred stock..................... 200,000 200,000 200,000 200,000 -- --
Shareholders' equity................ 20,500 88,101 168,572 250,168 37,231 40,468
OTHER DATA:
Net cash provided by operating
activities........................ N/A $ 196,990 $ 196,886 $ 65,687 $ 200,830 $ 81,353
EBITDA(c)........................... N/A 96,038 144,779 134,740 152,838 119,194
Ratio of earnings to fixed
charges(d)........................ N/A N/A 5.2 3.4 3.4 1.0
Depreciation and amortization....... $ 4,682 16,846 25,242 36,076 50,177 71,730
Pension and OPEB expenses(e)........ N/A 36,761 36,319 48,050 34,620 37,724
Capital expenditures................ 9,600 25,168 147,077 162,317 282,625 209,993
Net sales per year-end hourly
associate(f) ..................... N/A 214 258 268 293 280
Hourly associates at year-end(g).... N/A 7,242 7,631 7,542 7,323 7,192
</TABLE>
(Footnotes on next page)
1
<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(a) The accompanying statement of income data of the former Final Drive and
Forge Business Unit of the Saginaw Division of General Motors Corporation
(the "Business Unit" or "Predecessor") for the two months ended
February 28, 1994 reflects its historical cost basis prior to the purchase
of the Predecessor from GM by a private investor group led by Richard E.
Dauch (the "1994 Acquisition"). Accordingly, the statement of income data
for the periods subsequent to the 1994 Acquisition are not comparable to
such data for periods prior to the 1994 Acquisition. 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.
(b) Results are for the ten-month period beginning on the closing date of the
1994 Acquisition and ending on December 31, 1994.
(c) 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.
(d) For purposes of computing the ratio of earnings to fixed charges, earnings
represent net income before taxes and fixed charges. Fixed charges consist
of interest expense, capitalized interest, one-third of rental expense,
which the Company believes to be representative of interest, and preferred
stock dividends.
(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, $30.7
million and $36.9 million for the years ended December 31, 1995, 1996, 1997,
and 1998, respectively. In addition, the Company paid approximately
$16.8 million of prior year pension and OPEB obligations in 1998.
(f) Represents the net sales of the Company's U.S. manufacturing facilities
divided by the number of U.S. associates.
(g) Represents the number of U.S. associates.
2
<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
years ended December 31, 1998, and the Company's financial position at
December 31, 1998 and December 31, 1997. This discussion and analysis should be
read in conjunction with the "Selected Consolidated Financial and Other Data"
and the Consolidated Financial Statements and notes thereto appearing elsewhere
in this report.
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 sports utility vehicles ("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
General Motors Corporation's ("GM") principal supplier of driveline components
for light trucks, SUVs and rear-wheel drive ("RWD") passenger cars. Sales to GM
were approximately 93%, 96% and 96% of the Company's net sales in 1998, 1997 and
1996, respectively.
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
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 October 1997, the Company entered into a
Recapitalization Agreement pursuant to which Blackstone Capital Partners II
Merchant Banking Fund L.P. and certain of its affiliates (collectively,
"Blackstone") acquired control of the Company (the "Recapitalization"). In
connection with the Recapitalization, the Company and GM entered into an
additional binding agreement, the Amended and Restated Memorandum of
Understanding (the "MOU"). Under the MOU, the Company and GM have agreed to
commit to transition the CSA into a number of separate Lifetime Program
Contracts ("LPCs") applicable for the life of each GM vehicle program covered by
an LPC. These LPCs will ultimately replace the CSA. LPCs have been entered into
for substantially all GM vehicle programs supplied by the Company, including the
GMT-800 and GM's mid-size SUVs, which include the Blazer, Bravada and Jimmy (the
"M-SUV Program").
In order to induce GM to enter into the MOU and commit to enter into the
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
$51.5 million in 1998. Such reductions terminated at December 31, 1998.
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. 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. Under the CSA and
currently under the LPCs, 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 or LPCs 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-
3
<PAGE>
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.
ALBION ACQUISITION
In October 1998, the Company completed the acquisition of Albion Automotive
(Holdings) Limited ("Albion"). Albion manufactures front steerable and rear
axles, driving heads, crankshafts, chassis components and transmission parts
used primarily in medium-duty trucks and buses for customers located in the
United Kingdom and elsewhere in Europe. Albion's sales for the year ended
December 31, 1998 were approximately $130 million and its major customers
include Caterpillar (Perkins), LDV, PACCAR (Leyland and DAF), Renault,
Rolls-Royce, Rover and Volvo. The acquisition has been accounted for under the
purchase method of accounting, and Albion's results since the acquisition date
have been included in the Company's consolidated financial results for the year
ended December 31, 1998.
GM WORK STOPPAGE
The GM work stoppage which occurred in June and July of 1998 resulted in
the shutdown of nearly all of GM's North American production facilities and
impacted the Company's operations in June and July 1998 and also resulted in
related start-up inefficiencies in the Company's operations in August 1998. The
Company estimates that sales lost as a result of the GM work stoppage were
approximately $188 million and operating income was adversely impacted by
approximately $71 million.
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 original equipment manufacturers
("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.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data
expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
Statement of income data: 1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Net sales............................................................. 100.0% 100.0% 100.0%
Cost of goods sold.................................................... 91.3 89.8 92.3
----- ----- -----
Gross profit.......................................................... 8.7 10.2 7.7
Selling, general and administrative expenses.......................... 4.1 4.8 5.2
----- ----- -----
Operating income...................................................... 4.6 5.4 2.5
Other (expense) income................................................ .3 (1.0) (2.2)
----- ----- -----
Income before income taxes............................................ 4.9 4.4 .3
Income tax expense.................................................... 1.8 1.8 .1
----- ----- -----
Net income............................................................ 3.1% 2.6% .2%
----- ----- -----
----- ----- -----
</TABLE>
4
<PAGE>
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED
DECEMBER 31, 1997
Net Sales. Net sales decreased approximately 5% to $2.04 billion for the
year ended December 31, 1998 compared with $2.15 billion for the year ended
December 31, 1997. This decrease was primarily due to the adverse impact of the
GM work stoppage which occurred in June and July of 1998 and the impact of the
$51.5 million temporary payment reductions discussed under "--Company Overview"
above, partially offset by higher average Sales-Dollar Content per vehicle and
the inclusion of Albion sales since the acquisition. The Company estimates that
sales lost as a result of GM work stoppages approximated $188 million and
$60 million for the years ended December 31, 1998 and 1997, respectively. The
Company estimates that net sales growth would have approximated 3% for the year
ended December 31, 1998 after excluding the effects of the temporary payment
reductions in 1998 and the effects of the GM work stoppages in 1998 and 1997.
Average "Sales-Dollar Content" per vehicle (the Company's revenue per vehicle
containing the Company's products) for the year ended December 31, 1998 for GM
light trucks, SUVs and vans (excluding front-wheel drive mini-vans) increased
slightly over average Sales-Dollar Content per vehicle for such vehicles for the
year ended December 31, 1997 primarily due to: (1) higher average Sales-Dollar
Content per vehicle for the GMT-800 Program versus the GMT-400 Program and
(2) revenue increases related to certain cost increases and engineering changes
that could be passed on to GM. As adjusted for the GM work stoppages, 1998
production volumes were slightly below 1997 levels primarily due to the 1998
launch of the GMT-800 Program.
Sales to customers other than GM increased 51% to $134.1 million for the
year ended December 31, 1998, versus $88.5 million for the year ended
December 31, 1997. The increase in sales to customers other than GM is
principally due to the inclusion of Albion's sales and additional business the
Company has obtained. The Company had sales outside the United States of
$421.5 million in 1998 compared to $421.7 million in 1997. The change in
international sales is principally due to the inclusion of Albion's sales offset
by the unfavorable sales impact of the GM work stoppage in 1998.
Gross Profit. Gross profit decreased 29% to $156.4 million for the year
ended December 31, 1998 compared with $220.1 million for the year ended December
31, 1997. Gross margin decreased to 7.7% in the year ended December 31, 1998
compared to 10.2% for the year ended December 31, 1997. The decreases in gross
profit and gross margin in the year ended December 31, 1998 were due primarily
to the impact of the 1998 GM work stoppage, which is estimated to have caused
approximately $71 million of the decrease in gross profit, and the temporary
payment reductions discussed above, partially offset by increased productivity
as a result of the prior capital expenditures made to improve manufacturing
processes, reduce labor intensive operations and achieve other cost
efficiencies.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses (including R&D) increased 2% to $106.2 million for the
year ended December 31, 1998 compared with $104.0 million for the year ended
December 31, 1997. Selling, general and administrative expenses as a percentage
of sales increased to 5.2% for the year ended December 31, 1998 compared to 4.8%
for the year ended December 31, 1997. The increase in spending was principally
due to the Company's increase in personnel to support the Company's growth and
continued investments for information systems as the Company completes its
transition from GM systems. The increase as a percent of sales was primarily due
to lost sales as a result of the 1998 GM work stoppage. R&D expenses were
$29.5 million for the year ended December 31, 1998 compared to $27.8 million for
the year ended December 31, 1997. The increase in R&D expenses in the year ended
December 31, 1998 compared to the year ended December 31, 1997 is primarily due
to R&D expenses incurred to support new product programs.
Operating Income. Operating income was $50.2 million for the year ended
December 31, 1998 compared to $116.1 million for the year ended December 31,
1997. Operating margin decreased to 2.5% for the year ended December 31, 1998
compared to 5.4% for the year ended December 31, 1997. The decrease in operating
income was primarily due to the impact of the 1998 GM work stoppage which is
estimated to have caused approximately $71 million of the decrease, the impact
of the temporary payment reductions and increased selling, general and
administrative expenses.
Net Interest. Net interest expense was $44.3 million for the year ended
December 31, 1998 compared to net interest expense of $1.8 million for the year
ended December 31, 1997. The increase in net interest expense was due to the
borrowings incurred in connection with the Recapitalization.
5
<PAGE>
Income Tax Expense. There was an income tax expense of $2.1 million for
the year ended December 31, 1998 compared to $38.9 million for the year ended
December 31, 1997. The Company's effective income tax rate was 37.0% for the
year ended December 31, 1998 versus 41.3% for the year ended December 31, 1997.
Net Income. There was net income of $3.5 million for the year ended
December 31, 1998 compared to $55.3 million for the year ended December 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 due to: (1) a slight
increase in the volume of the Company's products for GM light trucks, SUVs and
vans (excluding front-wheel drive mini-vans) and (2) an estimated 6% increase in
the average Sales-Dollar Content per vehicle for GM light trucks, SUVs and vans
(excluding front-wheel drive mini-vans) primarily related to changes in product
mix and revenue increases related to certain cost increases and engineering
changes that could be passed on to GM.
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 sales outside the United States of $421.7 million in 1997 compared
to $360.5 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 net sales as described above 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,
partially offset by higher labor costs associated with the February 1997 labor
negotiations and resulting contracts.
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 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
6
<PAGE>
1996. The increase in the effective tax rate for 1997 was primarily due to
non-deductible permanent items related to stock compensation.
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.
LIQUIDITY AND CAPITAL RESOURCES
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 (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) 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) $250 million senior secured revolving credit facility
(the "Revolving Credit Facility" and, together with the Term Loan Facility, each
as amended, the "Credit Facilities") and a $125 million receivables purchase
facility (the "Receivables Facility") to finance operations and capital
expenditures. See Note 3 to the Consolidated Financial Statements.
The acquisition price for Albion was approximately $42 million in cash,
provided by borrowings under the Company's Revolving Credit Facility, and
approximately $30 million of assumed debt and capital lease obligations.
Approximately $14 million of consideration may be payable to Albion's former
shareholders based upon Albion's future financial performance.
At December 31, 1998, the Company had a working capital deficit of
$68.9 million versus a deficit of $96.8 million at December 31, 1997. This
decrease was a result of lower accounts receivable partially offset by increased
inventories, prepaid expenses principally related to income taxes and lower
levels of accrued compensation and benefits. The decrease in accounts receivable
at December 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.
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.
At December 31, 1998, $375.0 million of borrowings were outstanding and
$125.0 million was available for future borrowings under the Term Loan Facility
and $223.0 million was outstanding and $27.0 million was available for future
borrowings under the Revolving Credit Facility. Additionally at December 31,
1998, approximately $66 million was available under the variable funding
certificates of the Receivables Facility, of which $63.0 million was utilized
and borrowed. These facilities were established in connection with the
Recapitalization. The $186.3 million increase in long-term debt and capital
lease obligations at December 31, 1998, as compared to December 31, 1997, was
principally related to the effects of the GM work stoppage on cash flow from
operations, capital expenditures, the approximately $42 million of cash used to
acquire Albion and the assumption of the debt and capital lease obligations of
Albion.
The weighted average interest rate of the Company's long-term debt
outstanding as of December 31, 1998 was approximately 8.0% and was approximately
8.1% at December 31, 1997.
Capital expenditures were $210.0 million, $282.6 million and
$162.3 million in 1998, 1997 and 1996, 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 estimates that it will invest approximately
$360 million in capital expenditures during 1999.
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
7
<PAGE>
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 also intends to enter into sale/leaseback transactions with
respect to approximately $200 million of its existing machinery and equipment
during 1999. Such sale/leaseback transactions would be financed under operating
leases that would have a negative impact on the Company's operating income and
result in lower depreciation and amortization, but would have no material impact
on the net income of the Company. If such transactions are consummated they
would provide increased financial flexibility for the Company. In addition, the
Company is in discussions to increase the size of its Receivables Facility on
similar terms and in connection therewith may increase its size to approximately
$150 million. There can be no assurance, however, that such refinancing will be
obtained or, if obtained, what the size or terms of such refinanced facility
would be.
On February 3, 1999, American Axle & Manufacturing Holdings, Inc.
("Holdings") consummated the initial public offering of its common stock (the
"IPO"), the net proceeds of which totaled approximately $108 million and have
been used to reduce outstanding borrowings under the Revolving Credit Facility
(but not the related commitments). The additional liquidity provided by the IPO
may be used for capital expenditures, future acquisitions or general corporate
purposes.
On February 12, 1999, the Company announced the signing of a definitive
agreement to acquire all the outstanding stock of Colfor Manufacturing, Inc.
("Colfor") for a cash purchase price ranging from $160 million to $170 million,
depending on certain purchase price adjustments. Colfor specializes in precision
cold, warm and hot forgings, and operates three manufacturing facilities in
Ohio. Giving effect as of January 1, 1998 to Colfor's October 1998 acquisition
of Valley Forge, Inc., Colfor's pro forma net sales for 1998 would have been
approximately $126 million. The Company intends to finance the acquisition with
cash and, if necessary, borrowings under the Credit Facilities and/or the
Receivables Facility. The transaction is subject to customary closing
conditions, including approval of regulatory authorities, and there can be no
assurance that the transaction will be consummated.
The Company recently announced its anticipated acquisition of Colfor as
described above, and is currently in various stages of discussions or
negotiations with additional acquisition candidates. The Company anticipates
using the additional liquidity (including additional borrowing capacity)
provided by the IPO and the anticipated offering of Notes described below to
finance any such acquisitions. The Company expects that the aggregate purchase
price for Colfor and these other potential acquisition candidates would be less
than the amount of permitted acquisitions under the Credit Facilities, which,
after giving effect to such Notes offering, would be approximately $400 million.
As of the date of this Report, no definitive agreement with any such acquisition
candidate (other than Colfor as described above) has been entered into, and
there can be no assurance that any such acquisition will be successfully
negotiated, financed or consummated.
The Company anticipates issuing, during the first quarter of 1999,
approximately $300 million of Senior Subordinated Notes due 2009 ("the Notes")
in a private placement. It is currently anticipated that the net proceeds from
the sale of the Notes will be used to pay down existing debt and for general
corporate purposes, including financing acquisitions and capital expenditures.
The Company may also incur additional indebtedness in the future, including
to finance future acquisitions, subject to certain limitations contained in the
instruments governing its indebtedness.
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.
8
<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.
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 did not have any financial instruments
to reduce currency risks at December 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.
A 100 basis-point increase in interest rates (approximately 12.5% of the
Company's weighted average interest rate) affecting the Company's debt
obligations, related interest rate swaps and collars (based on balances existing
at December 31, 1998), would impact the Company's 1998 pretax earnings by
approximately $5.9 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 and its
recently acquired Albion operations in Europe, 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 has implemented a program to identify Year 2000 compliance
issues and develop detailed project plans so 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 Year 2000 compliance program implemented by the Company addresses all
plant equipment, computer hardware and software, and business support equipment.
The Year 2000 compliance program also includes modifications and conversions
necessary to address the Company's systems and process interfaces with third-
party suppliers and customers. To date, the Company has named a Year 2000
compliance program team leader, established a project team covering all
locations worldwide, completed its assessment of all systems which it believes
could be significantly affected by the Year 2000 issue, defined plans for
remediation and issued communications to all its departments regarding Year 2000
issues and strategies. Management presently believes that, with planned
modifications to existing systems and processes scheduled to be completed in
September 1999, Year 2000 compliance will not pose significant operational
problems.
The Company's design, engineering, manufacturing and administrative
functions are reliant upon a variety of third parties who could also be affected
by the Year 2000 issue. As a part of its Year 2000 compliance program, the
Company has initiated communications with key suppliers, customers and other
such third parties to evaluate their Year 2000 readiness and to determine
whether a Year 2000-related event could impede the ability
9
<PAGE>
of such suppliers, customers or other third parties to interact with and support
the Company's operations effectively. Issues identified as a result of these
communications have been addressed in the Company's Year 2000 compliance program
remediation and contingency planning actions.
Costs incurred by the Company to address Year 2000 compliance include the
acquisition of computer hardware and software to replace existing Year 2000
non-compliant systems. These costs have been capitalized and amortized over the
assets' estimated useful lives. There are no significant systems replacement
initiatives that have been accelerated as a result of the Company's Year 2000
compliance assessments.
Costs associated with modifying existing Year 2000 non-compliant systems
are expensed as incurred. The amounts expensed to date have been immaterial and
the Company does not expect amounts required to be expensed in the future to
have a material effect on its financial position or results of operations.
If the modifications and conversions planned by the Company to address Year
2000 compliance are not completed on a timely basis, or if the Company's key
suppliers, customers or other third parties have significant unresolved systems
problems, there is a risk that Year 2000 compliance could have a material impact
on the operations of the Company. Potential sources of risk include (a) the
inability of key suppliers (or their suppliers) to be Year 2000 ready, which
could result in delays in product or service deliveries from such suppliers;
(b) the inability of key customers (or their other suppliers) to be Year 2000
ready, which could result in the cancellation or postponement of orders from
such customers; (c) systems incompatabilities with key suppliers or customers
resulting from software conversions or other modifications and (d) the inability
of the Company to modify or replace systems on a timely basis, which could
result in manufacturing process delays that interrupt product shipments.
The Company is presently developing contingency plans for all significant
components of its computer information systems, including all plant equipment
and business support equipment, and expects to complete such contingency
arrangements by June 1999. These contingency plans involve, among other things,
manual work-arounds, alternative sourcing strategies and flexible staffing
arrangements.
LITIGATION AND ENVIRONMENTAL REGULATIONS
The Company is involved in various legal proceedings incidental to its
business. Although the outcome of these matters can not be predicted with
certainty, management believes that none of these matters, individually or in
the aggregate, will have a material adverse effect on the financial condition,
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 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, New York
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 byphenyls 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 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. In addition, GM is conducting remediation at
the Company's Tonawanda, New York facility as a result of the presence of
polychlorinated biphenyls in the soil. The contamination of both sites took
place prior to the Company acquiring the properties and is the responsibility of
GM.
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 condition, results of operations, cash flows or
competitive position.
10
<PAGE>
EFFECT OF NEW ACCOUNTING STANDARDS
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
was issued in June 1998. SFAS No. 133 establishes standards for the recognition
and measurement of derivatives and hedging activities. This statement is
effective for fiscal years beginning after June 15, 1999. The Company is
currently analyzing the impact SFAS No. 133 will have on its financial
statements.
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. The Company has historically followed the guidelines specified
in SOP 98-1.
SOP 98-5, Reporting on the Costs of Start-Up Activities, was issued in
April, 1998. SOP 98-5 establishes standards for the financial reporting of
start-up costs and organization costs and requires such costs to be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after December 15,
1998. The Company does not expect the adoption of SOP 98-5 to have a material
effect on its financial condition or results of operations.
11
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Consolidated Financial Statements:
<S> <C>
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheets at December 31, 1998 and 1997................................................ F-3
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996............... F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997
and 1996.............................................................................................. F-6
Notes to Consolidated Financial Statements............................................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
American Axle & Manufacturing Holdings, Inc.
We have audited the accompanying consolidated balance sheet of American Axle &
Manufacturing Holdings, Inc. and its subsidiaries (the "Company") as of
December 31, 1998, and the related consolidated statement of income,
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. The consolidated financial statements of the
Company for the years ended December 31, 1997 and 1996 were audited by other
auditors whose report thereon dated May 15, 1998 (except as to Note 16 thereto,
as to which the date is January 22, 1999) expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated 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 audit provides a reasonable basis
for our opinion.
In our opinion, such 1998 consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1998 and the results of their operations and their cash flows for the year then
ended in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Detroit, Michigan
February 5, 1999
F-2
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents................................................................ $ 4,547 $ 17,285
Accounts receivable, net of allowance of $2,986 in 1998 and $3,247 in 1997.......... 123,787 166,459
Inventories......................................................................... 137,066 96,636
Prepaid expenses and other.......................................................... 14,524 3,184
Deferred income taxes............................................................... 14,093 5,608
---------- ----------
Total current assets.................................................................. 294,017 289,172
Property, plant and equipment, net.................................................... 829,301 649,780
Deferred income taxes................................................................. 62,194 53,959
Other assets and deferred charges..................................................... 40,720 24,742
---------- ----------
Total assets.......................................................................... $1,226,232 $1,017,653
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 232,781 $ 227,826
Accrued compensation and benefits................................................... 105,355 135,513
Other accrued expenses.............................................................. 24,750 22,659
---------- ----------
Total current liabilities............................................................. 362,886 385,998
Long-term debt and capital lease obligations.......................................... 693,368 507,043
Postretirement benefits and other long-term liabilities............................... 129,510 87,381
---------- ----------
Total liabilities..................................................................... 1,185,764 980,422
Stockholders' equity:
Common stock, par value $.01 a share;
shares authorized--150,000,000;
shares issued--32,456,107 in 1998 and 32,385,097 in 1997......................... 1 1
Paid-in capital..................................................................... 92,527 92,225
Accumulated deficit................................................................. (51,467) (54,995)
Cumulative translation adjustment................................................... (593) --
---------- ----------
Total stockholders' equity............................................................ 40,468 37,231
---------- ----------
Total liabilities and stockholders' equity............................................ $1,226,232 $1,017,653
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net sales............................................................... $2,040,578 $2,147,451 $2,022,272
Cost of goods sold...................................................... 1,884,197 1,927,364 1,845,722
---------- ---------- ----------
Gross profit............................................................ 156,381 220,087 176,550
Selling, general and administrative expenses............................ 106,191 103,954 83,072
---------- ---------- ----------
Operating income........................................................ 50,190 116,133 93,478
Net interest (expense) income........................................... (44,337) (1,846) 9,412
Recapitalization expenses............................................... -- (15,929) --
Other (expense), net.................................................... (251) (4,161) (4,566)
---------- ---------- ----------
Income before income taxes.............................................. 5,602 94,197 98,324
Income taxes............................................................ 2,074 38,933 36,600
---------- ---------- ----------
Net income.............................................................. 3,528 55,264 61,724
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 stockholders............................ $ 3,528 $ 55,163 $ 48,082
---------- ---------- ----------
---------- ---------- ----------
Basic earnings per share................................................ $ .11 $ .74 $ .58
---------- ---------- ----------
---------- ---------- ----------
Diluted earnings per share.............................................. $ .08 $ .43 $ .43
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating activities
Net income............................................................... $ 3,528 $ 55,264 $ 61,724
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization....................................... 71,730 50,177 36,076
Deferred income taxes............................................... (14,356) (9,651) (7,549)
Stock option compensation expense................................... -- 6,870 --
Pensions and other postretirement benefits, net of contributions.... 20,073 30,701 22,050
Loss on disposal of equipment....................................... 271 4,161 4,566
Changes in operating assets and liabilities:
Accounts receivable.............................................. 59,232 (75,322) 2,529
Inventories...................................................... (26,981) 10,803 2,255
Accounts payable and accrued expenses............................ (34,841) 141,521 (68,963)
Long-term liabilities............................................ 15,394 (9,916) 6,049
Other assets and deferred charges................................ (12,697) (3,778) 6,950
--------- --------- ---------
Net cash provided by operating activities.................................. 81,353 200,830 65,687
Investing activities
Purchases of property and equipment, net................................. (209,993) (282,625) (162,317)
Acquisition, net of cash acquired........................................ (41,498) -- --
Proceeds from sale-leaseback of equipment................................ -- -- 31,085
--------- --------- ---------
Net cash used in investing activities...................................... (251,491) (282,625) (131,232)
Financing activities
Borrowings under Revolving Credit and Receivables facilities, net........ 156,000 130,000 --
Proceeds from issuance of long-term debt................................. 1,943 375,000 2,420
Payments on long-term debt............................................... (743) (325) (1,052)
Debt issuance costs...................................................... (102) (18,567) --
Payment of dividends..................................................... -- (34,538) (17,434)
Recapitalization payments................................................ -- (478,928) --
Proceeds from issuance of common stock................................... 302 404 --
Payments from stockholder of preferred stock............................. -- -- 37,306
--------- --------- ---------
Net cash provided by (used in) financing activities........................ 157,400 (26,954) 21,240
--------- --------- ---------
Net decrease in cash and equivalents....................................... (12,738) (108,749) (44,305)
Cash and equivalents at beginning of year.................................. 17,285 126,034 170,339
--------- --------- ---------
Cash and equivalents at end of year........................................ $ 4,547 $ 17,285 $ 126,034
--------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RECEIVABLE
RETAINED FROM
EARNINGS STOCKHOLDER CUMULATIVE
COMMON PAID-IN (ACCUMULATED OF PREFERRED TRANSLATION COMPREHENSIVE
STOCK CAPITAL DEFICIT) STOCK ADJUSTMENT INCOME
------ -------- ------------ ------------ ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996.................. $ 1 $ 94,499 $115,672 $(41,600) $ 0
Net income and comprehensive income......... 61,724 $61,724
-------
-------
Cash dividends:
Preferred stock--$1,023 per share......... (13,642)
Common stock--$.0456 per share............ (3,792)
Payment received from stockholder of
preferred stock........................... 37,306
Discount for prepayment of receivable from
stockholder of preferred stock............ (4,294) 4,294
------ -------- -------- -------- ------
Balance at December 31, 1996................ 1 90,205 159,962 0 0
Net income and comprehensive income......... 55,264 $55,264
-------
-------
Cash dividends:
Preferred stock--$2,243 per share......... (29,915)
Common stock--$.0558 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 stockholders........................... (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 0
Net income.................................. 3,528 $ 3,528
Issuance of common stock.................... 302
Foreign currency translation................ (593) (593)
-------
Comprehensive income........................ $ 2,935
------ -------- -------- -------- ------ -------
-------
Balance at December 31, 1998................ $ 1 $ 92,527 $(51,467) $ 0 $ (593)
------ -------- -------- -------- ------
------ -------- -------- -------- ------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
American Axle & Manufacturing Holdings, Inc. ("Holdings") and its
subsidiaries (collectively, 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 and medium-duty trucks,
sport-utility vehicles, vans and buses. 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 at manufacturing facilities
in the United States and the United Kingdom include axles, propeller shafts,
chassis components driving heads, crankshafts, transmission parts and forged
products. In addition, the Company is in the process of constructing a
manufacturing facility in Guanajuato, Mexico.
Holdings is the survivor of a migratory merger with American Axle &
Manufacturing of Michigan, Inc. ("AAMM" or "the predecessor company") and has no
significant assets other than its investment in its subsidiaries. Pursuant to
this merger, which was effected in January, 1999, each share of the predecessor
company's common stock was converted into 3,945 shares of Holdings' common
stock. All share and per share amounts have been adjusted to reflect this
conversion.
In February, 1999, Holdings completed an initial public offering and issued
7 million shares of its common stock. The net proceeds of the offering, after
deduction of associated expenses, approximated $108 million.
Principles of Consolidation
The consolidated financial statements include the accounts of Holdings and
its subsidiaries. All intercompany transactions, balances and profits are
eliminated upon consolidation.
Revenue Recognition
The Company recognizes revenue when products are shipped to the customer.
Research and Development Costs
The Company expenses research and development costs as incurred. Research
and development costs were $29.5 million, $27.8 million and $23.4 million for
1998, 1997 and 1996, respectively.
Cash and Equivalents
Cash and equivalents include all cash balances and highly liquid
investments with a maturity of ninety days or less at time of purchase.
Tooling
Costs incurred by the Company for tooling for which customer reimbursement
is anticipated are classified as accounts receivable in the accompanying
consolidated balance sheets. Provisions for losses are recorded at the time the
Company anticipates the costs of these projects to exceed anticipated customer
reimbursement.
Inventories
Inventories in the U.S. are stated at the lower of cost or market under the
last-in, first-out method (LIFO). Inventories in countries other than the U.S.
are stated at the lower of cost or market under the first-in, first-out method
(FIFO). 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.
F-7
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
The components of inventories are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Raw materials and work-in-process...................................... $ 87,540 $68,323
Finished goods......................................................... 42,233 25,587
-------- -------
Gross inventories at average cost...................................... 129,773 93,910
Excess of average cost over LIFO cost.................................. (7,030) (7,650)
-------- -------
Net inventories........................................................ 122,743 86,260
Supplies and repair parts.............................................. 14,323 10,376
-------- -------
$137,066 $96,636
-------- -------
-------- -------
</TABLE>
Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Land and land improvements.......................................... $ 19,308 $ 15,757
Buildings and building improvements................................. 51,434 40,426
Machinery and equipment............................................. 843,419 506,927
Construction in progress............................................ 133,080 205,773
---------- --------
1,047,241 768,883
Accumulated depreciation............................................ (217,940) (119,103)
---------- --------
Property, plant and equipment, net.................................. $ 829,301 $649,780
---------- --------
---------- --------
</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 of property, plant
and equipment amounted to $67 million, $48 million and $35 million in 1998, 1997
and 1996, 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 3 to 15 years
</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 11 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 (the
predecessor company's parent prior to the recapitalization discussed in Note 2;
"Jupiter") in an arms-length transaction.
F-8
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of purchased businesses over the
fair value of their net assets at the date of acquisition and is amortized on a
straight-line basis over periods not exceeding 40 years. Other intangible assets
consist of patents, other identified rights and deferred charges and are
amortized over their estimated useful lives, ranging from one to eight years at
December 31, 1998.
Impairment of Long-Lived Assets
The Company periodically reviews the realizability of its long-lived
assets, including goodwill and other intangible assets, based on an evaluation
of remaining useful lives, cash flows and profitability projections and has
determined that there is no impairment at December 31, 1998.
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 and lease 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.
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities, effective for all fiscal quarters of fiscal
years beginning after June 15, 1999. SFAS 133 requires that all derivatives be
recognized either as assets or liabilities in the statement of financial
position and be measured at fair value. The Company is currently analyzing the
impact SFAS 133 will have on its financial statements.
Earnings Per Share
Basic earnings per share are based upon the weighted average number of
shares outstanding during each year. Diluted earnings per share assumes the
exercise of common stock options when dilutive.
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 recording of
compensation for stock-based compensation at fair value.
Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income. Currency translation adjustments are
the Company's only component of other comprehensive income.
F-9
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Currency Translation
Assets and liabilities of foreign subsidiaries are translated to U.S.
dollars at end-of-period exchange rates. The effect of translation for the
Company's foreign subsidiaries that use the local currency as their functional
currency is reported in a separate component of stockholders' equity. The effect
of remeasurement of assets and liabilities of the Company's foreign subsidiary
that uses the U.S. dollar as its functional currency is included in income.
Income statement elements of all foreign subsidiaries are translated to U.S.
dollars at average-period exchange rates and are recognized as part of revenues,
costs and expenses. Also included in income are gains and losses arising from
transactions denominated in a currency other than the functional currency of the
particular subsidiary.
Effect of New Accounting Standards
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. The Company has historically followed the guidelines specified
in SOP 98-1.
SOP 98-5, Reporting on the Costs of Start-Up Activities, was issued in
April, 1998. SOP 98-5 establishes standards for the financial reporting of
start-up costs and organization costs and requires such costs to be expensed as
incurred. SOP 98-5 is effective for fiscal years beginning after December 15,
1998. The Company does not expect the adoption of SOP 98-5 to have a material
effect on its financial condition or results of operations.
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.
Reclassifications
Certain 1996 and 1997 amounts have been reclassified to conform with 1998
presentation.
2. RECAPITALIZATION
On October 29, 1997, AAMM completed a comprehensive recapitalization (the
"Recapitalization"). Prior to the Recapitalization, AAMM was a wholly-owned
subsidiary of American Axle & Manufacturing, Inc. ("AAM Inc."). Pursuant to the
Recapitalization, AAMM acquired a 100% ownership interest in AAM Inc. by
exchanging shares of its own stock, on a one-for-one basis, with the
stockholders of AAM Inc. The exchange of shares has been accounted for in a
manner similar to a pooling of interests since both AAMM and AAM Inc. were under
common control. Following the exchange of shares, AAMM repurchased 50,760,906
shares or 61% of its common stock outstanding for $216.3 million. Following the
Recapitalization, the original stockholders of AAM Inc. 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.
As part of the Recapitalization, AAMM redeemed and retired all outstanding
shares of Class A Preferred Stock ("preferred stock") issued in 1994 to General
Motors Corporation ("General Motors"). In 1997 and 1996, General Motors earned
$12 million and $17.9 million of dividends, respectively, based on cash flow and
net income formulae. Both the 1997 and 1996 dividends were declared and paid in
1997.
F-10
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. RECAPITALIZATION--(CONTINUED)
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 stockholders or to third parties on the
stockholders' behalf and have been charged directly to retained earnings.
3. ACQUISITION
In October, 1998, the Company acquired Albion Automotive (Holdings) Limited
("Albion") for a purchase price of approximately $42 million and approximately
$30 million of assumed debt and capital lease obligations. The excess of the
purchase price over the fair value of the net assets acquired of $20 million has
been recorded as goodwill and is included in other assets and deferred charges.
Approximately $14 million of additional purchase price consideration may be
payable to Albion's former stockholders based upon Albion's future financial
performance. For the year ended December 31, 1998, Albion sales were
approximately $130 million. The consolidated statement of income includes the
operating results of Albion from the acquisition date.
4. LONG-TERM DEBT AND LEASE OBLIGATIONS
Long-term debt and capital lease obligations consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Credit Facilities:
Revolver............................................................ $223,000 $ 55,000
Tranche A Term Loan................................................. 0 0
Tranche B Term Loan................................................. 375,000 375,000
-------- --------
Total Credit Facilities.......................................... 598,000 430,000
Receivables Facility.................................................. 63,000 75,000
Albion Capital Lease Obligations...................................... 26,102 0
Other................................................................. 6,266 2,043
-------- --------
$693,368 $507,043
-------- --------
-------- --------
</TABLE>
At December 31, 1998, 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.
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, 1998, $125 million was
available for future borrowings under the Tranche A Term Loan and $27 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
F-11
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT AND LEASE OBLIGATIONS--(CONTINUED)
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, 1998, the weighted average rate of interest on the balances
outstanding under the Credit Facilities was 8.1%.
Receivables Facility
In connection with the Recapitalization, AAM Inc. (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 if it were 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, 1998, approximately $66 million was
available of which $63 million was utilized under the VFC.
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 weighted average rate of interest on the balances outstanding under
the Receivables Facility at December 31, 1998 was 7.2%.
Leases
Albion leases certain facilities, machinery and equipment under capital
leases expiring at various dates. Approximately $32 million of such assets are
included in property, plant and equipment at December 31, 1998. The weighted
average rate of interest on these capital lease obligations was 8.5% at
December 31, 1998.
Substantially all of the Company's current maturities of long-term debt and
capital lease obligations at December 31, 1998 relate to Albion's capital
leases. The Company has sufficient availability to refinance this indebtedness
through its existing long-term Credit Facilities and, therefore, has classified
these capital lease obligations as noncurrent liabilities at December 31, 1998.
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 $14.0
million, $9.7 million and $4.4 million for the years ended December 31, 1998,
1997 and 1996 respectively.
F-12
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT AND LEASE OBLIGATIONS--(CONTINUED)
Future Minimum Debt and Lease Payments
Future minimum debt and lease payments at December 31, 1998, are as follows
(in thousands):
<TABLE>
<CAPTION>
OPERATING AGGREGATE DEBT AND
LEASES CAPITAL LEASES
--------- ------------------
<S> <C> <C>
1999..................................................................... $14,008 $ 5,759
2000..................................................................... 14,039 6,969
2001..................................................................... 14,052 5,770
2002..................................................................... 38,054 2,875
2003..................................................................... 1,698 2,234
Thereafter............................................................... 726 673,187
------- --------
Total obligations........................................................ $82,577 696,794
-------
-------
Amounts representing interest............................................ (3,426)
--------
Present value of long-term debt.......................................... $693,368
--------
--------
</TABLE>
The Company made cash payments of interest of $50.2 million, $1.7 million
and $14,000 in 1998, 1997 and 1996, respectively.
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. At December 31, 1998, the Company has interest rate
swap agreements with notional amounts of $70.2 million that convert the variable
rates of leases to fixed rates of approximately 8%.
Fair Values
The carrying value of cash and 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. The estimated fair values of interest-rate swaps and collars
has been determined using available market information. At December 31, 1998,
the interest-rate swaps and collars have notional values of $182.7 million and
unrealized losses of approximately $5.5 million.
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 Company invests the majority of its excess cash in money market
accounts and, when 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.
F-13
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. EMPLOYEE BENEFIT PLANS
Pension and Other Postretirement Benefits
The Company sponsors qualified and non-qualified defined benefit pension
plans covering substantially all hourly and salaried employees in the United
States. The Company also maintains hourly and salaried benefit plans that
provide postretirement medical, dental, vision and life benefits to retirees and
eligible dependents in the United States. Benefits for hourly employees are
substantially covered by collective bargaining agreements. Albion also sponsors
a defined benefit pension plan covering substantially all hourly and salaried
employees.
The following summarizes the changes in benefit obligations and plan assets
and reconciles the funded status of the benefit plans to net benefit plan
liability:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
-------------------- --------------------
1998 1997 1998 1997
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year............................ $ 78,361 $ 59,968 $ 52,666 $ 35,811
Service cost....................................................... 16,700 11,493 18,900 12,914
Interest cost...................................................... 7,100 4,111 5,400 2,804
Actuarial loss..................................................... 8,674 2,897 2,889 1,208
Acquisition of Albion.............................................. 38,150 -- -- --
Benefit payments................................................... (513) (108) (364) (71)
-------- -------- -------- --------
Net change....................................................... 70,111 18,393 26,825 16,855
-------- -------- -------- --------
Benefit obligation at end of year.................................. 148,472 78,361 79,491 52,666
-------- -------- -------- --------
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year..................... 81,296 68,557 -- --
Actual return on plan assets....................................... 9,658 10,965 -- --
Employer contributions............................................. 18,843 1,764 364 71
Participant contributions.......................................... 262 118 -- --
Acquisition of Albion.............................................. 33,898 -- -- --
Benefit payments................................................... (513) (108) (364) (71)
-------- -------- -------- --------
Net change....................................................... 62,148 12,739 -- --
-------- -------- -------- --------
Fair value of plan at end of year.................................. 143,444 81,296 -- --
-------- -------- -------- --------
FUNDED STATUS...................................................... (5,028) 2,935 (79,491) (52,666)
Unrecognized actuarial gain........................................ (14,198) (22,825) (13,841) (18,060)
Unrecognized prior service cost.................................... 5,109 5,612 118 146
-------- -------- -------- --------
Subtotal......................................................... (14,117) (14,278) (93,214) (70,580)
Fourth quarter contribution........................................ -- 2,000 202 53
-------- -------- -------- --------
NET LIABILITY AT END OF YEAR....................................... $(14,117) $(12,278) $(93,012) $(70,527)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
F-14
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. EMPLOYEE BENEFIT PLANS--(CONTINUED)
The principal weighted average assumptions used in the valuation of the
U.S. and Albion plans were as follows:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------------------------------ ---------------------------
1998
1998-U.S. ALBION 1997 1996 1998 1997 1996
--------- ------- ------- ------- ------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Discount rate............................ 6.75% 5.50% 7.50% 7.00% 7.15% 7.50% 7.00%
Expected return on plan assets........... 9.25% 8.00% 9.00% 8.00% N/A N/A N/A
Rate of compensation increase............ 4.00% 3.50% 4.00% 4.00% 4.00% 4.00% 4.00%
</TABLE>
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------------- -----------------------------
1998 1997 1996 1998 1997 1996
------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost.................................... $17,194 $15,324 $22,586 $18,900 $17,219 $19,764
Interest cost................................... 7,603 5,807 5,046 5,400 4,102 3,559
Expected asset return........................... (8,971) (6,261) (3,085) N/A N/A N/A
Amortized gain.................................. (1,610) (964) 41 (1,329) (1,136) --
Amortized prior service cost.................... 510 502 112 27 27 27
------- ------- ------- ------- ------- -------
Net benefit cost.............................. $14,726 $14,408 $24,700 $22,998 $20,212 $23,350
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
For measurement purposes, a 7.2% annual increase in the per capita cost of
covered health care benefits was assumed for 1999. The rate was assumed to
decrease gradually to 5.0% for 2002 and remain at that level thereafter. Health
care cost trend rates have a significant effect on the amounts reported for the
health care plans. A percentage-point change in assumed health care cost trend
rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE 1-PERCENTAGE
POINT INCREASE POINT DECREASE
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Total of service and interest cost....................................... $ 7,182 $ (5,752)
Postretirement benefit obligation........................................ 18,258 (14,844)
</TABLE>
Voluntary Savings Plans
The Company sponsors voluntary savings plans for eligible salaried and
hourly employees in the United States. The Company matches 50% of the first 6%
of salaried employee contributions. The Company's matching contribution was
increased to 50% from 25% of the first 6% of salaried contributions on July 1,
1997. Company matching contributions totaling $1.5 million, $910,000 and
$547,000 were made for the years ended December 31, 1998, 1997 and 1996,
respectively.
Profit-Sharing Plans
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, 1998,
1997 and 1996 was $11.8 million, $23.3 million and $16.9 million, respectively.
7. CAPITAL STOCK
The authorized capital stock of the Company consists of (i) 150,000,000
shares of common stock, par value $.01, of which 32,456,107 shares are issued
and outstanding at December 31, 1998; (ii) 10,000,000 shares of preferred stock,
par value $.01 per share, of which no shares are issued and outstanding at
December 31, 1998; and (iii) 40,000,000 shares of series common stock, par value
$.01, of which no shares are issued and outstanding at December 31, 1998.
F-15
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCK OPTIONS
In 1994, the Company granted an officer of the Company options to purchase
6,891,915 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 nominal price per share. At December 31, 1998,
none of the options were exercised. The Company recognized compensation expense
of $6.8 million in 1997 resulting from the modification of the exercisability
period.
On October 29, 1997, the Company granted several officers of the Company
options to purchase 1,858,095 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 per
share of approximately $.16. At December 31, 1998, none of the options were
exercised. Compensation expense relating to the incentive compensation plan
established in 1994 was $2.3 million and $6.1 million in 1997 and 1996,
respectively.
On October 29, 1997, the Company granted an officer of the Company options
to purchase 327,435 shares of the Company's common stock. The options may be
exercised at any time through November 20, 2000 at a price of $4.26 per share.
At December 31, 1998, 71,010 options were exercised.
On November 1, 1997, and as amended on November 15, 1997, the Company's
stockholders established a stock option plan ("the 1997 Plan"). There are
5,621,625 options authorized for grant under the 1997 Plan. The 1997 Plan allows
participants to vest in options to purchase shares of the Company's common stock
based upon duration of employment or operating performance. The exercise price
of the options equals 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,
5,387,645 options were granted under the 1997 Plan at an exercise price of
$4.26. No options were granted under the 1997 Plan in 1998 and no options were
exercised as of December 31, 1998.
In January, 1999, the Company established the 1999 Stock Incentive Plan
("the 1999 Plan"). Under the 1999 Plan, a total of 3,500,000 shares of common
stock is authorized for issuance in the form of options, stock appreciation
rights or other awards that are based on the value of the Company's common
stock. The exercise price of the options, rights or other awards granted under
the 1999 Plan will not be less than the fair market value of the common stock on
the date of grant. No options, rights or other awards have been granted under
the 1999 Plan.
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, 1996................................... 6,891,915 $ .01
Options granted................................................ -- --
Options exercised.............................................. -- --
Options lapsed or canceled..................................... -- --
---------- ------
Outstanding at December 31, 1996................................. 6,891,915 $ .01
Options granted................................................ 14,465,090 1.71
Options exercised.............................................. -- --
Options lapsed or canceled..................................... 6,891,915 .01
---------- ------
Outstanding at December 31, 1997................................. 14,465,090 $ 1.71
Options granted................................................ --
Options exercised.............................................. (71,010) 4.26
Options lapsed or canceled..................................... (49,580) 4.26
---------- ------
Outstanding at December 31, 1998................................. 14,344,500 $ 1.68
---------- ------
---------- ------
Options exercisable at December 31, 1996......................... 6,891,915 $ .01
---------- ------
---------- ------
Options exercisable at December 31, 1997......................... 9,077,445 $ .19
---------- ------
---------- ------
Options exercisable at December 31, 1998......................... 9,362,306 $ .31
---------- ------
---------- ------
</TABLE>
F-16
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCK OPTIONS--(CONTINUED)
Options outstanding at December 31, 1998 have a weighted average remaining
life of approximately 10 years.
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>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS, EXCEPT FOR PER
SHARE DATA)
<S> <C> <C> <C>
Net income as reported................................. $ 3,528 $55,264 $61,724
------- ------- -------
------- ------- -------
Pro forma.............................................. $ 2,779 $55,138 $61,724
------- ------- -------
------- ------- -------
Basic earnings per share as reported................... $ .11 $ .74 $ .58
------- ------- -------
------- ------- -------
Pro forma.............................................. $ .09 $ .73 $ .58
------- ------- -------
------- ------- -------
Diluted earnings per share as reported................. $ .08 $ .43 $ .43
------- ------- -------
------- ------- -------
Pro forma.............................................. $ .06 $ .43 $ .43
------- ------- -------
------- ------- -------
</TABLE>
9. NET INTEREST (EXPENSE) INCOME
Net interest (expense) income consists of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
-------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Gross interest costs.................................................... $(48,572) $(9,173) $ (340)
Less interest costs capitalized......................................... 3,788 217 --
-------- ------- ------
Interest (expense)...................................................... (44,784) (8,956) (340)
Interest income......................................................... 447 7,110 9,752
-------- ------- ------
Net interest (expense) income........................................... $(44,337) $(1,846) $9,412
-------- ------- ------
-------- ------- ------
</TABLE>
10. INCOME TAXES
The following is a summary of the components of the provision for income
taxes:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................................................. $43,439 $37,773
Michigan single business tax......................................... $ 449 4,051 5,638
Other state and local................................................ (931) 1,094 738
------- ------- -------
(482) 48,584 44,149
Deferred:
Federal.............................................................. 3,580 (8,108) (8,247)
Michigan single business tax......................................... 1,220 (1,132) 221
Other state and local................................................ (422) (411) 477
Foreign.............................................................. (1,822) -- --
------- ------- -------
2,556 (9,651) (7,549)
------- ------- -------
$ 2,074 $38,933 $36,600
------- ------- -------
------- ------- -------
</TABLE>
F-17
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES--(CONTINUED)
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,
----------------------------
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Federal statutory................................................... 35.0% 35.0% 35.0%
State and local..................................................... 5.7 2.9 4.1
Federal credits and other........................................... (7.3) 3.4 (1.9)
Foreign rate difference............................................. 3.6 -- --
------ ------ ------
Effective income tax rate........................................... 37.0% 41.3% 37.2%
------ ------ ------
------ ------ ------
</TABLE>
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, 1998:
Employee benefits...................................... $10,122 $38,958
Inventory.............................................. 3,394
Depreciation and amortization.......................... $ 8,562
Net operating loss carryforwards....................... 68,321
Tax credit carryforwards............................... 2,587
Goodwill............................................... 2,362
Prepaid taxes.......................................... 852
Other.................................................. 577 3,251
------- ------- ---- --------
14,093 116,331 0 8,562
Valuation allowance.................................... (45,575)
------- ------- ---- --------
$14,093 $70,756 $ 0 $ 8,562
------- ------- ---- --------
------- ------- ---- --------
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
------- ------- ---- --------
------- ------- ---- --------
</TABLE>
Realization of the net deferred tax assets is dependent on future reversals
of existing temporary differences and adequate future taxable income, exclusive
of reversing temporary differences and carryforwards. Although realization is
not assured, the Company believes that it is more likely than not that the net
deferred tax assets will be realized.
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 $30.4 million. This amount was charged
directly to retained earnings.
Through October 29, 1997, the Company filed a consolidated federal income
tax return with Jupiter. Under the terms of a tax-sharing agreement, federal
income taxes reflect the tax expense and the related liability which
F-18
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES--(CONTINUED)
would have been applicable if a separate federal income tax return had been
filed by the Company. Subsequent to the Recapitalization, the Company files
stand-alone consolidated tax returns. Prior to October 29, 1997, 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, 1998, 1997 and 1996 were $9.3 million, $43.7 million and
$44.1 million, respectively.
At December 31, 1998, the Company has net operating loss carryforwards for
federal tax purposes of approximately $93 million and approximately $106 million
for other foreign, state and local purposes. These net operating loss
carryforwards generally expire between 2008 and 2018, except that $49 million of
foreign net operating loss carryforwards do not expire. The Company also has
$3.8 million of federal research and development tax credits and $7.4 million of
other state tax credits. These tax credit carryforwards expire between 2011 and
2018.
11. RELATED PARTY TRANSACTIONS
On March 1, 1994, AAM, Inc. 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. ("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.
In 1994, General Motors agreed to contribute an additional $52 million to
fund capital improvements to increase the Company's productive capacity. General
Motors paid 14 installments of $867,000 and in March 1996 paid a final amount of
$35.6 million, to complete its obligation under this agreement. The Company is
not required to repay this contribution.
The following summarizes activity and balances with General Motors:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales to General Motors as a % of total........................ 93% 96% 96%
Purchases from General Motors...................................... $274,376 $331,116 $328,106
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
<S> <C> <C>
Accounts receivable from General Motors............................ $ 78,970 $143,756
Accounts payable to General Motors................................. 23,337 23,223
</TABLE>
In connection with the Recapitalization, the Company and Blackstone
Management Partners L.P. ("Blackstone Management"), an affiliate of the
Company's majority stockholder, entered into an agreement pursuant to which
Blackstone Management provides certain advisory and consulting services to the
Company. In 1998 and 1997, respectively, the Company paid Blackstone Management
$2.4 million and $.9 million for such services.
At December 31, 1998, the Company had a $13.4 million receivable from a
stockholder which was repaid in 1999. At December 31, 1997, the Company had a
$7.2 million receivable from a stockholder associated with the Recapitalization
which was repaid in 1998.
F-19
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. COMMITMENTS AND CONTINGENCIES
The Company plans to continue to make significant capital expenditures for
new product and capacity programs and to upgrade its machinery, equipment and
facilities. At December 31, 1998, obligated purchase commitments for capital
expenditures were approximately $145 million.
The Company is involved in various legal proceedings incidental to its
business. Although the outcome of these matters cannot be predicted with
certainty, management believes that none of these matters, individually or in
the aggregate, will have a material effect on the Company's consolidated
financial statements.
13. SEGMENT INFORMATION
The Company operates in one reportable segment, the design, engineering and
manufacturing of driveline systems (including forged products) for light and
medium-duty trucks, sport-utility vehicles, pick-ups, buses and vans. Financial
information relating to the Company's operations by geographic area are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
NET SALES(1)
United States................................................. $1,619,058 $1,725,703 $1,661,745
Canada........................................................ 264,204 303,496 253,381
Mexico & South America........................................ 127,525 116,813 105,574
Europe and Other.............................................. 29,791 1,439 1,572
---------- ---------- ----------
$2,040,578 $2,147,451 $2,022,272
---------- ---------- ----------
---------- ---------- ----------
LONG-LIVED ASSETS
United States................................................. $ 786,988 $ 674,522 $ 423,183
Other......................................................... 83,033 -- --
---------- ---------- ----------
$ 870,021 $ 674,522 $ 423,183
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
- ------------------
(1) Net sales are attributed to countries based upon location of customer.
F-20
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except share and per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Numerators:
Net Income.................................................... $ 3,528 $ 55,264 $ 61,724
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 STOCKHOLDERS........................................ 3,528 55,163 48,082
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 STOCKHOLDERS AFTER ASSUMED CONVERSIONS.............. $ 3,528 $ 55,264 $ 61,724
------------ ------------ ------------
------------ ------------ ------------
Denominators:
DENOMINATOR FOR BASIC EARNINGS PER SHARE--WEIGHTED-AVERAGE
SHARES..................................................... 32,439,932 74,620,428 83,054,085
Effect of dilutive securities:
Dilutive stock options outstanding......................... 10,812,749 8,050,311 6,891,494
Conversion of Class A Preferred Stock...................... -- 43,836,840 52,602,630
------------ ------------ ------------
Dilutive potential common shares.............................. 10,812,749 51,887,151 59,494,124
DENOMINATOR FOR DILUTIVE EARNINGS PER SHARE--ADJUSTED
WEIGHTED-AVERAGE SHARES AND ASSUMED CONVERSION............. 43,252,681 126,507,579 142,548,209
------------ ------------ ------------
Basic earnings per share........................................ $ .11 $ .74 $ .58
------------ ------------ ------------
------------ ------------ ------------
Diluted earnings per share...................................... $ .08 $ .43 $ .43
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-21
<PAGE>
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 FULL YEAR
-------- -------- ------------ ----------- ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
1998
Net sales..................................... $583,285 $462,913 $364,749 $ 629,631 $2,040,578
Gross profit.................................. 61,789 22,255 1,955 70,382 156,381
Net income (loss)............................. 16,923 (7,043) (21,081) 14,729 3,528
Diluted earnings per share.................... 0.39 (0.16) (0.49) 0.34 0.08
1997
Net sales..................................... $546,859 $538,730 $496,443 $ 565,419 $2,147,451
Gross profit.................................. 59,031 62,728 51,051 47,277 220,087
Net income (loss)............................. 24,790 26,403 17,890 (13,819) 55,264
Diluted earnings per share.................... 0.17 0.19 0.13 (0.18) 0.43
</TABLE>
16. SUBSEQUENT EVENT (UNAUDITED)
On February 12, 1999, the Company announced the signing of a definitive
agreement to acquire all of the outstanding stock of Colfor Manufacturing, Inc.
("Colfor") for a cash purchase price ranging from $160 million to $170 million,
depending on certain purchase price adjustments. Colfor specializes in cold,
warm and hot forgings, and operates three manufacturing facilities in Ohio.
Giving effect as of January 1, 1998 to Colfor's October 1998 acquisition of
Valley Forge, Inc., Colfor's pro forma net sales in 1998 would have been
approximately $126 million. The transaction is subject to customary closing
conditions, including approval of regulatory authorities.
F-22
